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Table of Contents

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 June 30, 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: 001-38219
___________________________________________
DECIPHERA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
___________________________________________
Delaware
(State or other jurisdiction of incorporation or organization)
30-1003521
(I.R.S. Employer Identification Number)
200 Smith Street, Waltham, MA
(Address of principal executive offices)
02451
(Zip Code)
(781) 209-6400
Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 Par Value Per ShareDCPHThe 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 filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒
As of July 31, 2020 there were 56,376,754 shares of Common Stock, $0.01 par value per share, outstanding.



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Deciphera Pharmaceuticals, Inc.
INDEX
Page
Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (Form 10-Q) contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plan, objectives of management and expected market growth are forward-looking statements. You can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under "Risk Factors" and include, among other things:
our ability to successfully launch and commercialize QINLOCK™ (ripretinib), referred to as QINLOCK, for the treatment of adult patients with advanced gastrointestinal stromal tumor (GIST) who have received prior treatment with three or more kinase inhibitors, including imatinib, in the United States (U.S.), and our readiness for commercial launch of QINLOCK in Canada and Australia, and any other jurisdictions where we may receive marketing approval in the future;
the success, cost, and timing of our product development activities and clinical trials, including the timing of our ongoing Phase 3 trial of QINLOCK for the treatment of second line GIST patients and results therefrom;
our ability to maintain and receive additional regulatory approval for QINLOCK or obtain and maintain regulatory approval for any of our current or future drug candidates, and any related restrictions, limitations, and/or warnings in the label of QINLOCK or any of our current or future drug candidates that may receive marketing approval;
the rate and degree of market acceptance for QINLOCK or any current or future drug candidate for which we may receive marketing approval;
our ability and plans in continuing to build out our commercial infrastructure and successfully launching, marketing, and selling QINLOCK and any current or future drug candidate for which we may receive marketing approval, including our plans with respect to the focus and activities of our sales force, the nature of our marketing, market access, and patient support activities, and our pricing of QINLOCK and related assumptions;
the pricing and reimbursement of, and the extent to which patient assistance programs are utilized for, QINLOCK, or any current or future drug candidates for which we may receive marketing approval;
our expectations regarding the size of target patient populations for QINLOCK, or any of our current or future drug candidates for which we receive marketing approval;
our ability to obtain funding for our operations;
our ability to manufacture or obtain sufficient quantities of QINLOCK or our drug candidates, on a timely basis, to support our planned clinical trials and commercialization of QINLOCK or any of our current or future drug candidates for which we receive marketing approval;
the therapeutic benefit and effectiveness of QINLOCK and our drug candidates;
the safety profile and related adverse events of QINLOCK and our drug candidates;
our plans to research, develop, and commercialize our drug candidates, including the timing of our ongoing Phase 3 trial of QINLOCK for the treatment of second line GIST patients, and the timing of investigational new drug (IND) applications, including, without limitation, the success of IND-enabling studies for, and the expected timing of, an IND application for our DCC-3116 program;
the performance and experience of our licensee, Zai Lab (Shanghai) Co., Ltd. (Zai), to successfully develop and commercialize QINLOCK, if approved, in Mainland China, Hong Kong, Macau, and Taiwan, also referred to as Greater China or the Greater China region, under the terms and conditions of our license agreement;
our ability to attract additional licensees and/or collaborators or distributors with development, regulatory, and commercialization expertise;
our expectations regarding our ability to obtain, maintain, enforce, and defend our intellectual property protection for QINLOCK or our drug candidates;
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future agreements with third parties in connection with the commercialization of QINLOCK or any of our current or future drug candidates for which we may receive marketing approval;
the size and growth potential of the markets for QINLOCK or any of our current or future drug candidates for which we may receive marketing approval and our ability to serve those markets;
regulatory and legal developments in the U.S. and foreign countries;
our ability to comply with healthcare laws and regulations in the U.S. and any foreign countries, including, without limitation, those applying to the marketing and sale of commercial drugs;
the performance and experience of our third-party suppliers and manufacturers;
the success and timing of competing therapies that are or may become available;
our ability to attract and retain key scientific or management personnel;
the accuracy of our estimates regarding expenses, future revenues, capital requirements, and needs for additional financing;
the impact of global economic and political developments on our business, including economic slowdowns or recessions that may result from the outbreak of the novel coronavirus (COVID-19), which could harm our commercialization efforts for QINLOCK as well as the value of our common stock and our ability to access capital markets;
natural and manmade disasters, including pandemics such as COVID-19, and other force majeures, which could impact our operations, and those of our partners and other participants in the health care industry, and which could adversely impact our clinical studies, preclinical research activities, and drug supply; and
our use of the proceeds from our follow-on public offerings and any other financing transaction we may undertake.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included elsewhere in this Form 10-Q and our prior filings with the Securities and Exchange Commission (SEC). The forward-looking statements contained in this Form 10-Q are made as of the date of this Form 10-Q, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Deciphera Pharmaceuticals, Inc.
Consolidated Balance Sheets
(Unaudited, in thousands, except share and per share amounts)
June 30, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$155,446  $120,320  
Short-term marketable securities454,890  459,256  
Accounts receivable, net7,384    
Inventory1,389    
Prepaid expenses and other current assets13,977  13,832  
Total current assets633,086  593,408  
Long-term marketable securities21,431    
Long-term investments—restricted2,125  1,510  
Property and equipment, net9,567  6,333  
Operating lease assets20,096  21,158  
Total assets$686,305  $622,409  
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$12,582  $19,575  
Accrued expenses and other current liabilities37,333  38,716  
Operating lease liabilities1,424  1,747  
Total current liabilities51,339  60,038  
Operating lease liabilities, net of current portion15,282  15,904  
Total liabilities66,621  75,942  
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; no shares issued or outstanding
    
Common stock, $0.01 par value per share; 125,000,000 shares authorized; 56,081,993 shares and 51,617,639 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
561  516  
Additional paid-in capital
1,247,158  1,033,819  
Accumulated other comprehensive income (loss)(8) 111  
Accumulated deficit(628,027) (487,979) 
Total stockholders' equity619,684  546,467  
Total liabilities and stockholders' equity$686,305  $622,409  
The accompanying notes are an integral part of these consolidated financial statements.
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Deciphera Pharmaceuticals, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited, in thousands, except share and per share amounts)
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Revenues:
Product revenues, net$4,825  $  $4,825  $  
Collaboration revenues2,265  25,000  2,327  25,000  
Total revenues7,090  25,000  7,152  25,000  
Cost and operating expenses:
Cost of sales8    8    
Research and development46,081  34,811  97,469  70,600  
Selling, general, and administrative29,933  13,164  53,869  26,400  
Total cost and operating expenses76,022  47,975  151,346  97,000  
Loss from operations(68,932) (22,975) (144,194) (72,000) 
Other income (expense):
Interest and other income, net1,691  1,540  4,146  3,194  
Interest expense  (25)   (38) 
Total other income (expense), net1,691  1,515  4,146  3,156  
Net loss$(67,241) $(21,460) $(140,048) $(68,844) 
Net loss per share—basic and diluted$(1.20) $(0.56) $(2.56) $(1.81) 
Weighted average common shares outstanding—basic and diluted55,920,122  38,200,288  54,743,778  38,129,049  
Comprehensive loss:
Net loss$(67,241) $(21,460) $(140,048) $(68,844) 
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities(771) 154  (119) 175  
Total other comprehensive income (loss)(771) 154  (119) 175  
Total comprehensive loss$(68,012) $(21,306) $(140,167) $(68,669) 
The accompanying notes are an integral part of these consolidated financial statements.
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Deciphera Pharmaceuticals, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited, in thousands, except share amounts)

Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated
Deficit
Total
Stockholders'
Equity
SharesAmountSharesAmount
Balance, March 31, 2020  $  55,681,027  $557  $1,231,726  $763  $(560,786) $672,260  
Issuance of common stock upon exercise of stock options
—  —  400,966  4  4,823  —  —  4,827  
Stock-based compensation expense—  —  —  —  10,609  —  —  10,609  
Unrealized gains (losses) on marketable securities
—  —  —  —  —  (771) —  (771) 
Net loss—  —  —  —  —  —  (67,241) (67,241) 
Balance, June 30, 2020  $  56,081,993  $561  $1,247,158  $(8) $(628,027) $619,684  

Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders' Equity
SharesAmountSharesAmount
Balance, December 31, 2019  $  51,617,639  $516  $1,033,819  $111  $(487,979) $546,467  
Issuance of common stock sold in public offering, net of underwriting discounts, commissions and offering costs
—  —  3,659,090  37  188,348  —  —  188,385  
Issuance of common stock upon exercise of stock options
—  —  805,264  8  7,388  —  —  7,396  
Stock-based compensation expense
—  —  —  —  17,603  —  —  17,603  
Unrealized gains (losses) on marketable securities
—  —  —  —  —  (119) —  (119) 
Net loss—  —  —  —  —  —  (140,048) (140,048) 
Balance, June 30, 2020  $  56,081,993  $561  $1,247,158  $(8) $(628,027) $619,684  
The accompanying notes are an integral part of these consolidated financial statements.



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Deciphera Pharmaceuticals, Inc.
Consolidated Statements of Stockholders' Equity (continued)
(Unaudited, in thousands, except share amounts)

Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders' Equity
SharesAmountSharesAmount
Balance, March 31, 2019  $  38,189,052  $382  $582,700  $21  $(343,107) $239,996  
Issuance of common stock upon exercise of stock options
—  —  26,056    81  —  —  81  
Stock-based compensation expense—  —  —  —  4,107  —  —  4,107  
Unrealized gains (losses) on marketable securities
—  —  —  —  —  154  —  154  
Net loss—  —  —  —  —  —  (21,460) (21,460) 
Balance, June 30, 2019  $  38,215,108  $382  $586,888  $175  $(364,567) $222,878  

Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders' Equity
SharesAmountSharesAmount
Balance, December 31, 2018  $  37,676,760  $377  $575,327  $  $(295,723) $279,981  
Issuance of common stock upon exercise of stock options
—  —  538,348  5  1,225  —  —  1,230  
Stock-based compensation expense
—  —  —  —  10,336  —  —  10,336  
Unrealized gains (losses) on marketable securities
—  —  —  —  —  175  —  175  
Net loss—  —  —  —  —  —  (68,844) (68,844) 
Balance, June 30, 2019  $  38,215,108  $382  $586,888  $175  $(364,567) $222,878  
The accompanying notes are an integral part of these consolidated financial statements.
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Deciphera Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Six Months Ended June 30,
20202019
Cash flows from operating activities:
Net loss$(140,048) $(68,844) 
Adjustments to reconcile net loss to net cash flows used in operating activities:
Stock-based compensation expense17,603  10,336  
Depreciation expense944  216  
Noncash lease expense1,062  337  
Net accretion of discounts on marketable securities(2,010) (1,297) 
Changes in operating assets and liabilities:
Accounts Receivable(7,384) (20,000) 
Unbilled Receivables  (5,000) 
Inventory(798)   
Prepaid expenses and other current assets(146) 1,263  
Accounts payable(7,056) 5,592  
Accrued expenses and other current liabilities(2,436) 7,239  
Operating lease liabilities(945) (349) 
Other long-term liabilities  235  
Net cash flows used in operating activities(141,214) (70,272) 
Cash flows from investing activities:
Purchases of marketable securities(818,182) (253,759) 
Maturities of marketable securities323,263  68,364  
Sales of marketable securities479,746  18,688  
Purchases of property and equipment(3,653) (244) 
Increase in restricted investments(615) (441) 
Net cash flows used in investing activities(19,441) (167,392) 
Cash flows from financing activities:
Proceeds from public offerings, net of underwriting discounts and commissions189,037    
Repayment of notes payable to related party  (93) 
Payments of public offering costs(652)   
Proceeds from exercise of stock options7,396  1,230  
Net cash flows provided by financing activities195,781  1,137  
Net increase (decrease) in cash and cash equivalents35,126  (236,527) 
Cash and cash equivalents at beginning of period120,320  293,764  
Cash and cash equivalents at end of period$155,446  $57,237  
Supplemental disclosure of cash flow information:
Cash paid for interest$  $38  
Inventory purchases included in accrued expenses and other current liabilities$591  $  
Property and equipment purchases included in accounts payable and accrued expenses and other current liabilities
$525  $  
The accompanying notes are an integral part of these consolidated financial statements.
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Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)


1. Nature of the Business and Summary of Significant Accounting Policies
Nature of the Business
Deciphera Pharmaceuticals, Inc. (the Company) is a biopharmaceutical company focused on discovering, developing, and commercializing important new medicines to improve the lives of people with cancer. The Company is leveraging its proprietary switch-control kinase inhibitor platform and deep expertise in kinase biology to develop a broad portfolio of innovative medicines. On May 15, 2020, QINLOCK™ (ripretinib), referred to as QINLOCK, was approved by the United States (U.S.) Food and Drug Administration (FDA) for the treatment of adult patients with advanced gastrointestinal stromal tumor (GIST) who have received prior treatment with three or more kinase inhibitors, including imatinib. QINLOCK is currently being investigated in a Phase 3 study for the treatment of patients with second-line GIST. In addition to QINLOCK, the Company is advancing multiple drug candidates from its platform in various stages of clinical development. The Company wholly owns its drug and all of its drug candidates with the exception of a development and commercialization out-license agreement for QINLOCK in Mainland China, Hong Kong, Macau, and Taiwan, also referred to as Greater China or the Greater China region.
The Company is subject to risks and uncertainties common to companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, market acceptance and the successful commercialization of QINLOCK or any of the Company's current or future drug candidates for which it receives marketing approval, competition for QINLOCK or any of the Company's current or future drug candidates for which it receives marketing approval, protection of proprietary technology, ability to complete late-stage clinical trials, ability to obtain and maintain regulatory approvals, compliance with government regulations, the impact of the novel coronavirus (COVID-19) pandemic on its operations, and the ability to secure additional capital to fund operations. QINLOCK and the Company's drug candidates currently under development will require significant additional research and development efforts, including extensive preclinical and/or clinical testing and regulatory approval. In addition to supporting its research and development efforts, the Company will be required to invest in the Company's commercial capabilities and infrastructure, to support its launch and commercialization of QINLOCK, the Company's first and recently approved drug in the U.S., Canada, and Australia, and any current or future drug candidate for which the Company obtains marketing approval. These efforts require significant amounts of additional capital, adequate personnel and infrastructure, and extensive compliance-reporting capabilities. Even if the Company's drug development and commercialization efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales of QINLOCK or any current or future drug candidates for which it receives marketing approval.
The full extent to which the COVID-19 pandemic, or the future outbreak of any other highly infectious or contagious diseases, may impact the Company's business, including its preclinical studies, clinical trial operations, or commercialization efforts, will depend on continuously changing circumstances, which are highly uncertain and cannot be predicted at this time, such as the duration of such pandemic including future waves of infection, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. The Company is continuing to monitor the long-term impact of COVID-19, if any, on its financial condition and results of operations. The ongoing fluidity of this situation precludes any prediction as to the full impact of the COVID-19 pandemic but it could have a material adverse effect on the Company's business, financial condition, and results of operations. The COVID-19 pandemic may also have the effect of heightening the risks to which the Company is subject, including various aspects of the Company's preclinical studies and ongoing clinical trials, the reliance on third parties in the Company's supply chain for materials and manufacturing of the Company's drug and drug candidates, disruptions in health regulatory agencies' operations globally, the volatility of the Company's common stock, and its ability to access capital markets, and the Company's ability to successfully launch, commercialize, and generate revenue from sales of QINLOCK.
In June 2018, the Company issued and sold 4,945,000 shares of its common stock in a follow-on public offering at a public offering price of $40.00 per share, resulting in net proceeds of $185.3 million after deducting underwriting discounts and commissions and other offering expenses. In the third quarter of 2019, the Company issued and sold 12,432,431 shares of its common stock in a follow-on public offering at a public offering price of $37.00 per share, resulting in net proceeds of $431.8 million after deducting underwriting discounts and commissions and other offering expenses. In February 2020, the Company issued and sold 3,659,090 shares of its common stock in a follow-on public offering at a public offering price of $55.00 per share, resulting in net proceeds of $188.4 million after deducting underwriting discounts and commissions and other offering expenses.
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Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

Basis of Presentation
The accompanying consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets, and the satisfaction of liabilities and commitments in the ordinary course of business. Since inception, the Company has incurred recurring losses including net losses of $140.0 million and $192.3 million for the six months ended June 30, 2020 and the year ended December 31, 2019, respectively. As of June 30, 2020, the Company had an accumulated deficit of $628.0 million. The Company expects to continue to generate operating losses for the foreseeable future. The Company expects that its cash, cash equivalents, and marketable securities will be sufficient to fund its operating expenses and capital expenditure requirements through at least 12 months from the issuance date of these consolidated financial statements. The future viability of the Company is dependent on its ability to raise additional capital to fund its operations.
The Company may need to obtain substantial additional funding in connection with continuing operations. If the Company is unable to raise capital when needed, or on attractive terms, it could be forced to delay, reduce, or eliminate its research or drug development programs or certain commercialization efforts. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
Unaudited Interim Financial Information
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP).
The consolidated balance sheet at December 31, 2019 was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying unaudited consolidated financial statements as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company's audited financial statements and the notes thereto for the year ended December 31, 2019 included in the Company's Annual Report on Form 10-K (Form 10-K) on file with the SEC.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company's consolidated financial position as of June 30, 2020 and consolidated results of operations and comprehensive loss for the three and six months ended June 30, 2020 and 2019 and consolidated cash flows for the six months ended June 30, 2020 and 2019 have been made. The consolidated results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.
Certain prior year amounts have been reclassified to conform to current year presentation.
The significant accounting policies used in preparation of these consolidated financial statements for the three and six months ended June 30, 2020 are consistent with those discussed in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in the Company's Form 10-K for the year ended December 31, 2019, except as noted within the section "Significant Accounting Policies" with respect to the Company's accounting policies for product revenue, accounts receivable, and inventory and within the section "Recently Issued Accounting Pronouncements."
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, the accrual for research and development expenses, and the valuation of stock-based awards. Estimates are periodically reviewed in light of
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Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
Net Loss per Share
Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the diluted net income (loss) by the weighted average number of common shares, including potential dilutive common shares assuming the dilutive effect as determined using the treasury stock method.
For periods in which the Company has reported net losses, diluted net loss per common share is the same as basic net loss per common share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss for the three and six months ended June 30, 2020 and 2019.
The following potential dilutive securities, presented based on amounts outstanding at the end of each reporting period, have been excluded from the calculation of diluted net loss per share because including them would have had an anti-dilutive impact:
As of June 30,
20202019
Options to purchase common stock7,073,775  6,891,799  
Unvested time-based restricted common stock units409,955  77,000  
Unvested performance-based restricted common stock units57,000    
Unvested employee stock purchase plan shares39,600    
Total7,580,330  6,968,799  
Significant Accounting Policies
Product Revenues
In May 2020, the Company began generating product revenue from sales of QINLOCK to specialty distributors and specialty pharmacies in the U.S. following the approval of QINLOCK by the FDA on May 15, 2020 for the treatment of adult patients with advanced GIST who have received prior treatment with three or more kinase inhibitors, including imatinib.
The Company recognizes product revenues, net of variable consideration related to certain allowances and accruals, when the customer takes control of the product, which is typically upon delivery to the customer. Product revenue is recorded at the net sales price, or transaction price. The Company records product revenue reserves, which are classified as a reduction in product revenues, to account for the components of variable consideration. Variable consideration includes the following components: chargebacks, government rebates, trade discounts and allowances, product returns, and other incentives, which are described below.
These reserves are based on estimates of 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 Company's customer) or a liability (if the amount is payable to a party other than the Company's customer). The Company's estimates of reserves established for variable consideration are calculated based upon a consistent application of the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. These estimates reflect 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. The amount of variable consideration that is included in the transaction price may be subject to constraint and is included in net product revenues 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 received may ultimately differ from the Company's estimates. If actual results vary, the Company adjusts these estimates, which could have an effect on earnings in the period of adjustment.
Chargebacks and Administrative Fees: Chargebacks for discounts represent the Company's estimated obligations resulting from contractual commitments to sell product to qualified healthcare providers and government agencies at prices lower than the
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Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

list prices charged to the customers who directly purchase the product from the Company. The customers charge the Company for the difference between what the customers pay the Company for the product and the customer's ultimate contractually committed or government required lower selling price to the qualified healthcare providers. As part of the Company's contractual commitments to sell product to qualified healthcare providers, the Company pays fees for administrative services, such as account management and data reporting.
Government rebates: Government rebates consist of Medicare, Tricare, and Medicaid rebates. These reserves are recorded in the same period the related revenue is recognized. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom it will owe a rebate under the Medicare Part D program.
Trade discounts and allowances: The Company provides the customers with discounts that are explicitly stated in the contracts and recorded in the period the related product revenue is recognized. In addition, the Company also receives sales order management, inventory management, and data services from the customers in exchange for certain fees.
Product returns: The Company estimates the amount of its product sales that may be returned by its customers and records this estimate in the period the related product revenue is recognized. The Company currently estimates product return liabilities based on available industry data and its visibility into the inventory remaining in the distribution channel.
Other incentives: Other incentives include co-payment assistance provided to qualified patients, whereby the Company may provide financial assistance to patients with prescription drug co-payments required by the patient's insurance provider. Reserves for co-payment assistance are recorded in the same period the related revenue is recognized.
Accounts Receivable
Accounts receivable arise from product sales and amounts due from the Company's collaboration partners and have standard payment terms that generally require payment within 30 to 90 days. The amount from product sales represents amounts due from specialty distributors and specialty pharmacies in the U.S., which are recorded net of reserves for customer chargebacks, trade discounts and allowances, and other incentives to the extent such amounts are payable to the customer by the Company. The Company monitors economic conditions to identify facts or circumstances that may indicate that its receivables are at risk of collection. The Company provides reserves against accounts receivable for estimated losses, if any, that may result from a customer's inability to pay based on the composition of its accounts receivable, current economic conditions, and historical credit loss activity. Amounts determined to be uncollectible are charged or written-off against the reserve. During the three and six months ended June 30, 2020, the Company did not record any expected credit losses related to outstanding accounts receivable.
Inventory
Inventories are stated at the lower of cost or estimated net realizable value with cost based on the first-in first-out method. Inventory that can be used in either the production of clinical or commercial products is expensed as research and development costs when identified for use in clinical trials.
Prior to the regulatory approval of its drug candidates, the Company incurs expenses for the manufacture of drug product supplies to support clinical development that could potentially be available to support the commercial launch of those drugs. Until the date at which regulatory approval has been received or is otherwise considered probable, the Company records all such costs as research and development expenses.
The Company performs an assessment of the recoverability of capitalized inventories during each reporting period and writes down any excess and obsolete inventory to its net realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded as a component of cost of sales in the Company's consolidated statements of operations and comprehensive loss. The determination of whether inventory costs will be realizable requires the use of estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required.
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Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

The Company commenced the capitalization of QINLOCK inventory in May 2020 upon receiving FDA approval of QINLOCK. Capitalized inventory consisted of the following:
(in thousands)As of June 30, 2020
Raw materials$765  
Work in process624  
Total inventory$1,389  
There were no inventory amounts written down as a result of excess, obsolescence, unmarketability, or other reasons charged to cost of sales during the three and six months ended June 30, 2020.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed below, the Company does not believe that the adoption of recently issued standards have or may have a material impact on its consolidated financial statements or disclosures.
Credit Losses
In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2020. This standard requires entities to estimate an expected lifetime credit loss on financial assets and report credit losses using an expected losses model rather than the incurred losses model that was previously used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. This standard 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.
This standard became effective for the Company on January 1, 2020, and adoption of this standard did not have a material impact on the consolidated financial statements and related disclosures.
2. Revenues
Net Product Revenues
On May 15, 2020, QINLOCK was approved by the FDA for the treatment of adult patients with advanced GIST who have received prior treatment with three or more kinase inhibitors, including imatinib.
As of June 30, 2020, the Company's only source of product revenues were from the U.S. sales of QINLOCK, with total net product revenues of $4.8 million for the three and six months ended June 30, 2020.
The Company primarily sells QINLOCK through specialty distributors and specialty pharmacies. The Company recognized revenues from two customers accounting for 50% and 33% of gross product revenues for the three and six months ended June 30, 2020. As of June 30, 2020, two customers individually accounted for approximately 51% and 32% of accounts receivable associated with the Company's product sales.
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Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

Activity in each of the product revenue allowance and reserve categories is summarized as follows:
(in thousands)Trade discounts and allowances
Chargebacks and administrative fees
Government rebates and other incentivesReturnsTotal
Balance at December 31, 2019$  $  $  $  $  
Provision related to sales in the current year165  142  221  119  647  
Adjustments related to prior period sales          
Credits and payments made(58) (52) (28)   (138) 
Balance at June 30, 2020$107  $90  $193  $119  $509  
The total reserves described above are summarized as components of the Company's consolidated balance sheets as follows:
(in thousands)As of June 30, 2020
Reduction of accounts receivable, net$305  
Component of accrued expenses and other current liabilities204  
Total revenue-related reserves$509  
As of June 30, 2020, net receivables related to the Company's net product revenue were $5.1 million, which were included in accounts receivable, net within the consolidated balance sheet.
Collaboration Revenues
In June 2019, the Company entered into a License Agreement (the Zai License Agreement) with Zai Lab (Shanghai) Co., Ltd. (Zai), pursuant to which the Company granted Zai exclusive rights to develop and commercialize QINLOCK, including certain follow-on compounds (the Licensed Products), in Greater China (the Territory). The Company retains exclusive rights to, among other things, develop, manufacture, and commercialize the Licensed Products outside the Territory.
Pursuant to the terms of the Zai License Agreement, the Company received an upfront cash payment of $20.0 million and became eligible to receive up to $185.0 million in potential development and commercial milestone payments, consisting of up to $50.0 million of development milestones and up to $135.0 million of commercial milestones. In addition, during the term of the Zai License Agreement, Zai will be obligated to pay the Company tiered percentage royalties ranging from low to high teens on potential annual net sales of the Licensed Products in the Territory, subject to adjustments in specified circumstances.
Under the Zai License Agreement, the Company recognized revenue of $25.0 million during the second quarter of 2019, which consisted of the $20.0 million upfront payment and a $5.0 million INTRIGUE study-related development milestone payment, which the Company believed to be probable of achievement in the second quarter of 2019 and was achieved in July 2019.
Under the Zai License Agreement, during the three and six months ended June 30, 2020, the Company recognized revenues of $2.1 million, which consisted of the achievement of a $2.0 million development milestone in the second quarter of 2020 and $0.1 million in reimbursable costs.
Subject to the terms and conditions of the Zai License Agreement, Zai will be responsible for conducting the development and commercialization activities in the Territory related to the Licensed Products. Please read Note 3, License Agreement, to the consolidated financial statements in the Company's Form 10-K for the year ended December 31, 2019 for further details on the Zai License Agreement.
In February 2020, the Company entered into a Supply Agreement (the Zai Supply Agreement) with Zai, as required by terms in the Zai License Agreement, pursuant to which the Company will supply the Licensed Products to Zai for use in the Territory for clinical trials as well as commercial inventory, if QINLOCK obtains regulatory approval in the Territory. Subject to the Zai Supply Agreement, costs incurred by the Company for external manufacturing services are reimbursed by Zai.
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Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

Under the Zai Supply Agreement, the Company recognized revenues of $0.1 million and $0.2 million associated with the reimbursement of costs incurred for external manufacturing services provided during the three and six months ended June 30, 2020, respectively.
The Company's receivables related to its agreements with Zai included in accounts receivable, net within the consolidated balance sheets were $2.3 million as of June 30, 2020. There were no receivables related to the Company's agreements with Zai as of December 31, 2019.
3. Marketable Securities and Fair Value Measurements
The following tables present marketable securities by contractual maturity and security type:
As of June 30, 2020 (in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Due within one year:
U.S. government securities$454,878  $75  $(63) $454,890  
Due after one year through five years:
U.S. government securities21,451    (20) 21,431  
Total$476,329  $75  $(83) $476,321  

As of December 31, 2019 (in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Due within one year:
Commercial paper$314,292  $74  $(23) $314,343  
U.S. government securities78,612  48  (3) 78,657  
Certificates of deposit66,241  17  (2) 66,256  
Total$459,145  $139  $(28) $459,256  
The following tables present information about the Company's financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:
As of June 30, 2020 (in thousands)Level 1Level 2Level 3Total
Cash equivalents:
Money market funds$  $120,776  $  $120,776  
U.S. government securities  20,600    20,600  
Marketable securities:
U.S. government securities  476,321    476,321  
Total$  $617,697  $  $617,697  

As of December 31, 2019 (in thousands)Level 1Level 2Level 3Total
Cash equivalents:
Money market funds$  $28,192  $  $28,192  
Certificates of deposit  20,500