| Summary of significant accounting policies and basis of presentation | 1. Summary of significant accounting policies and basis of presentation
Organization
Albireo Pharma, Inc. (the Company), is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel bile acid modulators to treat orphan pediatric liver diseases and other liver and gastrointestinal diseases and disorders. The Company’s clinical pipeline includes a Phase 3 product candidate, a Phase 2 product candidate, and elobixibat, which is approved in Japan for the treatment of chronic constipation. Odevixibat, the Company’s Phase 3 lead product candidate, is in development initially for the treatment of patients with progressive familial intrahepatic cholestasis (PFIC), a rare, life-threatening genetic disorder affecting young children.
Basis of presentation
These Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles in the United States (U.S. GAAP). Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB). The Company combined prepaid expenses and other assets with Other receivables and reflected this in the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows at December 2019 and December 2018, and for the twelve months ended December 2019 and 2018 respectively, with a change in the prior period presentation being made to conform to the current period presentation. There was no change to previously reported net loss or total comprehensive loss in the prior period presented as a result.
Principles of consolidation
The accompanying Consolidated Financial Statements include the accounts of the Company including its direct or indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each entity comprising the Company are measured using the currency of the primary economic environment in which the entity operates (the functional currency).
Transactions and balances
Foreign currency transactions in each entity comprising the Company are remeasured into the functional currency of the entity using the exchange rates prevailing at the respective transaction dates. Foreign exchange gains and losses resulting from the settlement of such transactions and from the remeasurement at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized within Other operating expense, net except for changes related to the liability related to the sale of future royalties which are recorded in Other non-operating (income) expense, net in the Consolidated Statements of Operations.
The results and financial position of the Company that have a functional currency different from the USD are translated as follows:
a.
assets and liabilities presented are translated at the closing exchange rate as of December 31, 2019 and 2018;
b.
income and expenses for the statements of operations and comprehensive loss are translated at average exchange rates that are relevant for the respective periods for which the income and expenses occurred; and
c.
significant transactions use the exchange rate on the date of the transaction;
All resulting exchange differences arising from such translations are recognized directly in other comprehensive income (loss) and presented as a separate component of equity.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements and accompanying notes. Management must apply significant judgment in this process. On an ongoing basis, the Company evaluates its estimates and assumptions, including but not limited to accruals, realizability of deferred tax assets and the accretion of interest on the monetization liability. Actual results could materially differ from these estimates.
Segment information
The Company’s entire business is managed by a single management team, which reports to the chief executive officer. The chief executive officer is the chief operating decision maker. The Company has determined it has one operating segment as its chief operating decision maker allocates resources and assesses the performance of the business at this level. Accordingly, the Company has one reporting segment, which is the research and development of novel treatments for liver and gastrointestinal diseases and disorders.
Cash and cash equivalents
The Company considers all short-term highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents.
Concentration of risk
Credit risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. For banks and financial institutions, only independent financial institutions with a high credit rating are utilized. The Company’s current license agreement is with an established and reputable pharmaceutical company and, historically, the Company has not had any material collection risk related to its accounts receivable.
Concentration of revenue
The Company generally does not require collateral or other security in support of accounts receivable. All revenue and receivables relate to one licensee.
Property and equipment, net
Property and equipment, including leasehold improvements, are recorded at cost and depreciated when placed into service using the straight-line method, based on their estimated useful lives as follows:
Estimated Useful Life
Asset Classification
(in years)
IT Equipment
3-5
Vehicles
5
Leaseholds improvements
Lesser of useful life or lease term
Furniture and fixtures
5-7
Property and equipment purchased for less than $5,000 are expensed immediately. Costs for repairs and maintenance are expensed as incurred.
Gains and losses on disposals of equipment are determined by comparing the proceeds with the carrying amount and are recognized within Other operating (income) expense, net in the Consolidated Statements of Operations.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In such instances, the recoverability of assets to be held and used is measured first by a comparison of the carrying amount of an asset group to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, an impairment loss would be recognized if the carrying amount of the asset exceeds the fair value of the asset. There were no impairments recorded for the years ended December 31, 2019 and 2018.
Research and development expenses
Research and development costs are expensed as incurred and include primarily salaries, benefits and other staff-related costs; clinical trial and related clinical manufacturing costs; contract services and other outside costs.
The Company’s nonclinical studies and clinical trials are performed by third-party contract research organizations (CROs). Some of these expenses are billed monthly for services performed, while others are billed based upon milestones achieved. For nonclinical studies, the significant factors used in estimating accruals include the percentage of work completed to date and contract milestones achieved. For clinical trial expenses, the significant factors used in estimating accruals include the number of patients enrolled and percentage of work completed to date or contract milestones achieved. The Company’s estimates are highly dependent upon the timeliness and accuracy of the data provided by the respective CROs regarding the status of the contracted activity, with adjustments made when deemed necessary.
Revenue recognition
Milestone Payments
At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates 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 the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
Royalties
For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes 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).
In 2012, the Company entered into a license agreement (the Agreement) with EA Pharma Co., Ltd. (EA Pharma, formerly Ajinomoto Pharmaceuticals Co., Ltd.) to develop a select product candidate (elobixibat) for registration and subsequent commercialization in select markets. In conjunction with the Agreement, the Company granted EA Pharma an exclusive license to its intellectual property for development and commercialization activities in the designated field and territories. The Company has completed all of its performance obligations.
As of December 31, 2019, the Company is eligible to receive an additional regulatory-based milestone payment under the Agreement of $4.8 million if a specified regulatory event is achieved for elobixibat. The cash payments and any other payments for milestones and royalties from EA Pharma are non-refundable, non-creditable and not subject to set-off.
The Agreement will continue until the last royalty period for any product in the territory, which is defined as the period when there are no remaining patent rights or regulatory exclusivity in place for any products subject to royalties. EA Pharma may terminate the Agreement at will upon 180 days’ prior written notice to the Company. Either party may terminate the Agreement for the other party’s uncured material breach or insolvency and in certain other circumstances agreed to by the parties.
In January 2018, the Japanese Ministry of Health Labour and Welfare (MHLW) approved a new drug application filed by EA Pharma for elobixibat for the treatment of chronic constipation, for which the Company received a milestone payment of $11.2 million. Based on the regulatory approval, the Company determined that the milestone was no longer at risk of significant reversal. As such, because the single performance obligation had previously been satisfied, the Company recognized this amount in full in the first quarter of 2018 and there was no deferred revenue or contract asset as of December 31, 2018. During the year ended December 31, 2019, the Company received a $4.5 million sales based milestone from EA Pharma. As the single performance obligation has been satisfied, the Company recognized this full amount in 2019. The Company recognizes the royalty revenue based on the estimated qualifying sales by EA Pharma each period. For the years ended December 31, 2019 and 2018, the Company recognized $5.1 million and $1.5 million, of royalty revenue, respectively.
Monetization of Future Royalties
In December 2017, the Company executed the RIAA with HCR pursuant to which it sold to HCR the right to receive all royalties from sales in Japan and sales milestones achieved from any covered territory potentially payable to the Company under the Agreement, up to a specified maximum “cap” amount of $78.8 million, based on the funds the Company received from HCR to date. The Company received $44.5 million from HCR, net of certain transaction expenses, under the RIAA and the Company is eligible to receive an additional $15.0 million under the RIAA if a specified sales milestone is achieved for elobixibat in Japan. If the cap amount is reached, the Company will again become eligible to retain royalties from Japanese sales and sales milestones from covered territories for elobixibat from EA Pharma under the Agreement. The Company is obligated to make royalty interest payments to HCR under the RIAA only to the extent it receives future Japanese royalties, sales milestones or other specified payments from EA Pharma. Although the Company sold its rights to receive royalties from the sales of elobixibat in Japan, as a result of its ongoing involvement in the cash flows related to these royalties, the Company will continue to account for these royalties as revenue. The Company recorded the $44.5 million received as a liability related to sale of future royalties (royalty obligation). The royalty obligation will be accreted using the effective interest rate method, based on the Company’s best estimate of the time it will take to reach the capped amount. The following table shows the activity within the liability account for the year ended December 31, 2019:
December 31, 2019
(in thousands)
Liability related to sale of future royalties—beginning balance
$
50,546
Foreign currency translation gain
(45)
Accretion of interest expense on liability related to royalty monetization
Repayment of the liability
(3,717)
Liability related to sale of future royalties—ending balance
$
55,144
Less current portion classified within accrued expenses
(6,430)
Net ending liability related to sale of future royalties
$
48,714
The Company records estimated royalties due for the current period in accrued other until the payment is received from EA Pharma at which time the Company then remits payment to HCR. As royalties are remitted to HCR, the balance of the royalty obligation will be effectively repaid over the life of the RIAA. In order to determine the accretion of the royalty obligation, the Company is required to estimate the total amount of future royalty payments to be received and submitted to HCR, as noted above, based on the Company’s best estimate of the time it will take to reach the cap amount and when milestones will be received. The sum of these amounts less the $44.5 million proceeds the Company received will be recorded as interest expense over the life of the royalty obligation. At December 31, 2019, the Company’s estimate of its total interest expense resulted in a quarterly effective interest rate of approximately 4.13%.
The Company periodically assesses the estimated royalty payments to HCR and to the extent such payments are greater or less than its initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectively adjust the accretion of interest on the royalty obligation. There are a number of factors that could materially affect the amount and the timing of royalty payments, most of which are not within the Company’s control. Such factors include, but are not limited to, the rate of elobixibat prescriptions, the number of doses administered, the introduction of competing products, manufacturing or other delays, patent protection, adverse events that result in governmental health authority imposed restrictions on the use of the drug products, significant changes in foreign exchange rates as the royalties remitted to HCR are in U.S. dollars while sales of elobixibat are in Japanese yen, and sales never achieving forecasted numbers, which would result in reduced royalty payments and reduced non-cash interest expense over the life of the royalty obligation . To the extent future royalties result in an amount less than the liability, the Company is not obligated to fund any such shortfall.
Stock-based compensation
The Company accounts for stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payments, including grants of stock options, to be recognized in the consolidated statements of operations based on their respective fair values whether granted to employees or non-employees.
The fair value of the Company’s stock options has been determined using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including (i) the expected stock price volatility, (ii) the expected term of the award, (iii) the risk-free interest rate and (iv) expected dividends. For the years ended December 31, 2019 and December 31, 2018, due to the lack of historical and implied volatility data of the Company’s common stock and equivalents, the expected volatility has been estimated based on the historical volatilities of peer companies in the Company’s industry that are publicly traded. The Company selected companies that it considers to have comparable characteristics to the Company, including enterprise value, risk profiles and position within the industry and with historical share price information sufficient to meet the expected term of the stock options. The historical volatility data has been computed using the daily closing prices for the selected companies.
Due to the lack of sufficient historical data, the Company used the “simplified” method, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the award, to determine the expected term of stock options.
The Company records compensation expense for service-based awards over the vesting period of the award on a straight-line basis. For awards with service and performance based conditions, compensation related to the performance-based vesting conditions is recognized when achievement of the performance condition is considered probable and the compensation expense related to the service condition is recorded using the accelerated method.
Modifications to stock-based awards are treated as an exchange of the original award for a new award with total compensation equal to the grant-date fair value of the original award plus any incremental value of the modification. The incremental value is based on the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.
Employee benefits
Pension obligations
The Company has defined contribution plans for its Sweden-based employees whereby the Company pays contributions to employee benefit or insurance plans on a mandatory, contractual or voluntary basis.
The Company paid $0.4 million and $0.4 million to the plans for the years ended December 31, 2019 and 2018, respectively.
401(k)
The Company has a 401(k) retirement plan in which all U.S.-based employees are eligible to participate. The Company contributed $0.2 million and $0.2 million to the plan for the years ended December 31, 2019 and 2018, respectively. The Company matches employee contributions to the plan, on a per employee basis, up to 4% of each employee’s wages for the years ended December 31, 2019 and 2018.
Loss contingencies
Loss contingencies are recorded as liabilities when it is probable that a liability has occurred and the amount of loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that an ultimate loss will be material. Contingent liabilities are often resolved over long periods of time. Estimating probable losses requires analysis that often depends on judgments about potential actions by third parties, such as regulators.
Income taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (ASC 740). Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax basis of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. The Company records a valuation allowance to reduce its deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.
Income tax expense consists of taxes currently payable and changes in deferred tax assets and liabilities calculated according to local tax rules. Deferred tax assets and liabilities are based on temporary differences that arise between carrying values used for financial reporting purposes and amounts used for taxation purposes of assets and liabilities and the future tax benefits of tax loss carry forwards. A deferred tax asset is recognized only to the extent that it is more likely than not that future taxable profits will be available against which the asset can be utilized.
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the Company considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. In the event that the Company changes its determination as to the amount of deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.
The amount of deferred tax provided is calculated using tax rates in effect at the balance sheet date. The impact of tax law changes is recognized in periods when the change is enacted.
A two-step approach is applied pursuant to ASC 740 in the recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
The Company’s policy is to recognize interest and penalty expenses associated with uncertain tax positions as a component of income tax expense in the Consolidated Statements of Operations. As of the years ended December 31, 2019 and 2018, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Consolidated Statements of Operations.
Net loss per share
Basic net loss per share is calculated by dividing the net loss attributable to holders of common stock by the weighted average number of shares of common stock outstanding. Diluted net loss per share is calculated by dividing the net loss attributable to holders of common stock by the weighted-average number of shares of common stock outstanding. If the Company were in a net income position, diluted net income per share would be calculated by dividing the net income attributable to holders of common stock by the weighted-average number of shares of common stock plus dilutive common stock equivalents outstanding, including any dilutive effect from such shares.
Goodwill
Goodwill is the excess of the purchase price in a business combination over the fair value of identifiable net assets acquired. Goodwill and certain other intangible assets having indefinite lives are not amortized to earnings, but instead are subject to periodic testing for impairment.
Goodwill and indefinite-lived intangible assets are assessed at least annually, but also whenever events or changes in circumstances indicate the carrying values may not be recoverable. Factors that could trigger an impairment review, include: (a) significant underperformance relative to historical or projected future operating results; (b) significant changes in the manner of or use of the acquired assets or the strategy for the Company’s overall business; (c) significant negative industry or economic trends; (d) significant decline in the Company’s stock price for a sustained period; and (e) a decline in the Company’s market capitalization below net book value.
The Company conducts an impairment assessment on October 1 each year taking a qualitative evaluation approach to determine if there are any adverse market factors or changes in circumstances indicating that the carrying value of goodwill may not be recoverable. If it is more likely than not that an impairment exists, the Company performs a quantitative test which compares the fair value to the net carrying value, and records an impairment of goodwill to the extent that the net carrying value exceeds the fair value. During the fourth quarter of 2019 and 2018, we completed our annual impairment assessment and concluded that goodwill was not impaired in any of those years.
Recently adopted accounting pronouncements
As of January 1, 2019, the Company adopted ASU 2016‑02, “ Leases (Topic 842) .” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The Company has applied the transition provisions at the beginning of the period of adoption, which results in recording the cumulative adjustment to the opening balance sheet as of January 1, 2019. Under this transition provision, the Company will continue to apply the legacy guidance under ASC 840, Leases , including its disclosure requirements, in the comparative periods presented in fiscal 2019. On the date of the adoption, the Company recorded a ROU asset of $1.2 million and lease liabilities of $1.2 million. Additionally, the Company elected the following practical expedients: the Company has elected to not separate lease components from non-lease components in its lease contract; the Company will not apply the recognition requirements of ASC 842 to its leases with lease terms of 12 months or less but rather recognize the lease expense on a straight-line basis over the lease term; Relief package – the Company has not reassessed whether expired or existing contracts may contain a lease, the lease classification of expired or existing leases and whether previously capitalized indirect costs would qualify for capitalization under ASC 842; Use of hindsight – the Company has elected to use hindsight in assessing the likelihood of renewals, terminations and purchase options and in assessing impairment of ROU assets; and Portfolio approach – the Company has elected to not apply the portfolio approach for groups of leases with similar characteristics. |
