KYNTRA BIO, INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information included in Item 8 of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, international operations and product candidates, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. BUSINESS OVERVIEW 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”) 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. 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 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. 90 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 Years Ended December 31, 2020 2019 2018 (in thousands, except for per share data) Result of Operations Revenue $ 176,319 $ 256,577 $ 212,958 Operating costs and expenses 368,199 345,891 299,651 Net loss (189,291 ) (76,970 ) (86,420 ) Net loss per share - basic and diluted $ (2.11 ) $ (0.89 ) $ (1.03 ) December 31, 2020 December 31, 2019 (in thousands) Balance Sheet Cash and cash equivalents $ 678,393 $ 126,266 Short-term and long-term investments $ 8,388 $ 468,609 Accounts receivable $ 41,883 $ 28,455 Our revenue for the year ended December 31, 2020 included the revenues recognized related to the following: • $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; and • $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: • $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; and • $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. 91 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; and • 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. Since inception and through December 31, 2020, we have incurred a total of approximately $2.2 billion in research and development expenses, a majority of which relates to the development of roxadustat, pamrevlumab and other HIF-PH inhibitors. We expect to continue to incur significant expenses and operating losses over at least the next several years and 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. In addition, we expect to incur significant expenses relating to seeking regulatory approval for our product candidates and commercializing those products in various markets, including China. We consider the active management and development of our clinical pipeline to be particularly crucial to our long-term success. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time consuming. The actual probability of success for each of our product candidates and clinical programs, and our ability to generate product revenue and become profitable, depends upon a variety of factors, including the quality of the product candidate, clinical results, investment in the program, competition, manufacturing capability, commercial viability, and our and our partners’ ability to successfully execute our development and commercialization plans. For a description of the numerous risks and uncertainties associated with product development, refer to “ Risk Factors .” 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 Our current and future research, development, manufacturing and commercialization efforts with respect to roxadustat and our other product candidates currently in development depend on funds from our collaboration agreements with Astellas and AstraZeneca as described below. Astellas In June 2005, we entered into a collaboration agreement with Astellas for the development and commercialization (but not manufacture) of roxadustat for the treatment of anemia in Japan (“Japan Agreement”). In April 2006, we entered into the Europe Agreement with Astellas for roxadustat for the treatment of anemia in Europe, the Commonwealth of Independent States, the Middle East, and South Africa. Under these agreements, we provide Astellas the right to develop and commercialize roxadustat for anemia indications in these territories. 92 We share responsibility with Astellas for clinical development activities required for the U.S. and the Europe regulatory approval of roxadustat, and share equally those development costs under the agreed development plan for such activities. Astellas will be responsible for clinical development activities and all associated costs required for regulatory approval in all other countries in the Astellas territories. Astellas will own and have responsibility for regulatory filings in its territories. 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. Either party may terminate the agreements for certain material breaches by the other party. In addition, Astellas will have the right to terminate the agreements for certain specified technical product failures, upon generic sales reaching a particular threshold, upon certain regulatory actions, or upon our entering into a settlement admitting the invalidity or unenforceability of our licensed patents. Astellas may also terminate the agreements for convenience upon advance written notice to us. In the event of any termination of the agreements, Astellas will transfer and assign to us the regulatory filings for roxadustat and will assign or license to us the relevant trademarks used with the products in the Astellas territories. Under certain terminations, Astellas is also obligated to pay us a termination fee. Consideration under these agreements includes a total of $360.1 million in upfront and non-contingent payments, and milestone payments totaling $557.5 million, of which $542.5 million are development and regulatory milestones and $15.0 million are commercial-based milestones. Total consideration, excluding development cost reimbursement and product sales-related payments, could reach $917.6 million. 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 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 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. 93 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. 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. AstraZeneca and Astellas approved the program in December 2018 and January 2019, respectively. Costs associated with the development of this indication are shared 50-50 between our two partners. For revenue recognition purposes, we concluded that this new indication represents a modification to the Europe agreements and will be accounted for separately, meaning the development costs associated with the new indications are distinct from the original development costs. The development service period for roxadustat for the treatment of CIA under the Europe Agreement is estimated to continue through the end of 2023 to allow for development of this indication. In addition, as of December 31, 2020, Astellas had separate investments of $80.5 million in the equity of FibroGen, Inc. AstraZeneca In July 2013, we entered into the U.S./RoW Agreement a collaboration agreement with AstraZeneca for roxadustat for the treatment of anemia in the U.S. and all territories not previously licensed to Astellas, except China. In July 2013, through our China subsidiary and related affiliates, we entered into the China Agreement a collaboration agreement with AstraZeneca for roxadustat for the treatment of anemia in China. Under these agreements, we provide AstraZeneca the right to develop and commercialize roxadustat for anemia in these territories. We share responsibility with AstraZeneca for clinical development activities required for U.S. 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. 94 In China, FibroGen (China) Medical Technology Development Co., Ltd. (“FibroGen Beijing”) will conduct the development work for CKD anemia, will hold all of the regulatory licenses issued by China regulatory authorities, and will be primarily responsible for regulatory, clinical and manufacturing. China development costs are shared 50/50. AstraZeneca is also responsible for 100% of development expenses in all other licensed territories outside of China. 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. Potential milestone payments under the agreements total $1.2 billion, of which $571.0 million are development and regulatory milestones and $652.5 million are commercial-based milestones. Total consideration under the agreements, excluding development cost reimbursement, transfer price payments, royalties and profit share, could reach $1.6 billion. The aggregate amount of such consideration received through December 31, 2020 totals $516.2 million. Under the U.S./RoW Agreement, AstraZeneca will pay for all commercialization costs in the U.S. and RoW and AstraZeneca will be responsible for 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 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. If AstraZeneca terminates the U.S./RoW Agreement at will, in addition to any unpaid non-contingent payments, it will be responsible for paying for a substantial portion of the post-termination development costs under the agreed development plan until regulatory approval. 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. 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. 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. 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. 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. 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 combined arrangement in the fourth quarter of 2019. This milestone payment was fully received during the first quarter of 2020. 95 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 . AstraZeneca and Astellas approved the program in December 2018 and January 2019, respectively. 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 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, 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. Ltd. (“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. 96 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. and Europe. For more detailed discussions on the accounting for these agreements, refer to Note 4, Collaboration Agreements and Revenues, to the consolidated financial statements. 97 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: Cash Received Through December 31, 2020 Additional Potential Cash Payments Total Potential Cash Payments (in thousands) Astellas--related-party: Japan Agreement $ 105,093 $ 67,500 $ 172,593 Europe Agreement 540,000 205,000 745,000 Total Astellas 645,093 272,500 917,593 AstraZeneca: U.S. / RoW Agreement 439,000 810,000 1,249,000 China Agreement 77,200 299,500 376,700 Total AstraZeneca 516,200 1,109,500 1,625,700 Total revenue $ 1,161,293 $ 1,382,000 $ 2,543,293 These collaboration agreements also provide for reimbursement of certain fully burdened research and development costs as well as direct out of pocket expenses. RESULTS OF OPERATIONS Revenue Years Ended December 31, Change 2020 vs. 2019 2020 2019 2018 $ % (dollars in thousands) Revenue: License revenue $ 14,323 $ 177,086 $ 22,269 $ (162,763 ) (92 ) % Development and other revenue 80,592 114,115 125,913 (33,523 ) (29 ) % Product revenue, net 72,498 1,700 — 70,798 4,165 % Drug product revenue 8,906 (36,324 ) 64,776 45,230 (125 ) % Total revenue $ 176,319 $ 256,577 $ 212,958 $ (80,258 ) (31 ) % 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. This revenue is generally recognized as deliverables are met and services are performed. License revenues represented 8%, 69% and 11% of total revenues for the years ended December 31, 2020, 2019 and 2018, respectively. 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 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, 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. 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 41% and 1% of total revenue for the year ended December 31, 2020 and 2019, respectively. 98 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 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 Years Ended December 31, Change 2020 vs. 2019 2020 2019 2018 $ % (dollars in thousands) License revenue: Astellas $ 14,323 $ 129,405 $ 14,323 $ (115,082 ) (89 ) % AstraZeneca — 47,681 7,946 (47,681 ) (100 ) % Total license revenue $ 14,323 $ 177,086 $ 22,269 $ (162,763 ) (92 ) % 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. 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 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. 99 Development and Other Revenue Years Ended December 31, Change 2020 vs. 2019 2020 2019 2018 $ % (dollars in thousands) Development revenue: Astellas $ 19,174 $ 29,394 $ 20,903 $ (10,220 ) (35 ) % AstraZeneca 61,418 84,719 104,970 (23,301 ) (28 ) % Total development revenue 80,592 114,113 125,873 (33,521 ) (29 ) % Other revenue — 2 40 (2 ) (100 ) % Total development and other revenue $ 80,592 $ 114,115 $ 125,913 $ (33,523 ) (29 ) % 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. 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. 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, Change 2020 vs. 2019 2020 2019 $ % (dollars in thousands) Gross revenue $ 89,027 $ 2,803 $ 86,224 3,076 % Price adjustment — (936 ) 936 (100 ) % Non-key account hospital listing award (9,325 ) — (9,325 ) 100 % Contractual sales rebate (6,189 ) (149 ) (6,040 ) 4,054 % Other discounts and rebates (923 ) (18 ) (905 ) 5,028 % Sales return (92 ) — (92 ) 100 % Product revenue, net $ 72,498 $ 1,700 $ 70,798 4,165 % 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. 100 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, Change 2020 vs. 2019 2020 2019 2018 $ % (dollars in thousands) Drug product revenue: Astellas $ 4,281 $ (36,324 ) $ 64,776 $ 40,605 (112 ) % AstraZeneca 4,625 — — 4,625 100 % Total drug product revenue: $ 8,906 $ (36,324 ) $ 64,776 $ 45,230 (125 ) % 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. 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 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. 101 Operating Costs and Expenses Years Ended December 31, Change 2020 vs. 2019 2020 2019 2018 $ % (dollars in thousands) Operating costs and expenses Cost of goods sold $ 8,869 $ 1,147 $ — $ 7,722 673 % Research and development 252,924 209,265 235,839 43,659 21 % Selling, general and administrative 106,406 135,479 63,812 (29,073 ) (21 ) % Total operating costs and expenses $ 368,199 $ 345,891 $ 299,651 $ 22,308 6 % 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. 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 (“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. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites. The following table summarizes our research and development expenses incurred during the years ended December 31, 2020, 2019 and 2018: Years Ended December 31, Product Candidate Phase of Development 2020 2019 2018 (in thousands) Roxadustat Phase 3 $ 122,962 $ 125,429 $ 139,876 Pamrevlumab Phase 2/3 111,728 58,750 72,063 FG-5200 Preclinical 4,132 5,323 5,122 Other research and development expenses 14,102 19,763 18,778 Total research and development expenses $ 252,924 $ 209,265 $ 235,839 102 The program-specific expenses summarized in the table above include costs we directly attribute to our product candidates. We allocate research and development salaries, benefits, stock-based compensation and other indirect costs to our product candidates on a program-specific basis, and we include these costs in the program-specific expenses. 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. 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; and • 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 We started to incur sales and marketing expenses in the first quarter of 2019 in China to prepare for commercial operations. Selling, general and administrative (“SG&A”) expenses consist primarily of employee-related expenses for executive, operational, finance, legal, compliance, and human resource functions. 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 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; and • Increase of $4.2 million in legal expenses primarily associated with patent-related activities in United Kingdom. 103 Interest and Other, Net Years Ended December 31, Change 2020 vs. 2019 2020 2019 2018 $ % (dollars in thousands) Interest and other, net: Interest expense $ (2,402 ) $ (2,876 ) $ (10,991 ) $ 474 (16 ) % Investment loss in unconsolidated variable interest entity (202 ) — — (202 ) 100 % Interest income and other, net 5,553 15,548 11,568 (9,995 ) (64 ) % Total interest and other, net $ 2,949 $ 12,672 $ 577 $ (9,723 ) (77 ) % Interest Expense 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 $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 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. dollar. 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 Years Ended December 31, 2020 2019 2018 (dollars in thousands) Loss before income taxes $ (188,931 ) $ (76,642 ) $ (86,116 ) Provision for income taxes 360 328 304 Effective tax rate (0.2 )% (0.4 )% (0.4 )% 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. U.S. 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. 104 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. 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 Financial Conditions We have historically funded our operations principally from the sale of common stock (including our public offering proceeds) and from the execution of collaboration agreements involving license payments, milestones and reimbursement for development services. As of December 31, 2020, we had cash and cash equivalents of $678.4 million. 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. in our foreign subsidiaries to be used primarily for our China operations. Operating Capital Requirements 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. To date, we have funded certain portions of our research and development and manufacturing efforts in China and Europe through outside parties. There is no guarantee that sufficient funds will be available to continue to fund these development efforts through commercialization or otherwise. 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. 105 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 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. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. 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 Factors ” 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. 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. Cash Sources and Uses The following table summarizes the primary sources and uses of cash for the years ended December 31, 2020, 2019 and 2018: Years Ended December 31, 2020 2019 2018 (in thousands) Net cash provided by (used in): Operating activities $ 81,602 $ (78,705 ) $ (76,144 ) Investing activities 452,487 120,018 (522,123 ) Financing activities 13,343 (4,300 ) 13,875 Effect of exchange rate changes on cash and cash equivalents 4,695 (5 ) (8 ) Net increase (decrease) in cash and cash equivalents $ 552,127 $ 37,008 $ (584,400 ) 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; and • Other assets of $6.8 million, primarily related to the return and consumption of input value added tax by FibroGen Beijing. 106 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; and • 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 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; • 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; and • 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; and • 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 $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. 107 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. Off-Balance Sheet Arrangements During the year ended December 31, 2020, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements. Indemnification Agreements 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 Contractual Obligations At December 31, 2020, our contractual obligations were as follows: Payments Due In Less Than 1 Year 1 - 3 Years 3 - 5 Years More Than 5 Years Total (in thousands) Operating lease liabilities $ 1,142 $ 982 $ — $ — $ 2,124 Finance lease liabilities 13,689 26,412 — — 40,101 Purchase obligation - Manufacture and supply of roxadustat 14,114 10,951 — — 25,065 Purchase obligation - Manufacture and supply of pamrevlumab 24,480 33,063 — — 57,543 Purchase obligation - Other purchases 3,418 — — — 3,418 Total contractual obligations $ 56,843 $ 71,408 $ — $ — $ 128,251 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. 108 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. Future milestone payments for research and pre-clinical stage development programs consisted of up to $10.9 million in total potential future milestone payments under our license agreements with Dana-Farber Cancer Institute, University of Miami and Medarex, Inc. These milestone payments generally become due and payable only upon the achievement of certain developmental, clinical, regulatory and/or commercial milestones. The event triggering such payment or obligation has not yet occurred . Clinical Trials As of December 31, 2020, we have several on-going clinical studies in various stages. Under agreements with various CROs, and clinical study sites, we incur expenses related to clinical studies of our product candidates and potential other clinical candidates. The timing and amounts of these disbursements are contingent upon the achievement of certain milestones, patient enrollment and services rendered or as expenses are incurred by the CROs or clinical trial sites. Therefore, we cannot estimate the potential timing and amount of these payments and they have been excluded from the table above. Although our material contracts with CROs are cancellable, we have historically not cancelled such contracts. Product Development Obligations As of December 31, 2020, our FibroGen Europe Oy (“FibroGen Europe”) subsidiary had $11.6 million of principal outstanding and $7.1 million of interest accrued related to the TEKES loans, respectively, which have been included as product development obligations on our consolidated balance sheet. There is no stated maturity date related to these loans and each loan may be forgiven if the research work funded by TEKES does not result in an economically profitable business or does not meet its technological objectives. In addition, we are not a guarantor of the TEKES loans, and these loans are not repayable by FibroGen Europe until it has distributable funds. We do not expect FibroGen Europe to have such funds for at least the next five years. For the foregoing reasons, we cannot estimate the potential timing and the amounts of repayments (if required) or forgiveness. As a result, the TEKES loans have been excluded from the table above. Legal Proceedings We are a party to various legal actions that arose in the ordinary course of our business. We recognize accruals for any legal action when we conclude that a loss is probable and reasonably estimable. 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 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, 2020 using the prospective method, and the adoption of this guidance did not have material impact to our consolidated financial statements. 109 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 Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements. Revenue Recognition Revenues under collaboration agreements Our collaboration agreements include multiple performance obligations comprised of promised services, or bundles of services, that are distinct. Services that are not distinct are combined with other services in the agreement until they form a distinct bundle of services. Our process for identifying performance obligations and an enumeration of each obligation for each agreement is outlined in Note 4, Collaboration Agreements and Revenues , to our consolidated financial statements. Determining the performance obligations within a collaboration agreement often involves significant judgment and is specific to the facts and circumstances contained in each agreement. We have identified the following material promises under our collaboration agreements: (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 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. In each agreement, the contract term is defined as the period in which parties to the contract have present and enforceable rights and obligations. We believe that the existence of what it considers to be substantive termination penalties on the part of the counterparty create sufficient incentive for the counterparty to avoid exercising its right to terminate the agreement unless in exceptionally rare situations. The transaction price for each collaboration agreement is determined based on the amount of consideration we expect to be entitled for satisfying all performance obligations within the agreement. Our collaboration agreements include payments to us of one or more of the following: non-refundable upfront license fees; co-development billings; development, regulatory, and commercial milestone payments; payments from sales of API; payments from sales of bulk drug product and royalties on net sales of licensed products. 110 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. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. Co-development billings resulting from our research and development efforts, which are reimbursable under our collaboration agreements, are considered variable consideration. Determining the reimbursable amount of research and development efforts requires detailed analysis of the terms of the collaboration agreements and the nature of the research and development efforts incurred. Determining the amount of variable consideration from co-development billings requires us to make estimates of future research and development efforts, which involves significant judgment. Co-development billings are allocated entirely to the co-development services performance obligation when amounts are related specifically to research and development efforts necessary to satisfy the performance obligation, and such an allocation is consistent with the allocation objective. Milestone payments are also considered variable consideration, which requires us to make estimates of when achievement of a particular milestone becomes probable. Similar to other forms of variable consideration, milestone payments are included in the transaction price when it becomes probable that such inclusion would not result in a significant revenue reversal. Milestone payments are therefore included in the transaction price when achievement of the milestone becomes probable. For arrangements that include sales-based royalties and for which the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from our collaboration arrangements. The transaction price is allocated to performance obligations based on their relative standalone selling price (“SSP”), with the exception of co-development billings allocated entirely to co-development services performance obligations. The SSP is determined based on observable prices at which we separately sell the products and services. If an SSP is not directly observable, then we will estimate the SSP considering marketing conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available. The process for determining SSP involves significant judgment and includes consideration of multiple factors, including assumptions related to the market opportunity and the time needed to commercialize a product candidate pursuant to the relevant license, estimated direct expenses and other costs, which include the rates normally charged by contract research and contract manufacturing organizations for development and manufacturing obligations, and rates that would be charged by qualified outsiders for committee services. Significant judgment may be required in determining whether a performance obligation is distinct, determining the amount of variable consideration to be included in the transaction price, and estimating the SSP of each performance obligation. An enumeration of our significant judgments is outlined in Note 4, Collaboration Agreements and Revenues , to our consolidated financial statements. For each performance obligation identified within an arrangement, we determine the period over which the promised services are transferred and the performance obligation is satisfied. Service revenue is recognized over time based on progress toward complete satisfaction of the performance obligation. 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. 111 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. 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. 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. 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. 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. Hospitals order roxadustat through a distributor and we ship the product directly to the distributors. The delivery of roxadustat to a distributor represents a single performance obligation. Distributors are responsible for delivering product to end users, primarily hospitals. 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 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. 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 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. The price adjustment is calculated based on estimated channel inventory levels at January 1, 2020. If price guidance changes in the future, the price adjustment will be calculated in the same manner; • Contractual sales rebate : 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 recorded as a reduction to revenue at the point of sale to the distributor; 112 • Key account hospital sales rebate : 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 recorded as a reduction to revenue as incurred; • Sales return : 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; and • 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 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. 113