What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-02-05 compared with 2020-02-07 · 0 added, 900 removed, 8 unchanged (99% of the section changed)

7 unchanged sentences

Due to the short holding period of our investments, we have concluded that we do not have a material financial market risk exposure.

F inancial Statements and Supplementary Data

NEUROCRINE BIOSCIENCES, INC.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2019 and 2018

Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

Notes to the Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Neurocrine Biosciences, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Neurocrine Biosciences, Inc.

(the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2019 and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 6, 2020 expressed an unqualified opinion thereon.

Adoption of ASU No.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No.

2016-02, Leases (Topic 842), and the related amendments.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Reserves for government rebates related to product sales

Description of the Matter

The Company sells drugs to specialty pharmacies and specialty distributors in the US (collectively, “customers”).

As described in Note 1 to the consolidated financial statements, the Company recognizes revenues for sales of INGREZZA to its customers after deducting management’s estimates of reserves, including drug coverage gap rebates, it will provide under government rebate programs (“government rebates”).

Estimated government rebates are presented within accounts payable and accrued liabilities on the consolidated balance sheet.

Auditing the estimates of government rebates was complex and judgmental due to the level of uncertainty involved in management’s assumptions used in the measurement process.

In particular, management was required to estimate, for product that remains in the distribution channel at December 31, 2019, the portion of product that is expected to be subject to a government rebate and the applicable contractual government rebate percentage by forecasting the revenue, the payor type underlying the revenue and the applicable rebate amount applicable for the payor type.

How We Addressed the Matter in Our Audit

We tested the Company’s internal controls over management’s process for estimating the portion of product that is expected to be subject to a government rebate for product that remains in the distribution channel at December 31, 2019 including controls over management’s forecast of revenue and the accuracy of data used in the calculation.

To test management’s estimate of government rebate reserves our audit procedures included, among others, evaluating the methodologies used, testing the significant assumptions discussed above and testing the completeness and accuracy of the underlying data used by the Company in its analyses.

Specifically, we compared the significant assumptions to third-party reports used by the Company to estimate product remaining in the distribution channel at December 31, 2019.

In addition, we compared the underlying government rebate percentages used in the Company’s analyses to those published by the applicable government entity.

We assessed the historical accuracy of management’s rebate estimates, tested payments of rebates and performed a sensitivity analysis of significant assumptions to evaluate the changes in the rebate allowance that would result from changes in the assumptions.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1992.

San Diego, California

February 6, 2020

NEUROCRINE BIOSCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

Current assets:

Cash and cash equivalents

Marketable securities

Accounts receivable

Other current assets

Total current assets

Marketable securities

Operating lease assets

Restricted equity securities

Property and equipment, net

Restricted cash

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued liabilities

Convertible senior notes

Other current liabilities

Total current liabilities

Convertible senior notes

Noncurrent operating lease liabilities

Other long-term liabilities

Total liabilities

Stockholders’ equity:

Preferred stock, $ 0.001 par value;

5,000 shares authorized;

issued and outstanding

Common stock, $ 0.001 par value;

220,000 shares authorized;

outstanding shares were 92,272 and 90,797 at December 31, 2019

and 2018, respectively

Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes to consolidated financial statements.

NEUROCRINE BIOSCIENCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

Year Ended December 31,

(in thousands, except per share data)

Product sales, net

Collaboration revenue

Total revenues

Operating expenses:

Cost of sales

Research and development

Acquired in-process research and development

Sales, general and administrative

Total operating expenses

Operating income (loss)

Other (expense) income:

Interest expense

Unrealized loss on restricted equity securities

Investment income and other, net

Total other expense, net

Income (loss) before provision for income taxes

Provision for income taxes

Net income (loss)

Unrealized gain (loss) on marketable securities

Comprehensive income (loss)

Net income (loss) per share, basic

Net income (loss) per share, diluted

Weighted average common shares outstanding, basic

Weighted average common shares outstanding, diluted

See accompanying notes to consolidated financial statements.

NEUROCRINE BIOSCIENCES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Comprehensive

Stockholders’

(in thousands)

Income (Loss)

Balance at December 31, 2016

Unrealized loss on marketable securities

Share-based compensation expense

Issuance of common stock for vested restricted stock units

Issuance of common stock for stock option exercises

Equity component of convertible debt, net

Balance at December 31, 2017

Unrealized loss on marketable securities

Share-based compensation expense

Issuance of common stock for vested restricted stock units

Issuance of common stock for stock option exercises

Balance at December 31, 2018

Unrealized gain on marketable securities

Share-based compensation expense

Cumulative-effect adjustment to equity due to adoption of ASU 2016-02

Issuance of common stock for vested restricted stock units

Issuance of common stock for stock option exercises

Issuance of common stock for employee stock purchase plan

Balance at December 31, 2019

See accompanying notes to consolidated financial statements.

NEUROCRINE BIOSCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

(in thousands)

Cash Flows from Operating Activities:

Net income (loss)

Reconciliation of net income (loss) to net cash provided by (used in) operating activities:

Share-based compensation expense

Amortization of debt discount

Amortization of debt issuance costs

Net (accretion of discounts) amortization of premiums on investments

Change in fair value of restricted equity securities

Changes in operating assets and liabilities:

Accounts receivable

Accounts payable and accrued liabilities

Other changes in operating assets and liabilities, net

Net cash provided by (used in) operating activities

Cash Flows from Investing Activities:

Purchases of marketable securities

Sales and maturities of marketable securities

Purchase of restricted equity securities

Purchases of property and equipment

Proceeds from sales of property and equipment

Net cash used in investing activities

Cash Flows from Financing Activities:

Issuance of common stock

Proceeds from issuance of convertible senior notes, net

Net cash provided by financing activities

Change in cash and cash equivalents and restricted cash

Cash and cash equivalents and restricted cash at beginning of period

Cash and cash equivalents and restricted cash at end of period

Supplemental Disclosure:

Cash paid for interest

Cash paid for income taxes

Non-cash capital expenditures

See accompanying notes to consolidated financial statements.

NEUROCRINE BIOSCIENCES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Organization and Summary of Significant Accounting Policies

Business Activities.

Neurocrine Biosciences, Inc., or Neurocrine, the Company, we, our or us, was incorporated in California in 1992 and reincorporated in Delaware in 1996.

Neurocrine Continental, Inc., is a Delaware corporation and a wholly owned subsidiary of Neurocrine.

We also have two wholly-owned Irish subsidiaries, Neurocrine Therapeutics, Ltd.

and Neurocrine Europe, Ltd.

both of which were formed in December 2014 and are inactive.

We are a commercial-stage biopharmaceutical company focused on discovering and developing innovative and life-changing treatments for patients with serious, challenging and under-addressed neurological, endocrine and psychiatric disorders.

We specialize in targeting and interrupting disease-causing mechanisms involving the interconnected pathways of the nervous and endocrine systems.

Currently, we are primarily focused on the commercialization of INGREZZA ® (valbenazine) in the United States, our first U.S.

Food and Drug Administration, or FDA, approved product.

In April 2017, we received FDA approval of our first product, INGREZZA, for the treatment of adults with tardive dyskinesia, or TD.

Shortly after receiving FDA approval, we began commercializing INGREZZA in the U.S.

using a specialty sales force primarily focused on educating physicians who treat patients with TD, including psychiatrists and neurologists.

In addition to our first marketed product, our collaboration partner, AbbVie Inc., or AbbVie, received approval of ORILISSA ® (elagolix) for the management of moderate to severe endometriosis pain in women from the FDA in July 2018 and Health Canada in October 2018.

We are eligible to receive royalties at tiered percentage rates on any net sales of ORILISSA.

Our late-stage pipeline includes opicapone as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in adult Parkinson's disease patients, elagolix for the treatment of heavy menstrual bleeding, or HMB, associated with uterine fibroids in women, valbenazine for the treatment of chorea in adult patients with Huntington’s disease, or HD, and NBIB-1817 (VY-AADC) for the treatment of advanced Parkinson’s disease patients with motor fluctuations that are refractory to medical management.

Our product candidates for uterine fibroids and advanced Parkinson’s disease are partnered with AbbVie and Voyager Therapeutics, Inc., or Voyager, respectively.

In December 2019, we entered into a license and collaboration agreement with Xenon Pharmaceuticals Inc, or Xenon, a clinical-stage biopharmaceutical company.

Pursuant to the terms of the agreement, we acquired an exclusive license to NBI-921352 (XEN901), a clinical-stage candidate with potential in epilepsy.

In January 2020, we announced a collaboration and optional licensing agreement with Idorsia Pharmaceuticals Ltd, granting us an option to license ACT-709478, a potent, selective, orally active and brain penetrating T-type calcium channel blocker, in clinical development for the treatment of a rare pediatric epilepsy.

The option also includes a research collaboration to discover, identify and develop additional novel T-type calcium channel blockers.

Principles of Consolidation.

The consolidated financial statements include the accounts of Neurocrine as well as our wholly owned subsidiaries.

All intercompany transactions and balances have been eliminated in consolidation.

Reclassifications.

Certain amounts in the consolidated financial statements for 2018 and 2017 have been reclassified to conform with the presentation adopted in the current year period, including an increase of $ 4.8 million and $ 30.0 million to acquired in-process research and development for 2018 and 2017, respectively, and a corresponding decrease to research and development in the same periods.

These reclassifications had no impact on operating income (loss), net income (loss) or net income (loss) per share .

Use of Estimates.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes.

Actual results could differ from those estimates.

Industry Segment and Geographic Information.

We operate in a single industry segment – the discovery, development and marketing of pharmaceuticals for the treatment of neurological and endocrine-based diseases and disorders.

We had no foreign-based operations during any of the years presented.

Cash Equivalents.

We consider all highly liquid investments that are readily convertible into cash and have an original maturity of three months or less at the time of purchase to be cash equivalents .

Accounts Receivable.

Accounts receivable are recorded net of customer allowances for prompt payment discounts, chargebacks and any allowance for doubtful accounts.

We estimate the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns of our customers and individual customer circumstances.

To date, an allowance for doubtful accounts has not been material.

Marketable Securities.

Marketable securities consist of investments in certificates of deposit, corporate debt securities and securities of government-sponsored entities.

We classify marketable securities as available-for-sale.

Marketable securities are recorded at fair value, with unrealized gains and losses included in comprehensive income (loss), until realized.

Realized gains and losses are included in investment income and other, net on a specific-identification basis.

Marketable securities classified as current have maturities of less than one year.

Marketable securities classified as non-current have maturities of one to two years.

We review marketable securities for other-than-temporary impairment whenever the fair value of a marketable security is less than the amortized cost and evidence indicates that a marketable security’s carrying amount is not recoverable within a reasonable period of time.

Factors considered in determining whether an impairment is other-than-temporary include the length of time and extent to which the marketable security has been less than the cost basis, the financial condition of the issuer and our intent and ability to hold such marketable security until recovery of the associated amortized cost basis.

Based on our evaluation, no such other-than-temporary impairments were identified at December 31, 2019 and 2018.

Further, we do not intend to sell our marketable security investments and it is not more likely than not that we will be required to sell these investments before recovery of their amortized cost bases, which may be maturity.

Restricted Equity Securities.

Investments in equity securities of certain companies that are subject to holding period restrictions longer than one year are carried at fair value using an option pricing valuation model.

The most significant assumptions within the option pricing valuation model are the term of the restrictions and the stock price volatility, which is based upon the historical volatility of similar companies.

Unrealized gains and losses on investments in restricted equity securities are included in other expense, net.

Fair Value of Financial Instruments.

We record cash equivalents, marketable securities and restricted equity securities at fair value based on a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs).

The hierarchy consists of three levels:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 – Unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing the asset or liability when there is little, if any, market activity for the asset or liability at the measurement date.

The fair value of marketable securities is determined using proprietary valuation models and analytical tools, which utilize market pricing or prices for similar instruments that are both objective and publicly available, such as matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities and bids and offers.

The fair value of restricted equity securities is determined using an option pricing valuation model.

Significant changes in any of those inputs in isolation would result in a significantly higher or lower fair value measurement.

The carrying amounts of accounts receivable and accounts payable and accrued liabilities approximate their fair values due to their short-term maturities.

There were no transfers between levels in the fair value hierarchy during 2019 or 2018.

Inventory is valued at the lower of cost or net realizable value.

We determine the cost of inventory using the standard-cost method, which approximates actual cost based on the first-in, first-out method.

We assess the valuation of our inventory on a quarterly basis and adjust the value for excess and obsolete inventory to the extent management determines that the cost cannot be recovered based on estimates about future demand.

Inventory costs resulting from these adjustments are recognized as cost of sales in the period in which they are incurred.

When future commercialization is considered probable and the future economic benefit is expected to be realized, based on management’s judgment, we capitalize pre-launch inventory costs prior to regulatory approval.

Property and Equipment.

Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method.

Equipment is depreciated over an average estimated useful life of three to seven years .

Leasehold improvements are depreciated over the shorter of their estimated useful lives or the remaining lease term.

Depreciation expense was $ 7.5 million for 2019, $ 4.0 million for 2018 and $ 2.4 million for 2017.

Impairment of Long-Lived Assets.

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

If indicators of impairment exist, we assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows.

If the carrying amount is not recoverable, we measure the amount of any impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the use of the asset.

Revenue Recognition.

We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.

Revenue is recognized using a five-step model:

(i) identify contract(s) with a customer;

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenues when (or as) we satisfy the performance obligation.

Product Sales, Net

Our product sales, net consist of sales of INGREZZA in the U.S.

to a limited network of specialty pharmacy providers, which delivers INGREZZA to patients by mail, and a specialty distributor, which distributes INGREZZA primarily to closed-door pharmacies and government facilities.

Product sales, net are recognized at the time the customer takes possession of the product.

Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, payors and other third parties.

Our process for estimating reserves established for these variable consideration components does not differ materially from historical practices.

The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenue recognized will not occur in a future period.

Actual amounts may ultimately differ from our estimates.

If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment.

Our significant categories of sales discounts and allowances are as follows:

Product discounts – product discounts are based on payment terms extended to our customers, which include incentives offered for prompt payment.

We maintain a reserve for product discounts based on our historical experience, including the timing of customer payments.

To date, actual product discounts have not differed materially from our estimates.

Product returns – our contracts with customers provide for product returns only if the product is damaged or there has been an error in shipment.

Returns based on product expiry are not permitted.

To date, product returns have not been significant, and a reserve has not been established.

Government rebates – we are obligated to pay rebates for mandated discounts under the Medicaid Drug Rebate Program.

The liability for such rebates consist of invoices received for claims from prior quarters that remain unpaid or for which an invoice has not been received and estimated rebates for the current applicable reporting period.

Such rebates are primarily estimated based upon, actual historical rebates, estimated payor mix, state and federal regulations and related contractual terms and are recorded as a reduction of product sales in the same period the related revenue is recognized.

To date, actual government rebates have not differed materially from our estimates.

Chargebacks – the difference between the list price, or the price at which we sell INGREZZA product to our customers, and the contracted price, or the price at which our customers sell INGREZZA product to qualified healthcare professionals, is charged back to us by our customers.

In addition to actual chargebacks received, we maintain a reserve for chargebacks based on estimated contractual discounts on INGREZZA product inventory levels on hand in our distribution channel.

To date, actual chargebacks have not differed materially from our estimates.

Payor and pharmacy rebates – we are obligated to pay rebates as a percentage of sales under payor and pharmacy contracts.

We estimate these rebates based on actual historical rebates, contractual rebate percentages, sales made through the payor channel and purchases made by pharmacies.

To date, actual payor and pharmacy rebates have not differed materially from our estimates.

Copay assistance – we offer qualified patients financial assistance with prescription drug co-payments required by insurance.

We accrue for copay assistance based on estimated claims and the cost per claim we expect to receive associated with inventory that remains in the distribution channel at period end.

To date, actual copay assistance has not differed materially from our estimates.

Collaboration Revenue

We have entered into collaboration and licensing agreements under which we license certain rights to our product candidates to third parties.

The terms of these arrangements typically include payment to us of one or more of the following:

non-refundable, up-front license fees;

development, regulatory, and/or commercial milestone payments;

and royalties on net sales of licensed products.

Licenses of intellectual property – if the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.

For licenses that are bundled with other promises, we use judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees.

We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone payments – at the inception of each arrangement that includes developmental, regulatory or commercial milestone payments, we evaluate whether achieving the milestones is considered probable and estimate the amount to be included in the transaction price using the most likely amount method.

If it is probable that a significant revenue reversal would not occur, the value of the associated milestone is included in the transaction price.

Milestone payments that are not within our control, such as approvals from regulators or where attainment of the specified event is dependent on the development activities of a third party, are not considered probable of being achieved until those approvals are received or the specified event occurs.

Revenue is recognized from the satisfaction of performance obligations in the amount billable to the customer.

Royalty revenue – for arrangements that include sales-based royalties, including milestone payments based on the level of sales, and 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).

Each quarterly period, sales-based royalties are recorded based on estimated quarterly net sales of ORILISSA.

Differences between actual results and estimated amounts are adjusted for in the period in which they become known, which typically follows the quarterly period in which the estimate was made.

To date, actual royalties received have not differed materially from our estimates.

Concentration of Credit Risk.

We do not currently have any of our own manufacturing facilities and therefore we depend on an outsourced manufacturing strategy for the production of INGREZZA for commercial use and for the production of our product candidates in clinical trials.

We have contracts with one third-party manufacturer approved for the commercial production of

INGREZZA’s capsules at two separate sites and two third-party manufacturer s approved for the production of INGREZZA’s API .

Although there are potential sources of supply other than our existing suppliers, any new supplier would be required to qualify under applicable regulatory requirements.

We have entered into distribution agreements with a limited number of specialty pharmacy providers and a specialty distributor, and all of our product sales are to these customers.

Our two largest customers represented approximately 86 % of our product revenue for 2019 and a significant majority of our accounts receivable balance at December 31, 2019.

For 2018 and 2017, our three largest customers represented approximately 93 % of our product revenue and substantially all of our accounts receivable balance at December 31, 2018 and 2017.

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, investments and accounts receivables.

We established guidelines to limit our exposure to credit risk by placing investments with high credit quality financial institutions, diversifying our investment portfolio and placing investments with maturities that maintain safety and liquidity.

Cost of Sales.

Cost of sales includes third-party manufacturing, transportation, freight and indirect overhead costs associated with the manufacture and distribution of INGREZZA, royalty fees on net sales of ORILISSA and adjustments for excess and obsolete inventory to the extent management determines that the cost cannot be recovered based on estimates about future demand.

Research and Development Expenses.

R&D expenses consist primarily of salaries, payroll taxes, employee benefits and share-based compensation charges for those individuals involved in ongoing R&D efforts;

as well as scientific consulting fees, preclinical and clinical trial costs, R&D facilities costs, laboratory supply costs and depreciation of scientific equipment.

All such costs are charged to R&D expense as incurred.

These expenses result from our independent R&D efforts, as well as efforts associated with collaborations, in-licenses and third-party funded research arrangements.

Asset Acquisitions.

We account for acquisitions of an asset or group of assets that do not meet the definition of a business using the cost accumulation method, whereby the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of their relative fair values.

No goodwill is recognized in an asset acquisition.

Intangible assets that are acquired in an asset acquisition for use in R&D activities which have no alternative future use are expensed as in-process research and development, or IPR&D, on the acquisition date.

Future costs to develop these assets are recorded to R&D expense as they are incurred.

Advertising Expense.

In connection with the FDA approval and commercial launch of INGREZZA in April 2017, we began to incur advertising costs, which are expensed when services are performed, or goods are delivered.

We incurred advertising costs related to our marketed product, INGREZZA, of $ 40.6 million in 2019, $ 20.5 million in 2018 and $ 10.1 million in 2017.

Share-Based Compensation.

We grant stock options to purchase our common stock to eligible employees and directors and also grant certain employees restricted stock units, or RSUs, and performance-based restricted stock units, or PRSUs.

Additionally, we allow employees to participate in an employee stock purchase plan, or ESPP.

We estimate the fair value of stock options and shares to be issued under the ESPP using the Black-Scholes option-pricing model on the date of grant.

Restricted stock units are valued based on the closing price of our common stock on the date of grant.

The fair value of equity instruments expected to vest are recognized and amortized on a straight-line basis over the requisite service period of the award, which is generally three to four years ;

however, certain provisions in our equity compensation plans provide for shorter vesting periods under certain circumstances.

The fair value of shares to be issued under the ESPP are recognized and amortized on a straight-line basis over the purchase period, which is generally six months .

Additionally, we granted certain PRSUs that vest upon the achievement of certain pre-defined company-specific performance-based criteria.

Expense related to these PRSUs is generally recognized ratably over the expected performance period once the pre-defined performance-based criteria for vesting becomes probable.

Net Income (Loss) Per Share.

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period.

Diluted net income (loss) per share is computed using the weighted average number of common and potentially dilutive shares outstanding during the period, including the potentially dilutive shares resulting from the conversion of the 2024 Notes and excluding the effect of stock options and restricted stock outstanding for periods when their effect is anti-dilutive, using the treasury stock method.

Convertible debt instruments that may be settled entirely or partly in cash (such as the 2024 Notes) may, in certain circumstances where the borrower has the ability and intent to settle in cash, be accounted for under the treasury stock method.

We issued the 2024 Notes with a combination settlement feature, which we have the ability and intent to use upon conversion of the 2024 Notes, to settle the principal amount of debt for cash and the excess of the principal portion in shares of our common stock.

As a result, of the approximately 6.8 million shares underlying the 2024 Notes, only the shares required to settle the excess of the principal portion would be considered dilutive under the treasury stock method.

Further, approximately 0.3 million PRSUs were excluded from the calculation of diluted net income per share as the performance condition has not been achieved.

In loss periods, basic net loss per share and diluted net loss per share are identical because the otherwise dilutive potential common shares become anti-dilutive and are therefore excluded.

Recently Adopted Accounting Pronouncements.

In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-02, “Leases (Topic 842)”, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements.

ASU 2016-02 establishes a right-of-use, or ROU, model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months.

ASU 2016-02 also requires disclosures to

meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

On January 1, 2019, we adopted ASU 2016-02 using the modified retrospective transition method.

Under this transition method, we recognized and measured leases that existed at the application date in our consolidated balance sheet as of January 1, 2019.

Arrangements that are determined to be operating leases at inception are included in operating lease assets, noncurrent operating lease liabilities and other current liabilities in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

Operating lease ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

As none of our operating leases provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The operating lease ROU asset is adjusted for any prepaid or accrued lease payments and any lease incentives received.

Operating lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components, which we have elected to account for as a single lease component.

Further, we have elected to recognize our short-term lease payments in profit or loss on a straight-line basis over the associated lease term and variable lease payments in the period in which the obligation for those payments is incurred.

Short-term and variable lease payments were not material for 2019.

In connection with the adoption of ASU 2016-02, we elected the package of practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the lease classification of any expired or existing leases, or initial direct costs for any existing leases.

We also made accounting policy elections not to apply the recognition requirements under ASU 2016-02 to any of our short-term leases and to account for each separate lease and associated nonlease components as a single lease component for all of our leases.

In preparation for implementation of ASU 2016-02, we finalized key accounting assessments and updated processes to appropriately recognize and present the associated financial information.

Based on these efforts, the adoption of ASU 2016-02 resulted in the recognition of (1) ROU assets of $ 50.0 million and operating lease liabilities of $ 70.9 million, resulting from leases of office and laboratory space;

(2) the derecognition of deferred rent of $ 20.9 million for certain lease incentives received;

and (3) a cumulative-effect adjustment of $ 8.0 million to the opening balance of the accumulated deficit as of January 1, 2019, resulting from the recognition of an existing deferred gain on sale of real estate.

The comparative prior period information continues to be reported under the accounting standards in effect during those periods.

Further, we expect the adoption of ASU 2016-02 to be immaterial to our results of operations and cash flows on an ongoing basis.

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

Improvements to Nonemployee Share-Based Payment Accounting”, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards.

On January 1, 2019, we adopted ASU 2018-07 using the modified retrospective transition method with no impact on our consolidated financial statements.

Further, we expect the adoption of ASU 2018-07 to be immaterial to our financial position, results of operations and cash flows on an ongoing basis.

Recently Issued Accounting Pronouncements.

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments".

The standard requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to credit risks.

For available-for-sale debt securities with unrealized losses, the standard requires allowances to be recorded instead of reducing the amortized cost of the investment.

The standard limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases.

The standard is effective for interim and annual periods beginning after December 15, 2019.

Based on the composition of our investment portfolio, current market conditions and historical credit loss activity, the adoption of ASU 2016-13 is not expected to have a material impact on our consolidated financial position, results of operations or the related disclosures.

License and Collaboration Agreements

In June 2010, we announced an exclusive worldwide collaboration with AbbVie, to develop and commercialize elagolix and all next-generation gonadotropin-releasing factor, or GnRH, antagonists and collectively, GnRH Compounds, for women’s and men’s health.

AbbVie made an upfront payment of $ 75.0 million and has agreed to make additional development and regulatory event-based payments of up to $ 480.0 million, of which $ 135.0 million has been earned as of December 31, 2019, and up to an additional $ 50.0 million in commercial event-based payments.

Under the terms of the agreement, AbbVie is responsible for all third-party development, marketing and commercialization costs.

We will be entitled to a percentage of worldwide sales of GnRH Compounds for the longer of ten years or the life of the related patent rights.

AbbVie may terminate the collaboration at its discretion upon 180 days’ written notice to us.

We evaluated the terms of this agreement under Topic 606 and determined that there is one performance obligation, the exclusive worldwide license with rights to develop, manufacture and commercialize elagolix.

At execution, the transaction price included only

the $ 75.0 million up-front consideration received.

None of the development or regulatory milestones were included in the transaction price, as all milestone amounts were fully constrained.

As part of our evaluation of the constraint, we considered numerous factors, including that achievement of the milestones is outside of our control and contingent upon success in future clinical trials and the licensee’s efforts.

Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to AbbVie and therefore have also been excluded from the transaction price.

We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

In the third quarter of 2019, AbbVie submitted a new drug application, or NDA, with the FDA for the approval of elagolix in the treatment of uterine fibroids.

The NDA was accepted by the FDA with a Prescription Drug User Fee Act, or PDUFA, target action date in the second quarter of 2020.

The FDA’s acceptance of the NDA triggered a milestone payment of $ 20.0 million, which we recognized as revenue in the third quarter of 2019 and received in the fourth quarter of 2019.

On July 24, 2018, AbbVie received approval from the FDA for ORILISSA for the management of moderate to severe endometriosis pain in women, resulting in the achievement of a $ 40.0 million event-based milestone, which we recognized as revenue in 2018.

We also recognized sales-based royalties on AbbVie net sales of ORILISSA of approximately $ 14.3 million for 2019 and $ 1.6 million for 2018.

In 2017, event-based revenue of $ 30.0 million was recognized based on AbbVie’s new drug application, or NDA, submission for elagolix in endometriosis being accepted by the FDA.

BIAL – Portela & Ca, S.A.

In February 2017, we entered into an exclusive license agreement with BIAL – Portela & Ca, S.A., or BIAL, for the development and commercialization of opicapone for the treatment of human diseases and conditions, including Parkinson’s disease, in the U.S.

We paid BIAL an upfront license fee of $ 30.0 million, which was expensed in 2017 as acquired in-process R&D.

During the first quarter of 2018, the FDA provided guidance on the regulatory path forward to support an NDA for opicapone for Parkinson’s disease, in which the FDA did not request that we conduct an additional Phase III study, resulting in a $ 10.0 million event-based milestone payment to BIAL, which was expensed as incurred.

In the second quarter of 2019, we submitted an NDA with the FDA for opicapone as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in adult Parkinson's disease patients.

The NDA was accepted by the FDA with a PDUFA target action date of April 26, 2020.

The FDA’s acceptance of the NDA triggered a milestone payment of $ 10.0 million, which we expensed as R&D in the second quarter of 2019.

We may be required to pay up to an additional $ 95.0 million in milestone payments associated with the regulatory approval and net sales of opicapone.

FDA approval of opicapone for Parkinson’s disease would trigger a milestone payment of $ 20.0 million, payable by us to BIAL.

Upon commercialization of opicapone, we agreed to determine certain annual sales forecasts.

In the event we fail to meet the minimum sales requirements for a particular year, we would be required to pay BIAL an amount equal to the difference between the actual net sales and minimum sales requirements for such year.

In the event we fail to meet the minimum sales requirements for any two years, BIAL may terminate the agreement.

Under the terms of the agreement, we are responsible for the management and cost of all opicapone development and commercialization activities in the U.S.

Further, unless terminated earlier, the agreement will continue on a licensed product-by-product and country-by-country basis until a generic product in respect of such licensed product under the agreement is sold in a country and sales of such generic product are greater than a specified percentage of total sales of such licensed product in such country.

Upon our written request prior to the estimated expiration of the term in respect of a licensed product, the parties shall negotiate a good faith continuation of BIAL’s supply of such licensed product after the term.

After the term, and if BIAL is not supplying a certain licensed product, we shall pay BIAL a trademark royalty based on the net sales of such licensed product.

Either party may terminate the agreement earlier if the other party materially breaches the agreement and does not cure the breach within a specified notice period, or upon the other party’s insolvency.

BIAL may terminate the agreement if we fail to use commercially reasonable efforts or to submit an NDA for a licensed product by a specified date or under certain circumstances involving a change of control of Neurocrine.

In certain circumstances where BIAL elects to terminate the agreement in connection with Neurocrine’s change of control, BIAL shall pay us a termination fee.

We may terminate the agreement at any time for any reason upon six months written notice to BIAL if prior to the first NDA approval in the U.S., and upon nine months written notice to BIAL if such notice is given after the first NDA approval in the U.S.

If our termination request occurs prior to the first NDA approval in the U.S., we shall pay BIAL a termination fee except under certain conditions specified in the agreement.

We entered into a collaboration and license agreement with Voyager, a clinical-stage gene therapy company, which became effective in March 2019.

The agreement is focused on the development and commercialization of four programs using Voyager’s proprietary gene therapy platform.

The four programs consist of the NBIb-1817 (VY-AADC) program for Parkinson’s disease, the Friedreich’s ataxia program and the rights to two undisclosed programs.

In connection with the agreement, we paid Voyager $ 115.0 million upfront and purchased $ 50.0 million of Voyager’s common stock at $ 11.9625 per share, representing approximately 4.2 million shares.

Pursuant to the terms of the agreement, Voyager may also be entitled to an additional $ 1.7 billion in development, regulatory and commercial milestone payments, as well as royalties on net sales of any collaboration product.

Pursuant to development plans agreed to by us and Voyager, unless Voyager exercises its co-development and co-commercialization rights as provided for in the agreement, we will be responsible for all development costs.

Further, upon the occurrence of a specified event for each program, we will assume responsibility for the development, manufacturing, and commercialization activities of such program.

We accounted for the transaction as an asset acquisition as the set of acquired assets did not constitute a business.

Our equity investment in Voyager was recorded at a fair value of $ 54.7 million after considering Voyager’s stock price on the date of closing and certain lock-up and voting provisions applicable to the acquired shares.

The remaining $ 113.1 million of the purchase price, which

includes the applicable transaction costs, was expensed as in-process research and development, or IPR&D , in the first quarter of 2019.

In June 2019, we entered into an amendment to the collaboration and license agreement with Voyager.

Under the terms of the amendment, we paid Voyager $ 5.0 million upfront to obtain rights outside the United States, or U.S., to the Friedreich’s ataxia program in connection with the early return of those rights to Voyager pursuant to a restructuring of Voyager’s gene therapy relationship with Sanofi Genzyme.

The upfront payment was expensed as IPR&D in the second quarter of 2019.

We may terminate the collaboration and license agreement with Voyager upon 180 days’ written notice to Voyager prior to the first commercial sale of any collaboration product or upon one year after the date of notice if such notice is provided after the first commercial sale of any collaboration product.

Unless terminated earlier, the agreement will continue in effect until the expiration of the last to expire royalty term with respect to any collaboration product or the last expiration or termination of any exercised co-development and co-commercialization rights by Voyager as provided for in the agreement.

In December 2019, we entered into a license and collaboration agreement with Xenon to establish a collaboration under which the parties will identify, research and develop sodium channel inhibitors, including clinical candidate NBI-921352 (XEN901) and three preclinical candidates, which compounds we will have the exclusive right to further develop and commercialize under the terms and conditions set forth in the agreement.

We will be solely responsible, at our sole cost and expense, for all development and manufacturing of the compounds and any pharmaceutical product that contains a compound, subject to Xenon’s right to elect to co-fund the development of one product in a major indication and thus receive a mid-single digit percentage increase in royalties owed on the net sales of such product in the U.S.

If Xenon exercises such option, the parties will share equally all reasonable and documented costs and expenses incurred in connection with the development of such product in the applicable indication, except costs and expenses that are solely related to the development of such product for regulatory approval outside the U.S.

In connection with the agreement, we paid Xenon $ 30.0 million upfront and purchased $ 20.0 million of Xenon’s common stock at $ 14.196 per share, representing approximately 1.4 million shares.

Pursuant to the terms of the agreement, Xenon may also be entitled to an additional $ 1.7 billion in development, regulatory and commercial milestone payments, as well as royalties on net sales of any collaboration product.

We accounted for the transaction as an asset acquisition as the set of acquired assets did not constitute a business.

Our equity investment in Xenon was recorded at a fair value of $ 14.1 million after considering Xenon’s stock price on the date of closing and certain lock-up and voting provisions applicable to the acquired shares.

The remaining $ 36.2 million of the purchase price, which includes the applicable transaction costs, was expensed as IPR&D in the fourth quarter of 2019.

Unless earlier terminated, the term of the license and collaboration agreement will continue on a product-by-product and country-by-country basis until the expiration of the royalty term for such product in such country.

Upon the expiration of the royalty term for a particular product and country, the exclusive license granted by Xenon to us with respect to such product and country will become fully-paid, royalty free, perpetual and irrevocable.

We may terminate the license and collaboration agreement by providing at least 90 days’ written notice, provided that such unilateral termination will not be effective for certain products until we have used commercially reasonable efforts to complete certain specified clinical studies.

Either party may terminate the agreement in the event of a material breach in whole or in part, subject to specified conditions.

Mitsubishi Tanabe Pharma Corporation.

During 2015, we entered into a collaboration and license agreement with Mitsubishi Tanabe Pharma Corporation, or MTPC, for the development and commercialization of INGREZZA for movement disorders in Japan and other select Asian markets.

MTPC made an up-front license fee of $ 30.0 million and has agreed to make payments up to $ 85.0 million in development and commercialization event-based payments, payments for the manufacture of pharmaceutical products and royalties on product sales in select territories in Asia.

Under the terms of the agreement, MTPC is responsible for all third-party development, marketing and commercialization costs in Japan and other select Asian markets and we would be entitled to a percentage of sales of INGREZZA in Japan and other select Asian markets for the longer of ten years or the life of the related patent rights.

Further, the collaboration effort between the parties to advance INGREZZA towards commercialization in Japan and other select Asian markets is governed by joint steering and development committees with representatives from both parties.

There are no performance, cancellation, termination or refund provisions in the agreement that would have a material financial consequence to us.

We do not directly control when event-based payments will be achieved or when royalty payments will begin.

MTPC may terminate the agreement at its discretion upon 180 days’ written notice to us.

In such event, all INGREZZA product rights for Japan and other select Asian markets would revert to us.

We assessed this arrangement in accordance with Topic 606 and identified the following performance obligations:

(i) INGREZZA technology license and existing know-how;

and (ii) development activities to initiate a clinical study of INGREZZA for Huntington’s chorea.

We have the option to participate on the joint steering committee, but since participation is at our option it was deemed to not be a performance obligation.

The option for MTPC to engage us to manufacture and supply pharmaceutical products, not at a discount, was not considered a material right and therefore not a performance obligation.

Based on these assessments, we identified the license and the development activities as the only performance obligations at the inception of the agreement, which were both deemed to be distinct.

To evaluate the appropriate transaction price, we determined that the up-front amount constituted the entirety of the consideration to be included in the transaction price and to be allocated to the performance obligations based on our best estimate of their relative stand-alone selling prices.

For the license, the stand-alone selling price was calculated using an income approach model and included the following key assumptions:

the development timeline, revenue forecast, discount rate and probabilities of technical and regulatory

The relative selling price of our development activities to initiate a clinical study of INGREZZA for Huntington’s chorea was based on an assessment of costs to perform the study, based upon a peer company analysis for similar studies.

We believe a change in the assumptions used to determine our stand-alone selling price for the license most likely would not have a significant effect on the allocation of consideration received (or receivable) to the performance obligations.

At execution, the transaction price included only the $ 30.0 million up-front consideration received.

None of the development or regulatory milestones have been included in the transaction price, as all milestone amounts were fully constrained.

Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to MTPC and therefore have also been excluded from the transaction price.

We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

Under the terms of the agreement, any payment we receive is generally non-refundable.

Since inception of the agreement, we have recognized revenue of $ 20.6 million associated with the delivery of a technology license and existing know-how, and $15.0 million in development event-based payments resulting from MTPC’s initiation of Phase II/III development of INGREZZA in tardive dyskinesia, or TD, in Asia.

In 2019, we recognized revenue of $ 0.9 million in connection with our initiation of the KINECT-HD study in November 2019, a placebo-controlled Phase III study of valbenazine in adult Huntington’s disease patients with chorea.

In accordance with our continuing performance obligations, $ 9.4 million of the $ 30.0 million up-front payment is being deferred and will be recognized as revenue over the KINECT-HD study period.

No revenue was recognized under the MTPC agreement for 2018.

In 2017, we recognized $ 15.0 million in development event-based payments resulting from MTPC’s initiation of Phase II/III development of INGREZZA in TD in Asia.

Marketable Securities

Available-for-sale debt securities consisted of the following:

(in thousands)

Commercial paper

Corporate debt securities

Securities of government-sponsored entities

Total marketable securities

The following table presents the amortized cost, gross unrealized gain (loss) positions and estimated fair value for available-for-sale debt securities, aggregated by investment category.

(in thousands)

December 31, 2019:

Classified as current assets:

Commercial paper

Corporate debt securities

Securities of government-sponsored entities

Classified as non-current assets:

Corporate debt securities

Securities of government-sponsored entities

December 31, 2018:

Classified as current assets:

Commercial paper

Corporate debt securities

Securities of government-sponsored entities

Classified as non-current assets:

Corporate debt securities

Securities of government-sponsored entities

The following table presents the estimated fair value and gross unrealized loss position for available-for-sale debt securities, aggregated by investment category and length of time that such securities have been in a continuous loss position.

Less Than 12 Months

12 Months or Greater

(in thousands)

December 31, 2019:

Commercial paper

Corporate debt securities

Securities of government-sponsored entities

December 31, 2018:

Commercial paper

Corporate debt securities

Securities of government-sponsored entities

Fair Value Measurements

Investments measured at fair value on a recurring basis consisted of the following:

Fair Value Measurements Using

(in thousands)

Quoted Prices in

Active Markets for

Identical Assets

December 31, 2019:

Classified as current assets:

Cash and money market funds

Commercial paper

Securities of government-sponsored entities

Corporate debt securities

Classified as long-term assets:

Certificates of deposit

Securities of government-sponsored entities

Corporate debt securities

Restricted equity securities

Less cash and cash equivalents and restricted cash

Total investments

December 31, 2018:

Classified as current assets:

Cash and money market funds

Commercial paper

Securities of government-sponsored entities

Corporate debt securities

Classified as long-term assets:

Cash and money market funds

Certificates of deposit

Securities of government-sponsored entities

Corporate debt securities

Less cash and cash equivalents and restricted cash

Total investments

A reconciliation of restricted equity securities measured at fair value on a recurring basis follows.

(in thousands)

Balance at December 31, 2018

Investments in restricted equity securities

Net unrealized loss recognized on restricted equity securities during the period

Balance at December 31, 2019

Convertible Senior Notes

On May 2, 2017, we completed a private placement of $ 517.5 million in aggregate principal amount of 2.25 % convertible senior notes due 2024, or the 2024 Notes, and entered into an indenture agreement that sets forth the details of all the terms and conditions of the 2024 Notes, or the 2024 Indenture.

The 2024 Notes accrue interest at a fixed rate of 2.25% per year, payable semiannually in arrears on May 15 and November 15 of each year, beginning on November 15, 2017.

The 2024 Notes mature on May 15, 2024 .

The net proceeds from the issuance of the 2024 Notes were approximately $ 502.8 million, after deducting commissions and the offering expenses payable by us.

Holders of the 2024 Notes may convert the 2024 Notes at any time prior to the close of business on the business day immediately preceding May 15, 2024, only under the following circumstances:

during any calendar quarter commencing after the calendar quarter ending on September 30, 2017 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130 % of the conversion price on each applicable trading day;

during the five business-day period immediately after any 5 consecutive trading-day period (the measurement period) in which the trading price (as defined in the 2024 Indenture) per $ 1,000 principal amount of the 2024 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;

upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of our assets;

if we call the 2024 Notes for redemption, until the close of business on the business day immediately preceding the redemption date.

On or after January 15, 2024, until the close of business on the scheduled trading day immediately preceding May 15, 2024, holders may convert their 2024 Notes at any time.

As the conditional conversion feature described under (i) above had been triggered as of December 31, 2019, holders of the 2024 Notes may convert the 2024 Notes at any time during the period beginning on January 2, 2020 and ending at the close of business on March 31, 2020.

Accordingly, the 2024 Notes have been classified as a current liability as of December 31, 2019.

The future conditional convertibility of the 2024 Notes will be monitored at each quarterly reporting date and analyzed dependent upon market prices of our common stock during the prescribed measurement periods.

Upon conversion, holders will receive the principal amount of their 2024 Notes and any excess conversion value, calculated based on the per share volume-weighted average price, or VWAP, for each of the 30 consecutive trading days during the observation period.

For both the principal and excess conversion value, holders may receive cash, shares of our common stock or a combination of cash and shares of its common stock, at our option.

It is our intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the principal portion in shares of common stock or cash.

In general, for each $1,000 in principal, the “principal portion” of cash upon settlement is defined as the lesser of $1,000, and the conversion value during the 25 -day observation period as described in the indenture for the notes.

The conversion value is the sum of the daily conversion value which is the product of the effective conversion rate divided by 25 days and the daily VWAP of our common stock.

The “share amount” is the cumulative “daily share amount” during the observation period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x daily VWAP) and $1,000.

The initial conversion rate for the 2024 Notes is 13.1711 shares of common stock per $ 1,000 principal amount, which is equivalent to an initial conversion price of approximately $ 75.92 per share of our common stock.

At the initial conversion rate, settlement of the 2024 Notes for shares of our common stock would approximate 6.8 million shares.

The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.

The initial conversion price of the 2024 Notes represented a premium of approximately 42.5 % to the closing sale price of $ 53.28 per share of our common stock on the Nasdaq Global Select Market on April 26, 2017, the date we priced the private offering of the 2024 Notes.

In the event of conversion, holders would forgo all future interest payments, any unpaid accrued interest and the possibility of further stock price appreciation.

Upon the receipt of conversion requests, the settlement of the 2024 Notes will be paid pursuant to the terms of the 2024 Indenture.

In the event that all of the 2024 Notes are converted, we would be required to repay the $517.5 million in principal value and any conversion premium in any combination of cash and shares of its common stock (at the Company’s option).

On or after, but not prior to May 15, 2021, we may redeem for cash all or part of the 2024 Notes if the last reported sale price (as defined in the 2024 Indenture) of its common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending on, and including, the trading day immediately before the date which we provide notice of redemption.

The redemption price will equal the sum of (i) 100 % of the principal amount

of the 2024 Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date.

No sinking fund is provided for the 2024 Notes.

If we undergo a fundamental change, as defined in the 2024 Indenture, subject to certain conditions, holders of the 2024 Notes may require us to repurchase for cash all or part of their 2024 Notes at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

In addition, if a ‘‘make-whole fundamental change’’ (as defined in the 2024 Indenture) occurs prior to January 15, 2024, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert the 2024 Notes in connection with the make-whole fundamental change.

The 2024 Notes are our general unsecured obligations that rank senior in right of payment to all of our indebtedness that is expressly subordinated in right of payment to the 2024 Notes, and equal in right of payment to our unsecured indebtedness.

An entity must separately account for the liability and equity components of convertible debt instruments, such as the 2024 Notes, that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost.

The liability component of the instrument was valued in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance.

The initial carrying value of the liability component of $ 368.3 million was calculated using a 7.5 % assumed borrowing rate.

The equity component of $ 149.2 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2024 Notes and is recorded in additional paid-in capital on the consolidated balance sheet at the issuance date.

That equity component is treated as a discount on the liability component of the 2024 Notes, which is amortized over the seven-year term of the 2024 Notes using the effective interest rate method.

The equity component is not re-measured as long as it continues to meet the conditions for equity classification.

At December 31, 2019, the remaining period over which the discount on the liability component will be amortized was approximately 4.4 years.

We allocated the total transaction costs of approximately $ 14.7 million related to the issuance of the 2024 Notes to the liability and equity components of the 2024 Notes based on their relative values.

Transaction costs attributable to the liability component are amortized to interest expense over the seven-year term of the 2024 Notes, and transaction costs attributable to the equity component are netted with the equity component in stockholders’ equity.

The 2024 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company.

The 2024 Indenture contains customary events of default with respect to the 2024 Notes, including that upon certain events of default, 100 % of the principal and accrued and unpaid interest on the 2024 Notes will automatically become due and payable.

Convertible senior notes, net of discounts and deferred financing costs consisted of the following:

(in thousands)

Deferred financing costs

Debt discount, net

Net carrying amount

The 2024 Notes were recorded at the estimated value of a similar non-convertible instrument on the date of issuance and accretes to the face value of the 2024 Notes over their seven-year term.

The fair value of the 2024 Notes, which was estimated utilizing market quotations from an over-the-counter trading market (Level 2), was $ 596.8 million at December 31, 2019 and $ 616.1 million at December 31, 2018.

Other Balance Sheet Details

Inventory consisted of the following:

(in thousands)

Raw materials

Work in process

Finished goods

Total inventory

Property and equipment, net, consisted of the following:

(in thousands)

Tenant improvements

Scientific equipment

Computer equipment

Furniture and fixtures

Less accumulated depreciation

Total property and equipment, net

Accounts payable and accrued liabilities consisted of the following:

(in thousands)

Accrued employee related costs

Revenue-related reserves for discounts and allowances

Accrued development costs

Accounts payable and other accrued liabilities

Total accounts payable and accrued liabilities

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the consolidated statement of cash flows.

(in thousands)

Cash and cash equivalents

Restricted cash

Total cash, cash equivalents and restricted cash

Net Income (Loss) Per Share

Net income (loss) per share was calculated as follows:

Year Ended December 31,

(in thousands, except per share data)

Net income (loss) - basic and diluted

Weighted average common shares outstanding, basic

Effect of dilutive securities:

Employee stock purchase program

Stock options

Restricted stock units

Weighted average common shares outstanding, diluted

Net income (loss) per share, basic

Net income (loss) per share, diluted

Shares which have been excluded from diluted per share amounts because their effect would have been anti-dilutive include the following:

Year Ended December 31,

(in thousands)

Stock options and restricted stock units

Share-Based Compensation

Share-Based Compensation Plans.

In May 2011, we adopted the Neurocrine Biosciences, Inc.

2011 Equity Incentive Plan, as amended, or the 2011 Plan, pursuant to which 21 million shares of our common stock are authorized for issuance.

The 2011 Plan provides for the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, non-statutory stock options, restricted stock awards, restricted stock unit awards, or RSUs, stock appreciation rights, performance stock awards, performance-based restricted stock units, or PRSUs, and other forms of equity compensation.

In May 2018, we adopted the Neurocrine Biosciences, Inc.

ESPP pursuant to which 300,000 shares of our common stock are authorized for issuance.

During 2019, we issued 78,000 shares of our common stock under the ESPP.

No purchases occurred under the ESPP during 2018.

We previously issued stock options and RSUs under the Neurocrine Biosciences, Inc.

Inducement Plan, or the Inducement Plan, to certain employees.

Pursuant to the Inducement Plan, we granted 70,000 stock options and 20,000 RSUs in 2018 and 410,000 stock options and 12,500 RSUs in 2017.

We did no t grant any stock options or RSUs pursuant to the Inducement Plan during 2019.

These stock option grants have a four-year vesting period and the RSUs generally have vesting periods of three to four years.

We currently have a total of 211,000 stock options and RSUs outstanding under this Inducement Plan.

At December 31, 2019, 6.8 million shares of common stock remained available for the future grant of awards under the 2011 Plan.

Only share awards made under the 2011 Plan that are subsequently cancelled due to forfeiture or expiration are returned to the share pool available for future grants.

We issue new shares upon the exercise of stock options, the issuance of stock bonus awards, and the vesting of RSUs and PRSUs.

At December 31, 2019, 7.8 million shares of common stock were reserved for such issuances.

Vesting Provisions of Share-Based Compensation.

Stock options generally have terms of ten years from the date of grant, and generally vest over a three to four-year period.

The maximum contractual term for all options granted from the 2011 Plan is ten years .

RSUs granted under the 2011 Plan generally have vesting periods of four years .

PRSUs granted under the 2011 Plan vest based on the achievement of certain pre-defined Company-specific performance criteria and expire four to five years from the grant date.

Share-Based Compensation.

The compensation cost that has been included in the statements of operations and comprehensive income (loss) for all share-based compensation arrangements is as follows:

Year Ended December 31,

(in thousands)

Sales, general and administrative expense

Research and development expense

Share-based compensation expense

Stock Options.

The exercise price of our stock options granted is equal to the closing price of our common stock on the date of grant.

The estimated fair value of each stock option award granted was determined on the date of grant using the Black-Scholes option-pricing valuation model with the following weighted-average assumptions for option grants:

Year Ended December 31,

(in thousands)

Risk-free interest rate

Expected volatility of common stock

Dividend yield

Expected option term

We estimate the fair value of stock options using a Black-Scholes option-pricing model on the date of grant.

The fair values of equity instruments are recognized and amortized on a straight-line basis over the requisite service period.

The Black-Scholes option-pricing model incorporates various and highly sensitive assumptions including expected volatility, term and interest rates.

The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected term of our stock options.

The expected option term is estimated based on historical experience as well as the status of the employee.

For example, directors and officers have a longer expected option term than all other employees.

The risk-free rate for periods within the contractual life of the option is based upon observed interest rates appropriate for the expected term of our employee stock options.

We have never declared or paid dividends and has no plans to do so in the foreseeable future.

Our determination of fair value is affected by our stock price as well as a number of assumptions that require judgment.

The weighted-average fair values of stock options granted during 2019, 2018 and 2017 estimated as of the grant date using the Black-Scholes option-pricing model, were $ 41.74 , $ 43.42 and $ 25.11 , respectively.

A summary of activity related to stock options follows:

Year Ended December 31,

(in thousands, except weighted average data)

Exercise Price

Outstanding at January 1

Outstanding at December 31

Stock options outstanding at December 31, 2019 had a weighted average remaining contractual term of 6.7 years.

For 2019, 2018 and 2017 share-based compensation expense related to stock options was $ 36.5 million, $ 35.4 million and $ 28.2 million, respectively.

At December 31, 2019, there was approximately $ 75.0 million of unamortized compensation cost related to stock options, which we expect to recognize over a weighted average remaining vesting period of approximately 2.4 years.

December 31, 201 9 , there were approximately 4.0 million stock options exercisable with a weighted average exercise price of $ 41.01 and a weighted-average remaining contractual term of 5.8 years .

The total intrinsic value, which is the amount by which the exercise price was exceeded by the sale price of our common stock on the date of sale, of stock option exercises during 201 9 , 201 8 , and 201 7 was $ 64.3 million, $ 117.0 million and $ 61.4 million, respe ctively.

A t December 31, 201 9 , the total intrinsic value of stock options outstanding and exercisable was $ 335.7 million and $ 268.2 million, respectively.

Cash received from stock option exercises for 201 9 , 201 8 and 201 7 was $ 27.3 million, $ 29.5 million , and $ 13.9 million, respectively.

Restricted Stock Units.

The fair value of RSUs is based on the closing sale price of our common stock on the date of issuance.

For 2019, 2018, and 2017 share-based compensation expense related to RSUs was $ 30.4 million, $ 21.9 million, and $ 13.9 million, respectively.

As of December 31, 2019, there was approximately $ 75.5 million of unamortized compensation cost related to RSUs, which is expected to be recognized over a weighted average remaining vesting period of approximately 2.4 years.

The total intrinsic value of RSUs converted into common shares for 2019, 2018 and 2017 was $ 36.1 million, $ 35.5 million, and $ 14.9 million, respectively.

The RSUs, at the election of eligible employees, may be subject to deferred delivery arrangement.

The total intrinsic value of RSUs outstanding at December 31, 2019 was $ 147.2 million based on our closing stock price on that date.

A summary of activity related to RSUs follows:

Year Ended December 31,

(in thousands, except weighted average data)

Weighted Average

Grant Date Fair

Value per Unit

Weighted Average

Grant Date Fair

Value per Unit

Weighted Average

Grant Date Fair

Value per Unit

Outstanding at January 1

Converted into common shares

Outstanding at December 31

Performance-Based Restricted Stock Units.

We had 0.3 million PRSUs outstanding at both December 31, 2019 and 2018.

During 2018, we granted approximately 0.2 million PRSUs that vest based on the achievement of certain pre-defined Neurocrine-specific performance criteria and expire approximately four to five years from the grant date.

No PRSUs were granted during 2019 or 2017.

The fair value of PRSUs is estimated based on the closing sale price of our common stock on the date of grant.

Expense recognition for PRSUs commences when attainment of the performance-based criteria is determined to be probable.

We recognized expense of $ 5.6 million for 2019 and $ 0.4 million for 2017 related to PRSUs.

We recognized no expense related to PRSUs for 2018.

At December 31, 2019, total unrecognized estimated compensation expense related to PRSUs was $ 14.1 million and the total intrinsic value of PRSUs outstanding was $ 35.5 million based on our closing stock price on that date.

The total intrinsic value of PRSUs converted into common shares was $ 8.8 million for 2017.

Employee Stock Purchase Plan.

Under the ESPP, eligible employees may purchase shares of our common stock at a discount semi-annually based on a percentage of their annual compensation.

The discounted purchase price is equal to the lower of 85 % of (i) the market value per share of the common stock on the first day of the offering period or (ii) the market value per share of common stock on the purchase date.

Share-based compensation expense recognized under the ESPP was $ 2.7 million for 2019 and $ 0.8 million for 2018.

Components of income tax expense for continuing operations were as follows:

Year Ended December 31,

(in thousands)

Total income tax expense

The provision for income taxes on earnings subject to income taxes differs from the statutory federal rate due to the following:

(in thousands)

Federal income taxes at 21 % for 2019 and 2018 and 35 % for 2017

State income tax, net of federal benefit

Tax effect on non-deductible expenses

Branded prescription drug fee

Share-based compensation expense

Officer compensation

Change in tax rate

Expired tax attributes

Research credits

Change in valuation allowance

Significant components of our deferred tax assets as of December 31, 2019 and 2018 are listed below.

We assess all available positive and negative evidence to estimate whether sufﬁcient future taxable income will be generated to permit use of the existing deferred tax assets.

A signiﬁcant piece of objective negative evidence evaluated was the cumulative book loss incurred over the three-year period ended December 31, 2019.

Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth.

On the basis of this analysis, we recorded a valuation allowance of $ 346.0 million and $ 335.2 million at December 31, 2019 and 2018, respectively, to offset the net deferred tax asset below as realization of such asset is uncertain.

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for future growth.

(in thousands)

Deferred tax assets:

Net operating losses

Research and development credits

Capitalized research and development

Share-based compensation expense

Operating lease assets

Intangible assets

Total deferred tax assets

Deferred tax liabilities:

Convertible senior notes

Operating lease liabilities

Total deferred tax liabilities

Net of deferred tax assets and liabilities

Valuation allowance

Net deferred tax assets

At December 31, 2019, we had federal and state income tax net operating loss carry forwards of approximately $ 816.2 million and $ 359.8 million, respectively.

The federal net operating losses will begin to expire in 2024 , unless previously utilized.

A portion of the California net operating loss carry forwards expired in 2018.

The remaining California net operating losses will begin to expire in 2028 and the net operating losses related to other states will begin to expire in 2026 .

In addition, we have federal and California R&D tax credit carry forwards of $ 73.2 million and $ 47.5 million, respectively.

A portion of the federal R&D tax credit carry forwards expired in 2019 .

The remaining federal R&D tax credits will continue to expire in 2020, unless previously utilized.

The California R&D tax credits carry forward indefinitely.

Additionally, the future utilization of our net operating loss and R&D tax credit carry forwards to offset future taxable income may be subject to annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that could result in the future.

No such ownership changes have occurred through December 31, 2019.

The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.

An uncertain income tax position will not be recognized if it has less than a 50 % likelihood of being sustained.

Our policy is to recognize interest or penalties related to income tax matters in income tax expense.

Interest and penalties related to income tax matters were not material for 2019, 2018 or 2017.

We are subject to taxation in the U.S.

and various state jurisdictions.

Our tax years for 2001 (federal) and 2008 (California) and forward are subject to examination by federal and state tax authorities due to the carry forward of unutilized net operating losses and R&D tax credits.

A summary of activity related to unrecognized tax benefits follows:

Year Ended December 31,

(in thousands)

Balance at January 1

Increases related to prior year tax positions

Increases related to current year tax positions

Expiration of the statute of limitations for the assessment of taxes

Balance at December 31

We excluded deferred tax assets that are not more-likely-than-not to be sustained under the technical merits of the tax position.

Such unrecognized tax benefits totaled $ 9.5 million for current year tax positions, as reflected in the table above.

At December 31, 2019, we had $ 57.9 million of unrecognized tax benefits that, if recognized and realized, would affect the effective tax rate, subject to the valuation allowance.

We do not expect a significant change in our unrecognized tax benefits in the next twelve months.

In December 2007, we closed the sale of our facility and associated real property for a purchase price of $ 109.0 million.

Concurrent with the sale, we retired the entire $ 47.7 million in mortgage debt previously outstanding with respect to the facility and associated real property and received cash of $ 61.0 million, net of transaction costs and debt retirement.

The ultimate result of this real estate sale was a net deferred gain of $ 39.1 million, of which the remaining balance was $ 8.0 million as of December 31, 2018, and which we recognized as a cumulative-effect adjustment to equity upon adoption of Topic 842 on January 1, 2019.

Upon closing of the sale of the facility and associated real property, we entered into an agreement, or the original lease, to lease back our corporate headquarters, comprised of two buildings located in San Diego, California, for a term of twelve years .

In 2008 through 2011, we entered into a series of subsequent amendments to the original lease, whereby we vacated one of the two buildings and continued to occupy one building, or the existing premises.

In June 2017, we entered into an amendment to the original lease, or the amended lease, whereby we extended its term through December 31, 2029 .

In August 2019, we entered into an amendment, or the 2019 amendment, to the amended lease, whereby we agreed to lease 80,282 square feet of additional office space, or the expanded premises, in San Diego, California, for a term of twelve years , and to extend the total term of the original lease to a coterminous date of July 31, 2031 .

Under the terms of the 2019 amendment, we will take possession of the expanded premises on a tranche-by-tranche basis as office space currently occupied by third-party tenants becomes available through 2021.

Commencing on each applicable tranche lease commencement date and continuing throughout the term of the lease, we will be obligated to pay base annual rent (subject to an annual fixed percentage increase) and our then-applicable portion of the operating expenses and taxes attributable to the expanded premises.

Additionally, we will continue to be obligated to pay base annual rent (subject to an annual fixed percentage increase), operating expenses, and taxes attributable to the existing premises.

The 2019 amendment includes two options to extend the term of the lease for a period of ten years each.

We were not reasonably certain to exercise either of these options at lease commencement.

As such, neither option was recognized as part of the associated operating lease ROU asset or liability.

In connection with the amended lease, in lieu of a cash security deposit, Wells Fargo Bank, N.A., or Wells Fargo, issued a $ 3.0 million letter of credit on our behalf, which is secured by a deposit of equal amount.

In May 2018, we entered into an agreement to lease 44,718 square feet of office space in San Diego, California, which commenced on July 1, 2018, for a term of ten years and ten months .

Under the terms of the lease, we pay base annual rent (subject to an annual fixed percentage increase), plus property taxes, and other normal and necessary expenses, such as utilities, repairs, and maintenance.

Certain incentives were included in the lease, including $ 4.2 million in tenant improvement allowances and twelve months of rent abatement.

In lieu of a cash security deposit, Wells Fargo issued a $ 1.0 million letter of credit on our behalf, which is secured by a deposit of $ 0.2 million.

We do not have the right to extend the lease or right of first offer for future rental of adjacent office space owned by the landlord.

For 2019, our operating lease cost was $ 8.1 million, and cash paid for amounts included in the measurement of lease liabilities for operating cash flows from operating leases was $ 7.7 million.

At December 31, 2019, we reported operating lease ROU assets and operating lease liabilities of $ 74.4 million and $ 95.0 million, respectively.

Further, at December 31, 2019, our operating leases had a weighted average remaining lease term of 11.2 years and a weighted average discount rate of 5.8 %.

At December 31, 2019, the approximate future minimum lease payments under operating leases were as follows:

(in thousands)

Operating Leases

Year Ending December 31,

Total operating lease payments

Less accreted interest

Less current operating lease liabilities

Noncurrent operating lease liabilities

Amounts presented in the table above exclude $ 28.3 million of non-cancelable future minimum lease payments for operating leases that have not yet commenced.

Retirement Plan

We have a 401(k) defined contribution savings plan, or the 401(k) Plan.

The 401(k) Plan is for the benefit of all qualifying employees and permits voluntary contributions by employees up to 60 % of base salary limited by the IRS-imposed maximum.

Employer contributions were $ 4.9 million, $ 1.8 million, and $ 1.1 million for 2019, 2018 and 2017, respectively.

Commitments and Contingencies

We have entered into various collaboration and licensing agreements that provide us with rights to certain know-how, technology and patent rights.

Under the terms of these agreements, we may be required to make milestone payments upon achievement of certain development and regulatory activities of up to $ 4.9 billion and pay royalties on future sales, if any, of commercial products resulting from these agreements.

Selected Quarterly Financial Data (Unaudited)

A summary of our quarterly results follows:

(in thousands, except per share data)

Year Ended December 31, 2019:

Total revenues

Total operating expenses (1)

Net (loss) income (1)

Net (loss) income per share, basic (1)

Net (loss) income per share, diluted (1)

Weighted average common shares outstanding, basic

Weighted average common shares outstanding, diluted

Year Ended December 31, 2018:

Total revenues

Total operating expenses

Net (loss) income

Net (loss) income per share, basic

Net (loss) income per share, diluted

Weighted average common shares outstanding, basic

Weighted average common shares outstanding, diluted

(1) In connection with the payment of the upfront fee pursuant to our collaboration and license agreement with Voyager, we recorded a charge of $ 113.1 million, accounted for as IPR&D, in the first quarter of 2019.

In the second quarter of 2019, we entered into an amendment to the collaboration and license agreement with Voyager, pursuant to which we paid Voyager $ 5.0 million upfront, accounted for as IPR&D, to obtain outside the U.S.

rights to the Friedreich’s ataxia program.

In connection with the payment of the upfront fee pursuant to our collaboration with Xenon, we recorded a charge of $ 36.2 million, accounted for as IPR&D, in the fourth quarter of 2019.

Changes and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

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

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk