Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(MARK ONE)
 
x         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
 
o         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 000-50797
 
Momenta Pharmaceuticals, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
04-3561634
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
301 Binney Street, Cambridge, MA
 
02142
(Address of Principal Executive Offices)
 
(Zip Code)
 
(617) 491-9700
(Registrant’s Telephone Number, Including Area Code)

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

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x   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 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 x
 
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 x
 
As of November 1, 2018, there were 78,559,960 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.
 


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MOMENTA PHARMACEUTICALS, INC.

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our logo, trademarks and service marks are the property of Momenta Pharmaceuticals, Inc. Other trademarks or service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Statements contained in this Quarterly Report on Form 10-Q that are about future events or future results, or are otherwise not statements of historical fact, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on current expectations, estimates, forecasts, projections, intentions, goals, strategies, plans, prospects and the beliefs and assumptions of our management. In some cases, these statements can be identified by words such as “anticipate,” “approach,” “believe,” “can,” “contemplate,” “continue,” “could,” “ensure,” “estimate,” “expect,” "goal," “intend,” “likely,” “may,” “might,” “objective,” “opportunity,” “plan,” “potential”, “predict,” “project,” “pursue,” “seek,” “schedule,” “should,” “strategy,” “target,” “typically,” “will,” “would,” and other similar words or expressions, or the negative of these words or similar words or expressions. These statements include, but are not limited to, statements regarding our priorities, goals and strategies, including our change in strategic focus toward the discovery and development of our novel drug candidates for immune-mediated diseases, including M281, M254 and M230 and the advancement of our late stage biosimilar candidates, M923 and M710; the use, efficacy, safety, convenience, differentiation and commercial potential of our products and product candidates; the timing of clinical trials and the availability of results; the timing of regulatory filings, reviews and approvals; our expectations regarding the development and utility of our products and product candidates; development timelines for our product candidates; development, manufacture and commercialization of our products and product candidates; efforts to seek and manage relationships with collaboration partners, including without limitation for our novel therapeutic and biosimilar programs; the timing of launch of products and product candidates; market share and product revenues of our products and product candidates, including GLATOPA and Enoxaparin Sodium Injection; the timing, merits, strategy, impact and outcome of, and decisions regarding, legal proceedings; timing of biosimilar market formation; collaboration revenues and research and development revenues; manufacturing; the sufficiency of our current capital resources and projected milestone payments and product revenues for future operations; our future financial position, including but not limited to our future operating losses, our potential future profitability; our future expenses, including anticipated restructuring charges; the composition and mix of our cash, cash equivalents and marketable securities; our future revenues and our future liabilities; our funding transactions and our intended uses of proceeds thereof; product candidate development costs; receipt of contingent milestone payments; accounting policies, estimates and judgments; our estimates regarding the fair value of our investment portfolio; the market risk of our cash equivalents, marketable securities and derivative, foreign currency and other financial instruments; rights, obligations, terms, conditions and allocation of responsibilities and decision making under our collaboration agreements; the regulatory pathway for biosimilars; our strategy, including but not limited to our regulatory strategy, and scientific approach; the importance of key customer distribution arrangements; market potential and acceptance of our products and product candidates; future capital requirements; reliance on our collaboration partners and other third parties; the competitive landscape; changes in, impact of and compliance with laws, rules and regulations; product reimbursement policies and trends; pricing of pharmaceutical products, including our products and product candidates; our stock price; our intellectual property strategy and position; sufficiency of insurance; attracting and retaining qualified personnel; our internal controls and procedures; acquisitions or investments in companies, products and technologies; entering into collaboration and/or license arrangements; marketing plans; financing our planned operating and capital expenditure; the terms and conditions of our facility leases; materials used in our research and development; dilution; royalty rates; and vesting of equity awards.
 
Any forward-looking statements in this Quarterly Report on Form 10-Q involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Important factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. “Risk Factors” and discussed elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
    
This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.


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PART I. FINANCIAL INFORMATION
 
Item 1.    FINANCIAL STATEMENTS

MOMENTA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 
September 30, 2018
 
December 31, 2017
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
65,202

 
$
73,651

Marketable securities
209,881

 
269,017

Collaboration receivable
13,835

 
15,048

Prepaid expenses and other current assets
5,256

 
6,798

Restricted cash

 
2,412

Total current assets
294,174

 
366,926

Marketable securities, long-term
6,490

 
37,222

Property and equipment, net
29,451

 
29,916

Restricted cash, long-term
19,349

 
20,620

Intangible assets, net
3,171

 
4,036

Other long-term assets
649

 
711

 
 
 
 
Total assets
$
353,284

 
$
459,431

 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
4,629

 
$
11,456

Accrued expenses
18,115

 
20,528

Accrued restructuring
8,674

 

Collaboration liabilities
3,186

 
9,258

Deferred revenue
3,705

 
2,866

Other current liabilities
16,136

 
379

Total current liabilities
54,445

 
44,487

Deferred revenue, net of current portion
33,527

 
30,751

Other long-term liabilities
16,555

 
10,039

Total liabilities
104,527

 
85,277

Commitments and contingencies (Note 8)


 


Stockholders’ Equity:
 

 
 

Common stock, $0.0001 par value per share; 100,000 shares authorized, 78,608 shares issued and 78,378 shares outstanding at September 30, 2018 and 76,584 shares issued and 76,355 shares outstanding at December 31, 2017
8

 
8

Additional paid-in capital
987,608

 
939,654

Accumulated other comprehensive loss
(164
)
 
(140
)
Accumulated deficit
(735,581
)
 
(562,254
)
Treasury stock, at cost, 229 shares
(3,114
)
 
(3,114
)
 
 
 
 
Total stockholders’ equity
248,757

 
374,154

 
 
 
 
Total liabilities and stockholders’ equity
$
353,284

 
$
459,431

The accompanying notes are an integral part of these unaudited, condensed consolidated financial statements.

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MOMENTA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
(unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Collaboration revenue:
 

 
 

 
 
 
 
Product revenue
$
13,621

 
$
10,890

 
$
28,921

 
$
53,434

Research and development revenue
1,263

 
13,200

 
3,846

 
20,840

Total collaboration revenue
14,884

 
24,090

 
32,767

 
74,274

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 
 
 
Research and development
30,727

 
37,914

 
95,309

 
113,078

General and administrative
20,437

 
20,703

 
63,580

 
66,380

Restructuring
15,535

 

 
15,535

 

Other operating expense

 

 
30,000

 

Total operating expenses
66,699

 
58,617

 
204,424

 
179,458

 
 
 
 
 


 


Operating loss
(51,815
)
 
(34,527
)
 
(171,657
)
 
(105,184
)
 
 
 
 
 


 


Other income, net
1,515

 
1,339

 
3,841

 
3,329

 
 
 
 
 


 


Net loss
$
(50,300
)
 
$
(33,188
)
 
$
(167,816
)
 
$
(101,855
)
 
 
 
 
 


 


Basic and diluted net loss per share
$
(0.65
)
 
$
(0.44
)
 
$
(2.20
)
 
$
(1.40
)
 
 
 
 
 


 


Weighted average shares used in computing basic and diluted net loss per share
77,229

 
74,611

 
76,415

 
72,585

 
 
 
 
 


 


Comprehensive loss:
 

 
 

 


 


Net loss
$
(50,300
)
 
$
(33,188
)
 
$
(167,816
)
 
$
(101,855
)
Net unrealized holding (loss) gain on available-for-sale marketable securities
137

 
52

 
(24
)
 
(39
)
Comprehensive loss
$
(50,163
)
 
$
(33,136
)
 
$
(167,840
)
 
$
(101,894
)

The accompanying notes are an integral part of these unaudited, condensed consolidated financial statements.


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MOMENTA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash Flows from Operating Activities:
 

 
 

Net loss
$
(167,816
)
 
$
(101,855
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

Depreciation and amortization of property and equipment
5,575

 
4,719

Impairment of equipment
1,605

 

Share-based compensation expense
20,172

 
16,309

Amortization of premium on investments
(175
)
 
248

Amortization of intangibles
865

 
865

Loss on disposal of assets
623

 

Changes in operating assets and liabilities:
 

 
 

Collaboration receivable
1,213

 
55,909

Prepaid expenses and other current assets
1,573

 
(1,734
)
Other long-term assets
62

 
1,071

Accounts payable
(5,893
)
 
8,081

Accrued expenses
(2,175
)
 
(3,382
)
Accrued restructuring
8,674

 

Collaboration liabilities
(6,072
)
 
(19,007
)
Deferred revenue
(1,896
)
 
45,700

Deferred rent
4,835

 
662

Other liabilities
17,438

 
1,538

 
 
 
 
Net cash (used in) provided by operating activities
(121,392
)
 
9,124

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Purchases of property and equipment
(8,594
)
 
(11,213
)
Proceeds from disposal of equipment
84

 

Purchases of marketable securities
(117,440
)
 
(366,292
)
Proceeds from maturities of marketable securities
207,459

 
318,178

 
 
 
 
Net cash provided by (used in) investing activities
81,509

 
(59,327
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net proceeds from issuance of common stock under ATM facility

 
64,090

Proceeds from issuance of common stock under stock plans
27,751

 
9,484

 
 
 
 
Net cash provided by financing activities
27,751

 
73,574

 
 
 
 
Net (decrease) increase in cash, cash equivalents and restricted cash
(12,132
)
 
23,371

Cash, cash equivalents and restricted cash, beginning of period
96,683

 
172,499

Cash, cash equivalents and restricted cash, end of period
$
84,551

 
$
195,870

 
 
 
 
Non-Cash Activities:
 
 
 
Purchases of property and equipment included in accounts payable and accrued expenses
$
1,228

 
$
3,542

Receivable due from stock option exercises
$
124

 
$
617

Impact of adopting ASU 2016-09
$

 
$
783

Impact of adopting ASC 606
$
5,511

 
$

 
The accompanying notes are an integral part of these unaudited, condensed consolidated financial statements.

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MOMENTA PHARMACEUTICALS, INC.
NOTES TO UNAUDITED, CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. The Company
 
Business Overview

Momenta Pharmaceuticals, Inc., referred to as Momenta or the Company, was incorporated in the state of Delaware in May 2001 and began operations in early 2002. Its facilities are located in Cambridge, Massachusetts. Momenta is a biotechnology company focused on developing novel therapeutics for autoimmune diseases and biosimilars. The Company presently derives all of its revenue from its collaborations.

2. Summary of Significant Accounting Policies
 
Basis of Presentation
 
In the opinion of management, the accompanying unaudited, condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company's financial statements for interim periods in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The information included in this quarterly report on Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements and the accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission, or SEC, on February 26, 2018. The Company's accounting policies are described in the “Notes to Consolidated Financial Statements” in its Annual Report on Form 10-K for the year ended December 31, 2017 and updated, as necessary, in this Form 10-Q. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from the Company's audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2018, are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Consolidation
 
The accompanying unaudited, condensed consolidated financial statements reflect the operations of the Company and the Company’s wholly-owned subsidiaries, Momenta Pharmaceuticals Securities Corporation and Momenta Ireland Limited. Intercompany balances and transactions are eliminated in consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, and share-based payments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.

Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, using the modified retrospective transition method as permissible for all contracts not yet completed as of January 1, 2018. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. 

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. 

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License Agreements

The Company has entered into license arrangements with pharmaceutical companies for the development and commercialization of product candidates. The terms of these agreements may include (i) transfer of intellectual property rights (licenses) and (ii) providing research and development services. Payments made by the customers may include non-refundable upfront license fees, payments for research and development activities, payments based upon the achievement of defined collaboration objectives and a share of profits on net sales of licensed products.

If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes the transaction price allocated to the license as revenue upon transfer of control of the license. The Company evaluates all other promised goods or services in the license agreement to determine if they are distinct. If they are not distinct, they are combined with other promised goods or services to create a bundle of promised goods or services that is distinct. Optional future services that reflect their standalone selling prices do not provide the customer with a material right and, therefore, are not considered performance obligations. If optional future services reflect a significant or incremental discount, they are material rights, and are accounted for as performance obligations.

The Company utilizes judgment to determine the transaction price. The Company evaluates contingent milestones to estimate the amount which is not probable of a material reversal to include in the transaction price using the most likely amount method. Milestone payments that are not within the control of the Company, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each reporting period, the Company re-evaluates the probability of achieving development milestone payments which may not be subject to a material reversal, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect research and development revenue and earnings in the period of adjustment.

The Company then determines whether the performance obligations or combined performance obligations are satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, upfront fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

The Company may earn a contractual percentage of a licensor’s revenues or profits after the successful development and commercialization of a licensed product. A sales or usage-based royalty on a license of intellectual property where the license is the predominant item to which the royalty relates is eligible for an exception to the standard revenue recognition model under Topic 606. Under this exception, an entity is permitted to (i) exclude such amounts from the initial determination of the transaction price (hence no amounts to allocate amongst the performance obligations) and (ii) defer recognition until underlying sales occur. The amount of net sales and contractual profit is determined based on information provided by the licensor and involves the use of estimates and judgments, such as product sales allowances and accruals related to prompt payment discounts, chargebacks, governmental and other rebates, distributor, wholesaler and group purchasing organizations fees, product returns, and co-payment assistance costs, which could be adjusted based on actual results in the future. Net sales and contractual profit may also include or exclude other amounts as defined in an agreement. The Company is highly dependent on the licensor for timely and accurate information regarding any net revenues realized from sales of the licensed products in order to accurately report its results of operations. Sales-based milestones and profit share revenues are recognized as revenue when sales thresholds are met under the sales or usage-based royalty exception under Topic 606.

Collaborative Arrangements
The Company considers the nature and contractual terms of the arrangement and assesses whether the arrangement involves a joint operating activity pursuant to which the Company is an active participant and is exposed to significant risks and rewards with respect to the arrangement. If the Company is an active participant and is exposed to significant risks and rewards with respect to the arrangement, the Company accounts for the arrangement as a collaboration under Topic 808, Collaborative Arrangements. Topic 808 describes arrangements within its scope and considerations surrounding presentation and disclosure, with recognition matters subjected to other authoritative guidance, in certain cases by analogy.
With respect to consideration other than cost sharing payments received from a collaboration partner, the Company has applied an accounting policy to analogize to other accounting guidance concerning revenue recognition, specifically Topic 606. Payments received from a collaboration partner to which this policy applies may include upfront payments in respect of a license of intellectual property, development milestones, profit share payments, and sales-based milestones.

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The Company classifies the payments received or made under the cost sharing provisions of the arrangement as a component of research and development or general and administrative expense, respectively, to reflect the joint risk sharing nature of the payment received or made.

Impact of Adoption

Under the modified retrospective transition method, the Company applied Topic 606 to all contracts within its scope as of January 1, 2018. Under the practical expedient concerning contract modifications contained in the transitional provisions of Topic 606, the Company has not retrospectively restated its contracts for modifications prior to the earliest period presented, and instead has reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price. Qualitatively, the effect of applying this practical expedient is not material to the periods presented in the consolidated financial statements.

As more fully discussed in Note 5, "License Agreements and Collaborative Agreements", only the arrangement with Mylan was determined to have unsatisfied performance obligations as of the adoption date for which the pattern of revenue recognition would change. All other agreements were unaffected by the adoption of Topic 606 in all periods presented in the consolidated financial statements through application of the modified retrospective transition method. As a result of adopting Topic 606, the Company recorded a $5.5 million cumulative transition adjustment to the opening balance of accumulated deficit on January 1, 2018 to reflect the use of a proportional performance method using costs incurred as an input measure of progress in satisfying performance obligations under the Mylan collaboration. The Company previously applied a straight-line method of recognition through the expected date of the Food and Drug Administration's, or FDA, approval for each product candidate.

The tables below include the amount by which each financial statement line item was affected as a result of applying or analogizing (with respect to the Company’s collaboration agreements) to Topic 606 as compared to the previous accounting policy. The amounts in the tables below are in thousands.

Condensed Consolidated Statement of Operations and Comprehensive Loss

 
For the Three Months Ended September 30, 2018
 
Topic 606
 
Topic 605
 
Change
Research and development revenue
$
1,263

 
$
1,336

 
$
(73
)
Loss from operations
$
51,815

 
$
51,742

 
$
73

Net loss
$
50,300

 
$
50,227

 
$
73

Comprehensive loss
$
50,163

 
$
50,090

 
$
73


 
For the Nine Months Ended September 30, 2018
 
Topic 606
 
Topic 605
 
Change
Research and development revenue
$
3,846

 
$
4,075

 
$
(229
)
Loss from operations
$
171,657

 
$
171,428

 
$
229

Net loss
$
167,816

 
$
167,587

 
$
229

Comprehensive loss
$
167,840

 
$
167,611

 
$
229


Condensed Consolidated Balance Sheet
 
Balance as of September 30, 2018
 
Topic 606
 
Topic 605
 
Change
Deferred revenue, current
$
3,705

 
$
2,816

 
$
889

Deferred revenue, non-current
$
33,527

 
$
28,676

 
$
4,851

Accumulated deficit
$
735,581

 
$
729,841

 
$
5,740



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Condensed Consolidated Statement of Cash Flows
 
For the Nine Months Ended September 30, 2018
 
Topic 606
 
Topic 605
 
Change
Net loss
$
167,816

 
$
167,587

 
$
229

Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
Deferred revenue
$
1,896

 
$
2,125

 
$
(229
)

Collaboration Receivable

Collaboration receivable includes:

Amounts due to the Company for its contractual profit share on Sandoz Inc.’s, or Sandoz', and sales of GLATOPA;

Amounts due to the Company for reimbursement of research and development services and certain external costs primarily under the collaborations with Sandoz; and

Amounts due from Mylan for its 50% share of certain collaboration expenses under the cost-sharing provisions of the agreement with Mylan, as described in Note 5, "License Agreements and Collaborative Agreements", that are not funded through the continuation payments.

The Company has not recorded any allowance for uncollectible accounts or bad debt write-offs and it monitors its receivables to facilitate timely payment.

Collaboration Liability

Collaboration liability includes:

Advance payments received from Mylan that will be applied to amounts due from Mylan in future periods for the funding of Mylan's 50% share of certain collaboration expenses under the cost-sharing provisions of the agreement with Mylan; and

Net payable to CSL for the Company's 50% share of collaboration expenses under the cost-sharing provisions of the agreement with CSL.

Deferred Revenue

Deferred revenue represents a contract liability associated with consideration received from collaborators in advance of achieving certain criteria that must be met for revenue to be recognized in conformity with GAAP.

Net Loss Per Common Share
 
Basic net loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period, which includes common stock issued and outstanding and excludes unvested shares of restricted stock awards and units. Diluted net loss per common share is calculated by dividing net loss by the weighted average number of common shares and potential shares from outstanding stock options and unvested restricted stock awards and units determined by applying the treasury stock method.
 

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The following table presents anti-dilutive shares for 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
Weighted-average anti-dilutive shares related to:
 

 
 

 
 
 
 
Outstanding stock options
2,091

 
3,649

 
2,841

 
4,064

Restricted stock awards and units
1,025

 
1,474

 
860

 
1,519

  
Fair Value Measurements
 
The tables below present information about the Company’s assets that are regularly measured and carried at fair value and indicate the level within the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):
Description
 
Balance as of
September 30, 2018
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
Assets:
 
 

 
 

 
 

 
 

Cash equivalents:
 
 

 
 

 
 

 
 

Money market funds
 
$
41,173

 
$
41,173

 
$

 
$

Overnight repurchase agreements
 
1,000

 

 
1,000

 

Marketable securities:
 
 

 
 

 
 

 
 

U.S. government-sponsored enterprise securities
 
31,688

 

 
31,688

 

Corporate debt securities
 
104,236

 

 
104,236

 

Certificates of deposit
 
7,200

 

 
7,200

 

Commercial paper obligations
 
55,958

 

 
55,958

 

Asset-backed securities
 
17,289

 

 
17,289

 

 
 
 
 
 
 
 
 
 
Total
 
$
258,544

 
$
41,173

 
$
217,371

 
$

 
Description
 
Balance as of
December 31, 2017
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
Assets:
 
 

 
 

 
 

 
 

Cash equivalents:
 
 

 
 

 
 

 
 

Money market funds
 
$
49,204

 
$
49,204

 
$

 
$

Overnight repurchase agreements
 
11,250

 

 
11,250

 

Marketable securities:
 
 

 
 

 
 

 
 

U.S. government-sponsored enterprise securities
 
18,181

 

 
18,181

 

Corporate debt securities
 
148,874

 

 
148,874

 

Certificates of deposit
 
7,794

 

 
7,794

 

Commercial paper obligations
 
108,630

 

 
108,630

 

Asset-backed securities
 
22,760

 

 
22,760

 

 
 
 
 
 
 
 
 
 
Total
 
$
366,693

 
$
49,204

 
$
317,489

 
$

 

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The Company held $1.0 million and $11.3 million in overnight repurchase agreements as of September 30, 2018 and December 31, 2017, respectively. The instruments are classified as Level 2 due to the collateral including both U.S. government-sponsored enterprise securities and treasury instruments.
There have been no impairments of the Company’s assets measured and carried at fair value during the three and nine months ended September 30, 2018 and 2017. In addition, there were no changes in valuation techniques or transfers between the fair value measurement levels during the three and nine months ended September 30, 2018. The fair value of Level 2 instruments classified as marketable securities were determined through third party pricing services. For a description of the Company’s validation procedures related to prices provided by third party pricing services, refer to Note 2, “Summary of Significant Accounting Policies: Fair Value Measurements”, to the Company’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2017. The carrying amounts reflected in the Company’s consolidated balance sheets for cash, collaboration receivable, other current assets, accounts payable and accrued expenses approximate fair value due to their short-term maturities.

Cash, Cash Equivalents and Marketable Securities

The Company’s cash equivalents are composed of money market funds and overnight repurchase agreements. Money market funds are carried at fair value, which approximate cost at September 30, 2018 and December 31, 2017. Overnight repurchase agreement yields are comparable to money market funds where principal and interest on the instruments is due the next day.

The Company classifies U.S. government-sponsored enterprise securities, corporate debt securities, certificates of deposit, commercial paper and asset-backed securities as short-term and long-term marketable securities in its consolidated financial statements. See Note 2, “Summary of Significant Accounting Policies: Cash, Cash Equivalents and Marketable Securities”, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of the Company’s accounting policies.
 
The following tables summarize the Company’s cash, cash equivalents and marketable securities as of September 30, 2018 and December 31, 2017 (in thousands):
 
As of September 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Cash, money market funds and overnight repurchase agreements
 
$
65,202

 
$

 
$

 
$
65,202

U.S. government-sponsored enterprise securities due in one year or less
 
31,697

 

 
(9
)
 
31,688

Corporate debt securities due in one year or less
 
100,205

 
4

 
(123
)
 
100,086

Corporate debt securities due in more than one year
 
4,175

 
1

 
(26
)
 
4,150

Certificates of deposit due in one year or less
 
6,900

 

 

 
6,900

Certificates of deposit due in more than one year
 
300

 

 

 
$
300

Commercial paper obligations due in one year or less
 
55,954

 
12

 
(8
)
 
55,958

Asset-backed securities due in one year or less
 
15,257

 

 
(10
)
 
15,247

Asset-backed securities due in more than one year
 
2,047

 

 
(5
)
 
2,042

Total
 
$
281,737

 
$
17

 
$
(181
)
 
$
281,573

 
 
 
 
 
 
 
 
 
Reported as:
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
65,202

 
$

 
$

 
$
65,202

Marketable securities
 
216,535

 
17

 
(181
)
 
216,371

Total
 
$
281,737

 
$
17

 
$
(181
)
 
$
281,573

 

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As of December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Cash, money market funds and overnight repurchase agreements
 
$
73,651

 
$

 
$

 
$
73,651

U.S. government-sponsored enterprise securities due in one year or less
 
18,186

 

 
(5
)
 
18,181

Corporate debt securities due in one year or less
 
118,541

 
3

 
(115
)
 
118,429

Corporate debt securities due in more than one year
 
30,487

 
1

 
(43
)
 
30,445

Certificates of deposit due in one year or less
 
6,501

 

 

 
6,501

Certificates of deposit due in more than one year
 
1,297

 

 
(4
)
 
1,293

Commercial paper obligations due in one year or less
 
108,573

 
65

 
(8
)
 
108,630

Asset-backed securities due in one year or less
 
17,307

 

 
(30
)
 
17,277

Asset-backed securities due in more than one year
 
5,487

 

 
(4
)
 
5,483

Total
 
$
380,030

 
$
69

 
$
(209
)
 
$
379,890

 
 
 
 
 
 
 
 
 
Reported as:
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
73,651

 
$

 
$

 
$
73,651

Marketable securities
 
306,379

 
69

 
(209
)
 
306,239

Total
 
$
380,030

 
$
69

 
$
(209
)
 
$
379,890


Cash, Cash Equivalents, and Restricted Cash

The following tables summarize the Company’s cash, cash equivalents and restricted cash as of September 30, 2018 and September 30, 2017 (in thousands):

 
As of September 30, 2018
 
As of September 30, 2017
Cash and cash equivalents
$
65,202

 
$
172,838

Restricted cash, current portion

 
2,412

Restricted cash, long-term
19,349

 
20,620

Total
$
84,551

 
$
195,870



Treasury Stock
 
Treasury stock represents common stock currently owned by the Company as a result of shares withheld from the vesting of performance-based restricted common stock to satisfy minimum tax withholding requirements.
 
Comprehensive Loss
 
Comprehensive loss is the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. Comprehensive loss includes net loss and the change in accumulated other comprehensive loss for the period. Accumulated other comprehensive loss consists entirely of unrealized gains and losses on available-for-sale marketable securities for all periods presented.
 
Accounting Pronouncements Adopted
 
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, or ASU 2016-18. The amendments in ASU 2016-18 require an entity to reconcile and explain the period-over-period change in total cash, cash equivalents and restricted cash within its statements of cash flows. A reporting entity must apply the amendments in ASU 2016-18 using a full retrospective approach. The retrospective adoption of ASU 2016-18 resulted in $23.0 million of restricted cash being included in cash, cash equivalents and restricted cash balances on the statement of cash flows for the period ended September 30, 2017. The Company included the necessary reconciliation above.


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On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118, or SAB 118, to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impacts related to the revaluation of the deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting was completed when the 2017 U.S. corporate income tax return was filed, and no material differences arose as compared to provisional amounts initially reflected in the consolidated financial statements for the year ended December 31, 2017.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies that the Company adopts as of the specified effective date.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11, which provides entities with an additional transition method to adopt Topic 842. Under the new transition method, an entity initially applies the new lease requirements at the adoption date, not the earliest period presented, and recognizes a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company expects to elect this transition method at the adoption date of January 1, 2019. The Company also expects to elect a package of practical expedients, under which an entity need not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases, or initial direct costs for any existing leases. The Company continues to evaluate the impact of the guidance on its financial position and results of operations, and anticipates recording additional right-of-use assets and corresponding liabilities on its consolidated balance sheet.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The new standard largely aligns the accounting for share-based payment awards issued to employees and nonemployees by expanding the scope of ASC 718 to apply to nonemployee share-based transactions, as long as the transaction is not effectively a form of financing. The new guidance will be effective for the Company on January 1, 2019. The Company is currently evaluating the potential impact that this guidance may have on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Requirements for Fair Value Measurement. The new standard added, modified or removed disclosure requirements under Topic 820 for clarity and consistency. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not believe the guidance will have a material impact on its financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendment updates the accounting for implementation, setup, and other upfront costs for a customer in a hosting arrangement that is a service contract. The amendment is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendment is permitted, including adoption in any interim period, for all entities. The amendment may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company expects to adopt this amendment prospectively when effective, and does not expect the amendment will have a material impact on its financial statements.

3. Restricted Cash

The Company designated $17.5 million as collateral for a security bond posted in the litigation against Amphastar and International Medical Systems, Ltd., a wholly owned subsidiary of Amphastar Pharmaceuticals, Inc. Additional information regarding the litigation is discussed within Note 8, "Commitments and Contingencies" herein. The $17.5 million is held in an escrow account by Hanover Insurance. The Company classified this restricted cash as long-term as the timing of a final decision in the Enoxaparin Sodium Injection patent litigation is not known.

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The following table summarizes the amounts designated as collateral for letters of credit related to the lease of office and laboratory space in Cambridge, Massachusetts (collateral amounts are presented in thousands).
Property Location
Approximate Square Footage
Lease Expiration Date
Letter of Credit Amount
Balance Sheet Classification
320 Bent Street
105,000

2/28/2027
$
748

Non-Current Asset
301 Binney Street, Fifth Floor
80,000

6/29/2025
1,101

Non-Current Asset
  Total
 
 
$
1,849

 

4. Other Liabilities

As of September 30, 2018 and December 31, 2017, other current and long-term liabilities consisted of the following (in thousands):

Other Current Liabilities
 
As of September 30, 2018
 
As of December 31, 2017
Accrued liability
$
15,000

 
$

Lease incentive, current portion
996

 
379

Deferred rent, current
12

 

Lease termination fee, current
128

 

Total other current liabilities
$
16,136

 
$
379


Other Long-Term Liabilities
 
As of September 30, 2018
 
As of December 31, 2017
Lease incentive, long-term
$
7,249

 
$
3,541

Deferred rent, long-term
8,358

 
6,498

Lease termination fee, long-term
948

 

Total other long-term liabilities
$
16,555

 
$
10,039



As of September 30, 2018, the Company included $15.0 million in other current liabilities in connection with the renegotiation with Human Genome Sciences, Inc. ("GSK") of certain remaining contractual obligations under a manufacturing services agreement.

5. License Agreements and Collaborative Agreements

Contracts with Customers

2003 Sandoz Agreement

In 2003, the Company entered into a license agreement with Sandoz, or the 2003 Sandoz Agreement, to jointly develop, manufacture and commercialize enoxaparin sodium injection, a generic version of LOVENOX® (enoxaparin), in the United States, the licensed product. The Company and Sandoz agreed to exclusively work with each other to develop and commercialize the enoxaparin sodium injection for any and all medical indications within the United States. In addition, the Company granted Sandoz an exclusive license under its intellectual property rights to develop and commercialize injectable enoxaparin for all medical indications within the United States.

The term of the agreement extends throughout the development and commercialization of the products until the last sale of the products, unless earlier terminated by either party. Either party may terminate the agreement if the other party breaches the agreement or files for bankruptcy. Additionally, Sandoz may terminate the agreement for commercial viability reasons.

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Sandoz has agreed to indemnify the Company for various claims, and a certain portion of such costs may be offset against certain future payments received by the Company.

Sandoz began selling the licensed product in July 2010. In June 2015, the Company and Sandoz amended the agreement to provide that Sandoz would pay the Company 50% of contractually defined profits on sales. Due to increased generic competition and resulting decreased market pricing for the licensed product, Sandoz did not record any profit on sales of the licensed product in the three and nine months ended September 30, 2018 and 2017, and therefore the Company did not record product revenue for the licensed product in those periods. The Company is no longer eligible to receive milestones under the agreement.

The Company concluded that the license agreement is within the scope of Topic 606. As of January 1, 2018, the Company has completed its performance obligations under the contract. The Company continues to be eligible to receive contractual profit share on Sandoz’ sales of the licensed product, which is recorded as product revenue. The Company recognizes revenue for profit share in the period the related sales occur. The Company recognizes research and development revenue related to on-going commercial services under the contract as those services are delivered, as they represent customer options for future services that reflect their standalone selling price. The adoption of Topic 606 had no impact on the accounting for this license agreement.

In July 2018, Sandoz notified its customers and the FDA that it will discontinue supplying the licensed product. We expect any future revenues from Sandoz' sales of the licensed product, if any, to be minimal.

2006 Sandoz Agreement

In 2006 and 2007, the Company entered into a series of agreements with Sandoz, or the 2006 Sandoz Agreement, where the Company and Sandoz agreed to exclusively collaborate on the development and commercialization of GLATOPA 20 mg/mL and 40 mg/mL, collectively GLATOPA, a generic version of COPAXONE, among other potential products. Costs, including development costs and the costs of clinical studies, will be borne by the parties in varying proportions depending on the type of expense. For GLATOPA, the Company is generally responsible for all of the development costs in the United States. For GLATOPA outside of the United States, the Company shares development costs in proportion to its profit sharing interest. The Company is reimbursed for personnel costs and external costs incurred in the development of products to the extent development costs are borne by Sandoz, as described above. All commercialization costs are borne by Sandoz. With respect to GLATOPA, Sandoz is responsible for funding legal expenses, except for personnel costs with respect to certain legal activities for GLATOPA; however 50% of legal expenses, including any patent infringement damages, can be offset against the profit-sharing amounts. Development costs, commercialization costs and legal costs have defined meanings under the agreement.

The term of the agreement extends throughout the development and commercialization of the products until the last sale of the products, unless earlier terminated by either party. The agreement may be terminated if either party breaches the agreement or files for bankruptcy, or, on a region-by-region basis, in the event clinical studies are needed in order to obtain marketing approval. Sandoz has agreed to indemnify the Company for various claims, and a certain portion of such costs may be offset against certain future payments received by the Company.

Sandoz commenced sales of GLATOPA 20 mg/mL in the United States in June 2015 and of GLATOPA 40 mg/mL in the United States in February 2018. Under the agreement, the Company earns 50% of contractually defined profits on Sandoz' worldwide net sales of GLATOPA. Profits on net sales of GLATOPA are calculated by deducting from net sales the costs of goods sold and an allowance for selling, general and administrative costs, which is a contractual percentage of GLATOPA net sales, and post-launch commercial milestones achieved.

Following FDA approval of Mylan N.V.'s generic equivalents of COPAXONE 20 mg/mL and 40 mg/mL, which Mylan N.V. announced in October 2017, the Company is no longer eligible to earn $80 million in future post-launch commercial milestone payments. The Company is still eligible to receive up to $30 million in performance-based milestone payments for GLATOPA in the United States, although the Company believes it is not likely that the performance-based milestones will be achieved. None of these payments, once received, is refundable and there are no general rights of return.

On October 4, 2017, the Company and Sandoz entered into a letter agreement, pursuant to which the Company agreed to reduce its 50% share of contractually defined profits on worldwide net sales of GLATOPA by up to an aggregate of approximately $9.8 million, commencing in the first quarter of 2018, representing 50% of GLATOPA 40 mg/mL pre-launch inventory costs. In the first quarter of 2018, the Company's product revenue was reduced by $9.8 million for the Company’s 50% share of GLATOPA 40 mg/mL inventory written off by Sandoz.

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The Company concluded that the license agreement is within the scope of Topic 606. As of January 1, 2018, the Company has completed its performance obligations under the contract. The Company continues to be eligible to receive contractual profit share on Sandoz’ sales of GLATOPA, which is recorded as product revenue. The Company recognizes revenue for profit share in the period the related sales occur. The Company recognizes research and development revenue related to on-going commercial services under the agreement as those services are delivered, as they represent customer options for future services that reflect their standalone selling price. The adoption of Topic 606 had no impact on the accounting for this license agreement.

Collaborative Arrangements

Mylan Collaboration Agreement

The Company and Mylan entered into a collaboration agreement, or the Mylan Collaboration Agreement, effective February 9, 2016, pursuant to which the Company and Mylan agreed to collaborate exclusively, on a worldwide basis, to develop, manufacture and commercialize six of the Company’s biosimilar candidates.

Under the agreement, the Company granted Mylan an exclusive license under the Company’s intellectual property rights to develop, manufacture and commercialize the product candidates for all therapeutic indications, and Mylan granted the Company a co-exclusive license under Mylan’s intellectual property rights for the Company to perform its development and manufacturing activities under the product work plans agreed by the parties, and to perform certain commercialization activities to be agreed by the joint steering committee for such product candidates if the Company exercises its co-commercialization option described below.

Under the terms of the Mylan Collaboration Agreement, Mylan paid the Company a non-refundable upfront payment of $45 million. In addition, the Company and Mylan equally share costs (including development, manufacturing, commercialization and certain legal expenses) and profits (losses) with respect to such product candidates, with Mylan funding its share of collaboration expenses incurred by the Company, in part, through up to six contingent milestone payments, totaling up to $200 million across the six product candidates, two of which, totaling $60 million, the Company received in 2016.

For each product candidate other than M834, at a specified stage of early development, the Company and Mylan will each decide, based on the product candidate’s development progress and commercial considerations, whether to continue the development, manufacture and commercialization of such product candidate under the collaboration or to terminate the collaboration with respect to such product candidate.

The Company and Mylan established a joint steering committee consisting of an equal number of members from the Company and Mylan to oversee and manage the development, manufacture and commercialization of product candidates under the collaboration. Unless otherwise determined by the joint steering committee, it is anticipated that, in collaboration with the other party, (a) the Company will be primarily responsible for nonclinical development activities and initial clinical development activities for product candidates; and regulatory activities for product candidates in the United States through regulatory approval; and (b) Mylan will be primarily responsible for additional (pivotal or Phase 3 equivalent) clinical development activities for product candidates other than M834; regulatory activities for the product candidates outside the United States; and regulatory activities for products in the United States after regulatory approval, when all marketing authorizations for the products in the United States will be transferred to Mylan. Mylan will commercialize any approved products, with the Company having an option to co-commercialize, in a supporting commercial role, any approved products in the United States. The joint steering committee is responsible for allocating responsibilities for other activities under the collaboration.

The term of the collaboration will continue throughout the development and commercialization of the product candidates, on a product-by-product and country-by-country basis, until development and commercialization by or on behalf of the Company and Mylan pursuant to the agreement has ceased for a continuous period of two years for a given product candidate in a given country, unless earlier terminated by either party pursuant to the terms of the agreement.

The agreement may be terminated by either party for breach by, or bankruptcy of, the other party; for its convenience; or for certain activities involving competing products or the challenge of certain patents. Other than in the case of a termination for convenience, the terminating party will have the right to continue the development, manufacture and commercialization of the terminated products in the terminated countries. In the case of a termination for convenience, the other party will have the right to continue. If a termination occurs, the licenses granted to the non-continuing party for the applicable product will terminate for the terminated country. Subject to certain terms and conditions, the party that has the right to continue the

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development or commercialization of a given product candidate may retain royalty-bearing licenses to certain intellectual property rights, and rights to certain data, for the continued development and sale of the applicable product in the country or countries for which termination applies.

The Mylan agreement is accounted for as a collaboration arrangement pursuant to Topic 808. The Company’s accounting policy for collaborations analogizes to Topic 606, primarily in determining the appropriate recognition for the upfront license fee and other consideration.

Upfront Payments for License of Intellectual Property

The Company identified the following material promises under the contract: (i) licenses to develop, manufacture and commercialize the named product candidates (six product candidates in total) and (ii) research and development services through FDA approval for each of the six product candidates. The Company’s participation in the joint steering committee was assessed as immaterial in the context of the contract. As the licenses for each of the products and the related research and development services for each of the product candidates are not capable of being distinct and are not distinct within the context of the contract, the Company concluded that each of the six bundles of a product license and the related research and development services through FDA approval should be combined as performance obligations. The Company next assessed whether each of the six bundles of a particular product license and the related research and development services is distinct from each other. The Company concluded that each of the six license and research and development services bundles is capable of being distinct, as Mylan can obtain benefit from each separately, and each is distinct within the context of the contract. Therefore, each of the six license and service bundles individually represent distinct performance obligations.

The Company determined that the upfront payment constituted the entirety of the consideration to be included in the transaction price to be allocated to the performance obligations at contract inception based on the stand-alone selling prices for each of the six license and service performance obligations. For the licenses, the relative stand-alone selling prices were based on an analysis of its existing license arrangements and other available data, with consideration given to the products’ stage of development at the time the licenses were delivered. The stand-alone selling prices of the research and development services were based on the nature and extent of the research and development services to be performed. Changes in the key assumptions used to determine the relative stand-alone selling prices would not have a significant effect on the allocation of the transaction price to the performance obligations. Of the $45 million upfront payment, $8.2 million was allocated to M834, $7.1 million was allocated to M710, and between $5.7 million and $9.0 million was allocated to the four additional performance obligations.

The Company considered both input and output methods to determine a method that depicts its performance in transferring control of the goods and services promised. The Company concluded that costs incurred to date, as a proportion of the total estimated costs to bring each product candidate through FDA approval, depict the performance of the research and development services. As of September 30, 2018, $37.2 million of the transaction price remains allocated to unsatisfied performance obligations. The license and related research and development services performance obligations are expected to be delivered over a period through estimated FDA approval of each product candidate. The pattern of recognition differs from the Company’s previous accounting policy. Refer to Note 2, "Summary of Significant Accounting Policies", for disclosure of the quantification and impact of this change as a result of adopting Topic 606.

Development milestones, sales-based milestones, and profit share related to the license of intellectual property will be recognized by analogy to the Company’s revenue accounting policies.

Collaboration Costs and Reimbursements

Collaboration costs incurred by the parties are subject to quarterly reconciliation such that the final amount of expense included in the Company's statement of operations is equal to its 50% share of the total collaboration costs. The Company classifies the payments received or made under the cost sharing provisions of the arrangement as a component of research and development or general and administrative expense accordingly to reflect the joint risk sharing nature of the arrangement. Mylan funds its 50% share of development-related collaboration costs through contingent milestone payments of up to $200 million across the six product candidates, while other shared collaboration costs are reconciled by the parties with the owing party reimbursing the other party by making quarterly payments. The Company records a contract asset to reflect a receivable due from Mylan for Mylan’s 50% share of other shared collaboration costs and a contract liability to reflect the balance of any advance payment from Mylan to be applied towards Mylan’s 50% share of future development-related collaboration costs.


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CSL License and Option Agreement

The Company and CSL, a wholly owned indirect subsidiary of CSL Limited, entered into a License and Option Agreement, or the CSL License Agreement, effective February 17, 2017, pursuant to which the Company granted CSL an exclusive worldwide license to research, develop, manufacture and commercialize the M230 pre-clinical product candidate, an Fc multimer protein that is a selective immunomodulator of the Fc receptor. The agreement also provides, on an exclusive basis, for the Company and CSL to conduct research on other Fc multimer proteins, and provides CSL the right to develop, manufacture and commercialize these additional research products globally. CSL's obligations under the agreement are guaranteed by its parent company, CSL Limited.

Pursuant to the terms of the agreement, CSL paid the Company a non-refundable upfront payment of $50 million. For the development and commercialization of M230, the Company is eligible to receive up to $550 million in contingent development, regulatory and sales milestone payments, and additional negotiated milestone payments for a named research stage product should that enter development. The Company is also entitled to sales-based royalty payments in percentages ranging from a mid-single digit to low-double digits for M230 and a named research stage product should that enter development and be commercialized, and royalties and development milestone payments to be negotiated for any other products developed under the agreement. Sales milestones are based on aggregated sales across M230 and any other products developed under the agreement. The Company also had the option to participate in a cost-and-profit sharing arrangement, or a co-funding option, under which the Company would fund 50% of global research and development costs and 50% of U.S. commercialization costs for all products developed pursuant to the agreement in exchange for either a 50% share of U.S. profits, or 30% share of U.S. profits, determined by the stage of development at which the Company makes such election. The Company also has the option to participate in the promotion of products under the agreement in the United States, subject to a co-promotion agreement to be negotiated with CSL. On August 28, 2017, the Company exercised its co-funding option for a 50% share of U.S. profits. As a result, royalties remain payable for territories outside of the United States, and the milestone payments for which the Company is eligible are reduced from up to $550 million to up to $297.5 million. The Company also has the right to opt-out of such arrangement at its sole discretion, which would result in milestone payments and royalties reverting to their pre-co-funded arrangement amounts.

Under the agreement, the Company granted CSL an exclusive license under its intellectual property to research, develop, manufacture and commercialize product candidates for all therapeutic indications. CSL granted the Company a non-exclusive, royalty-free license under CSL’s intellectual property for the Company's research and development activities pursuant to the agreement and the Company's commercialization activities under any co-promotion agreement with CSL. The Company and CSL formed a joint steering committee consisting of an equal number of members from the Company and CSL, to facilitate the research, development, and commercialization of product candidates.

Unless earlier terminated, the term of the agreement commences on the Effective Date, as defined in the agreement, and continues until the later of (i) the expiration of all payment obligations with respect to products under the agreement, (ii) the Company is no longer co-funding development or commercialization of any products and (iii) the Company and CSL are not otherwise collaborating on the development and commercialization of products or product candidates. CSL may terminate the agreement on a product-by-product basis subject to notice periods and certain circumstances related to clinical development. The Company may terminate the agreement under certain circumstances related to the development of M230 and if no activities are being conducted under the agreement. Either party may terminate the agreement (i) on a product-by-product basis if certain patent challenges are made, (ii) on a product-by-product basis for material breaches, or (iii) due to the other party’s bankruptcy.

Upon termination of the agreement, subject to certain exceptions, the licenses granted under the agreement terminate. In addition, dependent upon the circumstances under which the agreement is terminated, the Company or CSL has the right to continue the research, development, and commercialization of terminated products, including rights to certain data, for the continued development and sale of terminated products and, subject to certain limitations, obligations to make sales-based royalty payments to the other party.

After the Company exercised its co-funding option for a 50% share of U.S. profits, the Company has accounted for the CSL agreement as a collaboration arrangement pursuant to Topic 808. The Company’s accounting policy for collaborations analogizes to Topic 606, primarily in determining the appropriate recognition for the upfront license fee and other consideration.

Upfront Payments for License of Intellectual Property


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The Company identified the following material promises under the contract: (i) license to research, develop, manufacture and commercialize M230 and (ii) to perform a technology transfer to CSL. The Company’s participation in the joint steering committee and other promises were assessed as immaterial in the context of the contract. As the licenses and technology transfer are not capable of being distinct and are not distinct within the context of the contract, the Company concluded that the bundle of the licenses and technology transfer should be combined as one performance obligation. The combined performance obligation was delivered in 2017. As the $50 million upfront payment reflected the transaction price at contract inception, all revenue related to the single performance obligation was recognized prior to the date of adoption of Topic 606. Development milestones, sales-based milestones, and profit share related to the license of intellectual property will be recognized by analogy to the Company’s revenue accounting policies. No transition adjustment was recognized as a result of adopting Topic 606.

Co-funding Costs and Reimbursements

The co-funding arrangement with CSL is a cost-sharing arrangement. Reimbursement by CSL for its share of the development effort is presented as a reduction of operating expenses, and reimbursement by the Company for its share of the development effort is recorded as an incremental operating expense, consistent with the Company’s accounting policy for collaboration arrangements. Such amounts are settled quarterly amongst the parties.

License Agreement Summary

The following tables provide amounts by year indicated and by line item included in the Company's accompanying consolidated financial statements attributable to transactions arising from its license arrangements. The dollar amounts in the tables below are in thousands.
 
 
 
 
 
 
 
 
 
 
 
 
 
2003 Sandoz
Agreement
 
2006 Sandoz
Agreement
 
Mylan 
Collaboration
 Agreement 
 
CSL Collaboration Agreement
 
Total
Contract assets
 
 
 
 
 
 
 
 
 
 
Collaboration receivables:
 
 
 
 
 
 
 
 
 
 
Opening balance - January 1, 2018
 
$
406

 
$
14,219

 
$
423

 
$

 
$
15,048

Revenue / cost recovery
 
7

 
30,864

 
460

 

 
31,331

Cash receipts
 
(413
)
 
(31,412
)
 
(719
)
 

 
(32,544
)
Ending balance - September 30, 2018
 
$

 
$
13,671

 
$
164

 
$

 
$
13,835

 
 
 
 
 
 
 
 
 
 
 
Contract liabilities
 
 
 
 
 
 
 
 
 
 
Deferred revenue:
 
 
 
 
 
 
 
 
 
 
Opening balance - January 1, 2018
 
$

 
$

 
$
39,128

 
$

 
$
39,128

Revenue recognition
 

 

 
(1,896
)
 

 
(1,896
)
Ending balance - September 30, 2018
 

 

 
37,232

 

 
37,232

Less: current portion
 

 

 
(3,705
)
 

 
(3,705
)
Deferred revenue, net of current portion - September 30, 2018
 
$

 
$

 
$
33,527

 
$

 
$
33,527

 
 
 
 
 
 
 
 
 
 
 
Collaboration liabilities:
 
 
 
 
 
 
 
 
 
 
Opening balance - January 1, 2018
 
$

 
$

 
$
8,245

 
$
1,013

 
$
9,258

Payments
 

 

 

 
(5,146
)
 
(5,146
)
Net collaboration costs incurred in the period
 

 

 
(7,282
)
 
6,356

 
(926
)
Ending balance - September 30, 2018
 
$

 
$

 
$
963

 
$
2,223

 
$
3,186


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For the Three Months Ended September 30, 2018
 
 
2003 Sandoz
Agreement
 
2006 Sandoz
Agreement
 
Mylan 
Collaboration
 Agreement 
 
CSL Collaboration Agreement
 
Total
Product revenue
 
$

 
$
13,621

 
$

 
$

 
$
13,621

Research and development revenue
 

 
632

 
631

 

 
1,263

Total collaboration revenue
 
$

 
$
14,253

 
$
631

 
$

 
$
14,884

Operating expenses:
 
 

 
 

 
 

 
 
 
 

Research and development expense
 

 
448

 
5,929

 
189

 
6,566

General and administrative expense
 
3,282

 
22

 
571

 
7

 
3,882

Net amount (recovered from) / payable to collaborators
 

 

 
(2,890
)
 
2,223

 
(667
)
Total operating expenses
 
$
3,282

 
$
470

 
$
3,610

 
$
2,419

 
$
9,781

 
 
For the Three Months Ended September 30, 2017
 
 
2003 Sandoz
Agreement
 
2006 Sandoz
Agreement
 
Mylan 
Collaboration
 Agreement 
 
CSL Collaboration Agreement
 
Total
Product revenue
 
$

 
$
10,890

 
$

 
$

 
$
10,890

Research and development revenue
 
60

 
10,673

 
1,122

 
1,345

 
13,200

Total collaboration revenue
 
$
60

 
$
21,563

 
$
1,122

 
$
1,345

 
$
24,090

Operating expenses:
 
 

 
 

 
 
 
 
 
 

Research and development expense
 
$
21

 
$
422

 
$
14,709

 
$
2,544

 
$
17,696

General and administrative expense
 
3,780

 
119

 
1,004

 
36

 
4,939

Net amount (recovered from) / payable to collaborators
 

 

 
(7,046
)
 
(837
)
 
(7,883
)
Total operating expenses
 
$
3,801

 
$
541

 
$
8,667

 
$
1,743

 
$
14,752


 
 
For the Nine Months Ended September 30, 2018
 
 
2003 Sandoz
Agreement
 
2006 Sandoz
Agreement
 
Mylan 
Collaboration
 Agreement 
 
CSL Collaboration Agreement
 
Total
Product revenue
 
$

 
$
28,921

 
$

 
$

 
$
28,921

Research and development revenue
 
7

 
1,943

 
1,896

 

 
3,846

Total collaboration revenue
 
$
7

 
$
30,864

 
$
1,896

 
$

 
$
32,767

Operating expenses:
 
 

 
 

 
 

 
 
 
 

Research and development expense
 
$

 
$
698

 
$
22,438

 
$
778

 
$
23,914

General and administrative expense
 
8,901

 
103

 
1,691

 
28

 
10,723

Net amount (recovered from) / payable to collaborators
 

 

 
(7,742
)
 
6,356

 
(1,386
)
Total operating expenses
 
$
8,901

 
$
801

 
$
16,387

 
$
7,162

 
$
33,251


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Table of Contents

 
 
For the Nine Months Ended September 30, 2017
 
 
2003 Sandoz
Agreement
 
2006 Sandoz
Agreement
 
Mylan 
Collaboration
 Agreement 
 
CSL Collaboration Agreement
 
Total
Product revenue
 
$

 
$
53,434

 
$

 
$

 
$
53,434

Research and development revenue
 
2,822

 
11,653

 
4,299

 
2,066

 
20,840

Total collaboration revenue
 
$
2,822

 
$
65,087

 
$
4,299

 
$
2,066

 
$
74,274

Operating expenses:
 
 

 
 

 
 
 
 
 
 

Research and development expense
 
$
1,958

 
$
1,575

 
$
44,381

 
$
7,115

 
$
55,029

General and administrative expense
 
13,410

 
356

 
2,496

 
98

 
16,360

Net amount (recovered from) collaborators
 

 

 
(19,982
)
 
(4,333
)
 
(24,315
)
Total operating expenses
 
$
15,368

 
$
1,931

 
$
26,895

 
$
2,880

 
$
47,074



6. Share-Based Payments

Equity Award Plans

On March 7, 2018, the Company's Board of Directors approved the amendment and restatement of the Company’s 2013 Incentive Award Plan, or the Amended and Restated 2013 Plan, subject to and effective upon stockholder approval. At the Company’s 2018 Annual Meeting of Stockholders, held on June 20, 2018, stockholders approved the Amended and Restated 2013 Plan. The Amended and Restated 2013 Plan, among other things, increases the number of shares of common stock available for issuance under the plan by 1,000,000 shares.

Share-Based Compensation

The table below presents share-based compensation expense for research and development, general and administrative expense, and restructuring, all of which are included in operating expenses, in the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
 
For the Three Months Ended September 30, 2018
 
For the Three Months Ended
September 30, 2017
 
For the Nine Months Ended
September 30, 2018
 
For the Nine Months Ended
September 30, 2017
Research and development
 
$
1,870

 
$
1,860

 
$
5,933

 
$
6,083

General and administrative
 
3,000

 
3,056

 
8,983

 
10,226

Restructuring
 
$
5,256

 
$

 
$
5,256

 
$

  Total share-based compensation expense
 
$
10,126

 
$
4,916

 
$
20,172

 
$
16,309


The following table summarizes share-based compensation expense recorded in each of the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
 
 
For the Three Months Ended September 30, 2018
 
For the Three Months Ended
September 30, 2017
 
For the Nine Months Ended
September 30, 2018
 
For the Nine Months Ended
September 30, 2017
Stock options
 
$
1,819

 
$
2,494

 
$
5,720

 
$
7,819

Restricted stock awards and restricted stock units
 
2,951

 
2,289

 
8,914

 
8,120

Employee stock purchase plan
 
100

 
133

 
282

 
370

Restructuring
 
5,256

 

 
5,256

 

  Total share-based compensation expense
 
$
10,126

 
$
4,916

 
$
20,172

 
$
16,309

 
During the nine months ended September 30, 2018, the Company granted 372,690 options to its employees and board members. The average grant date fair value of options granted was calculated using the Black-Scholes-Merton option-pricing

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model and the weighted average assumptions are noted in the table below. The weighted average grant date fair value of option awards granted during the three months ended September 30, 2018 and 2017 was $13.08 per option and $8.58 per option, respectively. The weighted average grant date fair value of option awards granted during the nine months ended September 30, 2018 and 2017 was $9.66 per option and $9.17 per option, respectively.
 
The following tables summarize the weighted average assumptions the Company used in its fair value calculations at the date of grant:
 
 
Weighted Average Assumptions
 
 
Stock Options
 
Employee Stock Purchase Plan
 
 
For the Three Months Ended September 30, 2018
 
For the Three Months Ended September 30, 2017
 
For the Three Months Ended September 30, 2018
 
For the Three Months Ended September 30, 2017
Expected volatility
 
48
%
 
50
%
 
48
%
 
52
%
Expected dividends
 

 

 

 

Expected life (years)
 
5.9

 
6.2

 
0.5

 
0.5

Risk-free interest rate
 
3.0
%
 
2.0
%
 
1.9
%
 
0.9
%

 
 
Weighted Average Assumptions
 
 
Stock Options
 
Employee Stock Purchase Plan
 
 
For the Nine Months Ended
September 30, 2018
 
For the Nine Months Ended
September 30, 2017
 
For the Nine Months Ended
September 30, 2018
 
For the Nine Months Ended
September 30, 2017
Expected volatility
 
48
%
 
53
%
 
49
%
 
55
%
Expected dividends
 

 

 

 

Expected life (years)
 
6.1

 
5.8

 
0.5

 
0.5

Risk-free interest rate
 
2.8
%
 
2.1
%
 
1.6
%
 
0.7
%

 
Since April 13, 2016, the Company has awarded 1,785,600 shares of performance-based restricted stock to its employees. The vesting of the shares is subject to the Company achieving up to two of three possible performance milestones on or before April 13, 2019. Upon achieving each of the first and second milestones, 25% of the shares will vest on the later of the milestone achievement date and the first anniversary of the grant date, and an additional 25% of the shares will vest on the one year anniversary of such achievement date, subject to a requirement that recipients remain employees through each applicable vesting date. Each quarter, the Company evaluates the probability of achieving the milestones on or before April 13, 2019, and its estimate of the implicit service period over which the fair value of the awards will be recognized and expensed. As a result of discontinuing its necuparanib program in 2016, the Company determined that only two of the three performance milestones are possible to achieve prior to April 13, 2019. In the first quarter of 2018, one of the two available performance milestones was met and approximately 25% of the awards vested. The Company is expensing the fair value of the shares expected to vest over the implicit service period using the accelerated attribution method. For the three and nine months ended September 30, 2018, the Company recognized approximately $0.2 million and $1.2 million of stock-based compensation costs related to these awards.

In the nine months ended September 30, 2018, the Company awarded 1,033,505 shares of time-based restricted stock units to its employees. The time-based restricted stock units vest as to 50% on the one year anniversary of the grant date and as to 50% on the second anniversary of the grant date. Time-based awards are generally forfeited if the employment relationship terminates with the Company prior to vesting, except as provided in the Company's Equity Award Retirement Policy.

7. Restructuring

On September 26, 2018, following the completion of a strategic review of its business, the Company's Board of Directors approved a plan, or the Workforce Reduction, to reduce its workforce headcount by approximately 50%. The Company evaluated the related employee severance and other benefits to employees in connection with the Workforce Reduction to determine whether the benefits were within the scope ASC 712, Compensation - Non-retirement Post-employment Benefits, or

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within the scope of ASC 420, Exit or Disposal Cost Obligations, depending on the nature of the benefit and whether it is part of an on-going benefit arrangement under ASC 712 or a one-time termination benefit unique to the Workforce Reduction. The Company recorded restructuring expense of $8.7 million in the three and nine months ended September 30, 2018 pursuant to ASC 712. The Company also recorded incremental stock-based compensation charges associated with the accelerated vesting of certain awards previously issued to the Company’s executives that were part of the Workforce Reduction. In addition, the Company recorded certain asset impairments in accordance with ASC 360 Property, Plant and Equipment, primarily associated with lab equipment. The fair value of lab equipment for the purposes of measuring the asset impairment was determined by reference to prices of comparable equipment. The Company expects to record additional restructuring charges associated with one-time termination benefits of approximately $1.9 million in future periods when it meets the recognition requirements of ASC 420. The Company also expects to reverse $1.8 million of the accelerated stock-based compensation expense recorded through September 30, 2018 for awards that were forfeited by employees in October 2018 as a result of the Company’s accounting policy to record forfeitures as they occur.

The following table outlines the components of the restructuring charges during the three and nine months ended September 30, 2018 included in the consolidated statement of operations, and ending liability recorded in the balance sheet as at September 30, 2018:
 
 
Charges incurred during the period ended September 30, 2018
 
Amount paid through September 30, 2018
 
Less: non-cash charges during the period ended September 30, 2018
 
Remaining liability at September 30, 2018
Employee severance, bonus and other
 
$
8,674

 
$

 
$

 
$
8,674

Acceleration of stock-based compensation
 
5,256

 

 
(5,256
)
 

Impairment of equipment
 
1,605

 

 
(1,605
)
 

Total restructuring charges
 
$
15,535

 
$

 
$
(6,861
)
 
$
8,674


8. Commitments and Contingencies
 
Operating Leases

The Company leases office space and equipment under various operating lease agreements. See Note 14 “Commitments and Contingencies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of the Company’s operating lease agreements. On August 2, 2018, the Company amended its lease agreement to partially terminate the lease with respect to the premises located on the 4th floor of 301 Binney St., effective as of August 6, 2018.

Total operating lease commitments as of September 30, 2018 are as follows (in thousands):
 
 
October 1 to December 31, 2018
$
3,787

2019
15,418

2020
15,872

2021
16,266

2022
16,644

2023 and beyond
60,896

Total future minimum lease payments
$
128,883


.

Purchase Obligations

In June 2018, the Company amended a supply manufacturing agreement with GSK to provide for minimum purchase obligations of approximately $22.5 million during calendar years 2019 and 2020 and $28.3 million during calendar years 2021 and 2022.


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 Legal Contingencies 

The Company is involved in various litigation matters that arise from time to time in the ordinary course of business. The process of resolving matters through litigation or other means is inherently uncertain and it is possible that an unfavorable resolution of these matters will adversely affect the Company, its results of operations, financial condition and cash flows. The Company's general practice is to expense legal fees as services are rendered in connection with legal matters, and to accrue for liabilities when losses are probable and reasonably estimable. The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of any accrual on its consolidated balance sheets.

GLATOPA 40 mg/mL-Related Litigation

On September 10, 2014, Teva Pharmaceuticals Industries Ltd. and related entities, or Teva, and Yeda Research and Development Co., Ltd., or Yeda, filed a suit against the Company and Sandoz in the United States District Court for the District of Delaware in response to the filing by Sandoz of the Abbreviated New Drug Application, or ANDA, with a Paragraph IV certification for GLATOPA 40 mg/mL. The suit initially alleged infringement related to two Orange Book-listed patents for COPAXONE 40 mg/mL, each expiring in 2030, and sought declaratory and injunctive relief prohibiting the launch of the Company's product until the last to expire of these patents. In April 2015, Teva and Yeda filed an additional suit against the Company and Sandoz in the United States District Court for the District of Delaware alleging infringement related to a third Orange Book-listed patent for COPAXONE 40 mg/mL, which issued in March 2015 and expires in 2030. In May 2015, this suit was consolidated with the initial suit that was filed in September 2014. In November 2015, Teva and Yeda filed a suit against the Company and Sandoz in the United States District Court for the District of Delaware alleging infringement related to a fourth Orange Book-listed patent for COPAXONE 40 mg/mL, which issued in October 2015 and expires in 2030. In December 2015, this suit was also consolidated with the initial suit that was filed in September 2014. Teva and Yeda seek declaratory and injunctive relief prohibiting the launch of GLATOPA 40 mg/mL until the expiration of the patents at issue. On January 30, 2017, the District Court found the four patents to be invalid due to obviousness. In February 2017, Teva and Yeda appealed the District Court's January 30, 2017, decision to the U.S. Court of Appeals for the Federal Circuit, or CAFC. On October 12, 2018, the CAFC affirmed the District Court's decision that the four patents were invalid. Teva and Yeda may appeal the decision.

On January 31, 2017, Teva filed a suit against the Company and Sandoz in the United States District Court for the District of New Jersey alleging infringement related to an additional patent for COPAXONE 40 mg/mL, U.S. Patent No. 9,155,775, which issued in October 2015 and expires in October 2035. The Company and Sandoz filed a motion to dismiss and a motion to transfer the suit to the United States District Court for the District of Delaware. On January 31, 2017, Teva voluntarily dismissed the Company from the New Jersey suit for U.S. Patent No. 9,155,775, maintaining the suit against Sandoz. On May 23, 2017, the United States District Court for the District of New Jersey granted the motion to transfer the suit to the United States District Court for the District of Delaware. A claim construction hearing was held on November 2, 2017, and a claim construction opinion issued on December 1, 2017. On October 17, 2018, the United States District Court for the District of Delaware entered a revised schedule for the trial. Pursuant to the Court's amended schedule, a trial is scheduled to commence before the United States District Court for the District of Delaware on May 6, 2019.

On February 2, 2017, the Company filed a complaint in the United States District Court for the District of Delaware seeking a declaration that U.S. Patent No. 9,155,775 is invalid, not infringed or not enforceable against the Company. In March 2017, Teva filed a motion, which is currently pending, to stay further proceedings in the Delaware action.

Enoxaparin Sodium Injection-related Litigation

On September 21, 2011, the Company and Sandoz sued Amphastar and Actavis in the United States District Court for the District of Massachusetts for patent infringement. Also in September 2011, the Company filed a request for a temporary restraining order and preliminary injunction to prevent Amphastar and Actavis from selling their Enoxaparin product in the United States. In October 2011, the District Court granted the Company's motion for a preliminary injunction and entered an order enjoining Amphastar and Actavis from advertising, offering for sale or selling their Enoxaparin product in the United States until the conclusion of a trial on the merits and required the Company and Sandoz to post a security bond of $100 million in connection with the litigation. Amphastar and Actavis appealed the decision to the CAFC, and in January 2012, the CAFC stayed the preliminary injunction. In August 2012, the CAFC vacated the preliminary injunction and remanded the case to the District Court. In September 2012, the Company filed a petition with the CAFC for a rehearing by the full court en banc, which was denied. In February 2013, the Company filed a petition for a writ of certiorari for review of the CAFC decision by the United States Supreme Court which was denied in June 2013.


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In July 2013, the District Court granted a motion by Amphastar and Actavis for summary judgment. The Company filed a notice of appeal of that decision to the CAFC. In February 2014, Amphastar filed a motion to the CAFC for summary affirmance of the District Court ruling, which the CAFC denied in May 2014. On November 10, 2015, the CAFC affirmed the District Court summary judgment decision with respect to Actavis, reversed the District Court summary judgment decision with respect to Amphastar, and remanded the case against Amphastar to the District Court. On January 11, 2016, Amphastar filed a petition for rehearing by the CAFC, which was denied on February 17, 2016. On May 17, 2016, Amphastar filed a petition for writ of certiorari for review of the CAFC decision by the United States Supreme Court, which was denied on October 3, 2016. In April 2017, the Company, Sandoz and Actavis, or the Settling Parties, settled and signed reciprocal releases of all claims, and filed a voluntary stipulation with the District Court, pursuant to which the Settling Parties stipulated and agreed to dismiss with prejudice all claims and counterclaims among the Settling Parties, without fees or costs to any party, and with the Settling Parties waiving any and all right of appeal. The District Court trial was held in July 2017, and the jury verdict found the Company's patent to be infringed, but invalid and unenforceable. In February 2018, the District Court confirmed the jury’s opinion that the patent was infringed but invalid, and narrowed the jury’s recommendation on unenforceability by finding the patent to be unenforceable against only one of the two infringing methods used by Amphastar. On March 20, 2018, the District Court entered its final judgment affirming its February 2018 rulings. On March 27, 2018, the Company and Sandoz filed a notice of appeal of the final judgment with the CAFC. The appeal has been docketed and opening briefs were filed July 30, 2018. In the event that the Company is not successful in further appeal or prosecution or settlement of this action against Amphastar, and Amphastar is able to prove they suffered damages as a result of the preliminary injunction, the Company could be liable for damages for up to $35 million of the security bond. The Company posted $17.5 million as collateral for the security bond and classified the collateral as restricted cash in its consolidated balance sheet. On March 23, 2018, Amphastar filed a motion to enforce liability on the security bond with the District Court. On April 3, 2018, the Company and Sandoz filed an emergency motion to defer consideration of Amphastar's motion to enforce liability on the security bond pending exhaustion of appeals. On July 16, 2018, the District Court denied Amphastar's motion to enforce liability on the security bond and allowed the Company's and Sandoz' motion to defer consideration. Litigation involves many risks and uncertainties, and there is no assurance that the Company or Sandoz will prevail in this patent enforcement suit.

On September 17, 2015, Amphastar filed a complaint against the Company and Sandoz in the United States District Court for the Central District of California. The complaint alleges that, in connection with filing the September 2011 patent infringement suit against Amphastar and Actavis, the Company and Sandoz sought to prevent Amphastar from selling generic Enoxaparin Sodium Injection and thereby exclude competition for generic Enoxaparin Sodium Injection in violation of federal and California anti-trust laws and California unfair business laws. Amphastar is seeking unspecified damages and fees. In December 2015, the Company and Sandoz filed a motion to dismiss and a motion to transfer the case. In January 2016, the case was transferred to the United States District Court for the District of Massachusetts. In February 2016, Amphastar filed a writ of mandamus with the United States Court of Appeals for the Ninth Circuit requesting that the court reverse and review the District Court's grant of transfer and in May 2016, the writ requested by Amphastar was denied. On July 27, 2016, the Company's and Sandoz' motion to dismiss was granted by the District Court, and the case was dismissed. On August 25, 2016, Amphastar filed a notice of appeal from the dismissal with the United States Court of Appeals for the First Circuit. Briefing was completed in December 2016, and oral argument was held on February 9, 2017. On March 6, 2017, the United States Court of Appeals for the First Circuit reversed the District Court’s dismissal and remanded the case to the District Court for further proceedings. On April 6, 2017, the District Court held a scheduling conference to provide dates for the remanded case, and on April 20, 2017, the Company and Sandoz filed a renewed motion to dismiss which was denied by the District Court on March 20, 2018. A trial is scheduled for September 2019.

On October 14, 2015, The Hospital Authority of Metropolitan Government of Nashville and Davidson County, Tennessee, d/b/a Nashville General Hospital, or NGH, filed a class action suit against the Company and Sandoz in the United States District Court for the Middle District of Tennessee on behalf of certain purchasers of LOVENOX or generic Enoxaparin Sodium Injection. The complaint alleges that, in connection with filing the September 2011 patent infringement suit against Amphastar and Actavis, the Company and Sandoz sought to prevent Amphastar from selling generic Enoxaparin Sodium Injection and thereby exclude competition for generic Enoxaparin Sodium Injection in violation of federal anti-trust laws. NGH is seeking injunctive relief, disgorgement of profits and unspecified damages and fees. In December 2015, the Company and Sandoz filed a motion to dismiss and a motion to transfer the case to the United States District Court for the District of Massachusetts. On March 21, 2017, the United States District Court for the Middle District of Tennessee dismissed NGH’s claim for damages against the Company and Sandoz, but allowed the case to move forward, in part, for NGH’s claims for injunctive and declaratory relief. In the same opinion, the United States District Court for the Middle District of Tennessee denied the Company's motion to transfer. On June 9, 2017, NGH filed a motion to amend its complaint to add a new named plaintiff, the American Federation of State, County and Municipal Employees District Council 37 Health & Security Plan, or DC37. NGH and DC37 seek to assert claims for damages under the laws of more than 30 different states, on behalf of a putative class of indirect purchasers of Lovenox or generic enoxaparin. On June 30, 2017, the Company and Sandoz filed a brief opposing the motion to amend the complaint. On December 14, 2017, the Court granted NGH's motion to amend. In

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January 2018, the Company and Sandoz filed three motions to dismiss the amended complaint. Those briefs remain pending before the Court. While the outcome of litigation is inherently uncertain, the Company believes this suit is without merit, and intends to vigorously defend itself in this litigation.


9. Subsequent Events

On November 2, 2018, the Company entered into a $35.0 million letter of credit secured by a cash deposit of $36.0 million to replace the existing $17.5 million cash deposit collateral for the security bond described in Note 3 concerning the Enoxaparin Sodium Injection-related litigation, in connection with the renewal of the bond in November 2018.

Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.
 
This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many important factors, such as those set forth under “Risk Factors” in Part II., Item 1A. of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.
 
Recent Developments

On October 1, 2018, as a result of our strategic business review, we announced our intention to focus our resources on the discovery of and development of our pipeline of novel drug candidates for immune-mediated diseases and the advancement of two of our late stage biosimilar assets, M923, our proposed biosimilar to HUMIRA, and M710, our proposed biosimilar to EYLEA. We have initiated discussions with our collaboration partner Mylan to exit our participation in the development of our other five biosimilar programs, including M834, our proposed biosimilar to ORENCIA. Additionally, we have restructured our executive team and reduced our workforce by 50%, 37% as of October 5, 2018, with an additional 13% reduction in workforce planned over the next two to 12 months.

Overview

We are a biotechnology company focused primarily on discovering and developing novel drug candidates for immune-mediated diseases and developing two of our late stage biosimilar candidates.

To date, we have devoted substantially all of our capital resource expenditures to the research and development of our product candidates. Although we were profitable in fiscal years 2010 and 2011, since that time we have been incurring operating losses and we expect to incur annual operating losses over the next several years as we advance our drug development portfolio. As of September 30, 2018, we had an accumulated deficit of approximately $735.6 million. We will need to generate significant revenue to return to profitability. We expect that our return to profitability, if at all, will most likely come from the commercialization of the products in our drug development portfolio.

Complex Generics

GLATOPA® (glatiramer acetate injection) 20 mg/mL—Generic Once-daily COPAXONE® (glatiramer acetate injection) 20 mg/mL

In April 2015, the Food and Drug Administration, or the FDA, approved the Abbreviated New Drug Application, or ANDA, for GLATOPA 20 mg/mL, a generic equivalent of once-daily COPAXONE 20 mg/mL. GLATOPA 20 mg/mL was the first "AP" rated, substitutable generic equivalent of once-daily COPAXONE. Sandoz commenced sales of GLATOPA 20 mg/mL in June 2015. Under our 2006 collaboration agreement with Sandoz, or the 2006 Sandoz Agreement, we earn 50% of contractually defined profits on GLATOPA 20 mg/mL sales.

In October 2017, Mylan N.V. announced the launch of its generic equivalents of once-daily COPAXONE 20 mg/mL and three-times-weekly COPAXONE 40 mg/mL. Following Mylan N.V.’s entry into the market, Sandoz has defended GLATOPA’s share of the 20 mg/mL glatiramer acetate injection market by using one or more contracting strategies, including but not limited to, lowering its GLATOPA 20 mg/mL price or increasing the discounts or rebates it offers for GLATOPA 20 mg/mL, which has

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decreased contractual profit share revenue. Additionally, as a result of Mylan N.V.’s and our launches of generic equivalents of COPAXONE 40 mg/mL, the market and contractual profit share revenue of GLATOPA 20 mg/mL may be reduced by an accelerated conversion of patients from once-daily 20 mg/mL glatiramer acetate injection to three-times-weekly 40 mg/mL glatiramer acetate injection due to lower pricing in that market. As of the end of the third quarter of 2018, 40 mg/mL glatiramer acetate injection accounted for approximately 83% of the overall U.S. glatiramer acetate injection market (20 mg/mL and 40 mg/mL) based on volume prescribed.

GLATOPA® (glatiramer acetate injection) 40 mg/mL—Generic Three-times-weekly COPAXONE® (glatiramer acetate injection) 40 mg/mL

On February 13, 2018, we announced that GLATOPA 40 mg/mL, a generic version of three-times-weekly COPAXONE 40 mg/mL, was approved by the FDA and launched by our collaborator, Sandoz.

Since Sandoz’s launch of GLATOPA 40mg/mL in February 2018, Sandoz has encountered aggressive pricing and contracting tactics from competitors and as a result we expect modest revenues for the product in the future.

On January 30, 2017, the District Court for the District of Delaware found invalid four Orange Book-listed patents related to COPAXONE 40 mg/mL that we were alleged to have infringed. Three of these patents had previously been found invalid in August 2016 by the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office, or PTAB, in an Inter Partes Review filed by an unrelated third party. In February 2017, Teva and Yeda appealed the District Court's January 30, 2017 decision to the U.S. Court of Appeals for the Federal Circuit, or CAFC. On October 12, 2018, the CAFC affirmed the District Court's decision that the four patents were invalid. Teva and Yeda may appeal the decision. This and other legal proceedings related to GLATOPA 40 mg/mL are described under " Part II. Item 1. Legal Proceedings - GLATOPA 40 mg/mL-Related Proceedings."

GLATOPA refers to GLATOPA 20 mg/mL and GLATOPA 40 mg/mL, collectively.

Enoxaparin Sodium Injection—Generic LOVENOX®

Under our amended 2003 collaboration agreement with Sandoz, or the 2003 Sandoz Agreement, Sandoz is obligated to pay us 50% of contractually defined profits on sales of Enoxaparin Sodium Injection. In July 2018, Sandoz notified its customers and the FDA that it will discontinue supplying Enoxaparin Sodium Injection. We expect any future revenues from Sandoz' sales of Enoxaparin Sodium Injection, if any, to be minimal.

Biosimilars

M923—Biosimilar HUMIRA® (adalimumab) Candidate

In November 2016, we announced that the confirmatory, randomized, double-blind, multi-center, global study evaluating the efficacy, safety and immunogenicity of M923 in adult patients with moderate-to-severe chronic plaque psoriasis met its primary endpoint. Patients received up to 48 weeks treatment with M923, HUMIRA, or HUMIRA alternating with M923. The proportion of subjects who achieved the primary endpoint, at least 75% reduction in the Psoriasis Area and Severity Index, or PASI-75, following 16 weeks of treatment, was equivalent between M923 and HUMIRA. The estimated difference in responders was well within the pre-specified confidence interval, confirming equivalence. Equivalence was also achieved for all secondary efficacy endpoints, including the achievement of PASI-50, PASI-90, proportion achieving clear or near-clear skin, and change from baseline in absolute PASI score. Adverse events were comparable in terms of type, frequency, and severity, and were consistent with the published safety data for HUMIRA. Due to unexpectedly high enrollment rates, additional patients to those included in the interim analysis were enrolled in the study. These patients will be included in the regulatory submission.

On November 6, 2018, we executed global licensing agreements with AbbVie Inc. with respect to M923, pursuant to which, subject to approval by health regulatory authorities, we may launch M923 in the United States on November 20, 2023 and in Europe upon approval by the European Medicines Agency. We plan to submit a biologics license application ("BLA") for M923 with the FDA in the fourth quarter of 2018 and a market authorization application (MAA) in the European Union in the first half of 2019. We are working on identifying a commercialization partner for this product candidate. We expect that U.S. market formation for biosimilar versions of HUMIRA will likely be in the 2022-2023 time frame, subject to marketing approval, patent considerations and litigation timelines.
 

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M834—Biosimilar ORENCIA® (abatacept) Candidate

M834 is being developed in collaboration with Mylan. In the fourth quarter of 2017, we completed a randomized, double-blind, three-arm, parallel group, single-dose Phase 1 clinical trial in normal healthy volunteers to compare the pharmacokinetics, safety and immunogenicity of M834 to U.S.-sourced and EU-sourced ORENCIA. On November 1, 2017, we announced that M834 did not meet its primary pharmacokinetic endpoints in the Phase 1 clinical trial. We have initiated discussions with Mylan to exit our participation in the development of M834.

ORENCIA's composition of matter patents expire in the United States in 2019. We are currently involved in legal proceedings aimed at invalidating Bristol-Myers Squibb’s formulation patent on ORENCIA. This proceeding is further discussed below under "Part II. Item 1. Legal Proceedings - M834-Related Proceedings."
 
M710—Biosimilar EYLEA® (aflibercept) Candidate

M710 is being developed in collaboration with Mylan. On January 3, 2018, we announced the development strategy for M710. In August 2018, Mylan initiated dosing of patients in the United States in our pivotal clinical trial in patients. This trial is randomized, double-blind, active-control, multi-center study in patients with diabetic macular edema to compare the safety, efficacy and immunogenicity of M710 with EYLEA. Mylan has also received regulatory approval to dose patients in the European Union. Subject to development, marketing approval and patent considerations, we expect U.S. market formation for biosimilar versions of EYLEA will likely be in the 2023 time frame.

Other Biosimilar Candidates

On October 1, 2018, we announced we have initiated discussions with our collaboration partner Mylan to exit our participation in the development of our other four biosimilar programs, in addition to M834, our proposed biosimilar to ORENCIA.

Novel Therapeutics

We believe our novel product candidates could be capable of treating a large number of immune-mediated disorders driven by autoantibodies, immune complexes, and Fc receptor biology.

M281 - Anti-FcRn Candidate

M281 is a fully-human anti-neonatal Fc receptor (FcRn), aglycosylated immunoglobulin G, or IgG1, monoclonal antibody, engineered to reduce circulating pathogenic IgG antibodies, in excess of that achieved by any current treatments, by completely blocking endogenous IgG recycling via FcRn.

A Phase 1 randomized, double-blind, placebo-controlled study to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of M281 in normal healthy volunteers was initiated in June 2016. In January 2018, we announced the full results of the Phase 1 study. A total of 50 patients were enrolled in both the single ascending dose, or SAD, and multiple ascending dose, or MAD portions of the study, both of which showed predictable pharmacokinetics, and commensurate, controllable and reproducible reductions in circulating IgG. The data showed greater than 80% reduction in circulating IgG antibodies with a mean reduction of 84%. M281 was well tolerated at all dose levels and no serious adverse events or unexpected safety findings were observed in either portion of the study. The full data from our Phase 1 study was published on November 7, 2018. We intend to commence two proof of concept studies, one in generalized myasthenia gravis and one in hemolytic disease of the fetus and newborn, in the fourth quarter of 2018.

M230 (CSL730) - Recombinant Fc Multimer Candidate

M230 is a novel recombinant trivalent human IgG1 Fc multimer containing three IgG Fc regions joined carefully to maximize activity. Nonclinical data have shown that M230 enhances the molecules' avidity for the Fc receptors matching the potency and efficacy of IVIg at significantly lower doses.

Pursuant to the License and Option Agreement with CSL Behring Recombinant Facility AG (CSL), or the CSL License Agreement, effective February 17, 2017, we granted CSL an exclusive worldwide license to research, develop, manufacture and commercialize M230. On August 28, 2017, we exercised our 50% co-funding option, which is discussed further in Note 5, "License Agreements and Collaborative Agreements - CSL License and Option Agreement". CSL's Phase I study in healthy volunteers to evaluate safety and tolerability of M230 is ongoing and is targeted for completion in 2019.

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M254 - hsIVIg Candidate

M254 is a hyper-sialylated immunoglobulin designed as a high potency alternative for intravenous immunoglobulin (IVIg), a therapeutic drug product that is manufactured using pooled, human immunoglobulin G, or IgG, antibodies purified from blood plasma. IVIg is used to treat several inflammatory diseases, including idiopathic thrombocytopenic purpura, and chronic inflammatory demyelinating polyneuropathy. If approved, M254 has the potential to remediate the limitations of IVIg because sialylation of the Fc region of IgG has been seen to augment the anti-inflammatory attributes of IVIg. We have completed our IND-enabling toxicology study and intend to initiate a Phase 1/2 proof of concept clinical study in idiopathic thrombocytopenic purpura in early 2019, pending regulatory feedback. We continue to identify and explore potential collaboration opportunities to further develop and commercialize this product candidate.

Results of Operations
 
Comparison of Three Months Ended September 30, 2018 and 2017

Product revenue includes our contractually defined profits earned on Sandoz’ sales of GLATOPA and Enoxaparin Sodium Injection. Research and development revenue generally consists of amounts earned by us under our collaborations for development, regulatory and commercial milestones; reimbursement of research and development services and reimbursement of development costs; and recognition of upfront payments.

The following data summarizes our collaboration revenues for the periods indicated.
 
Three Months Ended September 30,
 
2018
 
2017
Collaboration revenue:
(in thousands)
 
(in thousands)
Product revenue
$
13,621

 
$
10,890

Research and development revenue
1,263

 
13,200

Total collaboration revenue
$
14,884

 
$
24,090


Product Revenue

GLATOPA

Sandoz commenced sales of GLATOPA 20 mg/mL in the United States in June 2015 and GLATOPA 40 mg/mL in February 2018. We earn 50% of contractually defined profits on Sandoz’ sales of GLATOPA. The following table presents GLATOPA product revenue by period.
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Change period over period
 
2018
 
2017
 
2018 compared to 2017
 
(in thousands)
 
(in thousands)
 
(in thousands)
 
(%)
GLATOPA
$