Momenta Pharmaceuticals, Inc.
MOMENTA PHARMACEUTICALS INC (Form: 10-Q, Received: 11/01/2017 09:19:55)
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, 2017
 
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.)
 
675 West Kendall Street, Cambridge, MA
 
02142
(Address of Principal Executive Offices)
 
(Zip Code)
 
(617) 491-9700
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  ¨
(Do not check if a smaller reporting company)
 
 
 
 
Emerging growth company  ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x
 
As of October 30, 2017 , there were 76,387,066 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.
 


Table of Contents

MOMENTA PHARMACEUTICALS, INC.

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of  September 30, 2017 and December 31, 2016
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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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Table of Contents

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,” “build,” “can,” “considering,” “contemplate,” “continue,” “could,” “determine,” “ensure,” “estimate,” “expect,” “goal,” “intend,” “likely,” “may,” “might,” “objective,” “opportunity,” “plan,” “possible,” “potential”, “predict,” “progress,” “pursue,” “seek,” “schedule,” “should,” “strategy,” “target,” “typically,” “will,” “working toward,” “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 expectations regarding the utility of our products and product candidates; development, manufacture and commercialization of our products and product candidates, including the next steps for M834, our biosimilar ORENCIA ® (abatacept) candidate; efforts to seek and manage relationships with collaboration partners, including without limitation for our biosimilar and novel therapeutic programs; the timing of clinical trials and the availability and timing of reporting results; the timing of launch of products and product candidates, including GLATOPA ® (glatiramer acetate injection) 40 mg/mL; market potential 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 and regulatory proceedings; collaboration revenues and research and development revenues; manufacturing, including statements regarding Sandoz' third party fill/finish manufacturer for GLATOPA, Pfizer Inc.; the FDA warning letter received by Sandoz' third party fill/finish manufacturer for GLATOPA, Pfizer Inc.; timing of regulatory filings, reviews and approvals, including the timing of the regulatory review and approval of the GLATOPA 40 mg/mL ANDA; 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, 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 timing of biosimilar market formation; 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, costs, 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, including Sandoz' third party fill/finish manufacturer for GLATOPA, Pfizer Inc.; the competitive landscape, including the effects of Mylan N.V.'s entry into the COPAXONE ® (glatiramer acetate injection) market; 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; royalty rates; our collaborators' plans; 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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Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.    FINANCIAL STATEMENTS

MOMENTA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 
September 30, 2017
 
December 31, 2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
172,838

 
$
150,738

Marketable securities
245,948

 
202,413

Collaboration receivable
14,333

 
70,242

Restricted cash
2,412

 

Prepaid expenses and other current assets
6,958

 
4,607

Total current assets
442,489

 
428,000

Marketable securities, long-term
4,292

 

Property and equipment, net
29,948

 
20,847

Intangible assets, net
4,324

 
5,189

Other long-term assets
21,489

 
23,701

Total assets
$
502,542

 
$
477,737

 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
12,652

 
$
3,632

Accrued expenses
25,152

 
26,866

Collaboration advance, net
13,888

 
32,895

Deferred revenue
54,487

 
7,272

Other current liabilities
80

 
11

Total current liabilities
106,259

 
70,676

Deferred revenue, net of current portion
29,845

 
31,360

Other long-term liabilities
5,924

 
3,793

Total liabilities
142,028

 
105,829

Commitments and contingencies (Note 6)


 


Stockholders’ Equity:
 

 
 

Common stock, $0.0001 par value per share; 100,000 shares authorized, 76,623 shares issued and 76,394 shares outstanding at September 30, 2017 and 71,305 shares issued and 71,076 outstanding at December 31, 2016
8

 
7

Additional paid-in capital
939,586

 
848,304

Accumulated other comprehensive income
47

 
86

Accumulated deficit
(576,013
)
 
(473,375
)
Treasury stock, at cost, 229 shares
(3,114
)
 
(3,114
)
 
 
 
 
Total stockholders’ equity
360,514

 
371,908

 
 
 
 
Total liabilities and stockholders’ equity
$
502,542

 
$
477,737


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

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Table of Contents

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,
 
2017
 
2016
 
2017
 
2016
Collaboration revenues:
 

 
 

 
 
 
 
Product revenue
$
10,890

 
$
23,339

 
$
53,434

 
$
58,831

Research and development revenue
13,200

 
5,805

 
20,840

 
16,593

Total collaboration revenue
24,090

 
29,144

 
74,274

 
75,424

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 
 
 
Research and development
37,914

 
31,568

 
113,078

 
93,498

General and administrative
20,703

 
15,758

 
66,380

 
46,301

Total operating expenses
58,617

 
47,326

 
179,458

 
139,799

 
 
 
 
 
 
 
 
Operating loss
(34,527
)
 
(18,182
)
 
(105,184
)
 
(64,375
)
 
 
 
 
 
 
 
 
Other income, net
1,339

 
638

 
3,329

 
1,833

 
 
 
 
 
 
 
 
Net loss
$
(33,188
)
 
$
(17,544
)
 
$
(101,855
)
 
$
(62,542
)
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
$
(0.44
)
 
$
(0.26
)
 
$
(1.40
)
 
$
(0.91
)
 
 
 
 
 
 
 
 
Weighted average shares used in computing basic and diluted net loss per share
74,611

 
68,799

 
72,585

 
68,540

 
 
 
 
 
 
 
 
Comprehensive loss:
 

 
 

 
 
 
 
Net loss
$
(33,188
)
 
$
(17,544
)
 
$
(101,855
)
 
$
(62,542
)
Net unrealized holding gains (losses) on available-for-sale marketable securities
52

 
(36
)
 
(39
)
 
246

Comprehensive loss
$
(33,136
)
 
$
(17,580
)
 
$
(101,894
)

$
(62,296
)

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


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Table of Contents

MOMENTA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) 
 
Nine Months Ended September 30,
 
2017
 
2016
Cash Flows from Operating Activities:
 

 
 

Net loss
$
(101,855
)
 
$
(62,542
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization of property and equipment
4,719

 
5,726

Share-based compensation expense
16,309

 
14,756

Amortization of premium on investments
248

 
524

Amortization of intangibles
865

 
1,240

Changes in working capital
87,567

 
4,141

 
 
 
 
Net cash provided by (used in) operating activities
7,853

 
(36,155
)
 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Purchases of property and equipment
(11,213
)
 
(4,806
)
Purchases of marketable securities
(366,292
)
 
(264,905
)
Proceeds from maturities of marketable securities
318,178

 
350,531

 
 
 
 
Net cash (used in) provided by investing activities
(59,327
)
 
80,820

 
 
 
 
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
9,484

 
1,218

Repurchase of common stock pursuant to share surrender

 
(1,065
)
 
 
 
 
Net cash provided by financing activities
73,574

 
153

 
 
 
 
Net increase in cash and cash equivalents
22,100

 
44,818

Cash and cash equivalents, beginning of period
150,738

 
61,461

Cash and cash equivalents, end of period
$
172,838

 
$
106,279

 
 
 
 
Non-Cash Investing/Financing Activities:
 
 
 
Purchases of property and equipment included in accounts payable and accrued expenses
$
3,542

 
$
267

Common shares issued to Parivid to settle milestone payment

$

 
$
3,190

Receivable due from stock option exercises
$
617

 
$

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

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Table of Contents

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 generic versions of complex drugs, biosimilars and novel therapeutics for autoimmune diseases. 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, 2016 filed with the Securities and Exchange Commission, or SEC, on February 24, 2017. The Company's accounting policies are described in the “Notes to Consolidated Financial Statements” in its 2016 Form 10-K 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, 2017 , 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.

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.
 
The following table presents anti-dilutive shares for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 

7


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Weighted-average anti-dilutive shares related to:
 

 
 

 
 
 
 
Outstanding stock options
3,649

 
6,826

 
4,064

 
6,880

Restricted stock awards
1,474

 
1,500

 
1,519

 
1,052

 
  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):

As of September 30, 2017
 
Total
 
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
 
$
131,428

 
$
131,428

 
$

 
$

Overnight repurchase agreements
 
29,000

 

 
29,000

 

Marketable securities:
 
 

 
 

 
 

 
 

U.S. government-sponsored enterprise securities
 
2,187

 

 
2,187

 

Corporate debt securities
 
95,780

 

 
95,780

 

Commercial paper obligations
 
102,668

 

 
102,668

 

Asset-backed securities
 
49,605

 

 
49,605

 

 
 
 
 
 
 
 
 
 
Total
 
$
410,668

 
$
131,428

 
$
279,240

 
$

 
As of December 31, 2016
 
Total
 
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
 
$
121,510

 
$
121,510

 
$

 
$

  Overnight repurchase agreements

 
24,000

 

 
24,000

 

Marketable securities:
 
 

 
 

 
 

 
 

Corporate debt securities
 
47,906

 

 
47,906

 

Commercial paper obligations
 
84,436

 

 
84,436

 

Asset-backed securities
 
70,071

 

 
70,071

 

 
 
 
 
 
 
 
 
 
Total
 
$
347,923

 
$
121,510

 
$
226,413

 
$

 
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, 2017 and 2016 . 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, 2017 . The fair value of Level 2 instruments classified as marketable securities were determined through third party pricing services.

Cash, Cash Equivalents and Marketable Securities

8


 
The following tables summarize the Company’s cash, cash equivalents and marketable securities as of September 30, 2017 and December 31, 2016 (in thousands):
 
As of September 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Cash, money market funds and overnight repurchase agreements
 
$
172,838

 
$

 
$

 
$
172,838

U.S. government-sponsored enterprise securities due in one year or less
 
2,188

 

 
(1
)
 
2,187

Corporate debt securities due in one year or less
 
95,806

 
2

 
(28
)
 
95,780

Commercial paper obligations due in one year or less
 
102,584

 
84

 

 
102,668

Asset-backed securities due in one year or less
 
45,318

 

 
(5
)
 
45,313

Asset-backed securities due in more than one year
 
4,297

 

 
(5
)
 
4,292

 
 
 
 
 
 
 
 
 
Total
 
$
423,031

 
$
86

 
$
(39
)
 
$
423,078

 
 
 
 
 
 
 
 
 
Reported as:
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
172,838

 
$

 
$

 
$
172,838

Marketable securities
 
250,193

 
86

 
(39
)
 
250,240

 
 
 
 
 
 
 
 
 
Total
 
$
423,031

 
$
86

 
$
(39
)
 
$
423,078

 
As of December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Cash, money market funds and overnight repurchase agreements
 
$
150,738

 
$

 
$

 
$
150,738

Corporate debt securities due in one year or less
 
47,942

 

 
(36
)
 
47,906

Commercial paper obligations due in one year or less
 
84,301

 
135

 

 
84,436

Asset-backed securities due in one year or less
 
70,084

 
1

 
(14
)
 
70,071

 
 
 
 
 
 
 
 
 
Total
 
$
353,065

 
$
136

 
$
(50
)
 
$
353,151

 
 
 
 
 
 
 
 
 
Reported as:
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
150,738

 
$

 
$

 
$
150,738

Marketable securities
 
202,327

 
136

 
(50
)
 
202,413

 
 
 
 
 
 
 
 
 
Total
 
$
353,065

 
$
136

 
$
(50
)
 
$
353,151


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.

On July 1, 2017, the Company adopted Accounting Standards Update, or ASU, No. 2016-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting and applied the new guidance prospectively to any modifications to share-based payment awards. This update provides guidance about which changes to the terms or conditions of

9


a share-based payment award require an entity to apply modification accounting in Topic 718. ASU No. 2016-09 introduces guidance that an entity should account for the effects of a modification unless all the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified and if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This update is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted, applied prospectively to an award modified on or after the adoption date. There were no modifications to the Company's share-based payment awards in the third quarter of 2017.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB has subsequently issued several amendments to ASU No. 2014-09 that have the same effective date and transition date of January 1, 2018.

The Company expects to adopt these standards using the modified retrospective method as permissible for all contracts not yet completed as of the effective date. The modified retrospective method applies the guidance retrospectively only to the most current period presented in the financial statements, recognizing the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings (or deficit) at the date of initial application. The Company continues to progress its analysis of its arrangements with Sandoz, Mylan and CSL under the new accounting standard, as well as estimating the expected financial statement impact of applying the new standard to these arrangements. During the fourth quarter of 2017 , the Company plans to finalize its analysis to determine the impact this standard may have on its results of operations, financial position and disclosures.

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. The new standard will be effective for the Company on January 1, 2019. The Company is currently evaluating the impact of adopting this new accounting standard on its financial position and results of operations.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which simplifies certain elements of cash flow classification. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance will be effective for annual periods beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of the ASU will have on its consolidated financial statements.

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. ASU 2016-18 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments in ASU 2016-18 using a full retrospective approach. The Company is currently evaluating the impact the adoption of the ASU will have on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which amended guidance related to business combinations. The amended guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amended guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company early adopted this new guidance as of January 1, 2017 and will apply this new guidance to any future acquisitions.  

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 6 " Commitments and Contingencies ." The $17.5 million is held in an escrow

10


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.

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
675 West Kendall Street
78,500

4/30/2018
$
2,412

Current Asset
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
301 Binney Street, Fourth Floor
53,000

3/31/2028
1,271

Non-Current Asset
  Total
 
 
$
5,532

 

4. Collaboration and License Agreements
 
At September 30, 2017 , the Company had collaboration and license agreements with Sandoz AG (formerly Sandoz N.V. and Biochemie West Indies, N.V.), an affiliate of Novartis Pharma AG, and Sandoz Inc. (formerly Geneva Pharmaceuticals, Inc.), collectively referred to as Sandoz; Sandoz AG; Mylan Ireland Limited, a wholly-owned, indirect subsidiary of Mylan N.V., or Mylan; and CSL Behring Recombinant Facility AG, or CSL, a wholly-owned indirect subsidiary of CSL Limited. M923, the Company's biosimilar HUMIRA ® (adalimumab) candidate, was previously developed in collaboration with Baxalta under the Baxalta Collaboration Agreement, as defined below. The Baxalta Collaboration Agreement was terminated effective December 31, 2016 .

Under its collaborations, the Company incurs employee expenses as well as external costs for development and commercial activities, presented as operating expenses. Reimbursements of those costs under the Company’s collaboration arrangements may be presented as revenue or a reduction of operating expenses, depending on the nature of responsibilities of each party under the collaboration.

The following tables provide amounts by period indicated and by line item included in the Company’s accompanying unaudited, condensed consolidated statements of operations and comprehensive loss attributable to transactions arising from its significant collaborative arrangements and all other arrangements, as defined in the FASB’s Accounting Standards Codification, or ASC, Topic 808, Collaborative Arrangements.

The amounts in operating expenses generally represent external expenditures, including amortization of an intangible asset, and exclude salaries and benefits, share-based compensation, facilities, depreciation and laboratory supplies, as the majority of such costs are not directly charged to programs. The dollar amounts in the tables below are in thousands.
 

11


 
 
For the Three Months Ended September 30, 2017
 
 
2003 Sandoz
Collaboration
Agreement
 
2006 Sandoz
Collaboration
Agreement
 
Mylan 
Collaboration
 Agreement 
 
CSL License Agreement
 
Total
Collaborations
Collaboration revenues:
 
 

 
 

 
 
 
 
 
 

Product revenue
 
$

 
$
10,890

 
$

 
$

 
$
10,890

Research and development revenue:
 
 

 
 

 
 

 
 
 
 

Milestone
 

 
10,000

 

 

 
10,000

Recognition of upfront payments
 

 

 
1,122

 

 
1,122

Research and development services and external costs
 
60

 
673

 

 
1,345

 
2,078

Total research and development revenue
 
60

 
10,673

 
1,122

 
1,345

 
13,200

Total collaboration revenues
 
$
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

   Less: net recoverable amount from collaboration partner
 

 

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

 
$
541

 
$
8,667

 
$
1,743

 
$
14,752



 
 
For the Three Months Ended September 30, 2016
 
 
2003 Sandoz
Collaboration
Agreement
 
2006 Sandoz
Collaboration
Agreement
 
Mylan 
Collaboration
 Agreement 
 
Baxalta
Collaboration
Agreement (1)
 
Total
Collaborations
Collaboration revenues:
 
 

 
 

 
 
 
 

 
 

Product revenue
 
$

 
$
23,339

 
$

 
$

 
$
23,339

Research and development revenue:
 
 

 
 

 
 
 
 

 
 

Recognition of upfront payments
 

 

 
1,785

 
2,498

 
4,283

Research and development services and external costs
 
128

 
494

 

 
900

 
1,522

Total research and development revenue
 
128

 
494

 
1,785

 
3,398

 
5,805

Total collaboration revenues
 
$
128

 
$
23,833

 
$
1,785

 
$
3,398

 
$
29,144

Operating expenses:
 
 

 
 

 
 
 
 

 
 

Research and development expense
 
$
1

 
$
349

 
$
16,481

 
$
402

 
$
17,233

General and administrative expense
 
332

 
66

 
1,289

 

 
1,687

   Less: net recoverable amount from collaboration partner
 

 

 
(8,114
)
 

 
(8,114
)
Total operating expenses
 
$
333

 
$
415

 
$
9,656

 
$
402

 
$
10,806




12


 
 
For the Nine Months Ended September 30, 2017
 
 
2003 Sandoz
Collaboration
Agreement
 
2006 Sandoz
Collaboration
Agreement
 
Mylan 
Collaboration
 Agreement 
 
CSL License Agreement
 
Total
Collaborations
Collaboration revenues:
 
 

 
 

 
 
 
 
 
 

Product revenue
 
$

 
$
53,434

 
$

 
$

 
$
53,434

Research and development revenue:
 
 
 
 
 
 
 
 
 
 
Milestone
 

 
10,000

 

 


10,000

Recognition of upfront payments
 

 

 
4,299

 

 
4,299

Research and development services and external costs
 
2,822

 
1,653

 

 
2,066

 
6,541

Total research and development revenue
 
2,822

 
11,653

 
4,299

 
2,066

 
20,840

Total collaboration revenues
 
$
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

   Less: net recoverable amount from collaboration partner
 

 

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

 
$
1,931

 
$
26,895

 
$
2,880

 
$
47,074



 
 
For the Nine Months Ended September 30, 2016
 
 
2003 Sandoz
Collaboration
Agreement
 
2006 Sandoz
Collaboration
Agreement
 
Mylan 
Collaboration
 Agreement
 
Baxalta
Collaboration
Agreement (1)
 
Total
Collaborations
Collaboration revenues:
 
 

 
 

 
 
 
 
 
 

Product revenue
 
$

 
$
58,831

 
$

 
$

 
$
58,831

Research and development revenue:
 
 
 
 
 
 
 
 
 
 
Recognition of upfront payments
 

 

 
4,550

 
7,382

 
11,932

Research and development services and external costs
 
266

 
1,878

 

 
2,517

 
4,661

Total research and development revenue
 
266

 
1,878

 
4,550

 
9,899

 
16,593

Total collaboration revenues
 
$
266

 
$
60,709

 
$
4,550

 
$
9,899

 
$
75,424

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Research and development expense
 
$
1

 
$
1,643

 
$
40,658

 
$
880

 
$
43,182

General and administrative expense
 
1,865

 
341

 
2,416

 
316

 
4,938

   Less: net recoverable amount from collaboration partner
 

 

 
(20,766
)
 

 
(20,766
)
Total operating expenses
 
$
1,866

 
$
1,984

 
$
22,308

 
$
1,196

 
$
27,354


(1) The Baxalta Collaboration Agreement was terminated effective December 31, 2016.

2003 Sandoz Collaboration Agreement
 
In 2003, the Company entered into a collaboration and license agreement, or the 2003 Sandoz Collaboration Agreement, with Sandoz to jointly develop, manufacture and commercialize Enoxaparin Sodium Injection, a generic version of LOVENOX ® (enoxaparin), in the United States. Under the terms of the 2003 Sandoz Collaboration Agreement, the Company and Sandoz agreed to exclusively work with each other to develop and commercialize 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.
 
Sandoz began selling Enoxaparin Sodium Injection in July 2010. In June 2015, the Company and Sandoz amended the 2003 Sandoz Collaboration Agreement, effective April 1, 2015, to provide that Sandoz would pay the Company 50% of

13


contractually defined profits on sales, if any. Due to increased generic competition and resulting decreased market pricing for generic enoxaparin sodium injection products, Sandoz has not recorded any profit on sales of Enoxaparin Sodium Injection since 2015 .

2006 Sandoz Collaboration Agreement
 
In 2006 and 2007, the Company entered into a series of agreements, including a collaboration and license agreement, as amended, or the 2006 Sandoz Collaboration Agreement, with Sandoz AG. Under the 2006 Sandoz Collaboration Agreement, the Company and Sandoz AG 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 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 at a contractual FTE rate for any FTE employee expenses as well as any external costs incurred in the development of products to the extent development costs are borne by Sandoz. All Commercialization Costs, as that term is defined in the 2006 Sandoz Collaboration Agreement, are borne by Sandoz. With respect to GLATOPA, Sandoz is responsible for funding Legal Expenses, as that term is defined in the 2006 Sandoz Collaboration Agreement, except for FTE 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.

The term of the 2006 Sandoz Collaboration Agreement extends throughout the development and commercialization of the products until the last sale of the products, unless earlier terminated by either party pursuant to the provisions of the 2006 Sandoz Collaboration Agreement. The 2006 Sandoz Collaboration Agreement may be terminated if either party breaches the 2006 Sandoz Collaboration Agreement or files for bankruptcy. In addition, either the Company or Sandoz may terminate the 2006 Sandoz Collaboration Agreement with respect to GLATOPA 40 mg/mL, if clinical trials are required for regulatory approval of GLATOPA 40 mg/mL. Sandoz AG 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 on June 18, 2015. Under the 2006 Sandoz Collaboration Agreement, the Company earns 50% of contractually defined profits on Sandoz’ worldwide net sales of GLATOPA 20 mg/mL. The Company is entitled to earn 50% of contractually defined profits on Sandoz’ worldwide net sales of GLATOPA 40 mg/mL, if approved and launched. Profits on net sales of GLATOPA are calculated by deducting from net sales the costs of goods sold, an allowance for selling, general and administrative costs, which is a contractual percentage of GLATOPA net sales, and post-launch commercial milestones achieved. On July 1, 2017, the Company earned a $10 million commercial milestone payment in connection with GLATOPA 20 mg/mL's being the sole FDA-approved generic of COPAXONE when earned and achieving a certain level of contractually defined profits in the United States. Sandoz deducted the $10 million commercial milestone from quarterly net profit in the three months ended September 30, 2017 prior to the calculation of the Company's 50% contractual share of profits. 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 milestones; however, the Company is still eligible to receive up to $30 million in sales-based milestones for GLATOPA in the United States. None of these payments, once received, is refundable and there are no general rights of return in the arrangement.

The amount of net sales and contractual profit is determined based on amounts provided by Sandoz 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. The Company is highly dependent on Sandoz for timely and accurate information regarding any net revenues realized from sales of GLATOPA 20 mg/mL in order to accurately report its results of operations.

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 approximately $9.8 million , representing 50% of potential GLATOPA 40 mg/mL pre-launch inventory costs. Such reductions would commence the earlier of the quarter GLATOPA 40 mg/mL is launched or the third quarter of 2018 . In the event GLATOPA 40 mg/mL is not launched by the third quarter of 2018 , the letter agreement provides that quarterly profits payable to the Company for GLATOPA 20 mg/mL will not be reduced by more than 20% until the earlier of the quarter GLATOPA 40 mg/mL is launched or the third quarter of 2019 , at which time Sandoz may reduce the Company's quarterly GLATOPA profits by up to 100% until the amount of the Company's share of GLATOPA 40 mg/mL pre-launch inventory costs is met.
 

14


Baxalta Collaboration Agreement  

The Company and Baxter International, Inc., Baxter Healthcare Corporation and Baxter Healthcare SA (or collectively referred to as Baxter) entered into a global collaboration and license agreement, or the Baxter Collaboration Agreement, effective February 2012, to develop and commercialize biosimilars, including M923. In connection with Baxter's internal corporate restructuring in July 2015, Baxter assigned the Baxter Collaboration Agreement to Baxalta U.S. Inc., Baxalta GmbH and Baxalta Incorporated, collectively referred to as Baxalta. Subsequent to the assignment, the Company refers to "Baxter" as "Baxalta" and the "Baxter Collaboration Agreement" as the "Baxalta Collaboration Agreement." On June 3, 2016, Baxalta Incorporated and Shire plc, or Shire, announced the completion of the combination of Baxalta Incorporated and Shire. As a result of the combination, Baxalta Incorporated, of which Baxalta US Inc. and Baxalta GmbH are wholly-owned subsidiaries, is a wholly-owned subsidiary of Shire. On September 27, 2016, Baxalta gave the Company twelve months ’ prior written notice of the exercise of its right to terminate for its convenience the Baxalta Collaboration Agreement. On December 31, 2016 , the Company and Baxalta entered into an asset return and termination agreement, or the Baxalta Termination Agreement, which amended certain termination provisions of the Baxalta Collaboration Agreement and made the termination of that agreement effective as of December 31, 2016 . In January 2017, Baxalta paid the Company a one-time cash payment of $51.2 million representing the costs Baxalta would have incurred in performing the activities it would have performed under Baxalta Collaboration Agreement through the original termination date.

Mylan Collaboration Agreement
 
On January 8, 2016, the Company and Mylan entered into a collaboration agreement, or the Mylan Collaboration Agreement, which became effective on 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, including M834.

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.
 
Under the Mylan Collaboration 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. 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; additional (pivotal or Phase 3 equivalent) clinical development activities for M834; 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 Mylan Collaboration Agreement has ceased for a continuous period of two years for a

15


given product candidate in a given country, unless earlier terminated by either party pursuant to the terms of the Mylan Collaboration Agreement.
 
The Mylan Collaboration 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 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.
 
In accordance with Topic 605, Revenue Recognition, the Company allocated $45 million in total arrangement consideration to seven units of accounting based on the relative selling price method. At the inception of the agreement, the Company delivered development and product licenses for the six collaboration product candidates and commenced revenue recognition for the seven units of accounting. The Company is recording revenue associated with the upfront payment on a straight-line basis over the applicable performance period during which the research and development services are expected to be delivered, which begins upon delivery of the development and product license and ends upon FDA approval of the product. The Company currently estimates that the performance periods for the units of accounting range from five years to eight years . As of September 30, 2017 , $34.3 million was deferred under the Mylan Collaboration Agreement, of which $4.5 million was included in current liabilities and $29.8 million was included in non-current liabilities in the condensed consolidated balance sheet.
 
The collaboration with Mylan is a cost-sharing arrangement pursuant to which reimbursement for Mylan’s 50% share of collaboration expenses is recorded as a reduction to research and development expense and general and administrative expense, depending on the nature of the activities. The collaboration advance at September 30, 2017 represents the unused portion of the $60 million contingent milestone payments received from Mylan in 2016 that will be applied to Mylan's 50% share of certain collaboration expenses under the agreement. The Company is eligible to receive up to $140 million in additional contingent milestone payments from Mylan.

As a result of the cost sharing provisions of the Mylan Collaboration Agreement, during the three months ended September 30, 2017 and September 30, 2016 , the Company's net recovery from Mylan for research and development expenses was $6.6 million and $7.7 million , respectively, and the Company's net recovery from Mylan for general and administrative expenses was $0.5 million and $0.4 million , respectively. During the nine months ended September 30, 2017 and September 30, 2016 , the Company's net recovery from Mylan for research and development expenses was $18.9 million and $19.8 million , respectively, and the Company's net recovery from Mylan for general and administrative expenses was $1.1 million and $1.0 million , respectively.

CSL License and Option Agreement

On January 5, 2017, the Company and CSL Behring Recombinant Facility AG, or CSL, a wholly-owned indirect subsidiary of CSL Limited, entered into a License and Option Agreement, or the CSL License Agreement, which became effective on February 17, 2017, pursuant to which the Company granted CSL an exclusive worldwide license to research, develop, and commercialize the Company’s M230 pre-clinical product candidate, an Fc multimer protein that is a selective immunomodulator of the Fc receptor. The CSL License 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 and commercialize these additional research products globally.

Pursuant to the terms of the CSL License 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 clinical, 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 CSL License Agreement. Sales milestones are based on aggregated sales across M230 and any other products developed under the CSL License Agreement. The Company also has the option to participate in a cost-and-profit sharing arrangement, 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 CSL License Agreement, or the Co-Funded Products,

16


in exchange for either a 50% share of U.S. profits, or the 50% Co-funding Option, or 30% share of U.S. profits, determined by the stage of development at which the Company makes such election. On August 28, 2017, the Company exercised its 50% Co-funding Option. As a result, for Co-Funded Products, 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-arrangement amounts. The Company also has the option to participate in the promotion of Co-Funded Products in the United States, subject to a co-promotion agreement to be negotiated with CSL.

Under the CSL License Agreement, the Company granted CSL an exclusive license under the Company’s intellectual property to research, develop, manufacture and commercialize product candidates for all therapeutic indications. CSL has 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 CSL License Agreement and its 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 CSL License Agreement commences on the Effective Date and continues until the later of (i) the expiration of all payment obligations with respect to products under the CSL License 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 CSL License Agreement on a product-by-product basis subject to notice periods and certain circumstances related to clinical development. The Company may terminate the CSL License Agreement under certain circumstances related to the development of M230 and if no activities are being conducted under the CSL License Agreement. Either party may terminate the CSL License 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 CSL License Agreement, subject to certain exceptions, the licenses granted under the CSL License Agreement terminate. In addition, dependent upon the circumstances under which the CSL License 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.

CSL's obligations under the CSL License Agreement are guaranteed by its parent company, CSL Limited.

The Company identified the deliverables at the inception of the CSL License Agreement. The deliverables were determined to include (i) the M230 research, development, manufacturing and commercialization license, (ii) the research license for other Fc multimer proteins and (iii) the Company's responsibility to transfer the technology package relating to M230 to CSL. The best estimate of the selling price associated with the Company's participation on the joint steering committee was deemed to be de minimis, and therefore was not evaluated further. The Company determined that the M230 research, development, manufacturing and commercialization license does not have stand-alone value separate and apart from the Company's responsibility to transfer the M230 technology package to CSL because (1) there are no other vendors selling similar licenses on a stand-alone basis, (2) CSL does not have the contractual right to resell the license or the transferred technology, and (3) CSL is unable to use the license for its intended purpose without the technology transfer. In addition, the Company determined that the research license does not have stand-alone value. As such, the Company determined that there is one unit of accounting. The total arrangement consideration of $50 million was allocated to the single unit of accounting and will be recognized as revenue once the technology transfer is completed, which is the final item to be delivered in the unit of accounting. The technology transfer is expected to be completed by the end of 2017 . As of September 30, 2017 , $50 million was included in deferred revenue under the CSL License Agreement and was classified as a current liability in the unaudited, condensed consolidated balance sheet.

As discussed above, on August 28, 2017 the Company exercised its 50% Co-funding Option. Prior to the Company's exercise of its 50% Co-funding Option, the Company was reimbursed for certain costs under the arrangement, and such amounts were recorded as revenue or reductions to research and development expense depending on the nature of the activities. When the Company contracted directly with, managed the work of and was responsible for payments to third-party vendors for services the Company was obligated to provide to CSL, reimbursement of such costs were recorded as revenues on a gross basis. Reimbursable material costs incurred on CSL's behalf were netted against research and development expense. After the Company's exercise of its 50% Co-funding Option, reimbursement by CSL for its share of the development effort is presented as a reduction of operating expenses, which is consistent with the Company’s accounting policy for collaborations under ASC

17


808 Collaborative Arrangements , and reimbursement by the Company for its share of the development effort is recorded as an incremental operating expense. 

5. Share-Based Payments

Equity Award Retirement Policy

In December 2016 , the Company's board of directors adopted the Momenta Pharmaceuticals, Inc. Equity Award Retirement Policy, or the Retirement Policy, to provide for the treatment of time-based options and restricted stock units upon a participant’s qualifying retirement from the Company, allowing employees until January 11, 2017 to opt-out of a modification to certain of their outstanding grants of incentive stock options. Under the Retirement Policy, following the qualifying retirement of any employee of the Company or non-employee member of the board of directors, the participant’s then-outstanding time-based options and restricted stock units will continue to vest during the one year period following the retirement date. In addition, the participant will have until the first anniversary of the retirement date (or 90 days following the date an option becomes first exercisable if such date is within the 90 days preceding the first anniversary of the retirement date) to exercise any vested options, except that no option may be exercised following the date upon which it would have expired under the applicable option award agreement if the participant had remained in service with the Company.

For those employees who did not opt out, the Retirement Policy amended the terms of existing grants of time-based options effective January 11, 2017; therefore, in the consolidated statement of operations for the nine months ended September 30, 2017 , the Company recorded incremental compensation expense of $0.4 million related to the modification of those options, of which $0.3 million was included in the general administrative expense and $0.1 million was included in research and development expense.

Share-Based Compensation

On January 1, 2017, the Company adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting and made an entity-wide accounting policy election to account for award forfeitures as they occur. As a result, the Company recorded a cumulative opening adjustment to accumulated deficit and additional paid-in capital of $0.8 million . The amended guidance also eliminates the requirement that excess tax benefits be realized as a reduction in current taxes payable before the associated tax benefit can be recognized in additional paid-in capital. This created approximately $5.3 million of deferred tax assets relating to federal and state net operating losses that are fully offset by a corresponding increase in the valuation allowance. As a result, there was no cumulative effect adjustment to accumulated deficit.
 
The table below presents share-based compensation expense for research and development as well as general and administrative expense, both of which are included in operating expenses, in the three and nine months ended September 30, 2017 and 2016 (in thousands):

 
 
For the Three Months Ended
September 30, 2017
 
For the Three Months Ended
September 30, 2016
 
For the Nine Months Ended
September 30, 2017
 
For the Nine Months Ended
September 30, 2016
Research and development
 
$
1,860

 
$
2,042

 
$
6,083

 
$
6,426

General and administrative
 
3,056

 
2,897

 
10,226

 
8,330

  Total share-based compensation expense
 
$
4,916

 
$
4,939

 
$
16,309

 
$
14,756


The following table summarizes share-based compensation expense by award category recorded in each of the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
 
 
For the Three Months Ended
September 30, 2017
 
For the Three Months Ended
September 30, 2016
 
For the Nine Months Ended
September 30, 2017
 
For the Nine Months Ended
September 30, 2016
Stock options
 
$
2,494

 
$
2,149

 
$
7,819

 
$
7,278

Restricted stock awards and units
 
2,289

 
2,688

 
8,120

 
7,161

Employee stock purchase plan
 
133

 
102

 
370

 
317

  Total share-based compensation expense
 
$
4,916

 
$
4,939

 
$
16,309

 
$
14,756

 

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During the nine months ended September 30, 2017 , the Company granted 1,456,880 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 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, 2017 and 2016 was $8.58 per option and $6.77 per option, respectively. The weighted average grant date fair value of option awards granted during the nine months ended September 30, 2017 and 2016 was $9.17 per option and $5.90 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, 2017
 
For the Three Months Ended September 30, 2016
 
For the Three Months Ended September 30, 2017
 
For the Three Months Ended September 30, 2016
Expected volatility
 
50
%
 
60
%
 
52
%
 
58
%
Expected dividends
 

 

 

 

Expected life (years)
 
6.2

 
6.1

 
0.5

 
0.5

Risk-free interest rate
 
2.0
%
 
1.4
%
 
0.9
%
 
0.4
%

 
 
Weighted Average Assumptions
 
 
Stock Options
 
Employee Stock Purchase Plan
 
 
For the Nine Months Ended September 30, 2017
 
For the Nine Months Ended September 30, 2016
 
For the Nine Months Ended September 30, 2017
 
For the Nine Months Ended September 30, 2016
Expected volatility
 
53
%
 
58
%
 
55
%
 
57
%
Expected dividends
 

 

 

 

Expected life (years)
 
5.8

 
6.1

 
0.5

 
0.5

Risk-free interest rate
 
2.1
%
 
1.5
%
 
0.7
%
 
0.4
%

Since April 2016, the Company awarded 1,761,750 shares of performance-based restricted stock to employees and officers. 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. The Company has determined that attainment of the remaining performance conditions is probable and is expensing the fair value of the shares over the implicit service period using the accelerated attribution method. In the three and nine months ended September 30, 2017 , the Company recognized approximately $1.0 million and $4.5 million of stock compensation costs related to these awards, respectively.

In the nine months ended September 30, 2017 , the Company awarded 519,753 shares of time-based restricted stock units to its employees. The time-based restricted stock units vest as to 25% on the one year anniversary of the grant date and as to 6.25% quarterly over three years that follow 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 Retirement Policy.  

6. Commitments and Contingencies
 
Operating Leases

The Company leases office space and equipment under various operating lease agreements.

Lease Amendment


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On July 24, 2017, the Company entered into the Fourth Amendment to the Lease, or the Fourth Amendment, with BMR-Rogers Street LLC, or BMR, which amends the Lease between Momenta and BMR, dated as of February 5, 2013, as amended. Pursuant to the Fourth Amendment, the Company will lease approximately 52,252 square feet of office space, or the Fourth Floor Binney Premises, on the fourth floor of 301 Binney Street, Cambridge, Massachusetts, or the Binney Building. The Fourth Amendment also amends certain of the terms and conditions of the Company's existing lease of office and laboratory space located in the basement and first and second floors of 320 Bent Street, Cambridge, Massachusetts, or the Bent Premises.

The term of the lease for the Fourth Floor Binney Premises will commence on or before October 1, 2017, or the Binney Commencement Date, and will end on the date that is 126 months from the Binney Commencement Date, unless earlier terminated or extended in accordance with the terms of the Fourth Amendment. The Company has an option, subject to certain terms and conditions, to extend the term of the lease for the Fourth Floor Binney Premises until June 30, 2035 . BMR has agreed to make available an approximately $5.0 million allowance for certain tenant improvements the Company is planning to make to the Fourth Floor Binney Premises.

The Company is obligated to pay rent for the Fourth Floor Binney Premises beginning six months after the Binney Commencement Date, or the Rent Commencement Date. From the Rent Commencement Date until the first anniversary of the Rent Commencement Date, the Company is obligated to pay a monthly base rent for the Fourth Floor Binney Premises of $0.3 million , or $73.00 per square foot. On each subsequent anniversary of the Rent Commencement Date, the annual base rent will increase by 3% of the then-current annual base rent. The Company is also obligated to pay certain operating expenses and a property management fee beginning on the Rent Commencement Date.

Pursuant to the Fourth Amendment, BMR also agreed to make available an additional $5.2 million allowance for certain tenant improvements the Company is planning to make to the Fourth Floor Binney Premises and the Bent Premises. The base rent for the Bent Premises will be correspondingly increased, effective September 1, 2017, to include the amount of the tenant improvement allowance as amortized over the term of the lease for the Bent Premises. From September 1, 2017 to August 31, 2018, the Company's monthly base rent obligation for the Bent Premises will be $0.7 million , or $77.52 per square foot. Each subsequent September 1 during the term of the lease for the Bent Premises, the Company's annual base rent for the Bent Premises will increase by approximately 2.7% of the then-current annual base rent. Subject to certain terms and conditions, the Company has an option to extend the term of the lease for the Bent Premises until June 30, 2035 .

In addition, under the terms of the Fourth Amendment, the Company has a right of first refusal on additional space on the fourth floor of the Binney Building, and a right of first offer on additional space on the fifth floor of the Binney Building.

The Company records rent expense on a straight-line basis over the term of the lease which includes base rent and the associated impact of free rent periods and rent escalation. The Company capitalizes the cost of normal tenant improvements as leasehold improvements as the costs are incurred.

See Note 14 “ Commitments and Contingencies ” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of the Company’s other operating lease agreements.

Total operating lease commitments as of September 30, 2017 are as follows (in thousands):

Operating lease commitments
Total
October 1 to December 31, 2017
$
3,310

2018
19,013

2019
18,848

2020
19,380

2021
19,856

2022 and beyond
102,860

Total future minimum lease payments
$
183,267


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

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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 Inc. in the United States District Court for the District of Delaware in response to the filing by Sandoz Inc. of the 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 Inc. 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 Inc. 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 Court of Appeals for the Federal Circuit. Briefing was completed in the third quarter of 2017 , and a decision is pending oral argument.

On December 19, 2016, Teva and Yeda filed suit against the Company and Sandoz Inc. in the United States District Court for the District of Delaware again in response to the filing by Sandoz Inc. of the ANDA with a Paragraph IV certification for GLATOPA 40 mg/mL, for alleged infringement of an Orange Book-listed patent for COPAXONE 40 mg/mL, U.S. Patent No. 9,402,874. On May 1, 2017, the District Court entered the joint stipulation filed by the parties, dismissing the case pertaining to U.S. Patent No. 9,402,874.

On January 31, 2017, Teva filed a suit against the Company and Sandoz Inc. 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 Inc. 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 Inc. 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 is scheduled for November 2, 2017.

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 Inc. 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 Inc. to post a security bond of $100 million in connection with the litigation. Amphastar and Actavis appealed the decision to the Court of Appeals for the Federal Circuit, or 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.

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

21


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 Inc. 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. The Company and Sandoz Inc. have filed post-trial motions and briefs and are considering all other available legal options to overturn the portions of the verdict finding the Company's patent to be invalid and unenforceable, including a potential appeal to the CAFC. In the event that the Company is not successful in further 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. Litigation involves many risks and uncertainties, and there is no assurance that the Company or Sandoz Inc. will prevail in this patent enforcement suit.

On September 17, 2015, Amphastar filed a complaint against the Company and Sandoz Inc. 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 Inc. 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 Inc. 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 Inc.'s 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 Inc. filed their renewed motion to dismiss. Trial is scheduled for April 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 Inc. 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 Inc. 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 our 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. The Court has not yet scheduled a hearing on the motion to amend. While the outcome of litigation is inherently uncertain, the Company believes this suit is without merit, and it intends to vigorously defend itself in this litigation.

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

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and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.
 
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 “Part II., Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.
 
Overview
 
We are a biotechnology company focused on developing generic versions of complex drugs, biosimilars and novel therapeutics for autoimmune diseases.
 
To date, we have devoted substantially all of our capital resource expenditures to the research and development of our products and 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 development portfolio. As of September 30, 2017 , we had an accumulated deficit of $576.0 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 development portfolio.
 
Complex Generics
 
GLATOPA ® (glatiramer acetate injection) 20 mg/mL—Generic Once-daily COPAXONE ® (glatiramer acetate injection) 20 mg/mL

On April 16, 2015, the FDA approved the 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 on June 18, 2015. Under our collaboration agreement with Sandoz, we earn 50% of contractually defined profits on GLATOPA 20 mg/mL sales. For the three months ended September 30, 2017 , we recorded $10.9 million in product revenues from Sandoz’ sales of GLATOPA 20 mg/mL. On July 1, 2017, we earned a $10 million commercial milestone payment in connection with GLATOPA 20 mg/mL's being the sole FDA-approved generic of COPAXONE when earned and achieving a certain level of contractually defined profits in the United States.

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. We expect GLATOPA 20 mg/mL will lose market share to Mylan's generic equivalent of COPAXONE 20 mg/mL and that Sandoz may use one or more contracting strategies to remain competitive, including but not limited to lowering its GLATOPA 20 mg/mL prices or increasing the discounts or rebates it offers for GLATOPA 20 mg/mL, which could further decrease contractual profit share revenue. The market potential of GLATOPA 20 mg/mL is also negatively impacted by the conversion of patients from once-daily 20 mg/mL glatiramer acetate injection to three-times-weekly 40 mg/mL glatiramer acetate injection. Prior to Mylan N.V.'s entry into the COPAXONE market, COPAXONE 40 mg/mL accounted for approximately 81% of the overall U.S. glatiramer acetate injection market (20 mg/mL and 40 mg/mL) based on volume prescribed; however, Mylan N.V.'s launch of its lower cost, generic equivalent of COPAXONE 40 mg/mL may result in additional conversion of patients from once-daily 20 mg/mL glatiramer acetate injection to three-times-weekly 40 mg/mL glatiramer acetate injection.

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

An ANDA seeking approval for GLATOPA 40 mg/mL, a generic equivalent of three-times-weekly COPAXONE 40 mg/mL, was filed by our collaborator, Sandoz, in February 2014 and remains under review by the FDA. Our GLATOPA 40 mg/mL formulation contains the same drug substance as GLATOPA 20 mg/mL, which we believe should help streamline the FDA review of the ANDA. On February 17, 2017, we announced that Sandoz’ third party fill/finish manufacturer for GLATOPA, Pfizer Inc., received an FDA warning letter. Although the FDA warning letter does not restrict the production or shipment of the GLATOPA 20 mg/mL product that is currently marketed by Sandoz in the United States, the FDA is withholding approval of the ANDA for GLATOPA 40 mg/mL until satisfactory resolution of the compliance observations in the FDA's warning letter to Pfizer Inc. We are working with Sandoz to resolve this matter. We believe it continues to be possible for GLATOPA 40 mg/mL to be approved and launched in the United States in late 2017 or early 2018. We expect Mylan N.V.'s launch of its generic equivalent of three-times-weekly COPAXONE 40 mg/mL will limit the market potential of GLATOPA 40 mg/mL, if approved and launched.


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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, or IPR, 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 the CAFC. 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."

Enoxaparin Sodium Injection—Generic LOVENOX ®  

Under our amended collaboration agreement with Sandoz, Sandoz is obligated to pay us 50% of contractually defined profits on sales of Enoxaparin Sodium Injection.

Due to increased generic competition and resulting decreased market pricing for generic enoxaparin sodium injection products, Sandoz did not record any profit on sales of Enoxaparin Sodium Injection in the three and nine months ended September 30, 2017, and therefore we recorded no product revenue for Enoxaparin Sodium Injection in the same periods.

Legal proceedings related to Enoxaparin Sodium Injection are described under "Part II., Item 1. Legal Proceedings -- Enoxaparin Sodium Injection-Related Proceedings."

Biosimilars
 
M923—Biosimilar HUMIRA ® (adalimumab) Candidate

In November 2016, following an interim analysis, 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 of 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.

We are working toward the first regulatory submission for marketing approval for M923 in the United States in late 2017 . We expect that U.S. market formation for biosimilar versions of HUMIRA will likely be in the 2022-2023 timeframe, subject to market approval, patent considerations and litigation timelines. We believe that, subject to our ability to identify a new collaboration partner, marketing approval, patent considerations and litigation timelines, M923 will be among the first biosimilar versions of HUMIRA to launch at U.S. market formation.

M923 was previously developed in collaboration with Baxalta. In June 2016, Baxalta became a wholly-owned subsidiary of Shire plc. In September 2016, Baxalta gave us twelve months' prior written notice of the exercise of its right to terminate for its convenience our collaboration agreement. On December 31, 2016 , we and Baxalta entered into an asset return and termination agreement, or the Baxalta Termination Agreement, amending certain termination provisions of the Baxalta Collaboration Agreement and making the termination of the Baxalta Collaboration Agreement effective December 31, 2016 . In January 2017, Baxalta paid us a one-time cash payment of $51.2 million , representing the costs Baxalta would have incurred in performing the activities it would have performed under the Baxalta Collaboration Agreement through the original termination effective date.

We continue to identify and evaluate potential collaboration opportunities to further develop and commercialize M923.

M834—Biosimilar ORENCIA ® (abatacept) Candidate

On January 8, 2016, we entered into a collaboration agreement, which became effective on February 9, 2016, with Mylan Ireland Limited, a wholly-owned indirect subsidiary of Mylan N.V., or Mylan, to develop and commercialize M834. 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.

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We and Mylan continue to gather and analyze the data from the Phase 1 clinical trial to better understand the results and evaluate the next steps for M834.

ORENCIA's composition of matter patents expire in the United States in 2019 . In December 2016, the PTAB in an IPR we filed upheld the validity of Bristol-Myers Squibb's formulation patent U.S. Patent No. 8,476,239 on ORENCIA. We appealed this decision to the CAFC, and an oral argument is scheduled for December 5, 2017. This proceeding is further discussed below under " Part II., Item 1. Legal Proceedings -- M834-Related Proceedings ."

Other Biosimilar Candidates

Our Mylan collaboration includes five other biosimilar candidates from our portfolio in addition to M834, including our undisclosed biosimilar candidate, M710. We and Mylan are targeting the first regulatory submission for M710 clinical development by early 2018 . We and Mylan will share equally costs and profits (losses) related to these earlier stage product candidates. We and Mylan will share development and manufacturing responsibilities across product candidates, and Mylan will lead commercialization of the products.

Novel Therapeutics

We believe our novel programs discussed below could have the potential to produce product candidates capable of treating a large number of immunological disorders driven by antibodies, immune complexes, and Fc receptor biology. Such disorders include rheumatoid arthritis, autoimmune neurologic diseases such as Guillain-Barre syndrome, chronic inflammatory demyelinating neuropathy and myasthenia gravis, autoimmune blood disorders such as immune thrombocytopenic purpura, systemic autoimmune diseases such as dermatomyositis, lupus nephritis, and catastrophic antiphospholipid syndrome, antibody-mediated transplant rejection, and autoimmune blistering diseases, several of which have few treatment options.

M281 - Anti-FcRn Candidate

M281 is a fully-human monoclonal antibody that blocks the neonatal Fc receptor, or FcRn. A Phase 1 study to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of M281 was initiated in June 2016. In January 2017, we announced that we had successfully completed the single ascending dose, or SAD, portion of the Phase 1 study in healthy volunteers. In the SAD portion of the study, M281 was well-tolerated with no serious adverse events observed. The multiple ascending dose, or MAD, portion of the Phase 1 study was completed in August 2017. We plan to report top line data from the MAD portion of the Phase 1 study in the fourth quarter of 2017 .

M230 - Selective Immunomodulator of Fc receptors (SIF3) Candidate

M230, a selective immunomodulator of Fc receptors, or SIF3, is a novel homogenous recombinant Fc multimer containing three IgG Fc regions joined carefully to maximize activity. Nonclinical data have shown that M230 enhances the molecules' avidity and affinity for the Fc receptors matching the potency and efficacy of IVIg at significantly lower doses.

Pursuant to the License and Option Agreement with CSL, 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 4 " Collaboration and License Agreements - CSL License and Option Agreement ". CSL has informed us that it plans to advance this candidate with a goal of beginning clinical development in late 2017 , subject to regulatory feedback.

M254 - hsIVIg Candidate

M254 is a hyper-sialylated version of IVIg, a therapeutic drug product that contains pooled, human immunoglobulin G, or IgG, antibodies purified from blood plasma. IVIg is used to treat several inflammatory diseases, including idiopathic thrombocytopenic purpura, Kawasaki disease, and chronic inflammatory demyelinating polyneuropathy. Our hsIVIg product is currently in nonclinical development and has the potential to be developed as a high-potency alternative to IVIg. We plan to initiate an investigational new drug application-enabling, or IND-enabling, toxicology study in 2017 and are targeting initiating a clinical trial in 2018 . We continue to identify and explore potential collaboration opportunities to further develop and commercialize this product candidate.

Results of Operations
 

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Comparison of Three Months Ended September 30, 2017 and 2016
 
Product Revenue

Product revenue includes our contractually defined profits earned on Sandoz’ sales of GLATOPA 20 mg/mL.

GLATOPA 20 mg/mL—Generic Once-daily COPAXONE 20 mg/mL

Sandoz commenced sales of GLATOPA 20 mg/mL in the United States on June 18, 2015. We earn 50% of contractually defined profits on Sandoz’ sales of GLATOPA 20 mg/mL. For the three months ended September 30, 2017 , we recorded $10.9 million in product revenues from Sandoz’ sales of GLATOPA 20 mg/mL, reflecting $11.1 million in profit share net of a deduction of $0.2 million for reimbursement to Sandoz of 50% of GLATOPA-related legal expenses incurred by Sandoz. For the three months ended September 30, 2016 , we recorded $23.3 million in product revenues from Sandoz’ sales of GLATOPA 20 mg/mL. The decrease in product revenues of $12.4 million , or 53% , from the three months ended September 30, 2016 to the three months ended September 30, 2017 was primarily due to the deduction of the $10 million commercial milestone we earned on July 1, 2017 from net profit prior to the calculation of our 50% contractual share of profits, which Sandoz was entitled to offset against future product revenues payable to us under the terms of the 2006 Sandoz Collaboration Agreement; lower net sales as a result of inventory price adjustments due to Mylan N.V.'s entry into the COPAXONE market; higher Medicaid deductions in the third quarter of 2017 ; and reimbursement of legal expenses relating to GLATOPA. At the end of the third quarter of 2017, prior to Mylan N.V.'s entry into the COPAXONE market, we estimate that the number of prescriptions for GLATOPA 20 mg/mL represented approximately 40% of the once-daily 20 mg/mL U.S. glatiramer acetate market.

Research and Development Revenue
 
Research and development revenue generally consists of amounts earned by us under our collaborations for technical development, regulatory and commercial milestones; reimbursement of research and development services and reimbursement of development costs under our collaborative arrangements; and recognition of the arrangement consideration.
 
Research and development revenue was $13.2 million and $5.8 million for the three months ended September 30, 2017 and 2016 , respectively. The increase in research and development revenue of $7.4 million , or 128% , from the three months ended September 30, 2016 to the three months ended September 30, 2017 was primarily due to a $10 million commercial milestone payment we earned on July 1, 2017 in connection with GLATOPA 20 mg/mL's being the sole FDA-approved generic of COPAXONE when earned and achieving a certain level of contractually defined profits in the United States, partially offset by less revenue due to the termination of the Baxalta Collaboration Agreement, effective December 31, 2016 , under which we were previously reimbursed for M923 FTE and external costs and for which we recognized a portion of Baxalta's initial upfront payment in the three months ended September 30, 2016 , which were non-recurring in the same period in 2017 .
 
We expect to continue to recognize revenue from Mylan's $45 million upfront payment on a quarterly basis. Finally, we expect to recognize the $50 million upfront payment from CSL as revenue in the fourth quarter of 2017 .
 
Research and Development Expense
 
Research and development expenses consist of costs incurred to conduct research, such as the discovery and development of our product candidates. We recognize all research and development costs as they are incurred. We track the external research and development costs incurred for each of our product candidates. Our external research and development expenses consist primarily of:
 
expenses incurred under agreements with consultants, third-party contract research organizations, or CROs, and investigative sites where all of our nonclinical studies and clinical trials are conducted;

costs of acquiring reference comparator materials and manufacturing nonclinical study and clinical trial supplies and other materials from contract manufacturing organizations, or CMOs, and related costs associated with release and stability testing; and

costs associated with process development activities.
 
Internal research and development costs are associated with activities performed by our research and development organization and are not tracked on a project-by-project basis. Internal costs consist primarily of:


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personnel-related expenses, which include salaries, benefits and share-based compensation; and

facilities and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation and amortization of leasehold improvements and equipment and laboratory and other supplies.

For our collaboration arrangements in which the parties share in collaboration expenses for products under the arrangement (cost sharing arrangements), we concluded that when there is a period during the collaboration arrangement during which we are owed payment from the collaborator, we record the reimbursement by the collaborator for its share of the development effort as a reduction of research and development expense. Amounts owed to the collaborator are recorded as incremental research and development expense.

Research and development expense for the three months ended September 30, 2017 was $37.9 million , compared with $31.6 million for the three months ended September 30, 2016 . The increase of $6.3 million , or 20% , from the three months ended September 30, 2016 to the three months ended September 30, 2017 was primarily due to $12.4 million in increased spending on M923, as the program was transitioned back to us effective December 31, 2016 in connection with the termination of the Baxalta Collaboration Agreement, partially offset by a $3.4 million reduction in spend on our necuparanib program, which we discontinued in August 2016, and a $2.6 million reduction in spend on M230 as those costs are now shared with CSL.
 
The lengthy process of securing FDA approval for generics, biosimilars and new drugs requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall. Accordingly, we cannot currently estimate with any degree of certainty the amount of time or money that we will be required to expend in the future on our product candidates prior to their regulatory approval, if such approval is ever granted. As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate when, if ever, our product candidates will generate revenues and cash flows.
 
The following table sets forth, in thousands, the primary components of our research and development external expenditures, including the amortization of our intangible asset, for each of our principal development programs by product area for the three months ended September 30, 2017 and 2016 , and from project inception to September 30, 2017 . The figures in the table include project expenditures incurred by us and reimbursed by our collaborators, but exclude project expenditures incurred by our collaborators. Although we track and accumulate personnel effort by percentage of time spent on our programs, a significant portion of our internal research and development costs, including salaries and benefits, share-based compensation, facilities, depreciation and laboratory supplies are not directly charged to programs. Therefore, our methods for accounting for internal research and development costs preclude us from reporting these costs on a project-by-project basis.
 
 
Phase of Development as of
 
Three Months Ended September 30,
 
Project 
Inception to 
 
September 30, 2017
 
2017
 
2016
 
September 30, 2017
External Costs Incurred by Product Area:
 
 
 

 
 

 
 

Complex Generics(1)
ANDAs filed(2)
 
$
443

 
$
349

 
$
107,987

Biosimilars
Various(3)
 
14,581

 
2,413

 
154,811

Novel Therapeutics
Various(4)
 
2,995

 
9,663

 
102,371

Internal Costs
 
 
19,895

 
19,143

 
 

Total Research and Development Expenses
 
 
$
37,914

 
$
31,568

 
 
 
(1)
Includes external costs for GLATOPA and Enoxaparin Sodium Injection.

(2)
In July 2010, the first ANDA for Enoxaparin Sodium Injection was approved by the FDA, and Sandoz launched the product. In April 2015, the FDA approved the ANDA for once-daily GLATOPA 20 mg/mL. Sandoz launched GLATOPA 20 mg/mL in June 2015. The ANDA for GLATOPA 40 mg/mL is under FDA review. For more information on GLATOPA 40 mg/mL, see " —Overview—Complex Generics—GLATOPA ® 40 mg/mL—Generic Three-times-weekly COPAXONE ® (glatiramer acetate injection) 40 mg/mL. "
 
(3)
Biosimilars include M923, a biosimilar candidate of HUMIRA ® (adalimumab), M834, a biosimilar candidate of ORENCIA ® (abatacept), as well as five other biosimilar candidates, including our undisclosed biosimilar candidate, M710. In April 2016, enrollment in the pivotal clinical trial for M923 was completed and in November 2016, following an interim analysis, we announced top-line Phase III results including that M923 met its primary endpoint in

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the study. We completed a Phase 1 clinical trial of M834. Our other biosimilar candidates are in the discovery and process development phase. As a result of the cost-sharing provisions of the Mylan Collaboration Agreement, we offset approximately $6.6 million and $7.7 million against research and development costs during the three months ended September 30, 2017 and 2016 , respectively.

(4)
Our novel therapeutic programs include M281, for which the multiple ascending dose portion of a Phase 1 study was initiated in January 2017; M230, which our licensee, CSL, has informed us that it plans to advance with a goal of beginning clinical development in late 2017 , subject to regulatory feedback; M254, which is currently in preclinical development and for which we are planning to initiate an IND-enabling toxicology study in 2017 ; costs related to our necuparanib program, which was discontinued in August 2016; as well as other discovery and nonclinical stage programs.

External expenditures for complex generics increased by $0.1 million , or 27% , from the three months ended September 30, 2016 to the three months ended September 30, 2017 as we continue to support our complex generics. External expenditures for our biosimilars programs increased by $12.2 million , or 504%, from the three months ended September 30, 2016 to the three months ended September 30, 2017 driven primarily by our assuming responsibility for development and commercialization of M923 effective December 31, 2016 . External costs of our novel therapeutic programs decreased by $6.7 million , or 69% , from the three months ended September 30, 2016 to the three months ended September 30, 2017 , driven primarily by a $3.4 million reduction in spend on our necuparanib program, which we discontinued in August 2016, and a $2.6 million reduction in spend on M230 as those costs are now shared with CSL. Finally, internal costs were consistent period over period.
 
Due to the variability in the length of time necessary to develop a product candidate, the uncertainties related to the estimated cost of the projects and ultimate ability to obtain governmental approval for commercialization, accurate and meaningful estimates of the ultimate cost to bring our product candidates to market are not available.
 
General and Administrative Expense
 
General and administrative expenses consist primarily of salaries and other related costs for personnel in general and administrative functions, professional fees for legal and accounting services, royalty and license fees, insurance costs, and rent, facility and lab supplies, and depreciation expense.
 
For our collaboration arrangements in which the parties share in collaboration expenses for products under the arrangement (cost sharing arrangements), we concluded that when there is a period during the collaboration arrangement during which we are owed payment from the collaborator, we record the reimbursement by the collaborator for its share of the development effort as a reduction of general and administrative expense. Amounts owed to the collaborator are recorded as incremental general and administrative expense.
 
General and administrative expense for the three months ended September 30, 2017 was $20.7 million , compared with $15.8 million for the three months ended September 30, 2016 . The increase of $4.9 million , or 31% , from the three months ended September 30, 2016 to the three months ended September 30, 2017 was primarily driven by approximately $3.3 million in legal fees relating to our ongoing litigation and $0.8 million in personnel-related expenses driven by increased headcount and higher share-based compensation expense.
 
We expect our general and administrative expenses, including internal and external legal and business development costs that support our various product development efforts, to vary from period to period in relation to our commercial and development activities.
 
Other Income, Net
 
Other income, net, primarily includes interest income. Interest income was $1.3 million and $0.6 million for the three months ended September 30, 2017 and 2016 , respectively. The increase of $0.7 million , or 117% , from the three months ended September 30, 2016 to the three months ended September 30, 2017 was caused by higher average investment balances due to funds raised under the 2015 ATM Agreement in 2017 .

Comparison of Nine Months Ended September 30, 2017 and 2016
 
Product Revenue

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GLATOPA 20 mg/mL—Generic Once-daily COPAXONE 20 mg/mL

For the nine months ended September 30, 2017 , we recorded $53.4 million in product revenues from Sandoz’ sales of GLATOPA 20 mg/mL, reflecting $54.5 million in profit share net of a deduction of $1.1 million for reimbursement to Sandoz of 50% of GLATOPA-related legal expenses incurred by Sandoz. For the nine months ended September 30, 2016 , we recorded $58.8 million in product revenues from Sandoz’ sales of GLATOPA 20 mg/mL. The decrease in product revenues of $5.4 million , or 9% , from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was primarily due to the deduction of the $10 million commercial milestone we earned on July 1, 2017 from net profit prior to calculating our 50% contractual share of profits, which Sandoz was entitled to offset against future product revenues payable to us under the terms of the 2006 Sandoz Collaboration Agreement; lower net sales from inventory price adjustments relating to Mylan N.V.'s entry into the COPAXONE market; higher Medicaid deductions in the third quarter of 2017 ; and reimbursement of legal expenses relating to GLATOPA.
 
Research and Development Revenue
 
Research and development revenue was $20.8 million and $16.6 million for the nine months ended September 30, 2017 and 2016 , respectively. The increase in research and development revenue of $4.2 million , or 25% , from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was primarily due to a $10 million commercial milestone payment we earned on July 1, 2017 in connection with GLATOPA 20 mg/mL's being the sole FDA-approved generic of COPAXONE when earned and achieving a certain level of contractually defined profits in the United States as of June 30, 2017, which was partially offset by a decrease in revenue due to the termination of the Baxalta Collaboration Agreement, effective December 31, 2016 , under which we were previously reimbursed for M923 FTE and external costs and for which we recognized a portion of Baxalta's initial upfront payment in the nine months ended September 30, 2016 , which were non-recurring in the same period in 2017 .
 
Research and Development Expense
 
Research and development expense for the nine months ended September 30, 2017 was $113.1 million , compared with $93.5 million for the nine months ended September 30, 2016 . The increase of $19.6 million , or 21% , from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was primarily due to $32.8 million in increased spending on M923, as the program was transitioned back to us effective December 31, 2016 in connection with the termination of the Baxalta Collaboration Agreement, partially offset by a $8.7 million reduction in spend on our necuparanib program, which we discontinued in August 2016, and a $4.5 million reduction in spend on M230 as those costs are now shared with CSL.

The following table sets forth, in thousands, the primary components of our research and development external expenditures, including the amortization of our intangible asset, for each of our principal development programs by product area for the nine months ended September 30, 2017 and 2016 , and from project inception to September 30, 2017 . The figures in the table include project expenditures incurred by us and reimbursed by our collaborators, but exclude project expenditures incurred by our collaborators. Although we track and accumulate personnel effort by percentage of time spent on our programs, a significant portion of our internal research and development costs, including salaries and benefits, share-based compensation, facilities, depreciation and laboratory supplies are not directly charged to programs. Therefore, our methods for accounting for internal research and development costs preclude us from reporting these costs on a project-by-project basis.
 
 
Phase of Development as of
 
Nine Months Ended September 30,
 
Project 
Inception to 
 
September 30, 2017
 
2017
 
2016
 
September 30, 2017
External Costs Incurred by Product Area:
 
 
 

 
 

 
 

Complex Generics(1)
ANDAs filed(2)
 
$
3,533

 
$
1,643

 
$
107,987

Biosimilars
Various(3)
 
41,091

 
8,625

 
154,811

Novel Therapeutics
Various(4)
 
9,106

 
24,816

 
102,371

Internal Costs
 
 
59,348

 
58,414

 
 

Total Research and Development Expenses
 
 
$
113,078

 
$
93,498

 
 
 
(1)
Includes external costs for GLATOPA and Enoxaparin Sodium Injection.


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(2)
In July 2010, the first ANDA for Enoxaparin Sodium Injection was approved by the FDA, and Sandoz launched the product. In April 2015, the FDA approved the ANDA for once-daily GLATOPA 20 mg/mL. Sandoz launched GLATOPA 20 mg/mL in June 2015. The ANDA for GLATOPA 40 mg/mL is under FDA review. For more information on GLATOPA 40 mg/mL, see " —Overview—Complex Generics—GLATOPA ® 40 mg/mL—Generic Three-times-weekly COPAXONE ® (glatiramer acetate injection) 40 mg/mL. "
 
(3)
Biosimilars include M923, a biosimilar candidate of HUMIRA ® (adalimumab), M834, a biosimilar candidate of ORENCIA ® (abatacept), as well as five other biosimilar candidates, including our undisclosed biosimilar candidate, M710. In April 2016, enrollment in the pivotal clinical trial for M923 was completed and in November 2016, following an interim analysis, we announced top-line Phase III results including that M923 met its primary endpoint in the study. We completed a Phase 1 clinical trial of M834. Our other biosimilar candidates are in the discovery and process development phase. As a result of the cost-sharing provisions of the Mylan Collaboration Agreement, we offset approximately $18.9 million and $19.8 million against research and development costs during the nine months ended September 30, 2017 and 2016 , respectively.

(4)
Our novel therapeutic programs include M281, for which the multiple ascending dose portion of a Phase 1 study was initiated in January 2017; M230, which our licensee, CSL, has informed us that it plans to advance with a goal of beginning clinical development in 2017 , subject to regulatory feedback; M254, which is currently in preclinical development and for which we are planning to initiate an IND-enabling toxicology study in 2017 ; costs related to our necuparanib program, which was discontinued in August 2016; as well as other discovery and nonclinical stage programs.

External expenditures for complex generics increased by $1.9 million , or 115% , from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 as we continue to support our complex generics. External expenditures for our biosimilars programs increased by $32.5 million , or 376% , from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 driven by our assuming responsibility for development and commercialization of M923 effective December 31, 2016 . External costs of our novel therapeutic programs decreased by $15.7 million , or 63% , from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 , primarily driven by a $8.7 million reduction in spend on our necuparanib program, which we discontinued in August 2016, and a $4.5 million reduction in spend on M230 as those costs are now shared with CSL. Finally, internal costs were consistent period over period.
  
General and Administrative Expense
 
General and administrative expense for the nine months ended September 30, 2017 was $66.4 million , compared with $46.3 million for the nine months ended September 30, 2016 . The increase of $20.1 million , or 43% , from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was driven by approximately $14.9 million of legal costs primarily relating to our ongoing litigation and $4.0 million in personnel-related expenses driven by increased headcount and higher share-based compensation expense.
 
Other Income, Net
 
Other income, net, primarily includes interest income. Interest income was $3.2 million and $1.6 million for the nine months ended September 30, 2017 and 2016 , respectively. The increase of $1.6 million , or 100% , from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was caused by higher average investment balances due to funds raised under the 2015 ATM Agreement in 2017 .

Liquidity and Capital Resources
 
At September 30, 2017 , we had $423.1 million in cash, cash equivalents and marketable securities and $14.3 million in collaboration receivables, which includes $10.9 million in profit share from Sandoz' sales of GLATOPA 20 mg/mL. In addition, we also held $23.0 million in restricted cash, of which $17.5 million serves as collateral for a $35 million security bond posted in the litigation against Amphastar.

We have funded our operations to date primarily through the sale of equity securities and payments received under our collaboration and license agreements, including contractual profits from Sandoz’ sales of Enoxaparin Sodium Injection and GLATOPA 20 mg/mL, upfront and milestone payments, and reimbursement of research and development services and reimbursement of development costs. We expect to fund our planned operating and expenditure requirements through a combination of current cash, cash equivalents and marketable securities; equity financings; and milestone payments and

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contractual profits under existing collaboration agreements. We may also seek funding from new collaborations and strategic alliances, debt financings and other financial arrangements. Future funding transactions may or may not be similar to our prior funding transactions. There can be no assurance that future funding transactions will be available on favorable terms, or at all. We currently believe that our current capital resources, projected milestone payments and contractual profits will be sufficient to meet our operating requirements through at least the end of 2018 .

Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate precisely our future operating and expenditure requirements. For information regarding certain important factors that could impact our financial position or future results of operations, please see “ Part II., Item IA. Risk Factors of this Quarterly Report on Form 10-Q.

Cash, Cash Equivalents and Marketable Securities

Our funds at September 30, 2017 were primarily invested in commercial paper, overnight repurchase agreements, asset-backed securities, corporate debt securities and United States money market funds, directly or through managed funds, with remaining maturities of 12 months or less. Our cash is deposited in and invested through highly rated financial institutions in North America. The composition and mix of cash, cash equivalents and marketable securities may change frequently as a result of our evaluation of conditions in the financial markets, the maturity of specific investments, and our near term liquidity needs. We do not believe that our cash equivalents and marketable securities were subject to significant market risk at September 30, 2017 .

Cash Flows  
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
(in thousands)
Net cash provided by (used in) operating activities
 
$
7,853

 
$
(36,155
)
Net cash (used in) provided by investing activities
 
$
(59,327
)
 
$
80,820

Net cash provided by financing activities
 
$
73,574

 
$
153

Net increase in cash and cash equivalents
 
$
22,100

 
$
44,818

 
Cash provided by (used in) operating activities
 
The cash provided by or used in operating activities generally approximates our net loss adjusted for non-cash items and changes in operating assets and liabilities.
 
Cash provided by operating activities was $7.9 million for the nine months ended September 30, 2017 reflecting a net loss of $101.9 million , which was partially offset by non-cash charges of $5.6 million for depreciation and amortization of property, equipment and intangible assets and $16.3 million in shared-based compensation.  The net change in our operating assets and liabilities provided cash of $87.6 million and primarily resulted from: the receipt of $50 million from CSL under the CSL License Agreement, which is included in deferred revenue at September 30, 2017 ; a one-time cash payment of $51.2 million in connection with the termination of the Baxalta Collaboration Agreement, which was included in collaboration receivable at December 31, 2016 ; and an increase in accounts payable of $8.1 million due to timing of vendor payments, partially offset by the change in collaboration advance of $19.0 million, the majority of which represents Mylan's 50% share of certain collaboration expenses under the cost-sharing provisions of the Mylan Collaboration Agreement.

Cash used in operating activities was $36.2 million for the nine months ended September 30, 2016 reflecting a net loss of $62.5 million , which was partially offset by non-cash charges of $7.0 million for depreciation and amortization of property, equipment and intangible assets, $14.8 million in shared-based compensation and $0.5 million for amortization of purchased premiums on our marketable securities. The net change in our operating assets and liabilities provided cash of $4.1 million and primarily resulted from the receipt of $45 million from Mylan under the Mylan Collaboration Agreement, partially offset by amortization of collaboration upfront payments and an increase in collaboration receivable of $24.6 million, the majority of which represents Mylan's 50% share of collaboration expenses under the cost-sharing arrangement.  

Cash (used in) provided by investing activities
 

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Cash used in investing activities of $59.3 million for the nine months ended September 30, 2017 includes cash outflows of $366.3 million for purchases of marketable securities and $11.2 million for capital equipment and leasehold improvements, partially offset by cash inflows of $318.2 million from maturities of marketable securities.

Cash provided by investing activities of $80.8 million for the nine months ended September 30, 2016 includes cash inflows of $350.5 million from maturities of marketable securities, partially offset by cash outflows of $264.9 million for purchases of marketable securities and $4.8 million for capital equipment and leasehold improvements.
 
Cash provided by financing activities
 
Cash provided by financing activities of $73.6 million for the nine months ended September 30, 2017 includes $64.1 million of net proceeds from shares sold under the 2015 ATM Agreement and $9.5 million in proceeds from stock option exercises and purchases of shares of our common stock through our employee stock purchase plan.

Cash provided by financing activities of $0.2 million for the nine months ended September 30, 2016 consists of $1.2 million in proceeds from stock option exercises and purchases of shares of our common stock through our employee stock purchase plan partially offset by $1.0 million of cash paid to tax authorities in connection with the vesting of employee performance-based restricted stock.
 
Contractual Obligations
 
Our major outstanding contractual obligations primarily relate operating lease obligations and purchase obligations. As discussed in Note 6 " Commitments and Contingencies ", in July 2017, we amended our lease agreement with BMR-Rogers Street LLC, and a result, rental payments for the Bent Premises will increase by $7.4 million over the remaining term of the lease, and rental payments for the Fourth Floor Binney Premises will be $43.7 million over the term of the lease. All other disclosures relating to our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2016 , filed with the Securities and Exchange Commission on February 24, 2017, have not materially changed since we filed that report.
 
Critical Accounting Policies and Estimates
 
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
 
Please refer to the significant accounting policies described in " Part II., Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations " of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 24, 2017.
 
Please refer to Revenue Recognition within Note 2 “ Summary of Significant Accounting Policies ” in Part II., Item 8. of our Annual Report on Form 10-K for the year ended December 31, 2016 for our discussion of our revenue recognition policy for our multiple element arrangements.
 
New Accounting Standards
 
Please refer to Note 2 “ Summary of Significant Accounting Policies ” to the accompanying unaudited condensed consolidated financial statements for a discussion of new accounting standards.
 
Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risk related to changes in interest rates. Our current investment policy is to maintain an investment portfolio consisting mainly of United States money market, government-secured, and high-grade corporate

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securities, directly or through managed funds, with maturities of twenty-four months or less. Our cash is deposited in and invested through highly rated financial institutions in North America. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. However, due to the conservative nature of our investments, low prevailing market rates and relatively short effective maturities of debt instruments, interest rate risk is mitigated. If market interest rates were to increase immediately and uniformly by 10% from levels at September 30, 2017 , we estimate that the fair value of our investment portfolio would decline by an immaterial amount. We do not own derivative financial instruments in our investment portfolio. Accordingly, we do not believe that there is any material market risk exposure with respect to derivative, foreign currency or other financial instruments that would require disclosure under this item.