UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.WASHINGTON, DC 20549

FORMForm10-Q

(Mark One)

For the quarterly period ended SeptemberJune 30, 20172018

or

For the transition period from                    to                    

Commission File Number:001-35420

ChemoCentryx, Inc.

(Exact Name of Registrant as Specified in Itsits Charter)

850 Maude Avenue

Mountain View, California 94043

(Address of Principal Executive Offices) (Zip Code)

(650)210-2900

(Registrant’s Telephone Number, Including Area Code)

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 daysdays.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☒☐  No  ☐

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

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)13 (a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of OctoberJuly 31, 2017,2018 was 48,766,664.50,378,571.

CHEMOCENTRYX, INC.

QUARTERLY REPORT ON FORM10-Q

For the quarterly period ended SeptemberJune 30, 20172018

Table of Contents

PART I. FINANCIAL INFORMATION

CHEMOCENTRYX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value data)

(unaudited)

See accompanying notes.

CHEMOCENTRYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

See accompanying notes.

CHEMOCENTRYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

See accompanying notes.

CHEMOCENTRYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See accompanying notes.

CHEMOCENTRYX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SeptemberJune 30, 20172018

(unaudited)

ChemoCentryx, Inc. (the Company) commenced operations in 1997. The Company is a clinical-stage biopharmaceutical company focused on developing new medications targeted at inflammatory disorders, autoimmune diseases and cancer. The Company’s principal operations are in the United States and it operates in one segment.

Unaudited Interim Financial Information

The financial information filed is unaudited. The Condensed Consolidated Financial Statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The December 31, 20162017 Condensed Consolidated Balance Sheet was derived from audited financial statements. The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The Condensed Consolidated Financial Statements should be read in conjunction with the Company’s financial statements and the notes thereto included in the Company’s annual reportAnnual Report on Form10-K for the year ended December 31, 20162017, filed with the Securities and Exchange Commission on March 14, 2017.12, 2018.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted accounting principles in the United States of America (U.S. GAAP)(GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

Concentration of Credit Risk

The Company invests in a variety of financial instruments and, by its policy, limits the amount of credit exposure with any one issuer, industry or geographic area.

Accounts receivable are typically unsecured and are concentrated in the pharmaceutical industry and government sector. Accordingly, the Company may be exposed to credit risk generally associated with pharmaceutical companies and government funded entities. The Company has not historically experienced any significant losses due to concentration of credit risk.

Accounts receivable consists of the following (in thousands):

As of December 31, 2016, accounts receivable excluded the $20.0 million cash commitment which is due from Vifor in December 2017 in connection with the CCX140 Agreement. See Note 7, “Collaboration and License Agreements” for a detailed discussion.

Net Loss Per Share

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents.

Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the sum of the weighted-average number of common shares outstanding and dilutive common stock equivalent shares outstanding for the period. The Company’s potentially dilutive common stock equivalent shares, which include incremental common shares issuable upon (i) the exercise of outstanding stock options and warrants, (ii) vesting of restricted stock units (RSUs) and restricted stock awards (RSAs), and (iii) the purchase from contributions to the 2012 Employee Stock Purchase Plan (the ESPP), (calculated based on the treasury stock method), are only included in the calculation of diluted net loss per share when their effect is dilutive.

For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the following potentially dilutive securities were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect:

Comprehensive Loss

Comprehensive loss comprises net loss and other comprehensive income (loss).loss. For the periods presented other comprehensive income (loss)loss consists of unrealized gains and losses on the Company’savailable-for-sale securities. For the three and ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, there were no sales of investments, and therefore there were no reclassifications from accumulated other comprehensive loss to net loss.reclassifications.

Recent Accounting PronouncementsRevenue Recognition

In May 2014,Effective January 1, 2018, the Financial Accounting Standard Board (FASB) issuedCompany adopted Accounting Standards Update (ASU)No. 2014-09,Codification (ASC) Topic 606, Revenue from Contracts with Customers. The new standard’s core principle isCustomers (ASC 606) using the modified retrospective transition method. This standard applies to all contracts with customers, except for contracts that a reporting entity will recognizeare within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, the Company recognizes revenue when it transfersits customer obtains control of promised goods or services, to customers in an amount that reflects the consideration to which the entityCompany expects to be entitledreceive in exchange for those goods or services. On July 9, 2015,To determine revenue recognition for arrangements that the FASB votedCompany determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to delay the effective dateperformance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company enters into corporate collaborations under which it may obtain upfront license fees, research and development funding and development and regulatory and commercial milestone payments and royalty payments. The Company’s performance obligations under these arrangements may include licenses of intellectual property, distribution rights, research and development services, delivery of manufactured product, and/or participation on joint steering committees.

Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from upfront license fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgement to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring proportional performance for purposes of recognizing revenue fromnon-refundable,up-front fees. The Company evaluates the measure of proportional performance each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone payments: At the inception of each arrangement that includes development, regulatory or commercial milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price. ASC 606 suggests two alternatives to use when estimating the amount of variable consideration: the expected value method and the most likely amount method. Under the expected value method, an entity considers the sum of

probability-weighted amounts in a range of possible consideration amounts. Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. Whichever method is used, it should be consistently applied throughout the life of the contract; however, it is not necessary for the Company to use the same approach for all contracts. The Company expects to use the most likely amount method for development and regulatory milestone payments. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis. The Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Companyre-evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulativecatch-up basis, which would affect revenues and earnings in the period of adjustment.

Commercial milestones and royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and in which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue when the related sales occur. To date, the Company has not recognized any royalty revenue resulting from its collaboration arrangements.

Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts payable to the Company are recorded as accounts receivable when the Company’s right to consideration is unconditional.

Upon adoption of ASC 606 under the modified retrospective transition method, the Company recognized the cumulative effect of initially applying the new revenue standard of $47.3 million as an adjustment to the opening balance of accumulated deficit and an increase in deferred revenue. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Before the adoption of ASC 606, the Company recognized upfront fees straight-line under ASC 605 over the estimated performance period and recognized milestones when earned under the milestone method of accounting. See “Note 2. Summary of Significant Accounting Policies – Revenue Recognition” in the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 12, 2018 for a detailed discussion.

The impact of adoption on the Company’s consolidated statement of operations and balance sheet was as follows (in thousands):

Recent Accounting Pronouncements

In June 2018, the Financial Accounting Standard Board issued Accounting Standards UpdateNo. 2018-07, Compensation – Stock Compensation (Topic 718). The new standard simplifies the accounting for share-based payments to nonemployees by one year.aligning it with the accounting for share-based payments to employees, with certain exceptions. The new standard would becomewill be effective for the Company beginning in the first quarter of 2018. Early application would be permitted in 2017. Entities would have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. In 2016, the FASB updated the guidance for reporting revenue gross versus net to improve the implementation guidance on principal versus agent considerations, and for identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients and made narrow scope improvements to the new accounting guidance.

The Company currently plans to adopt the accounting standard update on January 1, 2018, using the modified retrospective approach. The cumulative effect of adopting the accounting standard update will be recorded to the Company’s accumulated deficit on January 1, 2018.2019. The Company is currently analyzingevaluating the impact of the adoption of this standard on its collaboration agreementsfinancial statements and does not expect the adoption of this accounting guidance to determinehave a material impact on the differencesconsolidated financial statements.

On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was enacted into law. Accounting Standards Codification (ASC) 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. Shortly after the enactment of the Act, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting treatment under ASUNo. 2014-09 compared tofor certain income tax effects of the current accounting treatment. During 2016, the Company entered into two license and collaboration agreements.Act. The Company has primarily derivedadjusted its revenuesdeferred tax assets and liabilities based on the reduction of the U.S. federal corporate tax rate from license34% to 21% and collaboration agreements.assessed the realizability of its deferred tax assets based on its current understanding of the provisions of the new law. The considerationCompany considers its accounting for the impacts of the new law to be provisional and the Company is eligiblewill continue to receive under these agreements includes upfront payments, research and development funding, milestone payments, and royalties. Each license and collaboration agreement is unique and will need to be assessed separately under the five-step process under the new standard. The new revenue recognition standard differs from the current accounting standard in many respects, such as in the accounting for variable consideration and the measurement of progress toward completion of performance obligations. While the Company has not completed its ongoing assessment ofassess the impact of adoption, the adoption of ASUNo. 2014-09 may have a material effectrecently enacted tax law (and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting) on its business and consolidated financial statements.statements for the remainder of 2018. No adjustments were made to the provisional estimate during the three and six months ended June 30, 2018.

In February 2016, the FASBFinancial Accounting Standard Board issued ASUAccounting Standards UpdateNo. 2016-12, Leases (Topic 842). The new standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about itstheir leasing arrangements. The new standard will be effective for the Company on January 1, 2019. The Company is currently evaluating the impact of the adoption of this standard on its financial statements. However, the Company expects the adoption of this accounting guidance to result in an increase in lease assets and a corresponding increase in lease liabilities on its balance sheets.

In March 2016,The Company has reviewed other recent accounting pronouncements and concluded they are either not applicable to the FASB issued ASUNo. 2016-09, Improvements to Employee Share-Based Payment Accounting, whichbusiness or that no material effect is intended to simplify several aspects of the accounting for share-based payment award transactions, including the income tax consequences, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classificationsexpected on the statement of cash flows. Under this guidance, on a prospective basis, companies will no longer record excess tax benefits and tax deficiencies from stock option exercises in additionalpaid-in capital (APIC). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the statement of operations. In addition, the guidance eliminates the requirement that excess tax benefits be realized before companies can recognize them. The ASU requires a cumulative-effect adjustment for previously unrecognized excess tax benefits in opening retained earnings in the annual period of adoption. The Company adopted ASUNo. 2016-09 on January 1, 2017. Upon adoption, the Company recognized the excess tax benefit balance of $2.1 million as of January 1, 2017consolidated financial statements as a deferred tax asset with a corresponding increase to the Company’s deferred tax asset valuation allowance. Additionally, as provided for under this new guidance, the Company elected to continue to estimate forfeitures. The adoptionresult of this aspect of the guidance did not have a material impact on the Company’s financial statements.future adoption.

The amortized cost and fair value of cash equivalents and investments at SeptemberJune 30, 20172018 and December 31, 20162017 were as follows (in thousands):

Cash equivalents in the tables above exclude cash of $0.9$12.9 million and $2.3$3.2 million as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. Allavailable-for-sale securities held as of SeptemberJune 30, 20172018 had contractual maturities of less than two years. There have been no significant realized gains or losses onavailable-for-sale securities for the periods presented. No significantavailable-for-sale securities held as of SeptemberJune 30, 20172018 have been in a continuous unrealized loss position for more than 12 months. As of SeptemberJune 30, 2017,2018, unrealized losses onavailable-for-sale investments are not attributed to credit risk and are

considered to be temporary. The Company believes that it ismore-likely-than-not more likely than not that investments in an unrealized loss position will be held until maturity or the recovery of the cost basis of the investment. The Company believes it has no other-than-temporary impairments on its securities because it does not intend to sell these securities and it believes it is not more likely than not that it will be required to sell these securities before the recovery of their amortized cost basis. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

The Company determines the fair value of financial assets and liabilities using three levels of inputs as follows:

Level 1—Inputs which include quoted prices in active markets for identical assets and liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Recurring Fair Value Measurements

The Company’s financial assets subject to fair value measurements on a recurring basis and the level of inputs used in such measurements arewere as follows (in thousands) as of SeptemberJune 30, 20172018 and December 31, 2016:2017:

During the ninesix months ended SeptemberJune 30, 2017,2018, there were no transfers between Level 1 and Level 2 financial assets. When the Company uses observable market prices for identical securities that are traded in less active markets, the Company classifies its marketable debt instruments as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments usingnon-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data.Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, includingnon-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. The Company corroboratesnon-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, prime rate, currency spot and forward rates, and credit ratings.

Other Fair Value Measurements

The carrying amount and estimated fair value of financial instruments not recorded at fair value at June 30, 2018 and December 31, 2017 were as follows (in thousands):

The fair value of the Company’s long-term debt is estimated using the net present value of future debt payments, discounted at an interest rate that is consistent with market interest rates, which is a Level 2 input.

Accrued liabilities consist of the following (in thousands):

On December 28, 2017 (the Closing Date), the Company entered into a Loan and Security Agreement with Hercules Capital, Inc. (Hercules) pursuant to which term loans in an aggregate principal amount of up to $50.0 million (the Credit Facility) are available to the Company in three tranches, subject to certain terms and conditions. Under the first tranche, the Company may borrow through June 2018 an amount up to $15.0 million, of which $5.0 million was advanced to the Company on the Closing Date and the remaining $10.0 million was advanced in June 2018. Upon satisfaction of certain terms and conditions, the second tranche is available under the Credit Facility, which would allow the Company to borrow up to an additional $10.0 million through December 15, 2018. The third tranche, which would allow the Company to borrow up to an additional $25.0 million, would be available upon Hercules’ approval through June 15, 2019.

Advances under the Credit Facility will bear an interest rate equal to the greater of (i) 8.05% plus the prime rate as reported from time to time in The Wall Street Journal minus 4.75%, and (ii) 8.05%. For advances under the first tranche, the Company will make interest-only payments through July 1, 2020, and will then repay the principal balance and interest on the advances in equal monthly installments after the interest-only period and continuing through December 1, 2021. For advances made under the second and third tranches, the Company will make interest-only payments for the first 30 months, and will then repay the principal balance and interest on the advances in equal monthly installments after the interest-only period with each advance repaid 48 months after it is drawn.

The Company may prepay advances under the Credit Facility, in whole or in part, at any time, subject to a prepayment charge equal to: (a) 2.0% of amounts so prepaid, if such prepayment occurs during the first year following the Closing Date; (b) 1.5% of the amount so prepaid, if such prepayment occurs during the second year following the Closing Date; and (c) 1.0% of the amount so prepaid, if such prepayment occurs after the second year following the Closing Date. The Credit Facility is secured by substantially all of the Company’s assets, excluding intellectual property.

In addition, Hercules has the right to participate, in an amount up to $2.0 million, in any subsequent equity financing broadly marketed to multiple investors in an amount greater than $20.0 million. The Credit Facility also includes customary affirmative and negative covenants, including restrictions on the payment of dividends, and events of default, the occurrence and continuance of which provide Hercules with the right to demand immediate repayment of all principal and unpaid interest under the Credit Facility, and to exercise remedies against the Company and the collateral securing the Credit Facility. The Company was in compliance with all loan covenants for all periods presented.

The Company will pay anend-of-term charge for each tranche which will occur on the earliest of (i) the applicable tranche maturity date; (ii) the date that the Company prepays all of the outstanding principal under each tranche in full, or (iii) the date the loan payments are accelerated due to an event of default. For the first tranche, the end of term charge is the greater of (a) 6.25% of the aggregate amount of the advances and (b) 6.25% of the aggregate amount of the advances plus 50% of the unfunded portion of the first tranche. In the case of the second and third tranches, the charge is 6.25% of the aggregate amount of the advances applicable to such tranche.

In addition, the Company pays a commitment charge of 1% of the advances made under the Credit Facility, with a minimum charge of $162,500 paid on the Closing Date. Also, the Company reimbursed Hercules for costs incurred related to the Credit Facility. These charges were recorded as discounts to the carrying value of the loan and are amortized over the term of the loan using the effective interest method.

As of June 30, 2018, the Company had outstanding borrowings under the Credit Facility of $14.7 million, net of discounts of $0.3 million. Future minimum principal payments, which exclude the end of term charge, related to the Credit Facility as of June 30, 2018 are as follows (in thousands):

Bio-Techne

Bio-Techne Corporation, formerly Techne Corporation, is one of the Company’s principal stockholders. In connection with the Company’s initial public offering (IPO) in February 2012,Bio-Techne received a warrant with aten-year term to purchase 150,000 shares of the Company’s common stock at an exercise price per share equal to $20.00 per share, or 200% of the IPO price of its common stock, which was outstanding as of SeptemberJune 30, 2017.2018. The Company had an accounts payable balance due toBio-Techne for the purchases of research materials of approximately $1,000$1,100 and $25,000$6,000 as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.

Avacopan Agreements

In May 2016, the Company entered into an exclusive collaboration and license agreement with Vifor (International) Ltd. (Vifor) pursuant to which the Company granted Vifor exclusive rights to commercialize avacopan in Europe and certain other markets (the Avacopan Agreement). Avacopan is the Company’s lead drug candidate for the treatment of patients with anti-neutrophil cytoplasmic auto-antibody associated vasculitis (AAV) and other rare diseases. The Company retains control of ongoing and future development of avacopan (other than country-specific development in the licensed territories) and all commercialization rights to avacopan in the United States and China. The Avacopan Agreement also provided Vifor with an exclusive option to negotiate during 2016 a worldwide license agreement for one of the Company’s other drug candidates, CCX140, an orally administeredorally-administered inhibitor of the chemokine receptor known as CCR2.

In connection with the Avacopan Agreement, the Company received anon-refundable upfront payment of $85.0 million, comprising $60.0 million in cash and $25.0 million in the form of an equity investment to purchase 3,333,333 shares of the Company’s common stock at a price of $7.50 per share. The $85.0 million upfront consideration was initially allocated as of June 30, 2016 as follows:

Following the October 2016 expiration of the $12.5 million potentially creditable towards a CCX140 license agreement, such amount was reclassified to the amortizable portion of deferred revenue, which continues to be recognized over the estimated period of performance under the Avacopan Agreement ending in June 2020.

In February 2017, Vifor and the Company expanded the Vifor territories under the Avacopan Agreement to include all markets outside the United States and China (the Avacopan Amendment). In connection with this February 2017 arrangement, the Company received a $20.0 million upfront payment for the expanded rights. In June 2018, Vifor and the Company further expanded the Vifor territories under the Avacopan Agreement to provide Vifor with exclusive commercialization rights in China (the Avacopan Letter Agreement). The Company retains control of ongoing and future development of avacopan (other than country-specific development in the licensed territories), and all commercialization rights to avacopan in the United States and China.States. In connection withconsideration for this June 2018 arrangement, the Company received a $20.0$5.0 million upfront cash commitmentpayment for the expanded rights, $10.0 million of which was received in February 2017. The remaining $10.0 million is due in February 2018 and is not reflected in accounts receivable as of September 30, 2017. The February 2017 Avacopan Amendment and the original May 2016 Avacopan Agreement are accounted for as a combined agreement. The February 2017 Avacopan Amendment did not represent a material modification given among other factors, there were no changes to the Company’s deliverables under the arrangement. As such, the additional upfront commitment of $20.0 million under the Avacopan Amendment will be recognized over the remaining estimated period of performance ending in June 2020. For the three and nine months ended September 30, 2017, the Company recognized $6.2 million and $18.2 million, respectively, of collaboration and license revenue under the Avacopan Agreement and the Avacopan Amendment, compared to $4.1 million and $6.8 million in the same periods ended September 30, 2016. rights.

Upon achievement of certain regulatory and commercial milestones with avacopan, the Company will receive additional payments of up to $510.0$460.0 million under the Avacopan Agreement. In addition, the Company will receive royalties, with rates ranging from the low teens to themid-twenties, on future potential net sales of avacopan by Vifor in the licensed territories. In December 2017, the Company achieved a $50.0 million regulatory milestone when the European Medicines Agency (EMA) validated the Company’s Conditional marketing authorisation (CMA) application for avacopan for the treatment of AAV.

The Company identified the following material promises under the Avacopan Agreement, the Avacopan Amendment, and the Avacopan Letter Amendment: (1) the license related to avacopan; (2) the development and regulatory services for the submission of the marketing authorisation application (MAA); and (3) an exclusive option to negotiate a worldwide license agreement for CCX140, which expired in 2016. The Company considered that the license has standalone functionality and is capable of being distinct. However, the Company determined that the license is not distinct from the development and regulatory services within the context of the agreement because Vifor is dependent on the Company to execute the development and regulatory activities in order for Vifor to benefit from the license. As such, the license is combined with the development and regulatory services into a single performance obligation. The exclusive option related to CCX140 is a separate performance obligation and the Company determined that its transaction price is not material. As such, the transaction price under this arrangement will be allocated to the license and the development and regulatory services.

As of June 30, 2018, the transaction price of $153.0 million consists of the following:

The Company willre-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

The Company determined that the combined performance obligation will be performed over the duration of the contract, which began on the effective date of May 9, 2016 and ends upon completion of development and regulatory services. The Company will use a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. The Company believes this is the best measure of progress because other measures do not reflect how the Company transfers its performance obligation to Vifor. In applying the cost-based input method of revenue recognition, the Company measures actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party contract costs. Revenue will be recognized based on actual costs incurred as a percentage of total budgeted costs as the Company completes its performance obligations.

For the three and six months ended June 30, 2018, the Company recognized $12.9 million and $21.1 million of collaboration and license revenue under the Avacopan Agreement, the Avacopan Amendment, and the Avacopan Letter Agreement, respectively.

Prior to the adoption of ASC 606 on January 1, 2018, the Company accounted for its performance obligations under the Avacopan Agreement and Avacopan Amendment as one combined unit of accounting with the upfront fees being recognized over the estimated period of performance. See “Note 10. Collaboration and License Agreements – Avacopan Agreements” in the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 12, 2018, for further discussion. For the three and six months ended June 30, 2017, the Company recognized $6.2 million and $11.9 million of collaboration and license revenue under the Avacopan Agreement and Avacopan Amendment under ASC 605, respectively.

CCX140 Agreement

In December 2016, the Company entered into a second collaboration and license agreement with Vifor pursuant to which the Company granted Vifor exclusive rights to commercialize CCX140 (the CCX140 Agreement) in markets outside the U.S.United States and China,.China. CCX140 is an orally-administered inhibitor of the chemokine receptor known as CCR2. The Company retains marketing rights in the U.S.United States and China, while Vifor has commercialization rights in the rest of the world. Pursuant to the CCX140 Agreement, the Company will beis responsible for the clinical development of CCX140 in rare renal diseases and will beis reimbursed for Vifor’s equal share of such development cost. Vifor retains an option to solely develop and commercialize CCX140 in more prevalent forms of chronic kidney disease (CKD). Should Vifor later exercise the CKD option, ChemoCentryxthe Company would receiveco-promotion rights infor CKD in the U.S.

United States. Under the terms of the CCX140 Agreement, the Company received anon-refundable upfront commitmentpayment of $50.0 million $30.0 millionin 2017.

In June 2018, the Company and Vifor entered into a letter agreement to expand Vifor’s rights to include the right to exclusively commercialize CCX140 in China (the CCX140 Letter Agreement). In connection with the CCX140 Letter Agreement, the Company received a payment of which was received in January 2017.$5.0 million. The remaining $20.0 million, which is due onCompany and Vifor also entered into an amendment to the first anniversaryCCX140 Agreement (the CCX140 Amendment) to clarify the timing of certain payments with respect to development funding of the CCX140 Agreement, was not reflected in accounts receivable asprogram by Vifor, and the Company received anon-refundable payment of September 30, 2017. The upfront commitment of $50.0 million will be recognized over the estimated period of performance under the CCX140 Agreement, which approximates 5.0 years, ending in December 2021. The deliverables under the CCX140 Agreement consist of intellectual property licenses, development and regulatory services for the submission of the MAA.$11.5 million. The Company considered the provisionsretains control of the revenue recognition multiple-element arrangement guidanceongoing and concluded that the license and thefuture development and regulatory activities for the submission of the MAA do not have stand-alone value because the rights conveyed to do not permit Vifor to perform all efforts necessary to use the Company’s technology to bring the compound through development and, upon regulatory approval, commercialization of the compound. Accordingly, the Company combined these deliverables and allocated the upfront consideration of $50.0 million into a single unit of accounting.

For the three and nine months ended September 30, 2017, the Company recognized $2.8 million and $8.0 million of collaboration and license revenue under the CCX140 Agreement, respectively, of which $2.5 million and $7.5 million were associated with the recognition of upfront commitment. The remaining amounts represented collaboration revenue derived from funding of CCX140 (other than country-specific development services from Vifor. in the licensed territories), and all commercialization rights to CCX140 in the United States.

Upon achievement of certain regulatory and commercial milestones with CCX140, the Company will receive additional payments of up to $625.0 million under the CCX140 Agreement. In addition, the Company will receive tiered royalties, with rates ranging from ten to themid-twenties, on net sales of CCX140 in the licensed territories.

UnderThe Company identified the Avacopan Agreement andfollowing material promises under the CCX140 Agreement, the CCX140 Amendment, and CCX140 Letter Agreement: (1) the license related to CCX140; and (2) the development and regulatory services for the submission of the MAA. The Company considered that the license has standalone functionality and is capable of being distinct. However, the Company determined that future contingent payments relatedthe license is not distinct from the development and regulatory services within the context of the agreement because Vifor is dependent on the Company to execute the development and regulatory milestones meetactivities in order for Vifor to benefit from the definitionlicense. As such, the license is combined with the development and regulatory services into a single performance obligation.

As of a substantive milestoneJune 30, 2018, the transaction price of $112.9 million consists of the following:

The Company willre-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

The Company determined that the combined performance obligation will be performed over the duration of the contract, which began on the effective date of December 22, 2016 and ends upon completion of development and regulatory services. The Company will use a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue forto recognize. The Company believes this is the achievementbest measure of these milestonesprogress because other measures do not reflect how the Company transfers its performance obligation to Vifor. In applying the cost-based input method of revenue recognition, the Company measures actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party contract costs. Revenue will be recognized based on actual costs incurred as a percentage of total budgeted costs as the Company completes its performance obligations. For the three and six months ended June 30, 2018, the Company recognized $2.0 million and $3.3 million of collaboration and license revenue under the CCX140 Agreement, the CCX140 Amendment, and the CCX140 Letter Agreement, respectively.

Prior to the adoption of ASC 606 on January 2, 2018, the Company accounted for its performance obligations under the CCX140 Agreement as one combined unit of accounting with the upfront fee of $50.0 million being recognized over the estimated period of performance. See “Note 10. Collaboration and License Agreements – CCX140 Agreement” in the period whenCompany’s Annual Report onForm 10-K for the milestone is achieved. The Company will be eligible to receive contingent payments related to commercial milestones basedfiscal year ended December 31, 2017, filed with the SEC on March 12, 2018, for further discussion. For the performance of Viforthree and these payments are not considered to be milestones under the accounting guidance. These contingent commercial milestone payments will be included in the allocation of arrangement consideration if and when achieved, resulting in an accounting treatment similar to the upfront payment. As of Septembersix months ended June 30, 2017, the Company had not received any milestone paymentsrecognized $2.7 million and $5.2 million of collaboration and license revenue under the Avacopan Agreement or the CCX140 Agreement. The Company expects to recognize royalty revenue in the period of sale of the related product, based on the underlying contract terms. The Avacopan Agreement and the CCX140 Agreement are accountedunder ASC 605, respectively.

The following table presents the contract assets and liabilities for all of the Company’s revenue contracts as separate arrangements.

In April 2016, the Company was awarded an Orphan Products Development grant by the U.S. Food and Drug Administration to support the clinical development of avacopan in the amount of $500,000, which was fully recognized and received as of September 30, 2017. The term of the grant expired in May 2017. During the three and ninesix months ended SeptemberJune 30, 2017, the Company did not recognize any grant revenue. During the three and nine months ended September 30, 2016,2018, the Company recognized $120,000the following revenue as a result of changes in the contract asset and $295,000, respectively, of grant revenue.the contract liability balances (in thousands):

Stock Options

During the ninesix months ended SeptemberJune 30, 2017,2018, the Company had the following option activities under its equity incentive plans:

Restricted Stock

During the ninesix months ended SeptemberJune 30, 2017,2018, the activity for restricted stock is summarized as follows:

Stock-based Compensation

Total stock-based compensation expense was $1.9$2.7 million and $6.8$5.2 million during the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, and $1.8$2.5 million and $6.5$4.9 million respectively, during the same periods ended SeptemberJune 30, 2016.2017, respectively. As of SeptemberJune 30, 2017, $9.62018, $17.0 million, $2.0$3.0 million, and $23,000$101,000 of total unrecognized compensation expenses associated with outstanding employee stock options, unvested restricted stock, and the ESPP, net of estimated forfeitures, were expected to be recognized over a weighted-average period of 2.52, 1.72,2.70, 1.57, and 0.120.38 years, respectively.

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form10-Q and the financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form10-K for the fiscal year ended December 31, 2016,2017, filed with the Securities and Exchange Commission, or SEC, on March 14, 2017.12, 2018.

Forward-Looking Statements

This Quarterly Report on Form10-Q contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,” “aim,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “potential” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those included in “Item 1A. Risk Factors” in our Annual Report on Form10-K for the fiscal year ended December 31, 2016,2017, filed with the SEC on March 14, 2017.12, 2018.

Any forward-looking statement in this Quarterly Report on Form10-Q reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, industry and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

ChemoCentryx^®, the ChemoCentryx logo, Traficet™ and Traficet-EN™ are our trademarks in the United States, the European Community, Australia and Japan. EnabaLink^® and RAM^® are our trademarks in the United States. Each of the other trademarks, trade names or service marks appearing in this Quarterly Report on Form10-Q belongs to its respective holder.

Unless the context requires otherwise, in this Quarterly Report on Form10-Q the terms “ChemoCentryx,” “we,” “us” and “our” refer to ChemoCentryx, Inc., a Delaware corporation, and our subsidiary taken as a whole.whole unless otherwise noted.

Overview

ChemoCentryx is a biopharmaceutical company developing new medications targeted at inflammatory disorders, autoimmune diseases and cancer. Each of our drug candidates selectively blocks a specific chemokine or chemoattractant receptors,receptor, leaving the rest of the immune system intact. Our drug candidates are small molecules, which are orally administered, offering significant quality of life benefits, since patients swallow a capsule or pill instead of having to visit a clinic for an infusion or undergo an injection.

In 2016, we executed on our strategy to form an alliance with a partner that could provide upfront commitments and milestones to support the clinical development of our leading two drug candidates, avacopan and CCX140, to registration and pay us royalties upon sales in international markets, while we develop our own commercial infrastructure to sell directly in the United States.

To help us managecommunicate the wide arraybreadth of opportunities,our drug discovery platform, we have segmented our pipeline into early stage and late stage compounds.drug candidates.

Late Stage CompoundsDrug Candidates

We have chosen to focus initially on kidney disease, particularly on rareorphan indications, where orphan drug candidates tend to enjoy a faster path to market and better reimbursement. Our leading drug candidates address areas of clear unmet need, where the current standard of care, or SOC, is insufficient to halt progression of the disease and/or where today’s treatment options come with serious side effects, such as those which accompany the prolonged use of steroids:

Avacopan (CCX168)— – Complement Inhibition in Orphan and Rare Diseases

Avacopan (formerly CCX168) is an orally-administered complement inhibitor targeting the C5a receptor, or C5aR, and is being developed for orphan and rare diseases, including 1)(i) anti-neutrophil cytoplasmic auto-antibody associated vasculitis, or AAV, a devastating autoimmune disease that destroysdamages blood vessels and can lead to kidney failure; 2) atypical hemolytic uremic syndrome, or aHUS, a rare, life threatening disease; and 3)(ii) complement 3 glomerulopathy, or C3G, a debilitating kidney disease that can lead to kidney failure.failure; and (iii) hidradenitis suppurativa, or HS.

Avacopan has been granted orphan drug designation by the U.S. Food and Drug Administration, or FDA, for the treatment of AAV aHUS and C3G and by the European Medicines Agency, or EMA, for the treatment of C3G and microscopic polyangiitis and granulomatosis with polyangiitis, both forms of AAV, and C3G.AAV. Additionally, avacopan has been granted PRIority MEdicines, or PRIME, designation from the EMA, to expedite its clinical development, and to potentially accelerate its marketing authorization.

Following completion of two Phase II clinical trials in patients with AAV, the results ofin which demonstrated that avacopan was safe, well-tolerated and provided effective steroid-free control of the disease, we launched the Phase III ADVOCATE trial in December 2016. The FDA and the EMA concurred with the design of the study. ADVOCATE is a randomized, double-blindtwo-arm study that is planned to enroll 300which enrolled 316 patients at approximately 200 sites in the United States, Canada, Europe, Australia and New Zealand. We expect to complete patientPatient enrollment of the Phase III ADVOCATE trial was completed in mid-2018.July 2018 and we expect to report topline data from this study in the fourth quarter of 2019. We recently launched a registration-supporting clinical trial to study avacopan for the treatment of patients with C3G and also plan to initiate the sameclinical studies for the treatment of patients with aHUSHS in 2017; designed to potentially support registration of avacopan in these indications.2018.

CCX140—CCX140 – Chronic and RareOrphan Kidney Diseases

CCX140, is an orally-administered inhibitor of the chemokine receptor known as CCR2, has been in development for diabetic nephropathy, or DN, a form of chronic kidney disease, or CKD, and is now being developed for focal segmental glomerulosclerosis, or FSGS, a rare renal disease characterized by progressive proteinuria—proteinuria, excess protein in the urine—urine, and impaired renal function.

A global Phase II clinical trial of CCX140 in patients with DN met its primary endpoint by demonstrating that CCX140 given orally once daily added to ana SOC renin-angiotensin-aldosterone system inhibitor treatment resulted in a statistically significant reduction in proteinuria, beyond that achieved with SOC alone.alone, with the most pronounced effect shown in the highest proteinuric patients. Based on the safety and efficacy data related to reduction in proteinuria observed in the Phase II trial in DN, we plan to initiate in 2017 alaunched our clinical endpoint trialdevelopment program of CCX140 for the treatment of patients with primary FSGS, for which there are currently noFDA-approved treatments.

Global Kidney Health Alliance with Vifor

In May 2016, we announced a partnership, which we refer to as the Avacopan Agreement, with Vifor (International) Ltd., and/or its affiliates, or collectively, Vifor, a European-based world leader specializing in kidney disease, fordisease. While under this agreement we retained all rights to the commercialUnited States and China, we granted Vifor exclusive commercialization rights to avacopan in Europe and certain other international markets,markets. In December 2016, we entered into an additional agreement with Vifor, which we refer to as the Avacopan Agreement. We expanded our partnership with Vifor in December 2016 with an additional deal forCCX140 Agreement, relating to CCX140, our other late stage drug candidate, CCX140, wherebycandidate. Under this second agreement, we again retained all rights to the United States and China and we granted Vifor exclusive worldwide commercialization rights outside of the United States and China, which we refer to as the CCX140 Agreement; and inChina. In February 2017, we announced a further dealagreement with Vifor for avacopan that harmonized the geographic commercialization rights underlying the agreements for both drug candidates, which we refer to as the Avacopan Amendment. In June 2018, we entered into additional agreements with Vifor to further expand Vifor’s exclusive commercialization rights to include China under the Avacopan Agreement and the CCX140 Agreement.

We have secured $155$215 million in upfront cash payments and commitments, plus substantial potential milestone paymentsmilestones pursuant to our agreements with Vifor.Vifor and are eligible for additional substantial milestone payments. Through our alliance, we maintain the commercialcommercialization rights ofto avacopan and CCX140 in the United States, and China, and also retain control of the clinical development programs for rareorphan renal disease. Vifor gainsgained the commercialexclusive commercialization rights for all other international markets, and willis obligated to pay us tiered royalties, with rates ranging from ten to themid-twenties, on potential net sales.

At a future time defined in the contract,CCX140 Agreement, Vifor has an option to solely develop and commercialize CCX140 in more prevalent forms of CKD. Should Vifor later exercise the CKD option, we would receiveco-promotion rights for CKD in the United States, and we estimate that the clinical development and registration process for CKD would end at approximately the same time as Orphan Drug exclusivity.

Early Stage CompoundsDrug Candidates

While the science has led us to focus initially on kidney disease, our targeted blocking systemourtarget specific and selective approach designed to stop the spread of inflammatory disease-inducing cells shows promise in other disease areas. Over time we plan to bring forward drug candidates to treat other inflammatory and autoimmune disorders, as well as cancer, where our drug candidate CCX872 has shown promise in a Phase IIb trial for non-operableadvanced pancreatic cancer. OurWe expect that our ability to do so will grow as we increase our scale and start to earn revenues and royalties from the commercialization of our late stage kidney disease franchise.

Since commencing our operations in 1997, our efforts have focused on research, development and the advancement of our drug candidates into and through clinical trials. As a result, we have incurred significant losses. We have funded our operations primarily through the sale of convertible preferred and common stock, contract revenue under our collaborations, government contracts and grants and borrowings under equipment financing arrangements.

As of SeptemberJune 30, 2017,2018, we had an accumulated deficit of $328.9$352.8 million. We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our research and development activities, expand our systems and facilities, seek regulatory approvals and engage in commercialization preparation activities in anticipation of FDA approval of our drug candidates. In addition, if a product is approved for commercialization, we will need to expand our organization. Significant capital is required to launch a product and many expenses are incurred before revenues are received. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

JOBS ActRecent Developments and Corporate Highlights

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can utilize the extended transition period providedJune 2018, we expanded our commercial alliance with Vifor to provide Vifor with exclusive commercialization rights in Section 7(a)(2)(B) of the Securities ActChina for implementing new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise applyavacopan and CCX140, in exchange for upfront cash payments totaling $21.5 million. We will retain all rights to private companies. We have elected to delay such adoption of new or revised accounting standards,commercialize CCX140 and as a result, we may not implement new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies.

Subject to certain conditions set forthavacopan in the JOBS Act, as an emerging growth company, we intendUnited States and Vifor will have exclusive rights to rely on certaincommercialize CCX140 and avacopan in all other countries. We retain control of these exemptions, including without limitation, providing an auditor’s attestation report on our systemall ongoing and future development of internal controls over financial reporting pursuant to Section 404CCX140 and implementing any requirement that may be adopted regarding mandatory audit firm rotation or a supplement toavacopan, other than country-specific development in the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will apply for a period of five years following the completion of our IPO although if the market value of our common stock that is held by nonaffiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.Vifor territories.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no material changes in our critical accounting policies during the ninesix months ended SeptemberJune 30, 2017,2018, as compared to those disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form10-K for the fiscal year ended December 31, 2016,2017, filed with the SEC on March 14, 2017.12, 2018, other than the following:

Effective January 1, 2018, we adopted Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers,or ASC 606, using the modified retrospective transition method. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

We enter into corporate collaborations under which we may obtain upfront license fees, research and development funding and development and regulatory and commercial milestone payments and royalty payments. Our performance obligations under these arrangements may include licenses of intellectual property, distribution rights, research and development services, delivery of manufactured product, and/or participation on joint steering committees.

Licenses of intellectual property: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from upfront license fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgement to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring proportional performance for purposes of recognizing revenue fromnon-refundable,up-front fees. We evaluate the measure of proportional performance each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone payments: At the inception of each arrangement that includes development, regulatory or commercial milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price. ASC 606 suggests two alternatives to use when estimating the amount of variable consideration: the expected value method and the most likely amount method. Under the expected value method, an entity considers the sum of probability-weighted amounts in a range of possible consideration amounts. Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. Whichever method is used, it should be consistently applied throughout the life of the contract; however, it is not necessary for us to use the same approach for all contracts. We expect to use the most likely amount method for development and regulatory milestone payments. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis. We recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, were-evaluate the probability or achievement of each such milestone and any related constraint, and if necessary, adjust our estimates of the overall transaction price. Any such adjustments are recorded on a cumulativecatch-up basis, which would affect revenues and earnings in the period of adjustment.

Commercial milestones and royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and in which the license is deemed to be the predominant item to which the royalties relate, we recognize revenue when the related sales occur. To date, we have not recognized any royalty revenue resulting from our collaboration arrangements.

Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Amounts payable to us are recorded as accounts receivable when our right to consideration is unconditional.

Results of Operations

Revenue

We have not generated any revenue from product sales. For the periods presented, our revenues wererevenue was derived from (i) the recognition of the upfront paymentscollaboration and license revenue related to the Avacopan Agreement Avacopan Amendment and CCX140 Agreement; (ii) collaboration revenue underAgreement, in each case, as amended, and the CCX140 Agreement and (iii) grant revenue from the FDA Orphan Products Development grant to support the clinical development of avacopan for the treatment of patients with AAV.related letter agreements. Total revenuerevenues for the periods as compared to the same periods in the prior year were as follows (in thousands):

The increasesOn January 1, 2018, we adopted ASC 606 under the modified retrospective transition method and recognized the cumulative effect of initially applying the new revenue standard of $47.3 million as an adjustment to the opening balance of accumulated deficit and an increase in revenue from 2016deferred revenue. Revenue recognized prior to 2017January 1, 2018 has not been restated and continues to be reported under the accounting standards in effect for those periods.

For the three and nine month periods were due to; (i)six months ended June 30, 2018, we use a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. In applying the cost-based input method of revenue recognition, we measure actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party contract costs. Revenue is recognized based on actual costs incurred as a percentage of total budgeted costs as we complete our performance obligations.

Before the adoption of ASC 606, we recognized upfront fees straight-line under ASC 605 over the estimated performance period and recognized milestone when earned under the milestone method of accounting. For the three and six months ended June 30, 2017, revenue recognized represents amortization of the upfront license fee commitments from Vifor pursuant to the Avacopan Agreement Avacopan Amendment and CCX140 Agreement, in each case, as well as (ii) collaboration revenue for development services under the CCX140 Agreement in the 2017 periods. These increases were partially offset by a decrease in grant revenue from the FDA to support the clinical development of avacopan for the treatment of patients with AAV.amended.

Research and development expenses

Research and development expenses represent costs incurred to conduct basic research, the discovery and development of novel small molecule therapeutics, development of our suite of proprietary drug discovery technologies, preclinical studies and clinical trials of our drug candidates. We recognize all research and development expenses as they are incurred. These expenses consist primarily of salaries and related benefits, includingstock-based compensation, third-party contract costs relating to research, formulation, manufacturing, preclinical study and clinical trial activities, laboratory consumables, and allocated facility costs. Total research and development expenses for the three and ninesix months ended SeptemberJune 30, 2017,2018, as compared to the same periodperiods in the prior year, were as follows (in thousands):

The increaseincreases in research and development expenses from 20162017 to 20172018 for the three and six month period wasperiods were primarily attributable to higher in Phase III clinical development expenses due to the initiation and patient enrollment of the avacopan ADVOCATEPhase II clinical trial in patients with AAVC3G and higher Phase II clinical development expense due to start-up expenses related to the clinical trial of avacopan for the treatment of C3G. These increases were partially offset by lowerCCX140 Phase II expenses due to the completion of the avacopan

CLEAR and CLASSIC clinical trials for the treatment of AAV in 2016. Decreased Phase I development expense was due to the completion of enrollment in the clinical trial for CCX872 in patients with advanced pancreatic cancer in 2016.

Research and development expenses increased from 2016 to 2017 for the nine month period primarily due to the initiation andFSGS. Continued patient enrollment of the avacopan Phase III ADVOCATE trial in patients with AAV and start-up expenses relatedalso contributed to the Phase II clinical trial of avacopanincrease in research and development expenses for the treatment of C3G. These increases were partially offset by lower Phase II clinical development expense primarily due to the completion of the avacopan CLEAR and CLASSIC clinical trials for the treatment of AAV in 2016 and lower Phase I development expense due to the completion of enrollment in the clinical trial for CCX872 in patients with advanced pancreatic cancer in 2016.six-month period.

The following table summarizes our research and development expenses (in thousands):

We track development expenses that are directly attributable to our clinical development candidates by phase of clinical development. Such development expenses include third-party contract costs relating to formulation, manufacturing, preclinical studies and clinical trial activities. We allocate research and development salaries, benefits or indirect costs to our development candidates and we have included such costs in research and development expenses. All remaining research and development expenses are reflected in “Research and drug discovery” which represents early stage drug discovery programs. Such expenses include allocated employee salaries and related benefits, stock-based compensation, consulting and contracted services to supplement ourin-house laboratory activities, laboratory consumables and allocated facility costs associated with these earlier stage programs.