Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Significant Accounting Policies | SIGNIFICANT ACCOUNTING POLICIES |
Management's use of estimates and assumptions |
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. |
Basic and diluted net income per share |
Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, including performance-based stock options and restricted stock units for which performance criteria have been achieved, restricted stock units with time-based vesting and shares to be purchased under the employee stock purchase plan. The dilutive effect of potentially dilutive securities is reflected in diluted net income per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company's common stock can result in a greater dilutive effect from potentially dilutive securities. |
Cash and cash equivalents |
All highly liquid investments purchased with an original maturity date of three months or less that are readily convertible into cash and have an insignificant interest rate risk are considered to be cash equivalents. |
Marketable securities |
The Company's marketable securities are classified as “available-for-sale”. The Company includes these investments in current assets and carry them at fair value. Unrealized gains and losses on available-for-sale securities are included in accumulated other comprehensive loss. The amortized cost of debt securities is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Gains and losses on securities sold are recorded based on the specific identification method and are included in other expense, net in the consolidated statement of operations. |
Management assesses whether declines in the fair value of marketable securities are other than temporary. If the decline is judged to be other than temporary, the cost basis of the individual security is written down to fair value and the amount of the write down is included in the statement of operations within other expense, net. In determining whether a decline is other than temporary, management considers various factors including the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and the Company's intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value. |
Fair value measurements |
The fair value of the Company's financial assets is determined by using three levels of input which are defined as follows: |
Level 1 - Quoted prices in active markets for identical assets. At December 31, 2014, the Company's Level 1 assets were comprised of money market funds. At December 31, 2013, the Company's Level 1 assets were comprised of U.S. treasury securities and money market funds. |
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets. The Company's short-term investments primarily utilize broker quotes in markets with infrequent transactions for valuation of these securities. At December 31, 2014 and December 31, 2013, the Company's Level 2 assets were comprised of FDIC insured certificates of deposit. |
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. At December 31, 2014 and December 31, 2013, the Company did not hold any Level 3 assets. |
The Company utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. |
Fair value of financial instruments |
Cash and cash equivalents and marketable securities are carried at fair value. Accounts receivable, net, receivables from collaboration partners, accounts payable and accrued liabilities are valued at their carrying amounts, which approximate fair value due to their short-term nature. As of December 31, 2014 and December 31, 2013, the Company had no liabilities measured at fair value. |
Restricted investments |
Under one of its facilities lease agreements, the Company is required to maintain a $0.3 million letter of credit as security for performance under the lease. The letter of credit is secured by a $0.3 million certificate of deposit which is included in Other assets at December 31, 2014 and December 31, 2013. |
Accounts Receivable, net |
Accounts receivable, net represents amounts due to the Company from sales of IMBRUVICA. The Accounts receivable balance is recorded net of allowances which generally include wholesaler chargebacks from third-party payers including government and other programs, cash discounts for prompt payment and doubtful accounts. Estimates for wholesaler chargebacks, cash discounts and prompt payment discounts are based on contractual payment terms and the Company's expectations about utilization rates for these programs. The Company's estimate of the allowance for doubtful accounts is based on the creditworthiness of its customers, historical payment patterns, the aging of accounts receivable balances and general economic conditions. Accounts receivables balances are written off against the allowance when it is probable that the receivable will not be collected (see Note 4). |
Inventory valuation and related reserves |
Inventories are stated at the lower of cost or market value with the approximate cost being determined on a first-in, first-out basis. Costs capitalized as inventories include third-party manufacturing costs and labor costs for personnel involved in the manufacturing process. |
During the year ended December 31, 2013, the Company began capitalizing costs associated with manufacturing inventory as a result of the FDA approval for IMBRUVICA. Until September 30, 2013, all inventory costs incurred were recorded as research and development expense in the consolidated statements of operations. |
Products that have been approved by the FDA or other regulatory agencies, such as IMBRUVICA, are also used in clinical programs to assess the safety and efficacy of the products for usage in diseases that have not been approved by the FDA or other regulatory authorities. The form of IMBRUVICA (i.e., raw materials and active pharmaceutical ingredient (API)) utilized for both commercial and clinical programs is identical and, as a result, the inventory has an "alternative future use" as defined in authoritative guidance. Raw materials and purchased drug product associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and can no longer be used for commercial purposes and, therefore, does not have "alternative future use." |
The Company evaluates inventory levels quarterly to determine if the inventory has a cost basis in excess of its expected net realizable value, inventory has expired, inventory on-hand is in excess of expected sales forecasts, and/or inventory that does not meet its quality specifications. The Company's raw materials and API has no expiration date and can be revalidated for use after testing. The Company's finished goods inventory currently has an estimated life of 24 months and, based on the Company's sales forecasts, it expects to realize the carrying value of the IMBRUVICA inventory. If any impairment of inventory is identified, the related inventory is written down with a corresponding charge to cost of goods sold in the period that the inventory impairment is first identified. The Company's inventory valuation reserve balance was zero as of December 31, 2014 and December 31, 2013, respectively. |
Inventories consist of raw materials, work-in-process and finished goods related to the production of IMBRUVICA. Raw materials include IMBRUVICA API. Work-in-process includes third-party manufacturing and associated labor costs relating to the Company’s personnel involved in the production process. Included in inventories are raw materials and work-in-process that may be used as clinical products, which are charged to research and development expense when the product enters the research and development process. |
The components of inventory are as follows (in thousands): |
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| As of December 31, |
| 2014 | | 2013 |
Raw materials | $ | — | | | $ | 8,007 | |
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Work-in-process | 27,591 | | | 3,489 | |
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Finished goods | 6,855 | | | 1,107 | |
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| $ | 34,446 | | | $ | 12,603 | |
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Advances to manufacturers |
The Company records cash advances that it pays prior to the receipt of inventory as advances to manufacturers in the consolidated balance sheets. The cash advances may be forfeited if the Company terminates the scheduled production. The Company expects the carrying value of the advances to manufacturers to be fully realized. |
Concentration of credit risk and other risks and uncertainties |
Financial instruments that potentially subject the Company to credit risk consist principally of cash, cash equivalents, marketable securities, accounts receivable, net and receivables from collaboration partners. The Company places its cash and cash equivalents with high-credit quality financial institutions and invests in debt instruments of financial institutions, corporations and government entities with strong credit ratings. The Company's management believes it has established guidelines relative to credit quality, diversification and maturities that maintain safety and liquidity. |
The Company sells IMBRUVICA through a limited number of specialty pharmacies and specialty distributors. Therefore, the Company's accounts receivable balance is comprised of amounts due from a small number of customers. The Company continuously monitors the creditworthiness of its customers and has internal policies regarding customer credit limits. The Company's policy is to estimate the allowance for doubtful accounts based on the credit worthiness of its customers, historical payment patterns, the aging of accounts receivable balances and general economic conditions. For the year ended December 31, 2014, four individual customers accounted for 25%, 22%, 19% and 15% of accounts receivable, net, respectively. For the year ended December 31, 2013, three individual customers accounted for 26%, 26%, and 16% of accounts receivable, net, respectively. |
As of December 31, 2014, Company had $27.0 million receivable from Janssen, which consisted primarily of a milestone receivable of $20.0 million, $3.9 million related to material and product sales and $1.7 million related to value added taxes (see Note 5). As of December 31, 2013, the Company's receivable from collaboration partner balance of $52.0 million was comprised primarily of $50.2 million due from Janssen under the collaboration agreement. To date, the Company has not experienced credit losses from its receivables from collaborative partners, including Janssen. The amounts receivable from Janssen are included within Receivable from collaboration partners on the consolidated balance sheets. |
The Company's products require approvals from the FDA and international regulatory agencies prior to commercial sales. Although the FDA has approved IMBRUVICA as a single agent for the treatment of patients with mantle cell lymphoma who have received at least one prior therapy, the Company's prospects are largely dependent on (a) successful commercialization of IMBRUVICA in the U.S. to treat patients with MCL who have received at least one prior therapy, (b) obtaining regulatory approval of, and successfully commercializing, IMBRUVICA outside the U.S. to treat patients with MCL who have received at least one prior therapy, and (c) obtaining regulatory approval of, and successfully commercializing, IMBRUVICA both in and outside the U.S. to treat other indications. If the Company is unsuccessful in achieving any one or more of these critical business objectives, its ability to generate significant revenue or achieve profitability will be adversely affected and its business may fail. Further, there can be no assurance that the Company's other product candidates will receive required approvals. If the Company was denied such approvals or such approvals were delayed, it could have a materially adverse impact on the Company and the execution of its business strategy. |
The Company has expended and will continue to expend substantial funds for the commercialization, manufacturing, marketing and sales of IMBRUVICA and to complete the research, development and clinical testing of investigational uses of IMBRUVICA and additional products. The Company may be unable to entirely fund these efforts with its current financial resources and may require additional funds to continue to develop and commercialize its products. Additional funds may not be available on acceptable terms, if at all. If adequate funds are unavailable on a timely basis from operations or additional sources of financing, the Company may have to delay, reduce the scope of or eliminate one or more of its research or development programs which would materially and adversely affect its business, financial condition and operations. |
Property and equipment |
Property and equipment are stated at cost. Equipment is depreciated by the straight-line method over the estimated useful lives of the assets, generally 2 to 5 years. Furniture and fixtures are depreciated by the straight-line method over the estimated useful lives of the assets, generally 5 years. Leasehold improvements are generally amortized by the straight-line method over the shorter of the life of the related asset or the term of the underlying lease. Assets not yet placed in use are not depreciated. Substantially all of the Company's property and equipment is located within the U.S. |
Long-lived assets |
The Company evaluates long-lived assets (including finite-lived intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. In accordance with Accounting Standards Codification (ASC) ASC 350-10, Goodwill and Other Intangible Assets, intangible assets with estimable useful lives are amortized over their respective estimated useful lives, and reviewed for impairment in accordance with ASC 360-10, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company reviews long-lived assets, such as acquired intangibles and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company measures recoverability of assets to be held and used by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, the Company recognizes an impairment charge at the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company's impairment review requires significant judgment with respect to future revenue and expense growth rates, selection of appropriate discount rate and other assumptions and estimates. No significant impairment losses have been recorded to date with respect to the Company's long-lived assets (see Note 8). |
Donations to Third-Party Patient Assistance Foundations |
The Company provides cash and product donations to independent third-party patient assistance foundations that, in turn, make grants to help qualifying patients meet their out-of-pocket costs (including co-pay payments or co-insurance obligations) in connection with their use of the Company's products as well as those of other pharmaceutical and biotechnology companies. These independent patient assistance foundations maintain their own patient eligibility criteria and independently determine what type of assistance patients may qualify for. Given the non-reciprocal nature of these transactions with parties who are not considered direct or indirect customers, and for which the Company does not receive any consideration, and the fact that the donation of cash does not have any conditions attached to the donation, the Company accounts for the cash donations as a component of selling, general and administrative expenses in the consolidated statements of operations. |
Revenue Recognition |
Product revenue, net is recognized in accordance with the Financial Accounting Standards Board (FASB) ASC 605, Revenue Recognition, when the following criteria have been met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable and (4) collectability is reasonably assured. Revenues are deferred for fees received before earned or until no further obligations exist. We exercise judgment in determining that collectability is reasonably assured or that services have been delivered in accordance with the arrangement. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the customer's payment history and on the creditworthiness of the customer. |
Product Revenue, Net |
Product revenue, net consists of U.S. sales of IMBRUVICA and is recognized once all four revenue recognition criteria described above have been met. The Company sells IMBRUVICA directly to some customers who have in-house dispensing capabilities, specialty pharmacies (SP) that sell to individual patients, specialty distributors (SD) that sell to hospital pharmacies and other organizations that the Company has contracted with. The Company recognizes revenue from sales of IMBRUVICA when the product’s title and risk of loss transfers to the customer. The Company determined that it has the ability to make reasonable estimates of product returns in order to recognize revenue at the time that title and risk of loss transfers to the customer based on the following factors: (1) the Company believes that it has sufficient insight into the distribution channel at the SP's and SD's in order to ascertain their inventory level and dispense data, (2) due to the price of the Company's product and limited patient population, its SP and SD customers have not built up significant levels of inventory, nor does the Company expect they will do so for the foreseeable future, (3) inventory on hand at the Company's SP customers was approximately two weeks as of December 31, 2014, (4) there have been no product returns to-date since the Company's commercial launch of IMBRUVICA on November 13, 2013 and (5) the Company believes there is limited risk of return of inventory in the channel because there is significant remaining shelf life at the point of sale. |
The Company recognizes product revenue net of adjustments for customer credits, including estimated government rebates and charge-backs, returns, prompt payment discounts, U.S. Department of Veteran's Affairs (VA) negotiated discounts and administrative service fees related to its patient assistance program which includes co-payment and deductible assistance, and Medicare Part D coverage gap reimbursements. Each of the above adjustments is recorded at the time of revenue recognition, resulting in a reduction in product revenue, net and an increase in accrued expenses or a reduction in accounts receivable, net. The above adjustments require significant estimates, judgment and information obtained from external sources. If management's estimates differ from actual results, the Company will record adjustments that would affect product revenue, net in the period of adjustment. |
Gross-to-net sales adjustments |
Rebates |
The Company records an allowance for rebates including mandated discounts under the Medicaid Drug Rebate Program, discounts provided under the TRICARE Retail Pharmacy Refunds Program (TRICARE) and to members of organizations with whom the Company has contracted with. The allowance for rebates is based upon the Company's contractual agreements and/or legal requirements and public sector benefit providers, including Medicaid and TRICARE. For estimated amounts owed to public sector benefit providers, including Medicaid and TRICARE, the allowance for rebates is based on the estimated rebate percentage of forecasted eligible sales. The estimated rebate percentage is based on statutory discount rates and expected utilization. The forecasted eligible Medicaid and TRICARE sales represent those sales made by the Company that will ultimately be consumed by patients covered by Medicaid and TRICARE. To estimate the allowance for rebates, the Company uses the estimated patient mix information which is provided by its SP customers, as well as third party sources. For organizations that the Company has contracted with, the rebate is based upon contracted volume discount amounts. In addition, the Company incurs administrative fees in exchange for administrative services provided that are also accrued at the time of sale. Rebates for public sector benefit providers and organizational discounts are generally invoiced and paid in arrears. As such, the allowance for rebates consists of an estimate of the amount expected to be incurred for the current quarter's shipments to patients, plus an accrual balance for estimated unpaid rebates from prior periods. The allowance for rebates is recorded within accrued liabilities in the consolidated balance sheets. |
Charge-backs |
Charge-backs are discounts that result from the difference between the prices at which the Company makes IMBRUVICA available to wholesalers for purchase by discount customers under pricing agreements the Company has with the discount customers and the sales price paid to the Company by the wholesalers who service the discount customers. Such discount customers, which primarily consist of the U.S. Department of Defense (DOD), VA, Public Health Services (PHS), and other Federal Government institutions, purchase products through wholesalers at a lower price provided for in pricing contracts and the wholesalers then charge the Company the difference between the wholesale acquisition cost and the lower price paid by the discount customer. These reductions are settled through charge-backs from the Company's wholesalers. Charge-backs are recorded as a reduction to accounts receivable, net in the consolidated balance sheets. |
Product Returns |
Consistent with industry practice, the Company generally offers its customers a limited right to return. The Company generally allows for the return of product that is a few months prior to and up to a few months after the product expiration date. Additionally, the Company considers several other factors in the estimation process including the expiration dates of product shipped, third party data in monitoring channel inventory levels, shelf life of the product, prescription trends and other relevant factors. Provisions for estimated product returns are recorded within accrued liabilities in the consolidated balance sheets. |
Medicare Part D coverage gap |
Medicare Part D, also known as the Medicare prescription drug benefit, is a federal program to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States. The Medicare Part D prescription drug benefit mandates that drug manufacturers fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Funding of the Medicare Part D gap is invoiced and paid in arrears. As such, the allowance for Medicare Part D consists of an estimate of the amount expected to be incurred for the current quarter's shipments to patients, plus an accrual balance for estimated shipments remaining in the channel at period end which are estimated to ship to Medicare Part D patients. The allowance for rebates is recorded within accrued liabilities in the consolidated balance sheets. |
Prompt payment discounts |
The Company generally offers cash discounts to its customers, generally a 2% discount applied to the invoice amount, as an incentive for prompt payment. The Company expects that all of its customers to whom it offers cash discounts for prompt payment to take advantage of the full amount of the 2% discount. The Company records the prompt-payment discount as a reduction to accounts receivable, net in the consolidated balance sheets. |
Co-payment assistance |
Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators. The allowance for co-payment assistance is recorded within accrued liabilities in the consolidated balance sheets. |
Collaboration Revenues |
Revenue under the Company's license and collaboration arrangements is recognized based on the performance requirements of the contract. Determinations of whether persuasive evidence of an arrangement exists and whether delivery has occurred or services have been rendered are based on management’s judgments regarding the fixed nature of the fees charged for deliverables and the collectability of those fees. Should changes in conditions cause management to determine that these criteria are not met for any new or modified transactions, revenue recognized could be adversely affected. |
The Company recognizes revenue related to collaboration and license arrangements in accordance with the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605-25, “Revenue Recognition – Multiple-Element Arrangements,” or ASC Topic 605-25. Additionally, the Company adopted, effective July 1, 2010, Accounting Standards Update, or ASU, No. 2009-13, “Multiple Deliverable Revenue Arrangements,” or ASU 2009-13, which amended ASC Topic 605-25 and: |
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• | provided guidance on how deliverables in an arrangement should be separated and how the arrangement consideration should be allocated to the separate units of accounting; | | | | | | |
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• | required an entity to determine the selling price of a separate deliverable using a hierarchy of (i) vendor-specific objective evidence, or VSOE, (ii) third-party evidence, or TPE, or (iii) best estimate of selling price, or BESP; and | | | | | | |
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• | required the allocation of the arrangement consideration, at the inception of the arrangement, to the separate units of accounting based on relative fair value. | | | | | | |
The Company evaluates all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis. Based on this evaluation, the deliverables are separated into units of accounting. The arrangement consideration that is fixed or determinable at the inception of the arrangement is allocated to the separate units of accounting based on their relative selling prices. The Company may exercise significant judgment in determining whether a deliverable is a separate unit of accounting, as well as in estimating the selling prices of such unit of accounting. |
To determine the selling price of a separate deliverable, the Company uses the hierarchy as prescribed in ASC Topic 605-25 based on VSOE, TPE or BESP. VSOE is based on the price charged when the element is sold separately and is the price actually charged for that deliverable. TPE is determined based on third-party evidence for a similar deliverable when sold separately and BESP is the price at which the Company would transact a sale if the elements of collaboration and license arrangements were sold on a stand-alone basis. The Company may not be able to establish VSOE or TPE for the deliverables within collaboration and license arrangements, as the Company does not have a history of entering into such arrangements or selling the individual deliverables within such arrangements separately. In addition, there may be significant differentiation in these arrangements, which indicates that comparable third-party pricing may not be available. The Company may determine that the selling price for the deliverables within collaboration and license arrangements should be determined using BESP. The process for determining BESP involves significant judgment on the Company's part and includes consideration of multiple factors such as estimated direct expenses and other costs, and available data. |
For collaborations entered into after July 1, 2010, the Company has determined its best estimate of selling prices for the license unit of accounting based on the income approach as defined in ASC 820-10-35-32. This measurement is based on the value indicated by current estimates about those future amounts and reflects management determined estimates and assumptions. These estimates and assumptions include, but are not limited to, how a market participant would use the license, estimated market opportunity and expected market share and assumed royalty rates that would be paid for sales resulting from products developed using the license, similar arrangements entered into by third parties and entity-specific factors such as the terms of the Company's previous collaborative agreement, the Company's pricing practices and pricing objectives, the likelihood that clinical trials will be successful, the likelihood that regulatory approval will be received and that the products will become commercialized and the markets served. The Company has also determined BESP for services-related deliverables based on the nature of the services to be performed and estimates of the associated effort as well as estimated market rates for similar services. |
For each unit of accounting identified within an arrangement, the Company determines the period over which the performance obligation occurs. Revenue is then recognized using either a proportional performance or straight-line method. The Company recognizes revenue using the proportional performance method when the level of effort to complete our performance obligations under an arrangement can be reasonably estimated. Direct labor hours or full time equivalents are typically used as the measurement of performance. |
Effective July 1, 2010, the Company adopted ASU No. 2010-17, “Milestone Method of Revenue Recognition,” or ASU 2010-17, which provides guidance on revenue recognition using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in the period in which the milestone is achieved. The determination that a milestone is substantive is subject to considerable judgment. |
Cost of goods sold |
Cost of goods sold includes third-party manufacturing costs of products sold, fixed manufacturing overhead, royalty fees, and other indirect costs such as personnel compensation. |
During the fiscal year 2013, the Company began capitalizing costs associated with manufacturing inventory as a result of the FDA approval of IMBRUVICA for MCL on November 13, 2013. Until September 30, 2013, all inventory costs incurred were recorded as research and development expense in the consolidated statements of operations. This zero cost inventory primarily consisted of raw materials for which the shelf-life has not yet started. |
Research and development expense |
Research and development expenses include personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services. Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and amortized over the period that the goods are delivered or the related services are performed, subject to an assessment of recoverability. |
Clinical development costs are a significant component of research and development expenses. The Company has a history of contracting with third parties that perform various clinical trial activities on its behalf in the ongoing development of its product candidates. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flow. The Company accrues and expenses costs for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with contract research organizations and clinical trial sites. The Company determines its estimates through discussions with internal clinical personnel and outside service providers as to the progress or stage of completion of trials or services and the agreed upon fee to be paid for such services. |
The Company's worldwide collaboration and license agreement with Janssen (the Agreement) includes a cost sharing arrangement for certain collaboration activities. Except in certain cases, in general Janssen is responsible for approximately 60% of collaboration development costs and the Company is responsible for the remaining 40% of collaboration development costs. Further, the Agreement provides the Company with a $50.0 million annual cap of its share of collaboration costs and pre-tax commercialization losses for each calendar year until after the third profitable calendar quarter for the product and any amounts in excess of the annual cap (Excess Amounts) are funded by Janssen. Under the Agreement, total Excess Amounts plus interest may not exceed $225.0 million. |
The Company's policy is to account for cost-sharing payments to Janssen related to development services as a component of research and development expense and reimbursements for development services under the cost-sharing arrangement as an offset to research and development expense, upon delivery of the related services when expenses have been incurred and reimbursements have been earned. During the year ended December 31, 2013 and the six months ended December 31, 2012, the Company recognized Excess Amounts related to development services as a reduction to research and development expenses. The Company recognizes Excess Amounts as a reduction to Costs and expenses as the Company's payment of Excess Amounts to Janssen is contingent and would become payable only after the third profitable calendar quarter for the product. Further, Excess Amounts shall be reimbursable only from the Company's share of pre-tax profits after the third profitable calendar quarter for the product (see Note 5). |
Selling, general and administrative expense |
The Company expenses the cost of selling, general and administrative activities as incurred. Selling, general and administrative expenses consist primarily of personnel and facility-related expenses, outside contracted services and other costs not associated with the research and development activities of the Company. In connection with the Agreement, the Company also classifies certain commercial-related collaboration costs within Selling, general and administrative expense in the consolidated statements of operations. Costs under the Agreement that are recorded within selling, general and administrative expense are generally shared 50% by the Company and 50% by Janssen and include marketing costs, patent costs and the Company's share of pre-tax commercial losses on sales of IMBRUVICA. |
During the year ended December 31, 2013 and the six months ended December 31, 2012, the Company recognized Excess Amounts related to certain collaboration costs as a reduction to selling, general and administrative expenses (see Note 5). |
Income taxes |
The Company is subject to income taxes in both the U.S. and foreign jurisdictions, and it uses estimates in determining its provisions for income taxes. The Company provides for income taxes using the asset and liability method, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. The Company recognizes a valuation allowance against its net deferred tax assets if it is more likely than not that some portion of the deferred tax assets will not be fully realizable. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. |
The Company applies the provisions of FASB's guidance on accounting for uncertainty in income taxes. The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and the tax benefit to be recognized is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available. |
Stock-based compensation |
Stock-based compensation cost for employee and director stock options with time-based vesting and employee stock plan purchase rights is generally measured and recognized based on the fair value of the award at the grant date. Stock-based compensation cost for restricted stock units (RSUs) with time-based vesting is measured based on the closing fair market value of the Company's common stock on the date of the grant, multiplied by the number of RSUs granted. The accounting grant date for employee stock options and restricted stock units with performance obligations is the date on which the performance goals have been defined and a mutual understanding of the terms has been reached. Generally, the Company's time-based stock option and RSU grants vest over a four year period. Stock options and RSUs with performance obligations generally vest over a four year period, with the goals set and agreed upon annually. Stock-based compensation for non-employee stock options is re-estimated at each period-end through the vesting date. The Company estimates a forfeiture rate to calculate the stock-based compensation cost for its awards primarily based on an analysis of its historical pre-vesting forfeitures. |
The fair value of each stock option is estimated using the Black Scholes option-pricing model. Expected volatility is based on historical volatility data of the Company's stock. The expected term of stock options granted represents the period of time that stock options are expected to be outstanding. The Company generally does not expect substantially different exercise or post-vesting termination behavior among its employee or non-employee population. As such, for the majority of stock options granted and the Company's Employee Stock Purchase Plan, the Company generally calculates and applies an overall expected term assumption based on historical data. In certain cases, the Company uses a shorter expected term for performance-based stock options based on a combination of historical data and management's estimates of the period of time that options will be outstanding. The risk-free interest rate is based on a zero-coupon U.S. Treasury bond whose maturity period equals the expected term of the Company's options. |
Options and RSUs vest upon the passage of time or a combination of time and the achievement of certain performance obligations. Vesting of performance-based options and RSUs for executive officers depends on their attainment of key corporate and departmental goals. The Compensation Committee of the Board of Directors will determine if the performance conditions have been met. Stock-based compensation expense for the options and RSUs with performance obligations is recorded when the Company believes that the vesting of these options and RSUs is probable. |
Shipping and handling costs |
Shipping and handling costs incurred for inventory purchases and product shipments are recorded in Selling, general and administrative, net in the consolidated statements of income. Shipping and handling costs were not material for the years ended December 31, 2014 and December 31, 2013. |
Advertising expenses |
The Company expenses the costs of advertising, including promotional expenses, as incurred. The Company began incurring advertising expenses during the year ended December 31, 2014 due to the commercialization of IMBRUVICA on November 13, 2013. Advertising expenses were $4.4 million for the year ended December 31, 2014 and $0.3 million for the year ended December 31, 2013. |
Segment reporting |
Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and evaluated by the chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer (CEO). The Company operates as a single reportable segment, which primarily focuses on developing and commercializing novel therapies for the treatment of cancer and immune-mediated diseases. Product revenue, net is attributed to geography based upon the country in which the product is delivered. Long-lived assets are attributed to geography based on the country where the assets are located. |
Recent Accounting Pronouncements |
In April 2014, the FASB issued ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity", or ASU 2014-08. Under ASU 2014-08, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. ASU 2014-08 is effective for fiscal and interim periods beginning on or after December 15, 2014, with early adoption permitted. The Company will adopt the provisions of ASU 2014-08 beginning with the Company’s fiscal 2015. |
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which provides guidance for revenue recognition. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This standard is effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of this accounting standard on its consolidated financial statements. |
In June 2014, the FASB issued ASU 2014-12, "Accounting for Stock-based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. Early adoption is permitted. This standard is not expected to have any impact on current disclosures in the consolidated financial statements. |
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements - Going Concern, which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures." ASU 2014-15 is effective for annual and interim reporting periods beginning on or after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The standard allows for either a full retrospective or modified retrospective transition method. The Company does not expect this standard to have a any impact on the Company’s consolidated financial statements upon adoption. |
In November 2014, the FASB issued ASU 2014-17, "Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force)." ASU 2014-17 provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. This new standard is effective on November 18, 2014. Early application is prohibited. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be a change in accounting principle. The Company has adopted this new guidance and there's no impact on its consolidated financial statements. |