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10-Q
NEUROCRINE BIOSCIENCES INC filed this Form 10-Q on 11/05/2018
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nbix-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2018

OR

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

For the transition period from                      to                     

Commission file number 0-22705

 

NEUROCRINE BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

33-0525145

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

12780 El Camino Real,
San Diego, California

 

92130

(Address of principal executive office)

 

(Zip Code)

 

(858) 617-7600

(Registrant’s telephone number, including area code)

Not Applicable

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

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

Emerging growth company

 

 

 

 

 

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

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

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 90,682,182 as of October 30, 2018.

 

 

 


NEUROCRINE BIOSCIENCES, INC.

FORM 10-Q INDEX

 

 

 

PAGE

PART I. FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1: Financial Statements

 

3

 

 

 

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

 

3

 

 

 

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

 

4

 

 

 

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

 

5

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

6

 

 

 

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

 

ITEM 4: Controls and Procedures

 

28

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

ITEM 1: Legal Proceedings

 

29

 

 

 

ITEM 1A: Risk Factors

 

29

 

 

 

ITEM 5: Other Information

 

45

 

 

 

ITEM 6: Exhibits

 

46

 

 

 

Signatures

 

47

 

2


PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

NEUROCRINE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

(unaudited)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

195,734

 

 

$

254,712

 

Short-term investments, available for sale

 

 

439,609

 

 

 

261,217

 

Accounts receivable

 

 

54,097

 

 

 

31,127

 

Inventory

 

 

6,054

 

 

 

1,024

 

Other current assets

 

 

18,900

 

 

 

6,839

 

Total current assets

 

 

714,394

 

 

 

554,919

 

Property and equipment, net

 

 

28,618

 

 

 

10,811

 

Long-term investments, available for sale

 

 

185,257

 

 

 

247,361

 

Restricted cash

 

 

5,477

 

 

 

4,500

 

Total assets

 

$

933,746

 

 

$

817,591

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

72,022

 

 

$

53,520

 

Current portion of convertible senior notes

 

 

383,647

 

 

 

 

Other current liabilities

 

 

731

 

 

 

906

 

Total current liabilities

 

 

456,400

 

 

 

54,426

 

Deferred gain on sale of real estate

 

 

7,495

 

 

 

8,043

 

Deferred revenue

 

 

10,231

 

 

 

10,231

 

Deferred rent

 

 

12,107

 

 

 

3,135

 

Convertible senior notes

 

 

 

 

 

369,618

 

Total liabilities

 

 

486,233

 

 

 

445,453

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares

   issued and outstanding

 

 

 

 

 

 

Common stock, $0.001 par value; 220,000,000 shares authorized; issued and

   outstanding shares were 90,673,214 as of September 30, 2018 and

   88,793,903 as of December 31, 2017

 

 

91

 

 

 

89

 

Additional paid-in capital

 

 

1,645,311

 

 

 

1,572,765

 

Accumulated other comprehensive loss

 

 

(2,056

)

 

 

(1,850

)

Accumulated deficit

 

 

(1,195,833

)

 

 

(1,198,866

)

Total stockholders’ equity

 

 

447,513

 

 

 

372,138

 

Total liabilities and stockholders’ equity

 

$

933,746

 

 

$

817,591

 

 

See accompanying notes to the condensed consolidated financial statements.

3


NEUROCRINE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(unaudited)

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

 

$

111,291

 

 

$

45,774

 

 

$

279,282

 

 

$

52,109

 

Collaboration revenue

 

 

40,466

 

 

 

15,000

 

 

 

40,466

 

 

 

15,000

 

Total revenues

 

 

151,757

 

 

 

60,774

 

 

 

319,748

 

 

 

67,109

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

1,551

 

 

 

433

 

 

 

3,355

 

 

 

494

 

Research and development

 

 

35,482

 

 

 

22,463

 

 

 

121,417

 

 

 

96,213

 

Sales, general and administrative

 

 

60,401

 

 

 

43,873

 

 

 

179,952

 

 

 

113,597

 

Total operating expenses

 

 

97,434

 

 

 

66,769

 

 

 

304,724

 

 

 

210,304

 

Income (loss) from operations

 

 

54,323

 

 

 

(5,995

)

 

 

15,024

 

 

 

(143,195

)

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(7,672

)

 

 

(7,337

)

 

 

(22,767

)

 

 

(12,104

)

Investment income and other, net

 

 

4,113

 

 

 

2,207

 

 

 

10,776

 

 

 

5,863

 

Total other expense, net

 

 

(3,559

)

 

 

(5,130

)

 

 

(11,991

)

 

 

(6,241

)

Net income (loss)

 

$

50,764

 

 

$

(11,125

)

 

$

3,033

 

 

$

(149,436

)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.56

 

 

$

(0.13

)

 

$

0.03

 

 

$

(1.70

)

Diluted

 

$

0.52

 

 

$

(0.13

)

 

$

0.03

 

 

$

(1.70

)

Shares used in the calculation of net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

90,555

 

 

 

88,325

 

 

 

90,064

 

 

 

87,894

 

Diluted

 

 

96,798

 

 

 

88,325

 

 

 

95,272

 

 

 

87,894

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

50,764

 

 

$

(11,125

)

 

$

3,033

 

 

$

(149,436

)

Net unrealized gain (loss) on available-for-sale securities

 

 

753

 

 

 

179

 

 

 

(206

)

 

 

(216

)

Comprehensive income (loss)

 

$

51,517

 

 

$

(10,946

)

 

$

2,827

 

 

$

(149,652

)

 

See accompanying notes to the condensed consolidated financial statements.

4


NEUROCRINE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,033

 

 

$

(149,436

)

Reconciliation of net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,749

 

 

 

1,694

 

Amortization of debt discount

 

 

13,040

 

 

 

6,755

 

Amortization of debt issuance costs

 

 

989

 

 

 

526

 

Amortization of premiums on investments

 

 

1,436

 

 

 

1,202

 

Non-cash share-based compensation expense

 

 

44,800

 

 

 

29,070

 

Other

 

 

(482

)

 

 

(1,261

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(22,970

)

 

 

(29,818

)

Inventory

 

 

(3,907

)

 

 

(242

)

Reimbursements for tenant improvements

 

 

3,657

 

 

 

 

Other current assets

 

 

(6,837

)

 

 

(4,315

)

Accounts payable and accrued liabilities

 

 

15,577

 

 

 

11,107

 

Other current liabilities

 

 

(175

)

 

 

(188

)

Net cash provided by (used in) operating activities

 

 

50,910

 

 

 

(134,906

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(329,289

)

 

 

(444,538

)

Sales and maturities of investments

 

 

211,402

 

 

 

257,235

 

Purchases of property and equipment

 

 

(18,802

)

 

 

(4,563

)

Proceeds from sales of property and equipment

 

 

30

 

 

 

7

 

Net cash used in investing activities

 

 

(136,659

)

 

 

(191,859

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

27,748

 

 

 

8,265

 

Proceeds from issuance of convertible senior notes, net

 

 

 

 

 

502,781

 

Net cash provided by financing activities

 

 

27,748

 

 

 

511,046

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(58,001

)

 

 

184,281

 

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

 

 

259,212

 

 

 

88,150

 

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

 

$

201,211

 

 

$

272,431

 

 

SUPPLEMENTAL DISCLOSURE

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

5,822

 

 

$

 

Non-cash capital expenditures

 

$

1,802

 

 

$

 

 

See accompanying notes to the condensed consolidated financial statements.

5


NEUROCRINE BIOSCIENCES, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business. Neurocrine Biosciences, Inc. (the Company or Neurocrine) was incorporated in California in 1992 and reincorporated in Delaware in 1996. The Company discovers, develops and commercializes innovative and life-changing pharmaceuticals, in diseases with high unmet medical needs, through its novel research and development (R&D) platform, focused on neurological and endocrine related disorders. The Company discovered, developed and markets INGREZZA® (valbenazine), the first United States Food and Drug Administration (FDA)-approved product indicated for the treatment of adults with tardive dyskinesia (TD), a movement disorder. Discovered and developed through Phase II clinical trials by Neurocrine, ORILISSATM (elagolix), the first FDA-approved oral medication for the management of endometriosis associated with moderate to severe pain in over a decade, is marketed by AbbVie Inc. (AbbVie) as part of a collaboration to develop and commercialize elagolix for women’s health. Neurocrine’s clinical development programs include opicapone as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in Parkinson's disease patients, elagolix for uterine fibroids with AbbVie, valbenazine for the treatment of Tourette syndrome, NBI-74788 for the treatment of congenital adrenal hyperplasia (CAH), a vesicular monoamine transporter 2 (VMAT2) inhibitor and first-in-class central nervous system (CNS) compound with potential use in the treatment of neurologic and psychiatric disorders.

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions of the Securities and Exchange Commission (SEC) on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, the condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.

These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC. The results of operations for the interim period shown in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The balance sheet at December 31, 2017, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

Reclassifications. Certain amounts in prior year periods have been reclassified to conform with the presentation adopted in current year periods.

Impact of Recently Issued Accounting Standards. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which supersedes all existing revenue recognition requirements, including most industry-specific guidance. This new standard amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services. The FASB subsequently issued additional, clarifying standards to address issues arising from implementation of the new revenue recognition standard. The Company adopted this new standard as of January 1, 2018, using the modified retrospective method. The adoption of the new revenue standard did not change the Company’s revenue recognition. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to product revenues, or revenue from collaboration and license agreements, no adjustment to retained earnings was required upon adoption. See below for discussion of the Company’s revenue recognition policy.

In February 2016, the FASB issued ASU 2016-02, “Leases”. This update amends the current accounting guidance for lease transactions. Under the new guidance, a lessee will be required to recognize both assets and liabilities for any leases in excess of twelve months. Additionally, certain qualitative and quantitative disclosures will also be required in the financial statements. The Company is required to adopt this new guidance beginning in 2019 and early adoption is permitted. As of September 30, 2018, the Company was in the process of analyzing its lease contracts and the potential impact the standard may have on its condensed consolidated financial statements and related disclosures. The Company is also in the process of evaluating potential changes to its controls to support lease accounting and the related disclosures under the new standard. Based on management’s preliminary analysis, the Company anticipates the adoption of this guidance will have a material impact on the Company’s Condensed Consolidated Balance Sheets due to the requirement to recognize lease right-of-use (ROU) assets and corresponding liabilities, primarily relating to leases of office space.

6


In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which clarifies the presentation of restricted cash and restricted cash equivalents in the statements of cash flows. Under this ASU, restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the statements of cash flows. This ASU is intended to reduce diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. This ASU requires that the statement of cash flows explain the change in total cash and equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. This ASU also requires a reconciliation between the total of cash and equivalents and restricted cash presented on the statement of cash flows and the cash and equivalents balance presented on the balance sheet. This amended guidance was retrospectively adopted on January 1, 2018 and required that cash, cash equivalents and restricted cash reported on the Condensed Consolidated Statements of Cash Flows now includes restricted cash of $5.5 million and $4.6 million as of September 30, 2018 and 2017, respectively, as well as previously reported cash and cash equivalents.

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, which expands the scope of Topic 718 to include share based payment transactions for acquiring goods and services from nonemployees and applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606. This update is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is evaluating the effect that this update will have on its condensed consolidated financial statements and related disclosures.

Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Estimates for revenues, cost of sales, inventory, and R&D expenses are evaluated on an ongoing basis and are based on historical experience or other relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Inventory. Inventory is stated at the lower of cost or estimated net realizable value. The Company currently uses actual costing to determine the cost basis for its inventory. Inventory is valued on a first-in, first-out basis and consists primarily of third-party manufacturing costs. The Company capitalizes inventory costs associated with its products upon regulatory approval when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed.

Prior to FDA approval of INGREZZA, all costs related to its manufacture were charged to R&D expense in the period incurred. Historically, the Company’s physical inventory included active pharmaceutical product (API) that had been produced prior to FDA approval of INGREZZA and accordingly had no cost basis as the cost associated with producing this material was expensed rather than capitalized in accordance with GAAP. Costs associated with the manufacture of bulk drug product, finished bottling, and other labeling activities that occurred post FDA approval are included in the inventory value at September 30, 2018 and December 31, 2017.

The Company reduces its inventory to net realizable value for potential excess, dated, or obsolete inventory based on an analysis of forecasted demand compared to quantities on hand and any firm purchase orders, as well as product shelf life. To date, the Company has determined that such reserves are not required.

Cost of Sales. Cost of sales includes third-party manufacturing, transportation, freight, and indirect overhead costs associated with the manufacture and distribution of INGREZZA, sales-based license costs on AbbVie net sales of ORILISSA, as defined in the agreement with the party to which the Company pays such costs, and period costs resulting from certain inventory manufacturing services, inventory adjustment charges, and manufacturing variances. A significant portion of the costs associated with the manufacture of INGREZZA sold to date was expensed as R&D prior to the FDA’s approval and is therefore excluded from cost of sales during this period.

Accounts Receivable. Accounts receivable are recorded net of customer allowances for prompt payment discounts, chargebacks, and any allowance for doubtful accounts. The Company estimates the allowance for doubtful accounts based on actual payment patterns of its customers and individual customer circumstances. To date, the Company has determined that an allowance for doubtful accounts is not required.

Research and Development Expenses. R&D expenses consist primarily of salaries, payroll taxes, employee benefits, and share-based compensation charges for those individuals involved in ongoing R&D efforts; as well as scientific contractor fees, development milestones from in-licensed collaboration agreements, preclinical and clinical trial costs, R&D facilities costs, laboratory supply costs, and depreciation of scientific equipment. All such costs are charged to R&D expense as incurred. These expenses result from the Company’s independent R&D efforts as well as efforts associated with collaborations, in-licenses, and third-party funded research

7


arrangements. The Company reviews and accrues clinical trial expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies, and other events. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a research agreement or clinical trial can be made. Accrued clinical costs are subject to revisions as trials progress. Revisions are charged to expense in the period in which the facts that give rise to the revision become known.

Revenue Recognition. Effective January 1, 2018, the Company adopted Topic 606, using the modified retrospective method. As the Company did not identify any revenue recognition differences when comparing the revenue recognition criteria under Topic 606 to the requirements under previous criteria with respect to product revenues, or revenue from collaboration and license agreements, no cumulative effect adjustment to retained earnings was necessary upon adoption. See the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2017, for a detailed description of the Company’s accounting policy under Topic 605 which was effective for periods prior to January 1, 2018. Had the Company continued to account for revenue recognition under Topic 605, the Company’s revenues for the first three and nine months of 2018 would not have differed by a significant amount from those reported under Topic 606.

Under Topic 606, the Company recognizes revenues when its customers (as defined below) obtain control of its products or services in an amount that reflects the consideration it expects to receive from its customers in exchange for those products or services. To determine revenue recognition, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the 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 and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

If the consideration promised under the contract includes a variable amount, the Company must estimate the consideration it expects to receive for transferring the good or service to the customer. There are two methods for determining the amount of variable consideration: (i) the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts, and (ii) the mostly likely amount method, which identifies the single most likely amount in a range of possible consideration amounts. Performance milestone payments represent a form of variable consideration.

Product Sales, Net. The Company’s product sales consist of U.S. sales of INGREZZAINGREZZA was approved by the FDA on April 11, 2017 and the Company commenced shipments of INGREZZA to select pharmacies (SPs) and a select distributor (SD), or collectively, its customers, in late April 2017. The SPs dispense product to a patient based on the fulfillment of a prescription and the SD sells product to government facilities, long-term care pharmacies, or in-patient hospital pharmacies. The Company’s agreements with the SPs and SD provide for transfer of title to the product at the time the product is delivered to the SP or SD. In addition, except for limited circumstances, the SPs and SD have no right of product return to the Company. Product sales are recognized when the customer obtains control of the Company’s product, typically upon delivery to the customer.

Revenue from product sales is recorded at the net sales price (transaction price), which includes an estimate of variable consideration for which reserves are established and which results from contractual discounts, returns, chargebacks, rebates, co-pay assistance, and other allowances relating to the Company’s sales of its products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. The following are the Company’s significant categories of sales discounts and allowances:

Trade Discounts and Allowances: The Company generally provides customers with discounts that include prompt payment discounts, discounts for providing sales data, and other off-invoice discounts that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized.  

8


Product Returns: The Company offers customers limited product return rights for damages and shipment errors provided it is within a very limited period after the original shipping date as set forth in the applicable individual distribution agreement. The Company does not allow product returns for product that has been dispensed to a patient or for drug expiration. The Company receives real-time shipping reports and inventory reports from the customers and has the ability to control the amount of product that is sold to the customers. Product returns to date have not been significant and the Company has not considered it necessary to record a reserve for product returns.

Government Rebates: The Company is subject to discount obligations under state Medicaid programs and Medicare prescription drug coverage gap program. The Company estimates its Medicaid and Medicare prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued expenses on the Condensed Consolidated Balance Sheet. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.

Provider Chargebacks and Discounts: Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by customers, and the Company generally issues credits for such amounts following the customer’s notification to the Company of the resale. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distribution channel inventories at each reporting period end that the Company expects will be sold to qualified healthcare providers.

Co-Payment Assistance: The Company offers co-payment assistance to commercially insured patients meeting certain eligibility requirements. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.

Shipping and handling costs related to the Company’s product sales are included in selling, general and administrative expenses.

Collaboration and Other Revenue. The Company enters into collaboration and licensing agreements that are within the scope of Topic 606, under which it licenses certain rights to its product candidates to third-parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply services; and royalties on net sales of licensed products.  

In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Royalty Revenue: For arrangements that include sales-based royalties, including milestone payments based on the level of sales of licensed products, and where the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Sales-based royalties for ORILISSA are calculated as a percentage of AbbVie net sales as defined in the Company’s agreement with AbbVie. Each quarterly period, sales-based royalties are recorded based on estimated quarterly net sales of ORILISSA. Differences between actual results and estimated amounts are adjusted for in the period in which they become known, which typically follows the quarterly period in which the estimate was made.

9


Licenses of Intellectual Property: If the license to the Company’s intellectual property embedded within a collaboration and/or licensing arrangement is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

The Company receives payments from its licensees based on billing schedules established in each agreement. Up-front payments and fees are recorded as deferred revenue upon receipt, or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional.

Milestone Payments: At the inception of each arrangement that includes development, commercialization 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 control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones 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, which would affect milestone and license fees revenues and earnings in the period of adjustment.

Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations.  

2. SIGNIFICANT COLLABORATION AND LICENSING AGREEMENTS

Mitsubishi Tanabe Pharma Corporation (Mitsubishi Tanabe). During 2015, the Company entered into a collaboration and license agreement with Mitsubishi Tanabe for the development and commercialization of INGREZZA for movement disorders in Japan and other select Asian markets. Mitsubishi Tanabe made an up-front license fee of $30 million and has agreed to make payments up to $85 million in development and commercialization event-based payments, payments for the manufacture of pharmaceutical products, and royalties on product sales in select territories in Asia. Under the terms of the agreement, Mitsubishi Tanabe is responsible for all third-party development, marketing and commercialization costs in Japan and other select Asian markets. The Company will be entitled to a percentage of sales of INGREZZA in Japan and other select Asian markets for the longer of ten years or the life of the related patent rights.

Under the terms of the Company’s agreement with Mitsubishi Tanabe, the collaboration effort between the parties to advance INGREZZA towards commercialization in Japan and other select Asian markets is governed by a joint steering committee and joint development committee with representatives from both the Company and Mitsubishi Tanabe. There are no performance, cancellation, termination or refund provisions in the agreement that would have a material financial consequence to the Company. The Company does not directly control when event-based payments will be achieved or when royalty payments will begin. Mitsubishi Tanabe may terminate the agreement at its discretion upon 180 days’ written notice to the Company. In such event, all INGREZZA product rights for Japan and other select Asian markets would revert to the Company.

The Company assessed this arrangement in accordance with Topic 606 and identified the following material promises under the agreement: (i) INGREZZA technology license and existing know-how; and (ii) development activities to initiate a clinical trial of INGREZZA for Huntington’s chorea, at an estimated cost of approximately $12 million, should Mitsubishi Tanabe request. The Company has the option to participate on the joint steering committee, but since participation is at the Company’s option it was deemed to not be a material promise. The option for Mitsubishi Tanabe to engage the Company to manufacture and supply pharmaceutical products, not at a discount, was not considered a material right and therefore not a material promise. Based on these assessments, the Company identified the license and the development activities as the only performance obligations at the inception of the agreement, which were both deemed to be distinct.

10


Under the terms of the agreement, in order to evaluate the appropriate transaction price, the Company determined that the up-front amount constituted the entirety of the consideration to be included in the transaction price and to be allocated to the performance obligations based on the Company’s best estimate of their relative stand-alone selling prices. For the license, the stand-alone selling price was calculated using an income approach model and included the following key assumptions: the development timeline, revenue forecast, discount rate and probabilities of technical and regulatory success. The relative selling price of the Company’s development activities to initiate a clinical trial of INGREZZA for Huntington’s chorea was based on an assessment of costs to perform the study, based upon the peer company analysis for similar studies. The Company believes that a change in the assumptions used to determine its stand-alone selling price for the license most likely would not have a significant effect on the allocation of consideration received (or receivable) to the performance obligations.

At execution, the transaction price included only the $30 million up-front consideration received. None of the development or regulatory milestones has been included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including that receipt of the milestones is outside the control of the Company and contingent upon success in future clinical trials and the licensee’s efforts. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to Mitsubishi Tanabe and therefore have also been excluded from the transaction price. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

To date, the Company has recognized revenue under this agreement of $19.8 million associated with the delivery of a technology license and existing know-how, and $15 million in development event-based payments resulting from Mitsubishi Tanabe’s initiation of Phase II/III development of INGREZZA in TD in Asia. In accordance with our continuing performance obligations, $10.2 million of the $30 million up-front payment is being deferred and recognized in future periods. Under the terms of the agreement, there is no general obligation to return the up-front payment for any non-contingent deliverable. No revenue was recognized under the Mitsubishi Tanabe agreement for the three and nine months ended September 30, 2018. During the third quarter of 2017, Mitsubishi Tanabe initiated a pivotal trial of INGREZZA in Asia for the treatment of tardive dyskinesia which generated a $15 million milestone.

AbbVie Inc. (AbbVie). In June 2010, the Company announced an exclusive worldwide collaboration with AbbVie, to develop and commercialize elagolix and all next-generation GnRH antagonists (collectively, GnRH Compounds) for women’s and men’s health. AbbVie made an upfront payment of $75 million and has agreed to make additional development and regulatory event-based payments of up to $480 million, of which $115 million has been earned as of September 30, 2018, and up to an additional $50 million in commercial event-based payments.

Under the terms of the agreement, AbbVie is responsible for all third-party development, marketing and commercialization costs. The Company will be entitled to a percentage of worldwide sales of GnRH Compounds for the longer of ten years or the life of the related patent rights. AbbVie may terminate the collaboration at its discretion upon 180 days’ written notice to the Company. In such event, the Company would be entitled to specified payments for ongoing clinical development and related activities and all GnRH Compound product rights would revert to the Company.

The Company has evaluated the terms of this agreement under Topic 606 and has determined that there is one performance obligation, the exclusive worldwide license with rights to develop, manufacture and commercialize elagolixAt execution, the transaction price included only the $75 million up-front consideration received. None of the development or regulatory milestones has been included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including that receipt of the milestones is outside the control of the Company and contingent upon success in future clinical trials and the licensee’s efforts. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to AbbVie and therefore have also been excluded from the transaction price. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

On July 24, 2018, AbbVie received approval from the FDA for ORILISSA for the management of moderate to severe endometriosis pain in women, resulting in the achievement of a $40 million event-based milestone, which the Company recognized as revenue in the third quarter of 2018. During 2017, event-based revenue of $30 million was recognized based on AbbVie’s NDA submission for elagolix in endometriosis being accepted by the FDA. During 2016, event-based revenue of $15 million was recognized related to AbbVie’s initiation of Phase III development of elagolix in uterine fibroids. The Company also recognized sales-based royalties on AbbVie net sales of ORILISSA of $0.5 million in the third quarter of 2018. No revenue was recognized under the AbbVie agreement for the nine months ended September 30, 2017.

11


BIAL – Portela & CA, S.A. (BIAL). In February 2017, the Company entered into an exclusive license agreement with BIAL for the development and commercialization of opicapone for the treatment of human diseases and conditions, including Parkinson’s disease, in the United States and Canada. Under the terms of the agreement, the Company is responsible for the management and cost of all opicapone development and commercialization activities in the United States and Canada.

Under the terms of the agreement, the Company paid BIAL an upfront license fee of $30 million, which was expensed in the first quarter of 2017 as in-process research and development. In addition, during the first quarter of 2018, the FDA provided guidance on the regulatory path forward to support an NDA for opicapone for Parkinson’s Disease, in which the FDA did not request that the Company conduct an additional Phase III study, resulting in a $10 million event-based milestone payment to BIAL. The Company may also be required to pay up to an additional $105 million in milestone payments associated with the regulatory approval and net sales of products containing opicapone. Prior to FDA approval of opicapone, the Company may be required to pay up to an additional $10 million in milestones based on certain regulatory and clinical results and FDA acceptance of the Company’s NDA submission for opicapone. Upon commercialization of opicapone, the Company has agreed to determine certain annual sales forecasts. In the event that the Company fails to meet the minimum sales requirements for a particular year, the Company will be required to pay BIAL an amount corresponding to the difference between the actual net sales and the minimum sales requirements for such year, and if the Company fails to meet the minimum sales requirements for any two years, BIAL may terminate the agreement.

The agreement, unless terminated earlier, will continue on a licensed product-by-licensed product and country-by-country basis until a generic product in respect of such licensed product under the agreement is sold in a country and sales of such generic product are greater than a specified percentage of total sales of such licensed product in such country. Upon the Company’s written request prior to the estimated expiration of the term in respect of a licensed product, the parties shall negotiate a good faith continuation of BIAL’s supply of such licensed product after the term. After the term, and if BIAL is not supplying a certain licensed product, the Company shall pay BIAL a trademark royalty based on the net sales of such licensed product. Either party may terminate the agreement earlier if the other party materially breaches the agreement and does not cure the breach within a specified notice period, or upon the other party’s insolvency. BIAL may terminate the agreement if the Company fails to use commercially reasonable efforts or fails to submit an NDA for a licensed product by a specified date or under certain circumstances involving a change of control of the Company. In certain circumstances where BIAL elects to terminate the agreement in connection with the Company’s change of control, BIAL shall pay the Company a termination fee. The Company may terminate the agreement at any time for any reason upon six months written notice to BIAL if prior to the first NDA approval in the United States, and upon nine months written notice to BIAL if such notice is given after the first NDA approval in the United States. If the Company’s termination request occurs prior to the first NDA approval in the United States, the Company will have to pay BIAL a termination fee except under certain conditions specified in the agreement.

3. INVESTMENTS

Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in comprehensive income (loss). The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in investment income or expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.

Investments consist of the following (in thousands):

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Commercial paper

 

$

42,465

 

 

$

75,362

 

Corporate debt securities

 

 

541,694

 

 

 

414,815

 

Securities of government sponsored entities

 

 

40,707

 

 

 

18,401

 

Total investments

 

$

624,866

 

 

$

508,578

 

 

12


The following is a summary of investments classified as available-for-sale securities (in thousands):

 

 

 

Contractual

Maturity

(in years)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains(1)

 

 

Gross

Unrealized

Losses(1)

 

 

Aggregate

Estimated

Fair

Value

 

September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Less than 1

 

$

42,514

 

 

$

 

 

$

(49

)

 

$

42,465

 

Corporate debt securities

 

Less than 1

 

 

387,627

 

 

 

6

 

 

 

(1,407

)

 

 

386,226

 

Securities of government-sponsored entities

 

Less than 1

 

 

11,000

 

 

 

 

 

 

(82

)

 

 

10,918

 

Total short-term available-for-sale securities

 

 

 

$

441,141

 

 

$

6

 

 

$

(1,538

)

 

$

439,609

 

Classified as non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

1 to 2

 

$

155,935

 

 

$

1

 

 

$

(468

)

 

$

155,468

 

Securities of government-sponsored entities

 

1 to 2

 

 

29,846

 

 

 

 

 

 

(57

)

 

 

29,789

 

Total long-term available-for-sale securities

 

 

 

$

185,781

 

 

$

1

 

 

$

(525

)

 

$

185,257

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Less than 1

 

$

75,396

 

 

$

1

 

 

$

(35

)

 

$

75,362

 

Corporate debt securities

 

Less than 1

 

 

178,776

 

 

 

 

 

 

(400

)

 

 

178,376

 

Securities of government-sponsored entities

 

Less than 1

 

 

7,503

 

 

 

 

 

 

(24

)

 

 

7,479

 

Total short-term available-for-sale securities

 

 

 

$

261,675

 

 

$

1

 

 

$

(459

)

 

$

261,217

 

Classified as non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

1 to 2

 

$

237,749

 

 

$

 

 

$

(1,310

)

 

$

236,439

 

Securities of government-sponsored entities

 

1 to 2

 

 

11,004

 

 

 

 

 

 

(82

)

 

 

10,922

 

Total long-term available-for-sale securities

 

 

 

$

248,753

 

 

$

 

 

$

(1,392

)

 

$

247,361

 

 

(1)

Unrealized gains and losses are included in other comprehensive income (loss).

The following table presents gross unrealized losses and fair value for those available-for-sale investments that were in an unrealized loss position as of September 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position (in thousands):

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Estimated

Fair

Value

 

 

Unrealized

Losses

 

 

Estimated

Fair

Value

 

 

Unrealized

Losses

 

 

Estimated

Fair

Value

 

 

Unrealized

Losses

 

September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

32,634

 

 

$

(49

)

 

$

 

 

$

 

 

$

32,634

 

 

$

(49

)

Corporate debt securities

 

 

317,733

 

 

 

(931

)

 

 

188,998

 

 

 

(944

)

 

 

506,731

 

 

 

(1,875

)

Securities of government-sponsored entities

 

 

29,789

 

 

 

(57

)

 

 

10,918

 

 

 

(82

)

 

 

40,707

 

 

 

(139

)

Total

 

$

380,156

 

 

$

(1,037

)

 

$

199,916

 

 

$

(1,026

)

 

$

580,072

 

 

$

(2,063

)

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

62,602

 

 

$

(35

)

 

$

 

 

$

 

 

$

62,602

 

 

$

(35

)

Corporate debt securities

 

 

386,728

 

 

 

(1,660

)

 

 

28,087

 

 

 

(50

)

 

 

414,815

 

 

 

(1,710

)

Securities of government-sponsored entities

 

 

10,922

 

 

 

(82

)

 

 

7,479

 

 

 

(24

)

 

 

18,401

 

 

 

(106

)

Total

 

$

460,252

 

 

$

(1,777

)

 

$

35,566

 

 

$

(74

)

 

$

495,818

 

 

$

(1,851

)

 

The primary objective of the Company’s investment portfolio is to enhance overall returns in an efficient manner while maintaining safety of principal, prudent levels of liquidity and acceptable levels of risk. The Company’s investment policy limits interest-bearing security investments to certain types of instruments issued by institutions with primarily investment grade credit ratings and places restrictions on maturities and concentration by asset class and issuer.

13


The Company reviews the available-for-sale investments for other-than-temporary declines in fair value below cost basis each quarter and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. This evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below the cost basis and adverse conditions related specifically to the security, including any changes to the credit rating of the security, and the intent to sell, or whether the Company will more likely than not be required to sell the security before recovery of its amortized cost basis. The assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. As of September 30, 2018 and December 31, 2017, the Company believed the cost bases for available-for-sale investments were recoverable in all material respects.

4. FAIR VALUE MEASUREMENTS

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1:

Observable inputs such as quoted prices in active markets;

 

Level 2:

Inputs include quoted prices for similar instruments in active markets and/or quoted prices for identical or similar instruments in markets that are not active near the measurement date; and

 

Level 3:

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company classifies its cash equivalents and available for sale investments within Level 1 or Level 2. The fair value of the Company’s investment grade corporate debt securities is determined using proprietary valuation models and analytical tools. These valuation models and analytical tools use market pricing or prices for similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers. The Company did not reclassify any investments between levels in the fair value hierarchy during the three and nine months ended September 30, 2018.

14


The Company’s assets which were measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, were determined using the inputs described above and are as follows (in millions):

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

Carrying

Value

 

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

195.7

 

 

$

195.7

 

 

$

 

 

$

 

Commercial paper

 

 

42.5

 

 

 

 

 

 

42.5

 

 

 

 

Securities of government-sponsored entities

 

 

10.9

 

 

 

 

 

 

10.9

 

 

 

 

Corporate debt securities

 

 

386.2

 

 

 

 

 

 

386.2

 

 

 

 

Subtotal

 

 

635.3

 

 

 

195.7

 

 

 

439.6

 

 

 

 

Classified as long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

 

1.5

 

 

 

1.5

 

 

 

 

 

 

 

Certificates of deposit

 

 

4.0

 

 

 

4.0

 

 

 

 

 

 

 

Securities of government-sponsored entities

 

 

29.8

 

 

 

 

 

 

29.8

 

 

 

 

Corporate debt securities

 

 

155.5

 

 

 

 

 

 

155.5

 

 

 

 

Total

 

 

826.1

 

 

 

201.2

 

 

 

624.9

 

 

 

 

Less cash, cash equivalents and restricted cash

 

 

(201.2

)

 

 

(201.2

)

 

 

 

 

 

 

Total investments

 

$

624.9

 

 

$

 

 

$

624.9

 

 

$

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

170.2

 

 

$

170.2

 

 

$

 

 

$

 

Commercial paper

 

 

159.9

 

 

 

 

 

 

159.9

 

 

 

 

Securities of government-sponsored entities

 

 

7.5

 

 

 

 

 

 

7.5

 

 

 

 

Corporate debt securities

 

 

178.4

 

 

 

 

 

 

178.4

 

 

 

 

Subtotal

 

 

516.0

 

 

 

170.2

 

 

 

345.8

 

 

 

 

Classified as long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

 

1.5

 

 

 

1.5

 

 

 

 

 

 

 

Certificates of deposit

 

 

3.0

 

 

 

3.0

 

 

 

 

 

 

 

Securities of government-sponsored entities

 

 

10.9

 

 

 

 

 

 

10.9

 

 

 

 

Corporate debt securities

 

 

236.4

 

 

 

 

 

 

236.4

 

 

 

 

Total

 

 

767.8

 

 

 

174.7