| 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. The Company
acquired Cascadian Therapeutics, Inc., or Cascadian, in March 2018,
as further described in Note 8. 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 U.S.; however, the
Company also has subsidiaries in Australia, Canada, Ireland,
Luxembourg, Switzerland, and the United Kingdom.
The condensed consolidated balance sheet data as of
December 31, 2017 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.
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,
2017, 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 month period ended March 31, 2018 are not
necessarily indicative of the results to be expected for the full
year or any other interim period.
Non-cash investing activities
The Company had $2.3 million and $1.0 million of accrued
capital expenditures as of March 31, 2018 and
December 31, 2017, 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.
Investments
The Company adopted Accounting Standards Update entitled “ASU
2016-01, Financial Instruments: Overall” on January 1,
2018, which addressed certain aspects of recognition, measurement,
presentation and disclosure of financial instruments, including
that changes in the fair value of equity securities be recorded in
income or loss rather than accumulated other comprehensive income
or loss in stockholders’ equity. The Company used the
modified retrospective method and recognized a $64.1 million
cumulative effect of initially applying this ASU as an adjustment
to the opening accumulated deficit at January 1, 2018.
Accordingly, comparative information has not been adjusted and
continues to be reported under previous accounting standards. The
implementation of this standard increases the volatility of net
income or loss to the extent that the Company continues to hold
equity securities.
The Company invests primarily in debt securities. These debt
securities are classified as available-for-sale, which are reported
at estimated fair value with unrealized gains and losses included
in accumulated other comprehensive income and loss in
stockholders’ equity. Realized gains, realized losses and
declines in the value of investments judged to be
other-than-temporary are included in investment and other loss,
net. The cost of investments for purposes of computing realized and
unrealized gains and losses is based on the specific identification
method. Amortization of premiums and accretion of discounts on debt
securities are included in investment and other loss, net. Interest
and dividends earned on all securities are included in investment
and other loss, net. The Company classifies investments in debt
securities maturing within one year of the reporting date, or where
management’s intent is to use the investments to fund current
operations or to make them available for current operations, as
short-term investments. The Company also holds certain equity
securities, which are reported at estimated fair value.
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 loss, net.
Business combinations, including acquired in-process research
and development and goodwill
The Company accounts for business combinations using the
acquisition method, recording the acquisition-date fair value of
total consideration over the acquisition-date fair value of net
assets acquired as goodwill.
Fair value is typically estimated using the present value of future
discounted cash flows, an income approach. The significant
estimates in the discounted cash flow model primarily include the
discount rate, rates of future revenue growth and/or profitability
of the acquired business, and working capital effects. The discount
rate considers the relevant risk associated with business-specific
characteristics and the uncertainty related to the ability to
achieve the projected cash flows.
In-process research and development assets are accounted for as
indefinite-lived intangible assets and maintained on the balance
sheet until either the underlying project is completed or the asset
becomes impaired. If the project is completed, the carrying value
of the related intangible asset is amortized to cost of sales over
the remaining estimated life of the asset beginning in the period
in which the project is completed. If the asset becomes impaired or
is abandoned, the carrying value of the related intangible asset is
written down to its fair value and an impairment charge is recorded
in the period in which the impairment occurs.
The Company evaluates indefinite-lived intangible assets and
goodwill for impairment annually, or more frequently when events or
circumstances indicate that impairment may have occurred. As part
of the impairment evaluation, the Company may elect to perform an
assessment of qualitative factors. If this qualitative assessment
indicates that it is more likely than not that the fair value of
the indefinite-lived intangible asset or the reporting unit (for
goodwill) is less than its carrying value, the Company then would
proceed with the quantitative impairment test to compare the fair
value to the carrying value and recognize an impairment if the
carrying value exceeds the fair value.
Acquisition-related costs, including banking, legal, accounting,
valuation, and other similar costs, are expensed in the periods in
which the costs are incurred. The results of operations of the
acquired business are included in the consolidated financial
statements from the acquisition date.
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 regulatory
milestones. The Company records compensation expense over the
estimated service period for each milestone subject to the
achievement of the milestone being 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.
During the three months ended March 31, 2018, an LTIP
milestone was achieved related to the U.S. Food and Drug
Administration, or FDA, approval of a label expansion in the U.S.
for ADCETRIS, based on clinical trial data from the ECHELON-1
study. As of March 31, 2018, the estimated unrecognized
compensation expense related to all LTIPs was $34.8 million.
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.
Revenue recognition
The Company adopted Accounting Standards Codification Topic
606—Revenue from Contracts with Customers, or Topic 606, on
January 1, 2018, resulting in a change to its accounting
policy for revenue recognition. The Company used the modified
retrospective method and recognized the cumulative effect of
initially applying Topic 606 as an adjustment to the opening
accumulated deficit at January 1, 2018. Accordingly,
comparative information has not been adjusted and continues to be
reported under previous accounting standards. Refer to Note 2 for
additional information.
The Company’s revenues are comprised of ADCETRIS net product
sales, amounts earned under its collaboration and licensing
agreements and royalties. Revenue recognition occurs when a
customer obtains control of promised goods or services in an amount
that reflects the consideration the Company expects to receive in
exchange for those goods or services based on a short-term credit
arrangement.
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 delivery of ADCETRIS to
the end-user site represents a single performance obligation for
these transactions. The Company records product sales at the point
in time when title and risk of loss pass, which generally occurs
upon delivery of the product to the customer. The transaction price
for product sales represents the amount the Company expects to
receive, which is 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
payor mix in target markets and experience to date. These estimates
involve a substantial degree of judgment. The Company has applied a
portfolio approach as a practical expedient for estimating net
product sales from ADCETRIS.
Government-mandated rebates and chargebacks
The Company has also completed a Federal Supply Schedule, or FSS,
agreement under which certain U.S. government purchasers receive a
discount on eligible purchases of ADCETRIS. In addition, the
Company has entered into a Pharmaceutical Pricing Agreement with
the Secretary of Health and Human Services, which enables certain
entities that qualify for government pricing under the Public
Health Services Act, or PHS, to receive discounts on their
qualified purchases of ADCETRIS. Under these agreements,
distributors process a chargeback to the Company for the difference
between wholesale acquisition cost and the applicable discounted
price. As a result of the Company’s direct-ship distribution
model, it can identify the entities purchasing ADCETRIS and this
information enables the Company to estimate expected chargebacks
for FSS and PHS purchases based on each entity’s eligibility
for the FSS and PHS programs. The Company also reviews historical
rebate and chargeback information to further refine these
estimates.
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.
The Company’s collaboration and license agreements include
contractual milestones. Generally, the milestone events coincide
with the progression of the collaborators’ product
candidates. These consist of development milestones (such as
designation of a product candidate or initiation of preclinical
studies and the initiation of phase 1, phase 2, or phase 3 clinical
trials), regulatory milestones (such as the filing of regulatory
applications for marketing approval), and commercialization
milestones (such as first commercial sale in a particular market
and product sales in excess of a pre-specified threshold). 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. 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. In the case of the Company’s ADCETRIS collaboration
with Takeda Pharmaceutical Company Limited, or 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.
ADC collaborations are initially evaluated as to whether the
intellectual property licenses granted by the Company represent
distinct performance obligations. If they are determined to be
distinct, the value of the intellectual property licenses would be
recognized up-front while the research and development service fees
would be recognized as the performance obligations are satisfied.
Variable consideration is assessed at each reporting period as to
whether it is not subject to significant future reversal and,
therefore, should be included in the transaction price at the
inception of the contract. If a contract includes a fixed or
minimum amount of research and development support, this also would
be included in the transaction price. Changes to ADC
collaborations, such as the extensions of the research term or
increasing the number of targets or technology covered under an
existing agreement, are assessed for whether they represent a
modification or should be accounted for as a new contract.
The Company has concluded that the license of intellectual property
in its current ADC collaborations is not distinct from the
perspective of its customers at the time of initial transfer, since
the Company does not license intellectual property without related
technology transfer and research and development support services.
The Company’s performance obligations under its
collaborations include such things as providing intellectual
property licenses, performing technology transfer, performing
research and development consulting services, providing reagents,
ADCs, and other materials, and notifying the customer of any
enhancements to licensed technology or new technology that the
Company discovers, among others. The Company determined its
performance obligations under its current ADC collaborations as
evaluated at contract inception were not distinct and represented a
single performance obligation. Revenue is recognized using a
proportional performance model, representing the transfer of goods
or services as activities are performed over the term of the
agreement. Upfront payments are also amortized to revenue over the
performance period. Upfront payment contract liabilities resulting
from the Company’s collaborations do not represent a
financing component as the payment is not financing the transfer of
goods or services, and the technology underlying the licenses
granted reflects research and development expenses already incurred
by the Company.
When no performance obligations are required of the Company, or
following the completion of the performance obligation period, such
amounts are recognized as revenue upon transfer of control of the
goods or services to the customer. Generally, all amounts received
or due other than sales-based milestones and royalties are
classified as collaboration and license agreement revenues.
Sales-based milestones and royalties are recognized as royalty
revenue in the period the related sale occurred.
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 as performance obligations are satisfied. 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 to the
mid-twenties based on sales volume. Takeda bears a portion of
third-party royalty costs owed on its sales of ADCETRIS. This
amount is included in royalty revenues. 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 period in which the related sales by Takeda
occur.
Recent accounting pronouncements not yet adopted
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, and expects that the adoption of
the standard will increase assets and liabilities related to the
Company’s operating leases in the consolidated balance
sheets.
In June 2016, FASB issued an Accounting Standards 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. |
