| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Consolidation and Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the amounts of Portola, its wholly-owned subsidiaries and a development partner that is a variable interest entity (a “VIE”) for which Portola is deemed, under applicable accounting guidance, to be the primary beneficiary as of September 30, 2018. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP has been condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for a fair statement of our financial information. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period or for any other future year. The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2017 included in our Annual Report on Form 10-K filed on March 1, 2018 with the SEC. Reclassification Certain prior period amounts on the accompanying condensed consolidated financial statements have been reclassified to conform to current period presentation. This reclassification did not have any material impact on our results of operations or financial condition or statement of cash flows as of December 31, 2017. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses in the condensed consolidated financial statements and the accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, inventory, clinical trial accruals, fair value of assets and liabilities, income taxes, in-process research and development, carrying value of notes payable and long term debt less current royalty obligations, the consolidation of VIEs, and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates. Cash as Reported in Condensed Consolidated Statements of Cash Flows Cash as reported in the condensed consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and restricted cash, and consists of the following (in thousands):
September 30, 2018
December 31, 2017
September 30, 2017
December 31, 2016
Cash and cash equivalents
$
146,700
$
181,568
$
344,021
$
188,480
Restricted cash (SRX Cardio)
30
173
170
178
Restricted cash for royalty payments to HealthCare Royalty Partners and its affiliates ("HCR")
242
—
—
—
Total cash balance in condensed consolidated statements of cash flows
$
146,972
$
181,741
$
344,191
$
188,658
Inventories Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out, or FIFO, basis. We primarily use actual costs to determine our cost basis for inventories. To the extent inventories are not scheduled to be utilized in the manufacturing process and/or sold within twelve months of the balance sheet date, it is included as a component of prepaid and other long-term assets in our Condensed Consolidated Balance Sheets. Prior to the regulatory approval of our product candidates, we incur expenses for the manufacture of drug product that could potentially be available to support the commercial launch of our products. Until the first reporting period when regulatory approval has been received, we record all such costs as research and development expense. Beginning in the fourth quarter of 2017, we began to capitalize inventory costs associated with Bevyxxa when it was determined that the inventory had a probable future economic benefit. This inventory capitalization process began to be applied to Andexxa Gen 1 supply upon FDA approval on May 3, 2018. Costs incurred for Andexxa Gen 2 manufacturing process are currently expensed as we have not yet obtained regulatory approval. We periodically analyze our inventory levels, and write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and inventory in excess of expected sales requirements as cost of sales. The bulk drug substance (“BDS”) in Andexxa is currently produced by one supplier. The active pharmaceutical ingredient (“API”) in Bevyxxa is also produced by one supplier. Because the BDS and API have undergone significant manufacturing specific to their intended purposes at the point they are purchased by us, we classify them as work-in-process inventory. Customer Concentration Customers who accounted for 10% or more of total net revenues were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Bayer Pharma, AG and Janssen Pharmaceuticals, Inc.
14%
14%
28%
15%
Daiichi Sankyo, Inc.
26%
53%
23%
49%
Bristol-Myers Squibb Company and Pfizer Inc.
*
27%
*
30%
*
Less than 10% We have three Andexxa specialty distributor customers who each accounted for 10% or more of total net revenues during the three and nine months ended September 30, 2018. Revenue Recognition On January 1, 2018, we adopted Accounting Standards Codification (“ASC”), Topic 606 (ASC 606), Revenue from Contracts with Customers Pursuant to ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that 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, 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. Product Revenue, Net Our product revenue consists of the U.S. sales of Andexxa, which we began shipping to customers in May 2018, and the U.S. sales of Bevyxxa, which we began shipping to customers in January 2018. Prior to January 2018 we had no product revenues. We sell Andexxa and Bevyxxa to a limited number of specialty distributors and wholesalers in the United States (“Customers”). These Customers subsequently resell our products to hospitals, pharmacies and long-term care centers. In addition to distribution agreements with Customers, we enter into arrangements with group purchasing organizations, indirect customers and payors that provide for privately negotiated rebates, chargebacks, distribution costs and discounts with respect to the purchase of our products. We recognize revenue on product sales when the Customer obtains control of our product, which occurs at a point in time (upon delivery). Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances. We expense incremental costs of obtaining a contract when incurred, if the expected amortization period of the asset that we would have recognized is one year or less. To date, we have not incurred any such costs. Reserves for Variable Consideration Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, rebates, copay assistance and other allowances that are offered within contracts between us and our Customers, group purchasing organizations, payors and other indirect customers relating to our product sales. These reserves as detailed below are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than a Customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted in accordance with the expected value method under ASC 606 for relevant factors. These factors include current contractual and statutory requirements, specific known market events and trends, industry data, and/or forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known . Trade Discounts and Allowances: We generally provide Customers with discounts which include incentive fees that are explicitly stated in our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we compensate our Customers and indirect customers for sales order management, data and administrative and distribution services. However, we have determined such services received to date are not distinct from our sale of products to the Customer and therefore a fair market value for these services may not be reasonably determined for accounting purposes. Therefore, these payments have been recorded as a reduction of revenue within the condensed consolidated statement of operations for the three and nine months ended September 30, 2018. Product Returns: We generally offer Customers a right of return based on the product’s expiration date or other market-based factors for product that has been purchased from us. We estimate the amount of our product sales that may be returned by our Customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We currently estimate product return liabilities using available industry data, our own sales information and our visibility into the inventory remaining in the distribution channel. Chargebacks: Chargebacks are discounts that occur when contracted customers, which currently consist primarily of group purchasing organizations, purchase directly from our wholesalers at a discounted price. The wholesalers, in turn, charge us back the difference between the price initially paid by the wholesaler and the discounted price paid to the wholesaler by the healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and receivables. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and we generally issue credits for such amounts within a few weeks of the Customer’s notification to us of the resale. Reserves for chargebacks consist of (i) credits that we expect to issue for units that remain in the distribution channel inventories at each reporting period end that we expect will be sold to qualified healthcare providers, and (ii) chargebacks that Customers have claimed but for which we have not yet issued a credit. Payor Rebates: We contract with various private payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of our products. We estimate these rebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. Collaboration and License Revenue We enter into collaboration and license agreements for the development and commercialization of our products that are within the scope of ASC 606. The terms of collaboration and license agreements typically include payments to us of one or more of the following: non-refundable or partially refundable upfront or license fees; development, regulatory and commercial milestone payments; manufacturing supply services; partial or complete reimbursement of research and development costs; and royalties on net sales of licensed products. Each of these payments results in collaboration and license revenue, except for royalties on net sales of licensed products, which are classified as royalty revenues. To date, we have not received any royalty revenues. As part of the accounting for these arrangements, we must apply judgment to determine whether the performance obligations are distinct, and develop assumptions in determining the stand-alone selling price for each distinct performance obligation identified in the contract. To determine the stand-alone selling price, we rely on assumptions which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. 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 revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment 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 progress for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress 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 milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. 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 control or that of the licensee, such as regulatory approvals, are constrained until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration and license revenue in the period of adjustment. Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. We assess whether these options provide a material right to the licensee, and if so, they are accounted for as separate performance obligations. If we are entitled to additional payments when the licensee exercises these options, any additional payments are recorded in collaboration and license revenue when the licensee obtains control of the goods, which is upon delivery. Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our out-licensing arrangements. Research and Development Activities: Amounts related to research and development and regulatory activities are recognized as the related services or activities are performed, in accordance with the contract terms. Payments may be made to or by us based on the number of full-time equivalent researchers assigned to the collaboration project and the related research and development expenses incurred. We receive payments from our collaborators based on billing schedules established in each contract. Upfront payments and fees may be 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 are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the collaborators and the transfer of the promised goods or services to the collaborators will be one year or less. Cost of Sales Cost of sales represent primarily the costs associated with manufacturing of Andexxa and Bevyxxa, Bevyxxa net sales-based royalties payable to Millennium, amortization of an intangible asset associated with a capitalized milestone payment made to Millennium upon FDA approval of Bevyxxa and fixed costs to our contract manufacturers, if any, for anticipated shortfall in product demand relative to committed volumes. We periodically analyze our inventory levels, and write-down inventory for estimated excess, obsolete and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions. Net Loss per Share Attributable to Portola Common Stockholders Basic net loss per share attributable to Portola Common Stockholders is calculated by dividing the net loss attributable to Portola Common Stockholders by the weighted-average number of shares of Common Stock outstanding for the period. Diluted net loss per share attributable to Portola Common Stockholders is the same as basic net loss per share attributable to Portola Common Stockholders, since the effects of potentially dilutive securities are antidilutive. Recent Accounting Pronouncements Not Yet Adopted In February 2016, the Financial Accounting Standards Board (“ FASB”) issued Accounting Standards Update (“ ASU”) No. 2016-02, Leases (Topic 842) , which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. This ASU becomes effective in the first quarter of fiscal year 2019 and early adoption is permitted. This ASU is required to be applied with a modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements . In issuing ASU No. 2018-11, the FASB decided to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We are currently evaluating our population of leases and are continuing to assess all potential impacts of ASU 2016-02 and ASU 2018-11, but currently believe that the most significant impact relates to our accounting for office building operating leases. We anticipate recognition of additional assets and corresponding liabilities related to leases upon adoption, but have not yet quantified these at this time. We will adopt the standard effective January 1, 2019 and plan to utilize the transition method stated in ASU 2018-11. In June 2018, the FASB issued ASU No. 2018-07, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement Recent Accounting Pronouncements Adopted In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash . This ASU requires changes in restricted cash during the period to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. If cash, cash equivalents and restricted cash are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the total in the statement of cash flows to the related captions in the balance sheet. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2017, with early adoption permitted . The amendments in this ASU should be applied retrospectively to all periods presented. We adopted this guidance on January 1, 2018. The adoption of this ASU our beginning and ending cash balances within our condensed consolidated statements of cash flows. The adoption had no other material impacts to our condensed consolidated statements of cash flows and had no impact on our results of operations or financial position. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments . This ASU addresses the presentation of certain items on the statement of cash flows including among other things settlement of zero coupon debt instruments or other debt instruments with coupon interest rates that are insignificant to the effective interest rate of the borrowing. Pursuant to the new guidance, at the settlement of our promissory notes to Bristol-Myers Squibb Company (“BMS”) and Pfizer Inc. (“Pfizer”) and the fundings received from HealthCare Royalty Partners and its Affiliates, we should classify the portion of the cash payment attributable to the accreted interest related to the debt discount as cash outflows for operating activities, and the portion of the cash payment attributable to the principal as cash outflows for financing activities. Accretion of accrued interest will continue to be recorded as a non-cash item under operating activities. This guidance was effective for annual and interim periods of public entities beginning after December 15, 2017, with early adoption permitted . We adopted this guidance on January 1, 2018, and the adoption had no material impact on our condensed consolidated financial statements for the period ended September 30, 2018. In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 Income Tax Accounting Implications of the Tax Cuts and Jobs Act In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers using the modified retrospective method to all contracts that were not completed as of January 1, 2018. The cumulative effect of applying the new guidance was recorded as an adjustment to accumulated deficit as of the adoption date. As a result, the following adjustments were made to the condensed consolidated balance sheet as of January 1, 2018 (in thousands):
As of January 1, 2018
As Revised Under ASC 606
As Originally Reported
Effect of Change
Assets:
Unbilled - collaboration and license revenue
$
6,694
$
—
$
6,694
Trade and other receivables, net
2,706
—
2,706
Prepaid expenses and other current assets
—
2,706
(2,706
)
Liabilities:
Deferred revenue, current portion
6,354
11,169
(4,815
)
Deferred revenue, long-term
1,269
18,798
(17,529
)
Stockholders' equity:
Accumulated deficit
$
(1,175,481
)
$
(1,204,519
)
$
29,038
The following table compares the reported condensed consolidated balance sheet and statement of operations information to the balances that do not reflect the adoption of ASC 606 as of and for the three and nine months ended September 30, 2018 (in thousands, except for per share data):
As of September 30, 2018
As Reported
Balances Without the Adoption of ASC 606
Effect of Change
Assets:
Unbilled - collaboration and license revenue
$
9,872
$
—
$
9,872
Trade and other receivables, net
1,545
—
1,545
Prepaid expenses and other current assets
—
1,545
(1,545
)
Liabilities:
Deferred revenue, current portion
2,358
5,157
(2,800
)
Deferred revenue, long-term
5,085
24,298
(19,213
)
Stockholders' equity:
Accumulated deficit
(1,437,156
)
(1,469,041
)
31,885
Three Months Ended September 30, 2018
As Reported
Balances Without the Adoption of ASC 606
Effect of Change
Revenue:
Collaboration and license revenue
$
7,001
$
1,586
$
5,415
Operating expenses:
Research and development
40,237
39,289
948
Loss from operations
(69,144
)
(73,611
)
4,467
Net loss
(71,177
)
(75,644
)
4,467
Net loss attributable to Portola
(71,303
)
(75,770
)
4,467
Net loss per share attributable to Portola common stockholders: Basic and diluted
$
(1.08
)
$
(1.15
)
$
0.07
Nine Months Ended September 30, 2018
As Reported
Balances Without the Adoption of ASC 606
Effect of Change
Revenue:
Collaboration and license revenue
$
14,785
$
9,511
$
5,274
Operating expenses:
Research and development
166,744
164,310
2,434
Loss from operations
(258,139
)
(260,979
)
2,840
Net loss
(261,658
)
(264,498
)
2,840
Net loss attributable to Portola
(261,675
)
(264,515
)
2,840
Net loss per share attributable to Portola common stockholders: Basic and diluted
$
(3.97
)
$
(4.02
)
$
0.04
Our financial position with respect to product revenues would not have been materially different without the adoption of ASC 606, however, we would have had deferred revenue recognition under ASC Topic 605 until the product is sold through to the end customer. |
