Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of financial risks in the normal course of our business, including market risk (including currency, price, and interest rate risk), credit risk and liquidity risk. Our overall risk management program focuses on preservation of capital and the unpredictability of financial markets and has sought to minimize potential adverse effects on our financial performance and position.
Market Risk
Currency risk
We are exposed to foreign exchange risk arising from various currencies, primarily with respect to the U.S. dollar and euro and to a lesser extent to the British pound. As our U.S. operating entity primarily conducts its operations in U.S. dollars, its exposure to changes in foreign currency is insignificant.
Our Dutch entities hold significant amounts of U.S. dollars in cash and cash equivalents, have debt and interest obligations to Hercules denominated in U.S. dollars, generate collaboration revenue denominated in U.S. dollars, receive services from vendors denominated in U.S. dollars and occasionally British Pounds and fund the operations of our U.S. operating entity in U.S. dollars. Foreign currency denominated account receivables and account payables are short-term in nature (generally 30 to 45 days).
Variations in exchange rates will impact earnings and other comprehensive income. On December 31, 2020, if the euro had weakened 10% against the U.S. dollar with all other variables held constant, pre-tax earnings for the year would have been $13.0 million higher (December 31, 2019: $24.7 million higher), and other comprehensive income would have been $5.2 million higher (December 31, 2019: $31.9 million lower). Conversely, if the euro had strengthened 10% against the U.S. dollar with all other variables held constant, pre-tax earnings for the year would have been $13.0 million lower (December 31, 2019: $24.7 million lower), and other comprehensive income would have been $8.3 million lower (December 31, 2019: $31.8 million higher).
We strive to mitigate foreign exchange risk through holding sufficient funds in euro and dollars to finance budgeted cash flows for the next year.
The sensitivity in other comprehensive income to fluctuations in exchange rates primarily relates to the translation of the net assets of our Dutch entities from their functional currency euro into our reporting currency U.S. dollar.
Price risk
The market prices for the provision of preclinical and clinical materials and services, as well as external contracted research, may vary over time.
The commercial prices of any of our products or product candidates are currently uncertain.
We are not exposed to commodity price risk.
We do not hold investments classified as available-for-sale or at fair value through profit or loss; therefore, we are not exposed to equity securities price risk.
Interest rate risk
Our interest rate risk arises from short- and long-term debt. In June 2013, we entered into the Hercules Agreement, which was last amended and restated in December 2018, under which our borrowings bear interest at a variable rate with a fixed floor. Long-term debt issued at fixed rates expose us to fair value interest rate risk. As of December 31, 2020, the loan bore an interest rate of 8.85%.
As of December 31, 2020, if interest rates on borrowings had been 1.0% higher with all other variables held constant, pre-tax earnings for the year would have been $0.3 million (2019: $0.3 million; 2018: $0.2 million) lower.
105
Table of Contents
Credit Risk
Credit risk is managed on a consolidated basis. Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, outstanding receivables and committed transactions with collaboration partners and security deposits paid to landlords. We currently have no wholesale debtors other than BMS.
We deposited funds as security to our landlords related to our facility in Lexington, Massachusetts, and our facility in Amsterdam. We also deposited funds to the provider of our U.S. corporate credit cards. The deposits are neither impaired nor past due.
Our cash and cash equivalents include bank balances, demand deposits and other short-term highly liquid investments (with maturities of less than three months at the time of purchase) that are readily convertible into a known amount of cash and are subject to an insignificant risk of fluctuation in value. Restricted cash includes deposits made in relation to facility leases. Cash, cash equivalents and restricted cash were placed at the following banks:
As of December 31,
2020
2019
Amount
Credit rating
Amount
Credit rating
(in thousands)
Bank
Bank of America
$
73,922
Aa2
$
315,720
Aa2
Rabobank
173,758
Aa3
63,262
Aa3
Citizens Bank
—
-
1,744
A1
Total
$
247,680
$
380,726
Ratings are by Moody’s.
Liquidity Risk
We believe our cash and cash equivalents as of December 31, 2020, combined with the $100.0 million 2021 Amended Facility will enable us to fund our operating expenses, including our debt repayment obligations, as they become due and capital expenditure requirements into the second half of 2022. In the event that we receive the $450.0 million payment due on the closing of the CSL Behring Agreement, we expect that our cash and cash equivalents will be sufficient to fund operations into the second half of 2024 (assuming a full repayment of funds borrowed from Hercules under our term loan facility by 2023). We manage liquidity through a rolling forecast of our liquidity reserve based on expected cash flows and raise cash if needed, either through the issuance of shares or credit facilities.
The table below analyzes our financial liabilities in relevant maturity groupings based on the length of time until the contractual maturity date, as of the balance sheet date. Disclosed in the table below are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying value as the impact of discounting is not significant.
Less than
Between
Between
Undefined
1 year
1 - 3 years
3 - 5 years
Over 5 years
(in thousands)
At December 31, 2019
Long-term debt
$
—
$
4,119
$
28,143
$
14,269
$
—
Accounts payable, accrued expenses and other current liabilities
—
18,138
—
—
—
Derivative financial instruments
3,075
—
—
—
—
Total
$
3,075
$
22,257
$
28,143
$
14,269
$
—
At December 31, 2020
Long-term debt
$
—
$
3,141
$
39,271
$
—
$
—
Accounts payable, accrued expenses and other current liabilities
—
21,810
—
—
—
Derivative financial instruments
2,645
—
—
—
—
Total
$
2,645
$
24,951
$
39,271
$
—
$
—
106
Table of Contents
Due to uncertainty of timing of exercise of warrants by BMS, the amount owed to derivative financial instruments was classified as undefined in time as of December 31, 2019. We derecognized the warrants on December 1, 2020 when these were terminated by the amended BMS CLA. On December 1, 2020 we recognized a derivative financial liability related to the CoC-payment. Generally, the CoC-payment would be due to BMS upon the consummation of a change in control transaction prior to November 30, 2026 or BMS’s delivery of cessation notices for all four active Collaboration Targets. The derivative financial liability therefore has no contractual maturity date.