The following discussion also should be read in conjunction with our consolidated financial statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled Risk Factors, Cautionary Note Regarding Forward-Looking Statements and elsewhere herein, our actual results may differ materially from those anticipated in these forward-looking statements.
We are a global biopharmaceutical company on a mission to transform the lives of patients with serious and rare diseases. Our first commercial product, ARIKAYCE, was approved in the US in
September 2018, in the EU in October 2020and in Japanin March 2021. Our clinical-stage pipeline includes brensocatib and TPIP. Brensocatib is a small molecule, oral, reversible inhibitor of DPP1, which we are developing for the treatment of patients with bronchiectasis, CF and other neutrophil-mediated diseases. TPIP is an inhaled formulation of the treprostinil prodrug treprostinil palmitil which may offer a differentiated product profile for PAH and PH-ILD. We have legal entities in the US, France, Germany, Ireland, Italy, the Netherlands, Switzerland, the UKand Japan. Refer to Part I, Item 1. "Business" for a summary of our ongoing commercial and clinical programs for ARIKAYCE and our ongoing clinical programs for brensocatib and TPIP. Prior to 2019, we had not generated significant revenue and through December 31, 2021, we had an accumulated deficit of $2.3 billion. We have financed our operations primarily through the public offerings of our equity securities and debt financings. Although it is difficult to predict our future funding requirements, based upon our current operating plan, we anticipate that our cash and cash equivalents and marketable securities as of December 31, 2021will enable us to fund our operations for at least the next 12 months. Our ability to reduce our operating loss and begin to generate positive cash flow from operations depends on the continued success in commercializing ARIKAYCE and achieving positive results from the ARIKAYCE frontline clinical trial program in order to obtain full approval of ARIKAYCE in the US and potentially reach more patients. Additionally, our continued success also depends on bringing additional clinical stage products to market, such as brensocatib and TPIP. We expect to continue to incur substantial expenses related to our research and development activities as we continue the ARIKAYCE frontline clinical program, conduct the Phase 3 ASPEN trial for brensocatib, and continue the trials for TPIP and future product candidates. We also expect to continue to incur significant costs related to the commercialization of ARIKAYCE. Our financial results may fluctuate from quarter to quarter and will depend on, among other factors, the net sales of ARIKAYCE; the scope and progress of our research and development efforts; and the timing of certain expenses. We cannot predict whether or when new products or new indications for marketed products will receive regulatory approval or, if any such approval is received, whether we will be able to successfully commercialize such products and whether or when they may become profitable.
KEY ELEMENTS OF OUR OPERATING RESULTS
Product revenue, net
Product revenues, net, consist of net sales of ARIKAYCE. In
October 2018, we began shipping ARIKAYCE to our customers in the US, which include specialty pharmacies and specialty distributors. In December 2020and February 2021, we began commercial sales of ARIKAYCE in Germanyand the Netherlands, respectively. In July 2021, we began recognizing product revenue from commercial sales of ARIKAYCE in Japan. In September 2021, we began commercial sales of ARIKAYCE in Wales. We recognize revenue for product received by our customers net of allowances for customer credits, including prompt pay discounts, service fees, estimated rebates, including government rebates, such as Medicaid rebates and Medicare Part D coverage gap reimbursements in the US, and chargebacks.
Cost of product revenue (excluding amortization of intangible assets)
Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, and allocation of overhead costs, in addition to royalty expenses and revenue-based milestones. We began capitalizing inventory upon FDA approval of ARIKAYCE. All costs related to inventory for ARIKAYCE prior to FDA approval were expensed as incurred and therefore not included in cost of product revenues.
Research and development (R&D) expenditure
R&D expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our research and development functions, including medical affairs and program management. R&D 61
expenses also includes other internal operating expenses, the cost of manufacturing product candidates, including the medical devices for drug delivery, for clinical study, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. In addition, R&D expenses include payments to third parties for the license rights to products in development (prior to marketing approval), such as brensocatib. Our R&D expenses related to manufacturing our product candidates and medical devices for clinical study are primarily related to activities at CMOs that manufacture brensocatib and TPIP. Our R&D expenses related to clinical trials are primarily related to activities at CROs that conduct and manage clinical trials on our behalf. These contracts with CROs set forth the scope of work to be completed at a fixed fee or amount per patient enrolled. Payments under these contracts with CROs primarily depend on performance criteria such as the successful enrollment of patients or the completion of clinical trial milestones as well as time-based fees. Expenses are accrued based on contracted amounts applied to the level of patient enrollment and to activity according to the clinical trial protocol. Deposits for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed.
Selling, general and administrative (SG&A) expenses
SG&A expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for our non-employee directors and personnel serving in our executive, finance and accounting, legal and compliance, commercial and pre-commercial, corporate development, field sales, information technology and human resource functions. SG&A expenses also include professional fees for legal services, consulting services, including commercial activities, insurance, board of director fees, tax and accounting services and certain milestones related to ARIKAYCE.
Amortization of intangible assets
Upon commercialization of ARIKAYCE, our intangible assets began to be amortized over their estimated useful lives. The fair values assigned to our intangible assets are based on estimates and assumptions we believe are reasonable based on available facts and circumstances. Unanticipated events or circumstances may occur that require us to review the assets for impairment.
Change in fair value of deferred and contingent consideration liabilities
In connection with our acquisitions of Motus and AlgaeneX in
August 2021(the Business Acquisition), we recorded deferred and contingent consideration liabilities related to potential future milestone payments. Adjustments to the fair value are due to changes in: the probability of achieving milestones; our stock price; or certain other estimated assumptions. The change in fair value of deferred and contingent consideration liabilities is calculated quarterly with gains and losses recorded in the consolidated statements of comprehensive loss.
Investment income and interest expense
Investment income consists of interest and dividend income earned on our cash and cash equivalents and marketable securities. Interest expense consists primarily of the accretion of debt discount, contractual interest costs and the amortization of debt issuance costs related to our debt. Debt discount is accreted, and debt issuance costs are amortized, to interest expense using the effective interest rate method over the term of the debt. Our balance sheet reflects debt, net of the debt discount, debt issuance costs paid to the lender, and other third-party costs. Unamortized debt issuance costs associated with extinguished debt are expensed in the period of the extinguishment.
RESULTS OF OPERATIONS
We are committed to the safety and well-being of our staff and have taken the following protective measures:
March 2020, we implemented a number of corporate initiatives in response to the COVID-19 pandemic. These initiatives included a remote working policy for all employees in order to aid the global containment effort and allow infectious disease specialists and pulmonologists to focus exclusively on treating patients and containing the virus. The policy included all of the field-based therapeutic specialists and employees who support ARIKAYCE prescribers. •Since June 2020, certain of our field-based employees who support ARIKAYCE prescribers were permitted to return to the field on a voluntary basis. To date, access to prescribers has been limited with significant regional variability. Our Arikares® trainers are continuing to offer remote training for patients who initiate treatment with ARIKAYCE. As COVID-19 infections in the US subsided and vaccination rates increased, we observed a resumption of activities, including field-based employees returning to the field, reopening of physician offices and patients returning to in-office visits. However, as new variants of COVID-19 emerge, some of these activities have recently been paused in certain regions. 62
•Since reopening our physical offices in the third quarter of 2020, we have put protocols in place at each location in adherence with local and state laws and with the health and safety of our employees in mind. As of
October 2021, we require all employees and visitors entering our corporate headquarters to be fully vaccinated. •Effective mid-December 2021, with the health and safety of our employees and ARIKAYCE physicians, caregivers, and patients in mind, we required that all US employees be fully vaccinated against COVID-19 with limited exceptions. Though we continue to see use of ARIKAYCE, including new patient adds and continued prescription renewals, there remains a general uncertainty regarding the impact of COVID-19 on all aspects of our business, including how it will impact our patients, physicians, employees, suppliers, vendors, business partners and distribution channels. While the pandemic did not materially affect our financial results and business operations through the year ended December 31, 2021, we are unable to predict the impact that COVID-19 will have on our financial position and operating results in future periods due to these and other numerous uncertainties. We will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to our operations as necessary.
Comparison of the years ended
Overview – Operating results
Our operating results for the year ended
• Product revenue, net, up
•Cost of product revenues (excluding amortization of intangibles) increased
$4.3 million, or 10.7%, as compared to the prior year as a result of the increase in sales of ARIKAYCE and the decrease in the benefit from the sale of inventory for which the cost was incurred prior to FDA approval of ARIKAYCE; •R&D expenses increased $91.6 million, or 50.6%, as compared to the prior year primarily resulting from increases in clinical development and research costs for our ongoing clinical trials; •SG&A expenses increased $30.7 million, or 15.1%, as compared to the prior year resulting from increases in compensation and benefit related expenses, as well as increases related to our commercial launch efforts in Europeand Japan;
•The amortization of intangible fixed assets was in line with that of the previous year;
•Change in fair value of deferred and contingent consideration liabilities was
$7.3 millionas a result of our Business Acquisition in the third quarter of 2021; and
• Interest charges increased
Net loss for the year ended
December 31, 2021was $434.7 million, or $3.88per share-basic and diluted, compared with a net loss of $294.1 million, or $3.01per share-basic and diluted, for the year ended December 31, 2020.
Product revenue, net
Product revenues, net, consists of net sales of ARIKAYCE. The following table summarizes revenue by geography for the years ended
December 31, 2021and 2020 (in thousands): For the Year Ended December 31, Increase (decrease) 2021 2020 $ % US $ 159,510 $ 157,520 $ 1,9901.3% Japan 16,006 - 16,006 NA Europe and rest of world 12,945 6,893 6,052 87.8% Total product revenues, net $ 188,461 $ 164,413 $ 24,04814.6% Product revenues, net, for the year ended December 31, 2021increased to $188.5 millionas compared to $164.4 millionin 2020 as a result of the growth in sales of ARIKAYCE due primarily to the launches in Japanand certain European markets. 63
Cost of product revenue (excluding amortization of intangible assets)
Cost of product revenues (excluding amortization of intangibles) for the years ended
December 31, 2021and 2020 were comprised of the following (in thousands): For the Year Ended December 31, Increase (decrease) 2021 2020 $ % Cost of product revenues (excluding amortization of intangibles) $ 44,152 $ 39,872 $ 4,28010.7% Cost of product revenues, as % of revenues 23.4 % 24.3 % Cost of product revenues (excluding amortization of intangibles) increased by $4.3 million, or 10.7%, to $44.2 millionfor the year ended December 31, 2021as compared to $39.9 millionin 2020. The increase in cost of product revenues (excluding amortization of intangibles) in the year ended December 31, 2021was directly attributable to the increase in total revenues discussed above.
R&D expenses for the years ended
December 31, 2021and 2020 were comprised of the following (in thousands): For the Years Ended December 31, Increase (decrease) 2021 2020 $ % External Expenses Clinical development and research $ 107,096 $ 45,709 $ 61,387134.3% Milestone payment to AstraZeneca - 12,500 (12,500) (100.0)% Manufacturing 29,503 16,912 12,591 74.5% Regulatory, quality assurance, and medical affairs 17,734 15,557 2,177 14.0% Subtotal-external expenses $ 154,333 $ 90,678 $ 63,65570.2% Internal Expenses Compensation and benefit related expenses $ 82,909 $ 63,507 $ 19,40230.6% Stock-based compensation 17,814 11,789 6,025 51.1% Other internal operating expenses 17,688 15,183 2,505 16.5% Subtotal-internal expenses $ 118,411 $ 90,479 $ 27,93230.9% Total R&D expenses $ 272,744 $ 181,157 $ 91,58750.6% R&D expenses increased to $272.7 millionduring the year ended December 31, 2021from $181.2 millionin 2020. The $91.6 millionincrease was primarily due to a $61.4 millionincrease in clinical development and research costs related to the Phase 3 ASPEN trial of brensocatib and the initiation of the ARIKAYCE frontline clinical trial program, a $25.4 millionincrease in compensation and benefit related expenses and stock-based compensation due to an increase in headcount, as well as a $12.6 millionincrease in manufacturing expenses to support ongoing clinical trials, partially offset by the prior year's $12.5 millionmilestone payment obligation due to AstraZeneca upon the first dosing in our Phase 3 ASPEN trial.
External R&D expenses by product for the years ended
For the Year Ended December 31, Increase (decrease) 2021 2020 $ %
ARIKAYCE external R&D expenses $61,887
$ 15,37833.1% Brensocatib external R&D expenses 62,065 37,775 24,290 64.3% Other external R&D expenses 30,381 6,394 23,987 375.1% Total external R&D expenses $ 154,333 $ 90,678 $ 63,65570.2% We expect R&D expenses to increase in 2022 relative to 2021 primarily due to our clinical trial activities and related spend including our Phase 3 ASPEN trial of brensocatib, our confirmatory clinical trial of ARIKAYCE in a front-line treatment setting for patients with MAC lung disease, our TPIP clinical trials and other research efforts for future product candidates. 64
Table of Contents SG&A Expenses
General and administrative expenses for the years ended
For the Years Ended December 31, Increase (decrease) 2021 2020 $ %
Compensation and benefits expenses $84,447
$ 70,923 $ 13,52419.1% Stock-based compensation 28,206 24,370 3,836 15.7% Professional fees and other external expenses 94,549 83,902 10,647 12.7% Facility related and other internal expenses 27,071 24,418 2,653 10.9% Total SG&A expenses $ 234,273 $ 203,613 $ 30,66015.1% SG&A expenses increased to $234.3 millionduring the year ended December 31, 2021from $203.6 millionin 2020. The $30.7 millionincrease was primarily due to a $17.4 millionincrease in compensation and benefit related expenses and stock-based compensation due to an increase in headcount, as well as a $10.6 millionincrease in professional fees and other external expenses primarily resulting from our commercial launch efforts in Japanand Europeand from resuming certain commercial activities in the US.
Amortization of intangible assets
Amortization of intangible assets for the years ended
December 31, 2021and 2020 was $5.1 millionand $5.0 million, respectively. Amortization of intangible assets is comprised of amortization of acquired ARIKAYCE R&D and amortization of the milestones paid to PARI for the FDA and EMA approvals of ARIKAYCE.
Change in fair value of deferred and contingent consideration liabilities
The change in fair value of deferred and contingent consideration liabilities for the year ended
December 31, 2021was $7.3 millionas a result of our Business Acquisition in the third quarter of 2021. Adjustments to the fair value are due to changes in factors such as the probability of achieving milestones, our stock price, or certain other estimated assumptions.
Interest charges were
(Benefit) Provision for income taxes
The income tax benefit was
$1.8 millionfor the year ended December 31, 2021and the income tax provision was $1.4 millionfor the year ended December 31, 2020. The income tax benefit for the year ended December 31, 2021is primarily due to the partial reversal of a valuation allowance as a result of the Business Acquisition in the third quarter of 2021. The income tax provision for the year ended December 31, 2020reflects the income tax expense recorded as a result of taxable income in certain of our subsidiaries in Europeand Japanas well as a liability for certain state income taxes.
Comparison of the years ended
Please refer to the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2020for a comparative discussion of our fiscal years ended December 31, 2020and December 31, 2019.
CASH AND CAPITAL RESOURCES
There is considerable time and cost associated with developing potential pharmaceutical products to the point of regulatory approval and commercialization. We commenced commercial shipments of ARIKAYCE in
October 2018. We expect to continue to incur consolidated operating losses, including losses at our US and certain international entities, as we plan to fund R&D for ARIKAYCE, brensocatib, TPIP and our other pipeline programs, continue pre-commercial, commercialization and regulatory activities for ARIKAYCE, and engage in other general and administrative activities. In May 2021, we completed an underwritten public offering of $575.0 millionaggregate principal amount of the 2028 Convertible Notes, including the exercise in full of the underwriters' option to purchase additional notes. Our net proceeds from the offering, after deducting underwriting discounts and offering expenses of $15.7 million, were $559.3 million. A portion of the net proceeds from the 2028 Convertible Notes was used to repurchase $225.0 millionof our outstanding 2025 Convertible 65
Remarks. We recorded a loss on early extinguishment of debt of
May 2021, we also completed an underwritten public offering of 11,500,000 shares of our common stock, including 1,500,000 shares issued pursuant to the exercise in full of the underwriters' option to purchase additional shares, at a public offering price of $25.00per share. Our net proceeds from the sale of the shares, after deducting the underwriting discounts and offering expenses of $17.5 million, were $270.1 million. In the first quarter of 2021, we entered into a sales agreement with SVB Leerinkto sell shares of our common stock, with aggregate gross sales proceeds of up to $250.0 million, from time to time, through an at-the market (ATM) offering program, under which SVB Leerinkacts as sales agent. As of December 31, 2021, we had not sold or issued any shares under the ATM program. In the second quarter of 2020, we completed an underwritten public offering of 11,155,000 shares of our common stock, including 1,455,000 shares issued pursuant to the exercise in full of the underwriters' option to purchase additional shares, at a public offering price of $23.25per share. Our net proceeds from the sale of the shares, after deducting the underwriting discounts and commissions and other offering expenses of $13.5 million, were $245.9 million. In the second quarter of 2019, we completed an underwritten public offering of 10,657,692 shares of common stock, including 1,042,307 shares issued pursuant to the exercise in full of the underwriters' option to purchase additional shares at a public offering price of $26.00. Our net proceeds from the sale of the shares, after deducting underwriting discounts and commissions and other offering expenses of $16.0 million, were $261.1 million. The offering also included the sale of 400,000 shares from our Chair and Chief Executive Officer, from which we received no proceeds. We may need to raise additional capital to fund our operations, including the Phase 3 ASPEN study, the continued commercialization of ARIKAYCE, the ARISE and ENCORE clinical trials related to ARIKAYCE, launch readiness activities for the potential launch of brensocatib, if approved, other clinical trials for brensocatib, TPIP, and our future product candidates, and to develop, acquire, in-license or co-promote other products or product candidates, including those that address orphan or rare diseases. While we believe we currently have sufficient funds to meet our financial needs for at least the next 12 months, we expect to opportunistically raise additional capital and may do so through equity or debt financing(s), strategic transactions or otherwise. Our cash requirements for the next 12 months will be impacted by a number of factors, the most significant of which we expect to be the ASPENtrial, expenses related to our commercialization efforts and our ARISE and ENCORE clinical trials for ARIKAYCE, and other development activities for brensocatib, and to a lesser extent, expenses related to the clinical development of TPIP and other product candidates. Cash Flows As of December 31, 2021, we had cash and cash equivalents of $716.8 million, as compared with $532.8 millionas of December 31, 2020. In addition, as of December 31, 2021, we also had marketable securities of $50.0 million. The $184.0 millionincrease in cash and cash equivalents was primarily due to our May 2021underwritten public offerings of the 2028 Convertible Notes and our common stock, partially offset by the repurchase of a portion of our 2025 Convertible Notes and cash used in operating activities. Our working capital was $701.9 millionas of December 31, 2021as compared with $504.1 millionas of December 31, 2020. Net cash used in operating activities was $363.3 millionand $219.3 millionfor the years ended December 31, 2021and 2020, respectively. The net cash used in operating activities during the years ended December 31, 2021and 2020 was primarily for the commercial, clinical and manufacturing activities related to ARIKAYCE, as well as other SG&A expenses and clinical trial expenses related to brensocatib and TPIP. The increase in cash used in operating activities for the year ended December 31, 2021compared to 2020 was primarily due to the increase in R&D expenses to support our ongoing clinical trials. The increase was also due to the net change in working capital, driven by an in increase in other assets and accounts receivable and a decrease in accounts payable. Net cash used in investing activities was $64.3 millionand $6.8 millionfor the years ended December 31, 2021and 2020, respectively. The net cash used in investing activities during the years ended December 31, 2021and 2020 was for purchases of available-for-sale securities and purchases of fixed assets in 2021, and purchases of fixed assets in 2020. Net cash provided by financing activities was $612.5 millionand $271.0 millionfor the years ended December 31, 2021and 2020, respectively. Net cash provided by financing activities was primarily due to net cash proceeds from the issuance and extinguishment of debt during the year ended December 31, 2021and the net proceeds from the issuance of common stock during the years ended December 31, 2021and 2020. Contractual Obligations
aggregate principal amount of the 2028 Convertible Bonds under an indenture between the Company and
Indenture). Our net proceeds from the offering, after deducting underwriting discounts and offering expenses of
$15.7 million, were $559.3 million. The 2028 Convertible Notes bear interest payable semiannually in arrears on June 1and December 1of each year, beginning on December 1, 2021. The 2028 Convertible Notes mature on June 1, 2028, unless earlier converted, redeemed, or repurchased. The 2028 Convertible Notes are convertible into common stock of the Company under certain circumstances described in the indenture. For more information, see Note 8 - Debt in our notes to the consolidated financial statements. In January 2018, we completed an underwritten public offering of $450.0 millionaggregate principal amount of the 2025 Convertible Notes pursuant to the Indenture. Our net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million, were approximately $435.8 million. A portion of the net proceeds from the 2028 Convertible Notes was used to repurchase $225.0 millionof the Company's outstanding 2025 Convertible Notes. The Company recorded a loss on early extinguishment of debt of $17.7 million, primarily related to the premium paid on extinguishment of a portion of the 2025 Convertible Notes. The 2025 Convertible Notes bear interest payable semiannually in arrears on January 15and July 15of each year, beginning on July 15, 2018. The 2025 Convertible Notes mature on January 15, 2025, unless earlier converted, redeemed, or repurchased. The 2025 Convertible Notes are convertible into common stock of the Company under certain circumstances described in the Indenture. For more information, see Note 8 - Debt in our notes to the consolidated financial statements. In April 2020, we entered into a master services agreement with PPD pursuant to which we retained PPD to perform clinical development services in connection with certain of our clinical research programs. The master services agreement has an initial term of five years. Either party may terminate (i) any project addendum under the master services agreement for any reason and without cause upon 30 days' written notice, (ii) any project addendum in the event of the other party's breach of the master services agreement or such project addendum upon 30 days' written notice, provided that such breach is not cured within such 30-day period, (iii) the master services agreement or any project addendum immediately upon the occurrence of an insolvency event with respect to the other party or (iv) any project addendum upon 30 days' written notice if (a) the continuation of the services under such project addendum would post material ethical or safety risks to study participants, (b) any approval from a regulatory authority necessary to perform the applicable study is revoked, suspended or expires without renewal or (c) in the reasonable opinion of such party, continuation of the services provided under such project addendum would be in violation of applicable law. We have entered into project addenda with PPD to perform clinical development services over several years for, but not limited to, our ARISE, ENCORE, ASPENstudies and other brensocatib and TPIP studies. We currently expect to incur approximately $280 millionof costs related to these project addenda. In September 2018, we entered into an agreement (the Lease) with Exeter700 Route 202/206, LLC to lease 117,022 square feet of office space located in Bridgewater, New Jerseyfor our corporate headquarters. Subject to certain conditions, we have the one-time option to expand the leased premises by up to 50,000 rentable square feet, exercisable prior to the fifth anniversary of the Commencement Date, which was October 1, 2019. The initial Lease term runs 130 months from the Commencement Date and we have the option to extend that term for up to three additional five-year periods. In addition, we are responsible for operating expenses and taxes pursuant to the Lease. Future minimum payments under the Lease during the initial Lease term are approximately $21.4 million. The Lease contains customary default provisions, including those relating to payment defaults, performance defaults and events of bankruptcy. In October 2017, we entered into certain agreements with Patheon related to the increase of our long-term production capacity for ARIKAYCE. The agreements provide for Patheon to manufacture and supply ARIKAYCE for our anticipated commercial needs. Under these agreements, we are required to deliver to Patheon the required raw materials, including active pharmaceutical ingredients, and certain fixed assets needed to manufacture ARIKAYCE. Patheon's supply obligations will commence once certain technology transfer and construction services are completed. Our manufacturing and supply agreement with Patheon will remain in effect for a fixed initial term, after which it will continue for successive renewal terms unless either we or Patheon have given written notice of termination. The technology transfer agreement will expire when the parties agree that the technology transfer services have been completed. The agreements may also be terminated under certain other circumstances, including by either party due to a material uncured breach of the other party or the other party's insolvency. These early termination clauses may reduce the amounts due to the relevant parties. The aggregate investment to increase our long-term production capacity, including under the Patheon agreements and related agreements or purchase orders with third parties for raw materials and fixed assets, is estimated to be approximately $80 million. In October 2016, we entered into the AZ License Agreement, pursuant to which AstraZeneca granted us exclusive global rights for the purpose of developing and commercializing AZD7986 (which we renamed brensocatib). In consideration of the licenses and other rights granted by AstraZeneca, we made an upfront payment of $30.0 million, which was included as research and development expense in the fourth quarter of 2016. In December 2020, we incurred a $12.5 millionmilestone payment obligation upon first dosing in a Phase 3 clinical trial of brensocatib. We are obligated to make a series of additional contingent milestone payments to AstraZeneca totaling up to an additional $72.5 millionupon the achievement of clinical development and regulatory filing milestones. If we elect to develop brensocatib for a second indication, we will be obligated to 67
make an additional series of contingent milestone payments totaling up to
$42.5 million, the first of which occurs at the initiation of a Phase 3 trial in the additional indication. We are not obligated to make any additional milestone payments for any additional indications. In addition, we have agreed to pay AstraZeneca tiered royalties ranging from a high single-digit to mid-teens on net sales of any approved product based on brensocatib and one additional payment of $35.0 millionupon the first achievement of $1 billionin annual net sales. The AZ License Agreement provides AstraZeneca with the option to negotiate a future agreement with us for commercialization of brensocatib in chronic obstructive pulmonary disease or asthma. In September 2015, we entered into the Fill/Finish Agreement with Althea, for Althea to produce, on a non-exclusive basis, ARIKAYCE in finished dosage form at a 50 kg scale. Under the Fill/Finish Agreement, we are obligated to pay a minimum of $2.7 millionfor the batches of ARIKAYCE produced each calendar year during the term of the Fill/Finish Agreement. The Fill/Finish Agreement became effective as of January 1, 2015, and following extensions in 2018 and 2021, the agreement remains in effect until December 31, 2022. Currently, Althea manufactures placebo for use in our ARIKAYCE clinical trials. We have a licensing agreement with PARI for the use of optimized Lamira for delivery of ARIKAYCE in treating patients with NTM lung infections, CF and bronchiectasis. Under the licensing agreement, we have rights under several US and foreign issued patents, and patent applications involving improvements to optimized Lamira, to exploit the system with ARIKAYCE for the treatment of such indications, but we cannot manufacture the nebulizers except as permitted under our Commercialization Agreement with PARI, as described below. Lamira has been approved for use in the US (in combination with ARIKAYCE), the EU and Japan. Under the licensing agreement, we made an upfront license fee and milestone payments to PARI. Upon FDA acceptance of our NDA and the subsequent FDA and EMA approvals of ARIKAYCE, we made additional milestone payments of €1.0 million, €1.5 million, and €0.5 million, respectively, to PARI. In October 2017, we exercised an option to buy-down the royalties payable to PARI, which was included within selling, general and administrative expenses in the fourth quarter of 2017. PARI is entitled to receive royalty payments in the mid-single digits on the annual global net sales of ARIKAYCE, pursuant to the licensing agreement, subject to certain specified annual minimum royalties. In July 2014, we entered into a Commercialization Agreement with PARI for the manufacture and supply of Lamira as optimized for use with ARIKAYCE. Under the Commercialization Agreement, PARI manufactures Lamira except in the case of certain defined supply failures, when the Company will have the right to make Lamira and have it made by third parties (but not certain third parties deemed under the Commercialization Agreement to compete with PARI). The Commercialization Agreement has an initial term of 15 years that began in October 2018. The term of the Commercialization Agreement may be extended by us for an additional five years by providing written notice to PARI at least one year prior to the expiration of the Initial Term. In February 2014, we entered into a contract manufacturing agreement with Therapure Biopharma Inc., which has been assumed by Resilience, for the manufacture of ARIKAYCE, on a non-exclusive basis, at a 200 kg scale. Pursuant to the agreement, we collaborated with Resilience to construct a production area for the manufacture of ARIKAYCE in Resilience's existing manufacturing facility in Canada. The agreement has an initial term of five years, which began in October 2018, and will renew automatically for successive periods of two years each, unless terminated by either party by providing the required two years' prior written notice to the other party. Under the agreement, we are obligated to pay certain minimum amounts for the batches of ARIKAYCE produced each calendar year. In 2004 and 2009, we entered into research funding agreements with CFFT whereby we received $1.7 millionand $2.2 millionin research funding for the development of ARIKAYCE. As a result of the US approval of ARIKAYCE and in accordance with the agreements, as amended, we owe milestone payments to CFFT of $13.4 millionin the aggregate payable through 2025, of which $2.5 millionhas been paid as of December 31, 2021. Furthermore, if certain global sales milestones are met within five years of the commercialization of ARIKAYCE, we would owe up to an additional $3.9 million. We have determined the likelihood of meeting such global sales milestones and have accrued for these contingent obligations proportionally based on net sales of ARIKAYCE.
Future funding needs
We may need to raise additional capital to fund our operations, including the continued commercialization of ARIKAYCE, current and future clinical trials related to ARIKAYCE, development of brensocatib and TPIP, and the potential development, acquisition, in-license or co-promotion of other products or product candidates, including those that address orphan or rare diseases. We expect that our future capital requirements may be substantial and will depend on many factors, including:
• The timing and cost of our ongoing and planned clinical trials for our product candidates, including our Phase 3 ASPEN trial;
• The timing and cost of our current and future clinical trials of ARIKAYCE for the treatment of patients with NTM lung infections, including the ARISE and ENCORE trials;
•The cost of discovering or licensing additional product candidates;
•The costs of activities related to the regulatory approval process and the timing of approvals, if received;
•The cost of supporting sales and marketing efforts necessary to support ARIKAYCE’s ongoing business efforts;
•The cost of any support for commercial launches of brensocatib, TPIP and our other product candidates;
• The cost of filing, prosecuting, defending and enforcing patent claims;
•The costs of our manufacturing-related activities;
•The cost of hiring more staff to support our ongoing development and commercialization efforts;
• The levels, timing and collection of revenue from sales of ARIKAYCE and other approved products in the future, if any.
We have raised
$1.3 billionin net proceeds from securities offerings since 2019. We believe we currently have sufficient funds to meet our financial needs for at least the next 12 months. However, our business strategy may require us to raise additional capital at any time through equity or debt financing(s), strategic transactions or otherwise.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We do not have any interest in special purpose entities, structured finance entities or other variable interest entities.
CRITICAL ACCOUNTING ESTIMATES
Preparation of financial statements in accordance with generally accepted accounting principles in the US requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. We use our historical experience and other relevant factors when developing our estimates and assumptions and we regularly evaluate these estimates and assumptions. The amounts of assets and liabilities reported in our consolidated balance sheets and the amounts reported in our consolidated statements of comprehensive loss are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition and indefinite-lived intangible assets. The accounting estimates discussed below involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Actual results could differ materially from our estimates. For additional accounting policies, see Note 2 to our Consolidated Financial Statements-Summary of Significant Accounting Policies.
In accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, we recognize revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration we expect to receive in exchange for the goods or services provided. To determine revenue recognition for arrangements within the scope of ASC 606, we perform the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. At contract inception, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied. For all contracts that fall into the scope of ASC 606, we have identified one performance obligation: the sale of ARIKAYCE to its customers. We have not incurred or capitalized any incremental costs associated with obtaining contracts with customers. Product revenues, net, consist of net sales of ARIKAYCE. Our customers in the US include specialty pharmacies and specialty distributors. In
December 2020, we began recognizing product revenue from commercial sales of ARIKAYCE in Europe. In July 2021, we began recognizing product revenue from commercial sales of ARIKAYCE in Japan. Globally, product revenues are recognized once we perform and satisfy all five steps of the revenue recognition criteria mentioned above. Revenue is recorded at net selling price (transaction price), which includes estimates of variable consideration for which reserves are established for estimated government rebates, such as Medicaid and Medicare Part D reimbursements, and estimated managed care rebates. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as a current liability. Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the applicable contract. The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable 69
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 our estimates. If actual results in the future vary from estimates, we adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. Rebates: We contract with government agencies and managed care organizations, or collectively, third-party payors, so that ARIKAYCE will be eligible for purchase by, or partial or full reimbursement from, such third-party payors. We estimate the rebates we will provide to third-party payors and deduct these estimated amounts from total gross product revenues at the time the revenues are recognized. These reserves are recorded in the same period in which the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. The current liability is included in accrued liabilities on the consolidated balance sheets. We estimate the rebates that will be provided to third-party payors based upon (i) our contracts with these third-party payors, (ii) the government mandated discounts applicable to government-funded programs, (iii) a range of possible outcomes that are probability-weighted for the estimated payor mix, and (iv) information obtained from our specialty pharmacies.
If some or all of our actual experience differs from the above estimates, we may need to adjust prior period accruals, which will affect revenue during the adjustment period.
Indefinite life intangible assets
Indefinite-lived intangible assets consist of
In-Process Research & Development(IPR&D). IPR&D acquired directly in a transaction other than a business combination is capitalized if the projects will be further developed or have an alternative future use; otherwise they are expensed. The fair values of IPR&D project assets acquired in business combinations are capitalized. We generally utilize the Multi-Period Excess Earning Method to determine the estimated fair value of the IPR&D assets acquired in a business combination. The projections used in this valuation approach are based on many factors, such as relevant market size and share, probabilities of success, anticipated patent protection, and expected pricing. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. These assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are amortized over the remaining useful life or written off, as appropriate. Intangible assets with indefinite lives, including IPR&D, are tested for impairment if impairment indicators arise and, at a minimum, annually. However, an entity is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset's fair value is less than its carrying amount. Otherwise, no further impairment testing is required. The indefinite-lived intangible asset impairment test consists of a one-step analysis that compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We consider many factors in evaluating whether the value of our intangible assets with indefinite lives may not be recoverable, including, but not limited to, expected growth rates, the cost of equity and debt capital, general economic conditions, our outlook and market performance of our industry and recent and forecasted financial performance.
For more information regarding our estimates, including the quantitative impacts on our financial results, see Note 2 to our Consolidated Financial Statements – Summary of Significant Accounting Policies.
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