blue-10q_20180930.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2018

OR

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

For the transition period from                     to                    

Commission File Number: 001-35966

 

bluebird bio, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

13-3680878

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

60 Binney Street

Cambridge, Massachusetts

 

02142

(Address of Principal Executive Offices)

 

(Zip Code)

(339) 499-9300

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

  

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☐  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  

As of October 26, 2018, there were 54,694,411 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.  

 

 

 

 

 


 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

the initiation, timing, progress and results of our preclinical and clinical studies, and our research and development programs;

 

our ability to advance product candidates into, and successfully complete, clinical studies;

 

our ability to advance our viral vector and drug product manufacturing capabilities;

 

the timing or likelihood of regulatory filings and approvals for our product candidates;

 

the timing or success of commercialization of our product candidates, if approved;

 

the pricing and reimbursement of our product candidates, if approved;

 

the implementation of our business model, strategic plans for our business, product candidates and technology;

 

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;

 

estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

 

the potential benefits of strategic collaboration agreements and our ability to enter into strategic arrangements;

 

our ability to maintain and establish collaborations and licenses;

 

developments relating to our competitors and our industry; and

 

other risks and uncertainties, including those listed under Part II, Item 1A. Risk Factors.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other 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. 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 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.

 

 

 

 


 

bluebird bio, Inc.

Table of Contents

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

2

Item 1.

 

Financial Statements (unaudited)

 

2

 

 

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

 

2

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017

 

3

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

 

4

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

5

Item 2.

 

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

 

28

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risks

 

41

Item 4.

 

Controls and Procedures

 

41

 

 

 

PART II. OTHER INFORMATION

 

42

Item 1.

 

Legal Proceedings

 

42

Item 1A.

 

Risk Factors

 

42

Item 2.

 

Unregistered Sales of Equity Securities and Uses of Proceeds

 

74

Item 3.

 

Defaults Upon Senior Securities

 

74

Item 4.

 

Mine Safety Disclosures

 

74

Item 5.

 

Other Information

 

74

Item 6.

 

Exhibits

 

74

 

 

 

 

 

SIGNATURES

 

79

 

 

 

 

 

CERTIFICATIONS

 

 

 

 

 

 


 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

bluebird bio, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except par value amounts)

 

 

As of

 

 

As of

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

952,137

 

 

$

758,505

 

Marketable securities

 

723,141

 

 

 

531,604

 

Other investment and investment receivable

 

20,017

 

 

 

 

Tenant improvement receivable

 

19

 

 

 

3,112

 

Prepaid expenses

 

24,133

 

 

 

21,171

 

Receivables and other current assets

 

5,901

 

 

 

8,377

 

Total current assets

 

1,725,348

 

 

 

1,322,769

 

Marketable securities

 

323,772

 

 

 

324,193

 

Property, plant and equipment, net

 

232,863

 

 

 

199,606

 

Intangible assets, net

 

14,109

 

 

 

16,931

 

Goodwill

 

13,128

 

 

 

13,128

 

Restricted cash and other non-current assets

 

42,569

 

 

 

23,940

 

Total assets

$

2,351,789

 

 

$

1,900,567

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

$

12,891

 

 

$

12,873

 

Accrued expenses and other current liabilities

 

88,335

 

 

 

57,065

 

Deferred revenue, current portion

 

22,575

 

 

 

25,674

 

Collaboration research advancement, current portion

 

7,842

 

 

 

 

Total current liabilities

 

131,643

 

 

 

95,612

 

Deferred revenue, net of current portion

 

22,256

 

 

 

21,763

 

Collaboration research advancement, net of current portion

 

37,676

 

 

 

 

Contingent consideration

 

3,074

 

 

 

2,231

 

Financing lease obligation, net of current portion

 

153,716

 

 

 

154,749

 

Other non-current liabilities

 

2,634

 

 

 

2,780

 

Total liabilities

 

350,999

 

 

 

277,135

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 5,000 shares authorized; 0 shares issued and

   outstanding at September 30, 2018 and December 31, 2017

 

 

 

 

 

Common stock, $0.01 par value, 125,000 shares authorized; 54,678 and 49,406

   shares issued and outstanding at September 30, 2018 and December 31, 2017,

   respectively

 

547

 

 

 

494

 

Additional paid-in capital

 

3,355,491

 

 

 

2,540,951

 

Accumulated other comprehensive loss

 

(5,463

)

 

 

(4,205

)

Accumulated deficit

 

(1,349,785

)

 

 

(913,808

)

Total stockholders’ equity

 

2,000,790

 

 

 

1,623,432

 

Total liabilities and stockholders’ equity

$

2,351,789

 

 

$

1,900,567

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

2


 

bluebird bio, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(in thousands, except per share data)

 

 

For the three months ended

September 30,

 

 

For the nine months ended

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue

$

10,926

 

 

$

5,211

 

 

$

33,971

 

 

$

18,189

 

License and royalty revenue

 

602

 

 

 

2,500

 

 

 

1,365

 

 

 

13,070

 

Total revenues

 

11,528

 

 

 

7,711

 

 

 

35,336

 

 

 

31,259

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

116,744

 

 

 

61,545

 

 

 

328,867

 

 

 

180,464

 

General and administrative

 

44,527

 

 

 

22,982

 

 

 

120,621

 

 

 

64,463

 

Cost of license and royalty revenue

 

29

 

 

 

1,100

 

 

 

67

 

 

 

1,520

 

Change in fair value of contingent consideration

 

47

 

 

 

(258

)

 

 

843

 

 

 

205

 

Total operating expenses

 

161,347

 

 

 

85,369

 

 

 

450,398

 

 

 

246,652

 

Loss from operations

 

(149,819

)

 

 

(77,658

)

 

 

(415,062

)

 

 

(215,393

)

Interest income (expense), net

 

4,591

 

 

 

(1,155

)

 

 

8,415

 

 

 

(1,842

)

Other income (expense), net

 

(252

)

 

 

8

 

 

 

45

 

 

 

(1,180

)

Loss before income taxes

 

(145,480

)

 

 

(78,805

)

 

 

(406,602

)

 

 

(218,415

)

Net loss

$

(145,480

)

 

$

(78,805

)

 

$

(406,602

)

 

$

(218,415

)

Net loss per share - basic and diluted:

$

(2.73

)

 

$

(1.73

)

 

$

(7.95

)

 

$

(5.14

)

Weighted-average number of common shares used in computing net loss

   per share - basic and diluted:

 

53,277

 

 

 

45,648

 

 

 

51,130

 

 

 

42,524

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax expense of $0.0 and $0.0

   million for the three and nine months ended September 30, 2018

   and 2017, respectively

 

(66

)

 

 

(683

)

 

 

(1,255

)

 

 

(949

)

Total other comprehensive loss

 

(66

)

 

 

(683

)

 

 

(1,255

)

 

 

(949

)

Comprehensive loss

$

(145,546

)

 

$

(79,488

)

 

$

(407,857

)

 

$

(219,364

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

3


 

bluebird bio, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

For the nine months ended September 30,

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(406,602

)

 

$

(218,415

)

Adjustments to reconcile net loss to net cash used in operating

   activities:

 

 

 

 

 

 

 

Change in fair value of contingent consideration

 

843

 

 

 

(1,460

)

Depreciation and amortization

 

12,613

 

 

 

9,899

 

Stock-based compensation expense

 

80,849

 

 

 

38,953

 

Other non-cash items

 

3,106

 

 

 

2,545

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

(19,014

)

 

 

(12,865

)

Accounts payable

 

(493

)

 

 

(447

)

Accrued expenses and other liabilities

 

31,466

 

 

 

(6,468

)

Deferred revenue

 

(31,981

)

 

 

3,084

 

Collaboration research advancement

 

45,518

 

 

 

 

Net cash used in operating activities

 

(283,695

)

 

 

(185,174

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property, plant and equipment, including assets under

   financing lease obligation

 

(42,844

)

 

 

(43,408

)

Purchases of marketable securities

 

(827,163

)

 

 

(621,004

)

Proceeds from maturities of marketable securities

 

631,680

 

 

 

320,190

 

Purchase of other investment and investment receivable

 

(20,017

)

 

 

 

Net cash used in investing activities

 

(258,344

)

 

 

(344,222

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from public offering of common stock, net of issuance costs

 

649,367

 

 

 

436,805

 

Cash paid for contingent purchase price consideration

 

 

 

 

(1,074

)

Reimbursement of assets under financing lease obligation

 

3,098

 

 

 

38,021

 

Payments on financing lease obligation

 

(728

)

 

 

(315

)

Proceeds from issuance of common stock

 

29,550

 

 

 

14,406

 

Proceeds from issuance of common stock to Regeneron

 

54,484

 

 

 

 

Net cash provided by financing activities

 

735,771

 

 

 

487,843

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

193,732

 

 

 

(41,553

)

Cash, cash equivalents and restricted cash at beginning of period

 

772,268

 

 

 

293,277

 

Cash, cash equivalents and restricted cash at end of period

$

966,000

 

 

$

251,724

 

Supplemental cash flow disclosures from investing and financing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in accounts

   payable and accrued expenses

$

2,770

 

 

$

1,740

 

Assets acquired under financing lease obligation

$

 

 

$

2,467

 

Stock option exercise proceeds receivable

$

49

 

 

$

845

 

Tenant improvements under financing lease included in tenant

   improvements receivable

$

14

 

 

$

2,013

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

4


 

bluebird bio, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1. Description of the business

bluebird bio, Inc. (the “Company” or “bluebird”) was incorporated in Delaware on April 16, 1992, and is headquartered in Cambridge, Massachusetts. The Company researches, develops, manufactures and plans to commercialize gene therapies for the treatment of severe genetic diseases and cancer. Since its inception, the Company has devoted substantially all of its resources to its research and development efforts relating to its product candidates, including activities to manufacture product candidates, conduct clinical studies of its product candidates, perform preclinical research to identify new product candidates and provide general and administrative support for these operations.

The Company’s clinical programs in severe genetic diseases include its LentiGlobin® product candidate to treat transfusion-dependent β-thalassemia, or TDT, and to treat sickle cell disease, or SCD, and its Lenti-DTM product candidate to treat cerebral adrenoleukodystrophy, or CALD, a rare hereditary neurological disorder. The Company’s programs in oncology are built upon its leadership in lentiviral gene delivery and T cell engineering, with a focus on developing novel T cell-based immunotherapies, including chimeric antigen receptor (CAR) and T cell receptor (TCR) T cell therapies. bb2121 and bb21217, which are product candidates in oncology under the Company’s collaboration arrangement with Celgene Corporation (“Celgene”), are CAR T cell product candidates for the treatment of multiple myeloma. Refer to Note 9, “Collaborative arrangements” for further discussion of the Company’s collaboration with Celgene.

As of September 30, 2018, the Company had cash, cash equivalents and marketable securities of $2.0 billion. Although the Company has incurred recurring losses and expects to continue to incur losses for the foreseeable future, the Company expects that its cash, cash equivalents and marketable securities will be sufficient to fund current operations for at least the next twelve months.  

 

2. Basis of presentation, principles of consolidation and significant accounting policies

Basis of presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States (“GAAP”) as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. These interim condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods ended September 30, 2018 and 2017.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2017, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 21, 2018.

Certain items in the prior year’s condensed consolidated financial statements have been reclassified to conform to the current presentation.  As a result, no subtotals in the prior year condensed consolidated financial statements were impacted.

Amounts reported are computed based on thousands. As a result, certain totals may not sum due to rounding.

Principles of consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Any reference in these notes to applicable guidance is meant to refer to GAAP. The Company views its operations and manages its business in one operating segment. All material long-lived assets of the Company reside in the United States.

5


 

Significant accounting policies

The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and nine months ended September 30, 2018 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2017 Annual Report on Form 10-K, except as noted below with respect to the Company’s revenue recognition, collaboration revenue and license and royalty revenue accounting policies and as noted within the “Recent accounting pronouncements – Recently adopted” section below.  

Revenue recognition

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers (“Topic 606”), using the modified retrospective transition method. Under this method, the Company has recognized the cumulative effect of the adoption as an adjustment to the opening balance of accumulated deficit in the current period condensed consolidated balance sheet.  The Company has not revised its consolidated financial statements for prior periods. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as collaboration arrangements and leases.

 

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

Once a contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations.  Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options.  The Company assesses if these options provide a material right to the customer and if so, they are considered performance obligations.  The exercise of a material right is accounted for as a contract modification for accounting purposes.

The Company assesses whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract).  In assessing whether a promised good or service is distinct, the Company considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. The Company also considers the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct.

The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices (“SSP”) on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. The Company validates the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations.

6


 

If the consideration promised in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. The Company determines the amount of variable consideration by using the expected value method or the most likely amount method. The Company includes the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.

If an arrangement includes development and regulatory milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

In determining the transaction price, the Company adjusts consideration for the effects of the time value of money if the timing of payments provides the Company with a significant benefit of financing.  The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less.  The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in any of its arrangements.

The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time, and if over time recognition is based on the use of an output or input method.

Collaboration revenue

To date, the Company’s collaboration revenue has been exclusively generated from its collaboration arrangement with Celgene, which was originally entered into in March 2013 and was subsequently amended in June 2015, as further described in Note 9, “Collaborative arrangements”.

The Company analyzes its collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements (“ASC 808”) to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities.  This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement.  For collaboration arrangements within the scope of ASC 808 that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and therefore within the scope of Topic 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to Topic 606.  Amounts that are owed to collaboration partners are recognized as an offset to collaboration revenues as such amounts are incurred by the collaboration partner.  Where amounts owed to a collaboration partner exceed the Company’s collaboration revenues in each quarterly period, such amounts are classified as research and development expense. For those elements of the arrangement that are accounted for pursuant to Topic 606, the Company applies the five-step model described above.

License and royalty revenue

The Company enters into out-licensing agreements that are within the scope of Topic 606. The Company does not have any material license arrangements that contain more than one performance obligation. The terms of such out-license agreements include the license of functional intellectual property, given the functionality of the intellectual property is not expected to change substantially as a result of the licensor’s ongoing activities, and typically include payment of one or more of the following: non-refundable up-front license fees; development and regulatory milestone payments and milestone payments based on the level of sales; and royalties on net sales of licensed products. Nonrefundable up-front license fees are recognized as revenue at a point in time when the licensed intellectual property is made available for the customer’s use and benefit, which is generally at the inception of the arrangement.  Milestone fees, which are a type of variable consideration, are recognized as revenue to the extent that it is probable that a significant reversal will not occur. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied.

7


 

For a complete discussion of accounting for collaboration and other revenue-generating arrangements, see Note 9, “Collaborative arrangements” and Note 10, “License and royalty revenue”.  Additionally, see “Recent accounting pronouncements - Recently adopted” below for discussion of the impact of adopting Topic 606, which was effective on January 1, 2018.

 

Share-based compensation

The Company’s share-based compensation programs grant awards that have included stock options, restricted stock units, restricted stock awards, and shares issued under its employee stock purchase plan. Grants are awarded to employees, including directors, and non-employees.  As noted in the Company’s 2017 Annual Report on Form 10-K, the Company historically applied the guidance in FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees, to account for its awards to non-employees pursuant to which the measurement date for non-employee awards was generally the date the services are completed, resulting in financial reporting period adjustments to stock-based compensation during the vesting terms for changes in the fair value of the awards. As discussed below under “Recently Adopted Accounting Pronouncements”, in the third quarter of 2018 the Company adopted ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”).  As a result, the accounting for non-employee awards will be generally consistent with that of employee awards. The measurement date for non-employee awards is the date of grant without changes in the fair value of the award. Stock-based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis.

 

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including: expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements. Estimates are used in the following areas, among others: subsequent fair value estimates used to assess potential impairment of long-lived assets, including goodwill and intangible assets, financing lease obligation, contingent consideration, stock-based compensation expense, accrued expenses, revenue and income taxes.

Recent accounting pronouncements

Recently adopted

ASU No. 2014-09, Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which superseded the revenue recognition requirements in ASC 605, Revenue Recognition and created a new Topic 606, Revenue from Contracts with Customers.  In 2015 and 2016, the FASB issued additional ASUs related to Topic 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance.  The new standard became effective on January 1, 2018.  Topic 606 allows for either a full retrospective adoption, in which the standard is applied to all periods presented in an entity’s financial statements, or a modified retrospective approach, in which the standard is applied to the most current period presented in an entity’s financial statements with the cumulative effect of adoption recognized as an adjustment to the opening balance of accumulated deficit in the period of adoption. The Company adopted this new standard on January 1, 2018 using the modified retrospective approach, which has been applied consistently to all contracts, and has elected to use the following practical expedient that is permitted under the rules of adoption:

 

 

For contracts that were modified prior to Topic 606 adoption, the Company has not retrospectively accounted for each contract modification in accordance with the contract modification guidance.  Instead, the Company reflected the aggregate effect of all modifications occurring prior to Topic 606 adoption when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price.

8


 

As a result of adopting Topic 606, the Company recorded a $29.4 million adjustment to the opening balance of accumulated deficit in the first quarter of 2018 primarily as a result of the accounting for the up-front consideration received in March 2013 in connection with the collaboration arrangement with Celgene under ASC 605-25 versus Topic 606.  Refer below for a summary of the amount by which each financial statement line item was affected by the impact of the cumulative adjustment:

 

 

Impact of Topic 606 adoption on

condensed consolidated balance sheet

as of January 1, 2018

 

(in thousands)

As reported under

Topic 606

 

 

Adjustments

 

 

Balances without

adoption of

Topic 606

 

Deferred revenue, current portion

$

45,344

 

 

$

19,670

 

 

$

25,674

 

Deferred revenue, net of current portion

$

31,468

 

 

$

9,705

 

 

$

21,763

 

Accumulated deficit

$

(943,183

)

 

$

(29,375

)

 

$

(913,808

)

 

The amount by which each financial statement line item is affected in the current reporting period by Topic 606 as compared with the guidance that was in effect prior to adoption is disclosed below.

 

 

Impact of Topic 606 adoption on

condensed consolidated balance sheet

as of September 30, 2018

 

(in thousands)

As reported under

Topic 606

 

 

Adjustments

 

 

Balances without

adoption of

Topic 606

 

Deferred revenue, current portion

$

22,575

 

 

$

9,596

 

 

$

12,979

 

Deferred revenue, net of current portion

$

22,256

 

 

$

6,074

 

 

$

16,182

 

Accumulated deficit

$

(1,349,785

)

 

$

15,670

 

 

$

(1,365,455

)

 

 

 

Impact of Topic 606 adoption on condensed consolidated

statement of operations and comprehensive loss

for the three months ended September 30, 2018

 

(in thousands, except per share data)

As reported under

Topic 606

 

 

Adjustments

 

 

Balances without

adoption of

Topic 606

 

Collaboration revenue

$

10,926

 

 

$

2,097

 

 

$

8,829

 

Research and development expense

$

116,744

 

 

$

(2,789

)

 

$

119,533

 

Net loss

$

(145,480

)

 

$

4,886

 

 

$

(150,366

)

Net loss per share - basic and diluted:

$

(2.73

)

 

$

0.09

 

 

$

(2.82

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Topic 606 adoption on condensed consolidated

statement of operations and comprehensive loss

for the nine months ended September 30, 2018

 

(in thousands, except per share data)

As reported under

Topic 606

 

 

Adjustments

 

 

Balances without

adoption of

Topic 606

 

Collaboration revenue

$

33,971

 

 

$

9,116

 

 

$

24,855

 

Research and development expense

$

328,867

 

 

$

(4,589

)

 

$

333,456

 

Net loss

$

(406,602

)

 

$

13,705

 

 

$

(420,307

)

Net loss per share - basic and diluted:

$

(7.95

)

 

$

0.27

 

 

$

(8.22

)

 

 

 

Impact of Topic 606 adoption on

condensed consolidated statement of cash flows

for the nine months ended September 30, 2018

 

(in thousands)

As reported under

Topic 606

 

 

Adjustments

 

 

Balances without

adoption of

Topic 606

 

Net loss

$

(406,602

)

 

$

13,705

 

 

$

(420,307

)

Changes in deferred revenue

$

(31,981

)

 

$

(13,705

)

 

$

(18,276

)

 

9


 

The most significant change above relates to the Company’s collaboration revenue, which to date has been exclusively generated from its collaboration arrangement with Celgene. Under ASC 605, the Company accounted for contract modifications to the Celgene collaboration as they occurred and the accounting for those changes was prospective in nature.  Through the application of the practical expedient discussed above in connection with the adoption of Topic 606, the Company reflected the aggregate effect of all modifications to the Celgene collaboration when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price. As a result, although the performance obligations identified under Topic 606 were generally consistent with the units of account identified under ASC 605, the timing of the allocation of the transaction price to the identified performance obligations under Topic 606 differed from the allocations of consideration under ASC 605. Accordingly, the transaction price ultimately allocated to each performance obligation under Topic 606 differed from the amounts allocated under ASC 605.

 

As a result of adopting Topic 606, the Company established a deferred revenue deferred tax asset, and an offsetting valuation allowance, of $7.9 million through its accumulated deficit given it is not more likely than not that the deferred tax asset will be realized due to historical and expected future losses, such that there was no tax impact on the Company’s condensed consolidated financial statements as a result of adopting Topic 606.

ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“Topic 230”). The new standard clarifies certain aspects of the statement of cash flows, including the classification of contingent consideration payments made after a business combination and several other clarifications not currently applicable to the Company. The new standard also clarifies that an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. The new standard was effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s condensed consolidated statements of cash flows upon adoption.

ASU 2016-18, Statement of Cash Flows: Restricted Cash

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (“ASU 2016-18”). The amendments in this update require that amounts generally described as restricted cash and restricted cash equivalents be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective January 1, 2018.  As a result of adopting ASU 2016-18, the Company includes its restricted cash balance in the cash and cash equivalents reconciliation of operating, investing and financing activities.  The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows:

 

(in thousands)

As of

September 30,

2018

 

 

As of

September 30,

2017

 

Cash and cash equivalents

$

952,137

 

 

$

237,962

 

Restricted cash included in receivables and other current assets

 

100

 

 

 

 

Restricted cash included in restricted cash and other non-current assets

 

13,763

 

 

 

13,762

 

Total cash, cash equivalents, and restricted cash shown in the statement

   of cash flows

$

966,000

 

 

$

251,724

 

 

ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope Modification Accounting

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope Modification Accounting.  The new standard is intended to reduce the diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award.  The new standard was effective beginning January 1, 2018. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations upon adoption. 

10


 

ASU 2018-03, Technical Corrections and Improvements to Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities (“ASU 2018-03”). The new standard amends the standard ASU 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which was issued by the FASB in January 2016 and previously adopted by the Company. This amendment simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. In addition, it requires enhanced disclosures about investments. The Company adopted ASU 2018-03 effective July 1, 2018. The adoption of this standard did not have an impact on the Company’s financial position or results of operations upon adoption.

ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting

In June 2018, the FASB issued ASU 2018-07. The new standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions.  The new standard will be effective beginning January 1, 2019 and early adoption is permitted.  The Company early adopted ASU 2018-07 effective July 1, 2018 using a cumulative-effect adjustment as of the date of adoption. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations upon adoption.     

Not yet adopted

ASU 2016-02, Leases and ASU 2018-11, Leases, Targeting Improvements

In February 2016, the FASB issued ASU 2016-02, Leases, (“ASU 2016-02”), which requires a lessee to recognize assets and liabilities on the balance sheet for most leases and changes many key definitions, including the definition of a lease. The new standard includes a short-term lease exception for leases with a term of 12 months or less, as part of which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases using classification criteria that are substantially similar to the previous guidance. 

 

ASU 2016-02 will be effective beginning January 1, 2019 requiring the use of a modified retrospective transition approach applied at the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, Leases, Targeting Improvements, (“ASU 2018-11”), which contains certain amendments to ASU 2016-02 intended to provide relief in implementing the new standard. ASU 2018-11 provides registrants with an option to not restate comparative periods presented in the financial statements. The Company intends to elect this new transition approach using a cumulative-effect adjustment on the effective date of the standard, for which comparative periods will be presented in accordance with the previous guidance in ASC 840, Leases.

 

The Company is currently evaluating the potential impact ASU 2016-02 may have on its financial position, results of operations, and related footnotes. The Company expects it will elect to utilize the available package of practical expedients permitted under the transition guidance within the new standard, which does not require the reassessment of the following: i) whether existing or expired arrangements are or contain a lease, ii) the lease classification of existing or expired leases, and iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. Additionally, the Company expects it will make an accounting policy election to keep leases with an initial term of 12 months or less off of its balance sheet.  The Company’s assessment will include, but is not limited to, evaluating the impact that this standard has on the lease of its corporate headquarters at 60 Binney Street in Cambridge, Massachusetts, its laboratory space in Seattle, Washington, its office space in Zug, Switzerland, its equipment leases, and its embedded leases.

ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.  To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this ASU remove the second step of the test. An entity will instead apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The new standard will be effective beginning January 1, 2020 and early adoption is permitted with measurement dates on or after January 1, 2017.  The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

11


 

ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs

In April 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (“Subtopic 310-20”). The new standard amends the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period for the premium to the earliest call date. Subtopic 310-20 calls for a modified retrospective application under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The new standard will be effective beginning January 1, 2019 and early adoption is permitted for public entities. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  The new standard allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.  The new standard will be effective beginning January 1, 2019 and early adoption is permitted.  The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations upon adoption.

 

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”). The new standard removes certain disclosures, modifies certain disclosures and adds additional disclosures related to fair value measurement. The new standard will be effective beginning January 1, 2020 and early adoption is permitted. The Company is currently evaluating the potential impact ASU 2018-13 may have on its disclosures upon adoption.

ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, (“ASU 2018-15”). The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The new standard will be effective beginning January 1, 2020 and early adoption is permitted. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.  The Company is currently evaluating the potential impact ASU 2018-15 may have on its financial position and results of operations upon adoption.

 

 

3. Marketable securities

The following table summarizes the available-for-sale securities held at September 30, 2018 and December 31, 2017 (in thousands):

 

Description

 

Amortized

cost

 

 

Unrealized

gains

 

 

Unrealized

losses

 

 

Fair

value

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities and treasuries

 

$

1,042,297

 

 

$

1

 

 

$

(4,705

)

 

$

1,037,593

 

Certificates of deposit

 

 

9,320

 

 

 

 

 

 

 

 

 

9,320

 

Total

 

$

1,051,617

 

 

$

1

 

 

$

(4,705

)

 

$

1,046,913

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities and treasuries

 

$

841,895

 

 

$

 

 

$

(3,579

)

 

$

838,316

 

Certificates of deposit

 

 

17,480

 

 

 

1

 

 

 

 

 

 

17,481

 

Total

 

$

859,375

 

 

$

1

 

 

$

(3,579

)

 

$

855,797

 

12


 

The amortized cost of available-for-sale securities is adjusted for amortization of premiums and accretion of discounts to maturity. At September 30, 2018 and December 31, 2017, the balance in the Company’s accumulated other comprehensive loss was composed primarily of activity related to the Company’s available-for-sale marketable securities. There were no material realized gains or losses recognized on the sale or maturity of available-for-sale securities during the nine months ended September 30, 2018 or 2017, and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive loss for the same periods.

The aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months as of September 30, 2018 and December 31, 2017 was $640.1 million and $704.1 million, respectively. As of September 30, 2018 and December 31, 2017, there were $392.5 million and $134.4 million in securities held by the Company in an unrealized loss position for more than twelve months, respectively. The aggregate unrealized loss on securities held by the Company for less than twelve months as of September 30, 2018 and December 31, 2017 was $1.8 million and $3.3 million, respectively.  The aggregate unrealized loss on securities held by the Company for more than twelve months as of September 30, 2018 and December 31, 2017 was $2.9 million and $0.3 million, respectively. The Company has the intent and ability to hold such securities until recovery. The Company determined that there was no material change in the credit risk of the above investments. As a result, the Company determined it did not hold any investments with any other-than-temporary impairment as of September 30, 2018 and December 31, 2017.

No available-for-sale securities held as of September 30, 2018 or December 31, 2017 had remaining maturities greater than three years.

4. Fair value measurements

The following table sets forth the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 (in thousands):

 

Description

 

Total

 

 

Quoted

prices in

active

markets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

952,137

 

 

$

936,168

 

 

$

15,969

 

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities and treasuries

 

 

1,037,593

 

 

 

 

 

 

1,037,593

 

 

 

 

Certificates of deposit

 

 

9,320

 

 

 

 

 

 

9,320

 

 

 

 

Total assets

 

$

1,999,050

 

 

$

936,168

 

 

$

1,062,882

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

3,074

 

 

$

 

 

$

 

 

$

3,074

 

Total liabilities

 

$

3,074

 

 

$

 

 

$

 

 

$

3,074

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

758,505

 

 

$

758,505

 

 

$

 

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities and treasuries

 

 

838,316

 

 

 

 

 

 

838,316

 

 

 

 

Certificates of deposit

 

 

17,481

 

 

 

 

 

 

17,481

 

 

 

 

Total assets

 

$

1,614,302

 

 

$

758,505

 

 

$

855,797

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

2,231

 

 

$

 

 

$

 

 

$

2,231

 

Total liabilities

 

$

2,231

 

 

$

 

 

$

 

 

$

2,231

 

 

13


 

Cash, cash equivalents and marketable securities

The Company considers all highly liquid securities with original final maturities of 90 days or less from the date of purchase to be cash equivalents. As of September 30, 2018 and December 31, 2017, cash and cash equivalents comprises cash, money market accounts, and U.S. treasury securities.

Marketable securities classified as Level 2 within the valuation hierarchy generally consist of certificates of deposit, U.S. treasury securities and government agency securities. The Company estimates the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs. The Company validates the prices provided by its third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.

Contingent consideration

In connection with its prior acquisition of Precision Genome Engineering, Inc. (“Pregenen”), the Company may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approvals or sales-based milestone events. Contingent consideration is measured at fair value and is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions the Company believes would be made by a market participant. The Company assesses these estimates on an on-going basis as additional data impacting the assumptions is obtained. Future changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized within the condensed consolidated statements of operations and comprehensive loss. In the absence of new information, changes in fair value will reflect changing discount rates and the passage of time.

The significant unobservable inputs used in the measurement of fair value of the Company’s contingent consideration are probabilities of successful achievement of clinical and commercial milestones, the period in which these milestones are expected to be achieved ranging from 2021 to 2028 and discount rates ranging from 16.2% to 17.0%. Significant increases or decreases in any of the probabilities of success would result in a significantly higher or lower fair value measurement, respectively. Significant increases or decreases in the other inputs would result in a significantly lower or higher fair value measurement, respectively.

The table below provides a roll-forward of fair value of the Company’s contingent consideration obligations, which include Level 3 inputs (in thousands):

 

 

For the

nine months ended

 

 

September 30, 2018

 

Beginning balance

$

2,231

 

Additions

 

 

Changes in fair value

 

843

 

Payments

 

 

Ending balance

$

3,074

 

 

Please refer to Note 8, “Commitments and contingencies” for further information.

 

5. Other investment and investment receivable

On August 20, 2018, the Company entered into a license and collaboration agreement with Gritstone Oncology, Inc. (“Gritstone”) to utilize Gritstone’s proprietary technology platform to identify and validate tumor-specific targets and provide TCRs directed to selected targets for use in the Company’s gene therapy products.  Pursuant to this agreement, the Company paid Gritstone a non-refundable, non-creditable upfront payment of $20.0 million, which is inclusive of Gritstone’s costs to perform activities allocated to it under the research plan. The Company may also make, depending upon the resulting product, future payments of up to $129.0 million per therapy product and $27.5 million per target product for development, regulatory, and commercial milestones as well as low single-digit tiered royalty payments based on annual net sales.

The Company accounted for $14.5 million of the $20.0 million upfront payment as prepaid research and development costs, $3.2 million of which is reflected within prepaid expenses and $11.3 million within restricted cash and other non-current assets on the Company’s condensed consolidated balance sheet as of September 30, 2018. In future periods, the Company will recognize expense on a quarterly basis as a proportion of effort incurred by Gritstone as a percentage of total effort expected to be expended. The

14


 

remaining $5.5 million of the upfront payment was expensed within research and development expense on the Company’s condensed consolidated statement of operations and comprehensive loss for the quarter ending September 30, 2018, as this payment represented an access fee for technology that has no clear alternate future use under ASC 730-10, Research and Development.  

The Company simultaneously entered into a stock purchase agreement with Gritstone, pursuant to which the Company purchased $10.0 million of Series C preferred shares. The Company will account for this investment as a marketable security as the Company does not have the power to control or significantly influence Gritstone’s operations.  As the Series C preferred shares did not have a readily determinable fair value as of September 30, 2018, the Company elected the measurement alternative under ASC 321, Investments – Equity Securities and continued to record this investment at cost as of September 30, 2018.  The investment is included within other investment and investment receivable on the Company’s condensed consolidated balance sheet as of September 30, 2018.

 

On September 27, 2018, Gritstone announced the pricing of its initial public offering (“IPO”). In connection with Gritstone’s IPO, the Company initiated the purchase of 0.7 million common shares for $10.0 million. The purchase closed on September 28, 2018. Upon the closing of the IPO on October 2, 2018, the Company received its common shares and its Series C preferred shares were converted into common shares. As this transaction had not closed as of September 30, 2018, both the investment in Series C preferred shares of $10.0 million and the additional $10.0 million common stock investment receivable were recorded at cost within other investment and investment receivable as of September 30, 2018. In future periods, following Gritstone’s IPO, the Company will re-measure its combined $20.0 million investment in common shares at fair value at each reporting period, with subsequent changes in fair value reflected in earnings.

 

 

6. Property, plant and equipment, net

Property, plant and equipment, net, consists of the following (in thousands):

 

 

 

As of

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Land

 

$

1,210

 

 

$

1,210

 

Building

 

 

179,754

 

 

 

164,414

 

Computer equipment and software

 

 

6,790

 

 

 

5,134

 

Office equipment

 

 

5,371

 

 

 

4,478

 

Laboratory equipment

 

 

32,159

 

 

 

24,914

 

Leasehold improvements

 

 

115

 

 

 

116

 

Construction-in-progress

 

 

33,103

 

 

 

15,189

 

Total property, plant and equipment

 

 

258,502

 

 

 

215,455

 

Less accumulated depreciation and amortization

 

 

(25,639

)

 

 

(15,849

)

Property, plant and equipment, net

 

$

232,863

 

 

$

199,606

 

 

North Carolina manufacturing facility

In November 2017, the Company acquired a manufacturing facility, which is in the process of construction, in Durham, North Carolina for the future manufacture of lentiviral vector for the Company’s gene therapies.  Construction-in-progress as of September 30, 2018 and December 31, 2017 includes $27.3 million and $12.9 million, respectively, related to the North Carolina manufacturing facility. During the three months ended September 30, 2018, the Company placed $12.2 million of the North Carolina manufacturing facility into service and began to depreciate the assets.

60 Binney Street lease

As of September 30, 2018, total property, plant and equipment, gross, includes $167.6 million related to the Company’s headquarters at 60 Binney Street in Cambridge, Massachusetts, of which $156.0 million was incurred by the landlord. As of December 31, 2017, total property, plant and equipment, gross, includes $164.4 million related to the Company’s headquarters at 60 Binney Street in Cambridge, Massachusetts, of which $156.0 million was incurred by the landlord.  Please refer to Note 8, "Commitments and contingencies" for further information.

 

 

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7. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

As of

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Accrued goods and services

 

$

62,466

 

 

$

29,533

 

Employee compensation

 

 

21,139

 

 

 

19,657

 

Accrued professional fees

 

 

2,177

 

 

 

1,402

 

Financing lease obligation, current portion

 

 

1,318

 

 

 

1,051

 

Accrued license and milestone fees

 

 

608

 

 

 

4,584

 

Other

 

 

627

 

 

 

838

 

Total accrued expenses and other current

   liabilities

 

$

88,335

 

 

$

57,065

 

 

Accrued goods and services primarily include clinical manufacturing costs, contract research organization costs, and costs incurred related to the Company’s collaboration partnerships.

 

8. Commitments and contingencies

Operating lease commitments

On June 3, 2016, the Company entered into a manufacturing agreement for the future commercial production of the Company’s Lenti-D and LentiGlobin product candidates with a contract manufacturing organization. Under this 12 year agreement, the contract manufacturing organization will complete the design, construction, validation and process validation of the leased suites prior to anticipated commercial launch of the product candidates. During construction, the Company was required to pay $12.5 million upon the achievement of certain contractual milestones, and may pay up to $8.0 million in additional contractual milestones if the Company elects its option to lease additional suites. The Company paid $5.0 million for the achievement of the first and second contractual milestones during 2016 and paid $5.5 million for the third and fourth contractual milestones achieved during 2017.  In March 2018, $1.5 million of the possible $2.0 million related to the fifth contractual milestone was achieved and was paid in the second quarter of 2018.  Given that construction was completed in March 2018, beginning in April 2018 the Company will pay $5.1 million per year in fixed suite fees as well as certain fixed labor, raw materials, testing and shipping costs for manufacturing services, and may pay additional suite fees if it elects its option to reserve or lease additional suites. The Company may terminate this agreement at any time upon payment of a one-time termination fee and up to 24 months of fixed suite and labor fees. The Company concluded that this agreement contains an embedded lease as the suites are designated for the Company’s exclusive use during the term of the agreement. The Company concluded that it is not the deemed owner during construction nor is it a capital lease under ASC 840-10, Leases – Overall.  As a result, the Company accounts for the agreement as an operating lease and expenses the rental payments on a straight-line basis over the non-cancellable term of the embedded lease.

 

On November 18, 2016, the Company entered into an agreement for future clinical and commercial production of the Company’s LentiGlobin and Lenti-D gene therapy drug products with a contract manufacturing organization at an existing facility. The term of the agreement is five years with a three year renewal at the mutual option of each party. Under the agreement, the Company is required to pay an up-front fee of €3.0 million, €2.0 million of which was paid in the fourth quarter of 2016 and €1.0 million of which was paid in the third quarter of 2018, and annual maintenance and production fees of up to €9.8 million, depending on its production needs. The Company may terminate this agreement with twelve months’ notice and a one-time termination fee. The Company concluded that this agreement contains an embedded lease as the clean rooms are designated for the Company’s exclusive use during the term of the agreement and determined that it is not a capital lease under ASC 840-10, Leases – Overall. As a result, the Company accounts for the agreement as an operating lease and expenses the rental payments on a straight-line basis over the non-cancellable term of the embedded lease.

60 Binney Street Lease commitments

On September 21, 2015, the Company entered into a lease agreement for office and laboratory space located in a building (the “Building”) at 60 Binney Street, Cambridge, Massachusetts (the “60 Binney Street Lease”) for its corporate headquarters with a term through March 31, 2027.  Although the Company does not legally own the premises, it is deemed to be the owner of the building for accounting purposes because the Company was involved in the construction project, including having responsibility to pay for a portion of the costs of finish work and mechanical, electrical, and plumbing elements of the Building during the construction period. Accordingly, construction costs that were incurred by the landlord directly or indirectly through reimbursement to the Company as part of its tenant improvement allowance have been recorded as an asset in property, plant and equipment, net with a related financing obligation in accrued expenses and other current liabilities and financing lease obligation, net of current portion on the Company’s condensed consolidated balance sheets.

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The Company evaluated the 60 Binney Street Lease upon occupancy on March 27, 2017 and determined that the 60 Binney Street Lease did not meet the criteria for “sale-leaseback” treatment. This determination was based on, among other things, the Company's continuing involvement with the property in the form of non-recourse financing to the lessor. Accordingly, upon occupancy, the Company commenced depreciating the building over a useful life of 40 years and incurred interest expense related to the financing obligation of $3.9 million and $11.6 million for the three and nine months ended September 30, 2018, respectively.  The Company incurred interest expense related to the financing obligation of $4.1 million and $7.8 million for the three and nine months ended September 30, 2017, respectively.  The Company currently maintains a $13.8 million letter of credit as required under the terms of the lease.  Subject to the terms of the lease and certain reduction requirements specified therein, including market capitalization requirements, this amount may decrease to $9.2 million over time.

Contingent consideration related to business combinations

On June 30, 2014, the Company acquired Pregenen. The Company may be required to make up to $120.0 million in remaining future contingent cash payments to the former equityholders of Pregenen upon the achievement of certain clinical and commercial milestones related to the Pregenen technology, of which $20.1 million relates to clinical milestones and $99.9 million relates to commercial milestones. In accordance with accounting guidance for business combinations, contingent consideration liabilities are required to be recognized on the consolidated balance sheets at fair value. Estimating the fair value of contingent consideration requires the use of significant assumptions primarily relating to probabilities of successful achievement of certain clinical and commercial milestones, the expected timing in which these milestones will be achieved and discount rates. The use of different assumptions could result in materially different estimates of fair value. Please refer to Note 4, “Fair value measurements” for additional information.

Other funding commitments

The Company is party to various agreements, principally relating to licensed technology, that require future payments relating to milestones not met at September 30, 2018 and December 31, 2017 or royalties on future sales of specified products.  Additionally, the Company is party to various contracts with contract research organizations and contract manufacturers that generally provide for termination on notice, with the exact amounts due in the event of termination to be based on the timing of the termination and the terms of the agreement.  In each of 2018 and 2019, the Company expects to make payments of approximately $4.0 million and $23.0 million, respectively, under an agreement with a contract manufacturer.

 

 

9. Collaborative arrangements

To date, the Company’s collaboration revenue has been exclusively generated from its collaboration arrangement with Celgene Corporation (“Celgene”), which was originally entered into in March 2013 and was subsequently amended in June 2015, as further described below. During the three months ended September 30, 2018, the Company entered into a collaboration agreement with Regeneron Pharmaceuticals, Inc. (“Regeneron”), as further described below.

Celgene

Celgene Original Collaboration Agreement

On March 19, 2013, the Company entered into a Master Celgene Collaboration Agreement (the “Celgene Collaboration Agreement”) with Celgene to discover, develop and commercialize potentially disease-altering gene therapies in oncology. The collaboration is focused on applying gene therapy technology to genetically modify a patient’s own T cells, known as chimeric antigen receptor, or CAR T cells, to target and destroy cancer cells. Additionally, on March 19, 2013, the Company entered into a Platform Technology Sublicense Agreement with Celgene pursuant to which the Company obtained a sublicense to certain intellectual property from Celgene, originating under Celgene’s license from Baylor College of Medicine, for use in the collaboration.

Under the terms of the Celgene Collaboration Agreement, the Company received a $75.0 million up-front, non-refundable cash payment. The Company is responsible for conducting discovery, research and development activities through completion of Phase I clinical studies during the initial term of the Celgene Collaboration Agreement, or three years. The collaboration was governed by a joint steering committee (“JSC”) formed by an equal number of representatives from the Company and Celgene. The JSC, among other activities, reviewed the collaboration program, reviewed and evaluated product candidates and approved regulatory plans. In addition to the JSC, the Celgene Collaboration Agreement provided that the Company and Celgene each appoint representatives to a patent committee, which was responsible for managing the intellectual property developed and used during the collaboration.

17


 

Celgene Amended Collaboration Agreement

On June 3, 2015, the Company and Celgene amended and restated the Celgene Collaboration Agreement (the “Amended Celgene Collaboration Agreement”).  Under the Amended Celgene Collaboration Agreement, the parties narrowed the focus of the collaboration exclusively to anti- B-cell maturation antigen (“BCMA”) product candidates for a new three-year term that ended in June 2018. In connection with the Amended Celgene Collaboration Agreement, the Company received an upfront, one-time, non-refundable, non-creditable payment of $25.0 million. The collaboration continued to be governed by the JSC. Under the terms of the Amended Celgene Collaboration Agreement, for up to two product candidates selected for development under the collaboration, the Company was responsible for conducting and funding all research and development activities performed up through completion of the initial Phase I clinical study of such product candidates.

On a product candidate-by-product candidate basis, up through a specified period following enrollment of the first patient in an initial Phase I clinical study for such product candidate (the “Option Period”), the Company granted Celgene an option to obtain an exclusive worldwide license to develop and commercialize such product. Following Celgene’s license of each product candidate, the Company is entitled to elect to co-develop and co-promote each product candidate in the U.S.

Celgene bb2121 License Agreement

On February 10, 2016, Celgene exercised its option to obtain an exclusive worldwide license to develop and commercialize bb2121, the first product candidate under the Amended Celgene Collaboration Agreement, pursuant to an executed license agreement (“bb2121 License Agreement”) entered into by the parties on February 16, 2016 and paid the Company an option fee of $10.0 million. Pursuant to the bb2121 License Agreement, Celgene was responsible for development and related funding of bb2121 after the substantial completion of the on-going Phase I clinical trial. The Company was responsible for the manufacture of vector and associated payload throughout development and, upon Celgene’s request, commercialization, which is fully reimbursed by Celgene, and Celgene was responsible for the manufacture of drug product throughout development and commercialization.

Celgene bb2121 Co-Development, Co-Promote and Profit Share Agreement

On March 28, 2018, the Company elected to co-develop and co-promote bb2121 within the U.S. pursuant to the execution of the Amended and Restated Co-Development, Co-Promote and Profit Share Agreement (“bb2121 CCPS”).  The responsibilities of the parties remain unchanged from those under the bb2121 License Agreement, however, the Company will share equally in all profits and losses relating to developing, commercializing and manufacturing bb2121 within the U.S. and has the right to participate in the development and promotion of bb2121 in the U.S. Under the bb2121 CCPS, the Company may receive up to $70.0 million in development milestone payments for the first indication to be addressed by the bb2121 product candidate, with the ability to obtain additional milestone payments for a second indication and modified licensed products.  In addition, to the extent bb2121 is commercialized, the Company is entitled to receive tiered royalty payments ranging from the mid-single digits to low-teens based on a percentage of net sales generated outside of the U.S., subject to certain reductions.

Celgene bb21217 License Agreement

On September 22, 2017, Celgene exercised its option to obtain an exclusive worldwide license to develop and commercialize bb21217, the second product candidate under the Amended Celgene Collaboration Agreement, pursuant to an executed license agreement (“bb21217 License Agreement”) entered into by the parties on September 28, 2017 and paid the Company an option fee of $15.0 million. Pursuant to the bb21217 License Agreement, Celgene is responsible for development and related funding of bb21217 after the substantial completion of the on-going Phase I clinical trial.  The Company is responsible for the manufacture of vector and associated payload throughout development and, upon Celgene’s request, commercialization, which is fully reimbursed by Celgene, and Celgene is responsible for the manufacture of drug product throughout development and commercialization.

The Company currently expects it will exercise its option to co-develop and co-promote bb21217 within the U.S.  The Company’s election to co-develop and co-promote bb21217 must be made by the substantial completion of the ongoing Phase I trial of bb21217.  If elected, the Company expects the responsibilities of the parties to remain largely unchanged, however, the Company expects it will share equally in all profits and losses relating to developing, commercializing and manufacturing bb21217 within the U.S. and to have the right to participate in the development and promotion of bb21217 in the U.S.  Under this scenario, the Company expects to receive, per product, up to $70.0 million in development milestone payments for the first indication to be addressed by the bb21217 product candidate, with the ability to obtain additional milestone payments for a second indication and modified licensed products.  In addition, to the extent bb21217 is commercialized, the Company would be entitled to receive tiered royalty payments ranging from the mid-single digits to low-teens based on a percentage of net sales generated outside of the U.S., subject to certain reductions.

18


 

In the event the Company does not exercise its option to co-develop and co-promote bb21217, the Company will receive an additional fee in the amount of $10.0 million. Under this scenario, the Company may be eligible to receive up to $10.0 million in clinical milestone payments, up to $117.0 million in regulatory milestone payments, and up to $78.0 million in commercial milestone payments. In addition, to the extent bb21217 is commercialized, the Company would be entitled to receive tiered royalty payments ranging from the mid-single digits to low-teens based on a percentage of net sales, subject to certain reductions.

Accounting analysis – bb2121

The Company has elected to use a practical expedient within Topic 606 that allow entities to reflect the aggregate effect of all contract modifications when identifying the satisfied and unsatisfied performance obligations for contracts that were modified prior to Topic 606 adoption. Celgene’s option to in-license the first product candidate, bb2121, under the arrangement was considered a material right at the time the Amended Celgene Collaboration Agreement was executed in June 2015 given the product candidate had been formally nominated by the JSC and that substantially all investigational new drug application, or IND, enabling activities had been completed by that time.  Therefore, Celgene’s February 2016 exercise of its option that was considered a material right to obtain an exclusive worldwide license to develop and commercialize the first product candidate, bb2121, under the collaboration represented a contract modification. As a result, the Celgene Collaboration Agreement, Amended Celgene Collaboration Agreement, and bb2121 CCPS are combined for accounting purposes and treated as a single arrangement. As of February 2016, Celgene’s option to license an additional product candidate under the collaboration did not represent a material right. Therefore, the license to the Company’s second product candidate, bb21217, which was executed in September 2017, is accounted for as a separate contract.  Refer below for discussion of the bb21217 accounting analysis.

As of the February 2016 contract modification date, the Company concluded the arrangement contained the following promised goods and services: (i) research and development services, (ii) a license to the first product candidate, bb2121, and (iii) manufacture of vectors and associated payload for incorporation into bb2121 through development.  The Company determined that the manufacture of commercial vector represents an option to acquire additional goods and services that is not representative of a material right. In addition, at this time Celgene has not exercised its option to purchase any commercial vector. Accordingly, the manufacture of commercial vector is not considered to be a performance obligation at this time.

The Company concluded that the research and development services are distinct from the other promised goods and services under the arrangement and thus such services are considered to be a separate performance obligation.  The Company concluded that the license to bb2121 is not distinct from the vector manufacturing services because the manufacturing is essential to the use of the license. Accordingly, these two promised goods and services are considered a single combined performance obligation.  

 

As of September 30, 2018, the total transaction price of $185.5 million comprises the up-front non-refundable fees of $100.0 million, the option fee of $10.0 million, and the estimated variable consideration of $75.5 million related to the estimated reimbursement from Celgene for the manufacture of vectors and associated payload through development.  The total transaction price has been allocated to the performance obligations identified based on a relative SSP basis.  The Company estimated the SSP of the license after considering potential future cash flows under the license. The Company then discounted these probability-weighted cash flows to their present value. The Company estimated the SSP of each of the research and development services and manufacturing services to be provided based on the Company’s estimated cost of providing the services plus an applicable profit margin commensurate with observable market data for similar services.

None of the clinical or regulatory milestones have been included in the transaction price, as all milestone amounts are fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including the fact that achievement of the milestones is outside the control of the Company and contingent upon the future success of its clinical trials, the licensee’s efforts, and the receipt of regulatory approval. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as these amounts have been determined to relate predominantly to the license granted to Celgene and therefore are recognized at the later of when the performance obligation is satisfied, or the related sales occur. The Company will re-evaluate the transaction price, including its estimated variable consideration included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

bb2121 research and development services

The Company allocated $36.6 million of the transaction price to the research and development services.  The Company satisfied this performance obligation as the research and development services were performed.  The Company determined that the period of performance of the research and development services was three years through projected initial Phase I clinical study substantial completion, or through May 2018.  The Company recognized revenue related to research and development services performed using an input method by calculating costs incurred at each period end relative to total costs expected to be incurred.  Although the Company has fully satisfied this performance obligation during the second quarter of 2018, any future changes to the total transaction price allocated to the performance obligations under the arrangement may impact the revenue recognized for this performance obligation in the period of change.

19


 

 

The Company recognized revenue related to bb2121 research and development services of $0.6 million and $3.7 million for the three and nine months ended September 30, 2018, respectively.  The Company recognized revenue related to bb2121 research and development services of $1.6 million and $4.7 million for the three and nine months ended September 30, 2017, respectively.

bb2121 license and manufacturing services

The Company allocated $148.9 million of the transaction price to the combined unit of accounting which consists of the license and manufacture of vectors and associated payload for incorporation into bb2121.

The Company accounts for its vector manufacturing services for development in the U.S. and Celgene’s U.S. development efforts within the scope of ASC 808 given that both parties are active participants in the activities and both parties are exposed to significant risks and rewards dependent on the commercial success of the activities.  The Company recognizes revenue for its U.S. manufacturing services by analogy to Topic 606.  The portion of Celgene’s U.S. development costs that the Company is responsible for are recognized as a reduction to its collaboration revenues, or, if in excess of such revenues in a given quarter, the excess is recorded as research and development expense.  

Revenue recognition for the combined unit of accounting commenced during the first quarter of 2017.  The Company recognizes revenue associated with the combined unit of accounting using the proportional performance method, as the Company will satisfy this performance obligation as the manufacturing services are performed through development. In using this method, the Company estimated its development plan for bb2121, including expected demand from Celgene, and the costs associated with the manufacture of vectors and associated payload for incorporation into bb2121. On a quarterly basis, the Company determines the proportion of effort incurred as a percentage of total effort it expects to expend.  This ratio is applied to the transaction price, which includes variable consideration, allocated to the combined performance obligation consisting of the bb2121 license and manufacturing services. Management has applied significant judgment in the process of developing its budget estimates and any changes to these estimates will be recognized in the period in which they change as a cumulative catch up.

In developing the SSP for the combined performance obligation, management assumed that the Company would exercise its option to co-develop and co-promote bb2121, and therefore will recognize revenue related to 67.5% of worldwide development costs incurred, which represents the percentage the Company is contractually entitled to bill Celgene under the cost share provisions of the co-development and co-promotion agreement, upon its execution.  The Company exercised its option to co-develop and co-promote bb2121 in March 2018.  The period of performance and pattern of revenue recognition remained unchanged upon its execution and will be revisited as the development plan changes or if other events occur.

As noted above, the calculation of revenue or research and development expense to be recognized for the Company’s U.S. manufacturing services is performed on a quarterly basis.  The calculation is independent of previous activity, which may result in fluctuations between revenue and expense recognition period over period, depending on the varying extent of effort performed by each party during the period.  For the three months ended March 31, 2018, the Company recognized revenue of $3.9 million (representative of gross revenue of $11.8 million offset by approximately $7.9 million of cost reimbursement to Celgene) related to the combined unit of accounting for its license and vector manufacturing of bb2121 in the U.S. For the three months ended June 30, 2018, the portion of Celgene’s U.S. development costs that the Company is responsible for were in excess of the Company’s corresponding U.S. development costs, and, as such, the Company recognized research and development expense of $3.3 million (which is representative of gross revenue of $8.5 million offset by approximately $11.8 million of cost reimbursement to Celgene) related to the combined unit of accounting. For the three months ended September 30, 2018, the portion of Celgene’s U.S. development costs that the Company is responsible for are in excess of the Company’s corresponding U.S. development costs, and, as such, the Company recorded research and development expense of $5.3 million (which is representative of gross revenue of $11.2 million offset by approximately $16.6 million of cost reimbursement to Celgene) related to the combined unit of accounting.  

Revenue related to the combined unit of accounting for its rest of world license and vector manufacturing services is accounted for in accordance with Topic 606 and is recognized as collaboration revenue. The Company recognized $9.6 million and $24.3 million of revenue related to the combined unit of accounting for its rest of world license and vector manufacturing services for the three and nine months ended September 30, 2018, respectively.  The Company recognized $7.7 million and $18.6 million of revenue related to the combined unit of accounting of accounting for its license and vector manufacturing services for the three and nine months ended September 30, 2017, respectively, in accordance with ASC 605.

As of September 30, 2018, the aggregate amount of the transaction price allocated to the combined performance obligation, which consists of the bb2121 license and manufacturing services, that is unsatisfied, or partially unsatisfied, is $63.1 million, which the Company expects to recognize as revenue as manufacturing services are provided through the remaining development period which is estimated to be through 2020.  The Company had $32.1 million remaining deferred revenue as of September 30, 2018 associated with the combined performance obligation consisting of the bb2121 license and manufacturing services.

20


 

Accounting analysis – bb21217

On September 22, 2017, Celgene exercised its option to obtain an exclusive worldwide license to develop and commercialize bb21217, the second optioned product candidate, pursuant to the bb21217 License Agreement entered into by the parties on September 28, 2017.  The bb21217 License Agreement is considered a separate contract for accounting purposes as the option to obtain an exclusive worldwide license to develop and commercialize bb21217, or any other product candidate, was not considered a material right to Celgene at the time the practical expedient was applied. The Company made this evaluation after considering the significant uncertainty at that time regarding whether any additional product candidates would be identified under the Amended Celgene Collaboration Agreement. In particular, the Company considered that bb21217 had not been formally nominated as a product candidate under the collaboration at that time, primarily due to a lack of pre-clinical data as well as uncertainty surrounding the ability to successfully complete various IND-enabling activities.

At contract inception, the Company concluded that the arrangement contained the following promised goods and services: (i) research and development services, (ii) a license to the second product candidate, bb21217, and (iii) manufacture of vectors and associated payload for incorporation into bb21217 through development.  The Company determined that the manufacture of commercial vector represents an option to acquire additional goods and services that is not representative of a material right. In addition, at this time Celgene has not exercised its option to purchase any commercial vector. Accordingly, the manufacture of commercial vector is not considered to be a performance obligation at this time.

The Company concluded that the research and development services are distinct from the other promised goods and services under the arrangement and thus is considered to be a performance obligation. Similar to bb2121, the Company concluded that the license to bb21217 is not distinct from the vector manufacturing services because the manufacturing is essential to the use of the license. Accordingly, these two promised goods and services are considered a single combined performance obligation.

As of September 30, 2018, the total transaction price of $41.7 million comprises the option fee of $15.0 million and the estimated variable consideration of $26.7 million related to reimbursement from Celgene for the manufacturing services during development.  The total transaction price has been allocated to the performance obligations identified based on a relative SSP basis. The Company estimated the SSP of the license after considering potential future cash flows under the license. The Company then discounted these probability-weighted cash flows to their present value. The Company estimated the SSP of each of the research and development services and manufacturing services to be provided based on the Company’s estimated cost of providing the services plus an applicable profit margin commensurate with observable market data for similar services.

None of the clinical or regulatory milestones have been included in the transaction price, as all milestone amounts are fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including the fact that achievement of the milestones is outside the control of the Company and contingent upon the future success of its clinical trials, the licensee’s efforts, and the receipt of regulatory approval. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as these amounts have been determined to relate predominantly to the license granted to Celgene and therefore are recognized at the later of when the performance obligation is satisfied, or the related sales occur. The Company will re-evaluate the transaction price, including is estimated variable consideration included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

bb21217 research and development services

The Company allocated $5.4 million of the transaction price to the research and development services. The Company will satisfy this performance obligation as the research and development services are performed.  The Company determined that the period of performance of the research and development services was two years through projected initial Phase I clinical study substantial completion, or through September 2019.  The Company recognizes revenue related to research and development services performed using an input method by calculating costs incurred at each period end relative to total costs expected to be incurred.

The Company recognized revenue related to bb21217 research and development services for Celgene of $0.7 million and $2.2 million for the three and nine months ended September 30, 2018, respectively. During the three and nine months ended September 30, 2017, the Company did not recognize any revenue under the bb21217 License Agreement.

As of September 30, 2018, the aggregate amount of the transaction price allocated to the bb21217 research and development services performance obligation that are unsatisfied, or partially unsatisfied, and deferred is $2.9 million, which the Company expects to recognize through September 2019 as research and development services are performed.

21


 

bb21217 license and manufacturing services

The Company will satisfy its performance obligation related to the manufacture of vectors and associated payload for incorporation into bb21217 through development as the bb21217 manufacturing services are performed. As of September 30, 2018, the manufacturing services for bb21217 had not yet commenced.  Therefore, no revenue has been recognized for the combined unit of accounting for the three and nine months ended September 30, 2018 and 2017.

The aggregate amount of the transaction price allocated to the combined performance obligation, which consists of the bb21217 license and manufacturing services, is $36.2 million.  The Company does not expect that recognition will begin in the next twelve months and has therefore classified deferred revenue associated with the combined performance obligation as deferred revenue, net of current portion on its consolidated balance sheet. The Company had $9.8 million remaining deferred revenue as of September 30, 2018 associated with the combined performance obligation consisting of the bb21217 license and manufacturing services.

 

Contract assets and liabilities

 

The Company receives payments from its collaborative partners based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until such time as the Company satisfies its performance obligations under these arrangements. A contract asset is a conditional right to consideration in exchange for goods or services that the Company has transferred to a customer.  Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional.

 

The following table presents changes in the balances of the Company’s Celgene receivables and contract liabilities during the nine months ended September 30, 2018:

 

(in thousands)

Balance at

beginning of

period under

Topic 606

 

 

Additions

 

 

Deductions

 

 

Balance at

end of

period under

Topic 606

 

Receivables

$

4,635

 

 

$

1,641

 

 

 

(6,276

)

 

$