| 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 commercial-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 product pipeline includes Bylvay (odevixibat) approved in the United States and Europe, elobixibat, approved in Japan and Thailand for the treatment of chronic constipation, A3907, our Phase 1 lead candidate for the treatment of adult liver diseases, A2342, our lead preclinical candidate for the treatment of adult viral and liver diseases, and multiple other preclinical candidates. Bylvay was approved by the U.S. Food and Drug Administration (FDA) on July 20, 2021 for the treatment of pruritus in patients with progressive familial intrahepatic cholestasis (PFIC) ages 3 months or older, and authorized by the European Medicines Agency on July 16, 2021 for the treatment of PFIC in patients 6 months or older. Bylvay was also granted marketing authorization by the UK Medicines and Healthcare Products Regulatory Agency (MHRA) in September 2021 for the treatment of PFIC in patients 6 months or older. Bylvay is also in Phase 3 development for the treatment of biliary atresia and Alagille syndrome (ALGS), each a rare, life-threatening disorder affecting young children. Since its inception, the Company has devoted substantially all of its resources to its research and development efforts, including activities to develop its product candidates, to commercialize Bylvay in PFIC, to prepare for the commercialization of Bylvay in other indications, if approved, and to provide general and administrative support for these operations. The Company has primarily funded its operations with proceeds from the sales of common stock, the sale of future royalties, upfront and milestone payments for regional agreements, proceeds from the issuance of debt, and the sale of a Priority Review Voucher (PRV). As of June 30, 2022, the Company has raised an aggregate of $356.9 million through the issuance of common stock, net of issuance costs, $59.3 million from the sale of its future royalties, $9.5 million through the Loan and Security Agreement (see Note 7), net of issuance costs, and net proceeds of $103.4 million, after deducting commission costs, from the sale of the PRV. The Company has incurred significant operating losses and negative cash flows from operations since inception. The Company expects to continue to incur significant expenses and operating losses for the foreseeable future. In addition, the Company anticipates that its expenses will increase significantly in connection with ongoing activities to support the commercialization of Bylvay for PFIC and the advancement of Bylvay in its later stage clinical trials and providing administrative support. As a result, the Company will need substantial additional funding to support its continued operations and growth strategy. Until such a time as the Company can generate significant revenue from product sales, if ever, the Company expects to finance its operations through the sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. The Company may be unable to raise additional funds or enter into such other agreements on favorable terms, or at all. If the Company fails to raise capital or enter into such agreements as, and when, needed, the Company may have to significantly delay, scale back or discontinue the development and commercialization of one or more of its product candidates or delay its pursuit of potential in-licenses or acquisitions. As of June 30, 2022, the Company had cash and cash equivalents of $181.0 million. Management believes that its cash and cash equivalents at June 30, 2022 will be sufficient to allow the Company to fund its current operating plan through at least the next twelve months from the issuance of these financial statements. The Company is subject to those risks associated with any biopharmaceutical company that has substantial expenditures for research and development. There can be no assurance that the Company’s research and development projects will be successful, that products developed will obtain necessary regulatory approval, or that any approved product will be commercially viable. In addition, the Company operates in an environment of rapid technological change and is largely dependent on the services of its employees and consultants. If the Company fails to become profitable or is unable to sustain profitability on a continuing basis, then it may be unable to continue its operations at planned levels and be forced to reduce its operations. Basis of presentation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and 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 fiscal year ended December 31, 2021. In the opinion of management, all adjustments (including normal recurring adjustments) considered necessary for fair presentation have been included in the Condensed Consolidated Financial Statements. The results of operations for the three and six months ended June 30, 2022 and 2021 are not necessarily indicative of the results that may be expected for the full fiscal year, any other interim period or any future fiscal year. The Condensed Consolidated Financial Statements are prepared on a basis consistent with prior periods. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB). Principles of consolidation The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and 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 subsidiary 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 period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized within other operating expense (income), net except for changes in the liability related to the sale of future royalties which are recorded in interest expense, net in the Condensed Consolidated Statements of Operations. The results and financial position of the Company’s subsidiaries’ that have a functional currency different from the USD are translated into the presentation currency as follows: a. assets and liabilities presented are translated at the closing exchange rate as of June 30, 2022 and December 31, 2021; b. income and expenses for the statement of operations and comprehensive loss are translated at the average exchange rates that are relevant for the respective periods for which the income and expenses occur; 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 and presented as a separate component of equity. Use of estimates The preparation of financial statements in conformity with 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, including its clinical trial accruals and revenue deductions related to rebates, chargebacks and other discounts, realizability of deferred tax assets and the accretion of interest on the monetization liability. Actual results could materially differ from these estimates. Revenue recognition The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services in accordance with ASC 606 Revenue from Contracts with Customers Product Revenue, net The Company recognizes revenue on sales of Bylvay when a customer obtains control of the product, which occurs at a point in time and upon delivery. The Company sells Bylvay to a limited number of specialty pharmacies and a specialty distributor in the United States which dispense the product directly to patients. The specialty pharmacies and specialty distributor are referred to as the Company’s customers. The Company also sells Bylvay to its customers in the European Union, which includes a limited number of pharmacies. The Company provides the right of return to its customers for unopened product for a limited time before and after its expiration date. We currently estimate product returns using available industry data as well as the Company’s visibility into the inventory remaining in the distribution channel. The Company has written contracts with each of its customers that have a single performance obligation to deliver products upon receipt of a customer order and these obligations are satisfied when delivery occurs and the customer receives Bylvay. The Company evaluates creditworthiness of each of its customers to determine whether collection is reasonably assured. The wholesale acquisition cost that the Company charges its customers for Bylvay is adjusted to arrive at the Company’s estimated net product revenues by deducting components of variable consideration which include (i) estimated government rebates and discounts related to Medicaid and other government programs, (ii) estimated costs of incentives offered to certain indirect customers including patients, (iii) trade allowances, such as invoice discounts for prompt payment and customer fees, and (iv) allowance for sales returns. Product revenue, net was Rebates and Discounts The Company contracts with the Centers for Medicare & Medicaid Services and other government agencies in the U.S. to make Bylvay available to eligible patients. As a result, the Company estimates any rebates and discounts, including chargebacks related to Section 340B of the Public Health Service Act, and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized. The Company’s estimates of rebates and discounts are based on the government mandated discounts, which are statutorily-defined and applicable to these government funded programs and assumptions developed using historical experience with actual payments and redemptions. The Company recorded $1.1 million and $0.7 million in such estimates as of June 30, 2022 and December 31, 2021, respectively, in accounts receivable, net and other current liabilities on the consolidated balance sheets. The Company contracts with national authorities in Europe to make Bylvay available to eligible patients. In jurisdictions in which final pricing is subject to ongoing negotiations with the government, the Company estimates the rebate expected to be due and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized. The Company’s estimates of such liabilities are based on current invoice pricing and total prior units sold and assumptions developed using benchmarks of Bylvay pricing approved in other relevant European jurisdictions. The Company recorded $0.5 million and $0.2 million in such estimates as of June 30, 2022 and December 31, 2021, respectively, in other current liabilities on the consolidated balance sheets. Other Incentives Other incentives that the Company offers to indirect customers include co-pay assistance cards provided by the Company for patients who reside in states that permit co-pay assistance programs. The Company’s co-pay assistance program is intended to reduce each participating patient’s portion of the financial responsibility for Bylvay’s purchase price to a specified dollar amount. The Company estimates the amount of co-pay assistance provided to eligible patients based on the terms of the program when product is dispensed by the specialty pharmacies to the patients. These estimates are based on redemption information provided by third-party claims processing organizations. The Company funds this incentive program through upfront payments. There were no upfront payments made during the quarter ended June 30, 2022. The Company recorded less than $0.1 million in such estimates as of June 30, 2022 and December 31, 2021 in prepaid expenses on the consolidated balance sheets. Trade Allowances The Company provides invoice discounts on Bylvay sales to its customers for prompt payment and records these discounts as a reduction to gross product revenues. These discounts are based on contractual terms. The Company also pays fees to its distributors for their services as well as data that they provide to the Company. Prompt payment allowances are recorded in accounts receivable, net on the consolidated balance sheets. There were no prompt payment allowances as of June 30, 2022. Prompt payment allowances were less than $0.1 million at December 31, 2021. The other distributor fees are recorded as other current liabilities on the consolidated balance sheets and was $0.1 million as of June 30, 2022 and December 31, 2021. Milestone Payments At the inception of each arrangement that includes development milestone payments or upfront payment, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price, which includes any upfront payments, 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. Once the estimated transaction price is established, the associated consideration is allocated to the performance obligations that have been identified in the respective agreement. 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 in which 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 under the Agreement. As of June 30, 2022, the Company is eligible to receive an additional regulatory-based milestone payment under the Agreement of $4.5 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 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. Monetization of Future Royalties In December 2017, the Company entered into a royalty interest acquisition agreement (RIAA) with HealthCare Royalty Partners III, L.P. (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. In January 2018, the Company received $44.5 million from HCR, net of certain transaction expenses, under the RIAA. On June 8, 2020, the parties entered into an amendment to the RIAA pursuant to which HCR agreed to pay the Company an additional $14.8 million, net of certain transaction expenses, in exchange for the elimination of the (i) $78.8 million cap amount on HCR’s rights to receive royalties on sales in Japan and sales milestones for elobixibat in certain other territories that may become payable by EA Pharma and (ii) the $15.0 million payable to the Company if a specified sales milestone is achieved for elobixibat in Japan. 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 and milestones as revenue. Upon receipt of the payments from HCR the Company recorded net cash totaling $59.3 million as a liability related to sale of future royalties (royalty obligation). The royalty obligation will be amortized using the effective interest rate method. The following table shows the activity within the liability account for the six-month period ended June 30, 2022: June 30, 2022 (in thousands) Liability related to sale of future royalties—beginning balance $ 71,667 Accretion of interest expense on liability related to royalty monetization 5,474 Repayment of the liability (13,353) Liability related to sale of future royalties—ending balance $ 63,788 Less current portion classified within accrued expenses (2,295) Long-term liability related to sale of future royalties $ 61,493 The Company records estimated royalties due for the current period in accrued expenses 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. The sum of these amounts less the $59.3 million proceeds the Company received will be recorded as interest expense over the life of the royalty obligation. At June 30, 2022, the Company’s estimate of its total interest expense resulted in an annual effective interest rate of approximately 18.0%. 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. Trade Receivables, net Accounts receivable, net related to product sales, which are recorded in accounts receivable, net on the consolidated balance sheets, were approximately $1.8 million and $3.3 million as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022 and December 31, 2021, we had no allowance for doubtful accounts. An allowance for doubtful accounts is determined based on the Company’s assessment of the credit worthiness and financial condition of its customers, aging of receivables, as well as the general economic environment. Any allowance would reduce the net receivables to the amount that is expected to be collected. Payment terms for U.S. customers are typically 31 Inventory The Company commenced capitalizing inventory for Bylvay upon FDA approval on July 20, 2021. All commercial manufacturing expenses were expensed as research and development expenses prior to FDA approval. Manufacturing costs incurred prior to FDA approval totaled approximately $1.6 million and were not capitalized, and instead were expensed as research and development expenses from 2020 to 2021. Recent accounting pronouncements There are no recently issued accounting pronouncements the Company has not yet adopted that will materially impact the Company’s consolidated financial statements. |
