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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to                         

Commission file number: 001-35668

INTERCEPT PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

    

22-3868459

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

10 Hudson Yards, 37th Floor

New York, NY 10001

(Address of Principal Executive Offices and Zip Code)

(646) 747-1000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

ICPT

Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes       No  

The number of shares of the registrant’s common stock outstanding as of March 31, 2020 was 32,937,431.

Table of Contents

Intercept Pharmaceuticals, Inc.

INDEX

PART I
FINANCIAL INFORMATION

   

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets at March 31, 2020 (Unaudited) and December 31, 2019 (Audited)

6

Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2020 and 2019 (Unaudited)

7

Condensed Consolidated Statements of Comprehensive Loss for the three-month periods ended March 31, 2020 and 2019 (Unaudited)

8

Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity for the three-month periods ended March 31, 2020 and 2019 (Unaudited)

9

Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2020 and 2019 (Unaudited)

10

Notes to Condensed Consolidated Financial Statements (Unaudited)

11

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

88

Item 6.

Exhibits

88

Exhibit Index

89

Signatures

90

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to “we,” “our,” “us” and the “Company” refer, collectively, to Intercept Pharmaceuticals, Inc., a Delaware corporation, and its consolidated subsidiaries.

2

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, including, but not limited to, statements regarding the progress, timing and results of our clinical trials, including our clinical trials for the treatment of nonalcoholic steatohepatitis (“NASH”), the safety and efficacy of our approved product, Ocaliva (obeticholic acid or “OCA”) for primary biliary cholangitis (“PBC”), and our product candidates, including OCA for liver fibrosis due to NASH, the timing and acceptance of our regulatory filings and the potential approval of OCA for liver fibrosis due to NASH or any other indications in addition to PBC, the timing and potential commercial success of OCA and any other product candidates we may develop and our strategy, future operations, future financial position, future revenue, projected costs, financial guidance, prospects, plans and objectives.

These statements constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “possible,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates, and we undertake no obligation to update any forward-looking statement except as required by law. These forward-looking statements are based on estimates and assumptions by our management that, although believed to be reasonable, are inherently uncertain and subject to a number of risks.

The following represent some, but not necessarily all, of the factors that could cause actual results to differ materially from historical results or those anticipated or predicted by our forward-looking statements:

the impact of COVID-19, including any impact on our net sales, non-GAAP adjusted operating expenses or financial position, related quarantines and government actions, delays relating to our regulatory applications, disruptions relating to our ongoing clinical trials or involving our contract research organizations, study sites or other clinical partners, disruptions relating to our supply chain or involving our third-party manufacturers, distributors or other distribution partners, facility closures or other restrictions, and the extent and duration thereof;
our ability to successfully commercialize Ocaliva for PBC;
our ability to maintain our regulatory approval of Ocaliva for PBC in the United States, Europe, Canada, Israel, Australia and other jurisdictions in which we have or may receive marketing authorization;
the initiation, timing, cost, conduct, progress and results of our research and development activities, preclinical studies and clinical trials, including any issues, delays or failures in identifying patients, enrolling patients, treating patients, retaining patients, meeting specific endpoints in the jurisdictions in which we intend to seek approval or completing and timely reporting the results of our NASH or PBC clinical trials;
our ability to timely and cost-effectively file for and obtain regulatory approval of our product candidates, including the regulatory approval of our New Drug Application for liver fibrosis due to NASH; any advisory committee recommendation that our product candidates, including OCA for liver fibrosis due to NASH, should not be approved or approved only under certain conditions; or any determination that the regulatory applications and subsequent information we submit for our product candidates, including OCA for liver fibrosis due to NASH, do not contain adequate clinical or other data or meet applicable regulatory requirements for approval;
conditions that may be imposed by regulatory authorities on our marketing approvals for our products and product candidates, including OCA for liver fibrosis due to NASH, such as the need for clinical outcomes data (and not just results based on achievement of a surrogate endpoint), any risk mitigation programs such as a REMS, and any related restrictions, limitations and/or warnings contained in the label of any of our products or product candidates;

3

Table of Contents

any potential side effects associated with Ocaliva for PBC, OCA for liver fibrosis due to NASH or our other product candidates that could delay or prevent approval, require that an approved product be taken off the market, require the inclusion of safety warnings or precautions or otherwise limit the sale of such product or product candidate;
our ability to establish and maintain relationships with, and the performance of, third-party manufacturers, contract research organizations and other vendors upon whom we are substantially dependent for, among other things, the manufacture and supply of our products, including Ocaliva for PBC and, if approved, OCA for liver fibrosis due to NASH, and our clinical trial activities;
our ability to identify, develop and successfully commercialize our products and product candidates, including our ability to timely and successfully launch OCA for liver fibrosis due to NASH, if approved;
our ability to obtain and maintain intellectual property protection for our products and product candidates, including our ability to cost-effectively file, prosecute, defend and enforce any patent claims or other intellectual property rights;
the size and growth of the markets for our products and product candidates and our ability to serve those markets;
the degree of market acceptance of Ocaliva for PBC and, if approved, OCA for liver fibrosis due to NASH or our other product candidates among physicians, patients and healthcare payors;
the availability of adequate coverage and reimbursement from governmental and private healthcare payors for our products, including Ocaliva for PBC and, if approved, OCA for liver fibrosis due to NASH, and our ability to obtain adequate pricing for such products;
our ability to establish and maintain effective sales, marketing and distribution capabilities, either directly or through collaborations with third parties;
competition from existing drugs or new drugs that become available;
our ability to prevent system failures, data breaches or violations of data protection laws;
costs and outcomes relating to any disputes, governmental inquiries or investigations, legal proceedings or litigation, including any securities, intellectual property, employment, product liability or other litigation;
our collaborators’ election to pursue research, development and commercialization activities;
our ability to establish and maintain relationships with collaborators with development, regulatory and commercialization expertise;
our need for and ability to generate or obtain additional financing;
our estimates regarding future expenses, revenues and capital requirements and the accuracy thereof;
our use of cash and short-term investments;
our ability to acquire, license and invest in businesses, technologies, product candidates and products;
our ability to attract and retain key personnel to manage our business effectively;
our ability to manage the growth of our operations, infrastructure, personnel, systems and controls;

4

Table of Contents

our ability to obtain and maintain adequate insurance coverage;
the impact of general U.S. and foreign economic, industry, market, regulatory or political conditions, including the potential impact of Brexit; and
the other risks and uncertainties identified under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q and in our other periodic filings filed with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2019.

NOTE REGARDING TRADEMARKS

The Intercept Pharmaceuticals® name and logo and the Ocaliva® name and logo are either registered or unregistered trademarks or trade names of the Company in the United States and/or other countries. All other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® and TM symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights to these trademarks and trade names.

5

Table of Contents

PART I

Item 1. Financial Statements.

INTERCEPT PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

March 31, 

December 31, 

2020

2019

    

(Unaudited)

    

(Audited)

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

41,408

$

70,055

Restricted cash

5,011

4,725

Investment debt securities, available-for-sale

 

507,628

 

582,567

Accounts receivable, net of allowance for credit losses of $179 and $0, respectively

 

43,857

 

38,044

Prepaid expenses and other current assets

 

30,287

 

25,924

Total current assets

 

628,191

 

721,315

Fixed assets, net

 

4,846

 

5,202

Inventory

 

10,260

 

8,462

Security deposits

 

6,644

 

6,661

Other assets

 

12,440

 

13,246

Total assets

$

662,381

$

754,886

Liabilities and Stockholders’ (Deficit) Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable, accrued expenses and other liabilities

$

144,518

$

153,968

Short-term interest payable

 

5,450

 

8,037

Total current liabilities

 

149,968

 

162,005

Long-term liabilities:

 

  

 

  

Long-term debt

 

538,968

 

532,078

Long-term other liabilities

 

8,164

 

9,247

Total liabilities

$

697,100

$

703,330

Commitments and contingencies (Note 16)

Stockholders’ (deficit) equity:

 

  

 

  

Common stock par value $0.001 per share; 45,000,000 shares authorized; 32,937,431 and 32,853,066 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

 

33

 

33

Additional paid-in capital

 

2,185,501

 

2,176,133

Accumulated other comprehensive loss, net

 

(3,804)

 

(1,144)

Accumulated deficit

 

(2,216,449)

 

(2,123,466)

Total stockholders’ (deficit) equity

 

(34,719)

 

51,556

Total liabilities and stockholders’ (deficit) equity

$

662,381

$

754,886

See accompanying notes to the condensed consolidated financial statements.

6

Table of Contents

INTERCEPT PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

Three Months Ended

March 31, 

    

2020

    

2019

Revenue:

 

  

 

  

Product revenue, net

$

72,652

$

51,847

Licensing revenue

 

 

405

Total revenue

 

72,652

 

52,252

Operating expenses:

 

  

 

  

Cost of sales

 

852

 

574

Selling, general and administrative

 

98,558

 

77,227

Research and development

 

56,687

 

58,396

Total operating expenses

 

156,097

 

136,197

Operating loss

 

(83,445)

 

(83,945)

Other income (expense):

 

 

  

Interest expense

 

(11,777)

 

(7,839)

Other income, net

 

2,239

 

1,514

Total other (expense), net

 

(9,538)

 

(6,325)

Net loss

$

(92,983)

$

(90,270)

Net loss per common and potential common share:

 

  

 

  

Basic and diluted

$

(2.86)

$

(3.03)

Weighted average common and potential common shares outstanding:

 

  

 

  

Basic and diluted

 

32,561

 

29,760

See accompanying notes to the condensed consolidated financial statements.

7

Table of Contents

INTERCEPT PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

Three Months Ended

March 31, 

    

2020

    

2019

Net loss

$

(92,983)

$

(90,270)

Other comprehensive (loss) income:

 

  

 

  

Net changes related to available-for-sale investment debt securities:

Unrealized (losses) gains on investment debt securities

 

(2,163)

 

803

Reclassification adjustment for realized gains on investment debt securities included in other income, net

 

9

 

4

Net unrealized (losses) gains on investment debt securities

$

(2,154)

$

807

Foreign currency translation (losses) gains

 

(512)

 

283

Other comprehensive (loss) income

$

(2,666)

$

1,090

Comprehensive loss

$

(95,649)

$

(89,180)

See accompanying notes to the condensed consolidated financial statements.

8

Table of Contents

INTERCEPT PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity

(Unaudited)

(In thousands)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

Shares

    

Amount

    

Capital

    

Loss, Net

    

Deficit

    

(Deficit) Equity

Balance - December 31, 2019

32,853

$

33

$

2,176,133

$

(1,144)

$

(2,123,466)

$

51,556

Stock-based compensation

 

 

 

12,473

 

 

 

12,473

Net proceeds from exercise of stock options

88

(1,783)

(1,783)

Employee withholding taxes related to stock-based awards

(4)

(1,322)

(1,322)

Other comprehensive loss

 

 

 

(2,660)

 

 

(2,660)

Net loss

 

 

 

 

 

(92,983)

 

(92,983)

Balance - March 31, 2020

 

32,937

$

33

$

2,185,501

$

(3,804)

$

(2,216,449)

$

(34,719)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

Shares

    

Amount

    

Capital

    

Loss, Net

    

Deficit

    

(Deficit) Equity

Balance - December 31, 2018

29,694

$

30

$

1,800,144

$

(2,259)

$

(1,778,785)

$

19,130

Stock-based compensation

14,897

14,897

Net proceeds from exercise of stock options

83

943

943

Employee withholding taxes related to stock-based awards

(791)

(791)

Other comprehensive income

1,090

1,090

Net loss

(90,270)

(90,270)

Balance - March 31, 2019

 

29,777

$

30

$

1,815,193

$

(1,169)

$

(1,869,055)

$

(55,001)

See accompanying notes to the condensed consolidated financial statements.

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INTERCEPT PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Three Months Ended March 31, 

    

2020

    

2019

Cash flows from operating activities:

 

  

 

  

Net loss

$

(92,983)

$

(90,270)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Stock-based compensation

 

12,473

 

14,897

(Accretion) amortization of (discount) premium on investment debt securities

 

536

 

(299)

Amortization of deferred financing costs

 

614

 

406

Depreciation

764

996

Non-cash operating lease cost

 

1,584

 

1,404

Gain on lease termination

(1,995)

Loss on the disposal of fixed assets

 

 

2,683

Accretion of debt discount

 

6,276

 

3,695

Provision for allowance of credit losses

179

Changes in operating assets:

 

  

 

  

Accounts receivable

 

(6,549)

 

(3,746)

Prepaid expenses and other current assets

 

(7,122)

 

752

Inventory

 

(2,377)

 

(262)

Security deposits

50

883

Other assets

(19,716)

Changes in operating liabilities:

 

  

 

  

Accounts payable, accrued expenses and other current liabilities

 

(7,899)

 

(800)

Operating lease liabilities

(1,690)

(1,638)

Interest payable

(2,587)

(3,737)

Deferred revenue

 

 

690

Long-term other liabilities

12,632

Net cash (used in) operating activities

 

(98,731)

 

(83,425)

Cash flows from investing activities:

 

  

 

  

Purchases of investment debt securities

 

(34,444)

 

(5,212)

Sales and maturities of investment debt securities

 

106,693

 

100,412

Purchases of equipment, leasehold improvements, and furniture and fixtures

 

(432)

 

(733)

Net cash provided by investing activities

 

71,817

 

94,467

Cash flows from financing activities:

 

  

 

  

Proceeds from exercise of options, net

 

569

 

943

Payments of employee withholding taxes related to stock-based awards

(1,322)

(791)

Net cash (used in) provided by financing activities

 

(753)

 

152

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

(694)

 

282

Net (decrease) increase in cash, cash equivalents and restricted cash

 

(28,361)

 

11,476

Cash, cash equivalents and restricted cash at beginning of period

 

74,780

 

43,248

Cash, cash equivalents and restricted cash at end of period

$

46,419

$

54,724

Supplemental disclosure of non-cash transactions:

Right-of-use asset obtained in exchange for new operating lease obligations

$

1,006

$

Reconciliation of cash, cash equivalents and restricted cash included in the condensed consolidated balance sheets:

Cash and cash equivalents

$

41,408

$

54,724

Restricted cash

5,011

Total cash, cash equivalents and restricted cash

$

46,419

$

54,724

See accompanying notes to the condensed consolidated financial statements.

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INTERCEPT PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.    Overview of Business

Intercept Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat progressive non-viral liver diseases, including primary biliary cholangitis (“PBC”) and nonalcoholic steatohepatitis (“NASH”). The Company currently has one marketed product, Ocaliva (obeticholic acid or “OCA”). Founded in 2002 in New York, the Company has operations in the United States, Europe and Canada.

2.    Basis of Presentation

The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany balances and transactions have been eliminated in consolidation. Certain information that is normally required by U.S. GAAP has been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission (“SEC”). Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for any future period or for the year ending December 31, 2020. In the opinion of management, these unaudited condensed consolidated financial statements include all normal and recurring adjustments considered necessary for a fair presentation of these interim unaudited condensed consolidated financial statements.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC.

Use of Estimates

The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.

We are not presently aware of any events or circumstances arising from the coronavirus (“COVID-19”) pandemic that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities.

3.    Summary of Significant Accounting Policies

With the exception of the change for the accounting of credit losses as a result of the adoption of Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments” and related amendments (collectively, “ASC 326”), there have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Credit Losses

      Accounts receivable

The allowance for credit losses is based on the Company’s assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, the aging of the accounts receivable balances, credit conditions that may affect a customer’s ability to pay, current and forecast economic conditions and other relevant factors.

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The following table summarizes the allowance for credit losses activity on the Company’s trade receivables for the three-month period ended March 31, 2020 (in thousands):

Balance at December 31, 2019

$

Provision for credit losses

190

Write-offs

(11)

Balance at March 31, 2020

$

179

Available-for-sale investment debt securities

For available-for-sale investment debt securities in an unrealized loss position, the Company first assesses whether it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the amortized cost basis is written down to fair value through income. For any investment debt securities that do not meet the criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. Management considers the extent in which the fair value of the security is less than amortized costs, any changes to the rating of the security by a rating agency, changes in interest rates, and any other adverse factors related to the security. If the assessment indicates a credit loss, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security. If the expected present value of cash flows is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value is below the amortized cost basis. Any impairment not recorded through an allowance is recognized in Other comprehensive (loss) income.

Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of the security is confirmed or whether either of the criteria regarding intent or requirement to sell is met.

The Company excludes accrued interest from both the fair value and amortized cost basis in the assessment of credit losses on its available-for-sale investment debt securities and will instead elect to write-off any uncollectible accrued interest receivable balances in a timely manner, which is defined by the Company as when interest due becomes 90 days delinquent.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, which replaces the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 was subsequently updated by ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, to clarify that entities should include recoveries when estimating the allowance for credit losses. The Company will be required to use a forward-looking expected credit loss model for accounts receivables, loans and other financial instruments. Credit losses relating to available-for-sale investment debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The Company adopted the practical expedient to exclude the accrued interest included in the fair value and amortized cost basis in the assessment of credit losses on its available-for-sale investment debt securities. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and must be adopted using a modified retrospective approach, with certain exceptions. The Company adopted ASC 326 on January 1, 2020 and its adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or

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hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company adopted ASU 2018-13 on January 1, 2020 and its adoption did not have an impact on the Company’s condensed consolidated financial statements and related disclosures.

Recent Accounting Pronouncements to be Adopted

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

4.    Cash, Cash Equivalents and Investment Debt Securities

The following table summarizes the Company’s cash, cash equivalents and investment debt securities as of March 31, 2020 and December 31, 2019:

As of March 31, 2020

Allowance

Gross

Gross

for Credit

Unrealized

Unrealized

    

Amortized Cost

Losses

    

Gains

    

Losses

    

Fair Value

(in thousands)

Cash and cash equivalents:

 

  

 

  

 

  

 

  

Cash and money market funds

$

41,408

$

$

$

$

41,408

Total cash and cash equivalents

41,408

41,408

Investment debt securities:

 

  

 

  

 

  

 

  

 

  

Commercial paper

 

18,478

 

 

10

 

 

18,488

Corporate debt securities

 

486,490

 

 

189

 

(1,581)

 

485,098

U.S. treasuries

4,018

24

4,042

Total investment debt securities

 

508,986

 

 

223

 

(1,581)

 

507,628

Total cash, cash equivalents and investment debt securities

$

550,394

$

$

223

$

(1,581)

$

549,036

As of December 31, 2019

Gross

Gross

Unrealized

Unrealized

    

Amortized Cost

Gains

    

Losses

    

Fair Value

(in thousands)

Cash and cash equivalents:

 

  

 

  

 

  

Cash and money market funds

$

62,557

$

$

$

62,557

Commercial paper

7,498

7,498

Total cash and cash equivalents

70,055

70,055

Investment debt securities:

 

  

 

  

 

  

 

  

Commercial paper

 

42,806

 

43

 

(1)

 

42,848

Corporate debt securities

 

538,965

 

835

 

(81)

 

539,719

Total investment debt securities

 

581,771

 

878

 

(82)

 

582,567

Total cash, cash equivalents and investment debt securities

$

651,826

$

878

$

(82)

$

652,622

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The aggregate fair value of the Company’s available-for-sale investment debt securities that have been in a continuous unrealized loss position for less than twelve months or twelve months or longer is as follows:

As of March 31, 2020

Less than 12 months

12 months or longer

Total

(in thousands)

Gross

Gross

Gross

Unrealized

Unrealized

Unrealized

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

Corporate debt securities

$

326,320

$

(1,581)

$

$

$

326,320

$

(1,581)

Total

$

326,320

$

(1,581)

$

$

$

326,320

$

(1,581)

As of December 31, 2019

Less than 12 months

12 months or longer

Total

(in thousands)

    

Gross

    

    

Gross

    

    

Gross

Unrealized

Unrealized

Unrealized

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

Commercial paper

$

11,976

$

(1)

$

$

$

11,976

$

(1)

Corporate debt securities

 

121,684

 

(81)

 

 

 

121,684

 

(81)

Total

$

133,660

$

(82)

$

$

$

133,660

$

(82)

At March 31, 2020, the Company had 90 available-for-sale investment debt securities in an unrealized loss position without an allowance for credit losses. Unrealized losses on corporate debt securities have not been recognized into income because the issuers’ bonds are of high credit quality (rated A3/A- or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery and the decline in fair value is largely due to market conditions and/or changes in interest rates. The issuers continue to make timely interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

Accrued interest receivable on available-for-sale investment debt securities totaled $3.3 million at March 31, 2020, is excluded from the estimate of credit losses and is included in Prepaid expenses and other current assets.

5.    Fair Value Measurements

The carrying amounts of the Company’s receivables and payables approximate their fair value due to their short maturities.

Accounting principles provide guidance for using fair value to measure assets and liabilities. The guidance includes a three-level hierarchy of valuation techniques used to measure fair value, defined as follows:

Unadjusted Quoted Prices — The fair value of an asset or liability is based on unadjusted quoted prices in active markets for identical assets or liabilities (Level 1).
Pricing Models with Significant Observable Inputs — The fair value of an asset or liability is based on information derived from either an active market quoted price, which may require further adjustment based on the attributes of the financial asset or liability being measured, or an inactive market transaction (Level 2).
Pricing Models with Significant Unobservable Inputs — The fair value of an asset or liability is primarily based on internally derived assumptions surrounding the timing and amount of expected cash flows for the financial instrument. Therefore, these assumptions are unobservable in either an active or inactive market (Level 3).

The Company considers an active market as one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, the Company views an inactive

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market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, non-performance risk, or that of a counterparty, is considered in determining the fair values of liabilities and assets, respectively.

The Company’s money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices in active markets. Investment debt securities are classified as Level 2 instruments based on market pricing and other observable inputs.

Financial assets carried at fair value are classified in the tables below in one of the three categories described above:

Fair Value Measurements Using

    

Total

    

Level 1

    

Level 2

    

Level 3

(in thousands)

March 31, 2020

 

  

 

  

 

  

 

  

Assets

 

  

 

  

 

  

 

  

Cash and cash equivalents:

Money market funds

$

24,773

$

24,773

$

$

Available-for-sale investment debt securities:

 

  

 

  

 

  

 

  

Commercial paper

 

18,488

 

 

18,488

 

Corporate debt securities

 

485,098

 

 

485,098

 

U.S. treasuries

4,042

4,042

Total financial assets

$

532,401

$

24,773

$

507,628

$

December 31, 2019

 

  

 

  

 

  

 

  

Assets

 

  

 

  

 

  

 

  

Cash and cash equivalents:

Money market funds

$

19,376

$

19,376

$

$

Commercial paper

7,498

7,498

Available-for-sale investment debt securities:

 

  

 

  

 

  

 

  

Commercial paper

 

42,848

 

 

42,848

 

Corporate debt securities

 

539,719

 

 

539,719

 

Total financial assets

$

609,441

$

19,376

$

590,065

$

The aggregate fair value of all available-for-sale investment debt securities (commercial paper, corporate debt securities and U.S. treasuries), by contractual maturity, are as follows:

Fair Value as of

    

March 31, 2020

    

December 31, 2019

(in thousands)

Due in one year or less

$

433,013

$

473,602

Due after one year through two years

 

74,615

 

116,463

Total investment debt securities

$

507,628

$

590,065

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.

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6.    Fixed Assets, Net

Fixed assets are stated at cost and depreciated or amortized using the straight-line method based on useful lives as follows:

Useful lives

    

(Years)

    

March 31, 2020

    

December 31, 2019

(in thousands)

Office equipment and software

 

3

$

4,349

$

4,386

Leasehold improvements

 

Shorter of remaining lease term or useful life

 

10,743

 

10,489

Furniture and fixtures

 

7

 

4,139

 

4,032

Subtotal

 

19,231

 

18,907

Less: accumulated depreciation

 

(14,385)

 

(13,705)

Fixed assets, net

$

4,846

$

5,202

7.    Inventory

Inventories are stated at the lower of cost or market. Inventories consisted of the following:

    

March 31, 2020

    

December 31, 2019

(in thousands)

Work-in-process

$

10,030

$

8,302

Finished goods

 

230

 

160

Inventory

$

10,260

$

8,462

8. Leases

The Company leases various office spaces under non-cancelable operating leases with original lease periods expiring between the third quarter of 2020 and 2024. The Company subleases one of its office spaces to a third party. The Company also enters into leases for equipment. A number of the Company’s leases include one or more options to renew, with renewal terms that can extend the lease term. The exercise of lease renewal options is typically at the sole discretion of the Company; therefore, all renewals to extend the lease terms are not included in the right-of-use (“ROU”) assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise, includes the renewal period in the lease term. These operating leases do not contain material variable rent payments, residual value guarantees, covenants, or other restrictions.

The Company has elected the practical expedient to exclude short-term leases from its ROU assets and lease liabilities; therefore leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company elected the practical expedient not to separate non-lease components from all leases. As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company’s incremental borrowing rate is the estimated rate that would be required to pay for a collateralized borrowing equal to the total lease payment over the lease term. The Company estimates its incremental borrowing rate based on an analysis of publicly traded debt securities of companies with credit and financial profiles similar to its own adjusted to be commensurate with the term of the underlying lease and the Company’s secured borrowing rate.

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Operating lease assets and liabilities are classified on the condensed consolidated balance sheets as follows:

Leases

Classification

March 31, 2020

December 31, 2019

Assets

(in thousands)

Operating lease assets

Other assets

$

12,440

$

13,246

Total leased assets

$

12,440

$

13,246

Liabilities

Current

Operating lease liabilities

Accounts payable, accrued expenses and other liabilities

$

6,596

$

6,456

Noncurrent

Operating lease liabilities

Long-term other liabilities

8,164

9,222

Total operating lease liabilities

$

14,760

$

15,678

Operating lease costs for the three-month periods ended March 31, 2020 and 2019, are as follows:

Three Months Ended

March 31,

Lease Cost

Classification

2020

2019

(in thousands)

Operating lease cost

Selling, general and administrative expenses

$

1,739

$

1,678

Short-term lease cost

Selling, general and administrative expenses

421

826

Variable lease cost

Selling, general and administrative expenses

247

224

Sublease income

Other income, net

(120)

(180)

Net lease cost

$

2,287

$

2,548

The weighted-average remaining term of the Company’s operating leases was 2.4 years and the weighted-average discount rate used to measure the present value of the Company’s operating lease liabilities was 3.9% as of March 31, 2020.

Cash payments included in the measurement of the Company’s operating lease liabilities reported in operating cash flows were $1.8 million and $1.9 million for the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, the Company obtained a ROU asset of $1.0 million in exchange for new operating lease obligations of $1.0 million.

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Maturities of the Company’s operating lease liabilities, which do not include short-term leases, as of March 31, 2020 are as follows:

Maturity of Lease Liabilities

Operating leases

(in thousands)

2020

$

5,616

2021

6,475

2022

2,340

2023

895

2024

373

Thereafter

Total lease payments

15,699

Less: Present value discount

(939)

Total operating lease liabilities

$

14,760

9.    Accounts Payable, Accrued Expenses and Other Liabilities

Accounts payable, accrued expenses and other liabilities consisted of the following:

    

March 31, 2020

    

December 31, 2019

(in thousands)

Accounts payable

$

14,977

$

18,975

Accrued employee compensation

 

14,135

 

26,483

Accrued contracted services

 

76,592

 

74,486

Accrued rebates, discounts and other incentives

25,422

21,529

Operating lease liabilities

6,596

6,456

Other liabilities

6,796

6,039

Accounts payable, accrued expenses and other liabilities

$

144,518

$

153,968

Research & Development Tax Credit

The Company benefits from the U.K. Small and Medium-sized Enterprise R&D Tax Credit scheme, or the SME scheme, under which it can obtain a refundable credit of up to 33.4% of eligible research and development expenses incurred by the Company in the U.K.. Eligible expenses generally include employment costs for research staff, consumables, software and certain internal overhead costs incurred as part of research projects.

The Company submitted a claim seeking to obtain tax credits for qualifying R&D expenses incurred in the years ended December 31, 2015 and 2016. In September 2019, the Company received a partial payment of $10.5 million from Her Majesty’s Revenue and Customs, the U.K.’s government tax authority. Given the claim review has not been finalized, the credit received is recorded as a deferred liability within Accounts payable, accrued expenses, and other liabilities.

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10.  Long-Term Debt

Debt, net of discounts and deferred financing costs, consisted of the following:

    

March 31, 2020

    

December 31, 2019

(in thousands)

2023 Convertible Notes

$

460,000

$

460,000

2026 Convertible Notes

230,000

230,000

Long-term debt, gross

690,000

690,000

Less: Unamortized debt discounts and fees

(151,032)

(157,922)

Long-term debt, net

$

538,968

$

532,078

2019 Offering

On May 14, 2019, the Company issued and sold $230.0 million aggregate principal amount of 2.00% Convertible Senior Notes due 2026 (the “2026 Convertible Notes”). The Company received net proceeds from the sale of the 2026 Convertible Notes of $223.4 million, after deducting underwriting discounts, commissions and estimated offering expenses of approximately $6.6 million.

The 2026 Convertible Notes were issued pursuant to a Second Supplemental Indenture, dated as of May 14, 2019 (the “Second Supplemental Indenture”), which supplements the Indenture (the “Base Indenture”), as supplemented