| Summary of significant accounting policies | 1. Summary of significant accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial
statements reflect the accounts of Seattle Genetics, Inc. and its
wholly-owned subsidiaries (collectively “Seattle
Genetics” or the “Company”). All intercompany
transactions and balances have been eliminated. Management has
determined that the Company operates in one segment: the
development and sale of pharmaceutical products on its own behalf
or in collaboration with others. Substantially all of the
Company’s assets and revenues are related to operations in
the United States; however, the Company also has subsidiaries in
Canada, Switzerland and the United Kingdom.
The condensed consolidated balance sheet data as of
December 31, 2015 were derived from audited financial
statements not included in this quarterly report on Form 10-Q. The
accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission, or SEC, and generally
accepted accounting principles in the United States of America, or
GAAP, for unaudited condensed consolidated financial information.
Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. The
accompanying unaudited condensed consolidated financial statements
reflect all adjustments consisting of normal recurring adjustments
which, in the opinion of management, are necessary for a fair
statement of the Company’s financial position and results of
its operations, as of and for the periods presented.
Unless indicated otherwise, all amounts presented in financial
tables are presented in thousands, except for per share and par
value amounts.
These unaudited condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial
statements and accompanying notes included in the Company’s
Annual Report on Form 10-K for the year ended December 31,
2015, as filed with the SEC.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the amounts reported in the condensed consolidated financial
statements and accompanying notes. Actual results could differ from
those estimates. The results of the Company’s operations for
the three and nine month periods ended September 30, 2016 are
not necessarily indicative of the results to be expected for the
full year.
Non-cash investing activities
The Company had $4.3 million and $5.4 million of accrued capital
expenditures as of September 30, 2016 and December 31,
2015, respectively. Accrued capital expenditures have been treated
as a non-cash investing activity and, accordingly, have not been
included in the statement of cash flows until such amounts have
been paid in cash.
Other non-current assets
Other non-current assets include a $5.0 million non-controlling
investment in a privately-held company that is accounted for under
the cost method of accounting. The Company periodically evaluates
the carrying value of the investment if significant adverse events
or circumstances indicate a possible impairment. As of
September 30, 2016, no impairment in value has been
observed.
Long-term incentive plans
In May and July of 2016, the Company established two Long-Term
Incentive Plans, or the First LTIP and the Second LTIP,
respectively. The First LTIP provides eligible employees with the
opportunity to receive a performance-based incentive comprised of a
cash payment and stock options. The Second LTIP provides eligible
employees with the opportunity to receive a performance-based
incentive comprised of a cash payment and a restricted stock unit
award. The payment of the cash, commencement of the vesting of the
stock options, and grant and commencement of vesting of the
restricted stock units under the LTIPs are contingent upon the
achievement of pre-determined regulatory milestones. The Company
will record compensation expense for the LTIPs over the estimated
service period for each milestone once the achievement of the
milestone is considered probable in accordance with the provisions
of ASC 450, Contingencies. At each reporting date, the Company
assesses whether achievement of a milestone is considered probable,
and if so, records compensation expense based on the portion of the
service period elapsed to date with respect to that milestone, with
a cumulative catch-up, net of estimated forfeitures. The Company
will recognize remaining compensation expense with respect to a
milestone, if any, through the end of the estimated service period.
As of September 30, 2016, the estimated value to be delivered
in cash and stock options for employees currently eligible under
the First LTIP was approximately $20.7 million. As of
September 30, 2016, the estimated value to be delivered in
cash and restricted stock units for employees currently eligible
under the Second LTIP was approximately $20.9 million. No
compensation expense has been recorded to date under the LTIPs. The
total potential value to be delivered under the LTIPs is expected
to change in the future for several reasons, including the addition
of more eligible employees to the LTIPs.
Revenue Recognition
The Company’s revenues are comprised of ADCETRIS net product
sales, amounts earned under its collaboration and licensing
agreements and royalties. Revenue recognition is predicated upon
persuasive evidence of an agreement existing, delivery of products
or services being rendered, amounts payable being fixed or
determinable, and collectibility being reasonably assured.
Net product sales
The Company sells ADCETRIS through a limited number of
pharmaceutical distributors in the U.S. and Canada. Customers order
ADCETRIS through these distributors and the Company typically ships
product directly to the customer. The Company records product sales
when title and risk of loss pass, which generally occurs upon
delivery of the product to the customer. Product sales are recorded
net of estimated government-mandated rebates and chargebacks,
distribution fees, estimated product returns and other deductions.
Accruals are established for these deductions and actual amounts
incurred are offset against applicable accruals. The Company
reflects these accruals as either a reduction in the related
account receivable from the distributor, or as an accrued liability
depending on the nature of the sales deduction. Sales deductions
are based on management’s estimates that consider payer mix
in target markets and experience to date. These estimates involve a
substantial degree of judgment.
Government-mandated rebates and chargebacks
Distribution fees, product returns and other deductions
Collaboration and license agreement revenues
The Company has developed a proprietary technology for linking
cytotoxic agents to monoclonal antibodies called antibody- drug
conjugates, or ADCs. This proprietary technology is the basis of
ADC collaborations that the Company has entered into in the
ordinary course of its business with a number of biotechnology and
pharmaceutical companies. Under these ADC collaboration agreements,
the Company grants its collaborators research and commercial
licenses to the Company’s technology and provides technology
transfer services, technical advice, supplies and services for a
period of time.
If there are continuing performance obligations, the Company uses a
time-based proportional performance model to recognize revenue over
the Company’s performance period for the related agreement.
Collaboration and license agreements are evaluated to determine
whether the multiple elements and associated deliverables can be
considered separate units of accounting. To date, the
pre-commercial deliverables under the Company’s collaboration
and license agreements have not qualified as separate units of
accounting. The assessment of multiple element arrangements
requires judgment in order to determine the appropriate point in
time, or period of time, that revenue should be recognized. The
Company believes that the development period in each agreement is a
reasonable estimate of the performance obligation period of such
agreement. Accordingly, all amounts received or due, including any
upfront payments, maintenance fees, development and regulatory
milestone payments and reimbursement payments, are recognized as
revenue over the performance obligation periods of each agreement.
These performance obligation periods typically range from one to
three years. The agreements with Takeda Pharmaceutical Company
Limited, or Takeda, and Genentech, Inc., a member of the Roche
Group, or Genentech, have performance obligation periods of ten and
seventeen years, respectively. All of the remaining performance
obligation periods for our active collaborations are currently
expected to be completed in four years or less. When no performance
obligations are required of the Company, or following the
completion of the performance obligation period, such amounts are
recognized as revenue when collectibility is reasonably assured.
Generally, all amounts received or due other than sales-based
milestones and royalties are classified as collaboration and
license agreement revenues as they are earned. Sales-based
milestones and royalties are recognized as royalty revenue as they
are reported to the Company.
The Company’s collaboration and license agreements include
contractual milestones. Generally, the milestone events contained
in the Company’s collaboration and license agreements
coincide with the progression of the collaborators’ product
candidates from development, to regulatory approval and then to
commercialization and fall into the following categories.
Development milestones in the Company’s collaborations may
include the following types of events:
• Designation of a product candidate or
initiation of preclinical studies. The Company’s
collaborators must undertake significant preclinical research and
studies to make a determination of the suitability of a product
candidate and the time from those studies or designation to
initiation of a clinical trial may take several years.
• Initiation of a phase 1 clinical
trial. Generally, phase 1 clinical trials may take one to two years
to complete.
• Initiation of a phase 2 clinical
trial. Generally, phase 2 clinical trials may take one to three
years to complete.
• Initiation of a phase 3 clinical
trial. Generally, phase 3 clinical trials may take two to six years
to complete.
Regulatory milestones in the Company’s collaborations may
include the following types of events:
• Filing of regulatory applications for
marketing approval such as a Biologics License Application in the
United States or a Marketing Authorization Application in Europe.
Generally, it may take up to twelve months to prepare and submit
regulatory filings.
• Receiving marketing approval in a
major market, such as in the United States, Europe, Japan or other
significant countries. Generally it may take up to three years
after a marketing application is submitted to obtain approval for
marketing and pricing from the applicable regulatory agency.
Commercialization milestones in the Company’s collaborations
may include the following types of events:
• First commercial sale in a particular
market, such as in the United States, Europe, Japan or other
significant countries.
• Product sales in excess of a
pre-specified threshold. The amount of time to achieve this type of
milestone depends on several factors, including, but not limited
to, the dollar amount of the threshold, the pricing of the product,
market penetration of the product and the rate at which customers
begin using the product.
The Company’s ADC collaborators are solely responsible for
the development of their product candidates and the achievement of
milestones in any of the categories identified above is based
solely on the collaborators’ efforts.
In the case of the Company’s ADCETRIS collaboration with
Takeda, the Company may be involved in certain development
activities; however, the achievement of milestone events under the
agreement is primarily based on activities undertaken by
Takeda.
The process of successfully developing a product candidate,
obtaining regulatory approval and ultimately commercializing a
product candidate is highly uncertain and the attainment of any
milestones is therefore uncertain and difficult to predict. In
addition, since the Company does not take a substantive role or
control the research, development or commercialization of any
products generated by its ADC collaborators, the Company is not
able to reasonably estimate when, if at all, any milestone payments
or royalties may be payable to the Company by its ADC
collaborators. As such, the milestone payments associated with its
ADC collaborations involve a substantial degree of uncertainty and
risk that they may never be received. Similarly, even in those
collaborations where the Company may have an active role in the
development of the product candidate, such as the Company’s
ADCETRIS collaboration with Takeda, the attainment of a milestone
is based on the collaborator’s activities and is generally
outside the direction and control of the Company.
The Company generally invoices its collaborators and licensees on a
monthly or quarterly basis, or upon the completion of the effort or
achievement of a milestone, based on the terms of each agreement.
Deferred revenue arises from amounts received in advance of the
culmination of the earnings process and is recognized as revenue in
future periods when the applicable revenue recognition criteria
have been met. Deferred revenue expected to be recognized within
the next twelve months is classified as a current liability.
Royalty revenues and cost of royalty revenues
Royalty revenues primarily reflect amounts earned under the
ADCETRIS collaboration with Takeda. These royalties include sales
royalties, which are based on a percentage of Takeda’s net
sales at rates that range from the mid-teens to the mid-twenties
based on sales volume, and commercial sales-based milestones.
Takeda bears a portion of third-party royalty costs owed on its
sales of ADCETRIS. This amount is included in royalty revenue in
the Company’s consolidated financial statements. Cost of
royalty revenues reflects amounts owed to the Company’s third
party licensors related to Takeda’s sales of ADCETRIS. These
amounts are recognized in the quarter in which Takeda reports its
sales activity to the Company, which is the quarter following the
related sales. Royalty revenues also include amounts earned in
connection with the Company’s ADC collaborations.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued an Accounting Standards Update entitled
“ASU 2014-09, Revenue from Contracts with Customers.”
The standard requires entities to recognize revenue through an
evaluation that includes identification of the contract,
identification of the performance obligations, determination of the
transaction price, allocation of the transaction price to the
performance obligations, and recognition of revenue as the entity
satisfies the performance obligations. In August 2015, FASB issued
an Accounting Standards Update entitled “ASU 2015-14, Revenue
from Contracts with Customers: Deferral of the Effective
Date”, which defers the effective date of ASU 2014-09 to the
Company’s fiscal year beginning January 1, 2018. The
FASB has continued to issue accounting standards updates to clarify
and provide implementation guidance related to Revenue from
Contracts with Customers, including “ASU 2016-08, Revenue
from Contract with Customers: Principal versus Agent
Considerations”, “ASU 2016-10, Revenue from Contracts
with Customers: Identifying Performance Obligations and
Licensing”, and “ASU 2016-12, Revenue from Contracts
with Customers: Narrow-Scope Improvements and Practical
Expedients.” The Company is currently evaluating the guidance
to determine the potential impact on its financial condition,
results of operations and cash flows, and financial statement
disclosures.
In January 2016, FASB issued an Accounting Standards Update
entitled “ASU 2016-01, Financial Instruments: Overall.”
The standard addresses certain aspects of recognition, measurement,
presentation and disclosure of financial instruments. The standard
will become effective for the Company beginning January 1,
2018. The Company is currently evaluating the guidance to determine
the potential impact on its financial condition, results of
operations and cash flows, and financial statement disclosures.
In February 2016, FASB issued an Accounting Standards Update
entitled “ASU 2016-02, Leases.” The standard requires
entities to recognize in the consolidated balance sheet a liability
to make lease payments and a right-of-use asset representing its
right to use the underlying asset for the lease term. The standard
will become effective for the Company beginning January 1,
2019, with early adoption permitted. The Company is currently
evaluating the guidance to determine the potential impact on its
financial condition, results of operations and cash flows, and
financial statement disclosures.
In March 2016, FASB issued an Accounting Standard Update entitled
“ASU 2016-09, Compensation – Stock Compensation.”
The standard is intended to simplify certain elements of accounting
for share-based payment transactions, including the income tax
impact, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. The standards
will become effective for the Company beginning on January 1,
2017, with early adoption permitted. The Company is currently
evaluating the guidance to determine the potential impact on its
financial condition, results of operations and cash flows, and
financial statement disclosures.
In June 2016, FASB issued an Accounting Standard Update entitled
“ASU 2016-13, Financial Instruments: Credit Losses”.
The objective of the standard is to provide information about
expected credit losses on financial instruments at each reporting
date, and to change how other than temporary impairments on
investments securities are recorded. The standard will become
effective for the Company beginning on January 1, 2020 with
early adoption permitted. The Company is currently evaluating the
guidance to determine the potential impact on its financial
condition, results of operations and cash flows, and financial
statement disclosures. |
