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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-03-02 · 363 added, 258 removed, 327 unchanged (66% of the section changed)

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BUSINESS OVERVIEW

We were incorporated in 1993 in Delaware and are headquartered in San Francisco, California, with subsidiary offices in Beijing and Shanghai, People’s Republic of China (“China”).

We are headquartered in San Francisco, California, with subsidiary offices in Beijing and Shanghai, People’s Republic of China (“China”).

We are a leading biopharmaceutical company developing and commercializing a pipeline of first-in-class therapeutics.

We apply our pioneering expertise in hypoxia-inducible factor (“HIF”), connective tissue growth factor (“CTGF”) biology, and clinical development to advance innovative medicines for the treatment of anemia, fibrotic disease, and cancer.

Roxadustat, our most advanced product, is an oral small molecule inhibitor of HIF prolyl hydroxylase (“HIF-PH”) activity that has received marketing authorization in China for the treatment of anemia caused by chronic kidney disease (“CKD”) in dialysis and non-dialysis patients.

In September 2019, roxadustat (Evrenzo ® ) was approved in Japan for the treatment of anemia associated with CKD in dialysis-dependent patients.

In January 2020, Astellas Pharma Inc.

(“Astellas”) submitted a supplemental New Drug Application (“NDA”) in Japan for the treatment of anemia in non-dialysis CKD patients.

Our NDA filing for roxadustat for the treatment of anemia patients with dialysis-dependent CKD and non-dialysis-dependent CKD was accepted for review by the United States (“U.S.”) Food and Drug Administration (“FDA”) in February 2020, and Astellas is in the process of preparing a Marketing Authorization Application (“MAA”) for submission to the European Medicines Agency (“EMA”) in the second quarter of 2020 for the same indications.

We apply our pioneering expertise in hypoxia-inducible factor (“HIF”) biology, 2-oxoglutarate enzymology, connective tissue growth factor (“CTGF”) biology, and clinical development to advance innovative medicines for the treatment of anemia, fibrotic disease, and cancer.

Roxadustat, our most advanced product, is an oral small molecule inhibitor of HIF prolyl hydroxylase (together with HIF, “HIF-PH”) activity that has received marketing authorization in China (tradename:

爱瑞卓 ® ) for the treatment of anemia caused by chronic kidney disease (“CKD”) in dialysis and non-dialysis patients.

EVRENZO® (roxadustat) is also approved in Japan and Chile for the treatment of anemia associated with CKD in dialysis and non-dialysis patients.

Our New Drug Application (“NDA”) filing in the United States (“U.S.”) for roxadustat for the treatment of anemia in dialysis and non-dialysis CKD patients was submitted for review in December 2019 to the U.S.

Food and Drug Administration (“FDA”) and in December 2020, the FDA extended the review period of the NDA by three months for FibroGen to submit additional analyses of existing roxadustat clinical data, and set a new Prescription Drug User Fee Act (“PDUFA”) goal date of March 20, 2021.

On March 1, 2021, the FDA informed us that the Cardiovascular and Renal Drugs Advisory Committee will hold an advisory committee meeting to review the NDA for roxadustat.

The date of the advisory committee meeting has not been set.

As a result of this communication, we will not receive an approval decision by the PDUFA goal date.

In Europe, the Marketing Authorization Application (“MAA”) filing for roxadustat for the treatment of anemia in dialysis and non-dialysis CKD patients was accepted for regulatory review by the European Medicines Agency (“EMA”) in May 2020 and Astellas Pharma Inc.

(“Astellas”) expects an approval decision mid-2021.

Roxadustat is in Phase 3 clinical development in the U.S.

and Europe and in Phase 2/3 development in China for anemia associated with myelodysplastic syndromes (“MDS”).

and Europe and in Phase 2/3 development in China for anemia associated with myelodysplastic syndromes.

Roxadustat is in Phase 2 clinical development for chemotherapy-induced anemia.

Pamrevlumab, an anti-CTGF human monoclonal antibody, is in Phase 3 clinical development for the treatment of both idiopathic pulmonary fibrosis (“IPF”) and pancreatic cancer.

Pamrevlumab is also currently in a Phase 2 trial for Duchenne muscular dystrophy (“DMD”).

Pamrevlumab, an anti-CTGF human monoclonal antibody, is in Phase 3 clinical development for the treatment of idiopathic pulmonary fibrosis (“IPF”), pancreatic cancer and Duchenne muscular dystrophy.

Impact of COVID-19

On March 11, 2020, COVID-19, a disease caused by a novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization.

The rapid spread has resulted in authorities implementing numerous measures to contain the virus, such as travel restrictions, social distancing requirements, quarantines, shelter-in-place orders or voluntarily adopted practices, and business shutdowns.

We have taken measures to minimize the health risks of COVID-19 to our staff, patients, healthcare providers and their communities, as their safety and well-being are our top priority.

In the U.S., our employees are working remotely when possible, while in China they have returned to work in our offices, manufacturing plants, and are performing medical affairs out in the field.

While we have seen some impacts from COVID-19, such as slower enrollment in our clinical trials, particularly our Phase 3 IPF program, we do not know if, or to what extent, these effects will continue in the future, as the impact of the COVID-19 pandemic continues to unfold.

The effect on our operational and financial performance beyond those effects described above, including any impact on sales of roxadustat, will depend in large part on future developments with the pandemic, which cannot be predicted with confidence at this time.

Future developments include the duration, scope, and severity of the COVID-19 pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the impact on healthcare systems and operating procedures, the development of treatments or vaccines, and the resumption of widespread economic activity.

Due to the inherent uncertainty of the largely unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations.

The financial results for the year ended December 31, 2020 were not significantly impacted by COVID-19 relative to prior years.

However, we will continue to monitor, and to the extent possible, mitigate the impact of the COVID-19 pandemic on our business.

Financial Highlights

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Our revenue for the year ended December 31, 2020 included the revenues recognized related to the following:

Two regulatory milestones totaling $130.0 million associated with the planned MAA submission to the EMA under the collaboration agreement with Astellas for roxadustat as a treatment for dialysis and non-dialysis CKD patients;

A $50.0 million regulatory milestone associated with the NDA submission to the FDA under the collaboration agreement with AstraZeneca for roxadustat as a treatment for dialysis and non-dialysis CKD patients;

Three regulatory milestones totaling $22.0 million associated with roxadustat being included on the updated National Reimbursement Drug List (“NRDL”) released by China’s National Healthcare Security Administration (“NHSA”);

A regulatory milestone of $12.5 million associated with the NDA approval in Japan.

Meanwhile, our overall revenue for the year ended December 31, 2019 was reduced by $36.3 million of a change in estimated variable consideration related to the API product revenue that was recognized in 2018 discussed below, which reflected the total difference between estimated and actual listed price and yield from the manufacture of bulk product tablets.

$15.0 million regulatory milestone associated with the NDA approval in Japan;

$80.6 million development revenue recognized under collaboration agreements with our partners Astellas and AstraZeneca AB (“AstraZeneca”);

$72.5 million of net product revenue from roxadustat commercial sales in China;

$8.9 million of drug product revenue related to roxadustat bulk drug or active pharmaceutical ingredient (“API”) deliveries to AstraZeneca and Astellas.

As comparison, our revenue for the year ended December 31, 2019 included the revenues recognized related to the following:

A $64.8 million product revenue for API delivered during 2018, under the amendment to the collaboration agreement with Astellas for roxadustat for the treatment of anemia in Japan (“Japan Agreement”), to conduct commercial scale manufacturing validation for roxadustat drug product in anticipation of commercial launch in Japan;

A regulatory milestone of $15.0 million associated with an NDA submission during 2018 in Japan;

A $6.0 million milestone under the collaboration agreements with AstraZeneca upon our receipt of marketing authorization from the NMPA for roxadustat, a first-in-class HIF-PH inhibitor, for the treatment of anemia caused by CKD in patients on dialysis;

A $6.0 million milestone payable under the collaboration agreement with AstraZeneca upon our receipt of First Manufacturing Approval for a Product in the Field in the Territory, which allows production for Phase 4 clinical studies, patients’ early experience programs, donation programs, as well as to supply products for testing and assessments required prior to launch.

Operating expenses increased for the year ended December 31, 2019 compared to the prior year primarily due to the following:

Higher outside service expenses related to co-promotional activities and scientific contract expenses;

Higher stock-based compensation related to the cumulative impact of stock option grant activities;

Amortization of finance lease ROU assets and higher depreciation expenses related to the adoption of lease accounting guidance under ASC 842;

Higher legal expenses mainly associated with patent-related and international activities;

Higher employee-related expenses resulting from higher average compensation level.

The increases were partially offset by:

Lower clinical trial expenses related to lower activities for roxadustat offset by higher activities for pamrevlumab;

Lower drug development expenses associated with drug substance manufacturing activities related to pamrevlumab, and capitalization of inventory manufacturing costs.

$130.0 million total of two regulatory milestones associated with the planned MAA submission to the EMA under the collaboration agreement with Astellas for roxadustat as a treatment for dialysis and non-dialysis CKD patients;

$50.0 million regulatory milestone associated with the NDA submission to the FDA under the collaboration agreement with AstraZeneca for roxadustat as a treatment for dialysis and non-dialysis CKD patients;

$22.0 million total of three regulatory milestones associated with roxadustat being included on the updated National Reimbursement Drug List (“NRDL”) released by China’s National Healthcare Security Administration (“NHSA”);

$12.5 million regulatory milestone associated with the NDA approval in Japan;

$36.3 million reduction in drug product revenue of a change in estimated variable consideration related to the API product revenue that was recognized in 2018, which reflected the total difference between estimated and actual listed price and yield from the manufacture of bulk product tablets.

Operating costs and expenses increased for the year ended December 31, 2020 compared to the prior year primarily due to the following:

Higher clinical trial expenses associated with post-approval safety studies in China, and commencement of Phase 3 trials for pamrevlumab;

Higher drug development expenses associated with drug substance manufacturing activities related to pamrevlumab, partially offset by lower activities related to roxadustat and capitalization of inventory manufacturing costs;

Higher employee-related expenses primarily resulting from higher average compensation level and headcount;

Higher stock-based compensation expense, primarily due to the cumulative impact of stock option grant activities;

Higher legal expenses primarily associated with patent-related activities in the United Kingdom;

Lower sales and marketing expenses due to a reversal in co-promotion expenses with AstraZeneca as a result of the China Amendment between FibroGen China and AstraZeneca;

Lower outside services due to lower consulting expenses and scientific contract work related to roxadustat Phase 3 and submission activities.

Our research and development expenses were $252.9 million, $209.3 million and $235.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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For a description of the numerous risks and uncertainties associated with product development, refer to “ Risk Factors .”

During the year ended December 31, 2019, we had a net loss of $77.0 million, or net loss per basic and diluted share of $0.89, as compared to a net loss of $86.4 million, or net loss per basic and diluted share of $1.03 for the prior year, primarily due to an increase in revenue, partially offset by an increase in operating expenses.

Cash and cash equivalents, investments and accounts receivable totaled $623.3 million at December 31, 2019, a decrease of $117.6 million from December 31, 2018, primarily due to cash used in operations.

Roxadustat, our most advanced product, is an oral small molecule inhibitor of HIF-PH activity that has received marketing authorization in China for the treatment of anemia caused by CKD in non-dialysis-dependent patients (adding the non-dialysis indication to the label for dialysis-dependent patients, which was approved in December 2018).

In September 2019, roxadustat (Evrenzo ® ) was approved in Japan for the treatment of anemia associated with CKD in dialysis-dependent patients.

In January 2020, Astellas submitted a supplemental NDA in Japan for the treatment of anemia in non-dialysis CKD patients.

NDA filing for roxadustat for the treatment of anemia patients with dialysis-dependent CKD and non-dialysis-dependent CKD was accepted for review by the FDA in February 2020, and Astellas is in the process of preparing an MAA for submission to the EMA in the second quarter of 2020 for the same indications.

Roxadustat is in Phase 3 clinical development in the U.S.

and Europe and in Phase 2/3 development in China for anemia associated with MDS.

Roxadustat is in Phase 2 clinical development for chemotherapy-induced anemia.

Pamrevlumab, an anti-CTGF human monoclonal antibody, is in Phase 3 clinical development for the treatment of both IPF and pancreatic cancer.

Pamrevlumab is also currently in a Phase 2 trial for DMD.

During the year ended December 31, 2020, we had a net loss of $189.3 million, or net loss per basic and diluted share of $2.11, as compared to a net loss of $77.0 million, or net loss per basic and diluted share of $0.89 for the prior year, primarily due to a decrease in revenue and an increase in operating expenses.

Cash and cash equivalents, investments and accounts receivable totaled $728.7 million at December 31, 2020, an increase of $105.4 million from December 31, 2019, primarily due to cash provided by operations.

Collaboration Partnerships for Roxadustat

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We are responsible, either directly or through our contract manufacturers, for the manufacture and supply of all quantities of roxadustat to be used in development and commercialization under the agreements.

Astellas is responsible for roxadustat commercialization activities in the Astellas territories.

The Astellas agreements will continue in effect until terminated.

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The aggregate amount of such consideration received through December 31, 2020 totals $645.1 million.

Additionally, under these agreements, Astellas pays 100% of the commercialization costs in its territories.

Astellas will pay FibroGen a transfer price, based on net sales, in the low 20% range for our manufacture and delivery of roxadustat.

In September 2019, Japan’s Ministry of Health, Labour and Welfare approved roxadustat for the treatment of anemia associated with dialysis CKD patients.

Additionally, under these agreements, Astellas pays 100% of the commercialization costs in their territories.

In Europe, Astellas will pay us a tiered transfer price for our manufacture and supply of roxadustat based on net sales of roxadustat in the low 20% range.

In Japan, Astellas pays us a transfer price in the low 20% range of the list price published by the Japanese Ministry of Health, Labour and Welfare, adjusted for certain elements.

During the fourth quarter of 2020, the Japanese Ministry of Health, Labour and Welfare approved EVRENZO® (roxadustat) for the treatment of anemia of CKD in adult patients not on dialysis.

Accordingly, the consideration of $15.0 million associated with this milestone was included in the transaction price and allocated to performance obligations under the Japan Agreement in the fourth quarter of 2020, substantially all of which was recognized as revenue during the year ended December 31, 2020 from performance obligations satisfied or partially satisfied.

In September 2019, the Japanese Ministry of Health, Labour and Welfare approved roxadustat for the treatment of anemia associated with dialysis CKD patients.

Accordingly, the consideration of $12.5 million associated with this milestone was included in the transaction price and allocated to performance obligations under the Japan Agreement in the third quarter of 2019.

This milestone payment was received in October 2019.

During the second quarter of 2019, we received positive topline results from analyses of pooled major adverse cardiac event (“MACE”) and MACE+ data from its Phase 3 trials evaluating roxadustat as a treatment for dialysis and non-dialysis CKD patients, enabling Astellas to prepare for an MAA submission to the EMA in the second quarter of 2020 , following our NDA submission to the FDA in 2019 and acceptance for review in February 2020.

We evaluated the two regulatory milestone payments associated with the planned MAA submission and concluded that these milestones became probable of being achieved in the second quarter of 2019.

Accordingly, the total consideration of $130.0 million associated with these milestones was included in the transaction price and allocated to performance obligations under the Europe Agreement in the second quarter of 2019.

During the second quarter of 2018, Astellas reported positive results from the final Phase 3 CKD-dialysis trial of roxadustat in Japan, indicating that Astellas was ready to make an NDA submission for the treatment of anemia with roxadustat in CKD-dialysis patients in 2018.

We evaluated the regulatory milestone payment associated with NDA submission in Japan based on variable consideration requirements under the current revenue standards and concluded that this milestone became probable of being achieved in the second quarter of 2018.

On November 30, 2018, FibroGen and Astellas entered into an amendment to the Japan Agreement that will allow Astellas to manufacture roxadustat drug product for commercialization in Japan (the “Japan Amendment”).

Under this amendment, FibroGen would continue to manufacture and deliver to Astellas roxadustat API.

During the second quarter of 2019, we received positive topline results from analyses of pooled major adverse cardiovascular event (“MACE”) and MACE+ data from its Phase 3 trials evaluating roxadustat as a treatment for dialysis and non-dialysis CKD patients, enabling Astellas to prepare for an MAA submission to the EMA in the second quarter of 2020, following our NDA submission to the FDA in 2019 and acceptance for review in February 2020.

These milestones became probable of being achieved in the second quarter of 2019, and substantially all of the total consideration of $130.0 million associated with these milestones was included in the transaction price and allocated to performance obligations under the Europe Agreement in the second quarter of 2019, of which $128.8 million was recognized as revenue during 2019, and $0.8 million was recognized as revenue during 2020, from performance obligations satisfied or partially satisfied.

According to the Europe Agreement, these milestone payments were billed to Astellas upon the submission of an MAA in the second quarter of 2020 and the total $130.0 million was received during the same quarter.

In 2018, FibroGen and Astellas entered into an amendment to the Japan Agreement that will allow Astellas to manufacture roxadustat drug product for commercialization in Japan (the “Japan Amendment”).

Under this amendment, FibroGen would continue to manufacture and supply roxadustat API to Astellas.

The commercial terms of the Japan Agreement relating to the transfer price for roxadustat for commercial use remain substantially the same, reflecting an adjustment for the manufacture of drug product by Astellas rather than FibroGen.

This amendment obligated Astellas to purchase a total of $64.7 million API from FibroGen, all of which was delivered to Astellas in 2018.

In 2019, a change in estimated variable consideration resulted in a $36.3 million reduction to revenue, at the time the listed price for roxadustat was issued by the Japanese Ministry of Health, Labour and Welfare, which reflected the total difference between estimated and actual listed price and yield from the manufacture of bulk product tablets.

We fulfilled delivery of a total of $64.8 million API under this amendment in 2018.

In 2019, a change in estimated variable consideration resulted in a $36.3 million reduction to revenue associated with these API shipments , at the time the listed price for roxadustat was issued by the Japanese Ministry of Health, Labour and Welfare, which reflected the total difference between estimated and actual listed price and yield from the manufacture of bulk product tablets.

In addition, in 2020, we recorded another $4.0 million reduction to revenue associated with these API shipments, related to a change in estimated variable consideration, based on the API held by Astellas at March 31, 2020 adjusted to reflect the updated listed price for roxadustat issued by the Japanese Ministry of Health, Labour and Welfare and possible future changes to the listed price, adjusted for the timing of and estimated bulk product strength mix intended to be manufactured by Astellas, estimated cost to convert the API to bulk product tablets, and estimated yield from the manufacture of bulk product tablets, among others.

During the second quarter of 2020, we fulfilled delivery obligations under the term of the Japan Amendment, and recognized related drug product revenue of $8.2 million in the same period.

The amount represents variable consideration and was estimated based on the quantity of product shipped, actual listed price for roxadustat issued by the Japanese Ministry of Health, Labour and Welfare and possible future changes to the listed price, adjusted for the timing of and estimated bulk product strength mix intended to be manufactured by Astellas, estimated cost to convert the API to bulk product tablets, and estimated yield from the manufacture of bulk product tablets, among others.

During the fourth quarter of 2020, we shipped bulk drug product from process validation supplies for commercial sales under the term of the Europe Agreement.

We constrained the estimated variable consideration due to a high degree of uncertainty associated to the final consideration because of an extended length of time over which the considerations may be adjusted.

As a result, we constrained the consideration from this shipment, and recorded $1.4 million as current deferred revenue and $4.6 million as long-term deferred revenue as of December 31, 2020.

The deferred revenue will be recognized over the duration of the contract and when uncertainty is resolved.

In the fourth quarter of 2018, we were engaged in the final stages of review with our partners over the proposed development of roxadustat for the treatment of chemotherapy-induced anemia.

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We share responsibility with AstraZeneca for clinical development activities required for U.S.

regulatory approval of roxadustat.

regulatory approval of roxadustat, and FibroGen will transfer the U.S.

NDA to AstraZeneca upon approval.

AstraZeneca will hold the equivalent regulatory filings in the other licensed countries.

In 2015, we reached the $116.5 million cap on our initial funding obligations (during which time we shared 50% of the joint initial development costs), therefore all development and commercialization costs for roxadustat for the treatment of anemia in CKD in the U.S., Europe, Japan and all other markets outside of China have been paid by Astellas and AstraZeneca since reaching the cap.

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AstraZeneca is also responsible for 100% of development expenses in all other licensed territories outside of China.

We are responsible, through our contract manufacturers, for the manufacture and supply of all quantities of roxadustat to be used in development and commercialization under the AstraZeneca agreements.

Outside of China, we are responsible, through our contract manufacturers, for the manufacture and supply of all quantities of roxadustat to be used in development and commercialization under the AstraZeneca agreements.

Under the AstraZeneca agreements, we will receive upfront and subsequent non-contingent payments totaling $402.2 million.

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and RoW and AstraZeneca will be responsible for the U.S.

commercialization of roxadustat, with FibroGen undertaking specified promotional activities in the end stage renal disease segment in the U.S.

commercialization of roxadustat, with FibroGen undertaking specified commercial activities in the U.S.

In addition, we will receive a transfer price for delivery of commercial product based on a percentage of net sales in the low- to mid-single digit range and AstraZeneca will pay us a tiered royalty on net sales of roxadustat in the low 20% range.

Under the China Agreement, which is conducted through FibroGen China Anemia Holdings, Ltd.

(“FibroGen China”), the commercial collaboration is structured as a 50/50 profit share.

AstraZeneca will conduct sales and marketing activities in China and fund roxadustat launch costs in China until FibroGen Beijing has achieved profitability.

At that time, AstraZeneca will recoup 50% of their historical launch costs out of initial roxadustat profits in China.

As of December 31, 2019, we a ccrued $53.1 million of co-promotional expenses related to the estimated amount payable to AstraZeneca for such sales and marketing efforts.

The payment for such amount is not expected to occur within the next year.

Payments under these agreements include over $500.0 million in upfront, non-contingent and other payments received or expected to be received prior to the first U.S.

approval, excluding development expense reimbursement.

(“FibroGen Cayman”), FibroGen Beijing, and FibroGen International (Hong Kong) Limited (collectively, (“FibroGen China, the commercial collaboration was structured as a 50/50 profit share, which was amended by the China Amendment in the third quarter of 2020, as discussed and defined below in China Amendment .

AstraZeneca may terminate the U.S./RoW Agreement upon specified events, including our bankruptcy or insolvency, our uncured material breach, technical product failure, or upon 180 days prior written notice at will.

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AstraZeneca may terminate the China Agreement upon specified events, including our bankruptcy or insolvency, our uncured material breach, technical product failure, or upon advance prior written notice at will.

If AstraZeneca terminates our China Agreement at will, it will be responsible for paying for transition costs as well as make a specified payment to FibroGen China.

If AstraZeneca terminates our China Agreement at will, it will be responsible for paying for transition costs as well as make a specified payment to FibroGen.

In the event of any termination of the agreements, but subject to modification upon termination for technical product failure, AstraZeneca will transfer and assign to us any regulatory filings and approvals for roxadustat in the affected territories that they may hold under our agreements, grant us licenses and conduct certain transition activities.

In December 2019, roxadustat has been included on the updated NRDL released by China’s NHSA for the treatment of anemia in CKD, covering patients who are non-dialysis-dependent as well as those who are dialysis-dependent .

The inclusion on the NRDL triggered a total of $22.0 million milestones payable to us by AstraZeneca.

Accordingly, the total consideration of $22.0 million associated with these milestones was included in the transaction price and allocated to performance obligations under the U.S./ RoW Agreement in the fourth quarter of 2019.

As mentioned above, during the second quarter of 2019, we received positive topline results from analyses of pooled MACE and MACE+ data from its Phase 3 trials for roxadustat, enabling our U.S.

NDA submission to the FDA.

We evaluated the regulatory milestone payment associated with this NDA submission and concluded that this milestone became probable of being achieved in the second quarter of 2019.

Accordingly, the consideration of $50.0 million associated with this milestone was included in the transaction price and allocated to performance obligations under the U.S./ RoW Agreement in the second quarter of 2019.

We submitted our NDA to the FDA in December 2019, which was accepted for review in February 2020.

On December 17, 2018, FibroGen Beijing, received marketing authorization from the NMPA for roxadustat, a first-in-class HIF-PH inhibitor, for the treatment of anemia caused by CKD in patients on dialysis.

This approval triggered a $6.0 million milestone payable to us by AstraZeneca.

On December 29, 2018, FibroGen Beijing received First Manufacturing Approval for a Product in the Field in the Territory, which allows production for Phase 4 clinical studies, patients’ early experience programs, donation programs, as well as to supply products for testing and assessments required prior to launch.

This approval triggered a $6.0 million milestone payable to us by AstraZeneca.

The regulatory milestone payment associated with this NDA submission became probable of being achieved in the second quarter of 2019.

Accordingly, the consideration of $50.0 million associated with this milestone was included in the transaction price and allocated to performance obligations under the combined arrangement in the second quarter of 2019, of which $42.4 million was recognized as revenue during 2019, and $0.6 million was recognized as revenue during 2020, from performance obligations satisfied or partially satisfied.

We submitted such NDA to the FDA in December 2019, which was accepted for review in February 2020.

According to the U.S/RoW Agreement, this milestone payment is billable to AstraZeneca when the NDA is accepted by the FDA.

Therefore, this $50.0 million milestone was billed during the first quarter of 2020, the payment of which was fully received in April 2020.

This milestone payment was fully received during the first quarter of 2020.

As mentioned above, in the fourth quarter of 2018, we were engaged in the final stages of review with our partners over the proposed development of roxadustat for the treatment of CIA .

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Costs associated with the development of this indication are expected to be shared 50-50 between our two partners.

In addition to CIA, in December 2018, anemia of chronic inflammation (“ACI”) and multiple myeloma (“MM”) have been approved for development by AstraZeneca and is expected to be fully funded by them.

In addition to CIA, in December 2018, anemia of chronic inflammation and multiple myeloma have been approved for development by AstraZeneca and is expected to be fully funded by them.

For revenue recognition purposes, we concluded that the approval of additional research and development services for these new indications represent modifications to our collaboration agreements in the periods in which approval was received.

The research and development services associated with the new indications are distinct from other promises in our collaboration agreements, and will be accounted for separately .

The development service period for roxadustat for the treatment of CIA, ACI and MM under the AstraZeneca agreements is estimated to continue through the end of 2024, to allow for development of these additional indications.

The development service period for roxadustat for the treatment of CIA, anemia of chronic inflammation and multiple myeloma under the AstraZeneca agreements is estimated to continue through the end of 2024, to allow for development of these additional indications .

China Amendment

On July 8, 2020, FibroGen China and AstraZeneca (together with FibroGen China, the “Parties”) entered into an amendment, effective July 1, 2020, to the China Agreement, relating to the development and commercialization of roxadustat in China (the “China Amendment”).

While the responsibilities of the Parties under the China Agreement remain largely the same, certain changes were made.

The China Amendment provides for the establishment of a jointly owned entity that will perform roxadustat distribution, as well as conduct sales and marketing through AstraZeneca.

To prepare for the establishment of this jointly owned entity, in July 2020, FibroGen Beijing acquired Beijing Kangda Yongfu Pharmaceutical Co., LTD (“Kangda”).

The purpose of the acquisition was to acquire a distribution license owned by Kangda for commercializing and distributing roxadustat in China.

FibroGen Beijing continues to hold all of the regulatory licenses issued by China regulatory authorities and continues to be primarily responsible for regulatory, clinical, manufacturing, medical affairs and pharmacovigilance activities.

In September 2020, FibroGen Beijing and AstraZeneca entered into an equity transfer agreement and shareholders agreement related to Kangda.

Concurrently with the equity transfer, the two parties renamed Kangda to Beijing Falikang Pharmaceutical Co.

(“Falikang”).

See Note 3, Acquisition and Variable Interest Entity , to the consolidated financial statements for details.

As Falikang is a distribution entity for roxadustat and AstraZeneca is the final decision maker for all the roxadustat commercialization activities, we lack the power criterion while AstraZeneca meets both the power and economic criteria under ASC 810, to direct the activities of Falikang that most significantly impact its performance.

Therefore, we are not the primary beneficiary of Falikang.

As a result, we accounted for our investment in Falikang under the equity method, and Falikang is not consolidated into our consolidated financial statements.

In addition, we recognized our proportionate share of the reported profits or losses of Falikang, as other income (loss) in the consolidated statement of operations, and as an adjustment to its investment in unconsolidated subsidiary in the consolidated balance sheet.

Falikang has not incurred material profit or loss to date.

In accordance with the China Amendment, we are currently in the interim period.

The interim period is defined as the period from April 1, 2020 to the time when Falikang is fully operational, which commenced in January 2021.

During the interim period, FibroGen continues to sell product directly to the distributors, who remain as our customers.

The calculation for profit or loss share has changed related to sales of roxadustat in China for the period from April 1, 2020 onwards.

With effect from April 1, 2020, the Parties have changed the method under which commercial expenses incurred by AstraZeneca are calculated and billed.

AstraZeneca’s co-promotion expenses for their sales and marketing efforts are now subject to a cap of a percentage of net sales.

Once AstraZeneca has been fully reimbursed for their sales and marketing costs under the cap, AstraZeneca will bill the co-promotion expenses based on actual costs on a prospective basis.

In addition, the China Amendment has allowed for a higher cost of manufacturing incurred by FibroGen Beijing to be included in the profit or loss share calculation, subject to an annual cap, among other changes.

Once Falikang is fully operational, AstraZeneca will bill the co-promotion expenses to Falikang, rather than FibroGen Beijing.

In addition, FibroGen Beijing will manufacture and supply commercial product to Falikang based on an agreed upon transfer price.

Development costs will continue to be shared 50/50 between the Parties.

As a result, the interim period primarily includes the following activities :

Co-promotion expenses:

The China Amendment revised the payment arrangements and calculation of the historical unpaid co-promotion expenses to AstraZeneca for its sales and marketing efforts associated with the commercial sales for roxadustat in China since the product launch.

Under the previous China Agreement, payment of these historical co-promotion expenses was subject to certain profitability and cash flow thresholds.

No amount of the historical co-promotion costs had been paid prior to the China Amendment as these thresholds had not yet been met.

Under the China Amendment, a portion of the historical unpaid co-promotion expenses was adjusted to reduce the amount owed by FibroGen Beijing and the current period co-promotion expenses are capped at a percentage of net roxadustat sales in China.

As a result, in the third quarter of 2020, we reversed approximately $84.4 million of previously accrued co-promotion expenses payable, which was recorded as a reduction to selling, general and administrative expenses, where these expenses were initially recorded during the periods from the initiation of commercial activities in the first quarter of 2019 to the second quarter of 2020.

The co-promotion expenses for the year ended December 31, 2020, capped at a percentage of net roxadustat sales in China, were $27.2 million, included in the selling, general and administrative expenses.

After this adjustment, as of December 31, 2020, $16.9 million and $11.5 million of the recalculated accrued co-promotion expenses were recorded in accounts payable and accrued liabilities, respectively, as they were anticipated to be paid within the next 12 months;

and $27.4 million of the recalculated accrued co-promotion expenses remained in the long-term liabilities, as it is not anticipated to be paid within the next 12 months.

Profit share:

Profit/loss share between FibroGen Beijing and AstraZeneca is based on a calculation of the current period net roxadustat sales in China and deductible expenses pursuant to the China Agreement.

Based on the calculation revised under the China Amendment, profit was achieved during the third and fourth quarter of 2020.

As a result, we recorded a profit share liability of $7.0 million to AstraZeneca as of December 31, 2020 in the accrued and other current liabilities, which correspondingly reduced the deferred revenue related to the performance obligation in accordance with the China Agreement.

FibroGen, Inc.

and AstraZeneca concurrently amended the U.S./RoW Agreement to reflect minor changes in the governance structure under the China Agreement.

Starting in the first quarter of 2021, our revenue will be made of 1) a transfer price from our sales to Falikang, and 2) sales made directly by FibroGen Beijing to distributors who have not transitioned to Falikang.

The transfer price earned is expected to be in the range of 30-45% of Falikang’s net sales, which reflects the fact that Falikang will pay AstraZeneca the commercialization expenses and AstraZeneca’s profit share.

For revenue recognition purposes, we estimate the total consideration on a per unit basis and recognize as we transfer control of the commercial drug product to Falikang.

Additional Information Related to Collaboration Agreements

Of the $1.1 billion in development and regulatory milestones payable in the aggregate under our Astellas and AstraZeneca collaboration agreements, $425.0 million is payable upon achievement of milestones relating to the submission and approval of roxadustat in dialysis-dependent CKD and non-dialysis-dependent CKD in the U.S.

For more detailed discussions on the accounting for these agreements, refer to Note 3 to the consolidated financial statements.

In addition, refer to “ Business — Collaborations ” for a more detailed description of our collaboration agreements.

For more detailed discussions on the accounting for these agreements, refer to Note 4, Collaboration Agreements and Revenues, to the consolidated financial statements.

Total cash consideration received through December 31, 2020 and potential cash consideration, other than development cost reimbursement, transfer price payments, royalties and profit share, pursuant to our existing collaboration agreements are as follows:

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Development and other revenue

Product revenue

Product revenue, net

Drug product revenue

Total revenue

Our revenue to date has been generated substantially from our collaboration agreements with Astellas and AstraZeneca.

In addition, we started roxadustat commercial sales in China in the third quarter of 2019.

Under our revenue recognition policy, license revenue includes amounts from upfront, non-refundable license payments and amounts allocated pursuant to the standalone selling price method from other consideration received during the periods.

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License revenues represented 8%, 69% and 11% of total revenues for the years ended December 31, 2020, 2019 and 2018, respectively.

Development and other revenue includes co-development and other development related services.

Development revenue includes co-development and other development related services.

Co-development services are recognized as revenue in the period in which they are billed to our partners, excluding China.

For China co-development services, revenue is deferred until the end of the development period once all performance obligations have been satisfied.

For China co-development services, revenue is deferred until we begin to transfer control of the manufactured commercial drug product to AstraZeneca..

Other development related services are recognized as revenue over the non-contingent development period based on a proportional performance method.

As of December 31, 2019, the future non-contingent development periods range from 12 to 60 months.

Other revenues consist of sales of research and development material and have been included with Development and other revenue in the consolidated statements of operations, as they have not been material for any of the periods presented.

As of December 31, 2020, the estimated future non-contingent development periods range from 3 to 48 months.

Other revenues consist of sales of research and development material and have not been material for any of the periods presented.

Development and other revenues represented 46%, 44% and 59% of total revenues for the years ended December 31, 2020, 2019 and 2018, respectively.

In the third quarter of 2019, we started generating net product revenue from commercial sales of roxadustat drug product in China .

In addition, product revenue for 2019 included a change in estimated variable consideration related to the p roduct revenue recognized in 2018 associated with commercial-grade API sales to Astellas .

We started generating net product revenue from commercial sales of roxadustat drug product in China in the third quarter of 2019.

Product revenue is recognized when our customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services.

Product revenue represented (13)% and 30% of total revenue for the year ended December 31, 2019 and 2018.

There was no product revenue for the year ended December 31, 2017.

Product revenue represented 41% and 1% of total revenue for the year ended December 31, 2020 and 2019, respectively.

Drug product revenue includes commercial-grade API or bulk drug product sales to AstraZeneca and Astellas i n support of pre-commercial preparation prior to the NDA or MAA approval, and to Astellas for ongoing commercial launch in Japan.

Drug product revenue is recognized when we fulfill the delivery obligations.

The amount of variable consideration that is included in the transaction price may be constrained, and is included in the drug product revenue 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 when the uncertainty associated with the variable consideration is subsequently resolved.

Actual amounts of consideration ultimately received in the future may differ from our estimates, for which we will adjust these estimates and affect the drug product revenue in the period such variances become known.

Drug product revenues represented 5%, (14)% and 30% of total revenues for the years ended December 31, 2020, 2019 and 2018 , respectively.

In the future, we will continue generating revenue from collaboration agreements in the form of license fees, milestone payments, reimbursements for collaboration services and royalties on product sales, and from product sales.

We expect that any revenues we generate will fluctuate from quarter to quarter due to the uncertain timing and amount of such payments and sales.

Total revenue increased $43.6 million, or 20% for the year ended December 31, 2019 compared to the year ended December 31, 2018 for the reasons discussed in the sections below.

Total revenue decreased $80.3 million, or 31% for the year ended December 31, 2020 compared to the year ended December 31, 2019 for the reasons discussed in the sections below.

License Revenue

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Total license revenue

License revenue increased $154.8 million, or 695% for the year ended December 31, 2019 compared to the year ended December 31, 2018 .

License revenue recognized under our collaboration agreements with Astellas increased $115.1 million, or 803% for the year ended December 31, 2019 compared to the year ended December 31, 2018.

License revenue decreased $162.8 million, or 92% for the year ended December 31, 2020 compared to the year ended December 31, 2019.

License revenue recognized under our collaboration agreements with Astellas decreased $115.1 million, or 89% for the year ended December 31, 2020 compared to the year ended December 31, 2019.

License revenue recognized under our collaboration agreements with Astellas for the year ended December 31, 2020 represented the allocated revenue of related to a regulatory milestone of $15.0 million associated with the NDA approval in Japan achieved during the fourth quarter of 2020.

License revenue recognized under our collaboration agreements with Astellas for the year ended December 31, 2019 represented the allocated revenue of $117.5 million related to two regulatory milestones totaling $130.0 million associated with the planned MAA submission in Europe that were included in the transaction price during the second quarter of 2019 when these milestones became probable of being achieved;

and the allocated revenue of $11.9 million related to a regulatory milestone of $12.5 million associated with the NDA approval in Japan achieved during the third quarter of 2019.

License revenue recognized under our collaboration agreements with Astellas for the year ended December 31, 2018 represented the allocated revenue related to a $15.0 million regulatory milestone associated with Astellas’ expected NDA submission in Japan that was included in the transaction price during the second quarter of 2018 when this milestone became probable of being achieved.

License revenue recognized under our collaboration agreements with AstraZeneca increased $39.7 million, or 500% for the year ended December 31, 2019 compared to the year ended December 31, 2018.

License revenue recognized under our collaboration agreements with AstraZeneca for the year ended December 31, 2019 represented the allocated revenue of $33.1 million related to a regulatory milestone of $50.0 million associated with the NDA submission in the U.S.

We did not have any license revenue under our collaboration agreements with AstraZeneca for the year ended December 31, 2020.

License revenue recognized under our collaboration agreements with AstraZeneca for the year ended December 31, 2019 represented the revenue allocated to the U.S./RoW license of $33.1 million related to a regulatory milestone of $50.0 million associated with the NDA submission in the U.S.

that was included in the transaction price during the second quarter of 2019 when this milestone became probable of being achieved;

and the allocated revenue of $14.6 million related to three regulatory milestones totaling $22.0 million associated with roxadustat being included on the updated NRDL released by China’s NHSA during the fourth quarter of 2019 .

License revenue recognized under our collaboration agreements with AstraZeneca for the year ended December 31, 2018 represented the allocated revenue related to a $6.0 million milestone associated with FibroGen Beijing’s receipt of marketing authorization from the NMPA for roxadustat, and a $6.0 million milestone associated with FibroGen Beijing’s receipt of First Manufacturing Approval for a Product in the Field in the Territory.

and the revenue allocated to the U.S./RoW license of $14.6 million related to three regulatory milestones totaling $22.0 million associated with roxadustat being included on the updated NRDL released by China’s NHSA during the fourth quarter of 2019.

Development and Other Revenue

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Total development and other revenue

Development revenue decreased $11.8 million, or 9% for the year ended December 31, 2019 compared to the year ended December 31, 2018 .

Development revenue recognized under our collaboration agreements with Astellas increased $8.5 million, or 41% for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Development and other revenue decreased $33.5 million, or 29% for the year ended December 31, 2020 compared to the year ended December 31, 2019.

Development revenue recognized under our collaboration agreements with Astellas decreased $10.2 million, or 35% for the year ended December 31, 2020 compared to the year ended December 31, 2019.

Development revenue recognized under our collaboration agreements with Astellas for the year ended December 31, 2020 included the allocated revenue of $0.7 million related to the above-mentioned $15.0 million associated with the NDA approval in Japan achieved during the fourth quarter of 2020.

Development revenue recognized under our collaboration agreements with Astellas for the year ended December 31, 2019 included the allocated revenue of $11.4 million related to the above-mentioned $130.0 million associated with the regulatory milestones of the planned MAA submission in Europe, and the allocated revenue of $0.5 million related to the above-mentioned $12.5 million associated with the NDA approval in Japan.

Development revenue recognized under our collaboration agreements with Astellas for the year ended December 31, 2018 included the allocated revenue related to the above-mentioned $15.0 million associated with the regulatory milestone of NDA submission in Japan.

The increase for the year ended December 31, 2019 was partially offset by a decrease in co-development billings related to the development of roxadustat as a result of the substantial completion of Phase 3 trials for roxadustat.

The decrease for the year ended December 31, 2020 was partially offset by an increase in co-development billings related to related to higher medical affairs activities under the Europe Agreement.

Development revenue recognized under our collaboration agreements with AstraZeneca decreased $23.3 million, or 28% for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a decrease in co-development billings related to the development of roxadustat as a result of the substantial completion of Phase 3 trials for roxadustat.

The decrease was partially offset by the allocated revenue of $9.3 million related to the above-mentioned $50.0 million associated with the regulatory milestone of the NDA submission in the U.S., and the allocated revenue of $4.1 million related to the above-mentioned regulatory milestones totaling $22.0 million associated with roxadustat being included on the updated NRDL released by China’s NHSA.

Product Revenue

Development revenue recognized under our collaboration agreements with AstraZeneca for the year ended December 31, 2019 also included the allocated revenue of $9.3 million related to the above-mentioned $50.0 million associated with the regulatory milestone of the NDA submission in the U.S., and the allocated revenue of $4.1 million related to the above-mentioned regulatory milestones totaling $22.0 million associated with roxadustat being included on the updated NRDL released by China’s NHSA.

Product Revenue, Net

Years Ended December 31,

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(dollars in thousands)

Product revenue, net:

Gross revenue

Price adjustment

Sales rebates and other discounts

Drug product revenue, net

Total product revenue, net

Product revenue of $64.8 million for the year ended December 31, 2018 represented the sales of commercial-grade API to Astellas to conduct commercial scale manufacturing validation for roxadustat drug product in anticipation of commercial launch in Japan.

The product revenue was recorded in 2018 based on an estimated transaction price after we evaluated the latest available facts and circumstances, and was subject to potential future adjustments.

A change in estimated variable consideration resulted in a $36.3 million reduction to revenue, at the time the listed price for roxadustat was issued by the Japanese Ministry of Health, Labour and Welfare, which reflected the total difference between estimated and actual listed price and yield from the manufacture of bulk product tablets.

In addition, we started commercial sales of roxadustat drug product in China in the third quarter of 2019.

Drug product revenue is recognized in an amount that reflects the consideration to which we expect to be entitled in exchange for those products, net of price adjustment, contractual sales rebate and other discounts.

For the year ended December 31, 2019, upon roxadustat being included on the NRDL in December 2019, we recorded $0.9 million of price adjustment based on government-listed price guidance and estimated channel inventory levels.

The contractual sales rebate and other discounts were immaterial for the year ended December 31, 2019.

Operating Expenses

Non-key account hospital listing award

Contractual sales rebate

Other discounts and rebates

Product revenue, net

We started roxadustat commercial sales in China in the third quarter of 2019.

Therefore, the year-over-year comparison would not be meaningful, as the prior year was at limited sales volume.

The gross product revenue for the year ended December 31, 2020 was $89.0 million.

In the second quarter of 2020, we amended the agreement with our pharmaceutical distributors, which triggered accounting modifications particularly related to non-key account hospital listing award.

For the year ended December 31, 2020, the non-key account hospital listing award was $9.3 million, which was recorded as a reduction to the revenue and calculated based on eligible non-key account hospital listing to date achieved by each distributor with certain requirements met during the period.

For the year ended December 31, 2020 and 2019, the contractual sales rebate was $6.2 million and $0.1 million, respectively, which were calculated based on the stated percentage of gross sales by each distributor in the distribution agreement entered between FibroGen and each distributor.

All other rebates and discounts, including sales return allowance were immaterial for the periods presented .

For the year ended December 31, 2019, a $0.9 million of price adjustment was recorded based on government-listed price guidance and estimated channel inventory levels.

Drug Product Revenue

Years Ended December 31,

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(dollars in thousands)

Drug product revenue:

Total drug product revenue:

In 2018, FibroGen and Astellas entered into the Japan Amendment.

Under this amendment, FibroGen would continue to manufacture and supply roxadustat API to Astellas for the roxadustat commercial launch in Japan.

We fulfilled the shipment obligations under the term of the Japan Amendment during the year ended December 31, 2018, and recognized the related product revenue of $64.8 million based on a transaction price that was subject to potential future adjustments, which represented a form of variable consideration.

Related to the above API shipments in 2018, a change in estimated variable consideration incurred in 2019 at the time the actual listed price for roxadustat was issued by the Japanese Ministry of Health, Labour and Welfare, which resulted in a total difference of $36.3 million between the estimated and the actual listed price and yield from the manufacture of bulk product tablets.

In addition, during the year ended December 31, 2020, we recorded another $4.0 million reduction to drug product revenue, related to a change in estimated variable consideration, based on the API held by Astellas at March 31, 2020 adjusted to reflect the updated listed price for roxadustat issued by the Japanese Ministry of Health, Labour and Welfare and changes in the estimated bulk product strength mix intended to be manufactured by Astellas, estimated cost to convert the API to bulk product tablets, and estimated yield from the manufacture of bulk product tablets, among others.

During the second quarter of 2020, we fulfilled shipment obligations under the term of the Japan Amendment, and recognized the related drug product revenue of $8.2 million in the same period.

During the fourth quarter of 2020, we shipped bulk drug product from process validation supplies for commercial purposes under the term of the Europe Agreement.

We constrained the consideration of this shipment due to a high degree of uncertainty associated to the final consideration.

As a result, we recorded $1.4 million as current deferred revenue and $4.6 million as long-term deferred revenue as of December 31, 2020.

The deferred revenue will be recognized as and when uncertainty is resolved.

Under the U.S./RoW Agreement, FibroGen would manufacture and supply roxadustat bulk drug product to AstraZeneca in support of commercial supplies.

We shipped bulk drug product to AstraZeneca as pre-commercial supply for process validation purposes during the year ended December 31, 2020 and recognized drug product revenue of $4.6 million.

The drug product revenue amount represents variable consideration and was estimated based on the quantity of product shipped and an estimated price.

Operating Costs and Expenses

Years Ended December 31,

Change 2020 vs.

(dollars in thousands)

Operating costs and expenses

Cost of goods sold

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Total operating costs and expenses

We have taken measures to minimize the health risks of COVID-19 to our staff, patients, healthcare providers and their communities, as their safety and well-being are our top priority.

In the U.S., our employees are working remotely when possible, while in China they have returned to work in our offices, manufacturing plants, and are performing medical affairs out in the field.

We have also seen some reduced enrollment in our clinical trials, particularly for our IPF pamrevlumab trial.

However, the overall impact of COVID-19 on our expenses was not significant.

In the year ended December 31, 2020, some reduction in expenses, such as due to reduced travel and paused or slowed enrollment for trials, were offset by some increased expenses, such as in patient care.

Total operating expenses increased $22.3 million, or 6%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, for the reasons discussed in the sections below.

Cost of goods sold

Cost of goods sold was $8.9 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively, and primarily consisted of costs associated with the manufacturing of roxadustat product and storage and logistic costs.

We started commercial sales of roxadustat drug product in China in the third quarter of 2019.

The associated cost of goods sold was $1.1 million for the year ended December 31, 2019.

Cost of goods sold, associated with the roxadustat commercial sales in China, consists of direct costs to manufacture commercial product, as well as indirect costs including factory overhead, storage, shipping, quality assurance, idle capacity charges, and inventory valuation adjustments.

The year-over-year comparison would not be meaningful as the prior year was the first year for roxadustat commercial sales with limited sales volume.

Cost of goods sold associated with the roxadustat drug product revenue in the U.S.

was not material for the year ended December 31, 2020 and 2019.

W e expect costs of goods sold to increase in relation to drug product revenue as we deplete inventories that we had expensed prior to receiving regulatory approvals.

Research and Development Expenses

Research and development expenses consist of third-party research and development costs and the fully-burdened amount of costs associated with work performed under collaboration agreements.

Research and development costs include employee-related expenses for research and development functions, expenses incurred under agreements with clinical research organizations, other clinical and preclinical costs and allocated direct and indirect overhead costs, such as facilities costs, information technology costs and other overhead.

Research and development costs include employee-related expenses for research and development functions, expenses incurred under agreements with clinical research organizations (“CROs”), other clinical and preclinical costs and allocated direct and indirect overhead costs, such as facilities costs, information technology costs and other overhead.

Research and development costs are expensed as incurred.

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We expect our research and development expenses to increase in the future as we advance our product candidates through clinical trials and expand our product candidate portfolio.

We expect development expenses to increase as we continue Phase 3 trials for pamrevlumab.

Research and development expenses decreased $26.6 million, or 11%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

The decrease was primarily due to decreases in drug development expenses of $29.8 million, clinical trials costs of $20.7 million, and $6.8 million of capitalization of inventory manufacturing costs.

The decreases were partially offset by increases in allocated facility related expense of $11.9 million, stock-based compensation expense of $10.5 million, outside services of $7.3 million, and licenses and permits fees of $2.9 million.

Drug development expenses decreased primarily due to lower drug substance manufacturing activities related to pamrevlumab, partially offset by higher activities for roxadustat in its global program.

Clinical trial costs decreased as a result of the substantial completion of Phase 3 trials for roxadustat, partially offset by the increases resulted from Phase 3 trials for pamrevlumab and preparation work related to NDA submission in the U.S.

Facility related expenses, as part of the allocated overhead costs, was higher due to increase in depreciation expenses related to China facilities, the amortization of finance lease ROU assets related to the adoption of ASC 842, and higher depreciation expenses primarily related to the change estimated useful life for our leasehold improvements, from the building life to the shorter of the building life and remaining lease term, as a result of the adoption of ASC 842.

Stock-based compensation expense increased due to the cumulative impact of stock option grant activities.

Outside services costs increased due to higher scientific contract work related to roxadustat submission activities, higher medical affairs expenses for roxadustat in China and higher consulting expenses related to pamrevlumab.

Licenses and permits fees increased related to the Prescription Drug User Fee incurred for NDA submission to the FDA.

Research and development expenses increased $43.7 million, or 21%, for the year ended December 31, 2020 compared to the year ended December 31, 2019 as a result of the net effect of the following:

Increase of $36.1 million in clinical trials costs, primarily due to commencement of Phase 3 trials for pamrevlumab and post-approval safety studies in China;

Increase of $10.3 million in drug development expenses, primarily due to higher drug substance manufacturing activities and supplies related to pamrevlumab, and higher supply chain expenses related to roxadustat, partially offset by lower drug substance manufacturing activities related to roxadustat and lower drug product manufacturing costs related to pamrevlumab;

Increase of $5.2 million in stock-based compensation expense, primarily due to the cumulative impact of stock option grant activities and accelerated recognition due to departure of certain executive employees;

Increase of $3.2 million in employee-related costs primarily due to higher headcount in the research and development functions in China and higher compensation levels, partially offset by decrease in events and travel costs due to the COVID-19 pandemic;

Increase of $3.1 million in facility related expense, primarily due to higher allocated overhead costs, higher depreciation expenses related to China facilities and general maintenance expenses;

Decrease of $6.1 million due to capitalization of inventory manufacturing costs associated with roxadustat production;

Decrease of $5.3 million in outside services due to lower consulting expenses and scientific contract work related to roxadustat Phase 3 and submission activities.

Selling, General and Administrative Expenses

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SG&A expenses also include facility-related costs, professional fees, accounting and legal services, other outside services including co-promotional expenses, recruiting fees and expenses associated with obtaining and maintaining patents.

We anticipate that our SG&A expenses will increase in the future as we increase co-promotional expenses for roxadustat and our headcount to support potential commercialization of our product candidates.

We also anticipate increased expenses, including exchange listing and SEC requirements, director and officer insurance premiums, legal, audit and tax fees, and regulatory compliance programs associated with being a public company.

Additionally, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.

SG&A expenses increased $71.1 million, or 112%, for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to increases in outside service expenses of $54.1 million, employee-related costs of $5.1 million, legal expense of $4.7 million, stock-based compensation expense of $3.6 million, and facility related expenses of $2.9 million,

Outside service expenses increased due to the recognition of our share of co-promotional expenses incurred with AstraZeneca sales and marketing efforts related to the commercial launch of roxadustat in China, and licensing agreement fees associated with pamrevlumab.

Employee-related costs increased due to higher headcount primarily in the sales and marketing functions in China.

Legal expenses increased mainly associated with patent-related and international activities.

Stock-based compensation expense increased due to cumulative impact of stock option grant activities, partially offset by the cancellation of our founding chief executive officer’s unvested options upon his passing during the year.

Facility related expenses, as part of the allocated overhead costs, was higher due to the amortization of finance lease ROU assets related to the adoption of ASC 842, and higher depreciation expenses primarily related to the change estimated useful life for our leasehold improvements, from the building life to the shorter of the building life and remaining lease term, as a result of the adoption of ASC 842.

We anticipate that our SG&A expenses will increase in the future as we anticipate an increase in payroll and related expenses associated with an increase in headcount to support the growth of the business in connection with potential commercialization of our product candidates.

SG&A expenses decreased $29.1 million, or 21%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, as a result of the net effect of the following:

Decrease of $44.9 million in outside service expenses, resulting from the above-mentioned reversal of previously accrued co-promotion expenses payable, which was recorded as a reduction to selling, general and administrative expenses.

In addition, current year co-promotion expenses are capped at a percentage of net sales;

Increase of $6.8 million in employee-related costs primarily due to higher headcount in the sales and marketing functions in China and higher compensation levels;

Increase of $4.2 million in legal expenses primarily associated with patent-related activities in United Kingdom.

Interest and Other, Net

4 unchanged sentences

Interest expense

Investment loss in unconsolidated variable

interest entity

Interest income and other, net

1 unchanged sentence

Interest Expense

Before December 31, 2018, interest expense included payments made for imputed interest related to the facility lease financing obligations for our leased facilities in San Francisco and China.

After adoption of ASC 842 as of January 1, 2019, the interest expense relates to our finance lease liabilities accretion primarily for our leased facilities in San Francisco and China.

Interest expense relates to our finance lease liabilities accretion primarily for our leased facilities in San Francisco and China.

Interest expense also includes interest related to the Technology Development Center of the Republic of Finland product development obligations.

Interest expense decreased $8.1 million, or 74%, for the year ended December 31, 2019 compared to the year ended December 31, 2018 due to the different method of interest computation of interest expense under the old and new lease accounting rules.

Interest expense decreased $0.5 million, or 16%, for the year ended December 31, 2020 compared to the year ended December 31, 2019 due to lower interest rates related to our finance lease liabilities.

Investment Loss in Unconsolidated Variable Interest Entity

Investment loss in unconsolidated variable interest entity represented our proportionate share of the reported profits or losses of Falikang, an unconsolidated VIE accounted for under the equity method, and was immaterial for the year ended December 31, 2020.

See Note 3, Acquisition and Variable Interest Entity , to the consolidated financial statements for details.

Interest Income and Other, Net

Interest income and other, net primarily include interest income earned on our cash, cash equivalents and investments, foreign currency transaction gains (losses), remeasurement of certain monetary assets and liabilities in non-functional currency of our subsidiaries into the functional currency, realized gains (losses) on sales of investments.

Interest income and other, net increased $4.0 million, or 34%, for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to $3.9 million higher interest earned on our cash, cash equivalents and investments associated with the higher average balances and $1.2 million higher net unrealized gain on our marketable equity investments, partially offset by $1.2 million related to a one-time realized foreign currency gain during the prior year.

Interest income and other, net decreased $10.0 million, or 64%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to lower interest earned on our cash, cash equivalents and investments of $9.4 million associated with the lower average balances.

On April 1, 2020, FibroGen Beijing adopted Renminbi Yuan (“CNY”) as its functional currency based on reassessment of the primary economic environment in which FibroGen Beijing operates, as such environment was mainly associated with its growing manufacturing and product sales activities conducted in CNY.

Prior to April 1, 2020, FibroGen Beijing’s functional currency was the U.S.

This change did not result in material impact to unrealized foreign currency gain or loss during the year ended December 31, 2020.

Provision for Income Taxes

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The provisions for income taxes for the years end December 31, 2020 and 2019 were due to foreign taxes.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted and signed into law.

The CARES Act includes changes to the tax provisions that benefits business entities, and makes certain technical corrections to the 2017 Tax Cuts and Jobs Act.

GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date.

We evaluated and determined that the impact is immaterial.

Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception and expected continuing net loss, we have established a full valuation allowance against our net deferred tax assets as we do not currently believe that realization of those assets is more likely than not.

We will continue to maintain a full valuation allowance on our net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of this allowance.

SELECTED QUARTERLY FINANCIAL DATA

The following tables present unaudited quarterly results for 2019 and 2018.

These tables include all adjustments, consisting only of normal recurring adjustments that we consider for the fair statement of our consolidated financial position and operating results for the quarters presented.

Payments from our collaboration partners have caused, and are likely to continue to cause, fluctuations in our quarterly results.

These unaudited quarterly results of operations should be read in conjunction with the consolidated financial statements and notes included in Item 8 of this Annual Report on Form 10-K.

We have prepared the unaudited information on the same basis as our audited consolidated financial statements.

Our operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

(in thousands, except for per share data)

Operating expenses (2)

Net income (loss)

Net income (loss) per share (4):

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

(in thousands, except for per share data)

Operating expenses

Net income (loss)

Net income (loss) per share (4):

Revenue for the second quarter of 2019 was significantly higher compared to other quarters primarily due to the revenue recognized related to three milestone payments.

Revenue for the fourth quarter of 2019 was significantly lower compared to other quarters primarily due to the change in estimated variable consideration related to the API product revenue.

Operating expenses for the fourth quarter of 2019 was significantly higher compared to other quarters primarily due to the recognition of our share of co-promotional expenses incurred with AstraZeneca for sales and marketing efforts related to the commercial launch of roxadustat in China , and permit fees for NDA filing to the FDA.

Revenue for the fourth quarter of 2018 was significantly higher compared to other quarters due to the API product revenue recognized, and revenue recognized on two milestone payments.

Basic and diluted net income (loss) per share is computed independently for each of the quarters presented.

Therefore, the sum of quarterly basic and diluted net income (loss) per share may not equal annual basic and diluted net income (loss) per share.

During 2020, we transferred certain intellectual property rights relating to our Chinese business between our wholly owned subsidiaries that are based in different tax jurisdictions.

The transferor entity was not subject to income taxes in its local jurisdiction.

The acquiring entity of the intellectual property is entitled to amortize the acquisition price of the intangible assets for tax purposes.

In accordance with ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory , we recognized a deferred tax asset of $78.7 million for the temporary difference arising from the acquirer’s excess tax basis.

Furthermore, based upon the weight of available evidence, we recognized a full valuation allowance against this deferred tax asset since it does not currently believe that realization of this gross deductible temporary difference is more likely than not.

Accordingly, this inter-company transfer did not have a material impact to our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

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As of December 31, 2020, we had cash and cash equivalents of $678.4 million.

Cash is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation.

Investments, consisting of available-for-sale debt investments, marketable equity investments, term deposit and certificate of deposit, and stated at fair value, are also available as a source of liquidity.

As of December 31, 2020, we had short-term and long-term investments of $8.1 million and $0.2 million, respectively.

Cash is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation.

Investments, consisting of available-for-sale debt investments and marketable equity investments, and stated at fair value, are also available as a source of liquidity.

As of December 31, 2020, a total of $66.0 million of our cash and cash equivalents was held outside of the U.S.

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Operating Capital Requirements

In the third quarter of 2019, we started generating revenue from commercial sales of roxadustat drug product in China.

Even with the expectation of increases in revenue from drug product sales, we anticipate that we will continue to generate losses for the foreseeable future.

In the third quarter of 2019, we started generating revenue from commercial sales of roxadustat product in China.

Even with the expectation of increases in revenue from product sales, we anticipate that we will continue to generate losses for the foreseeable future.

We expect increase in our operating expenses as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products.

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Although our share of expenses for roxadustat will decrease as a result of AstraZeneca funding all non-China collaboration expenses not reimbursed by Astellas, we expect our research and development expenses to continue to increase as we invest in our other programs.

We are subject to all the risks related to the development and commercialization of novel therapeutics, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business, such as from the COVID-19 pandemic or other factors outlined under Part I, Item 1A “ Risk Factors ” in this Annual Report on Form 10-K.

We anticipate that we will need substantial additional funding in connection with our continuing operations.

We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all.

If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted.

If we raise additional financing by the incurrence of indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business.

If we are unable to obtain needed additional funds, we will have to reduce our operating costs and expenses, which would impair our growth prospects and could otherwise negatively impact our business.

We believe that our existing cash and cash equivalents, short-term and long-term investments and accounts receivable will be sufficient to meet our anticipated cash requirements for at least the next 12 months from the filing date of this Annual Report on Form 10-K.

However, our liquidity assumptions may change over time, and we could utilize our available financial resources sooner than we currently expect.

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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.

Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under Part I, Item 1A “ Risk Fact ors” in this Annual Report on Form 10-K.

We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all.

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Operating Activities

Net cash used in operating activities was $81.6 million for the year ended December 31, 2020 and consisted primarily of net loss of $189.3 million adjusted for non-cash items of $96.3 million and a net increase in operating assets and liabilities of $174.6 million.

The significant non-cash items included stock-based compensation expense of $72.7 million, depreciation expense of $11.7 million, and amortization of finance lease ROU of $10.4 million.

The significant items in the changes in operating assets and liabilities included the increases resulting from the following:

Prepaid expenses and other current assets of $123.5 million and Deferred revenue of $45.1 million, primarily related to the billing and receipt of $130.0 million in regulatory milestones under the Europe Agreement with Astellas associated with the MAA submission in Europe;

and the billing and receipt of $50.0 million regulatory milestone under the U.S./RoW Agreement with AstraZeneca associated with the NDA submission for review in the U.S.

These milestones were not billable as of December 31, 2019, and was net of the associated deferred revenues of $4.8 million and $50.0 million, respectively.

The change in deferred revenue was also driven by the recognition of revenues under our collaboration agreements with Astellas and AstraZeneca;

Accrued and other liabilities of $31.0 million, primarily driven by $11.5 million of the accrued co-promotion expenses at December 31, 2020 that is anticipated to be paid within the next 12 months resulting from the China Amendment in the third quarter of 2020, $7.0 million of profit share liability to AstraZeneca accrued at December 31, 2020, as well as driven by the timing of invoicing and payment;

offset by the payment of $36.3 million that was accrued at December 31, 2019, related to the change in estimated variable consideration associated with the API shipment;

Accounts payable of $17.7 million, primarily driven by $16.9 million of the co-promotion expenses at December 31, 2020 that is scheduled to be paid to AstraZeneca;

Other assets of $6.8 million, primarily related to the return and consumption of input value added tax by FibroGen Beijing.

The increases were partially offset by the decreases resulting from the following:

Other long-term liabilities of $28.2 million, primarily due to the adjustment in long-term co-promotion expenses payable to AstraZeneca for its sales and marketing efforts related to the commercial sales of roxadustat in China resulting from the China Amendment in the third quarter of 2020;

Accounts receivable of $12.0 million, primarily driven by the increase in accounts receivable from customers in China for roxadustat sales, as well as the timing of the receipt of upfront payments and the recognition of revenues under our collaboration agreements with Astellas and AstraZeneca;

Inventories of $9.2 million, driven by the increased inventory level primarily related to FibroGen Beijing’s productions of roxadustat for commercial sales purposes and pre-launch inventory cost capitalized in the U.S.

Net cash used in operating activities was $78.7 million for the year ended December 31, 2019 and consisted primarily of net loss of $77.0 million adjusted for non-cash items of $83.9 million and a net decrease in operating assets and liabilities of $85.7 million.

The significant non-cash items included stock-based compensation expense of $66.3 million, depreciation expense of $11.1 million, amortization of finance lease ROU of $10.3 million, and net amortization of premium and discount on investments of $3.7 million.

The significant items in the changes in operating assets and liabilities included decreases resulting from prepaid expenses and other current assets of $128.6 million, deferred revenue of $49.9 million, inventories of $6.9 million, other assets of $3.3 million, and accounts payable of $3.1 million, partially offset by increases resulting from other long-term liabilities of $52.4 million, accounts receivable of $35.2 million, and accrued and other liabilities of $18.3 million.

The changes in prepaid expenses and other current assets and deferred revenue were primarily driven by a $130.0 million unbilled contract asset related to regulatory milestones under the Europe Agreement with Astellas associated with the planned MAA submission in Europe and a $50.0 million contract asset related to a regulatory milestone under the U.S./RoW Agreement with AstraZeneca associated with the NDA submission in the U.S., which were not billable to Astellas or AstraZeneca as of December 31, 2019, net of the associated deferred revenues of $4.8 million and $50.0 million, respectively.

The significant items in the changes in operating assets and liabilities included the decreases resulting from the following:

Prepaid expenses and other current assets of $128.6 million and deferred revenue of $49.9 million, primarily driven by a $130.0 million unbilled contract asset related to regulatory milestones under the Europe Agreement with Astellas associated with the planned MAA submission in Europe and a $50.0 million contract asset related to a regulatory milestone under the U.S./RoW Agreement with AstraZeneca associated with the NDA submission in the U.S., which were not billable to Astellas or AstraZeneca as of December 31, 2019, net of the associated deferred revenues of $4.8 million and $50.0 million, respectively.

The change in deferred revenue was also related to the recognition of revenues under our collaboration agreements with Astellas and AstraZeneca;

The change in inventories was due to the capitalization of inventory costs starting in June 2019 when FibroGen Beijing began productions of roxadustat for commercial sales purposes.

The change in other assets was primarily related to the net accumulation of input value added tax by FibroGen Beijing.

The changes in accounts payable, and accrued and other liabilities were primarily driven by the timing of invoicing and payments.

The change in accrued and other liabilities was also driven by accrued $36.3 million related to the change in estimated variable consideration associated with the roxadustat API.

The change in other long-term liabilities was primarily due to the accrual of co-promotional expenses with AstraZeneca for sales and marketing efforts related to the commercial launch of roxadustat in China that are not expected to be paid in the next year.

The change in accounts receivable was primarily related to the collection of $43.9 million from Astellas for the API delivery in December 2018 under the Japan Amendment, as well as the timing of the receipt of upfront payments and recognition of revenues under our collaboration agreements with Astellas and AstraZeneca.

Net cash used in operating activities was $76.1 million for the year ended December 31, 2018 and consisted primarily of net loss of $86.4 million adjusted for non-cash items of $58.7 million and a net decrease in operating assets and liabilities of $48.4 million.

The significant non-cash items included stock-based compensation expense of $52.1 million, depreciation expense of $6.6 million, unrealized loss on our marketable equity investments of $1.1 million and realized foreign currency gain of $1.1 million.

The significant items in the changes in operating assets and liabilities included decreases resulting from accounts receivable of $55.2 million and deferred revenue of $5.0 million, partially offset by increases resulting from accrued liabilities of $5.6 million, accounts payable of $3.6 million, other long-term liabilities of $1.6 million and other assets of $1.1 million.

The change in accounts receivable was primarily related to the delivery of $43.9 million roxadustat API to Astellas in December 2018 under the Japan Amendment, as well as the timing of the receipt of payments and recognition of revenues under our collaboration agreements with Astellas and AstraZeneca.

The change in deferred revenue was related to the recognition of revenues under our collaboration agreements with Astellas and AstraZeneca.

The changes in accrued liabilities, accounts payable and other long-term liabilities were primarily driven by the timing of invoicing and payments.

The change in other assets was primarily related to a cash refund for value added tax received by FibroGen Beijing during the third quarter of 2018.

Inventories of $6.9 million, due to the capitalization of inventory costs starting in June 2019 when FibroGen Beijing began productions of roxadustat for commercial sales purposes.

Other assets of $3.3 million, primarily related to the net accumulation of input value added tax by FibroGen Beijing;

Accounts payable of $3.1 million, primarily driven by the timing of invoicing and payments.

The decreases were partially offset by the increases resulting from the following:

Other long-term liabilities of $52.4 million, primarily due to the accrual of co-promotional expenses with AstraZeneca for sales and marketing efforts related to the commercial launch of roxadustat in China that were not expected to be paid in the next year;

Accounts receivable of $35.2 million, primarily related to the collection of $43.9 million from Astellas for the API shipment in December 2018 under the Japan Amendment, as well as the timing of the receipt of upfront payments and recognition of revenues under our collaboration agreements with Astellas and AstraZeneca;

Accrued and other liabilities of $18.3 million, primarily driven by the accrued $36.3 million related to the change in estimated variable consideration associated with the roxadustat API, offset by the timing of invoicing and payments.

Investing Activities

Investing activities primarily consist of purchases of property and equipment, purchases of investments, and proceeds from the maturity and sale of investments.

Net cash provided by investing activities was $120.0 million for the year ended December 31, 2019 and consisted of proceeds from maturities of investments of $537.1 million, partially offset by cash used in purchases of available-for-sale securities and term deposit of $411.3 million, and purchases of property and equipment of $5.8 million.

Net cash used in investing activities was $522.1 million for the year ended December 31, 2018 and consisted of cash used in purchases of available-for-sale securities and term deposit of $576.9 million, and purchases of property and equipment of $8.0 million, partially offset by proceeds from maturities of investments of $54.4 million and sales of available-for-sale securities of $8.2 million.

Net cash provided by investing activities was $452.5 million for the year ended December 31, 2020 and consisted of proceeds from maturities of investments of $456.9 million, proceeds from sales of available-for-sale securities of $10.6 million, partially offset by cash used in purchases of available-for-sale securities of $8.2 million, purchases of property and equipment of $4.0 million, and net payments of $2.8 million made for investment in Falikang.

Net cash used in investing activities was $120.0 million for the year ended December 31, 2019 and consisted of proceeds from maturities of investments of $537.1 million, partially offset by cash used in purchases of available-for-sale securities and term deposit of $411.3 million, and purchases of property and equipment of $5.8 million.

Financing Activities

Financing activities primarily reflect proceeds from the issuance of our common stock, cash paid for payroll taxes on restricted stock unit releases, repayments of our lease liabilities and obligations.

Net cash provided by financing activities was $13.3 million for the year ended December 31, 2020 and consisted primarily of $37.8 million of proceeds from the issuance of common stock upon exercise of stock options and purchases under ESPP, partially offset by $12.6 million of repayments of finance lease liabilities, $11.5 million of cash paid for payroll taxes on restricted stock unit releases, and $0.4 million of repayments on our lease obligations.

Net cash used in financing activities was $4.3 million for the year ended December 31, 2019 and consisted primarily of $12.8 million of cash paid for payroll taxes on restricted stock unit releases, $11.9 million of repayments of finance lease liabilities, and $0.4 million of repayments on our lease obligations, partially offset by $20.8 million of proceeds from the issuance of common stock upon exercise of stock options and purchases under ESPP.

Net cash provided by financing activities was $13.9 million for the year ended December 31, 2018 and consisted primarily of $29.8 million of proceeds from the issuance of common stock upon exercise of stock options and purchases under ESPP, partially offset by $15.6 million of cash paid for payroll taxes on restricted stock unit releases, and $0.4 million of repayments on our lease liability.

Off-Balance Sheet Arrangements

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Indemnification Agreements

In the ordinary course of business, we provide indemnifications of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, solutions to be provided by us or from intellectual property infringement claims made by third parties.

In addition, we have entered into indemnification agreements with directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees.

We enter into standard indemnification arrangements in the ordinary course of business, including for example, service, manufacturing and collaboration agreements.

Pursuant to these arrangements, we indemnify, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, including in connection with intellectual property infringement claims by any third party with respect to its technology.

The term of these indemnification agreements is generally perpetual any time after the execution of the agreement.

We have entered into indemnification agreements with our directors and officers that may require us to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the extent permissible under applicable law.

The maximum potential amount of future payments we could be required to make under these arrangements is not determinable.

We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements.

As a result, we believe the estimated fair value of these arrangements is minimal.

Contractual Obligations and Commitments

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Finance lease liabilities

Purchase obligation - Manufacture and supply of roxadustat

Purchase obligation - Manufacture and supply of pamrevlumab

Purchase obligation - Other purchases

Total contractual obligations

The contractual obligations table excludes uncertain tax benefits of approximately $31.8 million that are disclosed in Note 12 to the consolidated financial statements because these uncertain tax positions, if recognized, would be an adjustment to the deferred tax assets.

The contractual obligations table excludes uncertain tax benefits of approximately $48.6 million that are disclosed in Note 13, Income Taxes , to the consolidated financial statements because these uncertain tax positions, if recognized, would be an adjustment to the gross deferred tax assets and the corresponding valuation allowance, if warranted.

Some of our license agreements provide for periodic maintenance fees over specified time periods, as well as payments by us upon the achievement of development, regulatory and commercial milestones.

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These milestone payments generally become due and payable only upon the achievement of certain developmental, clinical, regulatory and/or commercial milestones.

These contingent payments have not been included in the above table as the event triggering such payment or obligation has not yet occurred.

The event triggering such payment or obligation has not yet occurred .

Clinical Trials

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We recognize accruals for any legal action when we conclude that a loss is probable and reasonably estimable.

We did not have any material accruals for any currently active legal action in our consolidated balance sheets as of December 31, 2019 and 2018, as we could not predict the ultimate outcome of these matters, or reasonably estimate the potential exposure.

On April 20, 2020, in response to an invalidation action brought against certain FibroGen United Kingdom patents by Akebia, the United Kingdom court handed down a decision invalidating United Kingdom designations of European Patent Nos.

1463823, 1633333, 2298301, 2322153, and 2322155.

The United Kingdom designation to European Patent No.

2289531 was held to be valid in amended form, but not infringed by Akebia.

We and our partner Astellas have filed an appeal of the decision in the United Kingdom Court of Appeal.

We did not have any material accruals for any currently active legal action in our consolidated balance sheets as of December 31, 2020, as we could not predict the ultimate outcome of these matters, or reasonably estimate the potential exposure.

Recently Issued and Adopted Accounting Guidance

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”).

Under this guidance, an entity is required to recognize ROU assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements.

This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions.

Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842):

Targeted Improvements (“ASU 2018-11”), which provides entities the option to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

We adopted the above guidance under ASC 842 as of January 1, 2019, using the modified retrospective transition method, through a cumulative-effect adjustment at the beginning of the first quarter of 2019.

We elected the optional transition method under the guidance, which allowed it to continue applying previous lease guidance (ASC 840) for the comparative prior year periods presentation in the year of adoption.

Accordingly, we recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

In addition, we elected the package of transitional practical expedients permitted under the transition guidance under ASC 842, which among other things allows us to carry forward its historical lease classification, and not to reassess initial direct costs for any existing leases.

Meanwhile, we did not elect the hindsight practical expedient because it has limited number of leases, lease terms are straightforward, and most of its lease renewals are undefined until negotiated.

In addition, we have elected the short term accounting policy practical expedient and does not apply the balance sheet recognition requirements for short-term leases (excluding expenses relating to leases with a lease term of one month or less), by class of underlying asset to which the right of use relates.

We have not elected the non-lease components practical expedient, and therefore accounts for each lease component separately from the non-lease components.

Upon adoption of ASC 842, we classified our existing building leases that were previously accounted for as build-to-suit arrangements as finance leases, and applied the transition guidance.

Accordingly, we derecognized the assets and liabilities previously recognized under ASC 840 build-to-suit guidance.

In addition, as a result of applying the transition guidance, we also recorded an adjustment to the accumulated depreciation of related leasehold improvements to reflect a change in estimated useful life from the building life to the shorter of the building life and remaining lease term.

Differences between the assets and liabilities derecognized were recorded to the opening balance of retained earnings.

The adoption of ASC 842 resulted in a recognition of approximately $50.3 million in right-of-use assets and approximately $62.0 million in lease liabilities, respectively, upon adoption of this guidance, for our operating leases and finance leases.

The adoption of this guidance did not have a material impact to our consolidated statement of operations or consolidated statement of cash flows for the year ended December 31, 2019.

Refer to Note 2 to the consolidated financial statements for details.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income:

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income .

This guidance allows for the reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects arising from the reduction of the U.S.

federal statutory income tax rate from 35% to 21%.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.

This guidance requires capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

This guidance was effective for annual reporting periods beginning after December 15, 2019, including interim periods.

We adopted this guidance on January 1, 2019 using the modified retrospective approach, which resulted in a reclassification of $0.6 million, based on the aggregate portfolio approach, from accumulated other comprehensive loss to opening accumulated deficit.

The adoption of this guidance had no impact to our consolidated statement of operations or consolidated statement of cash flows for the year ended December 31, 2019.

Refer to Note 2 to the consolidated financial statements for details.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting.

This guidance expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.

The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards.

This guidance is effective for annual reporting period beginning after December 15, 2018, including interim periods.

We adopted this guidance on January 1, 2019 and the adoption of this guidance had no impact to our consolidated financial statements.

We adopted this guidance on January 1, 2020 using the prospective method, and the adoption of this guidance did not have material impact to our consolidated financial statements.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

This guidance is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

This guidance requires the measurement of financial assets with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

This guidance requires an impairment model, known as the current expected credit loss model, which is based on expected losses rather than incurred losses.

Entities are required to carry an allowance for expected credit losses for financial assets, including most debt instruments (except those carried at fair value) and trade receivables.

In November 2019, the FASB issued ASU No.

2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2019-11”) , which has the same effective dates and transition requirements as ASU 2016 - 13 .

ASU 2016-13 and ASU 2019-11 were effective for annual reporting periods beginning after December 15, 2019 including interim periods.

Our investment portfolio primarily consists of U.S.

Treasury bills and notes carried at fair value, which is required to follow the impairment model under Topic 326.

We adopted this guidance on January 1, 2020 .

Based on the composition of our trade receivables and investment portfolio, economic conditions and historical credit loss activity, the adoption of this guidance did not have material impact to our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Revenue Recognition

Substantially all of our revenues to date have been generated from our collaboration agreements.

Revenues under collaboration agreements

Our collaboration agreements include multiple performance obligations comprised of promised services, or bundles of services, that are distinct.

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(1) license of FibroGen technology, (2) the performance of co-development services, including manufacturing of clinical supplies and other services during the development period, and (3) manufacture of commercial supply.

The evaluation as to whether these promises are distinct, and therefore represent separate performance obligations, is described in more details in Note 3 “Collaboration Agreements” to our consolidated financial statements.

The evaluation as to whether these promises are distinct, and therefore represent separate performance obligations, is described in more details in Note 4, Collaboration Agreements and Revenues , to our consolidated financial statements.

For revenue recognition purposes, we determine that the term of our collaboration agreements begin on the effective date and ends upon the completion of all performance obligations contained in the agreements.

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development, regulatory, and commercial milestone payments;

and royalties on net sales of licensed products.

payments from sales of API;

payments from sales of bulk drug product and royalties on net sales of licensed products.

Upfront license fees are non-contingent and non-refundable in nature and are included in the transaction price at the point when the license fees become due to us.

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Service revenue is recognized over time based on progress toward complete satisfaction of the performance obligation.

We use an input method to measure progress toward the satisfaction of co-development services and certain other related performance obligations, which is based on costs of labor hours or full time equivalents and out-of-pocket expenses incurred relative to total expected costs to be incurred.

We believe this measure of progress provides a faithful depiction of the transfer of services because other measures do not measure as accurately how we transfer our performance obligations to our collaboration partners.

During 2019, we started selling roxadustat in China through a number of pharmaceutical distributors located in China.

For each performance obligation satisfied over time, we assess the proper method to be used for revenue recognition, either an input method to measure progress toward the satisfaction of services or an output method of determining the progress of completion of performance obligation.

Drug product revenue

Drug product revenue includes commercial-grade API or bulk drug product sales to AstraZeneca and Astellas, and is recognized when we fulfill the shipment obligations.

The drug product revenue is accounted for as variable consideration, estimated at the time of sale using the expected value method.

We apply significant judgment in estimating the variable consideration, which involves the use of significant assumptions such as the future list price adjustments set by the Japanese Ministry of Health, Labour and Welfare, product mix, and timing of processing of API into bulk drug product.

In 2018, FibroGen and Astellas entered into an amendment to the Japan Agreement that allows Astellas to manufacture roxadustat drug product for commercialization in Japan (the “Japan Amendment”).

Under this amendment, FibroGen would continue to manufacture and supply roxadustat API to Astellas for the roxadustat commercial launch in Japan.

The drug product revenue represents variable consideration and is estimated based on the quantity of product shipped, actual listed price for roxadustat issued by the Japanese Ministry of Health, Labour and Welfare and possible future changes to the listed price , adjusted for the timing of and estimated bulk product strength mix intended to be manufactured by Astellas, estimated cost to convert the API to bulk drug product tablets, and estimated yield from the manufacture of bulk product tablets, among others.

Under the Europe Agreement with Astellas, Astellas has an option to purchase roxadustat bulk drug product in support of commercial supplies.

The drug product revenue amount represents variable consideration and is estimated based on the quantity of product shipped and an estimated price.

The estimated price is based on the contractual transfer price percentage applied on the estimated weighted average net sales price per strength, which is estimated to be realized by Astellas from the end sale of roxadustat in its approved territories.

In 2020, we entered into Commercial Supply Agreement under the U.S./RoW Agreement with AstraZeneca to define general forecast, order, supply and payment terms for AstraZeneca to purchase roxadustat bulk drug product from us in support of commercial supplies.

The drug product revenue amount represents variable consideration and was estimated based on the quantity of product shipped and an estimated price.

The estimated price is based on the contractual transfer price percentage applied on the estimated weighted average net sales price per strength, which is estimated to be realized by AstraZeneca from the end sale of roxadustat in its approved territories.

Estimating variable consideration and the related constraint requires the use of significant management judgment.

We review new information that may affect its variable consideration estimate at every reporting period and record revenue adjustment, if certain and material.

As each of our collaboration agreements provide for annual true up to the considerations paid for our commercial supplies, we will re-evaluate the transaction price in each reporting period and record an adjustment to revenue as uncertain events are resolved or other changes in circumstances occur.

Product revenue, net

We sell roxadustat in China through a number of pharmaceutical distributors located in China.

These pharmaceutical distributors are our customers.

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Distributors bear inventory risk once they receive and accept the product.

Product revenue is recognized when control of the promised good is transferred to the customer in an amount that reflects the consideration to which we expect to be entitled in exchange for the product.

The period between the transfer control of promised goods and when we receive payment is based on a general 60-day payment term.

Product revenue is recognized when control of the promised good is transferred to the customer in an amount that reflects the consideration to which we expect to be entitled to in exchange for the product.

The period between the transfer of control of the promised goods and when we receive payment is based on a general 60-day payment term.

As such, product revenue is not adjusted for the effects of a significant financing component.

We establish a bad debt allowance based on our judgment to consider factors such as the age of the receivables.

Bad debt expense is included in selling, general and administrative expenses on the consolidated statements of operations.

There was no bad debt allowance provided as of December 31, 2019.

Product drug revenue is recorded at the net sales prices (transaction price) which includes the following estimates of variable consideration:

Product revenue is recorded at the net sales prices (transaction price) which includes the following estimates of variable consideration:

Price adjustment:

In December 2019, China’s NHSA released price guidance for roxadustat under NRDL, effective January 1, 2020.

In December 2019, China’s National Healthcare Security Administration released price guidance for roxadustat under the NRDL, effective January 1, 2020.

Any channel inventories as of January 1, 2020 that had not been sold to hospitals by distributors, or to patients by hospitals, were eligible for a price adjustment under the price protection.

3 unchanged sentences

The contractual sales rebate is calculated based on the stated percentage of gross sales by each distributor in the distribution agreement entered between FibroGen and each distributor.

The contractual sales rebate is accrued at the point of sale to the distributor, and applied to future sales orders made by the distributor under our discretion;

The contractual sales rebate is recorded as a reduction to revenue at the point of sale to the distributor;

Key account hospital sales rebate :

An additional sales rebate is provided to a distributor for product sold to key account hospitals as a percentage of gross sales made by the distributor to eligible hospitals.

This additional rebate is accrued at the point of sale to the distributor and applied to future sales orders made by the distributor under our discretion;

An a dditional sales rebate is provided to a distributor for product sold to key account hospitals as a percentage of gross sales made by the distributor to eligible hospitals .

This additional rebate is recorded as a reduction to revenue at the point of sale to the distributor;

Transfer fee discount :

The transfer fee discount is offered to a distributor who has its downstream distributors supply to eligible hospitals.

This discount is calculated based on a percentage of gross sales made to the downstream distributors, and accrued at the point of sale to the distributor;

This discount is calculated based on a percentage of gross sales made to the downstream distributors, and recorded as a reduction to revenue as incurred;

Sales return :

Distributors can request to return product to us only due to quality issues and for product within one year of its expiration date.

We, at our sole discretion, decide whether to accept such return request.

The sales return allowance provided as of December 31, 2019 was immaterial;

Distributors can request to return product to us only due to quality issues or for product purchased within one year prior to the product’s expiration date;

Non-key account hospital listing award:

A one-time fixed-amount award is offered to a distributor who successfully lists the product with an eligible hospital, and meets the sales volume and timing requirements.

The non-key account hospital listing award is accrued when the distributor meets eligibility requirements, and applied against future sales orders made by the distributor.

We consider this particular award to be a material right within the definitions of ASC 606 and therefore have treated it as a separate performance obligation.

The above allowances are recorded as reductions of the gross accounts receivable from the distributor in the same period that the related revenue is recorded, with the exception of the non-key account hospital listing award, which is accrued when the distributor meets the eligibility requirements.

The calculation of such allowances are based on gross sales to the distributor, or estimated utilizing best available information from the distributor, maximum known exposures and other available information including estimated channel inventory levels and estimated sales made by the distributor to hospitals, which involve a substantial degree of judgment.

A one-time fixed-amount award is offered to a distributor who successfully lists the product with an eligible hospital, and who meets certain requirements.

We consider this particular award to be an upfront payment to a customer within the definitions of ASC 606.

The non-key account hospital listing award is capitalized when the distributor meets eligibility requirements, and amortized as reduction to product revenue over future sales orders made by the distributor until exhausted.

The calculation of the above variable consideration is based on gross sales to the distributor, or estimated utilizing best available information from the distributor, maximum known exposures and other available information including estimated channel inventory levels and estimated sales made by the distributor to hospitals, which involve a substantial degree of judgment.

The above rebates and discounts all together are eligible to be applied against the distributor’s future sales order, limited to certain maximums until such rebates and discounts are exhausted.

These rebates and discounts are recorded as contract liabilities at the time they become eligible and in the same period that the related revenue is recorded.

Due to the distributor’s legal right to offset, at each balance sheet date, the rebates and discounts are presented as reductions to gross accounts receivable from the distributor, or as a current liability to the distributor to the extent that the total amount exceeds the gross accounts receivable or when we expect to settle the discount in cash.

The distributor’s legal right of offset is calculated at the individual distributor level.

Valuation of inter-company transfer of intellectual property

ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory, issued by the FASB requires companies to recognize the income tax consequences of an inter-company transfer of assets when the transfer occurs.

The guidance in ASU 2016-16 does not change accounting for the pre-tax effects of inter-company asset transfers under Accounting Standards Codification Topic 810, Consolidation.

As described in Note 13, Income Taxes , to our consolidated financial statements, during 2020, we transferred certain intellectual property rights relating to our Chinese business between our wholly owned subsidiaries that are based in different tax jurisdictions.

The transferor entity was not subject to income taxes in its local jurisdiction.

The acquiring entity of the intellectual property is entitled to amortize the acquisition price of the intangible assets for tax purposes.

In accordance with ASU 2016-16, we recognized a deferred tax asset of $78.7 million for the temporary difference arising from the acquirer’s excess tax basis.

Furthermore, based upon the weight of available evidence, we recognized a full valuation allowance against this deferred tax asset since we do not currently believe that realization of this gross deductible temporary difference is more likely than not.

The estimated fair value for the transfer of these intellectual property rights was determined using the excess earning method, a variation of the income valuation approach.

The excess earnings method estimates the value of an intangible asset equal to the present value of the incremental after-tax cash flows attributable to that intangible asset over its remaining economic life.

Long-term cash flow projections for the asset require the use of significant estimates and judgements, including revenue volume and price.

The fair value of the asset was determined using an estimated discount rate of 12.3%, which reflects the risks inherent in future cash flow projections and represents a rate of return that a market participant would expect for this asset.

The transferred intangible asset is being amortized over an estimated useful life of approximately 8 years by the acquiring entity.

We believe our assumptions are consistent with the plans and estimates that a market participant would use to acquire this intangible asset.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis