Organization and Summary of Significant Accounting Policies | 9 Months Ended |
Sep. 30, 2013 |
Organization and Summary of Significant Accounting Policies | ' |
1. Organization and Summary of Significant Accounting Policies |
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Nature of Operations |
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XenoPort, Inc., or the Company, was incorporated in the state of Delaware on May 19, 1999. The Company is a biopharmaceutical company focused on developing and commercializing a portfolio of internally discovered product candidates with an initial focus on neurological disorders. The Company is currently commercializing HORIZANT® (gabapentin enacarbil) Extended-Release Tablets in the United States and is developing its novel fumaric acid ester product candidate. The Company also has two internally discovered product candidates that may be developed as treatments for neurological disorders in the future to the extent its resources permit or the Company enters into collaborations with third parties for such development. HORIZANT and the Company’s product candidates are prodrugs that are typically created by modifying the chemical structure of currently marketed drugs, referred to as parent drugs, and are designed to correct limitations in the oral absorption, distribution and/or metabolism of the parent drug. HORIZANT and each of the Company’s product candidates are orally-available, patented molecules that address potential markets with clear unmet medical needs. The Company’s facilities are located in Santa Clara, California. |
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On November 8, 2012, the Company reached an agreement with Glaxo Group Limited, or GSK, to terminate the Amended and Restated Development and Commercialization Agreement dated November 7, 2010, between the Company and GSK regarding HORIZANT. |
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Under the terms of the November 2012 termination and transition agreement, during a transition period that ended on April 30, 2013, GSK continued to exclusively commercialize, promote, manufacture and distribute HORIZANT in the United States. The Company was not eligible to receive any milestone payments from GSK and did not receive any revenue or incur any losses from GSK’s sales of HORIZANT during the transition period. GSK will continue to fully fund the costs associated with the management and conduct of required post-marketing clinical studies initiated by GSK prior to the date of the termination and transition agreement. In addition, GSK provided to the Company inventory of gabapentin enacarbil in GSK’s possession that was not required for use by GSK in the manufacture of HORIZANT and related manufacturing property and equipment. In exchange for such inventory, the Company will make annual payments to GSK of $1,000,000 for six years beginning in 2016, which is recorded as “Other noncurrent liability” on the Company’s balance sheet for the periods ended September 30, 2013 and December 31, 2012. Pursuant to a separate stock purchase agreement, or SPA, entered into between the Company and GSK on November 8, 2012, GSK purchased $20,000,000 of the Company’s common stock, or an aggregate of 1,841,112 shares at $10.863 per share, which per share price represented a 12.5 percent premium to the average of the closing prices of the Company’s common stock for the ten trading days prior to October 31, 2012. In addition, on November 9, 2012, the Company exercised a put option requiring GSK to purchase an additional 2,190,100 shares of the Company’s common stock at $9.132 per share, which per share price represented a 12.5 percent premium to the average of the closing prices of the Company’s common stock for the ten trading days prior to November 9, 2012. On May 1, 2013, the Company completed the acquisition of the HORIZANT business in accordance with the termination and transition agreement and assumed all responsibilities and associated rights for the further development, manufacturing and commercialization of HORIZANT in the United States on that date. GSK was responsible for the commercial manufacture and supply of HORIZANT during the transition period, and the Company has elected to have GSK continue to supply HORIZANT tablets to the Company for up to six months following the transition period on pricing terms established under the termination and transition agreement. The Company did not assume any liabilities of GSK’s HORIZANT business as of the acquisition date. |
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This termination and transition agreement between the Company and GSK also provided for a mutual release of claims and resolved all ongoing litigation between the parties. |
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Basis of Preparation |
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The accompanying financial statements as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 are unaudited. These unaudited financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2013 and comprehensive losses for the three and nine months ended September 30, 2013 and 2012, and cash flows for the nine months ended September 30, 2013 and 2012. The Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or the Codification, is the single source of authoritative U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 or for any other interim period or any other future year. For more complete financial information, these financial statements, and the notes hereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2013. The results of operations of the acquired HORIZANT business, along with the fair values of the assets acquired in the transaction, have been included in the Company’s financial statements since the May 1, 2013 acquisition date. |
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Revenue Recognition |
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Product Sales |
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The Company began selling HORIZANT to wholesalers in May 2013 following the return of the Company’s commercial rights from GSK. The Company recognizes revenue from HORIZANT product sales when there is persuasive evidence that an arrangement exists, delivery to the customer has occurred, the price is fixed or determinable and collectability is reasonably assured. Revenue from product sales is recorded net of estimated allowances for government rebates such as Medicaid reimbursements, patient assistance programs, customer incentives such as cash discounts for prompt payment, distributor fees and expected returns, as appropriate, which are based on an analysis of historical return rates and deductions of HORIZANT, since its commercial launch by GSK in the second quarter of 2011. Calculating certain of these items involves estimates and judgments based on contractual terms, historical utilization rates data for HORIZANT and new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates, the Company’s expectations regarding future utilization rates for these programs and channel inventory data. |
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Items Deducted from Gross Product Sales |
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Prompt Pay Discount |
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The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. Based on GSK’s commercialization experience, the Company expects customers to continue to comply with the prompt payment terms to earn the cash discount as the Company is selling HORIZANT to the same customers under similar prompt payment terms and conditions. The Company estimates cash discounts for prompt payment based on contractual terms, GSK’s historical utilization rates and the Company’s expectations regarding future utilization rates. The Company accounts for cash discounts by reducing accounts receivable by the full amount and recognizing the discount as a reduction of revenue in the same period the related revenue is recognized. |
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Distributor Fees |
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Under the Company’s inventory management agreements with significant wholesalers, the Company pays the wholesalers a fee primarily for distribution services as well as the maintenance of inventory levels. These distributor fees are based on a contractually determined fixed percentage of sales. The Company accrues the contractual amount and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized. |
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Product Returns |
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The Company does not provide its customers with a general right of product return, but permits returns if the product is damaged or defective when received by the customer, or if the product has or is nearly expired. HORIZANT tablets currently have a shelf-life of 36 months from the date of manufacture. The Company will accept returns for product that will expire within six months or that have expired up to one year after their expiration dates. The Company obtained actual return history by type from GSK since GSK’s product launch in 2011, which provides a basis to reasonably estimate the Company’s future product returns. The Company estimates returns taking into consideration Company-specific adjustments to GSK’s returns history, the shelf life of product, shipment and prescription trends and estimated distribution channel inventory levels. |
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Government Rebates |
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The Company participates in a number of government rebate programs, such as the Medicaid Drug Rebate Program that provides assistance to eligible low-income patients based on each individual state’s guidelines regarding eligibility and services, Public Health Services or 340b programs, and the Medicare Part D Coverage Gap Discount Program, which provides rebates on prescriptions that fall within the “donut hole” coverage gap; and the Department of Veterans Affairs that offers discounts to authorized users of HORIZANT. HORIZANT is also listed on the Federal Supply Schedule, or “FSS”, of the General Services Administration which provides a discount to the Department of Defense, Department of Veterans Affairs, and TriCare. The Company estimates reductions to the Company’s revenues for government rebate programs based on product pricing, current rebates, GSK’s historical and estimated utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates, the Company’s expectations regarding future rebates for these programs and estimated levels of inventory in the distribution channel. |
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Patient Assistance |
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The Company offers a co-pay card program to assist commercially insured patients with the cost of their HORIZANT related co-payments. Participating retail pharmacies get reimbursed by the Company for the amount of the co-pay assistance provided to eligible patients. The Company estimates and accrues the cost of the co-pay program based on historical redemption activity for this program. The Company reimburses the participating pharmacies approximately one month after the prescriptions subject to co-pay assistance are filled. |
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Cost of Product Sales |
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Cost of product sales includes direct and indirect costs to manufacture product sold, including tableting, packaging, storage, shipping and handling costs and inventory write-downs, if any. |
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Accounts Receivable |
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Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment, wholesaler discounts and chargebacks. The need for bad debt allowance is evaluated each reporting period based on the Company’s assessment of the credit worthiness of its customers. |
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Inventories |
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Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out, or FIFO, basis. The Company will regularly evaluate the Company’s inventories for excess quantities and obsolescence (expiration), taking into account such factors as historical and anticipated future sales compared to quantities on hand and the remaining shelf life of HORIZANT. Write-downs of inventories are considered to be permanent reductions in the cost basis of inventories. |
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Inventories that are not expected to be consumed within twelve months following the balance sheet date are classified as a noncurrent asset. |
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Inventories as of September 30, 2013 are summarized as follows (in thousands): |
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Raw materials | | $ | 10,333 | |
Work in progress | | | 1,228 | |
Finished goods | | | 724 | |
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Total inventory | | | 12,285 | |
Less: Long-term inventories | | | 10,341 | |
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Total inventory classified as current | | $ | 1,944 | |
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The Company did not have inventories as of December 31, 2012. |
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Nonretirement Postemployment Benefits |
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On May 31, 2012, the Company adopted the XenoPort Amended and Restated 2012 Severance Plan, or the 2012 Severance Plan, for the benefit of the Company’s non-executive employees. Under the terms of the 2012 Severance Plan, a non-executive employee terminated by the Company because of elimination of his or her position is eligible to receive continuation of medical insurance under COBRA and specified severance payments based on the employee’s level and years of service with the Company. The Company accounts for employee termination benefits in accordance with the provisions of the Compensation-Nonretirement Postemployment Benefits topic of the Codification and records employee termination liabilities once they are both probable and estimable for severance provided under the Company’s existing severance program. |
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On June 14, 2013, the Company implemented a reduction in force that included the elimination of certain non-executive positions as the Company completed certain work projects on its arbaclofen placarbil development program. As a result, the Company recorded severance benefits charges of $0 and $703,000 in the three and nine months ended September 30, 2013, respectively, which were included in the “Research and development” line of the “Operating expenses” section of the Company’s statements of comprehensive loss. As of September 30, 2013, the associated liability balance, included within “Accrued compensation” on the Company’s balance sheets, was $275,000. |
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