srpt-10q_20200331.htm
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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 March 31, 2020

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 001-14895

 

SAREPTA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

93-0797222

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

215 First Street, Suite 415

Cambridge, MA

 

02142

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (617274-4000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of exchange on which registered

Common Stock, $0.0001 par value per share

SRPT

The NASDAQ Global Select Market

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  

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock with $0.0001 par value

  

77,988,744

(Class)

  

(Outstanding as of May 1, 2020)

 

 

 

 


SAREPTA THERAPEUTICS, INC.

FORM 10-Q

INDEX

 

 

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets — As of March 31, 2020 and December 31, 2019

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss — For the Three Months Ended March 31, 2020 and 2019

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity – For the Three Months Ended March 31, 2020 and 2019

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows — For the Three Months Ended March 31, 2020
and 2019

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

20

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

33

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

33

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

34

 

 

 

 

 

Item 1A.

 

Risk Factors

 

34

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

67

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

68

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

68

 

 

 

 

 

Item 5.

 

Other Information

 

68

 

 

 

 

 

Item 6.

 

Exhibits

 

68

 

 

 

 

 

Exhibits

 

69

 

 

 

 

 

Signatures

 

70

 

 

2


PART I — FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share and per share amounts)

 

 

 

As of

March 31, 2020

 

 

As of

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,764,212

 

 

$

835,080

 

Short-term investments

 

 

406,940

 

 

 

289,668

 

Accounts receivable

 

 

106,875

 

 

 

90,879

 

Inventory

 

 

173,168

 

 

 

171,379

 

Other current assets

 

 

96,153

 

 

 

81,907

 

Total current assets

 

 

2,547,348

 

 

 

1,468,913

 

Property and equipment, net

 

 

137,325

 

 

 

129,620

 

Intangible assets, net

 

 

12,813

 

 

 

12,497

 

Right of use assets

 

 

63,097

 

 

 

37,933

 

Other non-current assets

 

 

186,805

 

 

 

173,859

 

Total assets

 

$

2,947,388

 

 

$

1,822,822

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

26,595

 

 

$

68,094

 

Accrued expenses

 

 

176,298

 

 

 

185,527

 

Deferred revenue, current portion

 

 

91,073

 

 

 

3,303

 

Other current liabilities

 

 

12,463

 

 

 

7,843

 

Total current liabilities

 

 

306,429

 

 

 

264,767

 

Long-term debt

 

 

687,953

 

 

 

681,900

 

Lease liabilities

 

 

65,263

 

 

 

47,720

 

Deferred revenue, net of current portion

 

 

732,667

 

 

 

 

Other non-current liabilities

 

 

10,248

 

 

 

10,248

 

Total liabilities

 

 

1,802,560

 

 

 

1,004,635

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 3,333,333 shares authorized; none issued and  outstanding

 

 

 

 

 

 

Common stock, $0.0001 par value, 99,000,000 shares authorized; 77,957,790

   and 75,184,863 issued and outstanding at March 31, 2020, and

   December 31, 2019, respectively

 

 

8

 

 

 

8

 

Additional paid-in capital

 

 

3,455,689

 

 

 

3,112,130

 

Accumulated other comprehensive income, net of tax

 

 

624

 

 

 

50

 

Accumulated deficit

 

 

(2,311,493

)

 

 

(2,294,001

)

Total stockholders’ equity

 

 

1,144,828

 

 

 

818,187

 

Total liabilities and stockholders’ equity

 

$

2,947,388

 

 

$

1,822,822

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited, in thousands, except per share amounts)

 

 

 

For the Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Products, net

 

$

100,448

 

 

$

87,011

 

Collaboration

 

 

13,226

 

 

 

 

Total revenues

 

 

113,674

 

 

 

87,011

 

Cost and expenses:

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of in-licensed rights)

 

 

12,622

 

 

 

12,063

 

Research and development

 

 

136,144

 

 

 

90,553

 

Selling, general and administrative

 

 

82,768

 

 

 

60,566

 

Amortization of in-licensed rights

 

 

166

 

 

 

216

 

Total cost and expenses

 

 

231,700

 

 

 

163,398

 

Operating loss

 

 

(118,026

)

 

 

(76,387

)

Other income (loss):

 

 

 

 

 

 

 

 

Gain from sale of Priority Review Voucher

 

 

108,069

 

 

 

 

Other expense, net

 

 

(7,420

)

 

 

(172

)

Total other income (loss)

 

 

100,649

 

 

 

(172

)

 

 

 

 

 

 

 

 

 

Loss before income tax expense

 

 

(17,377

)

 

 

(76,559

)

Income tax expense

 

 

115

 

 

 

84

 

Net loss

 

 

(17,492

)

 

 

(76,643

)

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gains on investments, net of tax

 

 

574

 

 

 

118

 

Total other comprehensive income

 

 

574

 

 

 

118

 

Comprehensive loss

 

$

(16,918

)

 

$

(76,525

)

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(0.23

)

 

$

(1.07

)

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock used in

   computing basic and diluted net loss per share

 

 

76,432

 

 

 

71,731

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

 

 

Accumulated

 

 

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

 

 

Deficit

 

 

 

 

Equity

 

Balance at December 31, 2019

 

75,185

 

 

$

8

 

 

$

3,112,130

 

 

$

50

 

 

 

 

$

(2,294,001

)

 

 

 

$

818,187

 

Exercise of options for common stock

 

97

 

 

 

 

 

 

3,687

 

 

 

 

 

 

 

 

 

 

 

 

 

3,687

 

Vest of restricted stock units

 

98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock to Roche, net of issuance costs

 

2,522

 

 

 

 

 

 

312,053

 

 

 

 

 

 

 

 

 

 

 

 

 

312,053

 

Issuance of common stock under employee

   stock purchase plan

 

56

 

 

 

 

 

 

3,795

 

 

 

 

 

 

 

 

 

 

 

 

 

3,795

 

Stock-based compensation

 

 

 

 

 

 

 

24,024

 

 

 

 

 

 

 

 

 

 

 

 

 

24,024

 

Unrealized gains from available-for-sale securities, net of tax

 

 

 

 

 

 

 

 

 

 

574

 

 

 

 

 

 

 

 

 

 

574

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,492

)

 

 

 

 

(17,492

)

Balance at March 31, 2020

 

77,958

 

 

$

8

 

 

$

3,455,689

 

 

$

624

 

 

 

 

$

(2,311,493

)

 

 

 

$

1,144,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Loss) Income

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

71,072

 

 

$

7

 

 

$

2,611,294

 

 

$

(99

)

 

$

(1,578,926

)

 

$

1,032,276

 

Exercise of options for common stock

 

382

 

 

 

 

 

 

9,973

 

 

 

 

 

 

 

 

 

9,973

 

Grant of restricted stock awards and vest of

   restricted stock units, net of cancellations

 

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares withheld for taxes

 

(7

)

 

 

 

 

 

(889

)

 

 

 

 

 

 

 

 

(889

)

Issuance of common stock for cash, net of offering costs

 

2,604

 

 

 

 

 

 

365,264

 

 

 

 

 

 

 

 

 

365,264

 

Issuance of common stock under employee stock purchase plan

 

48

 

 

 

 

 

 

2,326

 

 

 

 

 

 

 

 

 

2,326

 

Stock-based compensation

 

 

 

 

 

 

 

16,139

 

 

 

 

 

 

 

 

 

16,139

 

Unrealized gains from available-for-sale securities

 

 

 

 

 

 

 

 

 

 

118

 

 

 

 

 

 

118

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(76,643

)

 

 

(76,643

)

Balance at March 31, 2019

 

74,134

 

 

$

7

 

 

$

3,004,107

 

 

$

19

 

 

$

(1,655,569

)

 

$

1,348,564

 

 

 

5


SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(17,492

)

 

$

(76,643

)

Adjustments to reconcile net loss to cash flows from operating activities:

 

 

 

 

 

 

 

 

Gain from sale of Priority Review Voucher

 

 

(108,069

)

 

 

 

Depreciation and amortization

 

 

6,529

 

 

 

4,879

 

Reduction in the carrying amounts of the right of use assets

 

 

2,153

 

 

 

1,491

 

Amortization of investment discount

 

 

(1,284

)

 

 

(3,476

)

Non-cash interest expense

 

 

6,342

 

 

 

5,208

 

Stock-based compensation

 

 

24,024

 

 

 

16,139

 

Other

 

 

(1,381

)

 

 

88

 

Changes in operating assets and liabilities, net:

 

 

 

 

 

 

 

 

Net increase in accounts receivable

 

 

(15,996

)

 

 

(1,466

)

Net increase in inventory

 

 

(1,789

)

 

 

(15,022

)

Net increase in other assets

 

 

(27,966

)

 

 

(79,564

)

Net increase in deferred revenue

 

 

820,437

 

 

 

682

 

Net (decrease) increase in accounts payable, accrued expenses and other liabilities

 

 

(57,718

)

 

 

1,451

 

Net cash provided by (used in) operating activities

 

 

627,790

 

 

 

(146,233

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(9,120

)

 

 

(16,263

)

Proceeds from sale of Priority Review Voucher, net of commission

 

 

108,069

 

 

 

 

Purchase of available-for-sale securities

 

 

(365,437

)

 

 

(494,481

)

Maturity and sale of available-for-sale securities

 

 

250,000

 

 

 

646,830

 

Other

 

 

(1,192

)

 

 

(855

)

Net cash (used in) provided by investing activities

 

 

(17,680

)

 

 

135,231

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock to Roche

 

 

316,338

 

 

 

 

Proceeds from sale of common stock, net of offering costs

 

 

 

 

 

365,264

 

Proceeds from exercise of stock options and purchase of stock under the Employee Stock Purchase Program

 

 

7,482

 

 

 

12,299

 

Taxes paid related to net share settlement of equity awards

 

 

(4,798

)

 

 

 

Net cash provided by financing activities

 

 

319,022

 

 

 

377,563

 

 

 

 

 

 

 

 

 

 

Increase in cash, cash equivalents and restricted cash

 

 

929,132

 

 

 

366,561

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Beginning of period

 

 

843,645

 

 

 

370,829

 

End of period

 

$

1,772,777

 

 

$

737,390

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,764,212

 

 

$

732,190

 

Restricted cash in other assets

 

 

8,565

 

 

 

5,200

 

Total cash, cash equivalents and restricted cash

 

$

1,772,777

 

 

$

737,390

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

5,385

 

 

$

 

Supplemental schedule of non-cash investing activities and financing activities:

 

 

 

 

 

 

 

 

Issuance costs related to the Roche Collaboration in accrued expenses

 

$

4,285

 

 

$

 

Manufacturing right of use asset additions

 

$

27,554

 

 

$

 

Manufacturing lease liability additions

 

$

24,783

 

 

$

 

Sale of available-for-sale securities included in investment receivable

 

$

 

 

$

42,300

 

Intangible assets and property and equipment included in accrued expenses

 

$

6,154

 

 

$

3,108

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


SAREPTA THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. ORGANIZATION AND NATURE OF BUSINESS

Sarepta Therapeutics, Inc. (together with its wholly-owned subsidiaries, “Sarepta” or the “Company”) is a commercial-stage biopharmaceutical company focused on helping patients through the discovery and development of unique RNA-targeted therapeutics, gene therapy and other genetic therapeutic modalities for the treatment of rare diseases. Applying its proprietary, highly-differentiated and innovative technologies, and through collaborations with its strategic partners, the Company is developing potential therapeutic candidates for a broad range of diseases and disorders, including Duchenne muscular dystrophy (“DMD”), Limb-girdle muscular dystrophies (“LGMDs”), Mucopolysaccharidosis type IIIA (“MPS IIIA”) and other neuromuscular and central nervous system (“CNS”) disorders.

Its first and second commercial products in the U.S., EXONDYS 51 (eteplirsen) Injection (“EXONDYS 51”) and VYONDYS 53 (golodirsen) Injection (“VYONDYS 53”) were granted accelerated approval by the U.S. Food and Drug Administration (the “FDA”) on September 19, 2016 and December 12, 2019, respectively. EXONDYS 51 and VYONDYS 53 are indicated for the treatment of DMD in patients who have a confirmed mutation of the DMD gene that is amenable to exon 51 and exon 53 skipping, respectively. EXONDYS 51 and VYONDYS 53 use the Company’s phosphorodiamidate morpholino oligomer (“PMO”) chemistry and exon-skipping technology to skip exon 51 and exon 53, respectively, of the dystrophin gene. Exon skipping is intended to promote the production of an internally truncated but functional dystrophin protein.

As of March 31, 2020, the Company had approximately $2,180.7 million of cash, cash equivalents and investments, consisting of $1,764.2 million of cash and cash equivalents, $406.9 million of short-term investments, and $9.6 million of restricted cash and investments. The Company believes that its balance of cash, cash equivalents and investments as of the date of the issuance of this report is sufficient to fund its current operational plan for at least the next twelve months, though it may pursue raising additional cash resources through public or private debt and equity financings, seek additional government contracts and establish collaborations with or license its technology to other companies.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), reflect the accounts of Sarepta Therapeutics, Inc. and its wholly-owned subsidiaries. All intercompany transactions between and among its consolidated subsidiaries have been eliminated. Management has determined that the Company operates in one segment: discovering, developing, manufacturing and delivering therapies to patients with rare diseases.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2019 which are contained in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 26, 2020. The results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.

Estimates and Uncertainties

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable from customers, cash held at financial institutions and cash equivalents and investments.  

As of March 31, 2020, the majority of the Company’s accounts receivable arose from product sales in the U.S. and all customers have standard payment terms which generally require payment within 60 to 91 days. Outside of the U.S., the majority of the Company’s customers have payment terms ranging between 45 and 150 days. Three individual customers accounted for 44%, 40% and 12% of net product revenues for the three months ended March 31, 2020 and 41%, 40% and 15% of net product revenues for the three months ended March 31, 2019. Three individual customers accounted for 49%, 37% and 11% of accounts receivable from product sales as of March 31, 2020 and 57%, 26% and 8% of accounts receivable from product sales as of March 31, 2019. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in its customers’ credit profile. As of March 31, 2020, the Company believes that such customers are of high credit quality.

7


As of March 31, 2020, the Company’s cash was concentrated at three financial institutions in the U.S., which potentially exposes the Company to credit risks. However, the Company does not believe that there is significant risk of non-performance by the financial institutions.

Significant Accounting Policies

For details about the Company’s accounting policies, please read Note 2, Summary of Significant Accounting Policies and Recent Accounting Pronouncements of the Annual Report on Form 10-K for the year ended December 31, 2019.

 

Collaboration revenue

 

The Company’s collaboration revenue is generated from its collaboration arrangement with F. Hoffman-La Roche Ltd. (“Roche”). For more information, please read Note 3, Collaboration and License Agreements. At the inception of a collaboration arrangement, the Company first assesses whether the contractual arrangement is within the scope of ASC 808, Collaborative Arrangements (“ASC 808”) to determine whether the arrangement involves a joint operating activity and involves two (or more) parties that are both active participants in the activity and exposed to significant risks and rewards dependent on the commercial success of such activity. Then the Company determines whether the collaboration arrangement in its entirety represents a contract with a customer as defined by ASC 606, Revenue from Contracts with Customers (“ASC 606”). If only a portion of the collaboration arrangement is potentially with a customer, the Company applies the distinct good or service unit-of-account guidance in ASC 606 to determine whether there is a unit of account that should be accounted for under ASC 606. For the units of account in the collaboration arrangement that do not represent a vendor-customer relationship, the Company will (i) consider applying other GAAP, including by analogy, or (ii) if there is no appropriate analogy, consistently apply a reasonable and rational accounting policy election.

 

In general, by analogy to ASC 606, the Company identifies the performance obligations within the collaboration arrangement and identifies and allocates the transaction price the Company expects to receive on a relative standalone selling price basis to each performance obligation.  The residual approach is used to determine estimated standalone selling prices when the selling price is uncertain. Variable consideration, consisting of development and regulatory milestones, will be included in the transaction price only if the Company expects to receive such consideration and if it is probable that the inclusion of the variable consideration will not result in a significant reversal in the cumulative amount of revenue recognized under the arrangement. Sales-based royalty and milestone payments are excluded from the transaction price the Company expects to receive until the underlying sales occur because the license to the Company’s intellectual property is deemed to be the predominant item to which the royalties or milestones relate as it is the primary driver of value in its collaboration arrangement.

 

For the recognition of revenue associated with each performance obligation, if the Company determines ASC 606 is not appropriate to apply by analogy, the Company will apply a reasonable, rational, and consistently applied accounting policy election to faithfully depict the transfer of services to the collaboration partner over the estimated performance period. Up-front payments from a collaboration partner are recognized as deferred revenue when received and recognized as revenue over the estimated performance period. Reimbursement payments from a collaboration partner associated with research and development cost sharing provisions in a collaboration arrangement are recognized as the related expense is incurred and classified as an offset to research and development expense.

 

The Company's collaboration arrangements may contain options which provide the collaboration partner with the right to obtain additional licenses. If an arrangement contains customer options, by analogy to ASC 606, the Company evaluates the customer options to determine whether they represent material rights, which may include options to acquire additional goods or services for free or at a discount. If the customer options are determined to represent material rights, they are recognized as a separate performance obligation at inception of the arrangement. The Company allocates a portion of the transaction price of the collaboration arrangement to material rights based on the relative standalone selling price. Amounts allocated to material rights are not recognized as revenue until related options are exercised or expire.

 

Key assumptions to determine the standalone selling price of units of account in a collaboration arrangement include, but are not limited to, forecasted revenues, development timelines, incremental costs related to the arrangement, discount rates and probabilities of technical and regulatory success.

 

Leases

 

In accordance with ASC 842, Leases (“ASC 842”), components of a lease should be bifurcated between lease components and non-lease components. The fixed and in-substance fixed contract consideration identified must then be allocated based on the relative standalone price to the lease and non-lease components. However, ASC 842 provides entities with a practical expedient that allows them to make an accounting policy election to not separate lease and non-lease components by class of underlying asset. In using this expedient, entities would account for each lease component and the related non-lease component together as a single

8


component. For new and amended real estate leases beginning after January 1, 2019, the Company has elected to account for the lease and non-lease components together for existing classes of underlying assets and allocates the contract consideration to the lease component only. In contrast, the Company does not apply the practical expedient for embedded leases in manufacturing and supply agreements with certain of its contract manufacturing organizations and has instead allocated contract consideration between the lease and non-lease components based on their relative standalone price.

There have not been any other material changes to the Company’s accounting policies through March 31, 2020.

 

Recent Accounting Pronouncements

Not yet adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to simplify the accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. The new standard will be effective beginning January 1, 2021. As of March 31, 2020, the Company is continuing to evaluate the potential impact this ASU may have on its financial position and results of operations upon adoption.

Recently adopted

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. This ASU removed the following disclosure requirements: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income and loss for recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 was effective beginning January 1, 2020. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This ASU requires a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance contained in ASC Subtopic 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrange is ready for its intended use. ASU No. 2018-15 was effective beginning January 1, 2020. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This ASU requires that credit losses for financial instruments measured at amortized cost be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, this standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. ASU 2016-13 was effective beginning January 1, 2020. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements. The Company has no historical write-offs of its accounts receivable and its terms range from 60 to 91 days for sales within the U.S. and 45 and 150 days for the majority of sales outside the U.S. The Company monitors the creditworthiness of its customers and payments such that it can properly assess and respond to changes in the customers’ credit profile or any specific issues. Upon adoption and as of March 31, 2020, the Company believes that such customers are of high credit quality and the expected credit losses are insignificant.

 

In November 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606”. This ASU: (i) clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer, (ii) provides guidance specifying that a distinct good or service is the unit of account for evaluating whether a transaction is with a customer, and (iii) precludes a company from presenting transactions with a collaborative arrangement participant that are not in the scope of ASC 606 together with revenue from contracts with customers. The new standard was effective beginning January 1, 2020. The Company presents collaboration revenue separate from product revenues.

 

 

9


3. LICENSE AND COLLABORATION AGREEMENTS

Roche Holding A.G.

On December 21, 2019, the Company entered into a license, collaboration and option agreement with Roche and a stock purchase agreement with an affiliate of Roche (collectively, the “Roche Agreement”), providing Roche with exclusive commercial rights to SRP-9001, the Company’s investigational gene therapy for DMD, outside the U.S. The Company retains all rights to SRP-9001 in the U.S. and will perform all development activities within the joint global development plan necessary to obtain and maintain regulatory approvals for SRP-9001 in the U.S. and the EU. Further: (i) research and development expenses incurred under the joint global development plan will be equally shared between the Company and Roche, (ii) Roche is solely responsible for all costs incurred in connection with any development activities (other than those within the joint global development plan) that are necessary to obtain or maintain regulatory approvals outside the U.S, and (iii) the Company will continue to be responsible for the manufacturing of clinical and commercial supplies of SRP-9001. The Company has also granted Roche options to acquire ex-U.S. rights to certain future DMD-specific programs (the “Options”) in exchange for separate option exercise payments, milestone and royalty considerations, and cost sharing provisions.   The agreement became effective on February 4, 2020 (“Effective Date”).

Within 10 days of the Effective Date, the Company received an aggregate of approximately $1.2 billion in cash consideration from Roche, consisting of an up-front payment and an equity investment in the Company. Additionally, the Company may receive up to $1.7 billion in development, regulatory and sales milestones related to SRP-9001. Upon commercialization, the Company is also eligible to receive tiered royalty payments based on net sales.

The Roche Agreement is governed by a joint steering committee (“JSC”) formed by representatives from Roche and the Company. The JSC, among other activities, manages the overall strategic alignment between the parties, approves any material update to the joint global development plan and budget and oversees the operations of the subcommittees.

The Company determined that the Roche Agreement represents a collaboration arrangement subject to the scope of ASC 808. To determine if the collaboration arrangement was also within the scope of ASC 606, using the unit of account guidance in ASC 606, the Company identified the distinct goods or services in the Roche Agreement and evaluated whether they were transferred to a customer.  However, since the Company’s ordinary activities do not include contracting with third parties to provide them with research and development services, it was determined that the Roche Agreement was not within the scope of ASC 606. Thus, for recognition and measurement purposes, the Company must apply other GAAP, including by analogy, or if there is no appropriate analogy, apply a reasonable, rational and consistently applied accounting policy election.  

Accordingly, the Company has analogized to ASC 606 for the accounting for certain aspects of the Roche Agreement. Of the $1.2 billion cash received from Roche, $316.3 million was allocated to the 2,522,227 shares of the Company’s common stock issued to Roche based on the closing price when the shares were issued.  Further, $491.0 million was allocated to the Options, as the Company determined that the option exercise payments (ranging from $20.0 million to $125.0 million per Option) are priced at a discount, resulting in material rights.  The residual amount of $342.7 million was allocated to a single, combined performance obligation (“Combined Performance Obligation”) comprised of: (i) the license of IP relating to SRP-9001 transferred to Roche, (ii) the related research and development services provided under the joint global development plan, (iii) the services provided to manufacture clinical supplies of SRP-9001, and (iv) the Company’s participation in the JSC, because the Company determined that the license of IP and related activities were not capable of being distinct from one another.

The Company recorded $312.1 million of common shares issued to Roche, based on the closing price of the Company’s stock on the date such shares were issued, less direct transaction fees incurred of $4.3 million. This net amount is reflected as an increase to common stock and additional paid-in-capital in the accompanying unaudited condensed consolidated balance sheets.  

The $491.0 million allocated to the material rights associated with the Options was based on their estimated standalone selling prices, determined using an income approach of projected incremental discounted cash flows from each Option.  The discounted cash flows incorporate the likelihood of success of the individual product candidates and the related commercial opportunity. The value assigned to the individual material rights is reflected as deferred revenue and will not be recognized until an option is either: (i) exercised by Roche, or (ii) expires. If exercised, the value of the material right will be aggregated with the option exercise price and recognized over the applicable performance period. If expired, the related transaction price will be recognized immediately. Through March 31, 2020, no options have been exercised or expired.

The $342.7 million allocated to the Combined Performance Obligation was determined using the residual approach because the standalone selling price is uncertain.  The Company recognizes revenue related to the Combined Performance Obligation on a straight-line basis over the expected performance period of the joint global development plan, which is expected to extend through the

10


fourth quarter of 2023. The Company believes this method represents the best depiction of the transfer of services to Roche, as the estimated full-time equivalent employees dedicated to the services is not expected to materially vary over the expected service period.

Revenue relating to future development, regulatory and sales milestones will be recognized when the milestone is probable of achievement (which is typically when the milestone has occurred). Any royalties payable by Roche in the future will be recognized in the period earned. In addition, the Company determined that the supply of commercial product to Roche under the agreement is not priced at a discount and represents optional goods or services (i.e., a contingent promise).  Accordingly, any revenues associated with the supply of commercial product in the future will be recognized in the period earned.

The Company classifies all revenues recognized under the Roche Agreement as collaboration revenues within the unaudited condensed consolidated statements of operations. For the three months ended March 31, 2020, the Company recognized $13.2 million of collaboration revenue, all of which relates to the Combined Performance Obligation. As of March 31, 2020, the Company has total deferred revenue of $820.4 million associated with the Roche Agreement, of which $87.8 million is classified as current. The portion of deferred revenue related to the separate material rights for the Options was $491.0 million as of March 31, 2020.

The costs associated with co-development activities performed under the Roche Agreement are included in research and development expenses, with any reimbursement of costs by Roche reflected as a reduction of such expenses when the related expense is incurred. For the three months ended March 31, 2020, costs reimbursable by Roche and reflected as a reduction to research and development expenses were $16.4 million and is included in accounts receivable as of March 31, 2020.

 

Milestone Obligations

 

The Company has license and collaboration agreements in place for which it could be obligated to pay, in addition to the payment of up-front fees upon execution of the agreements, certain milestone payments as a product candidate proceeds from the submission of an investigational new drug application through approval for commercial sale and beyond. As of March 31, 2020, the Company may be obligated to make up to $3.2 billion in future development, regulatory, commercial, royalty and up-front milestone payments associated with its license and collaboration agreements. For the three months ended March 31, 2020 and 2019, the Company recognized up-front, milestone, and other expenses of $8.5 million and $1.1 million, respectively, as research and development expense in the accompanying unaudited condensed consolidated statement of operations and comprehensive loss.

 

4. GAIN FROM SALE OF PRIORITY REVIEW VOUCHER

In February 2020, the Company entered into an agreement with Vifor (International) Ltd. to sell the rare pediatric disease Priority Review Voucher (“PRV”) it received from the FDA in connection with the approval of VYONDYS 53. Following the early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, in March 2020, the Company completed its sale of the PRV and received proceeds of $108.1 million, net of commission, which was recorded as a gain from sale of the PRV as it did not have a carrying value at the time of the sale.

 

5. FAIR VALUE MEASUREMENTS

The Company has certain financial assets and liabilities that are recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements.

 

Level 1 — quoted prices for identical instruments in active markets;

 

Level 2 — quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

 

Level 3 — valuations derived from valuation techniques in which one or more significant value drivers are unobservable.

11


The tables below present information about the Company’s financial assets and liabilities that are measured and carried at fair value and indicate the level within the fair value hierarchy of valuation techniques it utilizes to determine such fair value: 

 

 

 

Fair Value Measurement as of March 31, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,047,762

 

 

$

1,047,762

 

 

$

 

 

$

 

Government and government agency bonds

 

 

719,046

 

 

 

719,046

 

 

 

 

 

 

 

Strategic equity investments

 

 

33,697

 

 

 

3,697

 

 

 

 

 

 

30,000

 

Certificates of deposit

 

 

1,001

 

 

 

1,001

 

 

 

 

 

 

 

Total assets

 

$

1,801,506

 

 

$

1,771,506

 

 

$

 

 

$

30,000