| Basis of Presentation and Summary of Significant Accounting Policies | 2.
Basis of Presentation and Summary of Significant Accounting Policies Basis of Consolidation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of Coherus and its wholly owned subsidiaries as of December 31, 2018: Coherus Intermediate Corp, InteKrin Therapeutics Inc. (“InteKrin”) and InteKrin’s subsidiary, InteKrin Russia. In September 2018, InteKrin acquired the remainder of InteKrin Russia’s non-controlling interest of 17.5% for $0.7 million in cash. Unless otherwise specified, references to the Company are references to Coherus and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. Management uses significant judgment when making estimates related to its stock-based compensation, valuation of deferred tax assets, impairment of goodwill and long-lived assets, the valuation of acquired intangible assets, valuation and reserves for inventory, clinical trial accruals, revenue recognition periods, contingent consideration, convertible notes valuation, as well as certain accrued liabilities. Management bases its estimates on historical experience and on other various assumptions that are believed to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources. Accounting estimates and judgements are inherently uncertain and the actual results could differ from these estimates. Foreign Currency The functional currency of InteKrin Russia, which the Company acquired in February 2014, is the Russian Ruble. Accordingly, the financial statements of this subsidiary are translated into U.S. dollars using appropriate exchange rates. Unrealized gains or losses on translation are recognized in accumulated other comprehensive loss in the consolidated balance sheet. For the years ended December 31, 2018, 2017 and 2016, the foreign exchange gains and losses recorded in other income (expense), net in the consolidated statements of operations were a net loss of $571,000, a net gain of $52,000 and a net loss of $53,000, respectively. Segment Reporting and Customer Concentration The Company operates and manages its business as one reportable and operating segment, which is the business of developing and commercializing biosimilar products and, as part of the InteKrin acquisition, small molecules. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. Long-lived assets are primarily maintained in the United States of America. The following table summarizes revenue by geographic region (in thousands):
Year Ended December 31,
2018
2017
2016
United States
$
—
$
—
$
188,292
Rest of world
—
1,556
1,814
Total revenue
$
—
$
1,556
$
190,106
Customer Concentration Customers whose collaboration and license revenue accounted for 10% or more of total revenues were as follows:
Year Ended December 31,
2018
2017
2016
Baxalta
N/A
N/A
99
%
Daiichi Sankyo
N/A
100
%
*
* Cash and Cash Equivalents Cash, cash equivalents and restricted cash are comprised of cash and highly liquid investments with remaining maturities of 90 days or less at the date of purchase. The Company limits cash investments to financial institutions with high credit standings; therefore, management believes that there is no significant exposure to any credit risk in the Company’s cash, cash equivalents and restricted cash. The following table provides a reconciliation of cash, cash equivalents and restricted cash within the consolidated balance sheets and which, in aggregate, represent the amount reported in the consolidated statements of cash flows.
December 31,
December 31,
2018
2017
Cash and cash equivalents
$
72,356
$
126,911
Restricted cash
50
60
Restricted cash - non-current
785
785
Total cash, cash equivalents and restricted cash
$
73,191
$
127,756
Restricted cash consists of cash held in money market accounts at banks. The restricted cash is used as collateral against the Company’s corporate credit cards and is classified as current; restricted cash non-current is held to cover the standby letter of credit issued by the Company’s landlord to drawdown on in the event the facility lease is breached (see Note 8). Investments in Marketable Securities Management determines the appropriate classification of investments in marketable securities at the time of purchase based upon management’s intent with regards to such investments and reevaluates such designation as of each balance sheet date. All investments in marketable securities are held as “available-for-sale” and are carried at the estimated fair value as determined based upon quoted market prices or pricing models for similar securities. The Company classifies investments in marketable securities as short-term when they have remaining contractual maturities of one year or less from the balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of accumulated comprehensive income (loss). Realized gains and losses and declines in value judged to be other than temporary, if any, on available-for-sale securities are included in other income (expense), net, based on specific identification method. The Company started investing in marketable securities in 2017. For the years ended December 31, 2018 and 2017, interest income from marketable securities was $1.4 million and $0.8 million, respectively. Concentration of Credit Risk The Company’s financial instruments that are exposed to concentration of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains its cash in bank accounts, which at times exceed federally insured limits. The Company attempts to minimize the risks related to cash, cash equivalents and restricted cash by investing in money markets with a broad and diverse range of financial instruments. The investment portfolio is maintained in accordance with the Company’s investment policy, which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. The Company also maintains restricted cash in money market funds that invest primarily in U.S. Treasury securities. The Company has not recognized any losses from credit risks on such accounts during any of the periods presented. The Company believes it is not exposed to significant credit risk on its cash and money market funds. The Company entered into a strategic commercial supply agreement with KBI Biopharma (“KBI”) for the supply of UDENYCA™. The Company currently has not engaged back-up suppliers or vendors for this single-sourced service. If KBI is not able to manufacture the supply needed in the quantities and timeframe required, the Company may not be able to supply the Fair Value of Financial Instruments Fair value accounting is applied to all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Inventory Prior to the regulatory approval of the product candidates, the Company incurred expenses for the manufacture of drug product that could potentially be available to support the commercial launch of its products. The Company began to capitalize inventory costs associated with UDENYCA™ after receiving regulatory approval for UDENYCA™ in November 2018 when it was determined that the inventory had a probable future economic benefit. Inventory is stated at the lower of cost or estimated net realizable value with cost determined under the first-in first-out method. Inventory costs include third-party contract manufacturing, third-party packaging services, freight, labor costs for personnel involved in the manufacturing process, and indirect overhead costs. The Company primarily uses actual costs to determine the cost basis for inventory. The determination of whether inventory costs will be realizable requires management review of the expiration dates of the Company’s product UDENYCA™ compared to its forecasted sales. If actual market conditions are less favorable than projected by management, write-downs of inventory may be required which would be recorded as cost of sales in the consolidated statement of operations . Property and Equipment Property and equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred, and costs of improvements are capitalized. Depreciation and amortization is recognized using the straight-line method over the following estimated useful lives:
Computer equipment and software
3 years
Furniture and fixtures
5 years
Machinery and equipment
5 years
Leasehold improvements
Shorter of lease term or useful life Impairment of Long Lived Assets and Acquired Intangible Asset The Company reviews long-lived assets, including property and equipment, and indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying value of a long-lived asset exceeds its fair value. For the years ended December 31, 2018, 2017 and 2016, the Company recorded an impairment of property and equipment of $3.9 million, $558,000 and $0, respectively, in research and development within the statement of operations. Acquired in-process research and development (“IPR&D”) represents the fair value assigned to research and development assets that have not reached technological feasibility. The Company reviews amounts capitalized as acquired IPR&D for impairment at least annually, and whenever events or changes in circumstances indicate that the carrying value of the assets might not be recoverable. If the carrying value of the acquired IPR&D exceeds its fair value, then the intangible asset is written-down to its fair value. As of December 31, 2018, there have been no such impairments. Once the product candidate derived from the indefinite-lived intangible asset has been developed and commercialized, the useful life will be determined, and the carrying value of the finite-lived asset will be amortized prospectively over the estimated useful life. Alternatively, if the product candidate is abandoned, the carrying value of the intangible will be charged to research and development expense. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The Company tests goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that this asset may be impaired. The goodwill test is based on our single operating segment and reporting unit structure. The Company compares the fair value of its reporting unit to its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company would need to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference. No goodwill impairment was identified through December 31, 2018. Derivative Liability The Company has a derivative liability related to the contingent consideration associated with the acquisition of InteKrin in 2014. There were two contingent payments payable upon the achievement of certain events: (i) the completion of the first dosing of a human subject in the first Phase 2 clinical trial for InteKrin, (“Earn-Out Payment”) and (ii) upon the execution of any license, sublicense, development, collaboration, joint venture, partnering or similar agreement between the Company and the third party (“Compound Transaction Payment”). The derivative related to the contingent consideration is accounted for as a liability and remeasured to fair value as of each balance sheet date and the related remeasurement adjustment is recognized as other income (expense), net in the consolidated statements of operations. The Company determined the fair value of the two contingent consideration scenarios (the Earn-Out Payment and the Compound Transaction Payment) using a probability-weighted discounted cash flow approach. A probability-weighted value was determined by summing the probability of achieving a contingent payment threshold by the respective contingent payments. The expected cash flows were discounted at a rate selected to capture the risk of achieving the contingent payment thresholds and earning the contingent payment. This risk is comprised of InteKrin’s continued development, a specific risk factor associated with meeting the contingent consideration threshold and related payout, and counterparty risk associated with the payment of the contingent consideration. Accrued Research and Development Expense Clinical trial costs are a component of research and development expense. The Company accrues and expenses clinical trial activities performed by third parties based upon actual work completed in accordance with agreements established with clinical research organizations and clinical sites. The Company determines the actual costs through monitoring patient enrollment, discussions with internal personnel and external service providers regarding the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. Revenue Recognition The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations ; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ; and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients , (collectively, the “New Revenue Standard”) on January 1, 2018 using the modified retrospective method. The Company did not have any sources of revenue or active revenue arrangements upon adoption of the New Revenue Standard, therefore, no adjustment to its retained earnings was required. If, and when, the Company initiates product sales or enters into a new revenue arrangement, the Company will apply the New Revenue Standard accordingly. On September 25, 2018, the Company received regulatory approval for the marketing of UDENYCA™ from the European Commission, and received regulatory approval from the FDA on November 2, 2018. The Company initiated U.S. sales of UDENYCA™ on January 3, 2019, which will be accounted for under Topic 606 Revenue from Contracts with Customers Prior to the adoption of the New Revenue Standard, the Company recognized revenue in accordance with Accounting Standards Codification (ASC) 605, Revenue Recognition when persuasive evidence of an arrangement existed; transfer of technology had been completed, services had been performed or products had been delivered; the fee was fixed and determinable; and collection was reasonably assured. For revenue agreements with multiple elements, the Company identified the deliverables included within the agreement and evaluated which deliverables may represent separate units of accounting based on the achievement of certain criteria, including whether the delivered element had stand-alone value to the collaborator. Deliverables under the arrangement were considered a separate unit of accounting if (i) the delivered item had value to the customer on a standalone basis and (ii) if the arrangement included a general right of return relative to the delivered item and delivery or performance of the undelivered items were considered probable and substantially within the Company’s control. The Company determined how to allocate arrangement consideration to identified units of accounting based on the selling price hierarchy provided under the relevant guidance. The selling price used for each unit of accounting was based on vendor-specific objective evidence, if available, third party evidence if vendor-specific objective evidence was not available or estimated selling price if neither vendor-specific nor third-party evidence was available. Management was required to exercise considerable judgment in determining whether a deliverable was a separate unit of accounting and in estimating the selling prices of identified units of accounting under its agreements. Upfront payments received in connection with licenses of the Company’s technology rights were deferred if facts and circumstances dictated that the license did not have stand-alone value. Such payments were recognized as license revenue over the estimated period of performance, which was generally consistent with the terms of the research and development obligations contained in the specific collaboration and license agreement. The Company regularly reviewed the estimated period of performance based on the progress made under each arrangement. Amounts received as funding of research and development activities were recognized as revenue if the collaboration arrangement involved the sale of the Company’s research or development services. However, such funding was recognized as a reduction in research and development expense when the Company engaged in a research and development project jointly with another entity, with both entities participating in project activities and sharing costs and potential benefits of the arrangement. Payments that were contingent upon the achievement of a substantive milestone were recognized in their entirety in the period in which the milestone was achieved, assuming all other revenue recognition criteria were met. A milestone was defined as an event that could only be achieved based on the Company’s performance where there was substantive uncertainty about whether the event would be achieved at the inception of the arrangement. Events that were contingent upon on the passage of time or counterparty performance were not considered milestones under accounting guidance. The Company’s evaluation included an assessment of whether (a) the consideration was commensurate with either (1) the Company’s performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (b) the consideration related solely to past performance and (c) the consideration was reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluated factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether the milestone consideration was reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. Other contingent payments in which a portion of the payment was refundable or adjustable based on future performance or non-performance (e.g., through a penalty or claw-back provision) were not considered to relate solely to the Company’s past performance, and therefore, not considered substantive. Non-substantive contingent payments were classified as deferred revenue if they were ultimately expected to result in revenue recognition. The Company recognized non-substantive contingent payments over the remaining estimated period of performance once the specific objective was achieved. Any portion of the non-substantive contingent payments, which may have been required to be refunded to the collaborator, were not included in deferred revenue but instead were reflected as a contingent liability to collaborator on the consolidated balance sheets. Contingent payments associated with the achievement of specific objectives in certain contracts that were not considered substantive because the Company did not contribute effort to the achievement of such milestones were recognized as revenue upon achievement of the objective, as long as there were no undelivered elements remaining and no continuing performance obligations by the Company, assuming all other revenue recognition criteria were met. Research and Development Expense Research and development costs are charged to expense as incurred. Research and development expense includes, among other costs, salaries and other personnel-related costs, consultant fees, preclinical costs, cost to manufacture drug candidates, clinical trial costs and supplies, laboratory supply costs and facility-related costs. Costs incurred under agreements with third parties are charged to expense as incurred in accordance with the specific contractual performance terms of such agreements. Third-party costs include costs associated with manufacturing drug candidates, preclinical and clinical support activities. In certain cases, amounts received as reimbursement for research and development activities from the Company’s collaborators are recognized as a reduction in research and development expense when the Company engages in a research and development project, jointly with another party, with both parties incurring costs while actively participating in project activities and sharing costs and potential benefits of the arrangement. Costs incurred under arrangements where the Company provides research services approximate the amount of revenues recorded. Advance payments for goods or services to be received in the future to be utilized in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are rendered. The Company considers regulatory approval of product candidates to be uncertain, and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. The Company expenses manufacturing costs as incurred to research and development expense for product candidates prior to regulatory approval. If, and when, regulatory approval of a product is obtained, the Company will begin capitalizing manufacturing costs related to the approved product into inventory. Stock-Based Compensation The Company measures the cost of equity-based service awards based on the grant-date fair value of the award. The compensation cost is recognized as expense on a straight-line basis over the vesting period for options and restricted stock units (RSUs). The Company granted performance stock options (“PSO”) to purchase shares of its common stock, which will vest upon the achievement of specified conditions. The Company determined the fair values of these PSOs using the Black-Scholes option pricing model at the date of grant. For the portion of the PSOs for which the performance condition is considered probable, the Company recognizes stock-based compensation expense on the related estimated fair value of such options on a straight-line basis from the date of grant up to the date when it expects the performance condition will be achieved. The Company adopted the ASU No. 2016-09, Compensation-Stock Compensation Improvements to Employee Share-Based Payment, The Company accounts for equity instruments issued to non-employees using the fair value approach. These equity instruments consist of stock options and restricted common stock, which are valued using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized as the equity instruments are earned. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest. The Company utilizes the Black-Scholes option-pricing model for estimating fair value of its stock options and ESPP granted. Option valuation models, including the Black-Scholes option-pricing model, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant-date fair value of an award. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility and the expected life of the award. For RSUs, the Company bases the fair value of awards on the closing market value of the common stock at the date of grant. Selling, General and Administrative Expenses Selling, general and administrative expenses are primarily comprised of compensation and benefits associated with sales and marketing, finance, human resources, legal, information technology and other administrative personnel, outside marketing, advertising and legal expenses and other general and administrative costs. The Company expenses the cost of advertising, including promotional expenses, as incurred. Advertising expenses were $2.8 million, $0, and $0 for the years ended December 31, 2018, 2017 and 2016, respectively. Income Taxes The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to the Company’s lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had accrued no amounts for interest and penalties related to income tax matters in the Company’s consolidated balance sheet at December 31, 2018 and 2017. Comprehensive Loss Comprehensive loss is composed of two components: net loss and other comprehensive loss. Other comprehensive loss refers to gains and losses that under U.S. GAAP are recorded as an element of stockholders’ equity, but are excluded from net loss. The Company’s other comprehensive loss included unrealized gains and losses from available-for-sale marketable securities and foreign currency translation adjustments for the years ended December 31, 2018, 2017 and 2016. Net Loss per Share Attributable to Coherus Basic net loss per share attributable to Coherus is calculated by dividing the net loss attributable to Coherus by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive common shares. Since the Company was in a loss position for all periods presented, basic net loss per share attributable to Coherus is the same as diluted net loss per share attributable to Coherus as the inclusion of all potential dilutive common shares would have been anti-dilutive for all periods presented. The following outstanding dilutive potential shares have been excluded from the calculation of diluted net loss per share attributable to Coherus due to their anti-dilutive effect:
Year Ended December 31,
2018
2017
2016
Stock options, including purchases from contributions to ESPP
14,743,547
11,433,069
10,150,136
Restricted stock units
44,387
120,377
—
Shares issuable upon conversion of Convertible Notes
4,473,871
4,473,871
4,473,871
Total
19,261,805
16,027,317
14,624,007
In January 2019, the Company’s board of directors approved a refresh option grant of 2,556,000 shares at an exercise price of $12.37 to the employees and directors. Recent Accounting Pronouncements The following are the recent accounting pronouncements adopted by the Company in 2018: In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities all annual and interim reporting periods thereafter. E In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash — a consensus of the FASB Emerging Issues Task Force In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The following are the recent accounting pronouncements that the Company has not yet adopted: In February 2016, the FASB issued ASU No. 2016-02, Leases In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The Company has reviewed other recent accounting pronouncements and concluded they are either not applicable to the business or that no material effect is expected on the consolidated financial statements as a result of future adoption. |
