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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

_____________________________

FORM 10-Q

_____________________________

(Mark One)

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

For the quarterly period ended September 30, 2020

OR

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

Commission file number 001-37359

_____________________________

BLUEPRINT MEDICINES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

_____________________________

Delaware

 

26-3632015

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

45 Sidney Street

Cambridge, Massachusetts

 

02139

(Address of Principal Executive Offices)

 

(Zip Code)

(617374-7580

(Registrant’s Telephone Number, Including Area Code)

(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, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Non-accelerated filer  

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

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, par value $0.001 per share

BPMC

Nasdaq Global Select Market

Number of shares of the registrant’s common stock, $0.001 par value, outstanding on October 26, 2020: 55,730,804

Table of Contents

TABLE OF CONTENTS

Page

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

4

Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

4

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019

5

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019

6

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

7

Notes to Condensed Consolidated Financial Statements

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3. Quantitative and Qualitative Disclosures About Market Risk

46

Item 4. Controls and Procedures

47

Part II – OTHER INFORMATION

Item 1. Legal Proceedings

48

Item 1A. Risk Factors

48

Item 6. Exhibits

93

Signatures

94

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Unless otherwise stated, all references to “us,” “our,” “Blueprint,” “Blueprint Medicines,” “we,” the “Company” and similar designations in this Quarterly Report on Form 10-Q refer to Blueprint Medicines Corporation and its consolidated subsidiaries. Blueprint Medicines, AYVAKIT, AYVAKYT®, GAVRETO and associated logos are trademarks of Blueprint Medicines Corporation. Other brands, names and trademarks contained in this Quarterly Report on Form 10-Q are the property of their respective owners.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “aim,” “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would” or the negative of these words or other comparable terminology, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

the timing or likelihood of regulatory actions, filings and approvals for our current and future drug candidates, including our ability to obtain marketing approval for avapritinib and pralsetinib for additional indications or in additional geographies;
our ability and plans in continuing to build out our commercial infrastructure and successfully launching, marketing and selling AYVAKIT™ (avapritinib) (marketed in Europe under the brand name AYVAKYT®), GAVRETO™ (pralsetinib) and any current and future drug candidates for which we receive marketing approval;
the rate and degree of market acceptance of AYVAKIT/AYVAKYT, GAVRETO and any current and future drug candidates for which we receive marketing approval;
the pricing and reimbursement of AYVAKIT/AYVAKYT, GAVRETO and any current and future drug candidates for which we receive marketing approval;
the initiation, timing, progress and results of our pre-clinical studies and clinical trials, including our ongoing clinical trials and any planned clinical trials for avapritinib, pralsetinib, fisogatinib, BLU-263, BLU-945 and our research and development programs;
our ability to advance drug candidates into, and successfully complete, clinical trials;
our ability to successfully develop manufacturing processes for any of our current and future drugs or drug candidates and to secure manufacturing, packaging and labeling arrangements for development activities and commercial production;
the implementation of our business model and strategic plans for our business, drugs, drug candidates, platform and technology;
the scope of protection we are able to establish and maintain for intellectual property rights covering our current and future drugs, drug candidates and technology;
the potential benefits of our collaboration with F. Hoffmann-La Roche Ltd and Genentech, Inc. to develop and commercialize pralsetinib globally (excluding Greater China), our cancer immunotherapy collaboration with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc., and our collaboration with CStone Pharmaceuticals to develop and commercialize avapritinib, pralsetinib and fisogatinib in Greater China, as well as our ability to maintain these collaborations and establish additional strategic collaborations;
the potential benefits of our exclusive license agreement with Clementia Pharmaceuticals, Inc. to develop and commercialize BLU-782 for fibrodysplasia ossificans progressiva;

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the development of companion diagnostic tests for our current or future drugs or drug candidates;
our financial performance, estimates of our revenues, expenses and capital requirements and our needs for future financing, including our ability to achieve a self-sustainable financial profile;
developments relating to our competitors and our industry;
the actual or potential benefits of designations granted by the U.S. Food and Drug Administration, or FDA, such as orphan drug, fast track and breakthrough therapy designation or priority review, and the review of current or future new drug applications under the FDA’s Oncology Center of Excellence Real-Time Oncology Review pilot program or the FDA’s Project Orbis initiative; and
the impact and scope of the COVID-19 pandemic on our business, operations, strategy, goals and anticipated milestones, including our ongoing and planned research and discovery activities, ability to conduct ongoing and planned clinical trials, clinical supply of current or future drug candidates, and the launch, marketing, sale and commercial supply of AYVAKIT/AYVAKYT, GAVRETO and any current or future drug candidates for which we receive marketing approval.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or enter into.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results, performance or achievements may be materially different from what we expect. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

For purposes of this Quarterly Report on Form 10-Q, including the footnotes to our condensed consolidated financial statements, (i) with respect to our collaboration for pralsetinib, Roche means F. Hoffmann-La Roche Ltd and Genentech, Inc., and (ii) with respect to our cancer immunotherapy collaboration, Roche means F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Blueprint Medicines Corporation

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

September 30, 

December 31, 

    

2020

    

2019

 

Assets

Current assets:

Cash and cash equivalents

$

565,221

$

113,938

Investments, available-for-sale

192,209

369,616

Accounts receivable, net

44,369

663

Unbilled accounts receivable

16,887

22,749

Inventory

5,565

Prepaid expenses and other current assets

 

17,404

 

9,820

Total current assets

 

841,655

 

516,786

Investments, available-for-sale

 

598,470

64,406

Property and equipment, net

35,199

 

38,361

Operating lease right-of-use assets, net

69,020

72,753

Restricted cash

 

5,168

 

5,166

Other assets

 

8,666

 

10,222

Total assets

$

1,558,178

$

707,694

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

2,929

4,793

Accrued expenses

 

89,116

 

88,706

Current portion of operating lease liabilities

7,672

6,823

Current portion of deferred revenue

10,391

6,160

Total current liabilities

 

110,108

 

106,482

Operating lease liabilities, net of current portion

83,735

89,126

Deferred revenue, net of current portion

35,017

39,913

Other long-term liabilities

9,318

7,814

Total liabilities

238,178

243,335

Commitments (Note 15)

Stockholders’ equity:

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

Common stock, $0.001 par value; 120,000,000 shares authorized; 55,514,395 and 49,272,223 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

56

 

49

Additional paid-in capital

 

1,867,572

 

1,412,083

Accumulated other comprehensive loss

(1,940)

(2,535)

Accumulated deficit

 

(545,688)

 

(945,238)

Total stockholders’ equity

 

1,320,000

 

464,359

Total liabilities and stockholders’ equity

$

1,558,178

$

707,694

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Blueprint Medicines Corporation

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share data)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2020

    

2019

    

2020

    

2019

Revenues:

Product revenue, net

$

6,308

$

$

15,446

$

Collaboration revenue

738,810

9,139

744,183

14,979

Total revenues

745,118

9,139

759,629

14,979

Cost and operating expenses:

Cost of sales

146

297

Research and development

74,230

81,453

249,456

242,804

Selling, general and administrative

 

37,375

 

25,647

 

115,203

64,123

Total cost and operating expenses

 

111,751

 

107,100

 

364,956

 

306,927

Other income (expense):

Interest income, net

 

1,173

 

3,758

 

5,663

10,742

Other income (expense), net

 

(192)

 

(72)

 

(416)

(157)

Total other income

 

981

 

3,686

 

5,247

 

10,585

Income (loss) before income taxes

634,348

(94,275)

399,920

(281,363)

Income tax expense

370

370

Net income (loss)

$

633,978

$

(94,275)

$

399,550

$

(281,363)

Other comprehensive income (loss):

Unrealized gain (losses) on available-for-sale investments

(777)

(287)

658

828

Currency translation adjustments

(43)

(3)

(64)

(10)

Comprehensive income (loss)

$

633,158

$

(94,565)

$

400,144

$

(280,545)

Net income (loss) per share - basic

$

11.49

$

(1.93)

$

7.40

$

(5.94)

Net income (loss) per share - diluted

11.16

(1.93)

7.20

(5.94)

Weighted-average number of common shares used in net income (loss) per share - basic

55,169

48,921

54,018

47,361

Weighted-average number of common shares used in net income (loss) per share - diluted

 

56,786

 

48,921

 

55,492

47,361

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Blueprint Medicines Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(Unaudited)

Accumulated

 

Additional

Other

 

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

 

    

Shares

    

Amount

    

Capital

    

Loss

Deficit

Equity

 

Balance at December 31, 2019

49,272,223

$

49

$

1,412,083

$

(2,535)

$

(945,238)

$

464,359

Issuance of common stock under stock plan

186,166

1

1,612

 

1,613

Stock-based compensation expense

17,026

 

17,026

Follow on offering, net of issuance costs

4,710,144

4

308,419

308,423

Unrealized gain (loss) on available-for-sale securities

2,492

2,492

Cumulative translation adjustment

(26)

(26)

Net income (loss)

(110,954)

 

(110,954)

Balance at March 31, 2020

54,168,533

$

54

$

1,739,140

$

(69)

$

(1,056,192)

$

682,933

Issuance of common stock under stock plan

98,950

$

$

2,335

$

$

$

2,335

Purchase of common stock under ESPP

17,018

942

942

Stock-based compensation expense

19,675

19,675

Unrealized gain (loss) on available-for-sale securities

(1,057)

(1,057)

Cumulative translation adjustment

6

6

Net income (loss)

(123,474)

(123,474)

Other

7

7

Balance at June 30, 2020

54,284,501

$

54

$

1,762,099

$

(1,120)

$

(1,179,666)

$

581,367

Issuance of common stock under stock plan

194,375

$

1

$

6,279

$

$

$

6,280

Stock-based compensation expense

19,889

19,889

Issuance of common stock related to collaboration agreement

1,035,519

1

79,305

79,306

Unrealized gain (loss) on available-for-sale securities

(777)

(777)

Cumulative translation adjustment

(43)

(43)

Net income (loss)

633,978

633,978

Balance at September 30, 2020

55,514,395

$

56

$

1,867,572

$

(1,940)

$

(545,688)

$

1,320,000

Balance at December 31, 2018

 

44,037,026

$

44

$

1,016,690

$

(180)

$

(597,545)

$

419,009

Issuance of common stock under stock plan

134,439

2,061

 

2,061

Stock-based compensation expense

10,295

 

10,295

Unrealized gain (loss) on available-for-sale securities

270

270

Cumulative translation adjustment

(15)

(15)

Net income (loss)

(87,407)

 

(87,407)

Balance at March 31, 2019

44,171,465

$

44

$

1,029,046

$

75

$

(684,952)

$

344,213

Issuance of common stock under stock plan

215,299

5,813

5,813

Purchase of common stock under ESPP

10,718

522

522

Follow on offering, net of issuance costs

4,662,162

5

327,437

327,442

Stock-based compensation expense

13,666

13,666

Unrealized gain (loss) on available-for-sale securities

845

845

Cumulative translation adjustment

7

7

Net income (loss)

(99,681)

(99,681)

Balance at June 30, 2019

49,059,644

$

49

$

1,376,484

$

927

$

(784,633)

$

592,827

Issuance of common stock under stock plan

115,798

3,089

3,089

Stock-based compensation expense

14,993

14,993

Follow on offering, net of issuance costs

Unrealized gain (loss) on available-for-sale securities

(287)

(287)

Cumulative translation adjustment

(3)

(3)

Net income (loss)

(94,275)

(94,275)

Balance at September 30, 2019

49,175,442

$

49

$

1,394,566

$

637

$

(878,908)

$

516,344

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Blueprint Medicines Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

Nine Months Ended

September 30, 

    

2020

    

2019

Cash flows from operating activities

Net income (loss)

$

399,550

$

(281,363)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

 

4,887

3,685

Noncash lease expense

 

4,289

3,649

Stock-based compensation

56,022

38,954

Accretion of premiums and discounts on investments

 

245

(4,366)

Other

328

Changes in assets and liabilities:

 

Accounts receivable

(43,705)

(2,350)

Unbilled accounts receivable

5,862

(2,417)

Inventory

(4,491)

Prepaid expenses and other current assets

(7,266)

(7,175)

Other assets

 

1,796

(58)

Accounts payable

 

(1,978)

(1,095)

Accrued expenses

1,573

26,408

Deferred revenue

 

(666)

(4,836)

Operating lease liabilities

(4,612)

(2,156)

Net cash provided by (used in) operating activities

 

411,834

(233,120)

Cash flows from investing activities

 

Purchases of property and equipment

(2,472)

(10,122)

Purchases of investments

(796,980)

(597,514)

Maturities of investments

440,735

523,434

Net cash used in investing activities

 

(358,717)

(84,202)

Cash flows from financing activities

 

Proceeds from public offerings of common stock, net of issuance cost

308,750

327,466

Net proceeds from stock option exercises and employee stock purchase plan

 

9,921

11,454

Issuance of common stock related to collaboration agreement

79,305

Other financing activities

 

(310)

(116)

Net cash provided by financing activities

 

397,666

338,804

Net increase in cash, cash equivalents, and restricted cash

450,783

21,482

Cash, cash equivalents and restricted cash at beginning of period

119,604

73,429

Effect of exchange rate changes on cash, cash equivalents and restricted cash

2

(10)

Cash, cash equivalents and restricted cash at end of period

$

570,389

$

94,901

Supplemental cash flow information

Public offering costs incurred but unpaid at period end

$

6

$

25

Property and equipment purchases unpaid at period end

$

209

$

3,225

Cash paid for taxes, net

$

68

$

130

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands).

September 30, 

September 30, 

2020

2019

Cash and cash equivalents

$

565,221

$

89,237

Restricted cash included in prepaid expenses and other current assets

500

Restricted cash

5,168

5,164

Total cash, cash equivalents, and restricted cash shown in condensed consolidated statements of cash flows

$

570,389

$

94,901

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Blueprint Medicines Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Business

Blueprint Medicines Corporation (the Company), a Delaware corporation incorporated on October 14, 2008, is a precision therapy company focused on genomically defined cancers, rare diseases and cancer immunotherapy. The Company’s approach is to leverage its novel target discovery engine to systematically and reproducibly identify kinases that are drivers of diseases and to craft highly selective and potent drug candidates that may provide significant and durable clinical responses for patients without adequate treatment options. The Company has two approved precision therapies and is currently advancing multiple investigational medicines in clinical and pre-clinical development, along with a number of earlier stage research programs. The Company is devoting substantially all of its efforts to research and development for current and future drug candidates and commercialization of AYVAKIT/AYVAKYT, GAVRETO and any current or future drug candidates that obtain marketing approval.

As of September 30, 2020, the Company had cash, cash equivalents and investments of $1,355.9 million. Based on the Company’s current operating plans, the Company anticipates that its existing cash, cash equivalents and investments will be sufficient to enable it to fund its current operations for at least the next twelve months from the issuance of the financial statements.

2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Basis of Presentation

The unaudited interim condensed consolidated financial statements of the Company included herein have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) as found in the Accounting Standards Codification (ASC), Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB) and the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 13, 2020 (the 2019 Annual Report on Form 10-K).

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements, and updated, as necessary, in this report. In the opinion of the Company’s management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments that are necessary to present fairly the Company’s financial position as of September 30, 2020, the results of its operations for the three and nine months ended September 30, 2020 and 2019, stockholder’s equity for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results for the year ending December 31, 2020 or for any future period.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Blueprint Medicines Security Corporation, which is a Massachusetts subsidiary created to buy, sell and hold securities, Blueprint Medicines (Switzerland) GmbH, Blueprint Medicines (Netherlands) B.V., Blueprint Medicines (UK) Ltd, Blueprint Medicines (Germany) GmbH, Blueprint Medicines Spain, S.L., Blueprint Medicines (France) SAS and Blueprint Medicines (Italy) S.r.L. All intercompany transactions and balances have been eliminated.

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and in developing the estimates and assumptions that are used in the preparation of the financial statements. Management must apply significant judgment in this process. Management’s estimation process often may yield a range of potentially reasonable estimates and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following areas, among others: revenue recognition, operating lease right-of-use assets, operating lease liabilities, stock-based compensation expense, accrued expenses, and income taxes. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact thereof on local, regional, national and international customers and markets. The Company had made estimates of the impact of COVID-19 within its financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates.

Significant Accounting Policies

The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and nine months ended September 30, 2020 are consistent with those discussed in Note 2 to the consolidated financial statements in the 2019 Annual Report on Form 10-K, except as noted below with respect to the Company’s accounting policies for product revenue, accounts receivable, and inventory.

Product Revenue

The Company generated product revenue from sales of AYVAKIT and GAVRETO to a limited number of specialty distributors and specialty pharmacy providers in the U.S. These customers subsequently resell the products or dispense the products directly to patients. In addition, the Company entered into arrangements with payors that provide for government mandated rebates, discounts and allowances with respect to the utilization of its products.

Product revenue is recognized when the customer takes control of the product, typically upon delivery to the customer. Product revenue is recorded at the net sales price, or transaction price, which includes estimated reserves for variable consideration resulting from chargebacks, government rebates, trade discounts and allowances, product returns and other incentives that are offered within the contract with customers, healthcare providers, payors and other indirect customers relating to the sales of the Company’s product. Reserves are established based on the amounts earned or to be claimed on the related sales. Where appropriate, the Company utilizes the expected value method to determine the appropriate amount for estimates of variable consideration based on factors such as the Company’s 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 constrained 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 ultimately received may differ from the Company’s estimates. If actual results vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.

Chargebacks: Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell product to qualified healthcare providers and government agencies at prices lower than the list prices charged to the customers who directly purchase the product from the Company. The customers charge the Company for the difference between what they pay for the product and the ultimate contractually committed or government required lower selling price to the qualified healthcare providers. These reserves are estimated using the expected value method based upon a range of possible outcomes and are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue.

Government rebates: Government rebates consist of Medicare, Tricare and Medicaid rebates, which were estimated using the expected value method, based upon a range of possible outcomes for the estimated payor mix. These

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reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue. 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 as a reduction of revenue 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 as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using expected value method based on available industry data and its visibility into the inventory remaining in the distribution channel.

Other deductions: Co-pay assistance relates to financial assistance provided to qualified patients, whereby the Company may assist them with prescription drug co-payments required by the patient’s insurance provider. Reserves for co-pay assistance are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue.

Accounts Receivable, net

Accounts receivable arise from product sales and amounts due from the Company’s collaboration partners. The amount from product sales represents amounts due from specialty pharmacy providers in the U.S. 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 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. For the three and nine months ended September 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 product sales in the condensed 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.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the 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 condensed consolidated financial statements and disclosures.

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Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued amendments to ASU 2016-13, which had the same effective date and transition date of January 1, 2020. These standards require that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establish additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, these standards now require 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.

The Company adopted the new standard on a prospective basis on January 1, 2020 and has completed the assessment of the standard based on the composition of its accounts receivable, investment portfolio of financial instruments, current and forecasted economic conditions and historical credit loss activity as of January 1, 2020. The adoption of this standard did not have a significant impact on the Company’s condensed consolidated financial statements and related disclosures.

Fair Value Measurements

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 standard modifies certain disclosure requirements on fair value measurements. The Company adopted the new standard on January 1, 2020 and the adoption of this standard did not have a material impact on related disclosures.

Collaborative Arrangements

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This standard makes targeted improvements for collaborative arrangements as follows:

Clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606, Revenue from Contracts with Customers, when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in ASC 606 should be applied, including recognition, measurement, presentation and disclosure requirements;
Adds unit-of-account guidance to ASC 808, Collaborative Arrangements, to align with the guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606; and
Requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting that transaction together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer.

The Company adopted the new standard on January 1, 2020. A retrospective transition approach is required for either all contracts or only for contracts that are not completed at the date of initial application of ASC 606, with a cumulative adjustment to opening retained earnings. The adoption of this standard did not have a material impact on its condensed consolidated financial position and results of operations.

Internal-Use Software

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, which clarifies the accounting for implementation costs in cloud computing arrangements. The standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, and can be adopted prospectively or retrospectively.

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The Company adopted the new standard on January 1, 2020 on a prospective basis. The adoption of this standard did not have a significant impact on the Company’s condensed consolidated financial position and results of operations. However, the adoption of this standard will result in an increase in capitalized assets related to qualifying cloud computing arrangement implementation costs incurred after the adoption date.

Income Taxes

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in the accounting standards. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The amendments in ASU 2019-12 are effective for the fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The Company has early adopted this amendment as of January 1, 2020. The adoption of the standard did not have a material impact to the Company’s condensed consolidated financial position and results of operations as well as related income tax disclosures.

Reclassification

Certain items in the prior year’s condensed consolidated financial statements have been reclassified to conform to the current presentation.

3. Cash Equivalents and Investments

Cash equivalents and investments, available-for-sale, consisted of the following at September 30, 2020 and December 31, 2019 (in thousands):

Amortized

Unrealized

Unrealized

Fair

September 30, 2020

Cost

 

Gain

Losses

Value

Cash equivalents:

Money market funds

$

565,221

$

$

$

565,221

U.S. treasury obligations

Investments, available-for-sale:

U.S. government agency securities 

643,513

598

(173)

643,938

U.S. treasury obligations

146,002

740

(1)

146,741

Total

$

1,354,736

$

1,338

$

(174)

$

1,355,900

Amortized

Unrealized

Unrealized

Fair

December 31, 2019

Cost

 

Gain

Losses

Value

Cash equivalents:

Money market funds

$

98,946

$

$

$

98,946

U.S. treasury obligations

14,992

14,992

Investments, available-for-sale:

U.S. government agency securities