Clovis Oncology (CLVSQ) 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2019.
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from            to           .

Commission file number: 001-35347

Clovis Oncology, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	90-0475355
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
5500 Flatiron Parkway, Suite 100
Boulder, Colorado	80301
(Address of principal executive offices)	(Zip Code)

(303) 625-5000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act

Title of Each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock par Value $0.001 per share	CLVS	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ⌧    No  ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	⌧	Accelerated filer	◻
Non-accelerated filer	◻	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of November 1, 2019 was 54,815,202.

CLOVIS ONCOLOGY, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. Financial Information		3
ITEM 1.	Financial Statements (unaudited)	3
	Consolidated Statements of Operations and Comprehensive Loss — for the three and nine months ended September 30, 2019 and September 30, 2018	3
	Consolidated Balance Sheets — as of September 30, 2019 and December 31, 2018	4
	Consolidated Statements of Stockholders’ Equity (Deficit) – for the nine months ended September 30, 2019	5
	Consolidated Statements of Stockholders’ Equity (Deficit) – for the nine months ended September 30, 2018	6
	Consolidated Statements of Cash Flows — for the nine months ended September 30, 2019 and 2018	7
	Notes to Unaudited Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	41
ITEM 4.	Controls and Procedures	42
PART II. Other Information		43
ITEM 1.	Legal Proceedings	43
ITEM 1A.	Risk Factors	44
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
ITEM 3.	Defaults Upon Senior Securities	45
ITEM 4.	Mine Safety Disclosures	45
ITEM 5.	Other Information	45
ITEM 6.	Exhibits	45
SIGNATURES		50

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CLOVIS ONCOLOGY, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except per share amounts)

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands, except per share amounts)				(in thousands, except per share amounts)
Revenues:
Product revenue	$	37,603	$	22,757	$	103,699	$	65,037
Operating expenses:
Cost of sales - product		8,134		4,766		21,984		13,262
Cost of sales - intangible asset amortization		1,212		771		3,549		1,851
Research and development		77,896		63,887		210,674		160,138
Selling, general and administrative		41,811		42,495		137,601		126,634
Acquired in-process research and development		9,440		—		9,440		—
Other operating expenses		5,539		—		5,539		—
Total expenses		144,032		111,919		388,787		301,885
Operating loss		(106,429)		(89,162)		(285,088)		(236,848)
Other income (expense):
Interest expense		(5,278)		(3,376)		(12,684)		(9,592)
Foreign currency (loss) gain		(229)		151		(648)		(34)
Legal settlement loss		(1,750)		—		(26,750)		(27,975)
Gain on extinguishment of debt		18,480		—		18,480		—
Other income		781		2,536		5,081		5,419
Other expense, net		12,004		(689)		(16,521)		(32,182)
Loss before income taxes		(94,425)		(89,851)		(301,609)		(269,030)
Income tax benefit (expense)		350		(13)		686		280
Net loss		(94,075)		(89,864)		(300,923)		(268,750)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax		(143)		(495)		(149)		(2,448)
Net unrealized gain (loss) on available-for-sale securities, net of tax		(68)		(10)		84		71
Other comprehensive (loss) income:		(211)		(505)		(65)		(2,377)
Comprehensive loss	$	(94,286)	$	(90,369)	$	(300,988)	$	(271,127)
Loss per basic and diluted common share:
Basic and diluted net loss per common share	$	(1.72)	$	(1.71)	$	(5.62)	$	(5.18)
Basic and diluted weighted average common shares outstanding		54,707		52,669		53,549		51,844

See accompanying Notes to Unaudited Consolidated Financial Statements.

3

CLOVIS ONCOLOGY, INC.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except for share amounts)

	September 30,		December 31,
	2019		2018
ASSETS
Current assets:
Cash and cash equivalents	$	201,481	$	221,876
Accounts receivable, net		16,816		12,889
Inventories, net		24,864		27,072
Available-for-sale securities		152,622		298,270
Prepaid research and development expenses		4,597		3,579
Other current assets		18,095		8,613
Total current assets		418,475		572,299
Inventories		97,221		113,908
Deposit on inventory		12,350		12,350
Property and equipment, net		15,223		26,524
Right-of-use assets, net		25,427		—
Intangible assets, net		64,132		51,930
Goodwill		63,074		63,074
Other assets		20,990		23,475
Total assets	$	716,892	$	863,560
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	31,655	$	28,517
Accrued research and development expenses		43,981		29,676
Lease liabilities		4,458		—
Other accrued expenses		31,266		67,556
Total current liabilities		111,360		125,749
Long-term lease liabilities - less current portion		27,768		—
Convertible senior notes		644,095		575,470
Borrowings under financing agreement		19,944		—
Other long-term liabilities		1,220		15,872
Total liabilities		804,387		717,091
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2019 and December 31, 2018		—		—
Common stock, $0.001 par value per share, 200,000,000 and 100,000,000 shares authorized at September 30, 2019 and December 31, 2018, respectively; 54,805,525 and 52,797,516 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		55		53
Additional paid-in capital		2,101,162		2,034,142
Accumulated other comprehensive loss		(44,699)		(44,634)
Accumulated deficit		(2,144,013)		(1,843,092)
Total stockholders' equity (deficit)		(87,495)		146,469
Total liabilities and stockholders' equity (deficit)	$	716,892	$	863,560

See accompanying Notes to Unaudited Consolidated Financial Statements.

4

CLOVIS ONCOLOGY, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

						Accumulated
				Additional		Other
	Common Stock			Paid-In		Comprehensive		Accumulated
	Shares	Amount		Capital		Income (Loss)		Deficit		Total
	(in thousands, except for share amounts)
January 1, 2019	52,797,516	$	53	$	2,034,142	$	(44,634)	$	(1,843,092)	$	146,469
Exercise of stock options	83,132		—		1,093		—		—		1,093
Issuance of common stock from vesting of restricted stock units	113,402		—		—		—		—		—
Share-based compensation expense	—		—		13,639		—		—		13,639
Net unrealized gain on available-for-sale securities	—		—		—		75		—		75
Foreign currency translation adjustments	—		—		—		(5)		—		(5)
Net loss	—		—		—		—		(86,420)		(86,420)
March 31, 2019	52,994,050		53		2,048,874		(44,564)		(1,929,512)		74,851
Issuance of common stock under employee stock purchase plan	92,275		—		1,166		—		—		1,166
Exercise of stock options	20,741		—		223		—		—		223
Issuance of common stock from vesting of restricted stock units	63,413		—		—		—		—		—
Share-based compensation expense	—		—		14,130		—		—		14,130
Net unrealized gain on available-for-sale securities	—		—		—		77		—		77
Foreign currency translation adjustments	—		—		—		(1)		—		(1)
Net loss	—		—		—		—		(120,426)		(120,426)
June 30, 2019	53,170,479	$	53	$	2,064,393	$	(44,488)	$	(2,049,938)	$	(29,980)
Exercise of stock options	84,482		—		45		—		—		45
Issuance of common stock from vesting of restricted stock units	68,506		—		—		—		—		—
Share-based compensation expense	—		—		13,979		—		—		13,979
Litigation settlement	1,482,058		2		22,745		—		—		22,747
Net unrealized gain on available-for-sale securities	—		—		—		(68)		—		(68)
Foreign currency translation adjustments	—		—		—		(143)		—		(143)
Net loss	—		—		—		—		(94,075)		(94,075)
September 30, 2019	54,805,525	$	55	$	2,101,162	$	(44,699)	$	(2,144,013)	$	(87,495)

See accompanying Notes to Unaudited Consolidated Financial Statements.

5

CLOVIS ONCOLOGY, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

						Accumulated
				Additional		Other
	Common Stock			Paid-In		Comprehensive		Accumulated
	Shares	Amount		Capital		Income (Loss)		Deficit		Total
	(in thousands, except for share amounts)
January 1, 2018	50,565,119	$	51	$	1,887,197	$	(42,173)	$	(1,477,441)	$	367,634
Exercise of stock options	21,463		—		514		—		—		514
Issuance of common stock from vesting of restricted stock units	110,889		—		—		—		—		—
Share-based compensation expense	—		—		11,913		—		—		11,913
Net unrealized gain on available-for-sale securities	—		—		—		(5)		—		(5)
Foreign currency translation adjustments	—		—		—		1,517		—		1,517
Adoption of new revenue recognition standard	—		—		—		—		2,356		2,356
Net loss	—		—		—		—		(77,694)		(77,694)
March 31, 2018	50,697,471		51		1,899,624		(40,661)		(1,552,779)		306,235
Issuance of common stock, net or issuance costs	1,837,898		2		93,752		—		—		93,754
Issuance of common stock under employee stock purchase plan	35,636		—		1,377		—		—		1,377
Exercise of stock options	25,753		—		703		—		—		703
Issuance of common stock from vesting of restricted stock units	40,617		—		—		—		—		—
Share-based compensation expense	—		—		14,855		—		—		14,855
Net unrealized gain on available-for-sale securities	—		—		—		86		—		86
Foreign currency translation adjustments	—		—		—		(3,470)		—		(3,470)
Adoption of new revenue recognition standard	—		—		—		—		—		—
Net loss	—		—		—		—		(101,191)		(101,191)
June 30, 2018	52,637,375	$	53	$	2,010,311	$	(44,045)	$	(1,653,970)	$	312,349
Issuance of common stock, net or issuance costs	—		—		135		—		—		135
Exercise of stock options	23,514		—		604		—		—		604
Issuance of common stock from vesting of restricted stock units	47,878		—		—		—		—		—
Share-based compensation expense	—		—		10,947		—		—		10,947
Net unrealized loss on available-for-sale securities	—		—		—		(10)		—		(10)
Foreign currency translation adjustments	—		—		—		(495)		—		(495)
Adoption of new revenue recognition standard	—		—		—		—		—		—
Net loss	—		—		—		—		(89,864)		(89,864)
September 30, 2018	52,708,767	$	53	$	2,021,997	$	(44,550)	$	(1,743,834)	$	233,666

See accompanying Notes to Unaudited Consolidated Financial Statements9

6

CLOVIS ONCOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine months ended September 30,
	2019		2018
Operating activities
Net loss	$	(300,923)	$	(268,750)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation expense		41,748		37,715
Depreciation and amortization		5,727		2,497
Amortization of premiums and discounts on available-for-sale securities		(1,269)		1,079
Amortization of debt issuance costs		2,070		1,536
Legal settlement loss		22,747		—
Acquired in-process research and development		9,440		—
Gain on extinguishment of debt		(18,480)		—
Loss on sale of property and equipment		783		—
Allowance for obsolete inventories		521		—
Lease liabilities		(716)		—
Changes in operating assets and liabilities:
Accounts receivable		(3,952)		(4,978)
Inventory		(23,473)		(25,540)
Prepaid and accrued research and development expenses		13,293		1,390
Deposit on inventory		—		(24,173)
Other operating assets		(5,263)		(7,507)
Accounts payable		2,384		4,765
Other accrued expenses		1,895		(1,304)
Net cash used in operating activities		(253,468)		(283,270)
Investing activities
Purchases of property and equipment		(2,887)		(7,763)
Proceeds from sale of property and equipment		275		—
Purchases of available-for-sale securities		(335,104)		(320,000)
Sales of available-for-sale securities		480,097		105,000
Acquired in-process research and development - milestone payment		(15,750)		(55,000)
Net cash provided by (used in) investing activities		126,631		(277,763)
Financing activities
Proceeds from the sale of common stock, net of issuance costs		—		93,890
Proceeds from the issuance of convertible senior notes, net of issuance costs		254,965		290,887
Proceeds from borrowings under financing agreement, net of issuance costs		19,044		—
Proceeds from the exercise of stock options and employee stock purchases		2,526		3,197
Extinguishment of convertible senior notes		(169,853)		—
Net cash provided by financing activities		106,682		387,974
Effect of exchange rate changes on cash and cash equivalents		(240)		(286)
Decrease in cash and cash equivalents		(20,395)		(173,345)
Cash and cash equivalents at beginning of period		221,876		464,198
Cash and cash equivalents at end of period	$	201,481	$	290,853
Supplemental disclosure of cash flow information:
Cash paid for interest	$	8,640	$	9,188
Non-cash investing and financing activities:
Vesting of restricted stock units	$	4,735	$	10,130

See accompanying Notes to Unaudited Consolidated Financial Statements.

7

CLOVIS ONCOLOGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Clovis Oncology, Inc. (together with its consolidated subsidiaries, the “Company”, “Clovis”, “we”, “our”, “us”) is a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, the European Union (“EU”) and additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, for those indications that require them, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use. We have and intend to continue to license or acquire rights to oncology compounds in all stages of development. In exchange for the right to develop and commercialize these compounds, we generally expect to provide the licensor with a combination of upfront payments, milestone payments and royalties on future sales. In addition, we generally expect to assume the responsibility for future drug development and commercialization costs. We currently operate in 1 segment. Since inception, our operations have consisted primarily of developing in-licensed compounds, evaluating new product acquisition candidates and general corporate activities and since 2016 we have also marketed and sold products.

Our marketed product Rubraca® (rucaparib), an oral small molecule inhibitor of poly ADP-ribose polymerase (“PARP”), is available in the United States for two indications specific to recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. The initial indication received approval from the United States Food and Drug Administration (“FDA”) in December 2016 and covers the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic)-associated epithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with 2 or more chemotherapies and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. In April 2018, the FDA also approved Rubraca for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The approval in this second, broader and earlier-line indication on a priority review timeline was based on positive data from the phase 3 ARIEL3 clinical trial. Diagnostic testing is not required for patients to be prescribed Rubraca in this maintenance treatment indication.

In May 2018, the European Commission granted a conditional marketing authorization for Rubraca as monotherapy treatment of adult patients with platinum-sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have been treated with 2 or more prior lines of platinum-based chemotherapy, and who are unable to tolerate further platinum-based chemotherapy. As this is a conditional approval, it will be necessary to complete certain confirmatory post marketing commitments. In January 2019, the European Commission granted a variation to the marketing authorization to include the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. With this approval, Rubraca is now authorized in the EU for certain patients in the recurrent ovarian cancer maintenance setting regardless of their BRCA mutation status. Rubraca was the first PARP inhibitor licensed for an ovarian cancer treatment indication in the EU and is the only drug to be authorized for both treatment and maintenance treatment among eligible patients with ovarian cancer. We completed our launch of Rubraca as maintenance therapy in Germany and patients with private insurance in the United Kingdom in March 2019, and are currently launching Rubraca in England with reimbursement now provided via the Cancer Drugs Fund.

In addition to Rubraca, we have a second product candidate currently in clinical development. Lucitanib is an investigational, oral, potent inhibitor of the tyrosine kinase activity of vascular endothelial growth factor receptors 1 through 3 (VEGFR1-3), platelet-derived growth factor receptors alpha and beta (PDGFR α/β) and fibroblast growth factor receptors 1 through 3 (FGFR1-3). We believe that recent data for a drug similar to lucitanib that inhibits these same pathways – when combined with a PD-1 inhibitor – represent a scientific rationale for the development of lucitanib in combination with a PD-1 inhibitor, and a Clovis-sponsored study of lucitanib in combination with nivolumab is underway in advanced gynecologic cancers and other solid tumors. In addition, we have initiated a study of lucitanib in combination with Rubraca in ovarian cancer, based on encouraging data of VEGF and PARP inhibitors in combination. Each of these Phase 1b/2 studies is currently enrolling patients. We hold the global development and commercialization rights (except for China) for lucitanib.

8

In September 2019, we acquired rights from 3B Pharmaceuticals GmbH (“3BP”) to develop and commercialize a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast activation protein alpha (“FAP”), which is expressed by cancer-associated fibroblasts found in many epithelial cancers, including more than 90 percent of breast, lung, colorectal and pancreatic carcinomas. The collaboration is initially focused on the development of a FAP-targeted pre-clinical candidate identified by 3BP’s technology platform. Following completion of pre-clinical work to support an investigational new drug application for the lead candidate, FAP-2286, we plan to conduct global clinical trials in multiple solid tumor types. We hold global development rights, and U.S. and global commercialization rights, excluding Europe (inclusive of Russia, Turkey and Israel), where 3BP retains rights. The parties have also entered into a non-binding letter of intent to negotiate the terms of a definitive agreement to collaborate on a discovery program directed to up to three additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we would obtain global rights for any resulting product candidates.

Basis of Presentation

All financial information presented includes the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The unaudited financial statements of Clovis Oncology, Inc. included herein reflect all adjustments that, in the opinion of management, are necessary to fairly state our financial position, results of operations and cash flows for the periods presented herein. Interim results may not be indicative of the results that may be expected for the full year. Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) for a broader discussion of our business and the opportunities and risks inherent in such business.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and revenue and related disclosures. On an ongoing basis, we evaluate our estimates, including estimates related to revenue deductions, intangible asset impairment, clinical trial accruals and share-based compensation expense. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

Liquidity

We have incurred significant net losses since inception and have relied on our ability to fund our operations through debt and equity financings. We expect operating losses and negative cash flows to continue for the foreseeable future. As we continue to incur losses, transition to profitability is dependent upon achieving a level of revenues from Rubraca adequate to support our cost structure. We may never achieve profitability, and unless or until we do, we will continue to need to raise additional cash.

Based on current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund our operating plan through at least the next 12 months.

2. Summary of Significant Accounting Policies

Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which requires lessees to recognize assets and liabilities for the rights and obligations created by most leases on their balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered after, the date of initial application, with an option to use certain transition relief. We adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective method which leaves the comparative period reporting unchanged. Comparative reporting periods are

9

presented in accordance with Topic 840, while periods subsequent to the effective date are presented in accordance with Topic 842. We have elected to adopt the package practical expedient which allows us: 1) to not reassess whether any expired or existing contracts are or contain leases, 2) to not reassess the lease classification for any expired or existing leases and 3) to not reassess initial direct costs for any existing leases. We also elected not to recognize on the balance sheet leases with terms of 12 months or less. For these short-term leases, we will recognize the lease payments in profit or loss on a straight-line basis over the lease term and the variable lease payments in the period in which the obligation for those payments is incurred.

Adoption of the new lease standard resulted in the recording of net right-of-use assets and lease liabilities of $24.9 million and $31.4 million, respectively, as of January 1, 2019.

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”, which allow a reclassification from accumulated other comprehensive income (loss) (“AOCI”) to retained earnings for stranded tax effects resulting from the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted the new standard on January 1, 2019 and elected not to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. We continue to release disproportionate income tax effects from AOCI based on the aggregate portfolio approach. The adoption of this standard did not have an impact on our condensed consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, simplifies the accounting for share-based payment granted to nonemployees for goods and services. Under the standard, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted ASU 2018-07 as of January 1, 2019. There was no material impact on our consolidated financial statements and related disclosures.

Recently Issued Accounting Standards

From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an ASU.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We will adopt ASU 2018-02 as of January 1, 2020. We do not expect significant impact on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We will adopt ASU 2016-13 as of January 1, 2020 and we expect to recognize an allowance for credit losses related to our accounts receivable and available-for-sale securities. We do not expect significant impact on our consolidated financial statements and related disclosures.

Revenue Recognition

We are currently approved to sell Rubraca in the United States and the EU markets. We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently sell our products to patients and health care providers. Separately, we have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts. 

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Product Revenue

Revenue from product sales are recognized when the performance obligation is satisfied, which is when customers obtain control of our product at a point in time, typically upon delivery. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less.

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 price concessions that include rebates, chargebacks, discounts, co-pay assistance, estimated product returns and other allowances that are offered within contracts between us and our customers, health care providers, payors and other indirect customers relating to the sales of our product. These reserves 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 customers) 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 which are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and 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 contract. The amount of variable consideration which 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 adjust these estimates, which would affect product revenue and earnings in the period such variances become known.

Rebates. Rebates include mandated discounts under the Medicaid Drug Rebate Program and the Medicare coverage gap program. Rebates are amounts owed after the final dispensing of products to a benefit plan participant and are based upon contractual agreements or legal requirements with the public-sector benefit providers. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheet. We estimate our Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. The accrual for rebates is based on the expected utilization from historical data we have accumulated since the Rubraca product launch. Rebates are generally invoiced and paid quarterly in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known or estimated prior quarters’ unpaid rebates.

Chargebacks. Chargebacks are discounts that occur when contracted customers, which currently consist primarily of group purchasing organizations, Public Health Service organizations and federal government entities purchasing via the Federal Supply Schedule, purchase directly from our specialty distributors at a discounted price. The specialty distributor, in turn, charges back the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by the healthcare provider. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. The accrual for specialty distributor chargebacks is estimated based on known chargeback rates and known sales to specialty distributors adjusted for the estimated utilization by healthcare providers.

Discounts and Fees. Our payment terms are generally 30 days. Specialty distributors and specialty pharmacies are offered various forms of consideration, including service fees and prompt pay discounts for payment within a specified period. We expect these customers will earn prompt pay discounts and therefore, we deduct the full amount of these discounts and service fees from product sales when revenue is recognized.

Co-pay assistance. Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance. The intent of this program is to reduce the patient’s out of pocket costs. Liabilities for co-pay assistance are based on actual program participation provided by third-party administrators at month end.

Returns. Consistent with industry practice, we generally offer customers a right of return limited only to product that will expire in six months or product that is six months beyond the expiration date. To date, we have had minimal

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product returns and we currently have a minimal accrual for product returns. We will continue to assess our estimate for product returns as we gain additional historical experience.

Cost of Sales – Product

Product cost of sales consists primarily of materials, third-party manufacturing costs as well as freight and royalties owed to our licensing partners for Rubraca sales.

Cost of Sales – Intangible Asset Amortization

Cost of sales for intangible asset amortization consists of the amortization of capitalized milestone payments made to our licensing partners upon FDA approval of Rubraca. Milestone payments are amortized on a straight-line basis over the estimated remaining patent life of Rubraca.

Inventory

Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out (“FIFO”) basis. Inventories include active pharmaceutical ingredient (“API”), contract manufacturing costs and overhead allocations. We began capitalizing incurred inventory related costs upon the regulatory approval of Rubraca. Prior to the regulatory approval of Rubraca, we incurred costs for the manufacture of the drug that could potentially be available to support the commercial launch of Rubraca and all such costs were recognized as research and development expense.

We regularly analyze our inventory levels for excess quantities and obsolescence (expiration), taking into account factors such as historical and anticipated future sales compared to quantities on hand and the remaining shelf-life of Rubraca. Rubraca finished goods have a shelf-life of four years from the date of manufacture. The API currently has a shelf-life of four years from the date of manufacture but can be retested at an immaterial cost with no expected reduction in potency, thereby extending its shelf-life as needed. We expect to consume substantially all of the API over a period of approximately nine years based on our long-range sales projections of Rubraca.

We write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and/or inventory in excess of expected sales requirements. Expired inventory would be disposed of and the related costs would be written off as cost of product revenue. Inventories that are not expected to be consumed within 12 months following the balance sheet date are classified as long-term inventories. Long-term inventories primarily consist of API.

API is currently produced by a single supplier. As the API has undergone significant manufacturing specific to its intended purpose at the point it is purchased by us, we classify the API as work-in-process inventory. In addition, we currently manufacture Rubraca finished goods with a single third-party manufacturer. The disruption or termination of the supply of API or the disruption or termination of the manufacturing of our commercial products could have a material adverse effect on our business, financial position and results of operations.

Inventory used in clinical trials is expensed as research and development expense when it has been identified for such use.

Our other significant accounting policies are described in Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in our 2018 Form 10-K.

3. Financial Instruments and Fair Value Measurements

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (at exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

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The three levels of inputs that may be used to measure fair value include:

Level 1:	Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets consist of money market investments and U.S. treasury securities. We do not have Level 1 liabilities.
Level 2:	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 assets consist of U.S. treasury securities. We do not have Level 2 liabilities.
Level 3:	Unobservable inputs that are supported by little or no market activity. We do not have Level 3 assets or liabilities that are measured at fair value on a recurring basis.

The following table identifies our assets and liabilities that were measured at fair value on a recurring basis (in thousands):

	Balance		Level 1		Level 2		Level 3
September 30, 2019
Assets:
Money market	$	98,103	$	98,103	$	—	$	—
U.S. treasury securities		152,622		—		152,622		—
Total assets at fair value	$	250,725	$	98,103	$	152,622	$	—
December 31, 2018
Assets:
Money market	$	81,968	$	81,968	$	—	$	—
U.S. treasury securities		308,251		9,981		298,270		—
Total assets at fair value	$	390,219	$	91,949	$	298,270	$	—

There we 0 liabilities that were measured at fair value on a recurring basis as of September 30, 2019. There were 0 transfers between the Level 1 and Level 2 categories or into or out of the Level 3 category during the three and nine months ended September 30, 2019.

Financial instruments not recorded at fair value include our convertible senior notes. At September 30, 2019, the carrying amount of the 2021 Notes was $96.3 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $84.3 million. At September 30, 2019, the carrying amount of the 2024 Notes was $255.1 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $187.8 million. At September 30, 2019, the carrying amount of the 2025 Notes was $292.7 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $126.0 million. The fair value was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of these notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. See Note 10, Long-term Debt for discussion of the convertible senior notes.

4. Available-for-Sale Securities

As of September 30, 2019, available-for-sale securities consisted of the following (in thousands):

			Gross		Gross		Aggregate
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. treasury securities	$	152,575	$	47	$	—	$	152,622

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As of December 31, 2018, available-for-sale securities consisted of the following (in thousands):

			Gross		Gross		Aggregate
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. treasury securities	$	298,305	$	—	$	(35)	$	298,270

As of September 30, 2019, there were 0 available-for-sale securities that have been in a continuous unrealized loss position for more than 12 months.

As of September 30, 2019, the amortized cost and fair value of available-for-sale securities by contractual maturity were (in thousands):

	Amortized		Fair
	Cost		Value
Due in one year or less	$	152,575	$	152,622
Due in one year to two years		—		—
Total	$	152,575	$	152,622

5. Inventories

The following table presents current and long-term inventories as of September 30, 2019 and December 31, 2018:

	September 30,		December 31,
	2019		2018
Work-in-process	$	106,781	$	126,620
Finished goods		15,651		14,360
Allowance for obsolete inventories		(347)		—
Total inventories	$	122,085	$	140,980

Some of the costs related to our finished goods on-hand as of December 31, 2018 were expensed as incurred prior to the commercialization of Rubraca on December 19, 2016.

At September 30, 2019, we had $24.9 million of current inventory and $97.2 million of long-term inventory. In addition, we had $12.4 million long-term deposit on inventory, which consists of API which we expect to be converted to finished goods and sold beyond the next twelve months.

6. Other Current Assets

Other current assets were comprised of the following (in thousands):

	September 30,		December 31,
	2019		2018
Prepaid insurance	$	1,186	$	243
Prepaid advertising		—		1,802
Prepaid IT		1,080		666
Prepaid expenses - other		3,925		2,672
Value-added tax ("VAT") receivable		9,897		—
Receivable - other		1,851		2,274
Other		156		956
Total	$	18,095	$	8,613

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7. Intangible Assets and Goodwill

Intangible assets related to capitalized milestones under license agreements consisted of the following (in thousands):

	September 30,		December 31,
	2019		2018
Intangible asset - milestones	$	71,850	$	56,100
Accumulated amortization		(7,718)		(4,170)
Total intangible asset, net	$	64,132	$	51,930

The increase in our intangible asset – milestones since December 31, 2018 is due to a $15.0 million milestone payment to Pfizer related to the January 2019 European Commission approval and a $0.75 million milestone payment in June 2019 due to the launch of Rubraca as maintenance therapy in Germany in March 2019. See Note 13, License Agreements for further discussion of these approvals.

The estimated useful lives of these intangible assets are based on the estimated remaining patent life of Rubraca and extend through 2031 in Europe and 2035 in the U.S.

We recorded amortization expense of $1.2 million and $3.5 million related to capitalized milestone payments during the three and nine months ended September 30, 2019, respectively. We recorded amortization expense of $0.8 million and $1.9 million related to capitalized milestone payments during the three and nine months ended September 30, 2018. Amortization expense is included in cost of sales – intangible asset amortization on the Consolidated Statements of Operations and Comprehensive Loss.

Estimated future amortization expense associated with intangibles is expected to be as follows (in thousands):

2019	$	1,212
2020		4,847
2021		4,847
2022		4,847
2023		4,847
Thereafter		43,532
	$	64,132

8. Other Accrued Expenses

Other accrued expenses were comprised of the following (in thousands):

	September 30,		December 31,
	2019		2018
Accrued personnel costs	$	14,631	$	15,265
Accrued interest payable		3,275		2,721
Income tax payable		732		847
Accrued corporate legal fees and professional services		99		677
Accrued royalties		5,805		4,854
Accrued variable considerations		3,317		2,183
Current portion of capital lease obligations		—		1,031
Purchase of API received not yet invoiced		135		35,472
Accrued expenses - other		3,272		4,506
Total	$	31,266	$	67,556

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9. Lease

At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. We elected not to recognize on the balance sheet leases with terms of one year or less. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

The components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, maintenance, consumables, etc.) and non-components (e.g. property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values assigned to the lease components and non-lease components.

Our facilities operating leases have lease components, non-lease components and non-components, which we have separated because the non-lease components and non-components have variable lease payments and are excluded from the measurement of the lease liabilities. The lease component results in a right-of-use asset being recorded on the balance sheet and amortized as lease expense on a straight-line basis to the statements of operations.

We lease all of our office facilities in the U.S. and Europe. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We have a finance lease for certain equipment at the dedicated production train at Lonza, our non-exclusive manufacturer of the Rubraca API.

The components of lease expense and related cash flows were as follows (in thousands):

	Three months ended September 30,		Nine months ended September 30,
	2019		2019
Lease cost
Finance lease cost:
Amortization of right-of-use assets	$	356	$	1,068
Interest on lease liabilities		174		537
Operating lease cost		667		2,811
Short-term lease cost		80		177
Variable lease cost		379		1,749
Total lease cost	$	1,656	$	6,342
Operating cash flows from finance leases	$	174	$	537
Operating cash flows from operating leases	$	667	$	2,811
Financing cash flows from finance leases	$	260	$	765

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The weighted-average remaining lease term and weighted-average discount rate were as follows:

	September 30, 2019
Weighted-average remaining lease term (years)
Operating leases		7.2
Finance leases		6.3
Weighted-average discount rate
Operating leases		8%
Finance leases		8%

Future minimum commitments due under these lease agreements as of September 30, 2019 are as follows (in thousands):

	Operating Leases		Finance Leases		Total
2019 (remaining three months)	$	1,130	$	434	$	1,564
2020		5,278		1,736		7,014
2021		5,325		1,736		7,061
2022		3,388		1,736		5,124
2023		2,949		1,736		4,685
Thereafter		13,560		3,472		17,032
Present value adjustment		(7,920)		(2,334)		(10,254)
Present value of lease payments	$	23,710	$	8,516	$	32,226

10. Long-term Debt

2021 Notes

On September 9, 2014, we completed a private placement of $287.5 million aggregate principal amount of 2.5% convertible senior notes due 2021 (the “2021 Notes”) resulting in net proceeds of $278.3 million after deducting offering expenses. In accordance with the accounting guidance, the conversion feature did not meet the criteria for bifurcation, and the entire principal amount was recorded as a long-term liability on the Consolidated Balance Sheets.

The 2021 Notes are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2021 Notes are senior unsecured obligations and bear interest at a rate of 2.5% per year, payable semi-annually in arrears on March 15 and September 15 of each year. The 2021 Notes will mature on September 15, 2021, unless earlier converted, redeemed or repurchased.

Holders may convert all or any portion of the 2021 Notes at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 16.1616 shares per $1,000 in principal amount of 2021 Notes, equivalent to a conversion price of approximately $61.88 per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the 2021 Notes in connection with such a corporate event or during the related redemption period in certain circumstances.

On or after September 15, 2018, we may redeem the 2021 Notes, at our option, in whole or in part, if the last reported sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending not more than 2 trading days preceding the date on which we provide written notice of redemption at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2021 Notes.

If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the 2021 Notes, holders may require us to repurchase for cash all or any portion of the 2021 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2021 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

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The 2021 Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2021 Notes; equal in right of payment to all of our liabilities that are not so subordinated; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

Concurrently with the 2024 Notes offering, in separate transactions, we entered into privately negotiated transactions with a limited number of holders to repurchase, for settlement on or about August 13, 2019, $190.3 million aggregate principal amount of our outstanding 2021 Notes for an aggregate repurchase price of $171.8 million, including accrued interest. This repurchase resulted in the recognition of $18.5 million gain on extinguishment of debt.

In connection with the issuance of the 2021 Notes, we incurred $9.2 million of debt issuance costs, of which $2.0 million of unamortized debt issuance costs were derecognized in connection with the repurchase of the 2021 Notes. The remaining debt issuance costs are presented as a deduction from the convertible senior notes on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the 2021 Notes using the effective interest method. We determined the expected life of the debt was equal to the seven-year term of the 2021 Notes.

2025 Notes

On April 16, 2018, we completed an underwritten public offering of $300.0 million aggregate principal amount of 1.25% convertible senior notes due 2025 (the “2025 Notes”) resulting in net proceeds of $290.9 million, after deducting underwriting discounts and commissions and offering expenses. In accordance with the accounting guidance, the conversion feature did not meet the criteria for bifurcation, and the entire principal amount was recorded as a long-term liability on the Consolidated Balance Sheets.

The 2025 Notes are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, as supplemented by the terms of that certain first supplemental indenture thereto. The 2025 Notes are senior unsecured obligations and bear interest at a rate of 1.25% per year, payable semi-annually in arrears on May 1 and November 1 of each year. The 2025 Notes will mature on May 1, 2025, unless earlier converted, redeemed or repurchased.

Holders may convert all or any portion of the 2025 Notes at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 13.1278 shares per $1,000 in principal amount of 2025 Notes, equivalent to a conversion price of approximately $76.17 per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the 2025 Notes in connection with such a corporate event or during the related redemption period in certain circumstances.

On or after May 2, 2022, we may redeem the 2025 Notes, at our option, in whole or in part, if the last reported sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending not more than 2 trading days preceding the date on which we provide written notice of redemption at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2025 Notes.

If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the 2025 Notes, holders may require us to repurchase for cash all or any portion of the 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The 2025 Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2025 Notes; equal in right of payment to all of our liabilities that are not so subordinated, including the 2021 Notes; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

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In connection with the issuance of the 2025 Notes, we incurred $9.1 million of debt issuance costs. The debt issuance costs are presented as a deduction from the convertible senior notes on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the 2025 Notes using the effective interest method. We determined the expected life of the debt was equal to the seven-year term of the 2025 Notes.

2024 Notes

On August 13, 2019, we completed a private placement sale to qualified institutional buyers of $263.0 million aggregate principal amount of 4.50% convertible senior notes due 2024 (the “2024 Notes”) resulting in net proceeds of $255.0 million, after deducting underwriting discounts and commissions and offering expenses. In accordance with the accounting guidance, the conversion feature did not meet the criteria for bifurcation, and the entire principal amount was recorded as a long-term liability on the Consolidated Balance Sheets.

The 2024 Notes are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2024 Notes are senior unsecured obligations and bear interest at a rate of 4.50% per year, payable semi-annually in arrears on February 1 and August 1 of each year. The 2024 Notes will mature on August 1, 2024, unless earlier repurchased or converted.

Holders may convert all or any portion of the 2024 Notes at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 137.2213 shares per $1,000 in principal amount of 2024 Notes, equivalent to a conversion price of approximately $7.29 per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the 2024 Notes in connection with such a corporate event or during the related redemption period in certain circumstances.

We will not have the right to redeem the 2024 Notes prior to their maturity. If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the 2024 Notes, holders may require us to repurchase for cash all or any portion of the 2024 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. No sinking fund is provided for the 2024 Notes.

The 2024 Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2024 Notes; equal in right of payment to all of our liabilities that are not so subordinated, including the 2021 Notes and 2025 Notes; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness, including our borrowing under the TPG financing agreement; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

In connection with the issuance of the 2024 Notes, we incurred $8.0 million of debt issuance costs. The debt issuance costs are presented as a deduction from the convertible senior notes on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the 2024 Notes using the effective interest method. We determined the expected life of the debt was equal to the five-year term of the 2024 Notes.

As of September 30, 2019 and December 31, 2018, the balance of unamortized debt issuance costs related to the 2021 Notes, 2025 Notes and 2024 Notes was $16.1 million and $12.0 million, respectively.

TPG Financing Agreement

On May 1, 2019, we entered into a financing agreement with certain affiliates of TPG Sixth Street Partners, LLC (“TPG”) in which we plan to borrow from TPG amounts required to reimburse our actual costs and expenses incurred during each fiscal quarter (limited to agreed budgeted amounts), as such expenses are incurred, related to the ATHENA clinical trial, in an aggregate amount of up to $175 million. ATHENA is our largest clinical trial, with a planned target enrollment of 1,000 patients across more than 270 sites in at least 25 countries. The Clovis-sponsored phase 3 ATHENA study in advanced ovarian cancer is the first-line maintenance treatment setting evaluating Rubraca plus nivolumab (PD-1 inhibitor), Rubraca, nivolumab and a placebo in newly-diagnosed patients who have completed platinum-based chemotherapy. This study initiated in the second quarter of 2018 and is currently enrolling patients.

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We expect to incur borrowings under the financing agreement on a quarterly basis, beginning with such expenses incurred during the quarter ended March 31, 2019 and ending generally on the earliest to occur of (i) the termination of the ATHENA Trial, (ii) the date of completion of all activities under the ATHENA Trial Clinical Study Protocol, (iii) the date on which we pay the Discharge Amount (as defined in the financing agreement), (iv) the date of the occurrence of a change of control of us (or a sale of all or substantially all of our assets related to Rubraca) or our receipt of notice of certain breaches by us of our obligations under material in-license agreements related to Rubraca and (v) September 30, 2022.

We are obligated to repay the loan on a quarterly basis, beginning on the earliest to occur of (i) the termination of the ATHENA Trial, (ii) the approval by the FDA of an update to the label portion of the Rubraca new drug application (“NDA”) to include in such label the treatment of an indication resulting from the ATHENA Trial, (iii) the date on which we determine that the results of the ATHENA Trial are insufficient to achieve such an expansion of the Rubraca label to cover an indication based on the ATHENA Trial and (iv) September 30, 2022.

Payments are based on a certain percentage of the revenues generated from the sales and any future out-licensing of Rubraca with quarterly payment capped at $8.5 million, unless the label portion of the Rubraca NDA is expanded by the FDA to include such label the treatment of an indication resulting from the ATHENA Trial, in which case the quarterly payment is capped at $13.5 million. In the event the aggregate borrowed amount exceeds $166.5 million, such quarterly limits will be incrementally increased to a maximum of approximately $8.94 million and $14.19 million, respectively. The maximum amount required to be repaid under the agreement is 2 times the aggregate borrowed amount, which may be $350 million in the event we borrow the full $175 million under the financing agreement.

In the event we have not made payments on or before December 30, 2025 equal to at least the borrowed amount, we are required to make a lump sum payment in an amount equal to such borrowed amount less the aggregate of all prior quarterly payments described above. All other payments are contingent on the performance of Rubraca. There is no final maturity date on the financing agreement.

Our obligations under the financing agreement will be secured under a Pledge and Security agreement by a first priority security interest in all of our assets related to Rubraca, including intellectual property rights and a pledge of the equity of our wholly owned subsidiaries, Clovis Oncology UK Limited and Clovis Oncology Ireland Limited. In addition, the obligations will initially be guaranteed by Clovis Oncology UK Limited and Clovis Oncology Ireland Limited, secured by a first priority security interest in all the assets of those subsidiary.

For the nine months ended September 30, 2019, we recorded $19.9 million as a long-term liability on the Consolidated Balance Sheet and future quarterly draws will be recorded as a long-term liability on the Consolidated Balance Sheet. In connection with the transaction, we incurred $1.8 million of debt issuance costs. The debt issuance costs are presented as a deduction from the TPG financing liability on the Consolidated Balance Sheet and are amortized as interest expense over the expected life of the financing agreement using the straight-line method. As of September 30, 2019, the balance of unamortized debt issuance costs was $1.7 million.

For the nine months ended September 30, 2019, we used an effective interest rate of 15.4%. For subsequent periods, we will use the prospective method whereby a new effective interest rate is determined based on the revised estimate of remaining cash flows. The new rate is the discount rate that equates the present value of the revised estimate of remaining cash flows with the carrying amount of the debt, and it will be used to recognize interest expense for the remaining periods. Under this method, the effective interest rate is not constant, and any change in expected cash flows is recognized prospectively as an adjustment to the effective yield.

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The following table sets forth total interest expense recognized during the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Interest on convertible notes	$	3,708	$	2,735	$	9,176	$	7,078
Amortization of debt issuance costs		746		641		2,070		1,536
Interest on finance lease		174		—		537		—
Interest on borrowings under financing agreement		625		—		824		—
Accretion of interest on milestone liability		—		—		—		978
Other interest		25		—		77		—
Total interest expense	$	5,278	$	3,376	$	12,684	$	9,592

11. Stockholders’ Equity

Common Stock

The holders of common stock are entitled to 1 vote per share on all matters to be voted upon by our stockholders. Subject to the preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by our Board of Directors.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of changes in foreign currency translation adjustments, which includes changes in a subsidiary’s functional currency, and unrealized gains and losses on available-for-sale securities.

The changes in accumulated balances related to each component of other comprehensive income (loss) are summarized for the three months ended September 30, 2019 and 2018, as follows (in thousands):

	Foreign Currency				Unrealized				Total Accumulated
	Translation Adjustments				(Losses) Gains				Other Comprehensive Loss
	2019		2018		2019		2018		2019		2018
Balance at July 1,	$	(44,466)	$	(43,870)	$	(22)	$	(175)	$	(44,488)	$	(44,045)
Other comprehensive (loss) income		(143)		(495)		(68)		(10)		(211)		(505)
Total before tax		(44,609)		(44,365)		(90)		(185)		(44,699)		(44,550)
Tax effect		—		—		—		—		—		—
Balance at September 30,	$	(44,609)	$	(44,365)	$	(90)	$	(185)	$	(44,699)	$	(44,550)

The changes in accumulated balances related to each component of other comprehensive income (loss) are summarized for the nine months ended September 30, 2019 and 2018, as follows (in thousands):

	Foreign Currency				Unrealized				Total Accumulated
	Translation Adjustments				(Losses) Gains				Other Comprehensive Loss
	2019		2018		2019		2018		2019		2018
Balance at January 1,	$	(44,460)	$	(41,917)	$	(174)	$	(256)	$	(44,634)	$	(42,173)
Other comprehensive (loss) income		(149)		(2,448)		84		71		(65)		(2,377)
Total before tax		(44,609)		(44,365)		(90)		(185)		(44,699)		(44,550)
Tax effect		—		—		—		—		—		—
Balance at September 30,	$	(44,609)	$	(44,365)	$	(90)	$	(185)	$	(44,699)	$	(44,550)

The period change in each of the periods was primarily due to the deferred income taxes associated with the acquisition of EOS in November 2013. There were 0 reclassifications out of accumulated other comprehensive loss in each of the three and nine months ended September 30, 2019 and 2018.

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12. Share-Based Compensation

Share-based compensation expense for all equity-based programs, including stock options, restricted stock units and the employee stock purchase plan, for the three and nine months ended September 30, 2019 and 2018 was recognized in the accompanying Consolidated Statements of Operations and Comprehensive Loss as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Research and development	$	6,561	$	5,038	$	19,805	$	15,380
Selling, general and administrative		7,418		5,909		21,943		22,335
Total share-based compensation expense	$	13,979	$	10,947	$	41,748	$	37,715

We did not recognize a tax benefit related to share-based compensation expense during the three and nine months ended September 30, 2019 and 2018, as we maintain net operating loss carryforwards and have established a valuation allowance against the entire net deferred tax asset as of September 30, 2019.

Stock Options

The following table summarizes the activity relating to our options to purchase common stock for the nine months ended September 30, 2019:

				Weighted
		Weighted		Average	Aggregate
		Average		Remaining	Intrinsic
	Number of	Exercise		Contractual	Value
	Options	Price		Term (Years)	(Thousands)
Outstanding at December 31, 2018	6,311,513	$	46.05
Granted	987,862		19.74
Exercised	(188,355)		7.22
Forfeited	(512,425)		51.63
Outstanding at September 30, 2019	6,598,595	$	42.79	6.1	$	89
Unvested as of September 30, 2019	6,360,899	$	43.27	6.0	$	89
Vested and exercisable at September 30, 2019	4,673,118	$	46.79	5.1	$	89

The aggregate intrinsic value in the table above represents the pretax intrinsic value, based on our closing stock price of $3.93 as of September 30, 2019, which would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date.

The following table summarizes information about our stock options as of and for the three and nine months ended September 30, 2019 and 2018 (in thousands, except per share amounts):

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Weighted-average grant date fair value per share	$	4.40	$	28.97	$	14.40	$	38.52
Intrinsic value of options exercised	$	560	$	325	$	1,523	$	1,697
Cash received from stock option exercises	$	44	$	604	$	1,360	$	1,820

As of September 30, 2019, the unrecognized share-based compensation expense related to unvested options, adjusted for expected forfeitures, was $42.7 million and the estimated weighted-average remaining vesting period was 2.1 years.

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Restricted Stock

The following table summarizes the activity relating to our unvested restricted stock units (“RSUs”) for the nine months ended September 30, 2019:

		Weighted
		Average
	Number of	Grant Date
	Units	Fair Value
Unvested at December 31, 2018	795,684	$	47.73
Granted	2,073,338		25.12
Vested	(245,446)		48.91
Forfeited	(288,306)		32.98
Unvested as of September 30, 2019	2,335,270	$	29.36
Expected to vest after September 30, 2019	2,017,001	$	29.53

As of September 30, 2019, the unrecognized share-based compensation expense related to unvested RSUs, adjusted for expected forfeitures, was $51.8 million and the estimated weighted-average remaining vesting period was 2.3 years.

13. License Agreements

Rucaparib

In June 2011, we entered into a worldwide license agreement with Pfizer, Inc. to obtain exclusive global rights to develop and commercialize Rubraca. The exclusive rights are exclusive even as to Pfizer and include the right to grant sublicenses. Pursuant to the terms of the license agreement, we made a $7.0 million upfront payment to Pfizer and are required to make additional payments to Pfizer for the achievement of certain development and regulatory and sales milestones and royalties on sales as required by the license agreement. Prior to the FDA approval of Rubraca, we made milestone payments of $1.4 million, which were recognized as acquired in-process research and development expense.

On August 30, 2016, we entered into a first amendment to the worldwide license agreement with Pfizer, which amends the June 2011 existing worldwide license agreement to permit us to defer payment of the milestone payments payable upon (i) FDA approval of an NDA for 1^st Indication in US and (ii) EMA approval of an MAA for 1^st Indication in EU, to a date that is 18 months after the date of achievement of such milestones.

On December 19, 2016, Rubraca received its initial FDA approval. This approval resulted in a $0.75 million milestone payment to Pfizer as required by the license agreement, which was paid in the first quarter of 2017. This FDA approval also resulted in the obligation to pay a $20.0 million milestone payment, for which we exercised the option to defer payment by agreeing to pay $23.0 million within 18 months after the date of the FDA approval. We paid the $23.0 million milestone payment in June 2018.

On April 6, 2018, Rubraca received a second FDA approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in April 2018.

In May 2018, Rubraca received its initial European Commission approval. This approval resulted in an obligation to pay a $20.0 million milestone payment, which we paid in June 2018.

In January 2019, Rubraca received its second European Commission approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in February 2019.

In June 2019, we paid a $0.75 million milestone payment due to the launch of Rubraca as maintenance therapy in Germany in March 2019.

These milestone payments were recognized as intangible assets and will be amortized over the estimated remaining useful life of Rubraca.

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We are obligated under the license agreement to use commercially reasonable efforts to develop and commercialize Rubraca and we are responsible for all remaining development and commercialization costs for Rubraca. We are required to make regulatory milestone payments to Pfizer of up to an additional $16.0 million in aggregate if specified clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we are obligated to make sales milestone payments to Pfizer if specified annual sales targets for Rubraca are met, which relate to annual sales targets of $250.0 million and above, which, in the aggregate, could amount to total milestone payments of $170.0 million, and tiered royalty payments at a mid-teen percentage rate on our net sales, with standard provisions for royalty offsets to the extent we need to obtain any rights from third parties to commercialize Rubraca.

The license agreement with Pfizer will remain in effect until the expiration of all of our royalty and sublicense revenue obligations to Pfizer, determined on a product-by-product and country-by-country basis, unless we elect to terminate the license agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Pfizer can terminate the agreement, resulting in a loss of our rights to Rubraca and an obligation to assign or license to Pfizer any intellectual property rights or other rights we may have in Rubraca, including our regulatory filings, regulatory approvals, patents and trademarks for Rubraca.

In April 2012, we entered into a license agreement with AstraZeneca UK Limited to acquire exclusive rights associated with Rubraca under a family of patents and patent applications that claim methods of treating patients with PARP inhibitors in certain indications. The license enables the development and commercialization of Rubraca for the uses claimed by these patents. AstraZeneca receives royalties on any net sales of Rubraca.

Lucitanib

In connection with our acquisition of EOS in November 2013, we gained rights to develop and commercialize lucitanib, an oral, selective tyrosine kinase inhibitor. As further described below, in October 2008, EOS entered into an exclusive license agreement with Advenchen Laboratories LLC (“Advenchen”) to develop and commercialize lucitanib on a global basis, excluding China.

We are obligated to pay Advenchen tiered royalties at percentage rates in the mid-single digits on net sales of lucitanib, based on the volume of annual net sales achieved. In addition, after giving effect to the first and second amendments to the license agreement, we are required to pay to Advenchen 25% of any consideration, excluding royalties, we receive from sublicensees, in lieu of the milestone obligations set forth in the agreement. We are obligated under the agreement to use commercially reasonable efforts to develop and commercialize at least one product candidate containing lucitanib, and we are also responsible for all remaining development and commercialization costs for lucitanib.

The license agreement with Advenchen will remain in effect until the expiration of all our royalty obligations to Advenchen, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Advenchen can terminate the agreement, resulting in a loss of our rights to lucitanib.

FAP Program

In September 2019, we entered into a global license and collaboration agreement with 3BP to develop and commercialize a PTRT and imaging agent targeting FAP. The lead candidate, designated internally as FAP-2286, is being developed pursuant to a global development plan agreed to by the parties. We are responsible for the costs of all preclinical and clinical development activities described in the plan, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the preclinical development phase of the collaboration. Upon the signing of the license and collaboration agreement, we made a $9.4 million upfront payment to 3BP, which we recognized as acquired in-process research and development expense. An initial technology access fee is due in December 2019, and will be recognized as acquired in-process research and development expense.

Pursuant to the terms of the agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP single- to low-double-digit royalties on net sales of the FAP-targeted therapeutic product and imaging agent, based on the volume of annual net sales achieved. In addition, 3BP is entitled to

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receive 34% of any consideration, excluding royalties on the therapeutic product, pursuant to any sublicenses we may grant.

We are obligated under the license and collaboration agreement to use diligent efforts to develop FAP-2286 and commercialize a FAP-targeted therapeutic product and imaging agent, and we are responsible for all commercialization costs in our territory. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights. 3BP also has the right to terminate the agreement under certain circumstances in connection with our change of control in which the acquiring party retains a product competitive with the FAP-targeted therapeutic product or, in the event marketing authorization has not yet been obtained, does not agree to the then-current global development plan.

Pursuant to a non-binding letter of intent, the parties are negotiating the terms of a definitive agreement to collaborate on a discovery program directed to 3 additional undisclosed targets for radionuclide therapy, to which we would obtain global rights for any resulting product candidates.

Terms of both transactions comprise approximately $12.0 million in initial upfront payments to 3BP, with the upfront payment with respect to the discovery program collaboration subject to the parties reaching agreement on the terms of the definitive discovery collaboration agreement.

14. Net Loss Per Common Share

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding using the treasury-stock method for the stock options and RSUs and the if-converted method for the 2021 Notes, 2025 Notes and 2024 Notes. As a result of our net losses for the periods presented, all potentially dilutive common share equivalents were considered anti-dilutive and were excluded from the computation of diluted net loss per share.

The shares outstanding at the end of the respective periods presented in the table below were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect (in thousands):

	Three and Nine months ended September 30,
	2019	2018
Common shares under option plans	2,460	3,381
Convertible senior notes	41,598	8,584
Total potential dilutive shares	44,058	11,965

15. Commitments and Contingencies

Royalty and License Fee Commitments

We have entered into certain license agreements, as identified in Note 13, License Agreements, with third parties that include the payment of development and regulatory milestones, as well as royalty payments, upon the achievement of pre-established development, regulatory and commercial targets. Our payment obligation related to these license agreements is contingent upon the successful development, regulatory approval and commercialization of the licensed products. Due to the nature of these arrangements, the future potential payments are inherently uncertain, and accordingly, we only recognize payment obligations which are probable and estimable as of the balance sheet date.

Manufacture and Services Agreement Commitments

On October 3, 2016, we entered into a Manufacturing and Services Agreement (the “Agreement”) with a non-exclusive third-party supplier for the production of the active ingredient for Rubraca. Under the terms of the Agreement, we will provide the third-party supplier a rolling forecast for the supply of the active ingredient in Rubraca that will be updated by us on a quarterly basis. We are obligated to order material sufficient to satisfy an initial quantity specified in any forecast. In addition, the third-party supplier will construct, in its existing facility, a production train that will be exclusively dedicated to the manufacture of the Rubraca active ingredient. We are obligated to make scheduled capital

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program fee payments toward capital equipment and other costs associated with the construction of the dedicated production train. Further, once the production train became operational in October 2018, we are obligated to pay a fixed facility fee each quarter for the duration of the Agreement, which expires on December 31, 2025, unless extended by mutual consent of the parties. As of September 30, 2019, $96.7 million of purchase commitments exist under the Agreement.

At the time we entered into the Agreement, we evaluated the Agreement as a whole and bifurcated into lease and non-lease components, which consisted of an operating lease of warehouse space, capital lease of equipment, purchase of leasehold improvements and manufacturing costs based upon the relative fair values of each of the deliverables. During October 2018, the production train was placed into service and we recorded the various components of the Agreement.

Legal Proceedings

We and certain of our officers were named as defendants in several lawsuits, as described below. We cannot reasonably predict the outcome of these legal proceedings, nor can we estimate the amount of loss or range of loss, if any, that may result. An adverse outcome in these proceedings could have a material adverse effect on our results of operations, cash flows or financial condition.

Rociletinib-Related Litigation

Following Clovis’ regulatory announcement in November 2015 of adverse developments in its ongoing clinical trials for rociletinib, Clovis and certain of its current and former executives were named in various securities lawsuits, the largest of which was a putative class action lawsuit in the District of Colorado (the “Medina Action”) which was settled on October 26, 2017 (the “Medina Settlement”). The remaining actions are discussed below.

In March 2017, 2 putative shareholders of the Company, Macalinao and McKenry (the “Derivative Plaintiffs”), filed shareholder derivative complaints against certain directors and officers of the Company in the Court of Chancery of the State of Delaware. On May 4, 2017, the Macalinao and McKenry actions were consolidated for all purposes in a single proceeding under the caption In re Clovis Oncology, Inc. Derivative Litigation, Case No, 2017-0222 (the “Consolidated Derivative Action”).  

On May 18, 2017, the Derivative Plaintiffs filed a Consolidated Verified Shareholder Derivative Complaint (the “Consolidated Derivative Complaint”). The Consolidated Derivative Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by allegedly causing or allowing misrepresentations of the Company’s business operations and prospects, failing to ensure that the TIGER-X clinical trial was being conducted in accordance with applicable rules, regulations and protocols, and engaging in insider trading. The Consolidated Derivative Complaint sought, among other things, an award of money damages.  

On July 31, 2017, the defendants filed a motion to dismiss the Consolidated Derivative Complaint. Plaintiffs filed an opposition to the motion to dismiss on August 31, 2017, and the defendants filed a reply in further support of the motion to dismiss on September 26, 2017.

While the motion to dismiss remained pending, on November 19, 2018, Plaintiffs filed a motion for leave to file a supplemental consolidated complaint, and on November 20, 2018, the Court granted that motion. On November 27, 2018, Plaintiffs filed their supplemental complaint (the “Supplemental Derivative Complaint”), which adds allegations concerning the Company’s, Mr. Mahaffy’s and Mr. Mast’s settlements with the United States Securities and Exchange Commission. Pursuant to a briefing schedule entered by the Court, the defendants filed a supplemental motion to dismiss the Supplemental Derivative Complaint on February 6, 2019; plaintiffs filed an opposition brief on February 22, 2019; and the defendants filed a reply brief on March 5, 2019. The Court held oral arguments on the defendants’ motions to dismiss on June 19, 2019. At the oral arguments, the Court ordered the parties to submit supplemental letter briefs on the motion to dismiss; plaintiffs filed their letter brief on June 25, 2019 and the defendants filed theirs on July 1, 2019.

On October 1, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Chancery Court, issued a Memorandum Opinion granting in part and denying in part defendants’ motions to dismiss. The Supplemental Derivative Complaint was dismissed as to Plaintiffs’ derivative claims for unjust enrichment and insider trading. The Court allowed Plaintiffs’ remaining derivative claim for breach of fiduciary duty to proceed.

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While the Company continues to evaluate the remaining claim, it does not believe this litigation will have a material impact on its financial position or results of operations.

On March 20, 2017, a purported shareholder of the Company, filed a shareholder derivative complaint (the “Guo Complaint”) against certain officers and directors of the Company in the United States District Court for the District of Colorado. The Guo Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by either recklessly or with gross negligence approving or permitting misrepresentations of the Company’s business operations and prospects. The Guo Complaint also alleged claims for waste of corporate assets and unjust enrichment. Finally, the Guo Complaint alleged that certain of the individual defendants violated Section 14(a) of the Securities Exchange Act, by allegedly negligently issuing, causing to be issued, and participating in the issuance of materially misleading statements to stockholders in the Company’s Proxy Statement on Schedule DEF 14A in connection with the 2015 Annual Meeting of Stockholders, held on June 11, 2015. The Guo Complaint sought, among other things, an award of money damages.  

On June 19, 2017, the parties filed a joint motion to stay the Guo action pending resolution of the motion to dismiss the Consolidated Derivative Complaint. On June 20, 2017, the court granted the motion to stay and entered an order administratively closing the case. Based on the October 1, 2019 ruling in the Consolidated Derivative Action, on October 22, 2019, the court reinstated the Guo action pursuant to a joint motion filed by the parties to reopen the case. 

European Patent Opposition

NaN oppositions were filed in the granted European counterpart of the rucaparib camsylate salt/polymorph patent on June 20, 2017. The European Patent Office’s Opposition Division held an oral hearing on December 4, 2018, during which it upheld claims, narrowed from the originally granted patent, to certain crystalline forms of rucaparib camsylate, including, but not limited to, rucaparib S-camsylate Form A, the crystalline form in Rubraca. On February 4, 2019, the Opposition Division issued a written decision confirming its decision at the oral hearing. In June 2019, Clovis and one opponent, Hexal, appealed the written decision of the European Opposition Division and filed reply appeal briefs in early November 2019.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Quarterly Report on Form 10-Q and the information incorporated herein by reference includes statements that are, or may be deemed, “forward-looking statements.” In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or, in each case, their negative or other variations thereon or comparable terminology, although not all forward-looking statements contain these words. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, the market acceptance and commercial viability of our approved product, the development of our sales and marketing capabilities, the performance of our clinical trial partners, third party manufacturers and our diagnostic partners, our ongoing and planned non-clinical studies and clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, including our ability to confirm clinical benefit of our approved product through confirmatory trials and other post-marketing requirements, the degree of clinical utility of our products, particularly in specific patient populations, expectations regarding clinical trial data, expectations regarding sales of our products, our results of operations, financial condition, liquidity, prospects, growth and strategies, the industry in which we operate, including our competition and the trends that may affect the industry or us.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industry in which we operate may differ materially from the forward-looking statements contained herein.

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Any forward-looking statements that we make in this Quarterly Report on Form 10-Q speak only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

You should also read carefully the factors described in the “Risk Factors” in Part I, Item 1A in our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”), as updated from time to time in our subsequent SEC filings, to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

Clovis Oncology®, the Clovis logo and Rubraca® are trademarks of Clovis Oncology, Inc. in the United States and in other selected countries. All other brand names or trademarks appearing in this report are the property of their respective holders. Unless the context requires otherwise, references in this report to “Clovis,” the “Company,” “we,” “us” and “our” refer to Clovis Oncology, Inc., together with its consolidated subsidiaries.

Overview

We are a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, the EU and additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, for those indications that require them, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use.

Our marketed product Rubraca® (rucaparib), an oral small molecule inhibitor of poly ADP-ribose polymerase (“PARP”), is available in the United States for two indications specific to recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. The initial indication received approval from the FDA in December 2016 and covers the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic)-associated epithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with two or more chemotherapies and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. In April 2018, the FDA also approved Rubraca for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The approval in this second, broader and earlier-line indication on a priority review timeline was based on positive data from the phase 3 ARIEL3 clinical trial. Diagnostic testing is not required for patients to be prescribed Rubraca in this maintenance treatment indication.

In May 2018, the European Commission granted a conditional marketing authorization for Rubraca as monotherapy treatment of adult patients with platinum-sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have been treated with two or more prior lines of platinum-based chemotherapy, and who are unable to tolerate further platinum-based chemotherapy. As this is a conditional approval, it will be necessary to complete certain confirmatory post marketing commitments. In January 2019, the European Commission granted a variation to the marketing authorization to include the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. With this approval, Rubraca is now authorized in the EU for certain patients in the recurrent ovarian cancer maintenance setting regardless of their BRCA mutation status. Rubraca was the first PARP inhibitor licensed for an ovarian cancer treatment indication in the EU and is the only drug to be authorized for both treatment and maintenance treatment among eligible patients with ovarian cancer. We completed our launch of Rubraca as maintenance therapy in Germany and patients with private insurance in the United Kingdom in March 2019, and are currently launching Rubraca in England with reimbursement now provided via the Cancer Drugs Fund.

Beyond our initial labeled indication, we have a clinical development program underway to further evaluate Rubraca in a variety of solid tumor types, either as monotherapy or in combination with other agents, including several studies as part of our ongoing clinical collaboration with Bristol-Myers Squibb Company to evaluate its immunotherapy OPDIVO® (nivolumab) in combination with Rubraca. We hold worldwide rights for Rubraca.

The TRITON2 data presented at ESMO 2019 demonstrated a 43.9% confirmed objective response rate by investigator assessment in 57 RECIST/PCWG3 response-evaluable patients with a BRCA1/2 mutation. When assessed

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by independent radiological review, which is the primary endpoint of TRITON2, the response rate was similar (40.4%). In addition, a 52.0% confirmed prostate-specific antigen (“PSA”) response rate was observed in 98 response-evaluable patients with a BRCA1/2 mutation. Confirmed radiographic responses were durable, with 60 percent lasting 24 weeks or longer (15/25). Confirmed investigator-assessed RECIST* and PSA responses were also observed in patients with alterations in other DDR genes, including ATM, CDK12, CHEK2, PALB2, BRIP1, FANCA, and RAD51B. The median duration of follow-up (as of July 2, 2019) for patients in TRITON2 was 13.1 months (range 4.1–28.5 months) with the safety profile consistent with prior reports. The most common any-grade treatment-emergent adverse events (“TEAE”) >20% in the TRITON2 trial were asthenia/fatigue (55.3%), nausea (49.5%), anemia/decreased hemoglobin (37.9%), decreased appetite (27.9%), transient increased aspartate transaminase/alanine aminotransferase (ALT/AST) (24.7%), constipation (24.7%), vomiting (22.1%) and diarrhea (21.1%).

The TRITON2 data will be used to support the filing of Clovis Oncology’s planned supplemental New Drug Application (“sNDA”) to the FDA for Rubraca in BRCA1/2-mutant advanced prostate cancer, although the sNDA data set will include additional patients and additional data maturity on the patients reported at ESMO. The filing will be based on RECIST responses. We intend to file the planned sNDA for Rubraca in patients with BRCA1/2-mutant advance prostate cancer during the fourth quarter of 2019.

We are continuing to evaluate the potential for rucaparib in combination with other agents for the treatment of a variety of solid tumors. Our planned Phase 2 pan-tumor study in patients with solid tumors associated with deleterious mutations in homologous recombination repair genes is expected to begin by year-end 2019 or early 2020.

In addition to Rubraca, we have a second product candidate currently in clinical development. Lucitanib is an investigational, oral, potent inhibitor of the tyrosine kinase activity of vascular endothelial growth factor receptors 1 through 3 (VEGFR1-3), platelet-derived growth factor receptors alpha and beta (PDGFR α/β) and fibroblast growth factor receptors 1 through 3 (FGFR1-3). We believe that recent data for a drug similar to lucitanib that inhibits these same pathways – when combined with a PD-1 inhibitor – represent a scientific rationale for development of lucitanib in combination with a PD-1 inhibitor, and a Clovis-sponsored study of lucitanib in combination with nivolumab is underway in advanced gynecologic cancers and other solid tumors. In addition, we have initiated a study of lucitanib in combination with Rubraca in ovarian cancer, based on encouraging data of VEGF and PARP inhibitors in combination. Each of these Phase 1b/2 studies is currently enrolling patients. We hold the global development and commercialization rights (except for China) for lucitanib.

In September 2019, we entered into a license and collaboration agreement with 3BP to develop a PTRT and imaging agent targeting FAP, which is expressed by cancer-associated fibroblasts found in a majority of tumor types. Peptide-targeted radionuclide therapy is an emerging class of drugs and it involves the injection of a small amount of radioactive material, or of a radionuclide, that is combined with a cancer-targeting peptide for use as a targeted radiopharmaceutical. The targeting peptide is able to recognize and bind to specific receptors on the cancer cell, such as antigens and cell receptors. When used in a targeted radiopharmaceutical, the peptide is designed to attach to cancer cells, and the radiopharmaceutical would then deliver a high dose of radiation to the tumor while sparing normal tissue because of its rapid systemic clearance. In order for the targeted radiopharmaceutical to be safe and efficacious, it must rapidly attach to cancer cells or in close vicinity to the cancer cells, be retained in or at the tumor site for a sufficient period of time that the radionuclide can have activity on the cancer cells, have minimal attachment to non-cancer cells, and then be rapidly cleared from the body.

FAP is highly expressed in cancer-associated fibroblasts (“CAFs”) which are found in the majority of cancer types, potentially making it a suitable target across a wide array of solid tumors. FAP is highly expressed in many epithelial cancers, including more than 90 percent of breast, lung, colorectal and pancreatic carcinomas. CAFs are highly prevalent in the tumor microenvironment of many cancers and persist through all malignant stages of a tumor, from primary tumor to metastasis. FAP has limited expression on normal fibroblasts, reducing the potential for effects in normal tissue.

Clinical studies of small molecule imaging agents targeting FAP have validated this target in a diverse number of cancer indications and support the further evaluation of peptide-targeted radionuclide therapy. FAP-targeted radiopharmaceuticals have at least two potential modes of anti-tumor activity: radiation crossfire, in which tumor cells are irradiated due to their close proximity to CAFs; and depletion of CAFs, disrupting the communication between the tumor cells and the tumor stroma. In addition, in certain tumor types, such as sarcoma and mesothelioma, FAP is

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expressed on the tumor cells themselves, and in those tumors, FAP-targeted radiopharmaceuticals may have a direct antitumor effect.

Following completion of preclinical work to support an investigational new drug application for the lead candidate under our license and collaboration agreement, designated internally as FAP-2286, we plan to conduct global clinical trials. With respect to the FAP product candidate, we hold U.S. and global rights, excluding Europe (inclusive of Russia, Turkey and Israel), where 3BP retains rights. Patent applications are pending that claim FAP-2286 generically and specifically (including with respect to composition of matter) that, if issued, would have expiration dates in 2040. The parties have also entered into a non-binding letter of intent to negotiate the terms of a definitive agreement to collaborate on a discovery program directed to up to three additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we would obtain global rights for any resulting product candidates.

We commenced operations in April 2009. To date, we have devoted substantially all of our resources to identifying and in-licensing product candidates, performing development activities with respect to those product candidates and the general and administrative support of these operations. For the nine months ended September 30, 2019 and 2018, we have generated $103.7 million and $65.0 million, respectively, in product revenue related to sales of Rubraca, which we began to commercialize on December 19, 2016.

We have never been profitable and, as of September 30, 2019, we had an accumulated deficit of $2,144.0 million. We incurred net losses of $300.9 million and $268.8 million for the nine months ended September 30, 2019 and 2018, respectively. We had cash, cash equivalents and available-for-sale securities totaling $354.1 million at September 30, 2019.

We have principally funded our operations using the net proceeds from the sale of convertible preferred stock, the issuance of convertible promissory notes, public offerings of our common stock and our convertible senior notes offering. We expect to incur significant losses for the foreseeable future, as we incur costs related to commercial activities associated with Rubraca. Based on current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund our operating plan through at least the next 12 months. Until we can generate a sufficient amount of revenue from Rubraca, we expect to finance our operations in part through additional public or private equity or debt offerings and may seek additional capital through arrangements with strategic partners or from other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so.

License Agreements

Rucaparib

In June 2011, we entered into a worldwide license agreement with Pfizer, Inc. to obtain exclusive global rights to develop and commercialize Rubraca. The exclusive rights are exclusive even as to Pfizer and include the right to grant sublicenses. Pursuant to the terms of the license agreement, we made a $7.0 million upfront payment to Pfizer and are required to make additional payments to Pfizer for the achievement of certain development and regulatory and sales milestones and royalties on sales as required by the license agreement. Prior to the FDA approval of Rubraca, we made milestone payments of $1.4 million, which were recognized as acquired in-process research and development expense.

On August 30, 2016, we entered into a first amendment to the worldwide license agreement with Pfizer, which amends the June 2011 existing worldwide license agreement to permit us to defer payment of the milestone payments payable upon (i) FDA approval of an NDA for 1st Indication in US and (ii) EMA approval of an MAA for 1st Indication in EU, to a date that is 18 months after the date of achievement of such milestones.

On December 19, 2016, Rubraca received its initial FDA approval. This approval resulted in a $0.75 million milestone payment to Pfizer as required by the license agreement, which was paid in the first quarter of 2017. This FDA approval also resulted in the obligation to pay a $20.0 million milestone payment, for which we exercised the option to defer payment by agreeing to pay $23.0 million within 18 months after the date of the FDA approval. We paid the $23.0 million milestone payment in June 2018.

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On April 6, 2018, Rubraca received a second FDA approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in April 2018.

In May 2018, Rubraca received its initial European Commission approval. This approval resulted in an obligation to pay a $20.0 million milestone payment, which we paid in June 2018.

In January 2019, Rubraca received its second European Commission approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in February 2019.

In June 2019, we paid a $0.75 million milestone payment due to the launch of Rubraca as maintenance therapy in Germany in March 2019.

These milestone payments were recognized as intangible assets and will be amortized over the estimated remaining useful life of Rubraca.

We are obligated under the license agreement to use commercially reasonable efforts to develop and commercialize Rubraca and we are responsible for all remaining development and commercialization costs for Rubraca. We are required to make regulatory milestone payments to Pfizer of up to an additional $16.0 million in aggregate if specified clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we are obligated to make sales milestone payments to Pfizer if specified annual sales targets for Rubraca are met, which relate to annual sales targets of $250.0 million and above, which, in the aggregate, could amount to total milestone payments of $170.0 million, and tiered royalty payments at a mid-teen percentage rate on our net sales, with standard provisions for royalty offsets to the extent we need to obtain any rights from third parties to commercialize Rubraca.

The license agreement with Pfizer will remain in effect until the expiration of all of our royalty and sublicense revenue obligations to Pfizer, determined on a product-by-product and country-by-country basis, unless we elect to terminate the license agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Pfizer can terminate the agreement, resulting in a loss of our rights to Rubraca and an obligation to assign or license to Pfizer any intellectual property rights or other rights we may have in Rubraca, including our regulatory filings, regulatory approvals, patents and trademarks for Rubraca.

In April 2012, we entered into a license agreement with AstraZeneca UK Limited to acquire exclusive rights associated with Rubraca under a family of patents and patent applications that claim methods of treating patients with PARP inhibitors in certain indications. The license enables the development and commercialization of Rubraca for the uses claimed by these patents. AstraZeneca receives royalties on any net sales of Rubraca.

Lucitanib

In connection with our acquisition of EOS in November 2013, we gained rights to develop and commercialize lucitanib, an oral, selective tyrosine kinase inhibitor. As further described below, in October 2008, EOS entered into an exclusive license agreement with Advenchen Laboratories LLC (“Advenchen”) to develop and commercialize lucitanib on a global basis, excluding China.

We are obligated to pay Advenchen tiered royalties at percentage rates in the mid-single digits on net sales of lucitanib, based on the volume of annual net sales achieved. In addition, after giving effect to the first and second amendments to the license agreement, we are required to pay to Advenchen 25% of any consideration, excluding royalties, we receive from sublicensees, in lieu of the milestone obligations set forth in the agreement. We are obligated under the agreement to use commercially reasonable efforts to develop and commercialize at least one product candidate containing lucitanib, and we are also responsible for all remaining development and commercialization costs for lucitanib.

The license agreement with Advenchen will remain in effect until the expiration of all our royalty obligations to Advenchen, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Advenchen can terminate the agreement, resulting in a loss of our rights to lucitanib.

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FAP Program

In September 2019, we entered into a global license and collaboration agreement with 3BP to develop and commercialize a PTRT and imaging agent targeting FAP. The lead candidate, designated internally as FAP-2286, is being developed pursuant to a global development plan agreed to by the parties. We are responsible for the costs of all preclinical and clinical development activities described in the plan, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the preclinical development phase of the collaboration. Upon the signing of the license and collaboration agreement, we made a $9.4 million upfront payment to 3BP, which we recognized as acquired in-process research and development expense. An initial technology access fee is due in December 2019, and will be recognized as acquired in-process research and development expense.

Pursuant to the terms of the agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP single- to low-double-digit royalties on net sales of the FAP-targeted therapeutic product and imaging agent, based on the volume of annual net sales achieved. In addition, 3BP is entitled to receive 34% of any consideration, excluding royalties on the therapeutic product, pursuant to any sublicenses we may grant.

We are obligated under the license and collaboration agreement to use diligent efforts to develop FAP-2286 and commercialize a FAP-targeted therapeutic product and imaging agent, and we are responsible for all commercialization costs in our territory. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights. 3BP also has the right to terminate the agreement under certain circumstances in connection with our change of control in which the acquiring party retains a product competitive with the FAP-targeted therapeutic product or, in the event marketing authorization has not yet been obtained, does not agree to the then-current global development plan.

Pursuant to a non-binding letter of intent, the parties are negotiating the terms of a definitive agreement to collaborate on a discovery program directed to three additional undisclosed targets for radionuclide therapy, to which we would obtain global rights for any resulting product candidates.

Terms of both transactions comprise approximately $12.0 million in initial upfront payments to 3BP, with the upfront payment with respect to the discovery program collaboration subject to the parties reaching agreement on the terms of the definitive discovery collaboration agreement.

Financial Operations Overview

Revenue

Product revenue is derived from sales of our product, Rubraca, in the United States and the EU. We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently sell our products to patients and healthcare providers. Separately, we have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and other discounts. Revenue is recorded net of estimated rebates, chargebacks, discounts and other deductions as well as estimated product returns (collectively, “variable considerations”). Revenue from product sales are recognized when customers obtain control of our product, which occurs at a point in time, typically upon delivery to the customers. For further discussion of our revenue recognition policy, see Note 2, Summary of Significant Accounting Polices in the Revenue Recognition section.

In the three and nine months ended September 30, 2019, we recorded product revenue of $37.6 million and $103.7 million, respectively, related to sales of Rubraca, which we began to commercialize on December 19, 2016. Our ability to generate revenue and become profitable depends upon our ability to successfully commercialize products. Any inability on our part to successfully commercialize Rubraca in the United States, the EU and any foreign territories where it may be approved, or any significant delay in such approvals, could have a material adverse impact on our ability to execute upon our business strategy and, ultimately, to generate sufficient revenues from Rubraca to reach or maintain profitability or sustain our anticipated levels of operations.

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We supply commercially labeled Rubraca free of charge to eligible patients who qualify due to financial need through our patient assistance program and the majority of these patients are on Medicare. This product is distributed through a separate vendor who administers the program on our behalf. It is not distributed through our specialty distributor and specialty pharmacy network. This product is neither included in the transaction price nor the variable considerations to arrive at product revenue. Manufacturing costs associated with this free product is included in selling, general and administrative expenses. For the nine months ended September 30, 2019, the supply of this free drug was approximately 21% of the overall commercial supply or the equivalent of $26.7 million in commercial value.

Cost of Sales – Product

Product cost of sales consists primarily of materials, third-party manufacturing costs as well as freight and royalties owed to our licensing partners for Rubraca sales.

Cost of Sales – Intangible Asset Amortization

Cost of sales for intangible asset amortization consists of the amortization of capitalized milestone payments made to our licensing partners upon FDA approval of Rubraca. Milestone payments are amortized on a straight-line basis over the estimated remaining patent life of Rubraca.

Research and Development Expenses

Research and development expenses consist of costs incurred for the development of our product candidates and companion diagnostics, which include:

● license fees and milestone payments related to the acquisition of in-licensed products, which are reported on our Consolidated Statements of Operations and Comprehensive Loss as acquired in-process research and development;

● employee-related expenses, including salaries, benefits, travel and share-based compensation expense;

● expenses incurred under agreements with contract research organizations (“CROs”) and investigative sites that conduct our clinical trials;

● the cost of acquiring, developing and manufacturing clinical trial materials;

● costs associated with non-clinical activities and regulatory operations;

● market research, disease education and other commercial product planning activities; and

● activities associated with the development of companion diagnostics for our product candidates.

Research and development costs are expensed as incurred. License fees and milestone payments related to in-licensed products and technology are expensed if it is determined that they have no alternative future use. Costs for certain development activities, such as clinical trials and manufacturing of clinical supply, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors. Our research and development expenses increased in the three and nine months ended September 30, 2019 compared to the same period in the prior year. We expect research and development costs to be higher for the full year 2019 compared to 2018. Thereafter, we expect research and development costs to flatten, and then trend lower in the following years, as the largest of our sponsored clinical trials near completion.

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The following table identifies research and development and acquired in-process research and development costs on a program-specific basis for our products under development. Personnel-related costs, depreciation and share-based compensation are not allocated to specific programs, as they are deployed across multiple projects under development and, as such, are separately classified as personnel and other expenses in the table below (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
Rucaparib Expenses
Research and development	$	54,268	$	44,375	$	139,802	$	101,931
Rucaparib Total		54,268		44,375		139,802		101,931
FAP Expenses
Acquired in-process research and development	$	9,440	$	—	$	9,440	$	—
3BP Total		9,440		—		9,440		—
Lucitanib Expenses
Research and development		1,290		169		2,891		396
Lucitanib Total		1,290		169		2,891		396
Rociletinib Expenses
Research and development	$	252	$	399		778		1,993
Rociletinib Total		252		399		778		1,993
Personnel and other expenses		22,086		18,944		67,203		55,818
Total	$	87,336	$	63,887	$	220,114	$	160,138

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist principally of salaries and related costs for personnel in executive, commercial, finance, legal, investor relations, human resources and information technology functions. Other general and administrative expenses include facilities expenses, communication expenses, information technology costs, corporate insurance and professional fees for legal, consulting and accounting services. With the FDA approval of Rubraca on December 19, 2016, all sales and marketing expenses associated with Rubraca are included in selling, general and administrative expenses. We expect selling, general and administrative costs to be higher for the full year 2019 compared to 2018; however, these costs will continue to increase modestly as we prepare for anticipated product launches in a greater number of countries outside of the U.S. and launch activities for the anticipated prostate indication approval in 2020.

Acquired In-Process Research and Development Expenses

Acquired in-process research and development expenses consist of upfront payments to acquire a new drug compound, as well as subsequent milestone payments. Acquired in-process research and development payments are immediately expensed provided that the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use. Once regulatory approval is received, payments to acquire rights, and the related milestone payments, are capitalized and the amortization of such assets recorded to intangible asset amortization cost of sales.

Other Income and Expense

Other income and expense is primarily comprised of foreign currency gains and losses resulting from transactions with CROs, investigative sites and contract manufacturers where payments are made in currencies other than the U.S. dollar. Other expense also includes interest expense recognized related to our convertible senior notes.

Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, revenue and related disclosures. On an ongoing basis, we evaluate our estimates and judgments,

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including those related to revenue, intangible asset impairment, clinical trial accruals and share-based compensation expense. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For a description of our critical accounting policies, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Other than the adoption of the new lease standard discussed in Note 2, Summary of Significant Accounting Policies, there have not been any material changes to our critical accounting policies since December 31, 2018.

New Accounting Standards

From time to time, the Financial Accounting Standards Board (“FASB”) or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through the issuance of an Accounting Standards Update. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption.

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, Summary of Significant Accounting Policies, in the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

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Results of Operations

Comparison of Three Months Ended September 30, 2019 and 2018:

The following table summarizes the results of our operations for the three months ended September 30, 2019 and 2018 (in thousands):

					Change
	Three months ended September 30,				Favorable/(Unfavorable)
	2019		2018		$		%
Revenues:
Product revenue	$	37,603	$	22,757	$	14,846		65	%
Operating expenses:
Cost of sales - product		8,134		4,766		(3,368)		(71)	%
Cost of sales - intangible asset amortization		1,212		771		(441)		(57)	%
Research and development		77,896		63,887		(14,009)		(22)	%
Selling, general and administrative		41,811		42,495		684		2	%
Acquired in-process research and development		9,440		—		(9,440)		(100)	%
Other operating expenses		5,539		—		(5,539)		(100)	%
Total expenses		144,032		111,919		(32,113)		(29)	%
Operating loss		(106,429)		(89,162)		(17,267)		(19)	%
Other income (expense):
Interest expense		(5,278)		(3,376)		(1,902)		(56)	%
Foreign currency (loss) gain		(229)		151		(380)		252	%
Legal settlement loss		(1,750)		—		(1,750)		(100)	%
Gain on extinguishment of debt		18,480		—		18,480		100	%
Other income		781		2,536		(1,755)		(69)	%
Other income (expense), net		12,004		(689)		12,693		1,842	%
Loss before income taxes		(94,425)		(89,851)		(4,574)		(5)	%
Income tax benefit		350		(13)		363		(2,792)	%
Net loss	$	(94,075)	$	(89,864)	$	(4,211)		(5)	%

Product Revenue. Product revenue for the three months ended September 30, 2019 increased compared to the same period in the prior year primarily due to continued growth in sales of Rubraca, which is approved for sale in the United States and EU markets. We completed our launch of Rubraca as maintenance therapy in Germany and the UK in March 2019. Product revenue is recorded net of variable considerations comprised of rebates, chargebacks and other discounts. Product revenue for the three months ended September 30, 2019 was $36.5 million in the United States and $1.1 million outside of the United States. Variable considerations represented 14.1% and 11.2% of the transaction price recognized in the three months ended September 30, 2019 and 2018, respectively. This increase is primarily due to government and group purchasing organization rebates; in addition, our launch of Rubraca in Germany and the UK in March 2019 contributed to the increase. Amounts are summarized as follows:

	Three months ended				Three months ended
	September 30, 2019				September 30, 2018
	$		% of Gross Sales		$		% of Gross Sales
	(in thousands)				(in thousands)
Transaction price	$	43,775		100.0%	$	25,625		100.0%
Variable considerations:
Government rebates and chargebacks		3,789		8.7%		1,664		6.5%
Discounts and fees		2,383		5.4%		1,204		4.7%
Total variable considerations		6,172		14.1%		2,868		11.2%
Product revenue	$	37,603		85.9%	$	22,757		88.8%

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Cost of Sales – Product. Product cost of sales for the three months ended September 30, 2019 increased compared to the same period in the prior year primarily due to the increase in product revenue. Product cost of sales primarily relate to manufacturing, freight and royalties costs associated with Rubraca sales in the period.

Cost of Sales – Intangible Asset Amortization. In the three months ended September 30, 2019 and 2018, we recognized cost of sales of $1.2 million and $0.8 million, respectively, associated with the amortization of capitalized milestone payments related to the approvals of Rubraca by the FDA and the European Commission.

Research and Development Expenses. Research and development expenses increased during the three months ended September 30, 2019 compared to the same period in the prior year primarily due to higher research and development costs for Rubraca. Clinical trial costs for Rubraca were higher compared to the same period a year ago primarily due to increased costs related to our ATHENA combination study with Bristol-Myers Squibb Company’s immunotherapy OPDIVO for ovarian cancer and increased costs related to our TRITON3 study for prostate cancer. In addition, personnel costs increased during the three months ended September 30, 2019 due to higher headcount to support increased Rubraca clinical trial activities.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased during the three months ended September 30, 2019 compared to the same period in the prior year primarily due to a decrease of $1.7 million in legal expenses and $1.7 million in marketing expenses partially offset by an increase of $1.5 million stock compensation expense.

Acquired In-Process Research and Development Expenses.  In September 2019, we accrued $9.4 million in upfront payments to 3BP to develop a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast activation protein alpha (“FAP”). FAP is highly expressed in many epithelial cancers, including more than 90% of breast, lung, colorectal and pancreatic carcinomas. Upon achievement of certain development and regulatory milestones, additional potential milestone payments and single- to low-double-digit commercial royalties would be paid to 3BP by us.

Other Operating Expenses. During the three months ended September 30, 2019, we recognized other operating expenses related to the write off of some damaged API and costs related out dedicated production train at Lonza.

Interest Expense. Interest expense increased during the three months ended September 30, 2019 compared to the same period in the prior year primarily due to the issuance of the 2025 Notes on April 19, 2018 and the 2024 Notes on August 13, 2019.

Legal Settlement Loss. During the three months ended September 30, 2019, we recorded a $1.8 million legal settlement loss due to the difference in the volume weighted average price of our stock over the 10 trading days beginning on June 18, 2019 and the closing stock price on July 1, 2019, the date we issued the shares related to the Antipodean Complaint.

Gain on Extinguishment of Debt. On August 13, 2019, we repurchased $190.3 million aggregate principal amount of our outstanding 2021 Notes and $2.0 million of accrued interest for an aggregate repurchase price of $171.8 million. This repurchase resulted in the write off of $2.0 million in unamortized debt issuance costs and the recognition of $18.5 million gain on extinguishment of debt.

Other Income. Other income decreased during the three months ended September 30, 2019 compared to the same period in the prior year due to interest income earned on our available-for-sale securities.

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Comparison of Nine Months Ended September 30, 2019 and 2018:

The following table summarizes the results of our operations for the nine months ended September 30, 2019 and 2018 (in thousands):

					Change
	Nine months ended September 30,				Favorable/(Unfavorable)
	2019		2018		$		%
Revenues:
Product revenue	$	103,699	$	65,037	$	38,662		59	%
Operating expenses:
Cost of sales - product		21,984		13,262		(8,722)		(66)	%
Cost of sales - intangible asset amortization		3,549		1,851		(1,698)		(92)	%
Research and development		210,674		160,138		(50,536)		(32)	%
Selling, general and administrative		137,601		126,634		(10,967)		(9)	%
Acquired in-process research and development		9,440		—		(9,440)		(100)	%
Other operating expenses		5,539		—		(5,539)		(100)	%
Total expenses		388,787		301,885		(86,902)		(29)	%
Operating loss		(285,088)		(236,848)		(48,240)		(20)	%
Other income (expense):
Interest expense		(12,684)		(9,592)		(3,092)		(32)	%
Foreign currency loss		(648)		(34)		(614)		(1,806)	%
Legal settlement loss		(26,750)		(27,975)		1,225		4	%
Gain on extinguishment of debt		18,480		—		18,480		100	%
Other income		5,081		5,419		(338)		(6)	%
Other expense, net		(16,521)		(32,182)		15,661		49	%
Loss before income taxes		(301,609)		(269,030)		(32,579)		(12)	%
Income tax benefit		686		280		406		145	%
Net loss	$	(300,923)	$	(268,750)	$	(32,173)		(12)	%

Product Revenue. Product revenue for the nine months ended September 30, 2019 increased compared to the same period in the prior year primarily due to continued growth in sales of Rubraca, which is approved for sale in the United States and EU markets. We completed our launch of Rubraca as maintenance therapy in Germany and the UK in March 2019. Product revenue is recorded net of variable considerations comprised of rebates, chargebacks and other discounts. Product revenue for the nine months ended September 30, 2019 was $101.1 million in the United States and $2.6 million outside of the United States. Variable considerations represented 14.0% and 10.6% of the transaction price recognized in the nine months ended September 30, 2019 and 2018, respectively. This increase is primarily due to government and group purchasing organization rebates; in addition, our launch of Rubraca in Germany and the UK in March 2019 contributed to the increase. Amounts are summarized as follows:

	Nine months ended				Nine months ended
	September 30, 2019				September 30, 2018
	$		% of Gross Sales		$		% of Gross Sales
	(in thousands)				(in thousands)
Transaction price	$	120,759		100.0%	$	72,717		100.0%
Sales deductions:
Government rebates and chargebacks		10,691		8.7%		4,627		6.4%
Discounts and fees		6,369		5.3%		3,053		4.2%
Total sales deductions		17,060		14.0%		7,680		10.6%
Product revenue	$	103,699		86.0%	$	65,037		89.4%

Cost of Sales – Product. Product cost of sales for the nine months ended September 30, 2019 increased compared to the same period in the prior year primarily due to the increase in product revenue. Product cost of sales primarily relate to manufacturing, freight and royalties costs associated with Rubraca sales in the period.

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Cost of Sales – Intangible Asset Amortization. In the nine months ended September 30, 2019 and 2018, we recognized cost of sales of $3.5 million and $1.9 million, respectively, associated with the amortization of capitalized milestone payments related to the approvals of Rubraca by the FDA and the European Commission.

Research and Development Expenses. Research and development expenses increased during the nine months ended September 30, 2019 compared to the same period in the prior year primarily due to higher research and development costs for Rubraca. Clinical trial costs for Rubraca were higher compared to the same period a year ago due to increased enrollment in our TRITON3 study for prostate cancer. We have increased costs related to our ATLAS study for bladder cancer and our ATHENA combination study with Bristol-Myers Squibb Company’s immunotherapy OPDIVO for ovarian cancer. Since our ATLAS study for bladder cancer was discontinued in April 2019, costs for this study has decreased during the remainder of 2019. In addition, personnel costs increased during the nine months ended September 30, 2019 due to higher headcount to support increased Rubraca clinical trial activities.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased during the nine months ended September 30, 2019 compared to the same period in the prior year primarily due to increased commercialization activities for Rubraca and the increase of costs associated with building out the European infrastructure with the commercialization that occurred on March 1, 2019. This includes an increase of $4.7 million in personnel costs and $4.1 million in marketing costs.

Acquired In-Process Research and Development Expenses.  In September 2019, we accrued $9.4 million in upfront payments to 3BP to develop a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast activation protein alpha (“FAP”). FAP is highly expressed in many epithelial cancers, including more than 90% of breast, lung, colorectal and pancreatic carcinomas. Upon achievement of certain development and regulatory milestones, additional potential milestone payments and single- to low-double-digit commercial royalties would be paid to 3BP by us.

Other Operating Expenses. During the three months ended September 30, 2019, we recognized other operating expenses related to the write off of some damaged API and costs related out dedicated production train at Lonza.

Interest Expense. Interest expense increased during the nine months ended September 30, 2019 compared to the same period in the prior year primarily due to the issuance of the 2025 Notes on April 19, 2018 and the 2024 Notes on August 13, 2019.

Legal Settlement Loss. During the first quarter of 2018, we recorded a one-time charge of $8.0 million related to an agreement to resolve a potential litigation claim against us and our officers. We also we recorded a one-time charge of $20.0 million related to an agreement reached with the SEC to resolve its investigation. During the second quarter of 2019, we recorded a one-time charge of $26.8 million to settle the Antipodean Complaint.

Gain on Extinguishment of Debt. On August 13, 2019, we repurchased $190.3 million aggregate principal amount of our outstanding 2021 Notes and $2.0 million of accrued interest for an aggregate repurchase price of $171.8 million. This repurchase resulted in the write off of $2.0 million in unamortized debt issuance costs and the recognition of $18.5 million gain on extinguishment of debt.

Other Income. Other income decreased during the nine months ended September 30, 2018 compared to the same period in the prior year due to interest income earned on our available-for-sale securities.

Liquidity and Capital Resources

To date, we have funded our operations through the public offering of our common stock and convertible debt securities and the private placement of convertible debt securities and preferred stock. At September 30, 2019, we had cash, cash equivalents and available-for-sale securities totaling $354.1 million.

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The following table sets forth the primary sources and uses of cash for the nine months ended September 30, 2019 and 2018 (in thousands):

	Nine months ended September 30,
	2019		2018
Net cash used in operating activities	$	(253,468)	$	(283,270)
Net cash provided by (used in) investing activities		126,631		(277,763)
Net cash provided by financing activities		106,682		387,974
Effect of exchange rate changes on cash and cash equivalents		(240)		(286)
Net decrease in cash and cash equivalents	$	(20,395)	$	(173,345)

Operating Activities

Net cash used in operating activities resulted primarily from our net losses adjusted for non-cash items and changes in components of working capital. Net cash used in operating activities was lower during the nine months ended September 30, 2019 compared to the same period in the prior year primarily due to higher amounts paid for inventory during the nine months ended September 30, 2018, partially offset by a higher net loss as adjusted for non-cash items primarily due to legal settlement loss, acquired in-process research and development and gain on extinguishment of debt.

Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2019 included sales of available-for-sale securities of $480.1 million partially offset by purchases of available-for-sale securities of $335.1 million and milestone payments of $15.8 million. Net cash used in investing activities in the same period in the prior year included purchases of available-for-sale securities of $320.0 million and milestone payments of $55.0 million partially offset by cash from sales of available-for-sale securities of $105.0 million.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2019 included proceeds of $255.0 million from the issuance of our 2024 Notes, $19.0 million proceeds from borrowings under our financing agreement and $2.5 million received from employee stock option exercises and issuance of stock under the employee stock purchase plan, partially offset by the $169.9 million extinguishment of a portion of our 2021 Notes.

Net cash provided by financing activities for the nine months ended September 30, 2018 included proceeds of $93.9 million from the sale of common stock, proceeds of $290.9 million from the issuance of convertible senior notes and $3.2 million received from employee stock option exercises and issuance of stock under the employee stock purchase plan.

Operating Capital Requirements

In the United States, Rubraca is approved by the FDA for two indications for patients with recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. In the EU, Rubraca is approved by the EMA for two indications for patients with recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. We expect to incur significant losses for the foreseeable future, as we commercialize Rubraca and expand our selling, general and administrative functions to support the growth in our commercial organization.

As of September 30, 2019, we had cash, cash equivalents and available-for-sale securities totaling $354.1 million and total current liabilities of $111.4 million. Based on current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund our operating plan through at least the next 12 months. On May 1, 2019, we entered into a financing agreement in aggregate amount up to $175 million whereby we expect to borrow amounts required to reimburse our actual expenses incurred during each fiscal quarter, as such expenses are incurred, related to our ATHENA trial. We have agreed to repay the aggregate borrowed amount plus a return from revenues generated from sales of Rubraca on a quarterly basis, which is anticipated to begin in 2022. See Note 10, Long-term Debt, for additional information.

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On August 13, 2019, we completed a private placement sale to qualified institutional buyers of $263.0 million aggregate principal amount of 4.50% convertible senior notes due 2024 (the “2024 Notes”) resulting in net proceeds of $255.0 million, after deducting underwriting discounts and commissions and offering expenses. We used some of the net proceeds from the offering for the repurchases of the 2021 Notes. We intend to use the remaining net proceeds from this offering for general corporate purposes, including sales and marketing expenses associated with Rubraca, funding of our development programs, payment of milestones pursuant to our license agreements, general and administrative expenses, acquisition or licensing of additional product candidates or businesses, repurchase or repayment of other debt obligations and working capital.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including but not limited to:

● the number and characteristics of the product candidates, companion diagnostics and indications we pursue;

● the achievement of various development, regulatory and commercial milestones resulting in required payments to partners pursuant to the terms of our license agreements;

● the scope, progress, results and costs of researching and developing our product candidates and related companion diagnostics and conducting clinical and non-clinical trials;

● the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates and companion diagnostics;

● the cost of commercialization activities, including marketing and distribution costs;

● the cost of manufacturing any of our product candidates we successfully commercialize;

● the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and outcome of such litigation; and

● the timing, receipt and amount of sales, if any, of our product candidates.

Contractual Obligations and Commitments

For a discussion of our contractual obligations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 Annual Report on Form 10-K. For further information regarding our contractual obligations and commitments, see Note 15, Commitments and Contingencies to our unaudited consolidated financial statements included elsewhere in this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates. As of September 30, 2019, we had cash, cash equivalents and available-for-sale securities of $354.1 million, consisting of bank demand deposits, money market funds and U.S. treasury securities. The primary objectives of our investment policy are to preserve principal and maintain proper liquidity to meet operating needs. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Our available-for-sale securities are subject to interest rate risk and will decline in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair value of our portfolio.

We contract with contract research organizations, investigative sites and contract manufacturers globally where payments are made in currencies other than the U.S. dollar. In addition, on October 3, 2016, we entered into a Manufacturing and Services Agreement with a Swiss company for the production and supply of the active ingredient for Rubraca. Under the terms of this agreement, payments for the supply of the active ingredient in Rubraca as well as scheduled capital program fee payment toward capital equipment and other costs associated with the construction of a dedicated production train will be made in Swiss francs. Once the production train became operational in October 2018, we became obligated to pay a fixed facility fee each quarter for the duration of the agreement, which expires on December 31, 2025.

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As of September 30, 2019, $96.7 million of purchase commitments exist under the Manufacturing and Services Agreement, which includes the fixed facility fee noted above, and we are required to remit amounts due in Swiss francs. Due to other variables that may exist, it is difficult to quantify the impact of a particular change in exchange rates. However, we estimate that if the value of the US dollar was to strengthen by 10% compared to the value of Swiss franc as of September 30, 2019, it would decrease the total US dollar purchase commitment under the Manufacturing and Services Agreement by $10.0 million. Similarly, a 10% weakening of the US dollar compared to the Swiss franc would increase the total US dollar purchase commitment by $9.3 million.

While we periodically hold foreign currencies, primarily Euro, Swiss Franc and Pound Sterling, we do not use other financial instruments to hedge our foreign exchange risk. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. As of September 30, 2019 and December 31, 2018, approximately 2% and 6%, respectively, of our total liabilities were denominated in currencies other than the functional currency.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Finance Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. With the participation of our Chief Executive Officer and Chief Finance Officer, management performed an evaluation as of September 30, 2019 of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Finance Officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Rociletinib-Related Litigation

Following Clovis’ regulatory announcement in November 2015 of adverse developments in its ongoing clinical trials for rociletinib, Clovis and certain of its current and former executives were named in various securities lawsuits, the largest of which was a putative class action lawsuit in the District of Colorado (the “Medina Action”) which was settled on October 26, 2017 (the “Medina Settlement”). The remaining actions are discussed below.

In March 2017, two putative shareholders of the Company, Macalinao and McKenry (the “Derivative Plaintiffs”), filed shareholder derivative complaints against certain directors and officers of the Company in the Court of Chancery of the State of Delaware. On May 4, 2017, the Macalinao and McKenry actions were consolidated for all purposes in a single proceeding under the caption In re Clovis Oncology, Inc. Derivative Litigation, Case No, 2017-0222 (the “Consolidated Derivative Action”).  

On May 18, 2017, the Derivative Plaintiffs filed a Consolidated Verified Shareholder Derivative Complaint (the “Consolidated Derivative Complaint”). The Consolidated Derivative Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by allegedly causing or allowing misrepresentations of the Company’s business operations and prospects, failing to ensure that the TIGER-X clinical trial was being conducted in accordance with applicable rules, regulations and protocols, and engaging in insider trading. The Consolidated Derivative Complaint sought, among other things, an award of money damages.  

On July 31, 2017, the defendants filed a motion to dismiss the Consolidated Derivative Complaint. Plaintiffs filed an opposition to the motion to dismiss on August 31, 2017, and the defendants filed a reply in further support of the motion to dismiss on September 26, 2017.

While the motion to dismiss remained pending, on November 19, 2018, Plaintiffs filed a motion for leave to file a supplemental consolidated complaint, and on November 20, 2018, the Court granted that motion. On November 27, 2018, Plaintiffs filed their supplemental complaint (the “Supplemental Derivative Complaint”), which adds allegations concerning the Company’s, Mr. Mahaffy’s and Mr. Mast’s settlements with the United States Securities and Exchange Commission. Pursuant to a briefing schedule entered by the Court, the defendants filed a supplemental motion to dismiss the Supplemental Derivative Complaint on February 6, 2019; plaintiffs filed an opposition brief on February 22, 2019; and the defendants filed a reply brief on March 5, 2019. The Court held oral arguments on the defendants’ motions to dismiss on June 19, 2019. At the oral arguments, the Court ordered the parties to submit supplemental letter briefs on the motion to dismiss; plaintiffs filed their letter brief on June 25, 2019 and the defendants filed theirs on July 1, 2019.

On October 1, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Chancery Court, issued a Memorandum Opinion granting in part and denying in part defendants’ motions to dismiss. The Supplemental Derivative Complaint was dismissed as to Plaintiffs’ derivative claims for unjust enrichment and insider trading. The Court allowed Plaintiffs’ remaining derivative claim for breach of fiduciary duty to proceed.

While the Company continues to evaluate the remaining claim, it does not believe this litigation will have a material impact on its financial position or results of operations.

On March 20, 2017, a purported shareholder of the Company, filed a shareholder derivative complaint (the “Guo Complaint”) against certain officers and directors of the Company in the United States District Court for the District of Colorado. The Guo Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by either recklessly or with gross negligence approving or permitting misrepresentations of the Company’s business operations and prospects. The Guo Complaint also alleged claims for waste of corporate assets and unjust enrichment. Finally, the Guo Complaint alleged that certain of the individual defendants violated Section 14(a) of the Securities Exchange Act, by allegedly negligently issuing, causing to be issued, and participating in the issuance of materially misleading statements to stockholders in the Company’s Proxy Statement on Schedule DEF 14A in connection with the 2015 Annual Meeting of Stockholders, held on June 11, 2015. The Guo Complaint sought, among other things, an award of money damages.  

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On June 19, 2017, the parties filed a joint motion to stay the Guo action pending resolution of the motion to dismiss the Consolidated Derivative Complaint. On June 20, 2017, the court granted the motion to stay and entered an order administratively closing the case. Based on the October 1, 2019 ruling in the Consolidated Derivative Action, on October 22, 2019, the court reinstated the Guo action pursuant to a joint motion filed by the parties to reopen the case.

European Patent Opposition

Two oppositions were filed in the granted European counterpart of the rucaparib camsylate salt/polymorph patent on June 20, 2017.  The European Patent Office’s Opposition Division held an oral hearing on December 4, 2018, during which it upheld claims, narrowed from the originally granted patent, to certain crystalline forms of rucaparib camsylate, including, but not limited to, rucaparib S-camsylate Form A, the crystalline form in Rubraca. On February 4, 2019, the Opposition Division issued a written decision confirming its decision at the oral hearing. In June 2019, Clovis and one opponent, Hexal, appealed the written decision of the European Opposition Division and filed reply appeal briefs in early November 2019.

ITEM 1A. RISK FACTORS

Our business faces significant risks and uncertainties. Certain factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the risk factors described under the heading “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K, in addition to other information contained in or incorporated by reference into this Quarterly Report on Form 10-Q and our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations.

There were no material changes to the risk factors included in our previously filed Annual Report on Form 10-K for the year ended December 31, 2018, other than as highlighted below in connection with entering into the ATHENA clinical trial financing agreement. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial also may negatively impact our business.

Our ATHENA clinical trial financing agreement contains a number of covenants and other provisions, which, if violated, could result in the immediate acceleration of our outstanding indebtedness.

Pursuant to our ATHENA clinical trial financing agreement, we are required to repay amounts we borrow from the lenders, capped at specific quarterly amounts, based upon the revenues generated from the sales of Rubraca and other amounts we receive in connection with any out-licensing arrangement or settlement we may enter into with respect to Rubraca. If the total payments made on or prior to December 30, 2025 are less than the total amount borrowed prior to such time, we also would be required to make an additional lump-sum payment to the lenders equal to the amount of that shortfall on that date. Following that date, quarterly payments continue until the lenders have received payments equal to twice the amount borrowed under the financing agreement.

Pursuant to the financing agreement, we have agreed to certain limitations on our operations, including limitations on dividends, stock repurchases and repayments of certain indebtedness, and to certain covenants, including with respect to the conduct of the ATHENA trial. Our obligations under the financing agreement are secured by first priority security interests in all of our assets related to Rubraca, including intellectual property rights.

If an event of default (including a breach or default under, or termination of, any of our material in-license agreements and defaults under our other material indebtedness) occurs under the financing agreement, the lenders have the right to demand immediate repayment of our obligations, which may be as high as the greater of (x) twice the amount borrowed thereunder and (y) the amount borrowed thereunder plus either $35 million (if the payment is made in 2019) or $50 million (if the payment is made after 2019).

In addition, if we do not pay our obligations under the financing agreement when due, including at maturity or upon the occurrence of a liquidity event, which includes a change of control of us or upon demand following the occurrence of an event of default, the lenders would have the right to foreclose on the assets we have pledged as collateral and sell those assets, with the proceeds of the sale being applied to repay the indebtedness.

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There can be no assurance that we will not breach the covenants or other terms of, or that an event of default will not occur under, the financing agreement and, if a breach or event of default occurs, there can be no assurance that we will be able to obtain necessary waivers or amendments from the lenders or refinance the related indebtedness on terms we find acceptable, or at all. A default under the financing agreement may also trigger defaults under the indentures governing our senior convertible notes.

As a result, any failure to pay our obligations when due, any breach or default of our covenants or other obligations under the financing agreement, or any other event that allows any lender to demand immediate repayment of borrowings, could have a material adverse effect on our business, results of operations, financial condition and prospects. Furthermore, the financing agreement may make us less attractive to potential acquirers; and in the event of a change of control of us, the required discharge of the financing agreement out of our available cash or acquisition proceeds would reduce proceeds available to our stockholders.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

INDEX TO EXHIBITS

o
Exhibit
Number	Exhibit Description
3.1(5)	Amended and Restated Certificate of Incorporation of Clovis Oncology, Inc.
3.2(21)	Certificate of Amendment to Amended and Restated Certificate of Incorporation of Clovis Oncology, Inc.
3.3(5)	Amended and Restated Bylaws of Clovis Oncology, Inc.
4.1(3)	Form of Common Stock Certificate of Clovis Oncology, Inc.
4.2(8)	Indenture dated as of September 9, 2014, by and between Clovis Oncology, Inc. and The Bank of New York Mellon Trust Company, N.A.
4.3(16)	Indenture dated as of April 19, 2018, by and between Clovis Oncology, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee
4.4(16)	First Supplemental Indenture dated as of April 19, 2018, by and between Clovis Oncology, Inc. and The Bank of New York Mellon Trust Company, N.A.
4.5(22)	Indenture dated as of August 13, 2019, by and between Clovis Oncology, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee

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10.1*(4)	License Agreement, dated as of June 2, 2011, by and between Clovis Oncology, Inc. and Pfizer Inc.
10.2+(1)	Clovis Oncology, Inc. 2009 Equity Incentive Plan.
10.3+(4)	Clovis Oncology, Inc. 2011 Stock Incentive Plan.
10.4+(1)	Form of Clovis Oncology, Inc. 2009 Equity Incentive Plan Stock Option Agreement.
10.5+(4)	Form of Clovis Oncology, Inc. 2011 Stock Incentive Plan Stock Option Agreement.
10.6+(3)	Employment Agreement, dated as of August 24, 2011, by and between Clovis Oncology, Inc. and Patrick J. Mahaffy.
10.7+(3)	Employment Agreement, dated as of August 24, 2011, by and between Clovis Oncology, Inc. and Gillian C. Ivers-Read.
10.8+(1)	Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Paul Klingenstein.
10.9+(1)	Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and James C. Blair.
10.10+(1)	Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Edward J. McKinley.
10.11+(1)	Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Thorlef Spickschen.
10.12+(1)	Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and M. James Barrett.
10.13+(1)	Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Brian G. Atwood.
10.14+(1)	Indemnification Agreement, dated as of May 12, 2009, between Clovis Oncology, Inc. and Patrick J. Mahaffy.
10.15+(1)	Indemnification Agreement, dated as of May 12, 2009, between Clovis Oncology, Inc. and Erle T. Mast.
10.16+(1)	Indemnification Agreement, dated as of May 12, 2009, between Clovis Oncology, Inc. and Gillian C. Ivers-Read.
10.17+(1)	Indemnification Agreement, dated as of May 13, 2009, between Clovis Oncology, Inc. and Andrew R. Allen.
10.18+(17)	Clovis Oncology, Inc. 2011 Employee Stock Purchase Plan, as amended.
10.19+(4)	Clovis Oncology, Inc. 2011 Cash Bonus Plan.

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10.20+(6)	Indemnification Agreement, dated as of March 22, 2012, between Clovis Oncology, Inc. and Steven L. Hoerter.
10.21+(2)	Indemnification Agreement, dated as of June 13, 2013, between Clovis Oncology, Inc. and Ginger L. Graham.
10.22+(2)	Indemnification Agreement, dated as of June 13, 2013, between Clovis Oncology, Inc. and Keith Flaherty.
10.23(7)	Stock Purchase Agreement, dated as of November 19, 2013, by and among Clovis Oncology, Inc., EOS (Ethical Oncology Science) S.P.A., the Sellers listed on Exhibit A thereto and Sofinnova Capital V FCPR, acting in its capacity as the Sellers’ Representative.
10.24*(7)	Development and Commercialization Agreement, dated as of October 24, 2008, by and between Advenchen Laboratories LLC and Ethical Oncology Science S.P.A., as amended by the First Amendment, dated as of April 13, 2010 and the Second Amendment, dated as of July 30, 2012.
10.25+(12)	Indemnification Agreement, effective as of August 3, 2015, between Clovis Oncology, Inc. and Lindsey Rolfe.
10.26+(19)	Amended and Restated Employment Agreement, dated as of February 27, 2019, by and between Clovis Oncology, Inc. and Clovis Oncology UK Limited and Lindsey Rolfe.
10.27+(12)	Indemnification Agreement, effective as of February 1, 2016, between Clovis Oncology, Inc. and Dale Hooks.
10.28+(12)	Employment Agreement, effective as of February 1, 2016, by and between Clovis Oncology, Inc. and Dale Hooks.
10.29+(9)	Indemnification Agreement, dated as of February 17, 2016, between Clovis Oncology, Inc. and Daniel W. Muehl.
10.30+(15)	Employment Agreement, dated as of July 6, 2017, by and between Clovis Oncology, Inc. and Daniel W. Muehl.
10.31+(10)	Salary Waiver Letter, dated as of May 9, 2016, by and between Clovis Oncology, Inc. and Patrick J. Mahaffy.
10.32*(11)	First Amendment to License Agreement, between Clovis Oncology, Inc. and Pfizer Inc., dated as of August 30, 2016.
10.33+(13)	Form of Clovis Oncology, Inc. 2011 Stock Incentive Plan RSU Agreement.
10.34*(13)	Manufacturing Services Agreement, by and between Clovis Oncology, Inc. and Lonza Ltd, dated as of October 3, 2016.
10.35*(14)	Strata Trial Collaboration Agreement, by and between Clovis Oncology, Inc. and Strata Oncology, Inc., dated as of January 30, 2017
10.36+(18)	Indemnification Agreement, dated as of October 11, 2018, between Clovis Oncology, Inc. and Robert W. Azelby.

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10.37+(18)	Indemnification Agreement, dated as of October 11, 2018, between Clovis Oncology, Inc. and Richard A. Fair.
10.38+(19)	Employment Agreement, dated as of July 6, 2017, by and between Clovis Oncology, Inc. and Paul Gross.
10.39+(19)	Indemnification Agreement, dated as of September 9, 2016, by and between Clovis Oncology, Inc. and Paul Gross.
10.40(20)	Financing Agreement, dated as of May 1, 2019 among Clovis Oncology, Inc. (the “Company”), certain subsidiaries of the Company named therein, as Guarantors, the Lenders from time to time party thereto, and the Administrative Agent party thereto.
10.41(20)	Pledge and Security Agreement, dated as of May 1, 2019 among each of the Grantors party thereto and the Administrative Agent party thereto.
21.1(17)	List of Subsidiaries of Clovis Oncology, Inc.
31.1	Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of principal executive officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of principal financial officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from Clovis Oncology, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2019 formatted in Inline Extensible Business Reporting Language (“iXBRL”): (i) the Consolidated Statements of Operations and Comprehensive Loss, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Stockholders’ Equity (Deficit), (iv) the Consolidated Statements of Cash Flows and (v) Notes to Unaudited Consolidated Financial Statements.
104	The cover page from Clovis Oncology, Inc.’s Quarterly Report on Form 10-Q for the period ended Septebmer 30, 2019 is formatted in iXBRL.

(1) Filed as an exhibit with the Registrant’s Registration Statement on Form S-1 (File No. 333-175080) on June 23, 2011.

(2) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on June 14, 2013.

(3) Filed as an exhibit with Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-175080) on August 31, 2011.

(4) Filed as an exhibit with Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-175080) on October 31, 2011.

(5) Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on March 15, 2012.

(6) Filed as an exhibit with the Registrant’s Registration Statement on Form S-1 (File No. 333-180293) on March 23, 2012.

(7) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on November 19, 2013.

(8) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on September 9, 2014.

(9) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on April 1, 2016.

(10) Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on May 9, 2016.

48

(11) Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on November 4, 2016.

(12) Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 29, 2016.

(13) Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 23, 2017.

(14) Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on May 4, 2017.

(15) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on July 7, 2017.

(16) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on April 19, 2018.

(17) Filed as an exhibit with the Registrant’s Current Report on Form 10-Q on August 2, 2018.

(18) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on October 12, 2018.

(19) Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 28, 2019.

(20) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on May 2, 2019.

(21) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on June 6, 2019.

(22) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on August 13, 2019.

+     Indicates management contract or compensatory plan.

*     Confidential treatment has been granted with respect to portions of this exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 7, 2019	CLOVIS ONCOLOGY, INC.
	By:	/s/ PATRICK J. MAHAFFY
		Patrick J. Mahaffy
		President and Chief Executive Officer; Director
	By:	/s/ DANIEL W. MUEHL
		Daniel W. Muehl
		Executive Vice President and Chief Finance Officer

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