Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form-10-K (“Form 10-K”). This Form 10-K, including the following sections, contains forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the “Risk Factors” section in Item 1A of this Form 10-K. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-K.
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Overview
We are a commercial-stage biopharmaceutical company with a mission to increase patient access to cost-effective medicines that can have a major impact on their lives and to deliver significant savings to the health care system. We have become a leader in the biosimilar market by leveraging our team’s collective expertise in key areas such as process science, analytical characterization, protein production, clinical-regulatory development and commercialization. We began selling UDENYCA® (pegfilgrastim-cbqv), a biosimilar to Neulasta, a long-acting granulocyte-colony stimulating factor, in the United States in January 2019.
On February 1, 2021, we entered into an Exclusive License and Commercialization Agreement (the “Collaboration Agreement”) with Shanghai Junshi Biosciences, Co., Ltd. (“Junshi Biosciences”), for the co-development and commercialization of toripalimab, Junshi Biosciences’ anti-PD-1 antibody, in the United States and Canada. Under the Collaboration Agreement, we will also be granted options to Junshi Biosciences’ TIGIT-targeted antibody and next generation engineered IL-2 cytokine for evaluation as potential combination therapies with toripalimab, as well as certain negotiation rights to two early-stage checkpoint inhibitor antibodies (the “Collaboration”) . The Collaboration expands our late-stage pipeline into the rapidly growing checkpoint inhibitor market, which is expected to exceed $25.0 billion in the United States by 2025, and provides us a PD-1 backbone for potential long-term growth with next-generation immuno-oncology combinations. Closing of the Collaboration Agreement is subject to clearance under the HSR Act.
Our pre-commercial pipeline includes the following product candidates:
Oncology Pipeline
● Toripalimab, an anti-PD-1 antibody being developed in collaboration with Junshi Biosciences.
● A bevacizumab (Avastin) biosimilar candidate in collaboration with Innovent.
Immunology Pipeline
● CHS-1420 (our adalimumab (Humira) biosimilar candidate).
Opthalmology Pipeline
● A ranibizumab (Lucentis) biosimilar candidate in collaboration with Bioeq;
On January 3, 2019, we initiated the U.S. sales of UDENYCA®, our first commercial product. While we have been profitable for the years ended December 31, 2020 and 2019, we anticipate that we may experience lower profitability and annual losses in the near term as a result of incurring expenses associated with upfront and milestone payments under our collaboration with Junshi Biosciences, if cleared under the HSR Act. Our net income was $132.2 million and $89.8 million for the year ended December 31, 2020 and 2019, respectively, and our net loss was $209.4 million for the year ended December 31, 2018. As of December 31, 2020, we had an accumulated deficit of $762.8 million.
In February 2016, we issued and sold $100.0 million aggregate principal amount of our 8.2% Convertible Senior Notes due in March 2022 (the “2022 Convertible Notes”). These 2022 Convertible Notes require quarterly interest distributions at a fixed coupon rate of 8.2% until maturity, redemption or conversion, which will be no later than March 31, 2022. If we fail to satisfy certain registration or reporting requirements, then additional interest will accrue on the 2022 Convertible Notes at a rate of up to 0.50% per annum in the aggregate. The holders of the 2022 Convertible Notes are Healthcare Royalty Partners III, L.P. and three of its related entities, which hold $75.0 million in aggregate principal amount, and three related party investors, KKR Biosimilar L.P., which holds $20.0 million, MX II Associates LLC, which holds $4.0 million, and KMG Capital Partners, LLC, which holds $1.0 million. The 2022 Convertible Notes are convertible into shares of common stock at an initial conversion rate of 44.7387 shares of common stock per $1,000 principal amount of the 2022 Convertible Notes (equivalent to a conversion price of approximately $22.35 per share of common stock, representing a 60% premium over the average last reported sale price of our common stock over the 15 trading days preceding the date the 2022 Convertible Notes were issued), subject to adjustment in certain events. Upon conversion of the 2022 Convertible Notes by a holder, the holder will receive shares of our common stock, together, if applicable, with cash in lieu of any fractional share. After March 31, 2020, the full amount of the 2022 Convertible Notes not previously converted are redeemable for cash at our option if the last reported sale price per share of our common stock exceeds 160% of the conversion price on 20 or more trading days during the 30 consecutive trading days preceding the
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date on which we send notice of such redemption to the holders of the 2022 Convertible Notes. At maturity or redemption, if not earlier converted, we will pay 109% of the principal amount of the 2022 Convertible Notes, together with accrued and unpaid interest, in cash. In April 2020, we amended the 2022 Convertible Notes purchase agreement in connection with the issuance and sale of our 2026 Convertible Notes (as defined below).
In October 2016, we entered into a sales agreement with Cowen and Company, LLC (“Cowen”), under which we offered and sold our common stock, having aggregate gross proceeds of up to $100.0 million, from time to time through Cowen as our sales agent (the “ATM Offering Program”). In the first quarter of 2019, we sold 761,130 shares of common stock at a weighted average price of $11.17 per share under the ATM Offering Program for aggregate net proceeds of $8.2 million. Following such sales, the ATM Offering Program terminated as all shares authorized thereunder had been sold.
On January 7, 2019 (the “Term Loan Closing Date”), we entered into a credit agreement (the “Term Loan”) with affiliates of Healthcare Royalty Partners (together, the “Lender”). The Term Loan consists of a six-year term loan facility for an aggregate principal amount of $75.0 million (the “Borrowings”). Our obligations under the loan documents are guaranteed by our material domestic U.S. subsidiaries.
The Borrowings under the Term Loan bear interest through maturity at 7.00% per annum plus LIBOR (customarily defined). Pursuant to the terms of the Term Loan, the interest rate was reduced to 6.75% per annum plus LIBOR as of January 1, 2020 as the consolidated net sales (customarily defined) for UDENYCA® for the fiscal year ending December 31, 2019, were in excess of $250.0 million. Interest is payable quarterly in arrears.
We are required to pay principal on the Borrowings in equal quarterly installments beginning on the four year anniversary of the Term Loan Closing Date (or, if consolidated net sales of UDENYCA® in the fiscal year ending December 31, 2021 are less than $375.0 million, beginning on the three year anniversary of the Term Loan Closing Date), with the outstanding balance to be repaid on January 7, 2025, the maturity date.
We are also required to make mandatory prepayments of the Borrowings under the Term Loan, subject to specified exceptions, with the proceeds of asset sales, extraordinary receipts, debt issuances and specified other events including the occurrence of a change in control.
If all or any of the Borrowings are prepaid or required to be prepaid under the Term Loan, then we shall pay, in addition to such prepayment, a prepayment premium equal to (i) with respect to any prepayment paid or required to be paid on or prior to the three year anniversary of the Term Loan Closing Date, 5.00% of the Borrowings prepaid or required to be prepaid, plus all required interest payments that would have been due on the Borrowings prepaid or required to be prepaid through and including the three year anniversary of the Term Loan Closing Date, (ii) with respect to any prepayment paid or required to be paid after the three year anniversary of the Term Loan Closing Date but on or prior to the four year anniversary of the Term Loan Closing Date, 5.00% of the Borrowings prepaid or required to be prepaid, (iii) with respect to any prepayment paid or required to be paid after the four year anniversary of the Term Loan Closing Date but on or prior to the five year anniversary of the Term Loan Closing Date, 2.50% of the Borrowings prepaid or required to be prepaid, and (iv) with respect to any prepayment paid or required to be prepaid thereafter, 1.25% of the Borrowings prepaid or required to be prepaid.
In connection with the Term Loan, we paid a fee to the Lender of approximately $1.1 million at closing in the form of an original issue discount. Upon the prepayment or maturity of the Borrowings (or upon the date such prepayment or repayment is required to be paid), we are required to pay an additional exit fee in an amount equal to 4.00% of the total principal amount of the Borrowings.
The obligations under the Term Loan are secured by a lien on substantially all of our and our Guarantors’ tangible and intangible property, including intellectual property. The Term Loan contains certain affirmative covenants, negative covenants and events of default, including, covenants and restrictions that among other things, restrict our ability and our subsidiaries to, incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, in asset sales, and declare dividends or redeem or repurchase capital stock. Additionally, the consolidated net sales for UDENYCA® must not be lower than $70.0 million for the fiscal year ending December 31, 2019, (b) $125.0 million for the fiscal year ending December 31, 2020, and (c) $150.0 million for each fiscal year thereafter. A failure to comply with these covenants could permit the Lender under the Term Loan to declare the Borrowings, together with accrued interest and fees, to be immediately due and payable. In April 2020, we amended the Term Loan in connection with the issuance and sale of our 2026 Convertible Notes (as defined below).
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In April 2020, we issued and sold $230.0 million aggregate principal amount of 1.5% convertible senior subordinated notes due in 2026 (the “2026 Convertible Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. In connection with the pricing of the 2026 Convertible Notes, we entered into privately negotiated capped call transactions with one or more of the initial purchasers or their respective affiliates and/or other financial institutions (the “Option Counterparties”). The cap price of the capped call transactions will initially be $25.9263 per share, which represents a premium of approximately 75.0% over the last reported sale price of our common stock of $14.815 per share on April 14, 2020, and is subject to certain adjustments under the terms of the capped call transactions. The 2026 Convertible Notes are general unsecured obligations and will be subordinated to our designated senior indebtedness. The 2026 Convertible Notes accrue interest at a rate of 1.5% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2020, and will mature on April 15, 2026, unless earlier repurchased or converted. At any time before the close of business on the second scheduled trading day immediately before the maturity date, holders may convert their 2026 Convertible Notes at their option into shares of our common stock, together, if applicable, with cash in lieu of any fractional share, at the then-applicable conversion rate. The initial conversion rate is 51.9224 shares of common stock per $1,000 principal amount of 2026 Convertible Notes, which represents an initial conversion price of approximately $19.26 per share of common stock. The initial conversion price represents a premium of approximately 30.0% over the last reported sale of $14.815 per share of our common stock on the Nasdaq Global Market on April 14, 2020. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. If a “make-whole fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, we will, in certain circumstances, increase the conversion rate for a specified period of time for holders who convert their 2026 Convertible Notes in connection with that make-whole fundamental change. The 2026 Convertible Notes are not redeemable at our election before maturity. If a “fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, then, subject to a limited exception, holders may require us to repurchase their 2026 Convertible Notes for cash. The repurchase price will be equal to the principal amount of the 2026 Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date. The net proceeds from the offering were $222.2 million, net of the initial purchasers’ fees and the offering expenses. We used approximately $18.2 million of the net proceeds to fund the cost of entering into the capped call transactions.
COVID-19 Update
As a result of the COVID-19 outbreak, we have experienced and may continue to experience disruptions that could severely impact our business, clinical trials and preclinical studies. See “Risk Factors ”. These and other factors arising from the COVID-19 pandemic could result in us not being able to maintain UDENYCA®’s market position or increase its penetration against all Neulasta’s dosage forms, and could result in our inability to meet development milestones for our product candidates, each of which would harm our business, financial condition, results of operations and growth. We expect the COVID-19 pandemic to have some adverse impact on our sales growth on a year-over-year basis.
While the long-term economic impact and the duration of the COVID-19 pandemic may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, which could reduce our ability to access capital and could negatively affect our liquidity and the liquidity and stability of markets for our common stock and our convertible notes. In addition, a recession, further market correction or depression resulting from the spread of COVID-19 could materially affect our business and the value of our notes and our common stock.
Financial Operations Overview
Revenue
Our first FDA approved product, UDENYCA®, was approved in November 2018, and we initiated U.S. sales of UDENYCA® on January 3, 2019. We recorded net product revenue of $475.8 million and $356.1 million for the years ended December 31, 2020 and 2019, respectively.
Cost of Goods Sold
Cost of goods sold consists primarily of third-party manufacturing, distribution, and overhead costs associated with UDENYCA®. A portion of the costs of producing UDENYCA® sold to date was expensed as research and development prior to the FDA approval of UDENYCA® and therefore it is not reflected in the cost of goods sold.
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On May 2, 2019, we settled a trade secret action brought by Amgen Inc. and Amgen USA Inc. (collectively “Amgen”). As a result, the cost of goods sold reflects a mid-single digit royalty on net product revenue, which began on July 1, 2019. The royalty cost will continue for five years per the terms of the settlement agreement.
Research and Development Expense
Research and development expense represents costs incurred to conduct research, such as the discovery and development of our product candidates. We recognize all research and development costs as they are incurred. We currently track research and development costs incurred on a product candidate basis only for external research and development expenses. Our external research and development expense consists primarily of:
● expense incurred under agreements with consultants, third-party contract research organizations (“CROs”), and investigative sites where a substantial portion of our preclinical studies and all of our clinical trials are conducted;
● costs of acquiring originator comparator materials and manufacturing preclinical study and clinical trial supplies and other materials from contract manufacturing organizations (“CMOs”), and related costs associated with release and stability testing;
● costs associated with manufacturing process development activities; and
● certain upfront and milestone payments related to licensing and collaboration agreements.
Internal costs are associated with activities performed by our research and development organization and generally benefit multiple programs. These costs are not separately allocated by product candidate. Unallocated, internal research and development costs consist primarily of:
● personnel-related expense, which include salaries, benefits and stock-based compensation; and
● facilities and other allocated expense, which include direct and allocated expense for rent and maintenance of facilities, depreciation and amortization of leasehold improvements and equipment, laboratory and other supplies.
The largest component of our total operating expense has historically been our investment in research and development activities, including the clinical development and manufacturing process development of our product candidates. We received regulatory approval for UDENYCA® and as a result, all of our manufacturing costs for this product are capitalized as inventory and subsequently expensed as costs of goods sold when the inventory is sold. We expect our research and development expense in 2021 to be substantially higher than in 2020 due to the incurrence of the $150.0 million upfront payment as well as additional potential milestone payments to Junshi Biosciences and other additional increased development costs.
We consider regulatory approval of product candidates to be uncertain, and any products manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. We expense manufacturing costs as incurred for product candidates prior to regulatory approval as research and development expense. If, and when, regulatory approval of a product candidate is obtained, we will begin capitalizing manufacturing costs related to the approved product into inventory.
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The following table summarizes our research and development expense incurred during the respective periods:
Phase of
Development as of
Year ended December 31,
December 31, 2020
2020
2019
2018
(in thousands)
External costs incurred by product candidate:
UDENYCA®
Approved
$
14,008
$
9,047
$
42,975
CHS-1420
Completed
25,048
9,039
5,989
CHS-2020
Phase 3
19,249
5,024
878
CHS-131
Phase 2
1,470
4,789
1,181
Bevacizumab (Avastin) biosimilar product candidate licensed from Innovent
3,523
—
—
Upfront and milestone based license fees
7,500
11,075
—
Other research and development expenses (1)
9,635
3,654
7,139
Internal costs
62,326
51,560
52,077
Total research and development expenses
$
142,759
$
94,188
$
110,239
(1) Amount consists of costs for other pipeline candidates.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of personnel costs, allocated facilities costs and other expense for outside professional services, including legal, insurance, human resources, outside marketing, advertising, audit and accounting services, as well as costs associated with establishing commercial capabilities in support of the commercialization of UDENYCA®. Personnel costs consist of salaries, benefits and stock-based compensation. Our selling, general and administrative expense in 2020 was lower than expected as certain sales and marketing activities were decreased due to the COVID-19 pandemic. We expect our selling, general and administrative expense in 2021 to be higher than in 2020 as a result of anticipated increased commercial activities to support UDENYCA® sales and as a result of initiating our ophthalmology and immuno-oncology commercial activities.
Interest Expense
Interest expense consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to the amortization of debt discount and debt issuance costs associated with our various debt agreements outstanding during the years ended December 31, 2020, 2019 and 2018.
Other Income, Net
Other income, net for the years ended December 31, 2020, 2019 and 2018, consists of gains and losses resulting from the remeasurement of our contingent consideration, interest earned from our investments in marketable securities and foreign exchange gains and losses resulting from currency fluctuations. We will continue to record adjustments to the estimated fair value of our contingent consideration related to the Compound Transaction Payment until the contingency settles or expires.
Significant Transactions
1.5% Convertible Senior Subordinated Notes due 2026
In April 2020, we issued and sold $230.0 million aggregate principal amount of 1.5% convertible senior subordinated notes due 2026 (the “2026 Convertible Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2026 Convertible Notes are general unsecured obligations and will be subordinated to our designated senior indebtedness. The 2026 Convertible Notes accrue interest at a rate of 1.5% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2020, and will mature on April 15, 2026, unless earlier repurchased or converted.
At any time before the close of business on the second scheduled trading day immediately before the maturity date, noteholders may convert their 2026 Convertible Notes at their option into shares of our common stock, together, if applicable, with cash in lieu of any
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fractional share, at the then-applicable conversion rate. The initial conversion rate is 51.9224 shares of common stock per $1,000 principal amount of the 2026 Convertible Notes, which represents an initial conversion price of approximately $19.26 per share of common stock. The initial conversion price represents a premium of approximately 30.0% over the last reported sale of $14.815 per share of our common stock on the Nasdaq Global Market on April 14, 2020. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. If a “make-whole fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, we will, in certain circumstances, increase the conversion rate for a specified period of time for noteholders who convert their 2026 Convertible Notes in connection with that make-whole fundamental change. The 2026 Convertible Notes are not redeemable at our election before maturity. If a “fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, then, subject to a limited exception, noteholders may require us to repurchase their 2026 Convertible Notes for cash. The repurchase price will be equal to the principal amount of the 2026 Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date.
In connection with the pricing of the 2026 Convertible Notes, we entered into privately negotiated capped call transactions with one or more of the Option Counterparties. The cap price of the capped call transactions will initially be $25.9263 per share, which represents a premium of approximately 75.0% over the last reported sale price of our common stock of $14.815 per share on April 14, 2020, and is subject to certain adjustments under the terms of the capped call transactions.
The net proceeds from the offering were $222.2 million, net of the initial purchasers’ discounts and commissions and the offering expenses. We used approximately $18.2 million of the net proceeds to fund the cost of entering into the capped call transactions.
The 2026 Convertible Notes are accounted for in accordance with ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”) and ASC 815-40, Contracts in Entity’s Own Equity (“ASC 815-40”). Under ASC 815-40, to qualify for equity classification (or nonbifurcation, if embedded) the instrument (or embedded feature) must be both (1) indexed to the issuer’s stock and (2) meet the requirements of the equity classification guidance. We determined that the 2026 Convertible Notes do contain embedded features indexed to our own stock, but do not meet the requirements for bifurcation, and therefore do not need to be separately accounted for as an equity component. Since the embedded conversion feature meets the equity scope exception from derivative accounting, and also since the embedded conversion option does not need to be separately accounted for as an equity component under ASC 470-20, the proceeds received from the issuance of the convertible debt were recorded as a liability on the consolidated balance sheet. We evaluated the capped call transactions under ASC 815-10 and determined that it should be accounted as a separate transaction from the 2026 Convertible Notes and that the capped calls should be classified as equity instruments. Therefore, the capped call premium paid in the amount of $ 18.2 million was recorded as a reduction to additional paid-in capital. The capped calls will not be subsequently re-measured as long as the conditions for equity classification continue to be met.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). 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 consolidated financial statements, as well as the reported revenue generated and expense incurred during the reporting periods. As appropriate, we periodically evaluate our critical accounting policies and estimates. Our estimates are based on our historical experience and on various other factors that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Accounting estimates and judgements are inherently uncertain and the actual results could differ from these estimates.
Net Product Revenue
We account for sales of UDENYCA® under Topic 606 Revenue from Contracts with Customers . We sell UDENYCA® to wholesalers and distributors, (collectively, “Customers”). Our Customers resell UDENYCA® to hospitals and clinics (collectively, “Healthcare Providers”) under set contracts with us. In addition to distribution agreements with Customers and contracts with Healthcare Providers, we enter into arrangements with group purchasing organizations (“GPOs”) that provide for government-mandated or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of UDENYCA®. We also enter into rebate arrangements with payers, which consist primarily of commercial insurance companies, to cover the reimbursement of UDENYCA® to Healthcare Providers. We provide co-payment
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assistance to patients who have commercial insurance and meet certain eligibility requirements. Revenue from product sales is recognized when a Customer controls the product, which occurs upon delivery of UDENYCA® to and acceptance by that Customer.
Product Sales Discounts and Allowances
Revenue from product sales is recorded at the net sales price (“transaction price”), which includes estimates of variable consideration for which reserves are established and that result from discounts, chargebacks, rebates, co-pay assistance, returns and other allowances that are offered within contracts between us and our Customers, Healthcare Providers, payers and GPOs relating to the sales of UDENYCA®. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions in trade receivables (if the amounts are payable to the customer) or current liabilities (if the amounts are payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as historical experience, current contractual and statutory requirements, specifically known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the best estimates of the amount of consideration to which we are entitled based on the term of our contracts. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The actual amount of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, the estimates will be adjusted, which will affect net product revenue in the period that such variances become known.
Chargebacks: Chargebacks are discounts that occur when Healthcare Providers purchase directly from a Customer. Healthcare Providers, which belong to Public Health Service institutions, non-profit clinics, government entities, GPOs, and health maintenance organizations, generally purchase the product at a discounted price. The Customer, in turn, charges back to us the difference between the price initially paid by the Customer and the discounted price paid by the Healthcare Providers to the Customer. The allowance for chargebacks is based on an estimate of sales to contracted Customers.
Discounts for Prompt Payment: We provide prompt payment discounts to our Customers, which are recorded as a reduction in revenue in the same period that the related product revenue is recognized.
Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program, other government programs and commercial contracts. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid. Certain rebate amounts commensurate with share utilization of UDENYCA® related to other pegfilgrastim products. The allowance for rebates is based on statutory or contractual discount rates and expected utilization. Our estimates for the expected utilization of rebates are based on customer and payer data received from the pharmacies and distributors and historical utilization rates. Rebates are generally invoiced by the payer and paid in arrears, such that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s shipments to our Customers, plus an accrual balance for known prior quarters’ unpaid rebates. If actual future rebates vary from estimates, we may need to adjust our accruals, which would affect net product revenue in the period of adjustment.
Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue.
Product Returns: We offer our Customers a limited product return right, which is principally based upon whether the product is damaged or defective, or the product’s expiration date. Product return allowance is estimated and recorded at the time of sale.
Other Allowances: We pay fees to Customers for account management, data management and other administrative services. To the extent that the services received are distinct from the sale of products to the customer, these payments are classified in selling, general and administrative expense in our consolidated statements of operations, otherwise they are included as a reduction in product revenue.
Inventory
Prior to the regulatory approval of our product candidates, we incurred expenses for the manufacture of drug product that could potentially be available to support the commercial launch of our products. We began to capitalize inventory costs associated with
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UDENYCA® after receiving regulatory approval for UDENYCA® in November 2018 when it was determined that the inventory had a probable future economic benefit.
Our inventory is stated at the lower of cost or estimated net realizable value with cost determined under the first-in first-out method. Inventory costs include third-party contract manufacturing, third-party packaging services, freight, labor costs for personnel involved in the manufacturing process, and indirect overhead costs. We primarily use actual costs to determine the cost basis for inventory. The determination of whether inventory costs will be realizable requires our review of the expiration dates of our product UDENYCA® compared to our forecasted sales. If actual market conditions are less favorable than projected by us, write-downs of inventory may be required which would be recorded as cost of sales in our consolidated statement of operations.
Income Taxes
We file U.S. federal and state income tax with varying statutes of limitations. The tax years from 2011 forward remain open to examination due to the carryover of unused net operating losses and tax credits. To date, we have not been audited by the Internal Revenue Service or any state income tax authority.
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
As of December 31, 2020, our total net deferred tax assets, net of gross deferred tax liabilities, were $200.9 million. Due to the weight of the negative evidence, which is primarily our history of losses, outweighing other positive evidence, the federal net deferred tax assets and state net deferred tax assets have been fully offset by a valuation allowance. The deferred tax assets were primarily comprised of net operating losses, tax credit carryforwards, stock-based compensation expenses and sales related accruals. Utilization of the net operating loss and tax credit carryforwards may be subject to an annual limitation due to historical or future ownership changes under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions.
Recent Accounting Pronouncements
For a description of the impact of recent accounting pronouncements, see “Note 2. Basis of Presentation and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
Results of Operations
Comparison of Years Ended December 31, 2020, 2019 and 2018
Revenue
Year Ended December 31,
2020 vs 2019
2019 vs 2018
2020
2019
2018
Change
Change
(in thousands)
(in thousands)
Revenue:
Net product revenue
$
475,824
$
356,071
$
—
$
119,753
$
356,071
Net product revenue for the year ended December 31, 2020 was $475.8 million compared to $356.1 million for the year ended December 31, 2019, an increase of $119.8 million. The increase was primarily due to an increase in the number of units of UDENYCA® sold, which was partially offset by an increase in discounts and allowances incurred during the year ended December 31, 2020.
During the second quarter of 2020, we identified that certain of our commercial payer invoices were erroneously overstated and we received a refund of $7.5 million from these payers related to fiscal year 2019 which resulted in an increase in net product revenue by the same amount for 2020.
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We expect our net product revenue to decline during 2021, as a result of COVID-19 impact and new market entrants.
Net product revenue for the year ended December 31, 2019 was $356.1 million due to the U.S. sales of UDENYCA®, which commenced in January 2019. There were no product sales during the year ended December 31, 2018.
Cost of Goods Sold
Year Ended December 31,
2020 vs 2019
2019 vs 2018
2020
2019
2018
Change
Change
(in thousands)
(in thousands)
Cost of goods sold
$
37,667
$
17,078
$
—
$
20,589
$
17,078
Gross margin
92
%
95
%
—
%
(3)
%
95
%
The cost of goods sold was $37.7 million for the year ended December 31, 2020 compared to $17.1 million for the year ended December 31, 2019. Cost of goods sold consists primarily of third-party manufacturing, distribution, overhead costs associated with the sale of UDENYCA® and a mid-single digit royalty cost on net product revenue to Amgen, which began on July 1, 2019 and will continue for five years. A portion of the manufacturing costs for inventory were incurred prior to the regulatory approval of UDENYCA® and, therefore, were expensed as research and development costs when incurred. The costs associated with this inventory were approximately $3.3 million and $24.9 million at December 31, 2020 and December 31, 2019, respectively, with estimated associated sales value of approximately $44.8 million and $367.5 million, respectively, based on our current average net selling price for the three months ended December 31, 2020. The cost basis of product sold that was expensed prior to approval, was approximately $21.1 million and $17.0 million for the year ended December 31, 2020 and 2019, respectively. Had such inventories been valued at acquisition cost, it would have resulted in a corresponding increase in cost of goods sold and a corresponding decrease in gross margin during such period. We expect to utilize the inventory expensed prior to approval of UDENYCA® by the first quarter of 2021. Subsequent to using our entire zero cost inventory, we estimate cost of goods sold as a percentage of net product revenue will be in the range of a high single digit to low double digit percentage, including the mid-single digit royalty cost on net product revenue.
Cost of goods sold for the year ended December 31, 2019 included a write-down of manufacturing costs of $1.3 million due to the cancellation of certain manufacturing reservations and $0.4 million due to the write-off of excess and obsolete inventory.
We expect our gross margin to decrease during 2021 as a result of decreasing net revenue per unit sold.
Research and Development Expense
Year Ended December 31,
2020 vs 2019
2019 vs 2018
2020
2019
2018
Change
Change
(in thousands)
(in thousands)
Research and development
$
142,759
$
94,188
$
110,239
$
48,571
$
(16,051)
Research and development expense for the year ended December 31, 2020 was $142.8 million compared to $94.2 million for the same period in 2019, an increase of $48.6 million. The increase in research and development expense was primarily due to:
● an increase of $16.0 million in costs for CHS-1420 related to the preparation of our BLA submission and activities related to inspection readiness;
● an increase of $14.2 million in costs for CHS-2020 as we initiated the manufacturing scale-up to produce drug substance and drug product for clinical trial supply;
● an increase of $7.7 million in personnel, consulting and other related costs as a result of hiring personnel in research and development to advance our programs;
● an increase of $6.0 million related to right of first negotiation fees cost in connection with potential future strategic licensing transactions;
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● an increase of $5.0 million related to the on-body device development for UDENYCA®;
● an increase of $3.5 million in costs incurred to support opening an IND application with the FDA and continued development of bevacizumab (Avastin ) biosimilar product candidate licensed from Innovent in 2020; and
● an increase of $3.0 million in facilities, supplies and materials and other infrastructure to support our research and development programs.
The increase in research and development expense for the year ended December 31, 2020 was partially offset by:
● a decrease of $3.6 million in upfront and milestone-based license fee primarily attributable to $11.1 million of upfront and milestone payments to Bioeq in 2019 partially offset by $7.5 million of upfront and milestone payments to Innovent in 2020;
● a de crease of $3.3 million in CHS-131 related costs incurred in 2019 in connection with opening an IND application with the FDA and the initiation of a clinical program .
We expect our research and development expense in 2021 to be substantially higher than in 2020 due to the incurrence of $150.0 million upfront payment as well as additional potential milestone payments to Junshi Biosciences and other additional increased development costs.
Research and development expense for the year ended December 31, 2019 was $94.2 million compared to $110.2 million for the same period in 2018, a decrease of $16.1 million. The decrease in research and development expense was primarily due to:
● a decrease of $33.9 million in UDENYCA® manufacturing costs as we began capitalizing these costs as inventory after receiving FDA approval for UDENYCA® in November 2018, which was partially offset by an increase in development expense associated with an on-body device for UDENYCA®;
● a decrease of $4.5 million in facilities, supplies and materials and other infrastructure primarily due to the impairment loss of $3.9 million in the third quarter of 2018 for a machine and equipment used within research and development;
● a decrease of $3.9 million for CHS-0214 development costs due to close-out activities for our Phase 3 open-label extension study, which was completed in the first quarter 2018; and
● a decrease of $2.4 million in stock-based compensation expense primarily due to company-wide options granted in April 2015 with a higher exercise price that have been fully expensed and the capitalization of certain stock-based compensation expense as inventory after receiving FDA approval for UDENYCA® in November 2018. The decrease was partially offset by additional stock options and awards granted in 2019.
The decrease in research and development expense for the year ended December 31, 2019 was partially offset by the following:
● an increase of $15.6 million in costs primarily attributable to $11.1 million of upfront and milestone payments to Bioeq and increases related to the development of our other biosimilar product candidates as we continued to advance our pipeline;
● an increase of $6.4 million in personnel, consulting and other related costs as a result of hiring personnel in research and development to advance our programs;
● an increase of $3.6 million in costs related to CHS-131 in connection with opening an initial new drug (“IND”) application with the FDA and conducting a clinical trial; and
● an increase of $3.0 million in costs for CHS-1420 related to the preparation of our BLA.
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Selling, General and Administrative Expense
Year Ended December 31,
2020 vs 2019
2019 vs 2018
2020
2019
2018
Change
Change
(in thousands)
(in thousands)
Selling, general and administrative
$
139,079
$
137,037
$
94,177
$
2,042
$
42,860
Selling, general and administrative expense for the year ended December 31, 2020 was $139.1 million compared to $137.0 million for the same period in 2019, an increase of $2.0 million. The increase was primarily due to the following:
● a net increase of $12.8 million for personnel, consulting, professional services, marketing, advertising and other related expenses due to an increase in sales force personnel and related commercial functions to support the continued growth in UDENYCA ® sales, which was partially offset by a decrease of $3.8 million in travel expenses as a result of shelter-in-place response to COVID-19 ; and
● an increase of $2.1 million in facilities, supplies and materials and other infrastructure related expenses to support our growing commercial infrastructure for UDENYCA ® .
These increases were partially offset by a decrease of $9.0 million in legal costs related to entering into a legal settlement with Amgen in May 2019.
We expect our selling, general and administrative expense in 2021 to be higher than in 2020 as a result of anticipated increased commercial activities to support UDENYCA® sales and as a result of initiating our ophthalmology and immuno-oncology commercial activities.
Selling, general and administrative expense for the year ended December 31, 2019 was $137.0 million compared to $94.2 million for the same period in 2018, an increase of $42.9 million. The increase in selling, general and administrative expense was primarily due to:
● an increase of $35.6 million for personnel, consulting and other related expenses due to an increase in sales force personnel and related commercial functions in connection with the ongoing commercialization of UDENYCA®;
● an increase of $3.6 million for marketing, advertising, recruiting and other professional services to support the ongoing commercialization of UDENYCA®, which was partially offset by a decrease in legal costs as a result of entering into a legal settlement with Amgen in May 2019;
● an increase of $2.5 million in facility and other general and administrative expenses to support our growing commercial infrastructure for UDENYCA®; and
● an increase of $1.1 million in stock-based compensation expense due to an increase in commercial-related headcount and additional stock options and awards granted in 2019. The increase was partially offset by a decrease resulting from the company-wide options granted in April 2015 with a higher exercise price that have been fully expensed.
Interest Expense
Year Ended December 31,
2020 vs 2019
2019 vs 2018
2020
2019
2018
Change
Change
(in thousands)
(in thousands)
Interest expense
$
21,166
$
17,601
$
9,684
$
3,565
$
7,917
Interest expense for the year ended December 31, 2020 was $21.2 million compared to $17.6 million for the same period in 2019, an increase of $3.6 million. The increase in interest expense was primarily due to the interest related to our 2026 Convertible Notes that were issued in April 2020.
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Interest expense for the year ended December 31, 2019 was $17.6 million compared to $9.7 million for the same period in 2018, an increase of $7.9 million. The increase in interest expense was primarily attributable to the Term Loan we entered into in January 2019.
Other income, net
Year Ended December 31,
2020 vs 2019
2019 vs 2018
2020
2019
2018
Change
Change
(in thousands)
(in thousands)
Other income, net
$
554
$
2,608
$
4,691
$
(2,054)
$
(2,083)
Other income, net for the year ended December 31, 2020 was $0.6 million compared to $2.6 million for the year ended December 31, 2019, a decrease of $2.1 million. The decrease in other income, net was primarily due to decrease of $1.3 million in interest income due to lower portfolio yields as a result of decrease in interest rates in 2020 and a decrease of $0.6 million due to fluctuations in foreign exchange rates.
Other income, net was higher in 2018 compared to that of 2019 because the fair value of our contingent liability related to the Compound Transaction Payment associated with our InteKrin acquisition decreased as a result of a decrease in the probability of occurrence from 33% to 10% and an extension in the timing of occurrence to a later date.
Income Tax Provision
Year Ended December 31,
2020 vs 2019
2019 vs 2018
2020
2019
2018
Change
Change
(in thousands)
(in thousands)
Income tax provision
$
3,463
$
2,942
$
—
$
521
$
2,942
Income tax provision for the year ended December 31, 2020 was $3.5 million compared to $2.9 million for the same period in 2019, an increase of $0.5 million. Income tax provision primarily relates to state taxes in jurisdictions outside of California, for which we have a limited operating history. Our historical losses are sufficient to fully offset any federal taxable income. The income tax provision differed from the U.S. federal statutory rate of 21% primarily due to the effect of change in the valuation allowance against our federal deferred tax assets, which reduced our net tax expense. We maintain a full valuation allowance against our net deferred tax assets due to our history of losses.
There was no income tax provision for the year ended December 31, 2018 as we maintained a full valuation allowance against our net deferred tax assets due to our history of losses during these periods.
Liquidity and Capital Resources
Due to our significant research and development expenditures, and although we are profitable for the years ended December 31, 2020 and 2019, we previously generated significant operating losses since our inception. We funded our operations primarily through the equity financing, sales of our convertible preferred stock, sales of UDENYCA® units, issuance of debt and payments received under our collaboration and license agreements.
In October 2016, we entered into a sales agreement with Cowen, under which we offered and sold our common stock, having aggregate gross proceeds of up to $100.0 million, from time to time through Cowen as our sales agent in our ATM Offering Program. In January 2019, we issued and sold an aggregate of 761,130 shares of common stock at a weighted average price of $11.17 per share under the ATM Offering Program for aggregate net proceeds of $8.2 million. As of January 19, 2019, our Shelf Registration Statement expired and accordingly the ATM Offering Program was terminated.
On January 7, 2019 (the “Term Loan Closing Date”), we entered into a credit agreement (the “Term Loan”) with affiliates of Healthcare Royalty Partners (together, the “Lender”). The Term Loan consists of a six-year term loan facility for an aggregate principal amount of $75.0 million (the “Borrowings”). Our obligations under the loan documents are guaranteed by our material domestic U.S. subsidiaries. The Borrowings under the Term Loan bear interest through maturity at 7.00% per annum plus LIBOR (customarily defined).
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The consolidated net sales (customarily defined) for UDENYCA® for the fiscal year ending December 31, 2019, exceeded $250.0 million, which resulted in an interest rate reduction to 6.75% per annum plus LIBOR, effective January 1, 2020. Interest is payable quarterly in arrears. We are required to pay principal on the Borrowings in equal quarterly installments beginning on the four year anniversary of the Term Loan Closing Date (or, if consolidated net sales of UDENYCA® in the fiscal year ending December 31, 2021 are less than $375.0 million, beginning on the three year anniversary of the Term Loan Closing Date), with the outstanding balance to be repaid on January 7, 2025, the maturity date. We are also required to make mandatory prepayments of the Borrowings under the Term Loan, subject to specified exceptions, with the proceeds of asset sales, extraordinary receipts, debt issuances and specified other events including the occurrence of a change in control. If all or any of the Borrowings are prepaid or required to be prepaid under the Term Loan, then we shall pay, in addition to such prepayment, a prepayment premium equal to (i) with respect to any prepayment paid or required to be paid on or prior to the three year anniversary of the Term Loan Closing Date, 5.00% of the Borrowings prepaid or required to be prepaid, plus all required interest payments that would have been due on the Borrowings prepaid or required to be prepaid through and including the three year anniversary of the Term Loan Closing Date, (ii) with respect to any prepayment paid or required to be paid after the three year anniversary of the Term Loan Closing Date but on or prior to the four year anniversary of the Term Loan Closing Date, 5.00% of the Borrowings prepaid or required to be prepaid, (iii) with respect to any prepayment paid or required to be paid after the four year anniversary of the Term Loan Closing Date but on or prior to the five year anniversary of the Term Loan Closing Date, 2.50% of the Borrowings prepaid or required to be prepaid, and (iv) with respect to any prepayment paid or required to be prepaid thereafter, 1.25% of the Borrowings prepaid or required to be prepaid. In connection with the Term Loan, we paid a fee to the Lender of approximately $1.1 million at closing in the form of an original issue discount. Upon the prepayment or maturity of the Borrowings (or upon the date such prepayment or repayment is required to be paid), we are required to pay an additional exit fee in an amount equal to 4.00% of the total principal amount of the Borrowings. The obligations under the Term Loan are secured by a lien on substantially all of our and our Guarantors’ tangible and intangible property, including intellectual property. The Term Loan contains certain affirmative covenants, negative covenants and events of default, including, covenants and restrictions that among other things, restrict our ability and our subsidiaries to, incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, in asset sales, and declare dividends or redeem or repurchase capital stock. Additionally, the consolidated net sales for UDENYCA® must not be lower than $70.0 million for the fiscal year ending December 31, 2019, (b) $125.0 million for the fiscal year ending December 31, 2020, and (c) $150.0 million for each fiscal year thereafter. A failure to comply with these covenants could permit the Lender under the Term Loan to declare the Borrowings, together with accrued interest and fees, to be immediately due and payable.
In April 2020, we issued and sold $230 million aggregate principal amount of 1.5% convertible senior subordinated notes due 2026 (the “2026 Convertible Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. In connection with the pricing of the 2026 Convertible Notes, we entered into privately negotiated capped call transactions with one or more of the Option Counterparties. The cap price of the capped call transactions will initially be $25.9263 per share, which represents a premium of approximately 75.0% over the last reported sale price of our common stock of $14.815 per share on April 14, 2020, and is subject to certain adjustments under the terms of the capped call transactions. The 2026 Convertible Notes are general unsecured obligations and will be subordinated to our designated senior indebtedness. The 2026 Convertible Notes accrue interest at a rate of 1.5% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2020, and will mature on April 15, 2026, unless earlier repurchased or converted. At any time before the close of business on the second scheduled trading day immediately before the maturity date, holders may convert their 2026 Convertible Notes at their option into shares of our common stock, together, if applicable, with cash in lieu of any fractional share, at the then-applicable conversion rate. The initial conversion rate is 51.9224 shares of common stock per $1,000 principal amount of 2026 Convertible Notes, which represents an initial conversion price of approximately $19.26 per share of common stock. The initial conversion price represents a premium of approximately 30.0% over the last reported sale of $14.815 per share of our common stock on the Nasdaq Global Market on April 14, 2020. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. If a “make-whole fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, we will, in certain circumstances, increase the conversion rate for a specified period of time for holders who convert their 2026 Convertible Notes in connection with that make-whole fundamental change. The 2026 Convertible Notes are not redeemable at our election before maturity. If a “fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, then, subject to a limited exception, holders may require us to repurchase their 2026 Convertible Notes for cash. The repurchase price will be equal to the principal amount of the 2026 Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date. The net proceeds from the offering were $222.2 million, net of the initial purchasers’ fees and the offering expenses. We used approximately $18.2 million of the net proceeds to fund the cost of entering into the capped call transactions.
In 2020, we purchased investments in marketable securities in accordance with our investment policy in order to obtain interest income on our cash balances.
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As of December 31, 2020, we had an accumulated deficit of $762.8 million and cash and cash equivalents of $541.2 million. We had $132.2 million in net income for the year ended December 31, 2020. We believe that our current available cash, cash equivalents and cash collected from UDENYCA® sales will be sufficient to fund our planned expenditures and meet our obligations for at least the next 12 months following our financial statement issuance date. We may need to raise additional funds in the future; however, there can be no assurance that such efforts will be successful or that, in the event that they are successful, the terms and conditions of such financing will be favorable to us.
Summary Statement of Cash Flows
The following table summarizes our cash flows for the periods presented:
Year Ended December 31,
2020
2019
2018
(in thousands)
Net cash provided by (used in) operating activities
$
154,145
$
28,355
$
(159,266)
Net cash used in investing activities
(14,401)
(12,732)
(1,188)
Net cash provided by financing activities
223,946
89,370
105,421
Effect of exchange rate changes in cash, cash equivalents and restricted cash
—
(276)
468
Net increase in cash, cash equivalents and restricted cash
$
363,690
$
104,717
$
(54,565)
Net cash provided by (used in) operating activities
Cash provided by operating activities was $154.1 million for the year ended December 31, 2020, which was primarily due to the following:
● net income of $132.2 million;
● an increase in accrued rebates, fees and reserve of $30.4 million as a result of continued growth in UDENYCA ® sales ;
● upfront and milestone-based license fee payments of $7.5 million to Innovent are being reclassified to investing activities to provide better alignment between the cash flows and the underlying nature of the transactions;
● non-cash charges related to stock-based compensation of $38.2 million and depreciation and amortization of property and equipment of $2.9 million, non-cash interest expense from amortization of debt issuance discounts of $3.5 million, non-cash operating lease expense of $2.1 million, other non-cash adjustments of $0.4 million ;
● an increase in accrued compensation of $6.2 million primarily due to increase in headcount and vacation accrual for 2020, partially offset by the settlement of 2019 bonus payout;
● an increase in accrued and other liabilities of $5.5 million primarily related to contract manufacturing accruals; and
● An increase in other non-current liabilities of $0.9 million primarily due to deferral of certain payroll tax liabilities under the CARES act.
The cash provided by operating activities was partially offset by the following:
● an increase in inventory of $36.2 million primarily due to continued growth in UDENYCA ® sales and to maintain adequate supplies in order to meet future demand for UDENYCA ® ;
● an increase in trade receivables of $15.2 million primarily due to the timing of payment from our customers;
● an increase in prepaid manufacturing and other assets, non-current of $12.6 million to secure drug production runs scheduled for 2020 and 2021; and
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● a decrease in accounts payable of $9.8 million primarily due to the timing of receiving and processing invoices from our vendors.
● a decrease in lease liabilities of $1.4 million due to the lease payments for 2020.
Cash provided by operating activities was $28.4 million for the year ended December 31, 2019, which was primarily due to the following:
● net income of $89.8 million;
● an increase in accrued rebates, fees and reserve of $51.1 million as a result of UDENYCA® sales;
● non-cash charges related to stock-based compensation of $33.6 million, depreciation and amortization of property and equipment of $3.3 million, non-cash interest expense from amortization of debt issuance discounts of $2.3 million, non-cash operating lease expense of $1.8 million and excess and obsolete inventory of $0.4 million;
● upfront and milestone payments related to license and collaboration arrangements of $11.1 million are being reclassified as investing activities to provide better alignment between the cash flows and the underlying nature of those transactions;
● an increase in accrued and other liabilities of $10.4 million primarily due to our accruals for our UDENYCA® manufacturing and royalty expenses;
● an increase in accrued compensation of $10.0 million primarily due to increased compensation and bonus accrual attributable to increase in headcount and as a result of attainment of certain corporate goals during 2019; and
● an increase in accounts payable of $9.9 million due to the timing of receiving and processing invoices.
The cash provided by operating activities was partially offset by the following:
● an increase in trade receivables of $142.0 million due to initiating sales of UDENYCA® on January 3, 2019;
● an increase in inventory of $48.2 million as we began capitalizing inventory in November 2018 upon receiving FDA approval for UDENYCA®;
● an increase in other prepaid and current assets of $2.1 million primarily due to prepaid commercial activities to support UDENYCA® and the timing of vendor invoices;
● a decrease in lease liabilities of $2.0 million due to the lease payments for the twelve months of 2019 and amortization;
● an increase in prepaid manufacturing services of $0.7 million to secure drug production runs scheduled for 2020; and
● an increase in other assets, non-current of $0.3 million primarily due to the security deposit as a result of amending our operating lease agreement in September 2019.
Cash used in operating activities was $159.3 million for the year ended December 31, 2018, which was primarily due to the following:
● a net loss of $209.4 million;
● a non-cash gain of $3.2 million related to the fair value remeasurement of our contingent consideration obligation and $0.3 million related to the accretion of short-term investments;
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● an increase in inventory of $5.5 million as we began capitalizing inventory in November 2018 upon receiving FDA approval for UDENYCA®; and
● a decrease in accounts payable, accounts payable-related parties, accrued liabilities and other liabilities of $0.9 million primarily due to the payments to our CROs and CMOs as a result of the progression of our clinical trial programs that are winding down, and the timing of certain vendor payments.
The cash used in operating activities was partially offset by the following:
● non-cash charges related to stock-based compensation of $34.8 million;
● impairment of fixed asset equipment of $3.9 million, depreciation and amortization of property and equipment of $3.2 million and non-cash interest related to the amortization of debt discount and debt issuance cost of $1.5 million;
● an increase in accrued compensation of $8.5 million primarily due to the timing of bonus settlement as 2017 bonuses were paid in RSUs in December 2017; and
● a decrease in prepaid manufacturing, other prepaid and other assets of $8.2 million as we utilized the prepayment for our pre-commercial manufacturing of UDENYCA®.
Net cash used in investing activities
Cash used in investing activities of $14.4 million for the year ended December 31, 2020 was primarily due to purchases of investments in marketable securities of $273.8 million, upfront and milestone-based license fee payments of $7.5 million to Innovent and purchases of property and equipment of $7.2 million partially offset by the proceeds from maturities of investments in marketable securities of $274.0 million.
Cash used in investing activities of $12.7 million for the year ended December 31, 2019 was due to the purchase of short-term investments in marketable securities of $20.2 million, upfront and milestone payments related to our Bioeq license and collaboration arrangement of $11.1 million and purchases of property and equipment of $1.8 million. The cash used in investing activities was partially offset by proceeds from maturities of investments in marketable securities of $20.4 million.
Cash used in investing activities of $1.2 million for the year ended December 31, 2018 was due to the purchase of short-term investments in marketable securities of $42.9 million, the purchase of the non-controlling interest of $0.7 million and purchases of property and equipment of $0.8 million. The cash used in investing activities was partially offset by proceeds from maturities of investments in marketable securities of $43.2 million.
Net cash provided by financing activities
Cash provided by financing activities of $223.9 million for the year ended December 31, 2020 was primarily due to $222.2 million in proceeds from the issuance of 2026 Convertible Notes, net of issuance costs, $17.4 million proceeds from the exercise of stock options and $3.8 million proceeds from purchases under the Employee Stock Purchase Plan (“ESPP”) partially offset by $18.2 million of capped call option purchases related to 2026 Convertible Notes, $0.9 million in tax payments related to net share settlement of bonus payout in RSUs and $0.4 million in principal payments for finance lease obligations.
Cash provided by financing activities of $89.4 million for year ended December 31, 2019 was primarily related to $73.0 million in proceeds from our term loan, net of issuance costs, $8.1 million from the issuance of our common stock from our ATM Offering Program, net of underwriting discounts, commissions and offering costs, $5.6 million from the exercise of stock options and $3.5 million in proceeds related to our ESPP. The proceeds were partially offset by payments of $0.8 million for taxes related to the net shares settlement of bonus payout in RSUs.
Cash provided by financing activities of $105.4 million for year ended December 31, 2018 was primarily due to net proceeds of $102.3 million from the issuance of our common stock from an underwritten public offering in May 2018 and our ATM Offering Program,
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net of underwriting discounts and commissions, $2.0 million from the exercise of stock options, and $1.6 million in proceeds related to our ESPP. The proceeds were partially offset by payments of $0.5 million for offering expenses related to the issuance of common stock.
Funding Requirements
We believe that our current available cash, cash equivalents, and cash collected from UDENYCA® sales will be sufficient to fund our planned expenditures and meet our obligations for the foreseeable future, beyond the 12 months following our financial statement issuance date. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional agreements with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated research and development activities, and on-going and future licensing and collaboration obligations. Our future funding requirements will depend on many factors, including the following:
● cash proceeds from UDENYCA® sales;
● the costs of manufacturing, distributing and marketing UDENYCA®;
● the cost of manufacturing clinical supplies and any products that we may develop;
● the terms and timing of any other collaborative, licensing and other arrangements that we have established or may establish;
● the timing, receipt and amount of sales, profit sharing or royalties, if any, from any product candidates that are approved in the future;
● the number and characteristics of product candidates that we pursue;
● the scope, rate of progress, results and cost of our clinical trials, preclinical testing and other related activities;
● the costs of acquiring originator comparator materials and manufacturing preclinical study and clinical trial supplies and other materials from CMOs and related costs associated with release and stability testing;
● the cost, timing and outcomes of regulatory approvals;
● the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and
● the extent to which we acquire or invest in businesses, products or technologies.
If the proceeds from UDENYCA® sales are insufficient or are not collected in a timely manner and or our operating expenses are higher than the proceeds from UDENYCA® sales, we may need to raise additional capital to fund our operations in the near future. Funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our clinical trials or research and development programs. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. We may seek to enter into strategic partnerships to commercialize our biosimilar candidates in ex-US territories or globally for certain therapeutic areas. To the extent that we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject
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to additional covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Contractual Obligations
Our future contractual obligations as of December 31, 2020 were as follows:
As of December 31, 2020
Contractual Obligations
Total
Short Term
Long Term
(in thousands)
Long-term debt obligations - 2026 Convertible notes (1)
$
248,975
$
3,450
$
245,525
Long-term debt obligations - 2022 Convertible notes (1)
119,250
8,200
111,050
Long-term debt obligations - Term loan (1)
100,675
7,034
93,641
Non-cancelable purchase commitments (2)
66,662
40,963
25,699
Operating lease obligations (3)
13,744
3,425
10,319
Finance lease obligations (4)
1,537
626
911
Contingent payments to InteKrin Stockholders
102
—
102
Total contractual liabilities
$
550,945
$
63,698
$
487,247
(1) The long-term debt obligation is comprised of future minimum payments related to the Convertible Notes and Term Loan.
(2) These amounts are comprised of non-cancelable purchase commitments to our CMOs.
(3) These amounts are comprised of future minimum rent payment on our facility leases.
(4) These amounts are comprised of future minimum rent payment on our vehicle leases.
The Company enters into contracts in the normal course of business with CROs for preclinical studies and clinical trials and CMOs for the manufacture of drug materials. The contracts are cancellable, with varying provisions regarding termination. If a contract with a specific vendor were to be terminated, the Company would only be obligated for products or services that the Company had received as of the effective date of the termination and any applicable cancellation fees.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.