NEUROCRINE BIOSCIENCES INC 10-Q

Item 1. Financial Statements NEUROCRINE BIOSCIENCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (in millions, except per share data) March 31, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 270.2 $ 340.8 Debt securities available-for-sale 394.7 370.5 Accounts receivable 263.5 185.5 Inventories 29.0 30.5 Other current assets 60.8 45.5 Total current assets 1,018.2 972.8 Deferred tax assets 325.3 315.1 Debt securities available-for-sale 541.0 560.7 Right-of-use assets 94.7 97.2 Equity securities 91.3 63.7 Property and equipment, net 63.9 58.6 Other assets 10.1 4.4 Total assets $ 2,144.5 $ 2,072.5 Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 235.9 $ 225.8 Other current liabilities 17.6 20.0 Total current liabilities 253.5 245.8 Convertible senior notes 377.7 335.1 Operating lease liabilities 102.5 105.3 Other long-term liabilities 19.7 12.3 Total liabilities 753.4 698.5 Stockholders’ equity: Preferred stock, $ 0.001 par value; 5.0 million shares authorized; no shares issued and outstanding at March 31, 2022 and December 31, 2021 — — Common stock, $ 0.001 par value; 220.0 million shares authorized; issued and outstanding shares were 95.5 million at March 31, 2022 and 94.9 million at December 31, 2021 0.1 0.1 Additional paid-in capital 1,947.7 2,011.4 Accumulated other comprehensive loss ( 9.3 ) ( 1.7 ) Accumulated deficit ( 547.4 ) ( 635.8 ) Total stockholders’ equity 1,391.1 1,374.0 Total liabilities and stockholders’ equity $ 2,144.5 $ 2,072.5 See accompanying notes to the condensed consolidated financial statements. 3 NEUROCRINE BIOSCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) Three Months Ended March 31, (in millions, except per share data) 2022 2021 Revenues: Net product sales $ 305.0 $ 231.0 Collaboration revenues 5.6 5.6 Total revenues 310.6 236.6 Operating expenses: Cost of revenues 4.6 2.9 Research and development 102.2 73.2 Selling, general and administrative 200.7 129.0 Total operating expenses 307.5 205.1 Operating income 3.1 31.5 Other income (expense): Interest expense ( 2.6 ) ( 6.4 ) Unrealized gain on equity securities 19.9 0.7 Investment income and other, net 1.0 1.4 Total other income (expense), net 18.3 ( 4.3 ) Income before provision for (benefit from) income taxes 21.4 27.2 Provision for (benefit from) income taxes 7.5 ( 4.9 ) Net income 13.9 32.1 Unrealized loss on debt securities available-for-sale, net of tax ( 7.6 ) ( 0.8 ) Comprehensive income $ 6.3 $ 31.3 Earnings per share: Basic $ 0.15 $ 0.34 Diluted $ 0.14 $ 0.33 Weighted-average shares outstanding: Basic 95.3 94.2 Diluted 97.6 98.2 See accompanying notes to the condensed consolidated financial statements. 4 NEUROCRINE BIOSCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited) Accumulated Other Comprehensive Income (Loss) Common Stock Additional Paid-In Capital Accumulated Deficit (in millions) Shares $ Total Balances at December 31, 2021 94.9 $ 0.1 $ 2,011.4 $ ( 1.7 ) $ ( 635.8 ) $ 1,374.0 Net income — — — — 13.9 13.9 Unrealized loss on debt securities available-for-sale, net of tax — — — ( 7.6 ) — ( 7.6 ) Cumulative-effect adjustment due to adoption of ASU 2020-06 — — ( 106.8 ) — 74.5 ( 32.3 ) Stock-based compensation expense — — 37.0 — — 37.0 Issuances of common stock under stock plans 0.6 — 6.1 — — 6.1 Balances at March 31, 2022 95.5 $ 0.1 $ 1,947.7 $ ( 9.3 ) $ ( 547.4 ) $ 1,391.1 Balances at December 31, 2020 93.5 $ 0.1 $ 1,849.7 $ 1.8 $ ( 725.4 ) $ 1,126.2 Net income — — — — 32.1 32.1 Unrealized loss on debt securities available-for-sale, net of tax — — — ( 0.8 ) — ( 0.8 ) Stock-based compensation expense — — 32.9 — — 32.9 Issuances of common stock under stock plans 1.0 — 15.2 — — 15.2 Balances at March 31, 2021 94.5 $ 0.1 $ 1,897.8 $ 1.0 $ ( 693.3 ) $ 1,205.6 See accompanying notes to the condensed consolidated financial statements. 5 NEUROCRINE BIOSCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended March 31, (in millions) 2022 2021 Cash Flows from Operating Activities: Net income $ 13.9 $ 32.1 Reconciliation of net income to net cash (used in) provided by operating activities: Stock-based compensation expense 37.0 32.9 Depreciation 3.3 2.5 Amortization of debt discount — 3.9 Amortization of debt issuance costs 0.4 0.3 Change in fair value of equity security investments ( 19.9 ) ( 0.7 ) Deferred income taxes ( 0.3 ) ( 6.2 ) Other 0.8 2.6 Change in operating assets and liabilities: Accounts receivable ( 78.0 ) 9.3 Inventories 1.5 ( 2.1 ) Accounts payable and accrued liabilities 11.5 11.0 Other assets and liabilities, net ( 10.7 ) 1.7 Net cash (used in) provided by operating activities ( 40.5 ) 87.3 Cash Flows from Investing Activities: Purchases of debt securities available-for-sale ( 192.8 ) ( 93.7 ) Sales and maturities of debt securities available-for-sale 176.5 161.3 Purchases of equity securities ( 7.7 ) — Purchases of property and equipment ( 7.6 ) ( 4.5 ) Net cash (used in) provided by investing activities ( 31.6 ) 63.1 Cash Flows from Financing Activities: Issuances of common stock under benefit plans 6.1 15.2 Partial repurchase of convertible senior notes — ( 0.1 ) Net cash provided by financing activities 6.1 15.1 Change in cash, cash equivalents and restricted cash ( 66.0 ) 165.5 Cash, cash equivalents and restricted cash at beginning of period 344.0 190.3 Cash, cash equivalents and restricted cash at end of period $ 278.0 $ 355.8 Supplemental Disclosure: Non-cash capital expenditures $ 2.8 $ 0.1 Right-of-use assets acquired through operating leases $ — $ 16.0 See accompanying notes to the condensed consolidated financial statements. 6 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Organization and Significant Accounting Policies Description of Business . Neurocrine Biosciences, Inc., or Neurocrine Biosciences, 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 Biosciences. 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. Basis of Presentation . The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions of the Securities and Exchange Commission, or SEC, on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, the condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of our financial position and of the results of operations and cash flows for the periods presented. The accompanying unaudited condensed consolidated financial statements include the accounts of Neurocrine Biosciences and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2021, included in our Annual Report on Form 10-K, or the 2021 Form 10-K, filed with the SEC. The results of operations for the interim period shown in this report are not necessarily indicative of the results that may be expected for any other interim period or the full year. The condensed consolidated balance sheet as of December 31, 2021, has been derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. Recently Adopted Accounting Pronouncements. ASU 2020-06 . In August 2020, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity's own equity. Among other changes, ASU 2020-06 removed the separation models for convertible instruments with cash or beneficial conversion features. Instead, entities now account for convertible debt instruments wholly as debt, unless certain other conditions are met. The adoption of ASU 2020-06 prospectively reduces reported interest expense and increases (decreases) reported net income (loss), and resulted in a reclassification of certain conversion feature balance sheet amounts from stockholders’ equity to liabilities as it relates to the 2.25 % fixed-rate convertible senior notes due May 15, 2024, or the 2024 Notes. We adopted ASU 2020-06 on January 1, 2022, using the modified retrospective transition method, which allowed for a cumulative-effect adjustment in the period of adoption and did not require restatement of prior period amounts. Under this transition method, the cumulative effect of the accounting change increased the carrying amount of the 2024 Notes by $ 42.2 million, reduced deferred tax liabilities by $ 9.9 million, reduced additional paid-in capital by $ 106.8 million and reduced the accumulated deficit by $ 74.5 million. 2. Collaboration and License Agreements Heptares Therapeutics Limited, or Heptares. We entered into a collaboration and license agreement with Heptares, which became effective in December 2021, to develop and commercialize certain compounds containing sub-type selective muscarinic M1, M4, or dual M1/M4 receptor agonists, which compounds we have the exclusive rights to develop, manufacture and commercialize worldwide, excluding in Japan, where Heptares retains the rights to develop, manufacture, and commercialize all compounds comprised of M1 receptor agonists, subject to certain exceptions. With respect to such rights retained by Heptares, we retain the rights to opt in to profit sharing arrangements, pursuant to which we and Heptares will equally share in the operating profits and losses for such compounds in Japan. Subject to specified conditions, we may elect to exercise such opt-in rights with respect to each such compound either before initiation of the first proof of concept Phase II clinical trial for such compound or following our receipt from Heptares of the top-line data from such clinical trial for such compound. We are responsible for all development, manufacturing and commercialization costs of any collaboration product. 7 In connection with the agreement, we paid Heptares $ 100.0 million upfront, which, including certain transaction-related costs, was expensed as IPR&D in 2021. We accounted for the transaction as an asset acquisition as the set of acquired assets did not constitute a business. Under the terms of the agreement, Heptares may be entitled to receive potential future payments of up to $ 2.6 billion upon the achievement of certain event-based milestones and would be entitled to receive royalties on the future net sales of any collaboration product. Unless earlier terminated, the agreement will continue on a licensed product-by-licensed product and country-by-country basis until the date on which the royalty term for such licensed product has expired in such country. On a licensed product-by-licensed product and country-by-country basis, royalty payments would commence on the first commercial sale of a licensed product and terminate on the later of (i) the expiration of the last patent covering such licensed product in such country, (ii) a number of years from the first commercial sale of such licensed product in such country and (iii) the expiration of regulatory exclusivity for such licensed product in such country. We may terminate the agreement in its entirety or with respect to one or more targets upon 180 days’ written notice to Heptares during the research collaboration term and upon 90 days’ written notice to Heptares following the expiration of the research collaboration term. Following the expiration of the research collaboration term, Heptares may terminate the agreement on a target-by-target basis in the event that we do not conduct any material development activities outside of Japan with respect to a certain compound or licensed product within the applicable target class for a continuous period of not less than 365 days and do not commence any such activities within 120 days of receiving written notice. Either party may terminate the agreement, subject to specified conditions, (i) in the event of material breach by the other party, subject to a cure period, (ii) if the other party challenges the validity or enforceability of certain intellectual property rights, subject to a cure period, or (iii) if the other party becomes insolvent or takes certain actions related to insolvency. Takeda Pharmaceutical Company Limited, or Takeda. In 2020, we entered into an exclusive license agreement with Takeda, pursuant to which we acquired the exclusive rights to develop and commercialize certain early to mid-stage psychiatry compounds, including luvadaxistat, NBI-1065845, NBI-1065846 and four non-clinical stage compounds. Luvadaxistat and the 4 non-clinical stage compounds have each been designated as a royalty-bearing product. NBI-1065845 and NBI-1065846 are currently each designated as a profit-share product. We are responsible for all manufacturing, development and commercialization costs of any royalty-bearing product. With respect to NBI-1065845 and NBI-1065846, we and Takeda will equally share in the operating profits and losses. Takeda retains the rights to opt-out of the profit-sharing arrangements, pursuant to which Takeda would be entitled to receive potential future payments upon the achievement of certain event-based milestones with respect to such compounds and receive royalties on the future net sales of such compounds (in lieu of equally sharing in the operating profits and losses). Takeda may elect to exercise such opt-out right for such compound immediately following the completion of a second Phase II clinical trial for such compound, or, under certain circumstances related to the development and commercialization activities to be performed by us, before the initiation of a Phase III clinical trial for such compound. In connection with the agreement, we paid Takeda $ 120.0 million upfront, which, including certain transaction-related costs, was expensed as IPR&D in 2020. We accounted for the transaction as an asset acquisition as the set of acquired assets did not constitute a business. Under the terms of the agreement, Takeda may be entitled to receive potential future payments of up to $ 1.9 billion upon the achievement of certain event-based milestones and would be entitled to receive royalties on the future net sales of any royalty-bearing product. Unless earlier terminated, the agreement will continue on a licensed product-by-licensed product and country-by-country basis until the date on which, (i) for any royalty-bearing product, the royalty term has expired in such country; and (ii) for any profit-share product, for so long as we continue to develop, manufacture, or commercialize such licensed product. On a licensed product-by-licensed product and country-by-country basis, royalty payments would commence on the first commercial sale of a royalty-bearing product and terminate on the later of (i) the expiration of the last patent covering such royalty-bearing product in such country, (ii) a number of years from the first commercial sale of such royalty-bearing product in such country and (iii) the expiration of regulatory exclusivity for such royalty-bearing product in such country. We may terminate the agreement in its entirety or in one or more (but not all) of the United States, Japan, the European Union and the United Kingdom, or, collectively, the major markets, upon six months’ written notice to Takeda (i) with respect to all licensed products prior to the first commercial sale of the first licensed product for which first commercial sale occurs, or (ii) with respect to all licensed products in one or more given target classes, as defined in the agreement, prior to the first commercial sale of the first licensed product in such target class for which first commercial sale occurs. We may terminate the agreement in its entirety or in one or more (but not all) of the major markets upon 12 months’ written notice to Takeda (i) with respect to all licensed products following the first commercial sale of the first licensed product for which first commercial sale occurs, or (ii) with respect to all licensed products in one or more given target classes following the first 8 commercial sale of the first licensed product in such target class for which first commercial sale occurs. Takeda may terminate the agreement, subject to specified conditions, (i) if we challenge the validity or enforceability of certain Takeda intellectual property rights or (ii) on a target class-by-target class basis, in the event that we do not conduct any material development or commercialization activities with respect to any licensed product within such target class for a specified continuous period. Subject to a cure period, either party may terminate the agreement in the event of any material breach, solely with respect to the target class of a licensed product to which such material breach relates, or in its entirety in the event of any material breach that relates to all licensed products. Idorsia Pharmaceuticals Ltd., or Idorsia. In 2020, we entered into a collaboration and license agreement with Idorsia, pursuant to which we acquired the global rights to NBI-827104, a potent, selective, orally active and brain penetrating T-type calcium channel blocker in clinical development for the treatment of a rare pediatric epilepsy and other potential indications, including essential tremor. We are responsible for all manufacturing, development and commercialization costs of any collaboration product. In connection with the agreement, we paid Idorsia $ 45.0 million upfront, which was expensed as IPR&D in 2020. We accounted for the transaction as an asset acquisition as the set of acquired assets did not constitute a business. Under the terms of the agreement, Idorsia may be entitled to receive potential future payments of up to $ 1.7 billion upon the achievement of certain event-based milestones and would be entitled to receive royalties on the future net sales of any collaboration product. We may terminate the agreement, in its entirety or with respect to a particular compound or development candidate, upon 90 days’ written notice to Idorsia. Further, in the event a party commits a material breach and fails to cure such material breach within 90 days after receiving written notice thereof, the non-breaching party may terminate the agreement in its entirety immediately upon written notice to the breaching party. Xenon Pharmaceuticals Inc., or Xenon. In 2019, we entered into a collaboration and license agreement with Xenon to identify, research and develop sodium channel inhibitors, including NBI-921352 and three preclinical candidates, which compounds we have the exclusive rights to develop and commercialize. We are responsible for all development and manufacturing costs of any collaboration product, subject to certain exceptions. In connection with the agreement, we paid Xenon $ 50.0 million upfront, including a purchase of approximately 1.4 million shares of Xenon common stock (at $ 14.196 per share). We accounted for the transaction as an asset acquisition as the set of acquired assets did not constitute a business. The purchased shares were recorded at a fair value of $ 14.1 million after considering Xenon’s stock price on the measurement date and certain transfer restrictions applicable to the shares. The remaining $ 36.2 million of the purchase price, which includes certain transaction-related costs, was expensed as IPR&D in 2019. In connection with the European Union’s approval of our clinical trial application for NBI-921352 for the treatment of focal onset seizures in adults in September 2021, we paid Xenon a regulatory milestone of $ 10.0 million, including a purchase of approximately 0.3 million shares of Xenon common stock (at $ 19.9755 per share). The purchased shares were recorded at a fair value of $ 4.6 million after considering Xenon’s stock price on the measurement date and certain transfer restrictions applicable to the shares. The remaining $ 5.4 million of the milestone payment was expensed as R&D in 2021. In connection with the FDA's acceptance of our amended KAYAK TM study protocol in January 2022, we paid Xenon a regulatory milestone of $ 15.0 million, including a purchase of approximately 0.3 million shares of Xenon common stock (at $ 31.855 per share). The purchased shares were recorded at a fair value of $ 7.7 million after considering Xenon’s stock price on the measurement date. The remaining $ 7.3 million of the milestone payment was expensed as R&D in the first quarter of 2022. Under the terms of the agreement, Xenon may be entitled to receive potential future payments of up to $ 1.7 billion upon the achievement of certain event-based milestones and would be entitled to receive royalties on the future net sales of any collaboration product. Xenon retains the right to elect to co-develop one product in a major indication, pursuant to which Xenon would receive a mid-single digit percentage increase in royalties earned on the future net sales of such product in the United States and we and Xenon would equally share in the development costs of such product in the applicable indication, except where such development costs relate solely to the regulatory approval of such product outside the United States. Unless earlier terminated, the agreement will continue on a licensed product-by-licensed 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 licensed product and country, the license obtained by us with respect to such product and country will become fully paid, royalty free, perpetual and irrevocable. We may terminate the agreement upon 90 days’ written notice to Xenon, provided that such unilateral termination will not be effective for certain products until we have used commercially 9 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. Voyager Therapeutics, Inc., or Voyager. In 2019, we entered into a collaboration and license agreement with Voyager, pursuant to which we acquired certain rights to develop and commercialize the NBIb-1817 for Parkinson’s disease program, Friedreich’s ataxia program and two undisclosed programs. We are responsible for all development costs of any collaboration product, subject to certain co-development and co-commercialization rights retained by Voyager. In February 2021, we notified Voyager of our termination of the NBIb-1817 for Parkinson’s disease program, which became effective August 2, 2021. The termination did not apply to any program other than the NBIb-1817 for Parkinson’s disease program. In connection with the agreement, we paid Voyager $ 165.0 million upfront, including a purchase of approximately 4.2 million shares of Voyager common stock (at $ 11.9625 per share). We accounted for the transaction as an asset acquisition as the set of acquired assets did not constitute a business. The purchased shares were recorded at a fair value of $ 54.7 million after considering Voyager’s stock price on the measurement date and certain transfer restrictions applicable to the shares. The remaining $ 113.1 million of the purchase price, which includes certain transaction-related costs, was expensed as IPR&D in 2019. In addition, we paid Voyager $ 5.0 million upfront, which was expensed as IPR&D in 2019, to acquire the rights outside the United States to the Friedreich’s ataxia program. Under the terms of the agreement, Voyager may be entitled to receive potential future payments of up to $ 1.3 billion upon the achievement of certain event-based milestones and would be entitled to receive royalties on the future net sales 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. We may terminate the agreement 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. BIAL – Portela & Ca, S.A., or BIAL. We acquired the United States and Canada rights to ONGENTYS ® (opicapone) from BIAL in 2017, and launched ONGENTYS in the United States in September 2020 as an FDA-approved add-on treatment to levodopa/carbidopa in patients with Parkinson's disease experiencing motor fluctuations. We are responsible for all commercialization costs of ONGENTYS in the United States and Canada and rely on BIAL for the commercial supply of ONGENTYS. Under the terms of the license agreement, BIAL may be entitled to receive potential future payments of up to $ 75.0 million upon the achievement of certain event-based milestones. In addition, with respect to ONGENTYS, in the event we fail to meet certain minimum sales requirements for a particular year in comparison to our annual sales forecast for such year, we would be obligated to pay BIAL an amount equal to the difference between the actual net sales and minimum sales requirements for such year. Further, upon our written request to BIAL 12 months prior to the estimated expiration of the term of a licensed product, we will negotiate the continuation of BIAL’s supply of such licensed product after the term. After the term, and if BIAL is no longer supplying such licensed product, BIAL would be entitled to receive a low double-digit royalty on our future quarterly net sales of such licensed product. Unless earlier terminated, the agreement will continue on a licensed product-by-licensed product and country-by-country basis until a generic product with respect to such licensed product 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. We may terminate the agreement upon nine months’ written notice to BIAL. BIAL may terminate the agreement in the event we fail to meet the minimum sales requirements for any two years, or under certain circumstances involving a change of control of Neurocrine Biosciences. Under certain circumstances where BIAL elects to terminate the agreement in connection with a change of control of Neurocrine Biosciences, BIAL would be obligated to pay us a termination fee. Either party may terminate the agreement 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. Mitsubishi Tanabe Pharma Corporation, or MTPC. We out-licensed the rights to valbenazine in Japan and other select Asian markets to MTPC in 2015. In December 2020, we entered into a commercial supply agreement with MTPC pursuant to which we agreed to supply MTPC with valbenazine drug product for commercial use in Japan and other select Asian markets. MTPC is responsible for all development, manufacturing and commercialization costs of valbenazine in such markets. In March 2022, MTPC received Japanese Ministry of Health, Labour and Welfare approval for DYSVAL ® (valbenazine) for the treatment of tardive dyskinesia in Japan. Under the terms of our license agreement with MTPC, we are entitled to receive a milestone payment of $ 20.0 million upon MTPC's first commercial sale of DYSVAL in Japan, which is expected to occur 10 in the second quarter of 2022. In addition, we may also be entitled to receive potential future payments of up to $ 35.0 million upon the achievement of certain sales-based milestones and will be entitled to receive royalties at tiered percentage rates on future MTPC net sales of valbenazine for the longer of 10 years or the life of the related patent rights. MTPC may terminate the agreement upon 180 days’ written notice to us. In such event, all out-licensed product rights would revert to us. AbbVie Inc., or AbbVie. We out-licensed the global rights to elagolix to AbbVie in 2010. AbbVie is responsible for all development and commercialization costs of elagolix. AbbVie launched ORILISSA ® (elagolix tablets) in the United States and Canada in August and November 2018, respectively. In June 2020, AbbVie launched ORIAHNN ® (elagolix, estradiol and norethindrone acetate capsules and elagolix capsules) in the United States. We receive royalties at tiered percentage rates on AbbVie net sales of elagolix. We recognized elagolix royalty revenue of $ 4.2 million and $ 4.5 million, respectively, for the three months ended March 31, 2022 and 2021. Under the terms of our license agreement with AbbVie, we may be entitled to receive potential future payments of up to $ 366.0 million upon the achievement of certain event-based milestones and will continue to receive royalties at tiered percentage rates on future AbbVie net sales of elagolix for the longer of 10 years or the life of the related patent rights. AbbVie may terminate the agreement upon 180 days’ written notice to us. In such event, all out-licensed product rights would revert to us. 3. Debt Securities The following table presents the amortized cost, unrealized gain and loss recognized in accumulated other comprehensive income (loss) and fair value of debt securities available-for-sale, aggregated by major security type and contractual maturity. March 31, 2022 December 31, 2021 (in millions) Contractual Maturity Amortized Cost Unrealized Gain Unrealized Loss Fair Value Amortized Cost Unrealized Gain Unrealized Loss Fair Value Commercial paper 0 to 1 years $ 99.1 $ — $ ( 0.4 ) $ 98.7 $ 204.8 $ — $ — $ 204.8 Corporate debt securities 0 to 1 years 163.7 — ( 1.1 ) 162.6 128.2 — ( 0.1 ) 128.1 Securities of government-sponsored entities 0 to 1 years 134.6 — ( 1.2 ) 133.4 37.6 — — 37.6 $ 397.4 $ — $ ( 2.7 ) $ 394.7 $ 370.6 $ — $ ( 0.1 ) $ 370.5 Corporate debt securities 1 to 3 years $ 341.8 $ — $ ( 5.2 ) $ 336.6 $ 358.9 $ — $ ( 1.5 ) $ 357.4 Securities of government-sponsored entities 1 to 3 years 209.3 — ( 4.9 ) 204.4 204.3 — ( 1.0 ) 203.3 $ 551.1 $ — $ ( 10.1 ) $ 541.0 $ 563.2 $ — $ ( 2.5 ) $ 560.7 As of March 31, 2022, our security portfolio consisted of 174 debt securities available-for-sale, including 168 such securities that were in an unrealized loss position but of high credit quality. Unrealized losses on these investments were primarily due to changes in interest rates. We do not intend to sell these investments and it is not more likely than not that we will be required to sell these investments before recovery of their amortized cost basis. No allowance for credit losses was recognized as of March 31, 2022 or December 31, 2021. The following table presents debt securities available-for-sale that were in an unrealized loss position as of March 31, 2022, aggregated by major security type and length of time in a continuous loss position. Less Than 12 Months 12 Months or Longer Total (in millions) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Commercial paper $ 82.0 $ ( 0.4 ) $ — $ — $ 82.0 $ ( 0.4 ) Corporate debt securities $ 464.0 $ ( 5.9 ) $ 18.8 $ ( 0.4 ) $ 482.8 $ ( 6.3 ) Securities of government-sponsored entities $ 326.1 $ ( 5.8 ) $ 10.7 $ ( 0.3 ) $ 336.8 $ ( 6.1 ) The following table presents debt securities available-for-sale that were in an unrealized loss position as of December 31, 2021, aggregated by major security type and length of time in a continuous loss position. Less Than 12 Months 12 Months or Longer Total (in millions) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Corporate debt securities $ 428.6 $ ( 1.6 ) $ — $ — $ 428.6 $ ( 1.6 ) Securities of government-sponsored entities $ 230.5 $ ( 1.0 ) $ — $ — $ 230.5 $ ( 1.0 ) 11 Accrued interest receivables on debt securities available-for-sale totaled $ 3.0 million and $ 2.2 million, respectively, as of March 31, 2022 and December 31, 2021. We do not measure an allowance for credit losses for accrued interest receivables. For the purposes of identifying and measuring an impairment, accrued interest is excluded from both the fair value and amortized cost basis of the debt security. Uncollectible accrued interest receivables associated with an impaired debt security are reversed against interest income upon identification of the impairment. No accrued interest receivables were written off during the three months ended March 31, 2022 or 2021. 4. Fair Value Measurements We record cash equivalents, debt securities available-for-sale and equity security investments 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 fair value hierarchy consists of the following 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. Investments in debt securities available-for-sale are classified as Level 2 and carried at fair value. We estimate the fair value of debt securities available-for-sale by utilizing third-party pricing services. These pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. Such inputs include market pricing based on real-time trade data for similar instruments, issuer credit spreads, benchmark yields, broker/dealer quotes and other observable inputs. We validate valuations obtained from third-party pricing services by understanding the models used, obtaining market values from other pricing sources and analyzing data in certain instances. Investments in equity securities of certain companies that are subject to holding period restrictions longer than one year are classified as Level 3 and carried at fair value using an option pricing valuation model. The most significant assumptions within the option pricing valuation model are the stock price volatility, which is based on the historical volatility of similar companies and the discount for lack of marketability related to the term of the restrictions. We deem transfers between levels of the fair value hierarchy to have occurred at the end of the reporting period during which the event or change in circumstances that caused the transfer occurred. The following table presents a summary of investments, which were measured at fair value on a recurring basis. March 31, 2022 December 31, 2021 Fair Value Leveling Fair Value Leveling (in millions) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Cash and cash equivalents: Cash and money market funds $ 270.2 $ 270.2 $ — $ — $ 340.8 $ 340.8 $ — $ — Restricted cash: Certificates of deposit 7.8 7.8 — — 3.2 3.2 — — Debt securities available-for-sale: Commercial paper 98.7 — 98.7 — 204.8 — 204.8 — Corporate debt securities 499.2 — 499.2 — 485.5 — 485.5 — Securities of government-sponsored entities 337.8 — 337.8 — 240.9 — 240.9 — Equity securities: Equity securities–biotechnology industry 91.3 91.3 — — 63.7 52.7 — 11.0 $ 1,305.0 $ 369.3 $ 935.7 $ — $ 1,338.9 $ 396.7 $ 931.2 $ 11.0 12 The following table presents a reconciliation of equity security investments, which were measured at fair value on a recurring basis using significant unobservable inputs (Level 3). Three Months Ended March 31, (in millions) 2022 2021 Balance at beginning of period $ 11.0 $ 38.2 Unrealized gain included in earnings (1) 20.8 0.7 Transfers out of Level 3 (2) ( 31.8 ) — Balance at end of period $ — $ 38.9 _________________________ (1) Unrealized gains and losses on restricted equity security investments are included in other income (expense), net. (2) Our equity security investment in Voyager was transferred from Level 3 to Level 1 as the associated holding period restriction expired. 5. Inventories Inventories consisted of the following: (in millions) March 31, 2022 December 31, 2021 Raw materials $ 9.2 $ 11.2 Work in process 4.4 3.6 Finished goods 15.4 15.7 Total inventories $ 29.0 $ 30.5 6. Cash, Cash Equivalents and Restricted Cash The following table presents a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the condensed consolidated statements of cash flows. (in millions) March 31, 2022 March 31, 2021 Cash and cash equivalents $ 270.2 $ 352.6 Restricted cash included in other assets 7.8 3.2 Total cash, cash equivalents and restricted cash $ 278.0 $ 355.8 7. Leases Our operating leases that have commenced have terms that expire beginning 2024 through 2031 and consist of office space and research and development laboratories, including our corporate headquarters. Certain of these lease agreements contain clauses for renewal at our option. As we were not reasonably certain to exercise any of these renewal options at commencement of the associated leases, no such options were recognized as part of our operating lease right-of-use, or ROU, assets or operating lease liabilities. On February 8, 2022, we entered into a lease agreement for a four-building campus facility to be constructed in San Diego, California, pursuant to which we also secured a six-year option for the construction of a fifth building and an option to purchase the entire campus facility, which will consist of office space and research and development laboratories, in the future. Upon completion of construction, we expect to utilize the campus facility as our new corporate headquarters. Under the terms of the lease, on a building-by-building basis, base rent will be subject to a 10-month rent abatement period following the respective lease commencement date, which dates will be determined in the future based upon achievement of substantial completion of construction with respect to each such building in the condition suitable for the installation of our furniture, fixtures, and equipment, and on which date we will record a lease liability, corresponding right-of-use asset, and begin lease expense recognition with respect to each such building. After the rent abatement period, monthly base rent will be $ 6 per square foot, subject to annual escalations of 3 % during the initial 13.6-year lease term, which term we have the option to renew for two additional terms of five years each. In connection with our operating leases, in lieu of a cash security deposits, Wells Fargo Bank, N.A., issued letters of credit on our behalf, which are secured by deposits totaling $ 7.8 million. 13 The following table presents supplemental operating lease information for operating leases that have commenced. Three Months Ended March 31, (in millions, except weighted average data) 2022 2021 Operating lease cost $ 4.1 $ 3.4 Cash paid for amounts included in the measurement of operating lease liabilities $ 4.0 $ 2.6 March 31, 2022 March 31, 2021 Weighted average remaining lease term 8.5 years 9.8 years Weighted average discount rate 5.2 % 5.3 % The following table presents approximate non-cancelable future minimum lease payments under operating leases as of March 31, 2022. (in millions) Amount (1) 2022 (9 months remaining) $ 13.0 2023 17.9 2024 17.4 2025 15.9 2026 15.7 Thereafter 70.4 Total operating lease payments 150.3 Less accreted interest 30.9 Total operating lease liabilities 119.4 Less current operating lease liabilities included in other current liabilities 16.9 Noncurrent operating lease liabilities $ 102.5 _________________________ (1) Amounts presented in the table above exclude $ 17.2 million for 2024, $ 33.3 million for 2025, $ 41.9 million for 2026, and $ 479.7 million thereafter of approximate non-cancelable future minimum lease payments under operating leases that have not yet commenced. 8. Convertible Senior Notes On May 2, 2017, we completed a private placement of $ 517.5 million in aggregate principal amount of 2.25 % fixed-rate convertible senior notes due May 15, 2024, or the 2024 Notes, and entered into the 2017 Indenture with respect to the 2024 Notes. Interest on the 2024 Notes is due semi-annually on May 15 and November 15 of each year. In accordance with authoritative guidance in effect at the time of issuance, we were required to separately account for the liability and equity components of the 2024 Notes. The initial carrying value of the liability component of $ 368.3 million was calculated using a 7.50 % assumed borrowing rate, which reflected the market interest rate for a similar non-convertible instrument at the date of issuance. The equity component of $ 149.2 million, which was treated as a discount on the liability component and amortized over the seven-year term of the 2024 Notes using the effective interest rate method, was determined by deducting the fair value of the liability component from the par value of the 2024 Notes and recorded as an increase to additional paid-in capital on the issuance date. In addition, we allocated transaction costs of $ 14.7 million related to the issuance of the 2024 Notes to the liability and equity components based on their relative values on the issuance date. Transaction costs attributable to the liability component were being amortized over the seven-year term of the 2024 Notes using the effective interest rate method, while transaction costs attributable to the equity component were recorded as a reduction to additional paid-in capital on the issuance date. In November 2020, we entered into separate, privately negotiated transactions with certain holders of the 2024 Notes to repurchase $ 136.2 million aggregate principal amount of the 2024 Notes for an aggregate repurchase price of $ 186.9 million in cash. We accounted for the partial repurchase of the 2024 Notes as a debt extinguishment. As a result, we attributed $ 130.7 million of the aggregate repurchase price to the liability component based on the fair value of the liability component immediately before extinguishment. The fair value of the liability component was calculated at settlement using a discounted cash flow analysis with a discount rate of 3.37 %, which was the market rate for similar notes that have no conversion rights. The difference of $ 56.3 million between the fair value of the aggregate consideration remitted to certain holders of the 2024 Notes and the fair value of the liability component was attributed to the reacquisition of the equity component and recorded 14 as a reduction to additional paid-in capital. The carrying amount of the liability of $ 112.4 million at settlement was recognized as a reduction to the 2024 Notes and resulted in an $ 18.4 million loss on extinguishment, which we recognized in the fourth quarter of 2020. On January 1, 2022, we adopted ASU 2020-06 using the modified retrospective transition method, which allowed for a cumulative-effect adjustment in the period of adoption and did not require restatement of prior period amounts. Under this transition method, the cumulative effect of the accounting change increased the carrying amount of the 2024 Notes by $ 42.2 million, reduced deferred tax liabilities by $ 9.9 million, reduced additional paid-in capital by $ 106.8 million, and reduced the accumulated deficit by $ 74.5 million. The following table presents a summary of the 2024 Notes as of March 31, 2022. Principal Amount Unamortized Debt Net Carrying Amount (1) Fair Value (in millions) Discount Issuance Costs Amount Leveling 2024 Notes $ 381.2 $ — $ ( 3.5 ) $ 377.7 $ 491.7 Level 2 _________________________ (1) While the 2024 Notes were classified as a long-term liability as of March 31, 2022, the future convertibility and associated balance sheet classification will be monitored at each quarterly reporting date and determined based on the market prices of our common stock during the prescribed measurement period. In the event that we have the election to redeem the 2024 Notes or the holders of the 2024 Notes have the election to convert the 2024 Notes at any time during the prescribed measurement period, the 2024 Notes would be classified as a current obligation. The following table presents a summary of the 2024 Notes as of December 31, 2021. Principal Amount Unamortized Debt Net Carrying Amount Fair Value (in millions) Discount Issuance Costs Amount Leveling 2024 Notes $ 381.2 $ ( 43.2 ) $ ( 2.9 ) $ 335.1 $ 464.7 Level 2 The following table presents a summary of the interest expense of the 2024 Notes. Three Months Ended March 31, (in millions) 2022 2021 Coupon interest $ 2.2 $ 2.2 Amortization of debt discount and issuance costs 0.4 4.2 Total $ 2.6 $ 6.4 In December 2021, we entered into the First Supplemental Indenture to the 2017 Indenture, pursuant to which we irrevocably elected to settle the principal amount of the 2024 Notes in cash upon conversion and to settle any conversion premium, calculated based on the per share volume-weighted average price for each of the 30 consecutive trading days during the observation period (as more fully described in the 2017 Indenture), in either cash or shares of our common stock. The initial conversion rate for the 2024 Notes, which is subject to adjustment in some events (as provided for in the 2017 Indenture), is 13.1711 shares of common stock per $ 1,000 principal amount and equivalent to an initial conversion price of approximately $ 75.92 per share, reflecting a conversion premium of approximately 42.5 % above the closing price of $ 53.28 per share of our common stock on April 26, 2017. We may redeem for cash all or part of the 2024 Notes if the last reported sale price (as defined in the 2017 Indenture) of our common stock has been at least 130 % of the conversion price then in effect (equal to $ 98.70 as of March 31, 2022) 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. 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: (i) during any calendar quarter (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 (equal to $ 98.70 as of March 31, 2022) on each applicable trading day; (ii) during the five business-day period immediately after any five consecutive trading-day period (the measurement period) in which the trading price (as defined in the 2017 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; 15 (iii) upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of our assets; or (iv) 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 of the 2024 Notes may convert the 2024 Notes at any time. If we undergo a fundamental change (as defined in the 2017 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 2017 Indenture) occurs prior to January 15, 2024, we would, in certain circumstances, increase the conversion rate for a holder who elects to convert their 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. 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 us. The 2017 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. 9. Earnings per Share Earnings per share was calculated as follows: Three Months Ended March 31, (in millions, except per share data) 2022 2021 Net income - basic and diluted $ 13.9 $ 32.1 Weighted-average shares outstanding: Basic 95.3 94.2 Effect of dilutive securities: Stock options 1.5 2.1 Restricted stock 0.3 0.5 2024 Notes 0.5 1.4 Diluted 97.6 98.2 Earnings per share, basic $ 0.15 $ 0.34 Earnings per share, diluted $ 0.14 $ 0.33 Shares excluded from diluted per share amounts because their effect would have been anti-dilutive 6.0 2.7 16