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 and the Swiss Franc. As our U.S. operating entity primarily conducts its operations in U.S. dollars, its exposure to changes in foreign currency is insignificant. Similarly the exposure to changes in foreign currencies of our Swiss and French entities are insignificant as well.
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).
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Variations in exchange rates will impact earnings and other comprehensive income or loss. On December 31, 2021, 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 $42.2 million higher (December 31, 2020: $13.0 million higher), and other comprehensive income or loss would have been $23.5 million higher (December 31, 2020: $5.2 million higher). 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 $42.2 million lower (December 31, 2020: $13.0 million lower), and other comprehensive income or loss would have been $31.6 million lower (December 31, 2020: $8.3 million lower).
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 2021, 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, 2021, the loan bore an interest rate of 7.95%.
As of December 31, 2021, 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 $0.7 million (2020: $0.3 million; 2019: $0.3 million) lower.
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 and CSL Behring.
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.
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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,
2021
2020
Amount
Credit rating
Amount
Credit rating
(in thousands)
Bank
Bank of America
$
103,546
Aa2
$
73,922
Aa2
Rabobank
454,101
Aa2
173,758
Aa3
BNP Paribas
1,211
Aa3
-
-
Credit Suisse
495
Baa1
-
-
Total
$
559,353
$
247,680
Ratings are by Moody’s.
Liquidity Risk
We believe our cash and cash equivalents as of December 31, 2021 will fund our operations into the first half of 2025 assuming achievement of $230.0 million related to BLA and MAA submissions as well as first commercial sales milestones under the CSL Behring Agreement. 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, 2021
Long-term debt
$
—
$
7,984
$
26,054
$
101,549
$
—
Accounts payable, accrued expenses and other current liabilities
—
30,989
—
—
—
Derivative financial instrument
2,805
—
—
—
—
Commitments related to Corlieve acquisition (nominal amounts)
226,862
2,269
—
—
—
Total
$
229,667
$
41,242
$
26,054
$
101,549
$
—
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
$
—
$
—
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We previously had BMS warrants under the BMS CLA which we derecognized 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.
In relation to the Corlieve Transaction, we entered into commitments to make payments to the former shareholders upon the achievement of certain contractual milestones. The commitments include payments related to post-acquisition services that we agreed to as part of the SPA. The timing of achieving these milestones, as well as whether the milestone will be achieved at all, and consequently the timing of payments is generally uncertain with the exception of a payment we owe upon acquiring the remaining outstanding shares as well as certain payments for post-acquisition services in 2022. We expect these obligations will become payable between 2022 and 2031. If and when due, up to 25% of the milestone payments can be settled with our ordinary shares .
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and the notes thereto, included in Part IV, Item 15, are incorporated by reference into this Item 8.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.