| Basis of Presentation and Summary of Significant Accounting policies | Basis of presentation and summary of significant accounting policies Basis of presentation and consolidation The Consolidated Financial Statements include the accounts of Verona Pharma plc and its wholly-owned subsidiary Verona Pharma, Inc. All inter-company balances and transactions have been eliminated. The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and the following accounting policies have been consistently applied. Segment reporting Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. The Company has determined that the Chief Executive Officer (“CEO”) is the Company’s CODM as the CEO makes decisions as it relates to allocation of resources and key market strategies. The Company has one operating and reportable segment, the development and commercialization of pharmaceutical products. The CODM uses consolidated Net loss to assess financial performance and allocate resources. The significant expenses within Net Loss are separately presented on the Company’s Consolidated Statements of Operations and Comprehensive Loss. Use of estimates The preparation of Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these Consolidated Financial Statements include, but are not limited to, the accrual and prepayment of research and development expenses, gross-to-net revenue adjustments, amortization and carrying value of the RIPSA, and the fair value of share-based compensation. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known, and actual results could differ from the Company’s estimates. Business combinations The Company applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. The excess of the cost of acquisition over the fair value of the Company's share of the identifiable net assets acquired is recorded as goodwill. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred and included in administrative expenses. Cash, cash equivalents, and restricted cash The Company considers all highly liquid investments purchased with original maturities of ninety days or less at acquisition to be cash equivalents. Cash and cash equivalents includes deposits held at call with banks, and in money market funds investing in U.S. and U.K. government debt and liquid securities from highly rated institutions. Under the RIPSA agreement, the Company is required to maintain 4.5% of cash received from customers in a dedicated account. This balance is included in cash and cash equivalents on the Company's balance sheet. Restricted cash totaled $0.8 million as of December 31, 2024. Inventory, including Pre-Launch Inventory The Company values its inventory at the lower of actual cost or net realizable value. The Company determines the cost of its inventory, which includes amounts related to materials and manufacturing overhead, on a first-in, first-out basis. Inventory expected to be utilized more than one year from the balance sheet is classified as Inventory, long-term in the Consolidated Balance Sheets. Prior to obtaining initial regulatory approval for Ohtuvayre, the Company expensed costs relating to production of pre-launch inventory as research and development (“R&D”) expense in its Consolidated Statements of Operations and Comprehensive Loss in the period incurred. Inventory acquired and the related costs after June 26, 2024, the date of the FDA’s approval of Ohtuvayre, are capitalized. Products used in clinical trials are expensed as Research and development expense in the Statements of Operations and Comprehensive Loss. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and writes down any excess or obsolete inventory to its net realizable value in the period in which the impairment is identified through Cost of sales in the Consolidated Statements of Operations and Comprehensive Loss. Additionally, the Company’s product is subject to strict quality control and monitoring that is performed throughout the manufacturing process, including release of work-in-process to finished goods. In the event that certain batches or units of product do not meet quality specifications, the Company will record a write-down of any potential unmarketable inventory to its estimated net realizable value and record the expense as Cost of sales in the Consolidated Statements of Operations and Comprehensive Loss. No inventory was written down as a result of excess, obsolescence, scrap, or other reasons during the year ended December 31, 2024. Raw materials and finished goods balances were $0.2 million and $8.0 million respectively as of December 31, 2024 with no such balances as of December 31, 2023. Equity interest As part of the Nuance Agreement, the Company received an equity interest in Nuance Biotech, the parent company of Nuance Pharma (see Note 6 - Significant Agreements to the Consolidated Financial Statements). As Nuance Biotech’s securities are not publicly traded, the equity interest’s fair value is not readily determinable. The Company therefore follows guidance from ASC 321-10-35-2 and uses the fair value measurement alternative and measures the securities at cost, which is deemed to be the value indicated by the last observable transaction in Nuance Biotech's stock, subject to impairment. The valuation will be adjusted for any observable price changes in orderly transactions for an identical or similar investment in Nuance Biotech, or if there is an indicator of impairment. Furniture and equipment, net Furniture and equipment comprise office furniture, computer equipment, leasehold improvements and manufacturing equipment and are stated at cost less accumulated depreciation. Depreciation on furniture and equipment is calculated on a straight-line basis over the expected useful economic lives, generally two Substantially all of the Company’s furniture and equipment is located in the United States. Goodwill Goodwill consists of goodwill related to the acquisition of Rhinopharma. Goodwill is periodically tested for impairment. Impairment of long-lived assets The Company reviews long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of assets may not be fully recoverable. Debt and debt issuance costs Upon issuance of a new debt instrument, the Company recognizes a liability equal to the proceeds received, less any allocation of proceeds to other instruments issued with the debt, other elements of the transaction, or features within the debt instrument itself. The proceeds generally approximate the present value of interest and principal payments of the debt. In situations where, for economic or legal reasons related to the Company’s financial difficulties, the borrower grants a concession to the Company that it would not otherwise consider, the related loan is classified as a troubled debt restructuring. If a restructuring does not constitute a troubled debt restructuring, it will be evaluated to consider if it should be accounted for as an extinguishment or as a modification. Debt may be considered extinguished when it has been modified and the terms of the new debt instruments and old debt instruments are “substantially different” (as defined in the debt modification guidance in ASC 470-50 “Debt-Modifications and Extinguishments”). Debt issuance costs relating to the Company’s term debt are recorded in Term loan on the Consolidated Balance Sheets as a direct reduction of the carrying amount of the related debt; these costs are deferred and amortized to interest expense using the effective interest method, over the respective terms of the related debt. Revenue Interest Purchase and Sale Agreement The RIPSA is eligible to be repaid based on royalties from net sales of Ohtuvayre and any other future products. Interest expense is calculated using the effective interest method over the estimated period the related liability will be paid. This requires the Company to estimate the total amount of future royalty payments to be generated from product sales over the life of the agreement. The Company imputes interest on the carrying value of the RIPSA and records interest expense using an imputed effective interest rate. The Company reassesses the expected royalty payments each reporting period and accounts for any changes through an adjustment to the effective interest rate on a prospective basis. The assumptions used in determining the expected repayment term of the debt and amortization period of the issuance costs require that the Company make estimates that could impact the carrying value of the liability, as well as the periods over which associated issuance costs will be amortized. A significant increase or decrease in forecasted net sales could materially impact each of the liability balances, interest expense and the time periods for repayment. On a quarterly basis, the Company assesses the projected royalty payments relative to the projected interest accretion for the next twelve months to determine if the royalty liability balance is reduced relative to the current outstanding liability, which would signify a repayment of the liability. In such case of excess payments relative to interest accretion for the next twelve months, the excess payments are considered to be a short-term liability and classified within Current liabilities on the Company’s Consolidated Balance Sheets. Revenue recognition The Company’s revenues consist of product sales of Ohtuvayre. The Company accounts for contracts with its customers in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Pursuant to ASC 606, for arrangements or transactions between participants determined to be within the scope of the contracts with customers guidance, the Company performs the following five steps to determine the appropriate amount of revenue to be recognized as the Company fulfills its obligations: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. Revenue is recognized when, or as, the Company satisfies a performance obligation by transferring a promised good or service to a customer. An asset is transferred when, or as, the customer obtains control of that asset. Product Sales, Net The Company’s revenue from net product sales was generated in the U.S. following the FDA’s approval for marketing of Ohtuvayre for the treatment of COPD in June 2024. The Company sells Ohtuvayre principally through arrangements with specialty pharmacies (“SPs”), who are the Company’s customers. The customers subsequently resell the product to patients and health care providers. The Company applies the ASC 606 five step process discussed above to the contracts with SPs. The Company provides limited right of return to the customers in cases of shipment errors or expiring or defective products. Product revenues are recognized when the customers take control of the product, which occurs upon delivery to the customers. The Company recognizes revenue from product sales at the net sales price which includes estimates of variable consideration for which reserves are established and reflects each of these as a reduction to revenue. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which the Company is entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from estimates, the Company may need to adjust its estimates, which would affect net revenue in the period of adjustment. The following are the Company’s significant categories of variable consideration: Distribution fees: The Company pays distribution fees to SPs in connection with the sales of its product. These distributor fees are based on a contractually determined fixed percentage of sales. Government rebates and chargebacks: The Company contracts with Medicaid, Medicare, and other government agencies (“Government Payors”) so that Ohtuvayre will be eligible for purchase by, or partial or full reimbursement from, such Government Payors. The Company estimates the rebates, chargebacks and discounts it will provide to Government Payors and deducts these estimated amounts from its gross product revenue at the time the revenue is recognized. The Company estimates these reserves based upon its contracts with government agencies and other organizations, statutorily defined discounts and estimated payor mix, resulting in a reduction of product revenue and the establishment of a current liability. Commercial chargebacks: Chargebacks are discounts and fees related to contracts with various third-party payers and programs that purchase from SPs at a discounted price. SPs charge back to the Company the difference between the price initially paid by SPs and the discounted price paid to SPs by these entities. Product returns: Consistent with industry practice, the Company offers SPs limited product return rights for shipment errors or expiring or defective products. The Company makes a reasonable estimate of future potential product returns based on inventory reports from SPs, visibility into the inventory distribution channel, the underlying product demand, and industry data specific to the specialty pharmaceutical distribution industry. Co-pay assistance: Other incentives which the Company offers include voluntary patient assistance and assurance programs, such as a co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payers. Other fees: Fees payable to third party payers and healthcare providers, along with fees to our direct customers that are settled via cash payments, including certain patient assistance programs. For the year ended December 31, 2024 the Company relied on four specialty pharmacies to purchase and supply Ohtuvayre to patients. These four specialty pharmacies accounted for 100% of all Ohtuvayre net product sales in the year ended December 31, 2024 and accounted for all of the Company's outstanding accounts receivable from product sales as of December 31, 2024. The Company’s four specialty pharmacy customers accounted for 41%, 33%, 14%, and 12% of product sales, net for the year ended December 31, 2024. The loss, or a significant change in the buying patterns of any one of these specialty pharmacies could negatively impact net sales of Ohtuvayre. License Revenue The Company’s revenue may also at times consist of revenue from the Company’s strategic agreements for the development and commercialization of ensifentrine. The terms of the agreements may include non-refundable upfront fees, payments based upon achievement of milestones and eventually revenue from the commercialized product. These agreements usually have both fixed and variable consideration. Non-refundable upfront fees are considered fixed, while milestone payments and revenue from the commercialized product are identified as variable consideration. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied. If the right to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the right when the right is transferred to the customer, and the customer can use and benefit from the right. At the inception of the arrangement, the Company evaluates whether the development milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company, such as approvals from regulators, are not considered probable of being achieved until those approvals are received. Research and development costs Research and development (“R&D”) costs are expensed as incurred. R&D costs include salaries, share-based compensation and benefits of employees, and other costs related to the Company’s R&D activities, including but not limited to pre-approval manufacturing costs and contracts with clinical research organizations and contract manufacturers. The Company is required to estimate its expenses resulting from its obligations under contracts with vendors and consultants and clinical site agreements in connection with its R&D efforts. The financial terms of these contracts are subject to negotiations which vary contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts. The Company’s objective is to reflect the appropriate clinical trial expenses in its Consolidated Financial Statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the trials and other development activities. Judgment is applied in determining assumptions related to patient progression and the timing of various aspects of the trial used to measure progress. The Company determines prepaid and accrual estimates through discussions with applicable personnel and outside service providers as to the progress of clinical trials, or other services completed. During the course of a clinical trial, the Company adjusts its rate of clinical trial expense recognition if actual results differ from its estimates. The Company makes estimates of its prepaid and accrued expenses as of each balance sheet date in its Consolidated Financial Statements based on facts and circumstances known at that time. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. The Company’s clinical trial prepaid and accrual expense is dependent upon the timely and accurate reporting of study recruitment from contract research organizations and activities carried out by other third-party vendors as well as the timely processing of any change orders from the contract research organizations. Share-based compensation The Company has a share-based compensation plan under which various types of equity-based awards may be granted, including stock options, restricted stock units (“RSUs”) and performance restricted stock units (“PRSUs”). The fair value of share options and RSUs, which are subject to milestone or service conditions with graded vesting, are recognized as compensation expense on a straight-line basis using the graded-vesting method; forfeitures are recognized as they occur. The fair value of PRSUs, which are subject to certain performance and service conditions, will be recognized over the remaining service period using the graded-vesting method once the performance conditions are determined to be probable of occurring. The Company uses the fair-value based method to determine compensation for all arrangements under which employees receive shares. The fair value of stock options is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. The fair-value of RSUs and PRSUs is calculated using the closing price of the Company’s ordinary shares on the date of grant. Details of the assumptions used are set out in Note 7 - Share-based Compensation to the Consolidated Financial Statements. Other income - United Kingdom R&D tax credits Research and development tax credit relates to R&D tax credits receivable in the U.K. As a company that carries out extensive research and development activities, the Company is subject to the U.K. R&D Small and Medium Enterprise Program (for accounting periods commencing on or after April 1, 2024, this program has been merged with the R&D expenditure credit scheme) (the “R&D Program”). Qualifying expenditures largely comprise of staff costs for research staff, consumables, a proportion of relevant and permitted sub-contract costs incurred as part of research projects which are undertaken for its own accounts. The R&D tax credits related to the R&D Program are received as cash and are recorded as other income, as they are akin to grant income, in the Consolidated Statements of Operations and Comprehensive Loss. Income taxes The Company accounts for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). ASC 740 prescribes the use of the liability method, whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and 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 provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. ASC 740 establishes a single model to address accounting for uncertain tax positions. ASC 740 clarified the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The Company has no uncertain tax positions. Comprehensive loss The Company accounts for comprehensive loss in accordance with ASC 220, “Income Statement - Reporting Comprehensive Income”. Comprehensive loss represents all changes in shareholders’ equity during the period except those resulting from investments by, or distributions to, shareholders. Reporting and functional currencies The Consolidated Financial Statements are reported in U.S. dollars, which is also the functional currency of the Company’s subsidiary. Transactions in foreign currencies are remeasured into the Company’s functional currency at the rate of exchange prevailing at the date of the transaction. Any monetary assets and liabilities arising from these transactions are remeasured into our functional currency at exchange rates prevailing at the balance sheet date or on settlement. Resulting gains and losses are recorded in foreign exchange gain/(loss) in our Consolidated Statements of Operations and Comprehensive Loss. Treasury shares In the year ended December 31, 2020, the Company incorporated a trust to facilitate the acquisition of shares, by or for the benefit of employees and former employees. In the years ended December 31, 2024 and December 31, 2023 the Company issued 15.2 million ordinary shares (equivalent to 1.9 million ADSs) and 16.0 million (equivalent to 2.0 million ADSs), respectively, to the trust to cover expected shares issued upon the vesting of share awards to employees. The Company has the indirect ability to control the trust as trustees are required to act in accordance with the trust deed and because the Company controls the issuance of shares to cover awards. As a consequence, the trust is consolidated into the Company’s Consolidated Financial Statements. The shares that were issued to the trust that have not been issued to employees to satisfy vesting of share awards are included in the Consolidated Balance Sheets as Ordinary shares held in treasury. Fair value of financial instruments U.S. GAAP defines fair value and requires companies to establish a framework for measuring fair value and disclosure about fair value measurements using a three-tier approach. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Our financial instruments include cash equivalents, equity interest, other assets, accounts payable, accrued expenses, other liabilities, term loans, and RIPSA. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Refer to Note 5 - Debt to the Consolidated Financial Statements for fair value of term loans and RIPSA. The carrying amounts of the other instruments are considered to be representative of their fair values because of their short-term nature. Concentration of credit risk Financial instruments that potentially subject the Company to concentration of credit risk consist of principally cash and cash equivalents, bank deposits and certain receivables. The Company holds cash and cash equivalents with highly rated financial institutions and in highly rated money market funds. Our deposits at these institutions may exceed insured limits, however the Company has not experienced any significant credit losses in these accounts and does not believe the Company is exposed to any significant credit risk on these instruments. Lease accounting The Company determines if an arrangement is a lease at inception. ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the term of the lease. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As the Company's leases do not provide an implicit rate, the Company determines the incremental borrowing rate in calculating the present value of lease payments. The ROU assets also include any lease payments made prior to commencement and are recorded net of any lease incentives received. The Company’s lease terms may include options to extend or terminate the lease. When it is reasonably certain the Company will exercise such options the lease will be recognized as a liability and a corresponding ROU asset also recognized. Operating leases are included in Right-of-use assets and in Current and Non-current operating lease liabilities on the Company's Consolidated Balance Sheets. Recently adopted accounting standards In November 2023, the FASB issued ASU No. 2023-07, Improvements to Reportable Segment Disclosures, which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The purpose of the amendments is to enable investors to better understand an entity's overall performance and assess potential future cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2023 and interim periods beginning on December 15, 2024, and should be applied on a retrospective basis for all periods presented. This ASU did not have a material impact on the Company's Consolidated Financial Statements and related disclosures. Recently issued accounting standards not yet adopted In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures, which requires disaggregated information about a reporting entity's effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. The amendments in this ASU are effective for annual periods beginning after December 15, 2024, and should be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted. This ASU will have no impact on the Company's Consolidated Balance Sheets or Consolidated Statements of Operations and Comprehensive Loss. The Company is currently evaluating the impact to its income tax disclosures. In November 2024, the FASB issued ASU No. 2024-03: Disaggregation of Income Statement Expenses ("DISE"). The ASU requires additional disclosure of the nature of expenses included in the income statement. The ASU is effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. The requirements will be applied prospectively with the option for retrospective application. Early adoption is permitted. The Company is currently evaluating the extent of the impact of this ASU on disclosures in our Consolidated Financial Statements. |
