| Summary of Significant Accounting Policies | 2. Summary
of Significant Accounting Policies
Basis of
presentation
The
accompanying consolidated financial statements reflect the accounts
of Seattle Genetics, Inc. and its wholly-owned subsidiaries
(collectively “Seattle Genetics” or the
“Company”). The consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting
principles, or GAAP. All significant 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.
Use of
estimates
The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates. Estimates
include those used for revenue recognition, valuation of
investments, inventory valuation, accrued liabilities (including
those related to the long-term incentive plans, clinical trials and
contingencies), stock option valuation, and valuation allowance for
deferred tax assets.
Cash and
cash equivalents
The Company
considers all highly liquid investments with maturities of three
months or less at the date of acquisition to be cash
equivalents.
Non-cash
The Company
had $1.0 million and $8.1 million of accrued capital
expenditures as of December 31, 2017 and 2016, respectively.
Accrued capital expenditures have been treated as
a non-cash
As further
described in Note 8, the Company exercised a warrant to purchase
additional shares of common stock in Immunomedics, Inc., or
Immunomedics, in 2017. The fair value of the warrant derivative on
the exercise date represented a non-cash
Investments
The Company
invests primarily in debt securities. In addition, as of
December 31, 2017, the Company held an equity investment in
the common stock of Immunomedics, as further described in
Note 8. These debt and equity securities are classified
as available-for-sale, non-current
If the
estimated fair value of a security is below its carrying value, the
Company evaluates whether it is more likely than not that it will
sell the security before its anticipated recovery in market value
and whether evidence indicating that the cost of the investment is
recoverable within a reasonable period of time outweighs evidence
to the contrary. The Company also evaluates whether or not it
intends to sell the investment. If the impairment is considered to
be other-than-temporary, the security is written down to its
estimated fair value. In addition, the Company considers whether
credit losses exist for any securities. A credit loss exists if the
present value of cash flows expected to be collected is less than
the amortized cost basis of the security. Other-than-temporary
declines in estimated fair value and credit losses are charged
against investment and other income, net.
Derivative
financial instruments
The Company
accounts for financial instruments as derivatives when the
instrument includes an underlying and notional amount or payment
provision, an initial net investment, and a net settlement.
Derivative financial instruments are measured at fair value on the
issuance date and are revalued on each subsequent balance sheet
date. The Company uses the Black-Scholes model using observable
market inputs to estimate the fair value of derivatives. The
changes in estimated fair value are recognized as current period
income or loss. The Company does not hold derivative instruments
for trading or speculative purposes and had no derivative
instruments outstanding as of December 31, 2017 or
2016.
Fair value
of financial instruments
The recorded
amounts of certain financial instruments, including cash and cash
equivalents, interest receivable, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to their
relatively short maturities. Investments that are classified
as available-for-sale
Inventories
The Company
considers regulatory approval of product candidates to be
uncertain. Accordingly, it charges manufacturing costs to research
and development expense until such time as a product has received
regulatory approval for commercial sale. Production costs for the
Company’s marketed product, ADCETRIS, are capitalized into
inventory. ADCETRIS inventory that is deployed for clinical,
research or development use is charged to research and development
expense when it is no longer available for commercial sales.
Production costs for the Company’s other product candidates
continue to be charged to research and development
expense.
The Company
values its inventories at the lower of cost or market value. Cost
is determined on a specific identification basis. Inventory
includes the cost of materials, third-party contract manufacturing
and overhead associated with the production of ADCETRIS. In the
event that the Company identifies excess, obsolete or unsalable
inventory, its value is written down to net realizable
value.
Property
and equipment
Property and
equipment are stated at cost. Land is not depreciated, while all
other property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets,
which are generally as follows:
Years
Building 30
Laboratory and
manufacturing equipment 5-15
Furniture and
fixtures 5
Computers, software and
office equipment 3
Leasehold
improvements are amortized over the shorter of the remaining term
of the applicable lease or the useful life of the asset. Gains and
losses from the disposal of property and equipment are reflected in
income or loss at the time of disposition and have not been
significant. Expenditures for additions and improvements to the
Company’s facilities are capitalized and expenditures for
maintenance and repairs are charged to expense as incurred.
Concessions received by the Company in connection with leases,
including tenant improvement allowances and prorated rent, are
included in deferred rent and other long-term liabilities and
recognized as a reduction in rent expense over the term of the
applicable lease.
Other non-current
Other non-current
•
A $188.4 million investment in the common stock of
Immunomedics as of December 31, 2017. See Notes 3, 4 and 8 for
additional information.
•
A $5.0 million non-controlling
•
Intangible assets resulting from milestone payments that became
due upon the approval of ADCETRIS related to
certain in-licensed
December 31,
2017 2016
Intangible
assets $ 5,650 $ 5,650
Less: accumulated
amortization (4,886 ) (4,115 )
Total $ 764 $ 1,535
Amortization
expense on intangible assets was $0.8 million for each of the
years ended December 31, 2017, 2016, and 2015, respectively.
Assuming no changes in the cost basis of intangible assets, the
estimated aggregate amortization for the next five years will total
$0.8 million.
Impairment
of long-lived assets
The Company
assesses the impairment of long-lived assets, primarily property
and equipment and intangible assets, whenever events or changes in
business circumstances indicate that the carrying amounts of the
assets may not be fully recoverable. When such events occur,
management determines whether there has been an impairment in value
by comparing the asset’s carrying value with its fair value,
as measured by the anticipated undiscounted net cash flows of the
asset. If an impairment in value exists, the asset is written down
to its estimated fair value. The Company has not recognized any
impairment losses through December 31, 2017 as there have been
no events warranting an impairment analysis. The Company’s
long-lived assets are primarily located in the United
States.
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 collaboration and license agreements with a number of
biotechnology and pharmaceutical companies. The Company’s
proprietary technology for linking cytotoxic agents to monoclonal
antibodies called antibody-drug conjugates, or ADCs, is the basis
for many of these collaboration and license agreements, including
the ADC collaborations that the Company has entered into in the
ordinary course of business, under which the Company grants its
collaborators research and commercial licenses to the
Company’s technology and typically 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 when
no other discernible pattern exists. 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
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
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 commercial
sales-based milestones and sales royalties. Sales royalties are
based on a percentage of Takeda’s net sales of ADCETRIS, with
rates that range from the mid-teens mid-twenties
Research
and development expenses
Research and
development, or R&D, expenses consist of salaries, benefits and
other headcount-related costs of the Company’s R&D staff,
preclinical activities, clinical trials and related manufacturing
costs, lab supplies, contract and outside service fees and
facilities and overhead expenses for research, development and
preclinical studies focused on drug discovery, development and
testing. R&D activities are expensed as incurred.
Clinical
trial expenses are a significant component of research and
development expenses, and the Company outsources a significant
portion of these costs to third parties. Third party clinical trial
expenses include investigator fees, site costs, clinical research
organization costs, and costs for central laboratory testing and
data management. Costs associated with activities performed
under co-development In-licensing Non-refundable
Advertising
Advertising
costs are expensed as incurred. The Company incurred
$13.8 million, $12.9 million, and $16.4 million in
advertising expense during 2017, 2016, and 2015,
respectively.
Concentration of credit risk
Cash, cash
equivalents and investments are invested in accordance with the
Company’s investment policy. The policy includes guidelines
for the investment of cash reserves and is reviewed periodically to
minimize credit risk. Most of the Company’s investments are
not federally insured. The Company has accounts receivable from the
sale of ADCETRIS from a small number of distributors. The Company
does not require collateral on amounts due from its distributors or
its collaborators and is therefore subject to credit risk. The
Company has not experienced any significant credit losses to date
as a result of credit risk concentration and does not consider an
allowance for doubtful accounts to be necessary.
Major
customers
The Company
sells ADCETRIS through a limited number of distributors. Certain of
these distributors, together with entities under their common
control, each individually accounted for greater than 10% of total
revenues and greater than 10% of accounts receivable as noted
below. In addition, one of the Company’s collaborators
accounted for greater than 10% of total revenues as noted below.
Revenues generated outside the United States, as determined by
customer location, were less than 10% of total revenues for all
years presented.
The following
table presents each major distributor or collaborator that
comprised more than 10% of total revenue:
Years ended December 31,
2017 2016 2015
Distributor A 23 % 22 % 24 %
Distributor B 19 % 19 % 21 %
Distributor C 18 % 17 % 18 %
Collaborator A 29 % 27 % 17 %
The following
table presents each major distributor that accounted for more than
10% of accounts receivable:
December 31,
2017 2016
Distributor A 32 % 34 %
Distributor B 26 % 26 %
Distributor C 29 % 26 %
Major
suppliers
The use of a
relatively small number of contract manufacturers to supply drug
product necessary for the Company’s commercial operations and
clinical trials creates a concentration of risk for the Company.
While primarily one source of supply is utilized for certain
components of ADCETRIS and each of the Company’s product
candidates, other sources are available should the Company need to
change suppliers. The Company also endeavors to maintain reasonable
levels of drug supply for its use. A change in suppliers, however,
could cause a delay in delivery of drug product which could result
in the interruption of commercial operations or clinical trials.
Such an event would adversely affect the Company’s
business.
Income
taxes
The Company
recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax assets and
liabilities are determined based on the differences between the
financial statement and tax bases of assets and liabilities using
tax rates in effect for the year in which the differences are
expected to reverse. The Company has provided a full valuation
allowance against its deferred tax assets for all periods
presented. A valuation allowance is recorded when it is more likely
than not that the net deferred tax asset will not be realized. The
Company follows the guidance related to accounting for uncertainty
in income taxes, which requires the recognition of an uncertain tax
position when it is more likely than not to be sustainable upon
audit by the applicable taxing authority.
Share-based compensation
The Company
uses the graded-vesting attribution method for recognizing
compensation expense for its stock options and the straight-line
method for recognizing compensation expense for its restricted
stock units (“RSUs”). Compensation expense is
recognized over the requisite service periods on awards ultimately
expected to vest and reduced for forfeitures that are estimated at
the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. For
performance-based stock options and awards, the Company records
compensation expense over the estimated service period once the
achievement of the performance-based milestone is considered
probable. 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,
Long-term
incentive plans
The Company
has established Long-Term Incentive Plans, or LTIPs. The LTIPs
provide eligible employees with the opportunity to receive
performance-based incentive compensation, which may be comprised of
cash, stock options, and/or restricted stock units. The payment of
cash and the grant or vesting of equity are contingent upon the
achievement of pre-determined catch-up,
The total
estimate of unrecognized compensation expense is expected to change
in the future for several reasons, including the addition of more
eligible employees, or the addition, termination, or modification
of an LTIP.
Comprehensive loss
Comprehensive
loss is the change in stockholders’ equity from transactions
and other events and circumstances other than those resulting from
investments by stockholders and distributions to stockholders. The
Company’s comprehensive loss is comprised of net loss,
unrealized gains and losses on available-for-sale
Loss
contingencies
The Company
is involved in various legal proceedings in the normal course of
its business. A loss contingency is recorded if it is probable that
an asset has been impaired or a liability has been incurred and the
amount of the loss can be reasonably estimated. The Company
evaluates, among other factors, the probability of an unfavorable
outcome and its ability to make a reasonable estimate and the
amount of the ultimate loss. Loss contingencies that are determined
to be reasonably possible, but not probable, are disclosed but not
recorded. Legal fees incurred as a result of the Company’s
involvement in legal procedures are expensed as
incurred.
Certain
risks and uncertainties
The
Company’s revenues are derived from ADCETRIS sales and
royalties and from collaboration and license agreements. ADCETRIS
is the Company’s only product available for sale and is
subject to regulation by the FDA in the United States and other
regulatory agencies outside the United States as well as
competition by other pharmaceutical companies. The Company’s
collaboration and license agreement revenues are derived from a
relatively small number of agreements. Each of these agreements can
be terminated by the Company’s collaborators at their
discretion. The Company is also subject to risks common to
companies in the pharmaceutical industry, including risks and
uncertainties related to commercial success and acceptance of
ADCETRIS and the Company’s potential future products by
patients, physicians and payers, competition from other products,
regulatory approvals, regulatory requirements, business
combinations and product or product candidate acquisition
and in-licensing
Guarantees
In the normal
course of business, the Company indemnifies its directors, certain
employees and other parties, including distributors, collaboration
partners, lessors and other parties that perform certain work on
behalf of, or for the Company or take licenses to the
Company’s technologies. The Company has agreed to hold these
parties harmless against losses arising from the Company’s
breach of representations or covenants, intellectual property
infringement or other claims made against these parties in
performance of their work with the Company. These agreements
typically limit the time within which the party may seek
indemnification by the Company and the amount of the claim. It is
not possible to prospectively determine the maximum potential
amount of liability under these indemnification agreements.
Further, each potential claim would be based on the unique facts
and circumstances of the claim and the particular provisions of
each agreement.
Net loss
per share
Basic and
diluted net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the
period. The Company excluded all RSUs and options to purchase
common stock from the calculation of basic and diluted net loss per
share as such securities are anti-dilutive for all periods
presented.
The following
table presents the weighted-average shares that have been excluded
from the number of shares used to calculate basic and diluted net
loss per share as their effect is anti-dilutive (in
thousands):
Years ended
December 31,
2017 2016 2015
Stock options and
RSUs 13,592 12,987 11,953
Recent
accounting pronouncements
In May 2014,
the Financial Accounting Standards Board, or FASB, issued an
Accounting Standards Update entitled
“ASU 2014-09,
In January
2016, FASB issued an Accounting Standards Update entitled
“ASU 2016-01,
In February
2016, FASB issued an Accounting Standards Update entitled
“ASU 2016-02, right-of-use
In March
2016, FASB issued an Accounting Standards Update entitled
“ASU 2016-09,
In June 2016,
FASB issued an Accounting Standards Update entitled
“ASU 2016-13, |
