AGIOS PHARMACEUTICALS, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review "Item 1A, Risk Factors" of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a biopharmaceutical company committed to transforming patients’ lives through scientific leadership in the field of cellular metabolism and adjacent areas of biology, with the goal of creating differentiated, small molecule medicines in the areas of genetically defined diseases, or GDDs, and, until the completion of the sale of our oncology business to Servier as described below, hematologic malignancies and solid tumors. To address our focus areas, we take a systems biology approach to deeply understand disease states, drive the discovery and validation of novel therapeutic targets, and define patient selection strategies, thereby increasing the probability that our experimental medicines will have the desired therapeutic effect. Proposed Sale of Oncology Business to Servier Pharmaceuticals, LLC (Servier) On December 20, 2020, we entered into a Purchase and Sale Agreement, or the Purchase Agreement, with Servier. The Purchase Agreement provides for the sale of our commercial, clinical and research-stage oncology portfolio assets and pipeline, or oncology business, for a payment of $1.8 billion in cash at the closing, subject to certain adjustments for working capital of the oncology business at the closing and amounts for a representation and warranty insurance policy, and a payment of $200 million in cash, if, prior to January 1, 2027, vorasidenib is granted new drug application, or NDA, approval from the U.S. Food and Drug Administration, or FDA, with an approved label that permits vorasidenib’s use as a single agent for the adjuvant treatment of patients with Grade 2 glioma that have an isocitrate dehydrogenase 1 or 2, or IDH1 or IDH2, mutation (and, to the extent required by such approval, the vorasidenib companion diagnostic test is granted an FDA premarket approval), as well as a royalty of 5% of U.S. net sales of TIBSOVO® from the close of the transaction through loss of exclusivity of TIBSOVO® and a royalty of 15% of U.S. net sales of vorasidenib from the first commercial sale of vorasidenib through loss of exclusivity of vorasidenib. The transaction includes the proposed sale of our oncology business, including TIBSOVO®, our clinical-stage product candidates vorasidenib, AG-270 and AG-636, and our oncology research programs. Servier will also acquire our co-commercialization rights for Bristol Myers Squibb’s IDHIFA®, the $25.0 million potential milestone payment, and conduct certain clinical development activities within the IDHIFA® development program. The parties’ obligations to consummate the proposed sale are subject to customary conditions, including the approval of the sale by the holders of at least a majority of our outstanding shares of common stock, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of required regulatory approvals in Germany. If the transaction closes, we will be a smaller, less diversified company with a more limited business concentrated on GDDs. As a result, we may be more susceptible to changing market conditions, including fluctuations and risks particular to the markets for patients with GDDs, than a more diversified company, which could adversely affect our business, financial condition and results of operations. In addition, the diversification of our revenues, costs and cash flows will diminish following the transaction, such that our results of operations, cash flows, working capital and financing requirements may be subject to increased volatility and our ability to fund capital expenditures and investments or satisfy other financial commitments may be diminished. For more information on our proposed sale to Servier refer to " Proposed Sale of Oncology Business to Servier Pharmaceuticals, LLC (Servier)" within Item 1, Business . Our wholly-owned product, TIBSOVO® (ivosidenib) is an oral targeted inhibitor of the mutated isocitrate dehydrogenase 1, or IDH1 enzyme. TIBSOVO® is the first and only U.S. Food and Drug Administration, or FDA-approved therapy for the treatment of adult patients with (i) relapsed or refractory acute myeloid leukemia, or R/R AML, with a susceptible IDH1 mutation as detected by an FDA-approved test (approved by the FDA in July 2018) and (ii) newly diagnosed AML with a susceptible IDH1 mutation as detected by an FDA-approved test who are at least 75 years old or who have comorbidities that preclude use of intensive induction chemotherapy (approved by the FDA in May 2019). In December 2018, we submitted a Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, for TIBSOVO® for the treatment of adult patients with R/R AML with an IDH1 mutation. In October 2020, we announced the withdrawal of the MAA based on feedback from the EMA's Committee for Medicinal Products for Human Use (CHMP) that the available clinical data from our 73 Table of Contents single arm, uncontrolled Phase 1 trial did not sufficiently support a positive benefit-risk balance for the proposed indication. In addition, we are currently evaluating ivosidenib in the clinical trials described below. Our other marketed product is IDHIFA® (enasidenib), an oral targeted inhibitor of the mutated isocitrate dehydrogenase 2, or IDH2 enzyme and the first and only FDA-approved therapy for patients with R/R AML and an IDH2 mutation. In August 2017, the FDA granted our collaboration partner Celgene approval of IDHIFA® for the treatment of adult patients with R/R AML and an IDH2, mutation as detected by an FDA-approved test. We were eligible to receive royalties at tiered low-double digit to mid-teen percentage rates on any net sales of IDHIFA® and have exercised our rights to provide up to one-third of the field-based commercialization efforts in the United States. In June 2018, Celgene submitted an MAA to the EMA for IDHIFA® for IDH2 mutant-positive AML which it subsequently withdrew in December 2019. On June 11, 2020 we sold our tiered, sales-based royalty rights on worldwide net sales of IDHIFA®, as well as our rights to receive up to $55.0 million in outstanding regulatory milestone payments from Bristol Myers Squibb, or BMS, to Royalty Pharma, or RPI, for $255.0 million. In addition, we and Celgene are currently evaluating enasidenib in the clinical trials described below. Our pre-commercial clinical cancer product candidates are vorasidenib and AG-270. We are developing vorasidenib for the treatment of IDH mutant-positive low grade glioma. Vorasidenib is an orally available, selective brain-penetrant pan-IDH mutant inhibitor. We are currently evaluating vorasidenib in the clinical trials described below. We are developing AG-270 for the treatment of cancers carrying a methylthioadenosine phosphorylase, or MTAP, deletion, which is present in approximately 15 percent of all cancers. AG-270 is an orally available selective potent inhibitor of methionine adenosyltransferase 2a, or MAT2A. On March 25, 2020, Celgene declined to exercise its right to opt into co-development and co-commercialization for AG-270, our MAT2A inhibitor development program, under our 2016 global research and collaboration agreement with Celgene, or the 2016 Agreement. We are currently evaluating AG-270 in a phase 1 dose-escalation and expansion trial in multiple tumor types carrying a MTAP, deletion, described below. In the first quarter of 2020, we made the decision to cease the internal development of AG-636 for the treatment of hematologic malignancies, including lymphoma due to limited enrollment in our phase 1 trial in lymphoma. AG-636 is an inhibitor of the metabolic enzyme dihydroorotate dehydrogenase, or DHODH , licensed by us from Aurigene Discovery Technologies Limited, or Aurigene. The lead product candidate in our genetically defined disease, or GDD, portfolio, mitapivat, is an activator of both wild-type and mutant pyruvate kinase-R, or PKR, for the potential treatment of hemolytic anemias. We are currently evaluating mitapivat for the treatment of pyruvate kinase, or PK, deficiency, thalassemia and sickle cell disease, or SCD, in the clinical trials described below. We are also developing AG-946, a next-generation PKR activator, for the potential treatment of hemolytic anemias and other indications. In addition to the aforementioned development programs, we are seeking to advance a number of early-stage discovery programs in our focus areas of GDDs, malignant hematology and solid tumors based on our scientific leadership in the field of cellular metabolism and adjacent areas of biology. Collaboration and License Agreements In November 2019, the acquisition of Celgene was completed by BMS, and Celgene became a wholly-owned subsidiary. We will continue to refer to our collaboration agreements with Celgene throughout this Form 10-K as being with Celgene Corporation. Celgene Corporation Celgene is a related party through ownership of our common stock. In April 2010, we entered into a discovery and development collaboration and license agreement focused on cancer metabolism, or the 2010 Agreement. The 2010 Agreement was amended in October 2011 and July 2014. On June 11, 2020, we sold our tiered, sales-based royalty rights on worldwide net sales of IDHIFA®, as well as our rights to receive up to $55.0 million in outstanding regulatory milestone payments from BMS, to RPI for $255.0 million. Under the 2010 Agreement, we remain eligible to receive a $25.0 million potential milestone payment for the enasidenib program upon achievement of a specified ex-U.S. commercial milestone event, as well as reimbursement for costs incurred for our co-commercialization efforts and development activities. In April 2015, we entered into a joint worldwide development and profit share collaboration and license agreement with Celgene, and our wholly owned subsidiary, Agios International Sarl, entered into a collaboration and license agreement with Celgene International II Sarl, or collectively, the AG-881 Agreements, to establish a worldwide collaboration focused on the 74 Table of Contents development and commercialization of vorasidenib products. The AG-881 Agreements were terminated effective September 4, 2018. In May 2016, we entered into a master research and collaboration agreement with Celgene, or the 2016 Agreement. The initial four-year research term for the 2016 Agreement expired on May 17, 2020. On March 25, 2020 Celgene declined the option to extend the research agreement. Further, on April 10, 2020 Celgene notified us that they will be declining to elect any program as a continuation program under the 2016 agreement. Celgene had designated AG-270, our inhibitor MAT2A, as a development candidate under the 2016 Agreement. On March 25, 2020, Celgene notified us of their decision to decline their option to enter into a Development & Commercialization Agreement with respect to the MAT2A program under the 2016 Agreement. Refer to Note 13. Collaboration and License Agreements , to the consolidated financial statements in this Annual Report on Form 10-K for additional discussion of the Collaboration Agreements. CStone Agreement In June 2018, we entered into an exclusive license agreement with CStone Pharmaceuticals, or the CStone Agreement, for the development and commercialization of certain products containing ivosidenib in mainland China, Hong Kong, Macau, and Taiwan for therapeutic uses in humans, excluding brain cancer, unless added by us in our sole discretion. On March 2, 2020, we amended the CStone Agreement to include Singapore as part of the CStone Territory. We retain development and commercialization rights for the rest of the world. Refer to Note 13. Collaboration and License Agreements , to the consolidated financial statements in this Annual Report on Form 10-K for additional discussion of the CStone Agreement. Financial Operations Overview Impact of COVID-19 on our Business The spread of SARS-CoV-2 and the resulting disease COVID-19 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. In March 2020, the World Health Organization declared COVID-19 a pandemic. As of December 31, 2020, we have not experienced a significant financial or supply chain impact directly related to the pandemic but have experienced some disruptions to clinical operations, including timelines to complete patient enrollment in some of our clinical trials and delays in submission of regulatory filings, as further described below. In this time of uncertainty as a result of the COVID-19 pandemic, we are continuing to serve our customers while taking precautions to provide a safe work environment for our employees and customers. In March 2020, we established and implemented a work from home policy for our employees. In April 2020, we made internal resource allocation decisions in order to deliver on key business objectives and to increase our financial flexibility, including, pausing the development of certain preclinical research programs, delaying the start of certain longer-term clinical studies, limiting staff hiring, reducing the number of contract workers, and delaying or limiting information technology and facilities infrastructure projects. In June 2020, we implemented Phase 1 of our return to work program, which enabled all of our lab-based employees and related support personnel to return to our Cambridge office, and in September 2020 we began implementing Phase 2 of our return to work program by opening our Cambridge office to an additional, limited number of employees who prefer to work onsite. Our field-based employees engage with healthcare providers and other third parties remotely and, where local regulations allow, on a limited in-person basis. We are conducting our return to work program under strict guidelines as required by federal, state, and local authorities. We have been monitoring our supply chain network for disruptions due to the COVID-19 pandemic, and our third-party manufacturers remain largely unaffected, with any campaign delays experienced to date being limited to a few days in duration. Although global shipping continues to be disrupted due to the pandemic, we have not experienced a supply impact and have accrued additional safety stock of TIBSOVO® in order to further mitigate risk. As the pandemic continues to unfold, the extent of the pandemic’s effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include changes in the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Any prolonged material disruption of our employees, suppliers, manufacturing, or customers could negatively impact our consolidated financial position, consolidated results of operations and consolidated cash flows. As a result, we may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities. General Since inception, our operations have primarily focused on organizing and staffing our company, business planning, raising capital, assembling our core capabilities in cellular metabolism, identifying potential product candidates, undertaking preclinical studies, conducting clinical trials, establishing a commercial infrastructure and marketing our approved products. To date, we have financed our operations primarily through commercial sales of TIBSOVO®, funding received from our various 75 Table of Contents collaboration agreements discussed above, private placements of our preferred stock, our initial public offering of our common stock and concurrent private placement of common stock to an affiliate of Celgene, and our follow-on public offerings. Additionally, since inception, we have incurred significant operating losses. Our net losses were $327.4 million, $411.5 million and $346.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, we had an accumulated deficit of $1,843.5 million. We expect to continue to incur significant expenses and net losses until such time we are able to report profitable results. Our net losses may fluctuate significantly from year to year. We expect that we will continue to incur significant expenses as we continue to advance and expand clinical development activities for our lead programs: ivosidenib, vorasidenib, mitapivat, AG-270, and AG-946; continue to discover and validate novel targets and drug product candidates; expand and protect our intellectual property portfolio; and hire additional commercial, development and scientific personnel. Revenue Our wholly owned product, TIBSOVO®, received approval from the FDA on July 20, 2018 for the treatment of adult patients with R/R AML with susceptible IDH1 mutation. Upon FDA approval of TIBSOVO® in the U.S., we began generating product revenue from sales of TIBSOVO®. We sell TIBSOVO® to a limited number of specialty distributors and specialty pharmacy providers, or collectively, the Customers. These Customers subsequently resell TIBSOVO® to pharmacies or dispense directly to patients. In addition to distribution agreements with Customers, we enter into arrangements with healthcare providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of TIBSOVO®. For further discussion of our revenue recognition policy, see Note 3, Summary of Significant Accounting Polices and Note 12, Product Revenue , to the consolidated financial statements in this Annual Report on Form 10-K . We also recognize collaboration revenue from our agreements with Celgene and CStone, and royalty revenue from Celgene on sales of IDHIFA®. On June 11, 2020, we sold our tiered, sales-based royalty rights on worldwide net sales of IDHIFA®, as well as our rights to receive up to $55.0 million in outstanding regulatory milestone payments from Celgene, a wholly-owned subsidiary of BMS, to RPI for $255.0 million. Due to our continued involvement in the generation of these royalties through our co-promote right, we are treating the sale of these royalties as a liability and will continue to recognize royalty revenue on sales of IDHIFA®. In the future, we expect to continue to generate revenue from a combination of product sales, royalties on product sales, cost reimbursements, milestone payments, and upfront payments to the extent we enter into future collaborations or licensing agreements. Cost of Sales Cost of sales consists primarily of manufacturing costs for sales of TIBSOVO®. Based on our policy to expense costs associated with the manufacturing of our products prior to regulatory approval, certain of the manufacturing costs associated with product shipments of TIBSOVO® recorded during the years ended December 31, 2020, 2019 and 2018, respectively, were expensed prior to July 20, 2018 and, therefore, are not included in costs of sales during the years ended December 31, 2020, 2019 or 2018, respectively. Research and development expenses Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress. However, the successful development of our product candidates is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development and to commercialize these product candidates. We are also unable to positively predict when future net cash inflows will commence from TIBSOVO®, vorasidenib, mitapivat, AG-270, AG-946 or any of our other product candidates. This is due to the numerous risks and uncertainties associated with developing medicines, including the uncertainty of: • establishing an appropriate safety profile with an investigational new drug application, or IND, and/or NDA enabling toxicology and clinical trials; • the successful enrollment in, and completion of, clinical trials; • the receipt of marketing approvals from applicable regulatory authorities; • establishing compliant commercial manufacturing capabilities or making arrangements with third-party manufacturers; • obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates; • launching commercial sales of the products, if and when approved, whether alone or in collaboration with others; and 76 Table of Contents • maintaining an acceptable safety profile of the products following approval. A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate. Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our product candidates, which include: • employee-related expenses, including salaries, benefits and stock-based compensation expense; • expenses incurred under agreements with third parties, including contract research organizations, or CROs, that conduct research and development and both preclinical and clinical activities on our behalf, and the cost of consultants; • the cost of lab supplies and acquiring, developing and manufacturing preclinical and clinical study materials; and • facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and the maintenance of facilities, insurance and other operating costs. The following summarizes our most advanced programs: Ivosidenib (mutant IDH1 inhibitor) Ivosidenib is an orally available, selective, potent inhibitor of the mutated IDH1 protein, making it a highly targeted therapy for the treatment of patients with cancers that harbor IDH1 mutations. We hold worldwide development and commercial rights to ivosidenib and have licensed certain development and commercialization rights to ivosidenib in mainland China, Hong Kong, Macau, Singapore, and Taiwan to CStone, pursuant to an exclusive license agreement with CStone, or the CStone Agreement, discussed more fully above. We are required to fund the future development and commercialization costs related to this program with the exception of development and commercialization activities of CStone under the CStone Agreement. Mutations in IDH1 have been identified in difficult to treat hematologic and solid tumor cancers, including AML, myelodysplastic syndromes, or MDS, cholangiocarcinoma and low grade glioma, where both the treatment options and prognosis for patients are poor. The FDA has approved TIBSOVO® for the treatment of adult patients with R/R AML and a susceptible IDH1 mutation and for the treatment of patients with newly diagnosed AML with a susceptible IDH1 mutation as detected by an FDA-approved test who are at least 75 years old or who have comorbidities that preclude use of intensive induction chemotherapy. In December 2018, we submitted a MAA to the EMA for TIBSOVO® for the treatment of adult patients with IDH1 mutant-positive R/R AML. In October 2020, we withdrew the MAA based on feedback from the EMA's CHMP that the available clinical data from our single arm, uncontrolled Phase 1 trial did not sufficiently support a positive benefit-risk balance for the proposed indication. The FDA granted orphan drug designation for ivosidenib for the treatment of cholangiocarcinoma, granted Breakthrough Therapy designation for ivosidenib in combination with azacitidine for the treatment of newly diagnosed AML with an IDH1 mutation in adult patients who are at least 75 years old or who have comorbidities that preclude use of intensive induction chemotherapy, and granted Breakthrough Therapy designation for ivosidenib for the treatment of adult patients with relapsed or refractory MDS with a susceptible IDH1 mutation as detected by an FDA-approved test. We are evaluating ivosidenib in the following clinical trials: Hematologic Malignancies • A phase 1b, multicenter, international, open-label clinical trial, to evaluate safety and clinical activity of ivosidenib or enasidenib in combination with induction and consolidation therapy in patients with newly diagnosed AML with an IDH1 or IDH2 mutation who are eligible for intensive chemotherapy. This trial has completed enrollment. • A phase 1/2 frontline combination clinical trial, conducted by Celgene, of either ivosidenib or enasidenib in combination with VIDAZA® (azacitidine) in newly diagnosed AML patients not eligible for intensive chemotherapy. The trial has completed enrollment. • AGILE, a global, registration-enabling phase 3 clinical trial, combining ivosidenib and VIDAZA® (azacitidine) in newly diagnosed AML patients with an IDH1 mutation who are ineligible for intensive chemotherapy. The trial is enrolling patients. Although we experienced disruptions related to the COVID-19 pandemic, we expect to complete enrollment in 2021. • HO150/AMLSG29, an intergroup sponsored, global, registration-enabling phase 3 trial, supported in collaboration with Celgene, combining ivosidenib or enasidenib with standard induction and consolidation chemotherapy in frontline AML patients with an IDH1 or IDH2 mutation. The trial is currently enrolling patients, although we experienced disruptions related to the COVID-19 pandemic. • A phase 1 multicenter, open-label, dose-escalation and expansion clinical trial, designed to assess its safety, clinical activity and tolerability as a single agent in patients with advanced hematologic malignancies with an IDH1 mutation. 77 Table of Contents The trial reopened enrollment of its relapsed or refractory MDS arm and although we experienced disruptions related to the COVID-19 pandemic, we expect to complete enrollment in 2021. Solid Tumors • A phase 1 multicenter, open-label, dose-escalation and expansion clinical trial, designed to assess its safety, clinical activity and tolerability as a single agent in patients with advanced solid tumors with an IDH1 mutation, including glioma, cholangiocarcinoma, and chondrosarcoma. The trial has completed enrollment. • ClarIDHy, a registration-enabling phase 3, multicenter, randomized, double-blind, placebo-controlled clinical trial of ivosidenib in previously-treated patients with nonresectable or metastatic cholangiocarcinoma with an IDH1 mutation. The trial has completed enrollment. The primary endpoint of the trial of progression-free survival was met and, although we experienced disruptions related to the COVID-19 pandemic, we expect to file an sNDA with the FDA for TIBSOVO® in cholangiocarcinoma in the first quarter of 2021. • A phase 1 multi-center, open-label clinical trial of ivosidenib in patients with advanced IDH1 mutant-positive solid tumors, including glioma. The trial has completed enrollment. • A perioperative study with ivosidenib and vorasidenib in low grade glioma to further investigate their effects on brain tumor tissue. The trial has completed enrollment. Enasidenib (mutant IDH2 inhibitor) Enasidenib is an orally available, selective, potent inhibitor of the mutated IDH2 protein, making it a highly targeted therapeutic candidate for the treatment of patients with cancers that harbor IDH2 mutations, including those with AML, who have a historically poor prognosis. The FDA has granted Celgene approval of IDHIFA® for the treatment of adult patients with R/R AML and an IDH2 mutation. In addition to the clinical trials discussed above, enasidenib is also being evaluated by Celgene in IDHENTIFY, an international phase 3, multi-center, open-label, randomized clinical trial designed to compare the efficacy and safety of enasidenib versus conventional care regimens in patients 60 years or older with IDH2 mutant-positive AML that is refractory to or relapsed after second- or third-line therapy. This trial has completed enrollment. In August 2020, BMS announced that the trial did not meet the primary endpoint of overall survival in patients with IDH2 mutant positive AML. Vorasidenib: brain penetrant pan-IDH program Vorasidenib is an orally available, selective, brain-penetrant, pan-IDH mutant inhibitor. Celgene is eligible to receive royalties from us at a low single-digit percentage rate on worldwide net sales of products containing vorasidenib. We are evaluating vorasidenib in the following clinical trials: • A phase 1 multi-center, open-label clinical trial of vorasidenib in patients with advanced IDH1 or IDH2 mutant-positive solid tumors, including glioma. The trial has completed enrollment. • The above mentioned perioperative study with ivosidenib and vorasidenib in low grade glioma to further investigate their effects on brain tumor tissue. The trial has completed enrollment. • INDIGO, a registration-enabling phase 3 clinical trial of vorasidenib in low-grade (grade 2) glioma with an IDH1 or IDH 2 mutation. The trial is enrolling patients, although we experienced disruptions related to the COVID-19 pandemic. Mitapivat: PKR activator We are developing mitapivat for the treatment of PK deficiency and other hemolytic anemias such as thalassemia and SCD. Mitapivat is an orally available small molecule and a potent activator of the wild-type and mutated PKR enzymes. To date, we have demonstrated in clinical trials that treatment with mitapivat can lead to durable sustained increases in hemoglobin in patients with amenable mutations in the PKR gene and a statistically significant and clinically meaningful reduction in transfusion burden in regularly-transfused patients with PK deficiency, and we have observed early signs of improvements in hemoglobin in thalassemia patients who have wild-type PKR. We have worldwide development and commercial rights to mitapivat and expect to fund the future development and commercialization costs related to this program. Mitapivat has been granted orphan drug designation for the treatment of PK deficiency by the FDA and the EMA. Additionally, mitapivat has received orphan drug designation from the FDA for the treatment of thalassemia and sickle cell disease. 78 Table of Contents We are evaluating mitapivat in the following clinical trials: • DRIVE PK, a global phase 2, first-in-patient, open-label safety and efficacy clinical trial of mitapivat in adult, transfusion-independent patients with PK deficiency. This trial has completed enrollment. • ACTIVATE-T, a single arm, global, pivotal trial of mitapivat in regularly-transfused patients with PK deficiency. The trial has completed enrollment. Although we experienced disruptions related to the COVID-19 pandemic, we reported in January 2021 that this trial met its primary endpoint of a statistically significant and clinically meaningful reduction in transfusion burden. • ACTIVATE, a 1:1 randomized, placebo-controlled, global, pivotal trial of mitapivat in patients with PK deficiency who do not receive regular transfusions. The trial has completed enrollment. Although we experienced disruptions related to the COVID-19 pandemic, we reported in December 2020 that this trial met its primary endpoint of a statistically significant, sustained increase in hemoglobin compared to placebo. In addition, data from the trial demonstrated that treatment with mitapivat showed statistically significant improvement in key pre-specified secondary endpoints regarding patient reported outcomes. • A phase 2, open-label safety and efficacy clinical trial of mitapivat in adult patients with non-transfusion-dependent α- and β-thalassemia. The trial has completed enrollment. • In collaboration with the National Institutes of Health, or NIH, we are evaluating mitapivat in a phase 1 trial in patients with sickle cell disease pursuant to a cooperative research and development agreement. The trial is ongoing and enrolling patients, although the NIH experienced disruptions related to the COVID-19 pandemic. We plan to submit an NDA for mitapivat in adults with PK deficiency to the FDA in the second quarter of 2021, and plan to submit an MAA for mitapivat in adults with PK deficiency to the EMA in mid-2021, with a potential 2022 commercial launch in both geographies. We will continue to grow our US commercial infrastructure and evaluate all options for the commercialization and continued development of mitapivat outside of the United States in order to maximize the benefit to patients and value to our shareholders, including through exploring potential partnership opportunities. AG-270: Targeting MAT2A for the treatment of MTAP-deleted cancers AG-270, an orally available selective potent inhibitor of MAT2A, is our development candidate focused on MTAP-deleted cancers. MTAP is a metabolic gene that is deleted in approximately 15 percent of all cancers. We have shown in preclinical studies that MTAP deletion predicts sensitivity to inhibition of a subset of enzymes involved in the synthesis or utilization of the methyl donor S-adenosylmethionine, or SAM. Among this subset of enzymes, we have targeted MAT2A, the enzyme responsible for the synthesis of SAM in tumor cells. On April 10, 2020 Celgene notified us that they declined to elect any program as a continuation program under the 2016 agreement. With this decision we are no longer eligible for up to $168.8 million in clinical and regulatory milestone payments under the 2016 Agreement. We are evaluating AG-270 in a phase 1 trial in multiple tumor types carrying an MTAP deletion. The first part of the trial, was a dose-escalation of AG-270 and is complete. The next part of the trial consists of two arms evaluating AG-270 in combination with taxanes. One arm of the trial will test AG-270 in combination with docetaxel in MTAP-deleted non-small cell lung cancer and the other arm will test AG-270 in combination with nab-paclitaxel and gemcitabine in MTAP-deleted pancreatic ductal adenocarcinoma. Both combination arms are enrolling patients, although we experienced disruptions related to the COVID-19 pandemic. AG-636: Targeting DHODH for the treatment of hematologic malignancies We have discovered a lineage-specific dependence on DHODH in hematologic malignancies, particularly AML and diffuse large B-cell lymphoma. DHODH catalyzes a critical step in the biosynthesis of pyridimidines, which are critical for the production of RNA and DNA. We believe that DHODH inhibition will be differentiated from standard-of-care therapies, both by exhibiting activity in cancers that are resistant to standard-of-care chemotherapeutics and through a mechanism of anti-tumor effect that combines cell growth arrest and cellular differentiation. We were evaluating AG-636, an inhibitor of DHODH, licensed to us from Aurigene in a phase 1 dose-escalation trial in subjects with advanced lymphomas. In the first quarter of 2020, we made the decision to halt internal development of AG-636, due to limited enrollment in this trial, and will continue to wind down the trial until the close of the proposed sale to Servier. AG-946: Next-generation PKR Activator • We are developing AG-946, a next-generation PKR activator, for the potential treatment of hemolytic anemias. We are evaluating AG-964, in a phase 1 trial of AG-946 in healthy volunteers and in patients with SCD. The trial is currently enrolling healthy volunteers, although we experienced disruptions related to the COVID-19 pandemic. 79 Table of Contents Other research and platform programs Other research and platform programs include activities related to exploratory efforts, target validation and lead optimization for our discovery and follow-on programs, and our proprietary metabolomics platform. Selling, general and administrative expenses Selling, general and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, business development, commercial, legal and human resources functions. Other significant costs include facility related costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters, and fees for accounting and consulting services. We anticipate that our selling, general and administrative expenses will increase in the future to support continued research and development, and commercialization activities, including the potential commercialization of our product candidates. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical in fully understanding and evaluating our financial condition and results of operations. Revenue Recognition Under Accounting Standards Codification 606, Revenue from Contracts with Customers , or ASC 606, revenue is recognized when the customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that have been determined to be within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Once the contract is determined to be within the scope of ASC 606, 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 will 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. Product Revenue We generate product revenue from sales of TIBSOVO® to a limited number of specialty distributors and specialty pharmacy providers, or collectively, the Customers. The Customers subsequently resell TIBSOVO® to pharmacies or dispense directly to patients. In addition to distribution agreements with Customers, we enter into arrangements with healthcare providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of TIBSOVO®. The performance obligation related to the sale of TIBSOVO® is satisfied and revenue is recognized when the Customer obtains control of the product, which occurs at a point in time, typically upon delivery to the Customer. Revenues from product sales are recorded at the net sales price, or transaction price, which includes estimates of variable consideration for which reserves are established and result from contractual adjustments, government rebates, returns and other 80 Table of Contents allowances that are offered within the contracts with our Customers, healthcare providers, payors and other indirect customers relating to the sale of our products. Contractual Adjustments. We generally provide Customers with discounts, including prompt pay discounts, and allowances that are explicitly stated in the contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we receive sales order management, data and distribution services from certain Customers. Chargebacks and discounts represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are estimated using the expected value method, based upon a range of possible outcomes that are probability-weighted for the estimated channel mix and are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue. Government Rebates. Government rebates include Medicare, TriCare, and Medicaid rebates, which we estimate using the expected value method, based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Returns. We estimate the amount of product sales that may be returned by Customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We currently estimate product return liabilities using the expected value method, based on available industry data, including our visibility into the inventory remaining in the distribution channel. Collaboration Revenue We apply the provisions of ASC 808, Collaborative Arrangements, when accounting for our collaboration agreements. We evaluate the presentation of amounts due from our collaborative partners associated with activities in the collaborative arrangement based on the nature of each activity. For transactions with customers, we have reported revenues and costs in accordance with ASC 606 and ASC 606-10-55-36 through 55-40, Principal versus Agent Considerations . We recognize revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that have been determined to be within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract based on the relative standalone selling prices, or SSPs, of the goods or services provided; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. Once the contract is determined to be within the scope of ASC 606, 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 will 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. The transaction price for each collaboration agreement is determined based on the amount of consideration we expect to be entitled to for satisfying all performance obligations within the agreement. Significant judgment may be required in determining the amount of variable consideration to be included in the transaction price. We use the most likely amount and expected value methods to determine variable consideration and will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur. As part of the initial accounting for these arrangements, we must develop assumptions that require judgment to determine the SSP for each performance obligation identified in the contract. We use these key assumptions to determine the SSP, which include forecast of revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. We recognize the transaction price allocated to upfront license payments as revenue upon delivery of the license to the customer and resulting ability of the customer to use and benefit from the license, if the license is determined to be distinct from the other performance obligations identified in the contract. If the license is not considered to be distinct from the other performance obligations, we exercise judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied (i) at a point in time, but only for licenses determined to be distinct from other performance obligations in the contract, or (ii) over time; and, if over time, the appropriate method of measuring progress for 81 Table of Contents purposes of recognizing revenue from license payments. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. A significant portion of revenue generated from our collaboration agreements with Celgene relates to the provision of research and development services whereby revenue is recognized under an input method using the ratio of effort incurred to date compared to the total estimated effort required to complete the performance obligation. The calculation of the total estimated effort includes the total amount of forecasted costs associated with the completion of discovery, pre-clinical or clinical trials, as well as the assumed timing of these activities and estimated patient populations. Such cost estimates include forecasted direct labor and material costs, subcontractor costs, and external CRO costs. Milestone Revenue (variable consideration) Many of our collaboration agreements also entitle us to additional payments upon the achievement of performance-based milestones. These milestones are generally categorized into three types: development milestones, which are generally based on the initiation of clinical trials; regulatory milestones, which are generally based on the submission, filing or approval of regulatory applications such as an NDA in the U.S.; and sales-based milestones, which are generally based on meeting specific thresholds of sales in certain geographic areas during a specified period. Upfront and ongoing development milestones that we receive pursuant to our collaboration agreements are not subject to refund if the development activities are not ultimately successful. For each collaboration agreement that provides for development milestone payments, we evaluate whether it is probable that the consideration associated with each milestone will not be subject to a significant reversal in the cumulative amount of revenue recognized. Amounts that meet this threshold are included in the transaction price using the most likely amount method, whereas amounts that do not meet this threshold are considered constrained and excluded from the transaction price until they meet this threshold. Milestones tied to regulatory approval, and therefore not within our control, are considered constrained until such approval is received. At the end of each subsequent reporting period, we re-evaluate the probability of a significant reversal of the cumulative revenue recognized for our milestones, and, if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues from collaborators and loss in the period of adjustment. For arrangements that include sales-based milestone or royalty payments based on the level of sales, and in which the license is deemed to be the predominant item to which the sales-based milestone or royalties relate to, we recognize revenue in the period in which the sales-based milestone is achieved and in the period in which the sales associated with the royalty occur. Liability related to sale of future revenue We treat the sale of future revenue to RPI as a debt financing, as we have significant continuing involvement in the generation of the cash flows. As result, we recorded the proceeds from this transaction as a liability related to the sale of future revenue to be amortized to interest expense using the effective interest rate method over the life of the arrangement. The liability related to sale of future revenue and the related interest expense are based on our current estimates of future royalties expected to be paid over the life of the arrangement. We will periodically assess the expected royalty payments using forecasts from external sources. To the extent our future estimates of royalty payments are greater or less than previous estimates or the estimated timing of such payments is materially different than its previous estimates, we will prospectively recognize related non-cash interest expense. Accrued research and development expenses As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. Certain service providers invoice us in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to: (i) CROs and other third parties in connection with clinical studies and preclinical development activities; (ii) investigative sites in connection with clinical studies; and (iii) third parties related to product manufacturing, development and distribution of clinical supplies. We base our expenses related to CROs on our estimates of the services received and efforts expended pursuant to quotes and contracts with CROs that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our 82 Table of Contents estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. Stock-based compensation We account for stock-based compensation awards in accordance with ASC 718, Compensation –Stock Compensation . For stock-based awards granted to employees, non-employees and members of the board of directors for their services and for participation in our employee stock purchase plan, we estimate the grant date fair value of each option award using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires us to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. Expected term. We use the “simplified method” as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share Based Payments , to estimate the expected term of stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the contractual term of ten years and the weighted-average vesting term of the stock options, taking into consideration multiple vesting tranches. We utilize this method due to lack of historical data and the plain-vanilla nature of our share-based awards. Volatility. We use a weighted-average of expected volatility based on the volatilities of a representative group of publicly traded biopharmaceutical companies, including ourselves. The expected volatility has been determined using a weighted-average of the historical volatilities of the representative group of companies for a period equal to the expected term of the option grant. Risk-free rate. The risk-free rate is based on the yield curve of U.S. Treasury securities with periods commensurate with the expected term of the options being valued. Dividends. We have never paid, and do not anticipate paying, any cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero in the option-pricing model. Forfeitures. We account for forfeitures as they occur and, therefore, do not estimate forfeitures. For awards subject to service-based vesting conditions, we recognize stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period. For awards subject to both performance and service-based vesting conditions, we recognize stock-based compensation expense over the remaining service period if the performance condition is considered probable of achievement using management’s best estimates. Results of Operations Certain prior-year amounts have been reclassified to conform with current presentation. Comparison of years ended December 31, 2020, 2019 and 2018 Total Revenue (In thousands) 2020 2019 2018 Revenues: Product revenue, net $ 121,089 $ 59,851 $ 13,841 Collaboration revenue – related party 68,274 39,257 60,661 Collaboration revenue – other 3,571 8,262 12,670 Royalty revenue – related party 10,262 10,542 7,215 Total revenue $ 203,196 $ 117,912 $ 94,387 Total Revenue – 2020 vs 2019 – The increase in total revenue of $85.3 million in 2020 compared to 2019 was primarily due to an increase in product revenue of $61.2 million and an increase in collaboration revenue - related party of $29.0 million. The increase in product revenue was primarily the result of increased sales volume of TIBSOVO®. The increase in collaboration revenue-related party was primarily due to our updated estimate of the future costs of research and development services to complete one of our performance obligations under the 2016 Agreement which had been recognized over time. Total Revenue – 2019 vs 2018 – The increase in total revenue of $23.5 million in 2019 compared to 2018 was primarily due to an increase in product revenue of $46.0 million partially offset by a decrease in collaboration revenue - related party of $21.4 million. The increase in product revenue related to a full year of sales of TIBSOVO® in 2019 as compared to a partial year of 83 Table of Contents sales in 2018. The decrease in collaboration revenue-related party was primarily due to the $15.0 million milestone payment related to Celgene's filing of an MAA with the EMA for IDHIFA® for IDH2 mutant-positive R/R AML in 2018. We generate product revenue from sales of TIBSOVO® to Customers. If the proposed sale to Servier of our oncology business is completed, we will no longer sell TIBSOVO® and our product revenue will significantly decrease until such time as we commercialize another product candidate. Under the 2010 Agreement with Celgene, we are reimbursed for costs incurred for our co-commercialization efforts and development activities. If the proposed sale to Servier of our oncology business is completed, Servier will acquire our co-commercialization right and responsibilities for BMS’s IDHIFA®, and our collaboration revenue – related party will significantly decrease. Further, the $25.0 million milestone remaining under the 2010 Agreement after the sale of our IDHIFA® royalty revenue to RPI, will be payable to Servier following the close of the proposed sale. As partial consideration for our proposed sale to Servier, we are entitled to a royalty of 5% of U.S. net sales of TIBSOVO® from the closing through the loss of exclusivity of TIBSOVO® and a royalty of 15% of U.S. net sales of vorasidenib from the first commercial sale of vorasidenib through loss of exclusivity of vorasidenib. However, we cannot predict what success, if any, Servier may have in the United States with respect to sales of TIBSOVO® and vorasidenib and, therefore, the amount of royalty payments that we can expect to receive from Servier under the terms of the Purchase Agreement prior to the loss of exclusivity of these products. Total Operating Expenses (In thousands) 2020 2019 2018 Cost and expenses: Cost of sales $ 2,805 $ 1,317 $ 1,397 Research and development 367,470 410,894 341,324 Selling, general and administrative 149,070 132,034 114,145 Total Operating Expenses $ 519,345 $ 544,245 $ 456,866 Total Operating Expenses – 2020 vs 2019 – The decrease in total operating expenses of $24.9 million in 2020 compared to 2019 was primarily due to a decrease of $43.4 million in research and development expenses, which is described below under Research and Development Expenses, partially offset by an increase of $17.0 million in selling, general and administrative expense due to higher personnel costs, including stock-based compensation expense, related to additional hiring for our workforce. Included in selling, general and administrative expense is approximately $5.0 million in professional fees related to entering into the proposed sale transaction with Servier. In addition, our cost of sales increased moderately in 2020 as we continue to deplete our finished goods inventory that was expensed prior to receiving FDA approval of TIBSOVO®. Total Operating Expenses – 2019 vs 2018 – The increase in total operating expenses of $87.4 million in 2019 compared to 2018 was primarily due to an increase of $69.6 million in research and development expenses, which is described below under Research and Development Expenses. Cost of sales consists primarily of manufacturing costs for sales of TIBSOVO®. If our proposed sale of our oncology business to Servier is completed, our cost of sales will significantly decrease until such time as we commercialize another product candidate. 84 Table of Contents Research and Development Expenses Our research and development expenses, by major program, are outlined in the table below: (In thousands) 2020 2019 2018 IDH1 inhibitor (ivosidenib) $ 51,907 $ 79,087 $ 74,600 IDH2 inhibitor (enasidenib) 1,163 3,983 4,140 Pan IDH inhibitor (vorasidenib (AG-881)) 18,322 23,060 7,005 PKR activator (mitapivat) 48,669 47,481 31,254 MAT2A inhibitor (AG-270) 6,500 11,058 9,656 DHODH inhibitor (AG-636) discontinued 2,987 8,663 4,428 Next-Gen PKR activator (AG-946) 8,378 5,849 6,314 Other research and platform programs 32,979 38,208 30,193 Total direct research and development expenses 170,905 217,389 167,590 Compensation and related expenses 146,515 144,888 135,227 Facilities and IT related expenses & other 50,050 48,617 38,507 Total indirect research and development expenses 196,565 193,505 173,734 Total research and development expense $ 367,470 $ 410,894 $ 341,324 Total Research and Development Expenses – 2020 vs 2019 – The decrease in research and development expenses of $43.4 million in 2020 compared to 2019 was primarily due to a $46.5 million decrease in our direct expenses. The decrease in direct expenses was primarily due to a $27.2 million decrease in ivosidenib costs, a $5.7 million decrease in AG-636 costs, and a $5.2 million decrease in other research and platform programs. The decrease in ivosidenib costs was primarily due to decreased trial activities for the ClarIDHy trial and decreased clinical costs driven by $6.5 million in milestones achieved by HOVON during the year ended December 31, 2019 for the initiation of the HO150/AMLSG29 trial. The decrease in AG-636 costs was primarily due to the decision to halt internal development of AG-636 in the first quarter of 2020 due to limited trial enrollment, and a $2.0 million milestone payment due to Aurigene upon first patient dosing within the phase 1 lymphoma trial in the second quarter of 2019. The decrease in other research and platform programs was primarily driven by planned decreased activity on various exploratory and discovery activities and a $4.0 million upfront payment for exploratory efforts in the second quarter of 2019. Total Research and Development Expenses – 2019 vs 2018 – The increase in research and development expenses of $69.6 million in 2019 compared to 2018 was primarily due to a $49.8 million increase in our direct expenses and a $19.8 million increase in our indirect expenses. The increase in direct expenses of $49.8 million was primarily due to a $16.2 million increase for mitapivat driven by continuing enrollment and ongoing trial activities for ACTIVATE, ACTIVATE-T, DRIVE PK and related rollover studies, a $16.1 million increase for vorasidenib (AG-881) driven by clinical start up activities for the phase 3 INDIGO trial including clinical diagnostic costs, and research support activities including clinical pharmacology studies, and a $7.6 million increase in other research and platform program expenses driven by our other research programs due to the ongoing progression of our product pipeline. The increase in indirect expenses of $19.8 million was primarily due to a $10.1 million increase in facility and IT related expenses primarily driven by the new leasing space that we entered into in 2019 and associated costs and a $9.7 million increase in employee related expenses driven by additional hiring during the year to support increased clinical program activity. If our proposed sale to Servier is completed, we will no longer operate the oncology business. We will be a smaller, less diversified company with a more limited business concentrated on GDDs. As a result, our direct research and development expenses for ivosidenib, enasidenib, vorasidenib, AG-270 and AG-636 will cease, and our direct research and development expenses will largely be concentrated on mitapivat and AG-946. Interest Income and Expense (In thousands) 2020 2019 2018 Interest income, net $ 6,611 $ 14,861 $ 16,451 Non-cash interest expense for the sale of future revenue (17,832) — — Interest Income and Non-Cash Interest Expense for the Sale of Future Revenue – 2020 vs 2019 – The decrease in interest income, net in 2020 compared to 2019 is primarily attributable to the decrease in interest rates at the end of the first quarter of 2020, which reduced the interest rates earned by 0.50% to 1.50% from prior periods and the decrease in our outstanding marketable securities balance for the year ended December 31, 2020. The non-cash interest expense for the sale of future 85 Table of Contents revenue in 2020 was due to the interest expense associated with the sale of future revenue to RPI recorded in the year ended December 31, 2020. Interest Income and Expense – 2019 vs 2018 – The decrease in interest income, net in 2019 compared to 2018 is primarily driven by lower investment balances in 2019 due to lower interest earned on investments. The lower interest earned on investments in 2019 was primarily due to the amount and timing of the receipt of funds of $277.2 million in November 2019 from a follow-on common stock offering compared to $516.2 million in January 2018 from a follow-on common stock offering. Loss from Operations and Net Loss (In thousands) 2020 2019 2018 Loss from operations $ (316,149) $ (426,333) $ (362,479) Net loss (327,370) (411,472) (346,028) Loss from Operations and Net Loss – 2020 vs 2019 – The decrease in loss from operations and net loss in 2020 compared to 2019 is primarily driven by higher total revenue as described above in Total Revenue and lower operating expenses as described above in Total Operating Expenses. Loss from Operations and Net Loss – 2019 vs 2018 – The increase in loss from operations and net loss in 2019 compared to 2018 is primarily driven by higher operating expenses as described above in Total Operating Expenses. Liquidity and Capital Resources Sources of liquidity Since our inception, and through December 31, 2020, we have funded our operations through upfront, milestone, extension, cost reimbursement and royalty payments related to our collaboration agreements, product sales, proceeds from the rale of our royalty rights, proceeds received from our issuance of preferred stock, our initial public offering and concurrent private placement of common stock to an affiliate of Celgene, and our follow-on public offerings. On June 11, 2020, we sold our tiered, sales-based royalty rights on worldwide net sales of IDHIFA® (enasidenib), as well as our rights to receive up to $55.0 million in outstanding regulatory milestone payments from BMS, to RPI for $255.0 million. Under the 2010 Agreement, we remain eligible to receive a $25.0 million potential milestone payment for the enasidenib program. The potential milestone payment is a $25.0 million milestone payment upon achievement of a specified ex-U.S. commercial milestone event, as well as reimbursement for costs incurred for our co-commercialization efforts and development activities. On April 30, 2020, we entered into an at-the-market sales agreement, or the 2020 sales agreement, with Cowen & Company LLC, or Cowen, pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $250.0 million through Cowen pursuant to a universal shelf registration statement on Form S-3 filed with the SEC on April 30, 2020. As of December 31, 2020, $250.0 million in common stock remained available for future issuance under the 2020 sales agreement. In November 2019, we completed a public offering of 9,487,500 shares of common stock at an offering price of $31.00 per share. We received net proceeds from this offering of $277.2 million, after deducting underwriting discounts and commissions paid by us, certain of which are subject to reimbursement. In January 2018, we completed a public offering of 8,152,986 shares of common stock at an offering price of $67.00 per share. We received net proceeds from this offering of $516.2 million, after deducting underwriting discounts and commissions paid by us. In addition to our existing cash, cash equivalents and marketable securities, we are eligible to earn milestone payments, cost reimbursements, and royalty payments under our collaboration agreements with Celgene and CStone. Our ability to earn the milestone payments, cost reimbursements and royalty payments, and the timing of earning these amounts are dependent upon the timing and outcome of our development, regulatory and commercial activities, and is uncertain at this time. Our right to payments under our collaboration agreements with Celgene and CStone are our only committed potential external source of funds. In December 2020, we entered into the Purchase Agreement with Servier. The base purchase price of $1.8 billion is subject to a working capital adjustment and will increase or decrease based on the amount of working capital of the oncology business as of the completion of the transaction relative to a specified working capital target. It is not possible to determine with precision the amount of working capital the oncology business may have as of the completion of the transaction. It is possible that the working capital adjustment may result in a meaningful reduction to the purchase price. Whether the regulatory approval milestone for vorasidenib will be achieved is also subject to various risks and uncertainties. The transaction includes the sale of 86 Table of Contents TIBSOVO®, a current source of our revenue, and vorasidenib. We cannot predict what success, if any, Servier may have in the United States with respect to sales of TIBSOVO® and vorasidenib and, therefore, the amount of royalty payments that we can expect to receive from Servier under the terms of the Purchase Agreement prior to the loss of exclusivity of these products. The parties’ obligations to consummate the proposed sale are subject to customary conditions, including the approval of the sale by the holders of at least a majority of our outstanding shares of common stock, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of required regulatory approvals in Germany. Our board of directors may cause us to terminate the Purchase Agreement in order to enter into a definitive agreement relating to a superior proposal, subject to complying with certain conditions set forth in the Purchase Agreement. If we terminate the Purchase Agreement in order to enter into definitive agreements with respect to a superior proposal, we may be required to pay to Servier a termination fee of $45 million prior to or concurrently with such termination. Cash flows The following table provides information regarding our cash flows for the years ended December 31, 2020, 2019 and 2018: (In thousands) 2020 2019 2018 Net cash used in operating activities $ (290,759) $ (370,622) $ (304,421) Net cash provided by (used in) investing activities 75,746 91,440 (273,825) Net cash provided by financing activities 261,518 289,611 546,024 Net change in cash and cash equivalents $ 46,505 $ 10,429 $ (32,222) Net cash used in operating activities During the year ended December 31, 2020, we received $123.8 million from sales of TIBSOVO®, $7.9 million in royalty payments and $6.1 million in cost reimbursements related to our Collaboration Agreements with Celgene, $7.0 million in interest received, and $3.6 million in cost reimbursements related to our CStone Agreement. These amounts were offset by operating expenses driven by research and development costs described above in Research and Development Expenses and increased staffing needs due to our expanding operations. Net cash used in operating activities does not include the $5.0 million in professional fees related to entering into the proposed sale transaction with Servier in the fourth quarter of 2020. During the year ended December 31, 2019, we received $60.7 million from product sales of TIBSOVO®, $19.1 million in cost reimbursements and royalty payments under our collaboration agreement with Celgene, and a $5.0 million milestone payment under the CStone Agreement. The significant increase in product sales of TIBSOVO® was primarily due to having a full year of sales in 2019. These amounts were offset by increased operating expenses that related to increases in clinical study costs due to advancements in our most advanced product candidates, commercialization efforts, expanded facilities and increased staffing needs due to our expanding operations. During the year ended December 31, 2018, we received $10.0 million from product sales of TIBSOVO®, $20.1 million in cost reimbursements and royalty payments and a $15.0 million milestone payment under our collaboration agreements with Celgene and $12.0 million under the CStone Agreement. These amounts were offset by increased operating expenses that related to increases in clinical study costs due to advancements in our most advanced product candidates, commercialization efforts, expanded facilities and increased staffing needs due to our expanding operations. Net cash provided by (used in) investing activities The cash provided by investing activities for the year ended December 31, 2020 was primarily the result of lower purchases of marketable securities than proceeds from maturities and sales of marketable securities, offset by $14.9 million in purchases of property and equipment. The cash provided by investing activities for the year ended December 31, 2019 was primarily the result of lower purchases of marketable securities than proceeds from maturities and sales of marketable securities, offset by $12.2 million in purchases of property and equipment. The cash used in investing activities for the year ended December 31, 2018 was primarily the result of higher purchases of marketable securities than proceeds from maturities and sales of marketable securities, and $7.0 million in purchases of property and equipment. Net cash provided by financing activities The cash provided by financing activities for the year ended December 31, 2020 was primarily the result of net proceeds of $250.5 million from the sale of our tiered, sales-based royalty rights on worldwide net sales of IDHIFA® (enasidenib) and our 87 Table of Contents ex-US regulatory milestones to RPI in June 2020, and the $11.3 million of proceeds received from stock option exercises and purchases made pursuant to our employee stock purchase plan. The cash provided by financing activities for the year ended December 31, 2019 was primarily the result of proceeds of $277.2 million from the November 2019 follow-on public offering, net of underwriting discounts and commissions, as well as proceeds of $12.5 million received from stock option exercises and purchases made pursuant to our employee stock purchase plan. The cash provided by financing activities for the year ended December 31, 2018 was primarily the result of proceeds of $516.2 million from the January 2018 follow-on public offering, net of underwriting discounts and commissions, as well as proceeds of $30.2 million received from stock option exercises and purchases made pursuant to our employee stock purchase plan. Funding requirements Until the completion of the proposed sale of our oncology business to Servier, we expect our expenses to increase in connection with our ongoing activities, particularly as we continue to commercialize TIBSOVO®, and continue the research, development and clinical trials of, and seek additional marketing approvals for, our product candidates. If we obtain additional marketing approval for any of our other product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of Celgene, CStone or other partners. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. We expect that our existing cash, cash equivalents and marketable securities as of December 31, 2020, together with anticipated product revenue, anticipated interest income and anticipated expense reimbursements under our collaboration and license agreements, but excluding any additional program-specific milestone payments or any proceeds from the proposed sale of our oncology business to Servier, if such sale is consummated, will enable us to fund our operating expenses and capital expenditure requirements to the end of 2022. Following the completion of the transaction with Servier and any subsequent shareholder returns, we expect to have sufficient capital to fund operations through major catalysts and to cash-flow positivity without the need to raise additional equity. Our future capital requirements will depend on many factors, including: • the timing and likelihood of the closing of the sale of our oncology business to Servier and the amount of consideration we may receive in connection with the sale; • the scope, progress, results and costs of drug discovery, preclinical development, laboratory testing and clinical trials for our product candidates; • the success of and developments regarding, our collaborations; • the costs, timing and outcome of regulatory review of our product candidates; • the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; • commercialization expenses related to approved medicines; • levels of product revenue from sales of approved medicines; • the costs associated with preparation for the potential commercial launch of one or more of our product candidates; • our ability to establish and maintain additional collaborations on favorable terms, if at all; • our ability to successfully execute on our strategic plans; • operational delays due to the ongoing COVID-19 pandemic; and • the extent to which we acquire or in-license, or monitor or out-license, other medicines and technologies. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other nondilutive strategic transactions. We do not have any committed potential external source of funds other than our collaborations, and the proposed sale of our oncology business to Servier. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed or on attractive terms, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. 88 Table of Contents Off-Balance Sheet Arrangements We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules. Contractual Obligations The following table summarizes our significant contractual obligations as of the payment due date by period at December 31, 2020: Payments due by period (In thousands) Total Less than 1 year 1-3 years 3-5 years More than 5 years Operating lease obligations $ 130,649 $ 13,198 $ 34,899 $ 38,167 $ 44,385 Manufacturing arrangements 4,743 1,205 3,538 — — We enter into agreements in the normal course of business with CROs for clinical trials and contract manufacturing organizations, or CMOs, for supply manufacturing and with vendors for preclinical research studies and other services and products for operating purposes. These contractual obligations are cancelable at any time by us, generally upon prior written notice to the vendor, and are thus not included in the contractual obligations table. Other than the specific payments noted in the table of contractual obligations, we are obligated to make future milestone and royalty payments under our global license agreement with Aurigene, or the Aurigene Agreement. Financial terms of the Aurigene Agreement include potential future milestone payments of up to $15.0 million if we achieve certain development and regulatory milestones and low single-digit royalties on net product sales, if any. During the year ended December 31, 2019, upon initiation of the first phase 1 clinical trial for DHODH, we made a milestone payment of $2.0 million. We did not make any payments during the year ended December 31, 2020 and we do not expect to make any milestone payments during the next 12 months. In addition, we are also party to other license agreements which include contingent payments. However, contingent payments related to these license agreements are not disclosed as the satisfaction of these contingent payments is uncertain at December 31, 2020 and, if satisfied, the timing of payment for these amounts was not reasonably estimable at December 31, 2020. Commitments related to the license agreements include contingent payments that will become payable if and when certain development, regulatory and commercial milestones are achieved. During the next 12 months, we do not expect to make m ilestone payments related to such license agreements. Lastly, in connection with the proposed sale of our oncology business to Servier, if the agreement is terminated under specified conditions, we would be required to make a one-time payment of $45 million to Servier.