Item 7. Management’s Discussion and Analysis
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements within the meanings of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the “Risk Factors” section in Item 1A of Part I of this Form 10-K. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.
Overview
We are a biopharmaceutical company that develops and commercializes innovative products to enhance cancer care and improve treatment outcomes for patients. We are currently commercializing NERLYNX, an oral version of neratinib, for the treatment of certain HER2-positive breast cancers. Additionally, we recently in-licensed and are responsible for global development and commercialization of alisertib. Alisertib is a selective, small-molecule inhibitor of aurora kinase A that is designed to disrupt mitosis leading to apoptosis of rapidly proliferating tumor cells that are dependent on aurora kinase A. Prior to our licensing alisertib from Takeda, alisertib was tested in over 1,300 patients who were treated across 22 company-sponsored trials resulting in a large, well-characterized clinical safety database. Based on information in this database, we believe alisertib has potential application in the treatment of a range of different cancer types, including hormone receptor-positive breast cancer, triple-negative breast cancer and small cell lung cancer. We intend to pursue development of alisertib initially in small cell lung cancer and hormone receptor-positive breast cancer.
NERLYNX is currently approved in the United States for two indications: the extended adjuvant treatment of adult patients with early stage HER2-overexpressed/amplified breast cancer following adjuvant trastuzumab-based therapy and for use in combination with capecitabine for the treatment of adult patients with advanced or metastatic HER2-positive breast cancer who have received two or more prior anti-HER2-based regimens in the metastatic setting.
We currently market NERLYNX in the United States using our direct specialty sales force consisting of approximately 38 sales specialists. Our sales specialists are supported by an experienced sales leadership team consisting of regional managers and directors, as well as a commercial team of experienced professionals in marketing, access and reimbursement, managed markets, marketing research, commercial operations and sales force planning and management. Outside the United States, we seek to enter into exclusive sub-license agreements with third parties to pursue regulatory approval, if necessary, and commercialize NERLYNX, if approved. As of December 31 2023, NERLYNX has received approval for the treatment of certain patients with extended adjuvant or metastatic HER2-positive breast cancer in over 50 countries outside the United States. We are currently party to several sub-licenses in various regions outside the United States, including Europe (excluding Russia and Ukraine), Australia, Canada, China, Southeast Asia, Israel, South Korea, and various countries and territories in Central America, South America and Africa.
In September 2022, we entered into an exclusive license agreement with Takeda Pharmaceutical Company Limited (“Takeda”) to license the worldwide research and development and commercial rights to alisertib. Alisertib is an investigational, reversible, ATP-competitive inhibitor that is designed to be highly selective for aurora kinase A. Inhibition of aurora kinase A can lead to disruption of mitotic spindle apparatus assembly, disruption of chromosome segregation, and inhibition of cell proliferation. In clinical trials to date, alisertib had shown single agent activity and activity in combination with other cancer drugs in the treatment of many different types of cancers, including hormone receptor-positive breast cancer, triple - negative breast cancer, small cell lung cancer and head and neck cancer. We initiated the ALISertib in CAncer (ALISCA-Lung1) Phase II trial (PUMA-ALI-4201) of alisertib monotherapy for the treatment of patients with extensive stage small cell lung cancer in February 2024, and we plan to commence the ALISCA-Breast 1 trial in the second half of 2024.
Under the terms of the exclusive license agreement, we assumed sole responsibility for the global development and commercialization of alisertib. We paid Takeda an upfront license fee of $7.0 million in October 2022 , and it is eligible to receive potential future milestone payments of up to $287.3 million upon our achievement of certain regulatory and commercial milestones over the course of the exclusive license agreement, as well as tiered royalty payments for any net sales of alisertib. We recorded in-process research and development expense of $7.0 million during the year ended December 31, 2022, in connection with the up-front payment related to the asset acquisition. As of December 31, 2023, no milestones had been accrued as the underlying contingencies were not probable or estimable.
Our expenses to date have been related to hiring staff, commencing company-sponsored clinical trials and the build out of our corporate infrastructure and, since 2017, the commercial launch of NERLYNX. Going forward we anticipate significant expenses as we continue to develop NERLYNX in additional indications and as we pursue the development of alisertib in 2024. Accordingly, our success depends not only on the safety and efficacy of our drug candidates, but also on our ability to finance product development. To date, our major sources of working capital have been proceeds from product and license revenue, public offerings of our common stock, proceeds from our credit facility and sales of our common stock in private placements. We intend to satisfy our near-term liquidity requirements through a combination of our existing cash and cash equivalents and marketable securities as of December 31, 2023, and proceeds that will become available to us through product sales, royalties and sub-license milestone payments. However, this intention is based on assumptions that may prove to be wrong. Changes may occur that would consume our available capital faster than anticipated, including changes in and progress of our development activities, the impact of commercialization efforts, acquisitions of additional drug candidates and changes in regulation. Some of these developments have had and may continue to have an adverse effect on our revenue and thus could have an adverse effect on our ability to satisfy the minimum revenue and cash balance covenants contained in the Athyrium Notes.
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Summary of Income and Expenses
Product revenue, net
Product revenue, net consists of revenue from sales of NERLYNX. We sell NERLYNX to a limited number of specialty pharmacies and specialty distributors in the United States. We record revenue at the net sales price, which includes an estimate for variable consideration for which reserves are established. Variable consideration consists of trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates and other incentives.
Product revenue also consists of product sales under sub-license agreements to our sub-licensees, who then sell into their respective international territories.
License revenue
License revenue consists of consideration earned for performance obligations satisfied pursuant to our sub-license agreements.
Royalty revenue
Royalty revenue consists of consideration earned related to product sales made by our sub-licensees in their respective territories pursuant to our license agreements.
Cost of sales
Cost of sales consists of third-party manufacturing costs, freight, and indirect overhead costs associated with sales of NERLYNX. Cost of product sales also includes period costs related to royalty charges payable to Pfizer, the amortization of milestone payments under our license agreement with Pfizer, certain inventory manufacturing services, inventory adjustment charges, unabsorbed manufacturing and overhead costs, and manufacturing variances. Cost of sales includes applicable license termination fees.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses, consist primarily of salaries and payroll-related costs, stock-based compensation expense, professional fees, business insurance, rent, general legal activities, credit loss expense and other corporate expenses. We expense SG&A costs as they are incurred.
Research and development expenses
Research and development (“R&D”) expenses include costs associated with services provided by consultants who conduct clinical services on our behalf, contract organizations for manufacturing of clinical materials and clinical trials. During the years ended December 31, 2023, 2022 and 2021, our R&D expenses consisted primarily of CRO fees, fees paid to consultants, salaries and related personnel costs and stock-based compensation. We expense our R&D costs as they are incurred. Internal R&D expenses primarily consist of payroll-related costs and also include equipment costs, travel expenses and supplies. We expect R&D expenses to increase significantly in 2024 as we initiate two Phase II clinical trials of alisertib.
Acquired In-Process Research and Development Expense
Acquired in-process research and development expense includes the rights to develop new drug candidates. Payments to acquire a new drug candidate are immediately expensed as acquired in-process research and development provided that the drug candidate has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use.
Results of Operations
The following summarizes our results of operations for the years ended December 31, 2023 and 2022. For discussion related to the results of operations and changes in financial condition for the year ended December 31, 2022, compared to the year ended December 31, 2021, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the Year Ended December 31, 2022, which was filed with the United States Securities and Exchange Commission on March 2, 2023.
Total revenue
Total revenue was approximately $235.6 million for the year ended December 31, 2023, compared to $228.0 million for the year ended December 31, 2022. This increase in total revenue of $7.6 million was due to an increase in product revenue, net of approximately $3.1 million and an increase in royalty revenue of $4.5 million.
Product revenue, net
Product revenue, net was approximately $203.1 million for the year ended December 31, 2023 , compared to $200.0 million for the year ended December 31, 2022 . The increase in product revenue, net was primarily attributable to an increase in net selling price, partially offset by a volume decrease of approximately 6.3% in bottles of NERLYNX sold. Reserves for variable consideration were approximately 17.9% of product revenue for the years ended December 31, 2023 and 2022.
License revenue
There was no license revenue for the years ended December 31, 2023 and December 31, 2022 .
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Royalty revenue
Royalty revenue was approximately $32.5 million for the year ended December 31, 2023 , compared to $28.0 million for the year ended December 31, 2022 . The increase was due to increased product sales by our sub-licensees as they increased commercialization of NERLYNX in additional territories, including an increase in China sales.
Cost of sales
Cost of sales was approximately $62.7 million for the year ended December 31, 2023 , compared to $55.1 million for the year ended December 31, 2022 . The $7.6 million increase was primarily due to the increase of product unit sales to our sub-licensees and the related cost of sales, including higher royalty expense. There was also an increase in intangible amortization related to the $12.5 million we paid to Pfizer for meeting a commercial sales milestone as of December 31, 2022.
Selling, general and administrative expenses:
Selling, general, and administrative expenses
For the Year Ended
Change
(in thousands)
December 31,
$
%
2023
2022
2023/2022
2023/2022
Payroll and related costs
$
33,436
$
29,933
$
3,503
11.7
%
Provision for credit loss
881
—
881
100.0
%
Professional fees and expenses
34,011
38,122
(4,111
)
-10.8
%
Travel and meetings
5,537
5,057
480
9.5
%
Facilities and equipment costs
5,116
5,338
(222
)
-4.2
%
Stock-based compensation
6,909
8,046
(1,137
)
-14.1
%
Loss on impairment of asset
625
—
625
100.0
%
Other
3,418
3,482
(64
)
-1.8
%
$
89,933
$
89,978
$
(45
)
-0.1
%
Total SG&A expenses were consistent at approximately $90.0 million for the years ended December 31, 2023 and December 31, 2022. The slight increase is primarily attributable to the following:
•
an increase in payroll and related costs of approximately $3.5 million, primarily due to a $2.0 million tax credit under the Coronavirus Aid Relief Economic Security Act (the “CARES Act”) recorded during the year ended December 31, 2022, without a comparable tax credit in 2023, a $2.9 million increase in salary and benefits, offset by a decrease of $1.5 million in bonus expense;
•
an increase in provision for credit loss of approximately $0.9 million, due to royalties receivable due from a sub-license partner, compared to no provision for credit loss expense for the year ended December 31, 2022;
•
an increase in travel and meetings expense of approximately $0.5 million, primarily due to additional sales field personnel in 2023; and
•
an increase in loss on impairment of asset expense of $0.6 million in connection with our decision to sublease a portion of our leased office space, which was recorded as an operating asset in accordance with ASC 842.
The increases above were partially offset by:
•
a decrease in professional fees and expenses of approximately $4.1 million, primarily due to a decrease in consultant and contractor expenses approximately $3.1 million, a decrease in insurance and other expenses of approximately $1.8 million, offset by an increase in legal fees of approximately $0.8 million; and
•
a decrease in stock-based compensation expense of approximately $1.1 million, primarily due to lower fair value on equity grants as a result of a lower market price for our common stock.
Research and development expenses:
Research and development expenses
For the Year Ended
Change
(in thousands)
December 31,
$
%
2023
2022
2023/2022
2023/2022
Clinical trial expense
$
13,611
$
17,367
$
(3,756
)
-21.6
%
Internal R&D
30,731
27,511
3,220
11.7
%
Consultant and contractors
2,701
3,582
(881
)
-24.6
%
Stock-based compensation
3,339
3,780
(441
)
-11.7
%
$
50,382
$
52,240
$
(1,858
)
-3.6
%
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Total R&D expenses decreased approximately 3.6% to $50.4 million for the year ended December 31, 2023 from approximately $52.2 million for the year ended December 31, 2022. The decrease is primarily attributable to the following:
•
a decrease in clinical trial expense of approximately $3.8 million, primarily due to the reduction and closure of clinical trial sites with respect to NERLYNX;
•
a decrease in consultant and contractors of approximately $0.9 million, primarily due to the reduction and closure of clinical trial sites with respect to NERLYNX; and
•
a decrease in stock-based compensation of approximately $0.4 million, primarily due to lower fair value on equity grants as a result of a lower market price for our common stock.
The decreases above were partially offset by:
•
an increase in internal R&D of approximately $3.2 million, primarily due to a $1.8 million tax credit recorded during the year ended December 31, 2022 under the CARES Act without a comparable tax credit in 2023, and approximately $1.3 million increase primarily due to 2023 salary increases.
Acquired In-Process Research and Development Expense
For the year ended December 31, 2022, we entered into an exclusive license agreement with Takeda to license the worldwide research and development and commercial rights to alisertib, a new drug candidate. We recorded acquired in-process research and development expense related to the up-front payment of $7.0 million.
Other income and expenses:
Other income (expenses)
For the Year Ended
Change
(in thousands)
December 31,
$
%
2023
2022
2023/2022
2023/2022
Interest income
$
2,605
$
813
$
1,792
220.4
%
Interest expense
(13,330
)
(11,592
)
(1,738
)
15.0
%
Legal verdict expense
—
(12,456
)
12,456
-100.0
%
Other income
759
(28
)
787
-2810.7
%
$
(9,966
)
$
(23,263
)
$
13,297
-57.2
%
Interest income
For the year ended December 31, 2023, we recognized approximately $2.6 million in interest income compared to approximately $0.8 million of interest income for the year ended December 31, 2022. The $1.8 million increase in interest income was primarily the result of higher interest rates and an increase in return on investment securities compared to the same period in 2022.
Interest expense
For the year ended December 31, 2023, we recognized approximately $13.3 million in interest expense compared to approximately $11.6 million of interest expense for the year ended December 31, 2022. The approximately $1.7 million increase in interest expense was primarily related to higher interest rates on our Athyrium Notes, which is partially determined by the three-month SOFR rate, as well as imputed interest on $8.0 million related to the final installment payment on the Eshelman litigation settlement due on or before November 1, 2024.
Legal verdict expense
For the year ended December 31, 2022, we increased our legal expense accrual by approximately $12.5 million with respect to the Eshelman v. Puma Biotechnology, Inc., et al. judgment. There were no such expenses for the year ended December 31, 2023.
Other income
For the year ended December 31, 2023, we recognized approximately $0.4 million in foreign currency transaction gains related to euro denominated receivables with an international partner.
Non-GAAP Financial Measures:
In addition to our operating results, as calculated in accordance with generally accepted accounting principles in the United States, (“GAAP”), we use certain non-GAAP financial measures when planning, monitoring, and evaluating our operational performance. The following table presents our net income (loss) and net income (loss) per share, as calculated in accordance with GAAP, as adjusted to remove the impact of stock-based compensation. For the year ended December 31, 2023, stock-based compensation represented approximately 7.3% of the total of SG&A and R&D expenses. Our management believes that these non-GAAP financial measures are useful to enhance understanding of our financial performance, are more indicative of our operational performance and facilitate a better comparison among fiscal periods. These non-GAAP financial measures are not, and should not be viewed as, substitutes for GAAP reporting measures.
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Reconciliation of GAAP Net Loss to Non-GAAP Adjusted Net Income (Loss) and GAAP Net Loss Per Share to Non-GAAP Adjusted Net Income (Loss) Per Share
(in thousands except share and per share data)
For the Year Ended December 31,
2023
2022
GAAP net income
$
21,591
$
2
Adjustments:
Stock-based compensation -
Selling, general and administrative (1)
6,908
8,046
Research and development (2)
3,339
3,780
Non-GAAP adjusted net income
$
31,838
$
11,828
GAAP net income per share—basic
$
0.46
$
—
Adjustment to net income (as detailed above)
0.22
0.26
Non-GAAP adjusted basic net income per share
$
0.68
(3)
$
0.26
(3)
GAAP net income per share—diluted
$
0.45
$
—
Adjustment to net income (as detailed above)
0.22
0.26
Non-GAAP adjusted diluted net income per share
$
0.67
(4)
$
0.26
(4)
(1) To reflect a non-cash charge to operating expense for selling, general, and administrative stock-based compensation.
(2) To reflect a non-cash charge to operating expense for research and development stock-based compensation.
(3) Non-GAAP adjusted basic net income per share was calculated based on 47,134,331 and 44,674,501 weighted-average shares of common stock outstanding for the years ended December 31, 2023 and 2022, respectively.
(4) Non-GAAP adjusted diluted net income per share was calculated based on 47,550,852 and 44,929,998 weighted-average shares of common stock outstanding for the years ended December 31, 2023 and 2022, respectively.
Liquidity and Capital Resources
The following table summarizes our liquidity and capital resources as of and for the years ended December 31, 2023 and 2022 and is intended to supplement the more detailed discussion that follows:
As of
As of
Liquidity and capital resources (in thousands)
December 31, 2023
December 31, 2022
Cash and cash equivalents
$
84,585
$
76,201
Marketable securities
$
11,354
$
4,873
Working capital
$
56,803
$
56,797
Long term debt
$
65,659
$
98,307
Stockholders' equity
$
53,442
$
21,608
We also have long-term debt, net of $65.7 million and $98.3 million for the years ended December 31, 2023 and 2022, respectively, related to our Athyrium debt.
Year Ended
Year Ended
December 31, 2023
December 31, 2022
Cash provided by (used in):
Operating activities
$
27,009
$
(15,827
)
Investing activities
(19,125
)
7,104
Financing activities
—
12,223
Net increase in cash, cash equivalents and restricted cash
$
7,884
$
3,500
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Operating Activities
We recorded net income of approximately $21.6 million and two thousand dollars for the years ended December 31, 2023 and 2022 , respectively. We recorded cash flows from operating activities of approximately $27.0 million for the year ended December 31, 2023 and recorded negative cash flows from operating activities of approximately $15.8 million for the year ended December 31, 2022 .
Net cash provided by operating activities for the year ended December 31, 2023 was $27.0 million which consisted of net income of $21.6 million, adjusted for non-cash items of approximately $23.3 million, including stock-based compensation of $10.2 million, and depreciation and amortization of $11.5 million, provision of credit loss of $0.9 million and loss on impairment of ROU asset of $0.6 million. Total changes in cash flows from operations were due to changes in working capital and primarily related to an increase in inventory of approximately $2.6 million (increase in inventory purchases) and an increase in accounts receivable, net of approximately $8.4 million (increase and timing of fourth quarter total revenues) and a decrease in accrued expenses of approximately $7.6 million.
Net cash used in operating activities for the year ended December 31, 2022 of $15.8 million consisted of net income of two thousand dollars, adjusted for non-cash items of approximat ely $21.7 mil lion, including stock-based compensation and depreciation and amortization. Total changes in cash flows from operations were due to changes in working capital and included a decrease in inventory of approximately $2.6 million and a decrease in prepaid expenses and other of approximately $2.4 million. These changes were offset by an increase in accounts receivable, net of approximately $7.8 million, an increase in other current assets of approximately $2.0 million, a decrease in post-marketing commitment liability of approximately $0.9 million, a decrease in accounts payable of approximately $4.7 million, and a decrease in accrued expenses of approximately $33.1 million.
Investing Activities
During the year ended December 31, 2023, cash used in investing activities was approximately $19.1 million. Cash used in investing activities was primarily due to the purchase of the intangible asset of $12.5 million we paid to Pfizer for meeting a commercial sales milestone and the purchase of available-for-sale securities of approximately $23.8 million, partially offset by the maturities of available-for-sale securities of approximately $17.3 million.
During the year ended December 31, 2022, cash provided by investing activities was approximately $7.1 million. This included the maturity of available-for-sale securities of approximately $18.9 million, partially offset by the purchase of available-for-sale securities of approximately $4.8 million, and the purchase of in-process R&D of $7.0 million as part of the Takeda Agreement.
Financing Activities
There were no financing activities recorded for the year ended December 31, 2023 . Cash provided by financing activities for the year ended December 31, 2022 was approximately $12.2 million, representing cash raised, net of offering expenses, from the Purchase Agreement entered into on March 8, 2022 with Mr. Auerbach and Athyrium, and the Purchase Agreement entered into with Mr. Auerbach on December 9, 2022.
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Athyrium Note Purchase Agreement
We issued senior notes for an aggregate principal amount of $100.0 million pursuant to the note purchase agreement dated July 23, 2021, by us, and our subsidiaries, and Athyrium, as Administrative Agent, and certain other investor parties (the “Note Purchase Agreement”), with an initial maturity date of July 23, 2026 (the “Athyrium Notes”). The Athyrium Notes were issued for face amount of $100.0 million net of an original issue discount of $1.5 million. The Athyrium Notes also require a 2.0% exit payment to be made on each payment of principal. The borrowings under the Athyrium Notes, together with cash on hand, were used to repay our outstanding indebtedness, including the applicable exit and prepayment fees owed to lenders under our prior credit facility with Oxford (the “Prior Oxford Credit Facility”). We can borrow up to an additional $25.0 million under the Note Purchase Agreement for certain purposes specified in the Note Purchase Agreement. The Athyrium Notes are secured by substantially all of our assets. We incurred $1.9 million of deferred financing costs with the initial borrowing of the Athyrium Notes.
Interest on the Athyrium Notes is calculated in part based on the Secured Overnight Financing Rate (“SOFR”), which replaced the “London Interbank Offering Rate” as the floating benchmark for interest rate calculations applicable to the Athyrium Notes pursuant to the terms of the Third Amendment to Note Purchase Agreement dated as of September 16, 2022 (the “Third Amendment”). The modification of the Note Purchase Agreement pursuant to the Third Amendment did not meet the requirements of a debt extinguishment under ASC 470-50 - Debt Modifications and Exchanges and no gain or loss was recognized. We performed a quantitative analysis and determined that the terms of the new debt and original debt instrument are not substantially different. Accordingly, the Third Amendment is accounted for as a debt modification.
Following the effectiveness of the Third Amendment, the Athyrium Notes bear interest at an annual rate equal to the sum of (a) eight percent (8.00%) plus (b) the lesser of (i) the sum of (x) three-month term SOFR for an interest period of three months plus (y) 0.26161% (26.161 basis points) and (ii) three and one-half of one percent (3.50%) per annum. Interest is payable quarterly on the last business day of March, June, September and December each year. Beginning June 30, 2024, principal payments are required to be made quarterly at 11.11% of the original face amount with the remaining balance paid at maturity. Each principal payment will also include a 2.0% exit payment. As of December 31, 2023, the effective interest rate for the loan was 12.99% .
At our option, we may prepay the outstanding principal balance of the notes in whole or in part, subject to a prepayment fee of 2.0% of the amount prepaid if the prepayment occurs on or prior to the second anniversary of the issuance date of such notes, plus the present value of remaining interest that would have accrued through and including the second anniversary date, and 2.0% of the amount prepaid if the prepayment occurs after the second anniversary but on or prior to the third anniversary of the issuance date of such notes.
The Athyrium Notes include affirmative and negative covenants applicable to us. The affirmative covenants include, among others, covenants requiring us to maintain our legal existence and governmental approvals, deliver certain financial reports, maintain insurance coverage, and satisfy certain requirements regarding deposit accounts. The negative covenants include, among others, restrictions on our transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets and suffering a change in control, in each case subject to certain exceptions. We are also required to maintain minimum cash balances and to achieve certain minimum product revenue targets, measured as of the last day of each fiscal quarter on a trailing year-to-date basis.
As of December 31, 2023, the principal balance outstanding under the Athyrium Notes was $100.0 million, re presenting all of our debt. We were in compliance with all applicable covenants under the Athyrium Notes.
Current and Future Financing Needs
We did not receive or record any product revenue until the third quarter of 2017. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials, our R&D efforts and our commercialization efforts.
We may choose to begin new R&D efforts, or we may choose to launch additional marketing efforts. For example, we recently in-licensed alisertib from Takeda and assumed sole responsibility for its global development and commercialization. These efforts will require funding in addition to the cash and cash equivalents totaling approximately $84.6 million and approximately $11.4 million in marketable securities available at December 31, 2023. While our consolidated financial statements have been prepared on a going concern b asis, we may incur significant losses in the future and will need to generate sig nificant revenue to sustain operations and successfully commercialize neratinib and develop alisertib. While we have been successful in raising financing in the past, there can be no assurance that we will be able to do so in the future. Our ability to obtain funding may be adversely impacted by uncertain market conditions, our success in commercializing neratinib, our success in developing alisertib, unfavorable decisions of regulatory authorities or adverse clinical trial results. The outcome of these matters cannot be predicted at this time. We believe that our existing cash and cash equivalents and marketable securities as of December 31, 2023, and proceeds that will become available to us through product sales and sub-license payments are sufficient to satisfy our operating cash and capital needs for at least one year after the filing of this Annual Report.
In addition, we have based our estimate of capital needs on assumptions that may prove to be wrong. Changes may occur that would consume our available capital faster than anticipated, including changes in and progress of our development activities, the impact of commercialization efforts, acquisitions of additional drug candidates and changes in regulation. Potential sources of financing include strategic relationships, public or private sales of equity or debt and other sources of funds. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interests of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations, and our business, financial condition and results of operations would be materially harmed. In such an event, we will be required to undertake a thorough review of our programs, and the opportunities presented by such programs, and allocate our resources in the manner most prudent.
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Off-Balance Sheet Arrangements
We do not have any “off-balance sheet arrangements,” as defined by the SEC regulations.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent liabilities for which we cannot reasonably predict future payment. Our contractual obligations result from leases for office space and office equipment and the principal and interest owed under our Note Purchase Agreement. We also have unrecognized tax benefits that, if recognized, would affect the effective tax rate at December 31, 2023. We do not have tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefit will significantly increase or decrease within 12 months of the reporting date. Additionally, the expected timing of payment of the obligations presented below is estimated based on current information.
The following table represents our contractual obligations as of December 31, 2023, aggregated by type (in thousands):
Contractual Obligations
Total
Less than 1 year
1 - 3 years
Operating Lease Obligations
13,296
5,805
7,491
Long Term Debt Obligations (principal and interest)
119,574
44,709
74,865
Total
132,870
50,514
82,356
We also engage with CROs and contract manufacturing organizations (“CMOs”) in addition to eng aging in contracts for the management of its ongoing clinical trials and pre-commercialization efforts. We may cancel these agreements with a 30 to 45 day written notice to the outside vendor. We would be obligated to pay for services rendered up to that point, which amounts to total contractual obligations of $66.0 million within the next twelve months. The contracts also contain variable costs that are hard to predict as they are based on such things as patients enrolled and clinical trial sites, which can vary, and therefore, are not included in the total obligations amount. The remaining milestone amounts were not included in the table above as the timing of when or if these payments will be made is uncertain. As of December 31, 2023, our obligations for potential milestone payments totaled approximately $15.5 million.This amount will be paid by us if all milestones are reached and would reduce the overall contractual obligation if one or more milestone is never reached.
In regard to our contractual obligations in relation to the Pfizer in-license a greement, as consideration for the license, we are required to make substantial payments upon the achievement of certain milestones totaling approximately $187.5 million if all such milestones are achieved, of which $102.5 million have been achieved as of December 31, 2023 . The remaining milestone amounts were not included in the table above as the timing of when or if these payments will be made is uncertain. In connection with the FDA approval of NERLYNX in July 2017, we triggered a one-time milestone payment pursuant to the agreement. In June 2020, we entered into a letter agreement with Pfizer relating to the method of payment associated with a milestone payment under our license agreement with Pfizer (see Note 13-Commitments and Contingencies in the accompanying notes to the financial statements). In addition, we reached a commercial milestone by achieving aggregate worldwide net sales of $250.0 million in calendar year 2022, resulting in a payable to Pfizer of $12.5 million. The commercial milestone payable was paid in February 2023. Should we commercialize any more of the compounds licensed from Pfizer or any products containing any of these compounds, we will be obligated to pay to Pfizer annual royalties at a fixed rate in the low to mid-teens of net sales of all such products, subject to certain reductions and offsets in some circumstances. Our royalty obligation continues, on a product-by-product and country-by-country basis, until the later of (i) the last to expire licensed patent covering the applicable licensed product in such country, or (ii) the earlier of generic competition for such licensed product reaching a certain level in such country or expiration of a certain time period after first commercial sale of such licensed product in such country. In the event that we sublicense the rights granted to us under the license agreement with Pfizer to a third party, the same milestone and royalty payments are required. We can ter minate the license agreement at will, or for safety concerns, in each case upon specified advance notice.
In regard to our contractual obligations with Takeda, as consideration for the license, we are required to make substantial payments upon the achievement of certain milestones totaling $287.3 million if all such milestones are achieved. As of December 31, 2023, no milestones had been achieved.
See Note 12-Income Taxes and Note 13-Commitments and Contingencies in the accompanying notes to the financial statements for a summary of our uncertain tax positions and contracts held by us as of December 31, 2023. As of December 31, 2023, the amount of unrecognized tax benefit was $2.8 million , and is also not included in the table above as the timing of when or if these payments will be made is uncertain.
Critical Accounting Estimates
The discussion and analysis of our consolidated financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and expenses, and related disclosure of contingent assets and liabilities reported in our consolidated financial statements. The estimation process requires assumptions to be made about future events and conditions and, as a result, is inherently subjective and uncertain. Actual results could differ materially from our estimates.
The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. We consider the following policies to be critical to an understanding of our consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact our results of operations, financial position, and cash flows.
Revenue Recognition
Under Accounting Standards Codification (“ASC”) Topic 606 - Revenue from Contracts with Customers (“ ASC 606”) we recognize revenue when a customer obtains control of the promised goods or services, in an amount that reflects the consideration which we expect to be entitled in exchange for those goods or services. We had no contracts with customers until the FDA approved NERLYNX on July 17, 2017. Subsequent to receiving FDA approval, we entered into a limited number of arrangements with specialty pharmacies and specialty distributors in the United States to distribute NERLYNX. These arrangements are our initial contracts with customers. We have determined that these sales channels with customers are similar.
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Product Revenue, Net:
We sell NERLYNX to a limited number of specialty pharmacies and specialty distributors in the United States. These customers subsequently resell our products to patients and certain medical centers or hospitals. In addition to distribution agreements with these customers, we enter into arrangements with healthcare providers and payors that provide for government mandated and/or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. Product revenue also consists of product sales under sub-license agreements to our sub-licensees, who then sell into their respective international territories.
We recognize revenue on product sales when the specialty pharmacy or specialty distributor, as applicable, obtains control of our product, which occurs at a point in time (upon delivery). Product revenue is recorded net of applicable reserves for variable consideration.
Shipping and handling costs for product shipments occur prior to the customer obtaining control of the goods and are recorded in cost of sales.
Reserves for Variable Consideration:
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payor rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between us and our customers, payors, and other indirect customers relating to the sale of our products. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable or a current liability. These estimates take into consideration a range of possible outcomes that are probability-weighted in accordance with the expected value method in ASC 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.
The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Our analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a significant reversal of revenue would not occur in a future period for the estimates detailed below as of December 31, 2023 and, therefore, the transaction price was not reduced further during the year ended December 31, 2023. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances:
We generally provide customers with discounts which include incentive fees that are explicitly stated in our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we compensate (through trade discounts and allowances) our customers for sales order management, data, and distribution services. However, we have determined such services received to date are not distinct from our sale of products to the customer and, therefore, these payments have been recorded as a reduction of revenue within the statement of operations.
Product Returns:
Consistent with industry practice, we offer the specialty pharmacies and specialty distributors limited product return rights for damaged and expiring products, provided it is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. We estimate the amount of our product sales that may be returned by our customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as a reduction to accounts receivables, net on the consolidated balance sheets. We currently estimate product returns using our sales information, including our visibility into the inventory remaining in the distribution channel. We have an insignificant amount of returns to date and believe that returns of our products will continue to be minimal.
Provider Chargebacks and Discounts:
Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and a reduction to accounts receivable, net on the consolidated balance sheets. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by customers, and we generally issue credits for such amounts within a few weeks of the customer’s notification to us of the resale. Chargebacks consist of credits that we expect to issue for units that remain in the distribution channel at each reporting period end that we expect will be sold to qualified healthcare providers, and chargebacks that customers have claimed, but for which we have not yet issued a payment.
Government Rebates:
We are subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheets. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel at the end of each reporting period.
Payor Rebates:
We contract with certain private payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products. We estimate these rebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.
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Other Incentives:
Other incentives which we offer include voluntary patient assistance programs, such as the co-pay assistance program, which are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue, but remains in the distribution channel at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses on the consolidated balance sheets.
License Revenue:
We recognize license revenue under certain of our sub-license agreements that are within the scope of ASC 606. The terms of these agreements may contain multiple performance obligations, which may include licenses and research and development activities. We evaluate these agreements under ASC 606 to determine the distinct performance obligations. Non-refundable, up-front fees that are not contingent on any future performance and require no consequential continuing involvement by us, are recognized as revenue when the license term commences and the licensed data, technology or product is delivered. We defer recognition of non-refundable upfront license fees if the performance obligations are not satisfied.
Prior to recognizing revenue, we make estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration may include nonrefundable upfront license fees, payments for research and development activities, reimbursement of certain third-party costs, payments based upon the achievement of specified milestones, and royalty payments based on product sales derived from the collaboration.
If there are multiple distinct performance obligations, we allocate the transaction price to each distinct performance obligation based on its relative standalone selling price. The standalone selling price is generally determined based on the prices charged to customers or using expected cost-plus margin. Revenue is recognized by measuring the progress toward complete satisfaction of the performance obligations using an input measure.
Royalty Revenue:
For sub-license agreements that are within the scope of ASC 606, we recognize revenue when the related sales occur in accordance with the sales-based royalty exception under ASC 606-10-55-65. Royalty revenue consists of consideration earned related to international sales of NERLYNX made by our sub-licensees in their respective territories. We recognize royalty revenue when the performance obligations have been satisfied.
Legal Contingencies and Expense
For legal contingencies, we accrue a liability for an estimated loss if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated. Legal fees and expenses are expensed as incurred based on invoices or estimates provided by legal counsel. We periodically evaluate available information, both internal and external, relative to such contingencies and adjust the accrual as necessary. We determine whether a contingency should be disclosed by assessing whether a material loss is deemed reasonably possible. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the lo ss (see Note 13-Commitments and Contingencies in the accompanying notes to the financial statements).
Acquired In-Process Research and Development Expense
We have acquired, and may continue to acquire, the rights to develop new drug candidates. Payments to acquire a new drug candidate are immediately expensed as acquired in-process research and development provided that the drug candidate has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use.
Recently Issued Accounting Standards
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements – Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The ASU modifies the disclosure or presentation requirements of a variety of Topics in the Codification to align with the SEC’s regulations. The ASU also makes those requirements applicable to entities that were not previously subject to the SEC’s requirements. The ASU is effective for the Company two years after the effective date to remove the related disclosure from Regulation S-X or S-K. As of the date these financial statements have been made available for issuance, the SEC has not yet removed any related disclosure. The Company does not expect the adoption of ASU 2023-06 to have a material effect on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU requires the annual financial statements to include consistent categories and greater disaggregation of information in the rate reconciliation, and income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for the Company’s annual reporting periods beginning after December 15, 2025. Adoption is either with a prospective method or a fully retrospective method of transition. Early adoption is permitted. The Company is currently evaluating the effect that adoption of ASU 2023-09 will have on its consolidated financial statements.
Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures requires enhanced disclosures about segment expenses on an annual and interim basis. The impact of the adoption of this ASU is not expected to have a material effect on our consolidated financial statements.
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832) , which enhances disclosure of transactions with governments that are accounted for by applying a grant or contribution model. ASU 2021-10 requires entities to provide information about the nature of the transactions, the related accounting policies used to account for the transactions, the effect of the transactions on an entity's finan cial statements, and significant terms and conditions associated with the transactions. ASU 2021-10 must be adopted for fiscal years beginning after December 15, 2021. Early adoption is permitted. We adopted this guidance during 2022, and recognized approximately $3.8 million in payroll tax credits under the CARES Act.
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