UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 8-K

 


 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of Report (Date of earliest event reported): July 27, 2015

 


 

CELGENE CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

001-34912

 

22-2711928

(State or other jurisdiction
of incorporation)

 

(Commission
File Number)

 

(IRS Employer
Identification No.)

 

86 Morris Avenue, Summit, New Jersey

 

07901

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (908) 673-9000

 

 

(Former name or former address, if changed since last report.)

 


 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

o                     Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o                     Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o                     Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o                     Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 



 

Item 8.01 Other Events

 

As previously disclosed, on July 14, 2015, Celgene Corporation, a Delaware corporation (“Celgene”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Receptos, Inc., a Delaware corporation (“Receptos”), and Strix Corporation, a Delaware corporation and a wholly-owned subsidiary of Celgene (“Acquisition Sub”), pursuant to which, among other things, subject to the terms and conditions of the Merger Agreement, Acquisition Sub will commence a tender offer (the “Offer”) for all of the outstanding shares of common stock of Receptos, par value $0.001 per share (the “Receptos Shares”), other than any Receptos Shares that are owned immediately prior to the commencement of the Offer by Celgene, Acquisition Sub, Receptos or any of their wholly-owned subsidiaries (the “Cancelled Receptos Shares”), at a purchase price of $232.00 per Receptos Share, net to the holder thereof in cash, subject to reduction for any applicable withholding taxes (the “Offer Price”). Following the completion of the Offer and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Acquisition Sub will merge with and into Receptos, with Receptos surviving as a wholly-owned subsidiary of Celgene, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law without any stockholder approvals (the “Merger”). At the effective time of the Merger, each outstanding Receptos Share (other than any Cancelled Receptos Shares, Receptos Shares accepted for purchase pursuant to the Offer and Receptos Shares held by stockholders who have properly exercised appraisal rights under Delaware law) will be automatically converted into the right to receive an amount in cash equal to the Offer Price, without interest. The acquisition transaction has been approved by the boards of directors of both companies and is subject to customary closing conditions, including the tender of at least a majority of outstanding shares of Receptos common stock in the tender offer and expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is anticipated to close in 2015.

 

Celgene will acquire all of the outstanding shares of common stock of Receptos through a tender offer, followed by a merger. In the tender offer, Celgene will offer to purchase all of the outstanding shares of common stock of Receptos for $232.00 per share in cash, or an aggregate of approximately $7.2 billion, net of cash acquired. In connection with the proposed acquisition of Receptos, Celgene has obtained a $5.0 billion committed syndicated bridge facility (the “Bridge Facility”). No amounts are anticipated to be drawn under the Bridge Facility prior to the closing of the acquisition. Celgene expects to fund the transaction through a combination of existing cash and the issuance of approximately $5.0 billion of senior notes pursuant to a public offering. Upon closure of the senior notes offering, the Bridge Facility will be automatically terminated. The debt covenants on Celgene’s existing credit facility have been amended in order to accommodate the planned additional borrowing. Celgene may issue up to an additional $3.0 billion of senior notes for general corporate purposes consistent with normal financing activity before year-end.

 

The audited consolidated balance sheets of Receptos as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss, consolidated statements of convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2014, the unaudited condensed consolidated balance sheets of Receptos as of March 31, 2015 and December 31, 2014, and the related unaudited condensed consolidated statements of operations and comprehensive loss and cash flows for each of the three months ended March 31, 2015 and 2014, and Celgene’s unaudited pro forma consolidated balance sheet as of March 31, 2015 and consolidated statements of income for the year ended December 31, 2014 and for the three months ended March 31, 2015, giving effect to the Merger as if it had occurred on January 1, 2014, are attached hereto as Exhibits 99.1, 99.2 and 99.3, respectively.

 

Forward-Looking Statements

 

This Current Report on Form 8-K contains forward-looking statements, which are generally statements that are not historical facts. Forward-looking statements can be identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “plans,” “will,” “outlook” and similar expressions. Forward-looking statements are based on management’s current plans, estimates, assumptions and projections, and speak only as of the date they are made. Celgene and Receptos undertake no obligation to update any forward-looking statement in light of new information or future events, except as otherwise required by law. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond the control of either company, including the following: (a) the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement; (b) the inability to complete the transaction due to the failure to satisfy conditions to the transaction; (c) the risk that the proposed transaction disrupts current plans and operations; (d) difficulties or unanticipated expenses in connection with integrating Receptos into Celgene; (e) the risk that the acquisition does not perform as planned; and (f) potential difficulties in employee retention following the closing of the transaction. Actual results or outcomes may differ materially from those implied by the forward-looking statements as a result of the impact of a number of factors, many of which are discussed in more detail in the public reports of each company filed with the Securities and Exchange Commission.

 

2



 

Item 9.01 Financial Statements and Exhibits

 

d) Exhibits

 

23.1

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm

99.1

Receptos’ Audited Historical Consolidated Financial Statements and Related Notes

99.2

Receptos’ Unaudited Condensed Consolidated Financial Statements and Related Notes for the Three Months Ended March 31, 2015

99.3

Celgene’s Unaudited Pro Forma Combined Financial Statements and Related Notes

 

3



 

SIGNATURES

 

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

 

 

 

CELGENE CORPORATION

 

 

 

 

Date: July 27, 2015

 

By:

/s/ Peter N. Kellogg

 

 

 

Peter N. Kellogg

 

 

 

Executive Vice President and

 

 

 

Chief Financial Officer

 

 

 

(principal financial and accounting officer)

 

4



 

Exhibit Index

 

23.1

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm

99.1

Receptos’ Audited Historical Consolidated Financial Statements and Related Notes

99.2

Receptos’ Unaudited Condensed Consolidated Financial Statements and Related Notes for the Three Months Ended March 31, 2015

99.3

Celgene’s Unaudited Pro Forma Combined Financial Statements and Related Notes

 

5




Exhibit 23.1

 

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm

 

We consent to the incorporation by reference in the Registration Statements (Nos. 333-70083, 333-91977, 333-39716, 333-107980, 333-65908, 333-138497, 333-149603, 333-152655, 333-160955, 333-177669, 333-184634, 333-191996, 333-199638) on Form S-8, in the Registration Statements (Nos. 333-02517, 333-32115, 333-38861, 333-52963, 333-87197, 333-93759, 333-94915, 333-75636, 333-107977, 333-107978, 333-138395, 333-169731, 333-191998) on Form S-3, and in the Registration Statements (Nos. 333-101196, 333-42302, 333-148777 and 333-168369) on Form S-4 of Celgene Corporation and to the inclusion in this Celgene Corporation Current Report on Form 8-K, of our report dated March 2, 2015, with respect to the consolidated balance sheets of Receptos, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2014.

 

 

 

/s/ Ernst & Young LLP

 

 

San Diego, California

 

July 24, 2015

 

 




Exhibit 99.1

 

RECEPTOS, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Page

Report of Independent Registered Public Accounting Firm

 

F-2

Consolidated Balance Sheets as of December 31, 2014 and 2013

 

F-3

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2014, 2013 and 2012

 

F-4

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years ended December 31, 2014, 2013 and 2012

 

F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012

 

F-6

Notes to Consolidated Financial Statements

 

F-7

 

F-1



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders of Receptos, Inc.

 

We have audited the accompanying consolidated balance sheets of Receptos, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss, consolidated statements of convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Receptos, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Receptos, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 2, 2015 expressed an unqualified opinion thereon.

 

 

/s/ Ernst & Young LLP

 

San Diego, California

March 2, 2015

 

F-2



 

RECEPTOS, INC.

 

Consolidated Balance Sheets

 

(In thousands, except par value information)

 

 

 

December 31,

 

 

 

2014

 

2013

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

458,278

 

$

23,805

 

Short-term investments

 

213,651

 

45,685

 

Prepaid expenses and other current assets

 

3,603

 

914

 

 

 

 

 

 

 

Total current assets

 

675,532

 

70,404

 

Property and equipment, net

 

966

 

269

 

Other assets

 

1,509

 

555

 

 

 

 

 

 

 

Total assets

 

$

678,007

 

$

71,228

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

7,909

 

$

5,096

 

Accrued expenses

 

16,161

 

7,612

 

Accrued compensation and benefits

 

4,450

 

1,998

 

Current portion of term loan

 

 

735

 

Current portion of deferred revenue

 

 

700

 

 

 

 

 

 

 

Total current liabilities

 

28,520

 

16,141

 

Term loan

 

 

4,180

 

Deferred rent

 

 

112

 

 

 

 

 

 

 

Total liabilities

 

28,520

 

20,433

 

Commitments and contingencies (Note 8)

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock, $0.001 par value; 200,000 shares authorized; 31,516 and 18,350 shares issued and outstanding at December 31, 2014 and 2013, respectively

 

31

 

18

 

Additional paid-in capital

 

860,384

 

146,680

 

Accumulated comprehensive (loss) income

 

(49

)

6

 

Accumulated deficit

 

(210,879

)

(95,909

)

 

 

 

 

 

 

Total stockholders’ equity

 

649,487

 

50,795

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

678,007

 

$

71,228

 

 

See accompanying notes to consolidated financial statements.

 

F-3



 

RECEPTOS, INC.

 

Consolidated Statements of Operations and Comprehensive Loss

 

(In thousands, except per share data)

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

Collaborative revenue

 

$

5,900

 

$

4,641

 

$

8,647

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

101,663

 

43,585

 

22,927

 

General and administrative

 

15,807

 

8,949

 

3,430

 

 

 

 

 

 

 

 

 

Total operating expenses

 

117,470

 

52,534

 

26,357

 

 

 

 

 

 

 

 

 

Loss from operations

 

(111,570

)

(47,893

)

(17,710

)

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

428

 

27

 

18

 

Interest expense

 

(909

)

(443

)

 

Foreign currency loss

 

(2,949

)

 

 

Other income (expense)

 

30

 

(11

)

(18

)

 

 

 

 

 

 

 

 

Net loss

 

(114,970

)

(48,320

)

(17,710

)

Preferred stock deemed dividend

 

 

(2,056

)

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(114,970

)

$

(50,376

)

$

(17,710

)

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

Net loss per common share, basic and diluted

 

$

(4.63

)

$

(4.23

)

$

(13.73

)

 

 

 

 

 

 

 

 

Weighted-average shares used to compute basic and diluted net loss per common share

 

24,827

 

11,916

 

1,289

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

Net loss

 

$

(114,970

)

$

(48,320

)

$

(17,710

)

Unrealized (loss) gain on marketable securities

 

(55

)

6

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(115,025

)

$

(48,314

)

$

(17,710

)

 

See accompanying notes to consolidated financial statements.

 

F-4



 

RECEPTOS, INC.

 

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

(In thousands)

 

 

 

Series A
convertible
preferred stock

 

Series B
convertible
preferred stock

 

Common
stock

 

Additional
paid-in

 

Accumulated
comprehensive

 

Accumulated

 

Total
stockholders’
equity

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

capital

 

(loss) income

 

deficit

 

(deficit)

 

Balance at December 31, 2011

 

39,376

 

$

27,260

 

 

$

 

1,739

 

$

2

 

$

7,310

 

$

 

$

(29,879

)

$

(22,567

)

Net loss

 

 

 

 

 

 

 

 

 

(17,710

)

(17,710

)

Stock-based compensation expense

 

 

 

 

 

 

 

220

 

 

 

220

 

Issuance of Series B convertible preferred stock and common stock warrants

 

 

 

12,358

 

12,556

 

 

 

 

 

 

 

Issuance of common stock, net of repurchase liability and including vesting of stock option early exercises

 

 

 

 

 

550

 

 

43

 

 

 

43

 

Issuance of common stock upon exercise of warrants

 

 

 

 

 

128

 

 

10

 

 

 

10

 

Vesting of restricted common stock subject to repurchase

 

 

 

 

 

 

 

21

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

39,376

 

27,260

 

12,358

 

12,556

 

2,417

 

2

 

7,604

 

 

(47,589

)

(39,983

)

Net loss

 

 

 

 

 

 

 

 

 

(48,320

)

(48,320

)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

6

 

 

6

 

Stock-based compensation expense

 

 

 

 

 

 

 

2,969

 

 

 

2,969

 

Issuance of Series B convertible preferred stock

 

 

 

20,596

 

21,192

 

 

 

 

 

 

 

Preferred stock deemed dividend

 

 

 

 

2,056

 

 

 

(2,056

)

 

 

(2,056

)

Conversion of convertible preferred stock into common

 

(39,376

)

(27,260

)

(32,954

)

(35,804

)

9,644

 

10

 

63,054

 

 

 

63,064

 

Initial public offering of common stock

 

 

 

 

 

5,933

 

6

 

75,003

 

 

 

75,009

 

Vesting of restricted common stock subject to repurchase

 

 

 

 

 

 

 

79

 

 

 

79

 

Issuance of common stock upon exercise of options and warrants

 

 

 

 

 

356

 

 

27

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

 

 

 

 

18,350

 

18

 

146,680

 

6

 

(95,909

)

50,795

 

Net loss

 

 

 

 

 

 

 

 

 

(114,970

)

(114,970

)

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

(55

)

 

(55

)

Stock-based compensation expense

 

 

 

 

 

 

 

11,148

 

 

 

11,148

 

Issuance of common stock in secondary offerings

 

 

 

 

 

13,056

 

13

 

701,615

 

 

 

701,628

 

Vesting of restricted common stock subject to repurchase and restricted stock units

 

 

 

 

 

2

 

 

(15

)

 

 

(15

)

Issuance of common stock upon exercise of options, net of repurchase of restricted common stock

 

 

 

 

 

108

 

 

956

 

 

 

956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

 

$

 

 

$

 

31,516

 

$

31

 

$

860,384

 

$

(49

)

$

(210,879

)

$

649,487

 

 

See accompanying notes to consolidated financial statements.

 

F-5



 

RECEPTOS, INC.

 

Consolidated Statements of Cash Flows

 

(In thousands)

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(114,970

)

$

(48,320

)

$

(17,710

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Stock-based compensation expense

 

11,148

 

2,969

 

220

 

Depreciation and amortization

 

236

 

350

 

656

 

Deferred rent

 

(112

)

(116

)

27

 

Amortization of discount on marketable securities

 

1,948

 

64

 

 

Accretion of debt discount and exit fee

 

434

 

126

 

 

Amortization of debt issuance costs

 

100

 

23

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

(3,751

)

(363

)

(278

)

Restricted cash in connection with leased facility and corporate credit card

 

(162

)

(25

)

 

Accounts payable

 

2,522

 

4,077

 

557

 

Accrued expenses

 

8,606

 

5,643

 

122

 

Accrued compensation and benefits

 

2,452

 

970

 

216

 

Deferred revenue

 

(700

)

(2,225

)

(2,228

)

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

(92,249

)

(36,827

)

(18,418

)

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of marketable securities

 

(324,094

)

(45,743

)

 

Maturities and sales of marketable securities

 

154,125

 

 

 

Purchases of property and equipment

 

(642

)

(70

)

(214

)

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(170,611

)

(45,813

)

(214

)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

701,887

 

75,009

 

 

Proceeds from exercise of common stock options and warrants, net of repurchase of restricted common stock

 

956

 

27

 

41

 

Proceeds from issuance of convertible preferred stock, net

 

 

21,192

 

12,556

 

Net proceeds from borrowings under term loan

 

 

4,790

 

 

Proceeds from early exercises of stock options

 

 

 

126

 

Other

 

(162

)

 

 

Repayment of borrowings under terms loan

 

(5,348

)

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

697,333

 

101,018

 

12,723

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

434,473

 

18,378

 

(5,909

)

Cash and cash equivalents at beginning of period

 

23,805

 

5,427

 

11,336

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

458,278

 

$

23,805

 

$

5,427

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Conversion of Series A and B Preferred Stock to common stock

 

$

 

$

63,064

 

$

 

 

 

 

 

 

 

 

 

Accrued expenses relating to deferred offering costs

 

$

259

 

$

254

 

$

77

 

 

 

 

 

 

 

 

 

Release of repurchase liability for stock options and restricted stock shares

 

$

62

 

$

79

 

$

32

 

 

 

 

 

 

 

 

 

Amounts accrued for capital expenditures

 

$

291

 

$

 

$

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

410

 

$

259

 

$

 

 

 

 

 

 

 

 

 

Non-cash financing activity:

 

 

 

 

 

 

 

Preferred stock deemed dividend

 

$

 

$

2,056

 

$

 

 

See accompanying notes to consolidated financial statements.

 

F-6



 

RECEPTOS, INC.

 

Notes to Consolidated Financial Statements

 

1. Description of Business

 

Receptos, Inc. is a biopharmaceutical company focused on discovering, developing and commercializing innovative therapeutics in immune disorders for specialty markets including for Relapsing Multiple Sclerosis (RMS), Inflammatory Bowel Disease (IBD) and Eosinophilic Esophagitis (EoE). The Company was incorporated in the state of Delaware on September 26, 2008 under the name Receptor Pharmaceuticals, Inc., and commenced significant operations in 2009. As used in this report, unless the context suggests otherwise, “the Company” and “Receptos” mean Receptos, Inc.

 

The consolidated financial statements include the accounts of Receptos, Inc. and its wholly owned subsidiaries, Apoptos, Inc. (Apoptos) and Receptos UK Ltd., which are both currently inactive. All intercompany balances and transactions among the consolidated entities have been eliminated in consolidation.

 

Liquidity

 

The Company has incurred losses and negative cash flows from operating activities since inception. As of December 31, 2014, the Company had an accumulated deficit of $210.9 million. The Company anticipates that it will continue to incur net losses into the foreseeable future as it: (i) continues the development and commercialization of its drug candidates; (ii) works to develop additional drug candidates through research and development programs; and (iii) expands its corporate infrastructure. The Company had cash, cash equivalents and short-term investments of $671.9 million as of December 31, 2014. Based on the Company’s current business plan, management believes that existing cash, cash equivalents and short-term investments will be sufficient to fund the Company’s obligations for at least the next twelve months. The Company plans to continue to fund its losses from operations and capital funding needs through cash and investments on hand, as well as future debt and equity financing and potential collaboration arrangements. If the Company is not able to secure adequate additional funding, it may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects.

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the US (US GAAP). The preparation of the Company’s consolidated financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes. The most significant estimates in the Company’s consolidated financial statements relate to clinical trial accruals and stock-based compensation expense. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

 

Segment Reporting

 

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment, operating primarily in the United States.

 

Cash and Cash Equivalents

 

The Company classifies time deposits and other investments that are highly liquid and have maturities of three months or less at the date of purchase as cash equivalents. The carrying amounts approximate fair value due to the short maturities of these instruments. As of December 31, 2014, cash and cash equivalents include cash in readily available checking and money market accounts, as well as government sponsored entities. As of December 31, 2013, cash and cash equivalents include cash in readily available checking and money market accounts, as well as corporate debt securities.

 

F-7



 

Short-Term Investments

 

The Company carries short-term investments classified as available-for-sale at fair value as determined by prices for identical or similar securities at the balance sheet date. Short-term investments consist of both Level 1 and Level 2 financial instruments in the fair-value hierarchy. The Company records unrealized gains and losses as a component of other comprehensive loss within the statements of operations and comprehensive loss and as a separate component of stockholders’ equity. Realized gains or losses on available-for-sale securities are determined using the specific identification method and the Company includes net realized gains and losses in interest income.

 

At each balance sheet date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether the unrealized loss is other-than-temporary. The Company considers factors including: the significance of the decline in value compared to the cost basis, underlying factors contributing to a decline in the prices of securities in a single asset class, the length of time the market value of the security has been less than its cost basis, the security’s relative performance versus its peers, sector or asset class, expected market volatility and the market and economy in general. An impairment loss is recognized at the time the Company determines that a decline in the fair value below its cost basis is other-than-temporary.

 

Restricted Cash

 

Restricted cash as of December 31, 2014 consists of $216,000 to secure lines of credit associated with leased facilities and $50,000 to secure the Company’s corporate credit card. The short term portion of restricted cash is grouped within prepaid expenses and other current assets while the long term portion of restricted cash is grouped with other assets.

 

Fair Value of Financial Instruments

 

The valuation of assets and liabilities are subject to fair value measurements using a three tiered approach and fair value measurement is classified and disclosed by the Company in one of the following three categories:

 

Level 1:                     Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2:                     Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

 

Level 3:                     Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

 

The carrying amounts of all cash equivalents, accounts payable, accrued expenses and accrued compensation and benefits are reasonable estimates of their fair value because of the short nature of these items. The Company reports its available-for-sale securities at their estimated fair value based on quoted market prices for identical or similar instruments.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash balances due to the financial position of the depository institutions in which those deposits are held. Additionally, the Company has established guidelines regarding approved investments and maturities of investments, which are designed to preserve principal and liquidity.

 

Property and Equipment

 

Property and equipment is carried at cost and depreciation is computed using the straight-line method over the estimated useful lives of the assets (generally three to ten years). The Company amortizes leasehold improvements over the lease term or the useful life of the improvement, whichever is shorter (including any renewal periods that are deemed to be reasonably assured). The Company expenses repair and maintenance costs that do not improve service potential or extend economic life as such costs are incurred.

 

F-8



 

Impairment of Long-Lived Assets

 

The Company reviews property and equipment for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset are less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value. While the Company’s current and historical operating losses and negative cash flows are possible indicators of impairment, management believes that the future cash flows to be generated by these assets support the carrying value of its long-lived assets and, accordingly, has not recognized any impairment losses during the years ended December 31, 2014, 2013 and 2012.

 

Income Taxes

 

The accounting guidance for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities based on the technical merits of the position.

 

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.

 

Revenue Recognition

 

The Company enters into arrangements with pharmaceutical and biotechnology partners that may involve multiple deliverables. The Company’s arrangements may contain upfront payments, license fees for research and development arrangements, research and development funding and milestone payments under collaborative agreements. Each deliverable in the arrangement is evaluated to determine whether it meets the criteria to be accounted for as a separate unit of accounting or whether it should be combined with other deliverables. Revenue is recognized separately for each unit of accounting when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.

 

Upfront Fees. When management determines the Company has a single unit of accounting under its collaborative arrangements, upfront fees received for collaborative agreements are recognized ratably over the expected performance period under each respective arrangement. As a result, management makes its best estimate of the period over which the Company expects to fulfill its performance obligations under an arrangement. Any amounts received under the arrangement in advance of performance, if deemed substantive, are recorded as deferred revenue and recognized as revenue as the Company completes its performance obligations.

 

Milestones . The Company evaluates all milestones at the beginning of the agreement to determine if they meet the definition of a substantive milestone. Revenue is recognized from milestone payments when earned, provided that (i) the milestone event is substantive, in that it can only be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance, and its achievability was not reasonably assured at the inception of the agreement, (ii) the Company does not have ongoing performance obligations related to the achievement of the milestone, and (iii) it would result in the receipt of additional payments. A milestone payment is considered substantive if all of the following conditions are met: (i) the milestone payment is non-refundable; (ii) achievement of the milestone was not reasonably assured at the inception of the arrangement; (iii) substantive effort is involved to achieve the milestone; and (iv) the amount of the milestone payments appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with the achievement of the milestone.

 

Deferred Revenue. Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized within the next 12 months are classified as non-current deferred revenue.

 

F-9



 

Research and Development

 

Research and development (R&D) expenses include the costs associated with the Company’s R&D activities, including salaries, benefits and occupancy costs. Also included in R&D expenses are third-party costs incurred in conjunction with contract manufacturing for the Company’s R&D programs and clinical trials, including the cost of clinical trial drug supply shipped to the Company’s clinical study vendors, costs incurred by contract research organizations (CROs) and regulatory expenses. R&D costs are expensed as incurred, except when accounting for nonrefundable advance payments for goods or services to be used in future R&D activities. These payments are capitalized at the time of payment and expensed as the related goods are delivered or the services are performed.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation expense related to stock options granted to employees and members of its board of directors by estimating the fair value of each stock option on the date of grant using the Black-Scholes options-pricing model, net of estimated forfeitures. In estimating fair value for options issued under the 2013 Plan, expected volatility was based on historical volatility of comparable publicly-traded companies. As our historical share option exercise experience does not provide a reasonable basis upon which to estimate the expected term, we used the simplified method. Expected life is calculated in two tranches based on the employment level defined as director or employee. The risk-free rate used in calculating fair value of stock options for periods within the expected term of the option is based on the U.S. Treasury yield bond curve in effect on the date of grant. For awards subject to time-based vesting conditions, stock-based compensation expense is recognized using the straight-line method. In accordance with the authoritative accounting literature, options subject to both performance and time-based vesting conditions are expensed using an accelerated multiple-option approach. Under the accelerated multiple-option approach (also known as the graded-vesting method), compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as though the award was, in substance, multiple awards, resulting in accelerated expense recognition during the earlier vesting periods. The Company accounts for stock options granted to non-employees using the fair value approach. Stock options granted to non-employees are subject to periodic revaluation over their vesting terms.

 

For performance-based awards to employees (i) the fair value of the award is determined on the grant date, (ii) the Company assesses the probability of the individual milestones under the award being achieved and (iii) the fair value of the shares subject to the milestone is expensed over the implicit service period commencing once management believes achieving the performance criteria is probable. For performance-based awards to non-employees, no expense is recognized until such time as the milestone event is achieved. Upon achievement, the portion of the milestone subject to immediate vesting is expensed based upon the then fair value of the award. For the portion of the award further subject to time-based vesting restrictions, expense is recorded quarterly, at the then fair value, as the shares vest until such time as performance is complete.

 

Comprehensive Loss

 

Comprehensive loss is defined as the change in equity during a period due to transactions and other events and/or circumstances from non-owner sources.

 

Net Loss per Share

 

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration of common stock equivalents. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. The calculation of the net loss per share during 2014 and 2013 includes the impact of the conversion of 72.3 million shares of convertible preferred stock into 9.6 million shares of common stock on May 14, 2013 in connection with the Company’s initial public offering. The calculation of the weighted-average number of shares outstanding excludes shares which have been issued upon the early exercise of stock options and are subject to future vesting and unvested restricted stock totaling 0.2 million, 0.5 million and 0.9 million shares as of December 31, 2014, 2013 and 2012, respectively.

 

Basic and diluted net loss per share are equivalent because the Company has incurred a net loss in all periods presented causing any potentially dilutive securities, consisting of common stock options, to be anti-dilutive. The calculation of net loss per share excludes potentially dilutive common stock options totaling 1.8 million and 3.8 million as of December 31, 2014 and 2013. Potentially dilutive securities not included in the calculation of diluted net loss per share as of December 31, 2012 were shares of convertible preferred stock convertible into shares of common stock and common stock options totaling 6.9 million.

 

F-10



 

Recent Accounting Pronouncements

 

Revenue Recognition

 

In May 2014, the FASB issued accounting guidance on the recognition of revenue from customers that supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The guidance allows for either full retrospective or modified retrospective adoption and will become effective for the Company in the first quarter of 2017. The Company is evaluating the alternative transition methods and the potential effects of the adoption of this update on its financial statements.

 

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

 

In June 2014, the Financial Accounting Standards Board (FASB) issued an accounting standards update (ASU), which updated the guidance on performance stock awards. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early application is permitted. The Company does not expect the application of the updated guidance will have a material impact on its financial position, results of operations or cash flows.

 

Presentation of Financial Statements—Going Concern

 

In August 2014, the FASB issued an ASU, which requires management of public and private companies to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable) and, if so, disclose that fact. Management will be required to make this evaluation for both annual and interim reporting periods, if applicable. Management is also required to evaluate and disclose whether its plans alleviate that doubt. The standard is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not believe the adoption of this standard will have a material impact on its financial position, results of operations or related financial statement disclosures.

 

Income Statement—Extraordinary and Unusual

 

In January 2015, the FASB issued an ASU which eliminates the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not believe the adoption of this standard will have a material impact on its financial position, results of operations or related financial statement disclosures.

 

3. Short-Term Investments

 

The Company invests its excess cash in available-for-sale securities consisting of money market funds, commercial paper, government-sponsored entities and debt instruments of financial institutions and corporations. Available-for-sale securities with maturities of three months or less from date of purchase are classified as part of cash equivalents in the accompanying consolidated balance sheets. Available-for-sale securities with maturities greater than three months from date of purchase are classified as part of short-term investments in the accompanying consolidated balance sheets.

 

Available-for-sale securities classified as cash equivalents amounted to $411.6 million and $19.1 million as of December 31, 2014 and 2013, respectively.

 

F-11



 

The carrying value of available for sale securities classified as short-term investments consisted of the following (in thousands):

 

 

 

As of December 31, 2014

 

 

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Market
Value

 

Commercial paper

 

$

30,164

 

$

34

 

$

 

$

30,198

 

Government sponsored entities

 

73,623

 

 

(9

)

73,614

 

Corporate debt securities

 

109,913

 

 

(74

)

109,839

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

213,700

 

$

34

 

$

(83

)

$

213,651

 

 

 

 

As of December 31, 2013

 

 

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Market
Value

 

Commercial paper

 

$

18,927

 

$

17

 

$

 

$

18,944

 

Corporate debt securities

 

26,752

 

 

(11

)

26,741

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

45,679

 

$

17

 

$

(11

)

$

45,685

 

 

All of the Company’s available-for-sale securities held at December 31, 2014 and December 31, 2013 had maturity dates of less than 17 months and 12 months, respectively. The Company has classified all of its available-for-sale investment securities, including those with maturities beyond one year, as current assets on the accompanying consolidated balance sheets based on the highly liquid nature of these investment securities and because these investment securities are considered available for use in current operations.

 

The following table summarizes the Company’s short-term investments which are in an unrealized loss position as of December 31, 2014, (in thousands):

 

 

 

As of December 31, 2014

 

 

 

Amortized
Cost

 

Unrealized
Losses

 

Fair Market
Value

 

Government sponsored entities

 

$

55,259

 

$

(9

)

$

55,250

 

Corporate debt securities

 

106,101

 

(74

)

106,027

 

 

 

 

 

 

 

 

 

Total

 

$

161,360

 

$

(83

)

$

161,277

 

 

The following table summarizes the contract maturity of the available-for-sale securities the Company held as of December 31, 2014, (in thousands):

 

 

 

Fair Market
Value

 

Maturing within 1 year

 

$

193,926

 

Maturing after 1 year through 2 years

 

$

19,725

 

 

 

 

 

Total

 

$

213,651

 

 

At neither December 31, 2014 nor 2013, none of the Company’s available-for-sale securities was in a material unrealized loss position. The Company reviewed its investment holdings as of December 31, 2014 and determined that its unrealized losses were not considered to be other-than-temporary based upon (i) the financial strength of the issuing institution and (ii) the fact that all securities have been in an unrealized loss position for less than twelve months. As such, the Company has not recognized any such impairment in its financial statements. The Company did not realize any significant gains or losses on sales of available-for-sale securities for the years ended December 31, 2014 and 2013.

 

4. Fair Value Measurements

 

Available-for-sale investment securities are classified within the fair-value hierarchy as defined by authoritative guidance. The Company obtains the fair value of its Level 2 financial instruments from the custodian bank or from a professional pricing service. The Company’s Level 2 financial instruments are valued using market prices on less active markets and model-derived valuations with observable valuation inputs such as interest rates and yield curves. The Company obtains the fair value of Level 2 financial instruments from quoted market price, calculated price or quotes from third-party pricing services. The Company validates fair value through independent valuation testing and review of portfolio valuations provided by the Company’s investment managers. There were no transfers between Level 1 and Level 2 securities during the years ended December 31, 2014 and 2013.

 

F-12



 

The fair value of the Company’s investment holdings is summarized in the following tables (in thousands):

 

 

 

As of December 31, 2014

 

 

 

Total Fair

 

Fair Value Determined Under

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Money market funds

 

$

67,374

 

$

67,374

 

$

 

$

 

Commercial paper

 

30,198

 

 

30,198

 

 

Government sponsored entities

 

417,814

 

417,814

 

 

 

Corporate debt securities

 

109,839

 

 

109,839

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

625,225

 

$

485,188

 

$

140,037

 

 

 

 

 

As of December 31, 2013

 

 

 

Total Fair

 

Fair Value Determined Under

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Money market funds

 

$

8,147

 

$

8,147

 

$

 

$

 

Commercial paper

 

18,944

 

 

18,944

 

 

Corporate debt securities

 

37,649

 

 

37,649

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

64,740

 

$

8,147

 

$

56,593

 

 

 

5. Balance Sheet Details

 

Prepaid Expenses and Other Current Assets

 

The following table summarizes major classes of prepaid expenses and other current assets (in thousands):

 

 

 

December 31,

 

 

 

2014

 

2013

 

Prepaid research and development services

 

$

751

 

$

 

Interest receivable

 

1,035

 

277

 

Prepaid-insurance

 

986

 

321

 

Prepaid contract research costs

 

90

 

 

Other prepaid costs

 

741

 

316

 

 

 

 

 

 

 

Total

 

$

3,603

 

$

914

 

 

Property and Equipment

 

The following table summarizes major classes of property and equipment (in thousands):

 

 

 

Useful

 

December 31,

 

 

 

life

 

2014

 

2013

 

Laboratory equipment

 

3 years

 

$

3,054

 

$

2,860

 

Computer equipment and software

 

3 years

 

36

 

19

 

Furniture and fixtures

 

5 to 10 years

 

812

 

131

 

Leasehold improvements

 

5 to 10 years

 

880

 

854

 

 

 

 

 

 

 

 

 

 

 

 

 

4,782

 

3,864

 

Less accumulated depreciation and amortization

 

 

 

3,816

 

3,595

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

 

$

966

 

$

269

 

 

F-13



 

Accrued Expenses

 

The following table summarizes major classes of accrued expenses (in thousands):

 

 

 

December 31,

 

 

 

2014

 

2013

 

Accrued clinical trial services

 

$

11,149

 

$

3,197

 

Accrued royalty payable

 

 

550

 

Other accrued expenses

 

5,012

 

3,865

 

 

 

 

 

 

 

Total

 

$

16,161

 

$

7,612

 

 

6. Collaborative Arrangements

 

In December 2011, the Company entered into a co-exclusive Collaboration Agreement with Ono Pharmaceutical Co., Ltd., or Ono, to utilize the Company’s proprietary GPCR structure determination technologies for the identification of a high resolution novel protein crystal structure of an Ono proprietary GPCR drug discovery target. In December 2011, Ono paid the Company an upfront fee as consideration for technology access. The Company determined there was one unit of accounting under the Collaboration Agreement, and as such, recognized the upfront fee as collaborative revenue on a straight-line basis over the expected period of performance of the arrangement. The Collaboration Agreement also provided for certain other milestone payments which the Company concluded did not meet the definition of a substantive milestone, inasmuch as achievability was reasonably assured at the inception of the Collaboration Agreement. Such milestone payments were also deferred and were amortized over the estimated period of performance of the arrangement. In December 2013, the Collaboration Agreement was amended to allow for the early termination of the research term and the Company agreed to perform technology transfer and training with respect to, and to grant Ono a non-exclusive sublicense to, the Company’s GPCR technology platform for high-resolution crystal structure determination (the Amendment). Pursuant to the Amendment, the Company received upfront license and collaborative research termination fees totaling $3.7 million in the first quarter of 2014. The Company determined there was one unit of accounting under the Amendment. As such, the upfront fees of $3.7 million, along with the remaining deferred revenue of $0.7 million from the Collaboration Agreement, were amortized over the revised expected period of performance of 12 months.

 

The Company received notice from Ono in August 2014 that all deliverables specified by the Amendment had been satisfied in full, and as such, the Company recognized all previously deferred revenue associated with the collaboration with Ono. During the third quarter of 2014, the Company also recognized collaborative revenue of $1.3 million associated with a technology transfer milestone payment received in connection with the Amendment.

 

Revenue under the Collaboration Agreement, as amended, with Ono for the years ended December 31, 2014 and 2013 was $5.9 million and $4.6 million, respectively.

 

The Company remains eligible for (i) future technology transfer milestone payments of up to an additional $0.8 million (upon satisfaction of certain predetermined criteria), (ii) research milestone payments of up to another $1.8 million based on successful completion of certain research activities and (iii) development milestone payments of up to $13.5 million for the achievement of development milestones based solely upon Ono’s performance.

 

7. Term Loan and Security Agreement

 

In April 2013, the Company entered into a credit and security agreement with MidCap Funding III, LLC. under which it borrowed $5.0 million. The loan was recorded at its initial carrying value of $5.0 million, less the debt discount of $0.2 million. The debt discount included an initial fee and certain reimbursed transaction costs paid to the lender. The agreement also called for the Company to pay an exit fee based on a percentage (7%) of borrowings under the facility, as well as a prepayment fee on any amounts repaid prior to loan maturity. In August 2014, the Company terminated this facility and repaid the loan, as well as exit and prepayment fees totaling $0.5 million. The Company has no further obligations under this agreement, and there are no further encumbrances on the Company’s assets associated with the security provisions of this agreement.

 

F-14



 

8. Commitments and Contingencies

 

License Agreements

 

The Company has license agreements with The Scripps Research Institute, or TSRI, that require it to make annual license maintenance payments and future payments upon the success of licensed products that include milestones and/or royalties. The Company’s agreements with TSRI include the following:

 

S1P1R Modulators License Agreement. In April 2009, the Company entered into a License Agreement with TSRI, whereby the Company received an exclusive worldwide license under the Licensed Patent Rights (as defined in the license agreement) for S1P1R modulators and a non-exclusive worldwide license to the Licensed Materials (as defined in the license agreement). In consideration, the Company (i) agreed to pay a nominal annual maintenance fee, (ii) is responsible for paying royalties on annual net sales of Licensed Product (as defined in the license agreement) ranging between 1.5% and 2.0%, until such time as the expiration of the last valid claim in the Licensed Patent rights , (iii) is responsible for paying royalties ranging between 0.75% and 1.0%, on annual net sales of Non-Patent Product (as defined in the license agreement) until such time as one or more generic versions of such Non-Patent Product are commercially sold and the Company demonstrates to TSRI that sales of such generic products account for a specific percentage of aggregate unit sales in a calendar quarter, (iv) is responsible for paying product development milestone payments not to exceed $4.4 million, and (v) is responsible for paying a percentage of any sublicense revenue payments received by the Company.

 

During the years ended December 31, 2014, 2013 and 2012, consideration paid to TSRI under this agreement was $0.3 million, $25,000 and $10,000, respectively. Included in accrued expenses in the consolidated balance sheet as of December 31, 2013 are accrued royalties associated with this agreement of $0.3 million. As of December 31, 2014, the Company was not required to record an accrual for royalties.

 

Technology Platform License Agreement. In June 2009, the Company entered into a Technology Platform License Agreement with TSRI whereby the Company received an exclusive worldwide license under the Licensed Patent Rights (as defined in the agreement), and a non-exclusive worldwide license under the Know-How (as defined in the agreement). In consideration, the Company (i) agreed to pay a nominal annual maintenance fee beginning after June 18, 2011, which is credited against running royalties during the term of the agreement, (ii) agreed to pay running royalties at a de minimus rate of annual net sales of Company Products (as defined in the agreement) until June 18, 2019, (iii) agreed to pay product development milestone payments not to exceed approximately $1.0 million and (iv) is required to make non-creditable, non-refundable Aggregate Technology Income, or ATI (as defined in the agreement) payments of 7.5% of the first $100 million of cumulative ATI, except that no ATI payments is due on the first $2.5 million in cumulative ATI and a reduced percentage of that portion of cumulative ATI that is in excess of $100 million. All product development milestone and ATI payments are payable up to June 18, 2027.

 

Royalty consideration paid to TSRI under this agreement for the years ended December 31, 2014, 2013 and 2012, was $0.3 million, $0.2 million and $0.5 million, respectively. Included in accrued expenses in the consolidated balance sheet as of December 31, 2013 are accrued royalties associated with this agreement of $0.2 million. As of December 31, 2014, the Company was not required to record an accrual for royalties.

 

Operating Lease

 

On December 24, 2014, the Company moved into its new laboratory and office space headquartered in San Diego, California, The lease commenced in December 2014 and expires in December 2024. The lease can be terminated by the Company after five years, subject to payment of a lease termination fee as well as certain other costs. The Company has the option to extend the term of this lease for an additional five-year period with a base rent equal to the then market rate. Under the terms of the lease the Company maintains a letter of credit totaling $0.1 million which is included in other assets in the accompanying consolidated balance sheets. During construction, under the appropriate accounting guidance, the Company was considered to be the owner of the property and accordingly capitalized the asset at fair value and an offsetting lease liability in its consolidated balance sheets. Upon completion of the construction, under the appropriate accounting guidance the Company is no longer considered to be the owner of the property and accordingly has removed the associated asset and liability from its consolidated balance sheets.

 

The Company previously occupied laboratory and office space under a lease which expires in January 2015. Under the terms of the lease the Company maintains a letter of credit totaling $0.1 million which is included in other assets in the accompanying consolidated balance sheets. The Company recognizes minimum rent payments and escalation clauses on a straight-line basis over the lease term. The Company accounts for the difference between the minimum lease payments and the straight-line amount as deferred rent. The Company also pays property taxes, maintenance and insurance, in addition to rent. Rent expense for the years ended December 31, 2014, 2013 and 2012 was $0.6 million, $0.9 million and $0.8 million, respectively.

 

F-15



 

Future minimum lease payments due under facility leases are as follows (in thousands):

 

2015

 

$

494

 

2016

 

1,689

 

2017

 

1,740

 

2018

 

1,792

 

2019

 

1,846

 

Thereafter

 

10,052

 

 

 

 

 

Total future minimum lease payments due facility leases

 

$

17,613

 

 

Litigation

 

From time to time, the Company may be involved in various lawsuits, legal proceedings, or claims that arise in the ordinary course of business. Management does not believe any legal proceedings or claims pending at December 31, 2014, will have, individually or in the aggregate, a material adverse effect on its business, liquidity, financial position or results of operations. Litigation, however, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business.

 

9. Stockholders’ Equity

 

Common Stock

 

Restricted Common Stock.

 

The Company’s 2008 Stock Plan allowed for the early exercise of option awards issued under the plan. As of December 31, 2014, options for the purchase of 982,000 shares of the Company’s common stock (net of repurchased shares) have been exercised, of which 133,000 are unvested and subject to repurchase. Under the authoritative guidance, early exercise is not considered an exercise for accounting purposes and, therefore, any payment for unvested shares is recognized as a liability at the original exercise price. This repurchase obligation is included in accrued expenses in the consolidated balance sheets and is not material for any period presented. During the years ended December 31, 2014 and 2013, the Company repurchased from terminated employees 19,000 and 123 unvested shares of common stock, respectively, associated with early exercised option grants. During the year ended December 31, 2012, no shares were repurchased by the Company.

 

Prior to 2013, the Company issued restricted common stock to certain founders and officers of the Company with both performance-based and time-based vesting provisions. As of December 31, 2014, all remaining outstanding restricted shares are subject to time-based vesting that will lapse over the next year. As of December 31, 2014, 46,000 shares associated with these restricted stock awards were subject to repurchase by the Company.

 

Public Offerings of Common Stock.

 

In May 2013, the Company completed the initial public offering of its common stock (the IPO) of 5,933,277 shares of common stock at an offering price of $14.00 per share. The Company received net proceeds of approximately $75.0 million, after deducting underwriting discounts, commissions and offering-related transaction costs of $8.1 million.

 

During January 2014, the Company completed an underwritten public offering of 3,818,000 shares of its common stock at an offering price of $30.75 per share. The Company received net proceeds from this offering of approximately $109.9 million, after deducting underwriting discounts, commissions and offering-related expenses of $7.5 million.

 

During June 2014, the Company completed an underwritten public offering of 5,097,950 shares of its common stock at an offering price of $40.25 per share. The Company received net proceeds from this offering of approximately $195.0 million, after deducting underwriting discounts, commissions and offering-related expenses of $10.1 million.

 

During November 2014, the Company completed an underwritten public offering of 4,140,000 shares of its common stock at an offering price of $100.00 per share. The Company received net proceeds from this offering of approximately $396.7 million, after deducting underwriting discounts, commissions and offering-related expenses of $17.3 million.

 

F-16



 

10. Stock-Based Compensation and Equity Plans

 

2013 Stock Incentive Plan

 

Prior to the completion of the IPO, the Company issued stock options under its 2008 Stock Plan. Effective upon the closing of the IPO, the Company’s board of directors and stockholders approved the 2013 Stock Incentive Plan (the 2013 Plan). The 2013 Plan provides for the granting of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to employees and the granting of nonstatutory stock options, restricted stock, stock appreciation rights, stock units and cash-based awards to employees, non-employee directors, advisors and consultants. The Company has issued under the 2008 Plan and intends to continue to issue under the 2013 Plan both performance-based and time-based stock options and restricted stock awards. Performance-based awards generally vest 25% upon achievement of a milestone event, with monthly time-based vesting over the subsequent 36 months, while time-based awards generally vest over a four-year period commencing on the first anniversary of the date of grant. Milestone events are specific to corporate goals. Awards generally expire ten years from the date of grant.

 

As of December 31, 2014, the number of shares authorized for issuance under the 2013 Plan was 1,899,307 of which 360,301 remain available for future issuance. Under the evergreen provision in the 2013 Plan, an additional 1,260,656 shares became authorized and available for future grant on January 1, 2015.

 

Stock Options

 

The following table summarizes stock option activity for the year ended December 31, 2014 (in thousands except weighted-average amounts):

 

 

 

# Shares

 

Weighted-
Average
Exercise
Price
per Share

 

Weighted-
Average
Remaining
Contractual
Term (years)

 

Aggregate
Intrinsic
Value(1)

 

Outstanding at December 31, 2013

 

1,398

 

$

14.78

 

9.4

 

 

 

Granted

 

749

 

43.68

 

 

 

 

 

Exercised

 

(127

)

7.51

 

 

 

 

 

Cancelled / forfeited

 

(93

)

18.68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2014

 

1,927

 

$

26.31

 

8.8

 

$

185,392.6

 

 

 

 

 

 

 

 

 

 

 

Vested or expected to vest at December 31, 2014(2)

 

2,060

 

$

24.84

 

9.0

 

$

201,266.4

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2014

 

472

 

$

16.40

 

8.4

 

$

50,064.8

 

 


(1)                  The aggregate intrinsic value of options as of December 31, 2014 is calculated as the difference between the exercise price of the underlying options and the closing market price of the Company’s common stock on that date, which was $122.51

(2)                  A portion of the Company’s stock options have been early exercised and are not outstanding. As of December 31, 2014, vested or expected to vest included 133,000 options which were early exercised and are still subject to future vesting (and which may be repurchased by the Company in the event the option holder ceases to provide services to the Company).

 

The aggregate intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was approximately $7.3 million, $0.3 million and $24,000, respectively, determined as of the date of exercise. The Company did not recognize any income tax benefits from stock option exercises as it continues to record a full valuation allowance on its deferred tax assets. The fair value of options vested during the years ended December 31, 2014, 2013 and 2012 was $5.8 million, $0.6 million and $1.1 million, respectively.

 

Stock Compensation Expense

 

The Company uses the Black-Scholes model to estimate the grant date fair value of its stock options. The weighted-average assumptions underlying the calculation of grant date fair value include the following:

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

Risk free interest rate

 

2.0

%

1.4

%

1.1

%

Expected term (years)

 

6.1

 

6.1

 

6.0

 

Expected volatility

 

114.7

%

105.9

%

94.2

%

Expected dividend yield

 

0

%

0

%

0

%

 

F-17



 

The weighted-average grant date fair value of options granted during the years ended December 31, 2014, 2013 and 2012 was approximately $38.63, $15.28 and $0.30, respectively.

 

The following table summarizes share-based compensation expense for all awards granted (in thousands):

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

Research and development

 

$

5,497

 

$

1,360

 

$

192

 

General and administrative

 

5,651

 

1,609

 

28

 

 

 

 

 

 

 

 

 

Total share-based compensation expense

 

$

11,148

 

$

2,969

 

$

220

 

 

As of December 31, 2014, unrecognized compensation expense related to non-vested stock options totaled $33.4 million. Such compensation expense is expected to be recognized over a weighted-average period of 2.9 years.

 

Employee Stock Purchase Plan

 

Effective upon closing of the IPO, the Company’s board of directors and the stockholders approved the Employee Stock Purchase Plan (the ESPP). The purpose of the ESPP is to assist employees in acquiring a stock ownership interest in the Company and to encourage them to remain employees of the Company. The ESPP is qualified under Section 423 of the Code and upon activation, permits eligible employees to purchase common stock at a discount through payroll deductions during specified six-month offering periods. No employee may purchase more than $25,000 worth of stock in any calendar year or 1,500 shares in any on offering period.

 

As of December 31, 2014, the number of shares authorized for issuance under the ESPP was 343,000. Under the evergreen provision in the ESPP, an additional 315,000 shares became authorized and available for future grant on January 1, 2015. The Company has not yet activated the ESPP plan, and accordingly, the Company has not issued any shares under the ESPP and has not recognized any stock-based compensation related to the ESPP.

 

11. Income Taxes

 

The following is a reconciliation of the expected statutory federal income tax provision to the actual income tax provision (in thousands):

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

Expected income tax benefit at federal statutory tax rate

 

$

(39,090

)

$

(16,429

)

$

(6,021

)

State income taxes, net of federal benefit

 

(6,431

)

(2,694

)

(1,019

)

Permanent items

 

1,260

 

558

 

82

 

Research credits

 

(2,631

)

(2,393

)

(477

)

Removal of net operating losses and research and development credits

 

42,561

 

20,527

 

6,774

 

Change in valuation allowance

 

4,331

 

431

 

661

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

$

 

$

 

$

 

 

The following table summarizes the significant components of deferred tax assets (in thousands):

 

 

 

December 31,

 

 

 

2014

 

2013

 

Deferred tax assets:

 

 

 

 

 

Depreciation and amortization

 

$

447

 

$

499

 

Deferred revenue

 

 

279

 

Stock options

 

3,331

 

543

 

Unrealized foreign currency exchange loss

 

1,174

 

 

Accrued expenses and reserves

 

1,426

 

705

 

 

 

 

 

 

 

Total deferred tax assets

 

6,378

 

2,026

 

Less: Valuation allowance

 

6,378

 

2,026

 

 

 

 

 

 

 

Net deferred tax assets

 

$

 

$

 

 

F-18



 

At December 31, 2014, the Company had net deferred tax assets of $6.4 million. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the weight of all available evidence, including the Company’s history of losses from inception, management has determined that it is not more likely than not that the net deferred tax assets will be realized. Accordingly, a full valuation allowance has been established to offset the net deferred tax asset for all periods presented.

 

As of December 31, 2014, the Company had federal and California net operating loss carryforwards of $189.0 million and $187.7 million, respectively, which will begin to expire in 2027 and 2017, respectively. At December 31, 2014, the Company had federal and California research and development tax credit carryforwards of $6.3 million and $3.0 million, respectively. The federal research and development tax credit carryforwards will begin to expire in 2027. The California research and development tax credit carryforwards are available indefinitely.

 

The future utilization of the Company’s net operating loss and research and development credit carryforwards to offset future taxable income may be subject to limitation as a result of ownership changes and restructurings that have occurred previously or that could occur in the future. The Tax Reform Act of 1986 (the Act) limits a company’s ability to utilize certain tax credit carryforwards and net operating loss carryforwards in the event of a cumulative change in ownerships in excess of 50% as defined in the Act. The Company has not completed its analysis to determine what, if any, impact the ownership change and restructuring would have on the Company’s ability to utilize its net operating loss and research and development credit carryforwards. Until this analysis has been completed, the Company has removed the deferred tax assets for net operating losses of $74.5 million and tax credits of $8.2 million generated through 2014 from its deferred tax asset schedule and has recorded a corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

 

The Company recognizes excess tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not recognized for net operating losses resulting from excess tax benefits. As of December 31, 2014, deferred tax assets do not include approximately $0.8 million of these excess tax benefits from employee stock option exercises that are a component of the Company’s net operating loss carryforwards. Accordingly, additional paid-in capital will increase $0.8 million if and when such excess tax benefits are realized. During 2014, no excess tax benefits were realized.

 

The impact of an uncertain income tax position on the income tax return must be recognized 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. There were no unrecognized tax benefits recorded by the Company as of the date of adoption. As a result of the implementation, the Company did not recognize an increase in the liability for unrecognized tax benefits. There are no unrecognized tax benefits included in the consolidated balance sheets that would, if recognized, affect the effective tax rate.

 

The Company is subject to taxation in the US and California and various other states. The Company is subject to tax examination by tax authorities in those jurisdictions for 2009 and forward. The Company’s practice is to recognize interest or penalties related to income tax matters as income tax expense. The Company has no accruals for interest or penalties on its accompanying consolidated balance sheets as of December 31, 2014 and 2013, and has not recognized interest or penalties in its consolidated statements of operations and comprehensive loss for all periods presented.

 

12. Employee Benefits

 

The Company has a defined contribution 401(k) plan for all employees. Employees are eligible to participate in the plan beginning on the first day of the month following date of hire. Under the terms of the plan, employees may make voluntary contributions as a percent of compensation. During the years ended December 31, 2014 and 2013, the Company did not make any matching contributions.

 

F-19



 

13. Selected Quarterly Financial Information (Unaudited)

 

The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for 2014 and 2013 are as follows (in thousands, except per share data):

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

2014:

 

 

 

 

 

 

 

 

 

Collaborative revenue

 

$

1,350

 

$

1,100

 

$

3,450

 

$

 

Operating expenses

 

$

22,766

 

$

24,171

 

$

33,374

 

$

37,159

 

Net loss

 

$

(21,500

)

$

(23,154

)

$

(32,165

)

$

(38,151

)

Basic and diluted net loss per common share (1)

 

$

(1.01

)

$

(1.04

)

$

(1.19

)

$

(1.32

)

2013:

 

 

 

 

 

 

 

 

 

Collaborative revenue

 

$

1,488

 

$

1,238

 

$

1,142

 

$

773

 

Operating expenses

 

$

9,082

 

$

11,030

 

$

16,550

 

$

15,872

 

Net loss

 

$

(9,649

)

$

(9,918

)

$

(15,565

)

$

(15,244

)

Basic and diluted net loss per common share (1)

 

$

(5.46

)

$

(0.98

)

$

(0.88

)

$

(0.86

)

 


(1)                  Net loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly per-share calculations will not necessarily equal the annual per share calculation.

 

14. Subsequent Events

 

In February 2015, the Company amended the lease agreement for its corporate headquarters to increase the leased space by approximately 23,478 square feet, and in connection therewith, also increased the letter of credit for the security deposit held by the landlord from $0.1 to $0.2 million. The Company anticipates occupying the additional space in July 2015.

 

F-20




Exhibit 99.2

 

Condensed consolidated balance sheets — March 15, 2015 and December 31, 2014

2

 

 

Condensed consolidated statements of operations and comprehensive loss — Three months ended March 31, 2015 and 2014

3

 

 

Condensed consolidated statements of cash flows — Three months ended March 31, 2015 and 2014

4

 

 

Notes to condensed consolidated financial statements — March 31, 2015

5

 



 

RECEPTOS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except par value information)

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

111,457

 

$

458,278

 

Short-term investments

 

533,112

 

213,651

 

Prepaid expenses and other current assets

 

10,243

 

3,603

 

 

 

 

 

 

 

Total current assets

 

654,812

 

675,532

 

Property and equipment, net

 

1,366

 

966

 

Other assets

 

5,247

 

1,509

 

 

 

 

 

 

 

Total assets

 

$

661,425

 

$

678,007

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

9,586

 

$

7,909

 

Accrued expenses

 

32,074

 

16,161

 

Accrued compensation and benefits

 

2,059

 

4,450

 

 

 

 

 

 

 

Total current liabilities

 

43,719

 

28,520

 

Deferred rent

 

3,627

 

 

 

 

 

 

 

 

Total liabilities

 

47,346

 

28,520

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock, $0.001 par value; 200,000 shares authorized; 31,548 and 31,516 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

 

31

 

31

 

Additional paid-in capital

 

865,010

 

860,384

 

Accumulated comprehensive (loss) income

 

258

 

(49

)

Accumulated deficit

 

(251,220

)

(210,879

)

 

 

 

 

 

 

Total stockholders’ equity

 

614,079

 

649,487

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

661,425

 

$

678,007

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

2



 

RECEPTOS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

(Unaudited)

 

 

 

Three months ended March 31,

 

 

 

2015

 

2014

 

Collaborative revenue

 

$

 

$

1,350

 

Operating expenses:

 

 

 

 

 

Research and development

 

36,042

 

20,007

 

General and administrative

 

5,386

 

2,759

 

 

 

 

 

 

 

Total operating expenses

 

41,428

 

22,766

 

 

 

 

 

 

 

Loss from operations

 

(41,428

)

(21,416

)

Other income (expense):

 

 

 

 

 

Interest income

 

303

 

73

 

Interest expense

 

 

(157

)

Foreign currency gain

 

786

 

 

Other income (expense)

 

(2

)

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(40,341

)

$

(21,500

)

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

Net loss per common share, basic and diluted

 

$

(1.29

)

$

(1.01

)

 

 

 

 

 

 

Weighted-average shares used to compute basic and diluted net loss per common share

 

31,337

 

21,195

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

Net loss

 

$

(40,341

)

$

(21,500

)

Unrealized gain (loss) on marketable securities

 

307

 

(13

)

 

 

 

 

 

 

Comprehensive loss

 

$

(40,034

)

$

(21,513

)

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

3



 

RECEPTOS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three months ended March 31,

 

 

 

2015

 

2014

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(40,341

)

$

(21,500

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Stock-based compensation expense

 

3,780

 

1,845

 

Depreciation and amortization

 

50

 

89

 

Deferred rent

 

577

 

(33

)

Amortization of discount on marketable securities

 

489

 

345

 

Accretion of debt discount and exit fee

 

 

46

 

Amortization of debt issuance costs

 

 

8

 

Change in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other assets

 

(2,206

)

(973

)

Restricted cash in connection with leased facility and corporate credit card

 

(76

)

 

Accounts payable

 

1,809

 

(607

)

Accrued expenses

 

10,877

 

(1,335

)

Accrued compensation and benefits

 

(2,391

)

(963

)

Deferred revenue

 

 

2,600

 

 

 

 

 

 

 

Net cash used in operating activities

 

(27,432

)

(20,478

)

Cash flows from investing activities

 

 

 

 

 

Purchases of marketable securities

 

(408,300

)

(86,925

)

Maturities and sales of marketable securities

 

88,657

 

5,801

 

Purchases of property and equipment

 

(582

)

(215

)

 

 

 

 

 

 

Net cash used in investing activities

 

(320,225

)

(81,339

)

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock, net

 

 

110,121

 

Proceeds from exercise of common stock options and warrants, net of repurchase of restricted common stock

 

850

 

11

 

Payment of accrued offering costs

 

(55

)

 

 

Other

 

41

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

836

 

110,132

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(346,821

)

8,315

 

Cash and cash equivalents at beginning of period

 

458,278

 

23,805

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

111,457

 

$

32,120

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Capitalized costs associated with leased building

 

$

3,050

 

$

 

Accrued expenses relating to prepaid research and development services

 

$

5,100

 

$

 

Release of repurchase liability for stock options and restricted stock shares

 

$

9

 

$

19

 

Amounts accrued for capital expenditures

 

$

159

 

$

 

Cash paid for interest

 

$

 

$

157

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

4



 

RECEPTOS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.                       Organization and Basis of Presentation

 

Description of Business

 

Receptos, Inc. is a biopharmaceutical company focused on discovering, developing and commercializing innovative therapeutics in immune disorders for specialty markets including for Relapsing Multiple Sclerosis (RMS), Inflammatory Bowel Disease (IBD) and Eosinophilic Esophagitis (EoE). The Company was incorporated in the state of Delaware on September 26, 2008 under the name Receptor Pharmaceuticals, Inc., and commenced significant operations in 2009. As used in this report, unless the context suggests otherwise, “the Company” and “Receptos” mean Receptos, Inc.

 

The consolidated financial statements include the accounts of Receptos, Inc. and its wholly owned subsidiaries, Apoptos, Inc. (Apoptos) and Receptos UK Ltd., which are both currently inactive. All intercompany balances and transactions among the consolidated entities have been eliminated in consolidation.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC) related to interim reporting in a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations. The unaudited condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the periods presented. All such adjustments are of a normal and recurring nature. The operating results presented in these unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2014 included in the Company’s Form 10-K.

 

Liquidity

 

The Company has incurred losses and negative cash flows from operating activities since inception. As of March 31, 2015, the Company had an accumulated deficit of $251.2 million. The Company anticipates that it will continue to incur net losses into the foreseeable future as it (i) continues the development and commercialization of its drug candidates, (ii) works to develop additional drug candidates through research and development programs; and (iii) expands its corporate infrastructure. The Company had cash, cash equivalents and short-term investments of $644.6 million as of March 31, 2015. Based on the Company’s current business plan, management believes that existing cash and cash equivalents and short-term investments will be sufficient to fund the Company’s obligations for at least the next 12 months. The Company plans to continue to fund its losses from operations and capital funding needs through cash and investments on hand, as well as future debt and equity financing and potential collaboration arrangements. If the Company is not able to secure adequate additional funding, it may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects.

 

2.                       Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of the Company’s condensed consolidated financial statements in conformity with U.S. GAAP requires management to make informed estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and accompanying notes. The most significant estimates in the Company’s condensed consolidated financial statements relate to clinical trial accruals and revenue recognition. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately differ materially from these estimates and assumptions.

 

Segment Reporting

 

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment, operating primarily in the United States.

 

5



 

Cash and Cash Equivalents

 

The Company classifies time deposits and other investments that are highly liquid and have maturities of three months or less at the date of purchase as cash equivalents. The carrying amounts approximate fair value due to the short maturities of these instruments. As of March 31, 2015 and December 31, 2014, cash and cash equivalents include cash in readily available checking and money market accounts, as well as government sponsored entities and corporate debt securities.

 

Short-Term Investments

 

The Company carries short-term investments classified as available-for-sale at fair value as determined by prices for identical or similar securities at the balance sheet date. Short-term investments consist of both Level 1 and Level 2 financial instruments in the fair-value hierarchy. The Company records unrealized gains and losses as a component of other comprehensive loss within the statements of operations and comprehensive loss and as a separate component of stockholders’ equity. Realized gains or losses on available-for-sale securities are determined using the specific identification method and the Company includes net realized gains and losses in interest income.

 

At each balance sheet date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether the unrealized loss is other-than-temporary. The Company considers factors including: the significance of the decline in value compared to the cost basis, underlying factors contributing to a decline in the prices of securities in a single asset class, the length of time the market value of the security has been less than its cost basis, the security’s relative performance versus its peers, sector or asset class, expected market volatility and the market and economy in general. An impairment loss is recognized at the time the Company determines that a decline in the fair value below its cost basis is other-than-temporary. The Company does not generally intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

 

Restricted Cash

 

Restricted cash as of March 31, 2015 consists of $292,000 to secure lines of credit associated with leased facilities and $50,000 to secure the Company’s corporate credit card. The short term portion of restricted cash is grouped within prepaid expenses and other current assets while the long term portion of restricted cash is grouped with other assets.

 

Fair value of Financial Instruments

 

The valuation of assets and liabilities are subject to fair value measurements using a three-tiered approach and fair-value measurement is classified and disclosed by the Company in one of the following three categories:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

The carrying amounts of all cash equivalents, accounts payable, accrued expenses and accrued compensation and benefits are reasonable estimates of their fair value because of the short-term nature of these items. The Company reports its available-for-sale securities at their estimated fair value based on quoted market prices for identical or similar instruments.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash balances due to the financial position of the depository institutions in which those deposits are held. Additionally, the Company has established guidelines regarding approved investments and maturities of investments, which are designed to preserve principal and liquidity.

 

Property and Equipment

 

Property and equipment is carried at cost and depreciation is computed using the straight-line method over the estimated useful lives of the assets (generally three to ten years). The Company amortizes leasehold improvements over the lease term or the useful life of the improvement, whichever is shorter (including any renewal periods that are deemed to be reasonably assured). The Company expenses repair and maintenance costs that do not improve service potential or extend economic life as such costs are incurred.

 

6



 

Impairment of Long-Lived Assets

 

The Company reviews property and equipment for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset are less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value. While the Company’s current and historical operating losses and negative cash flows are possible indicators of impairment, management believes that the future cash flows to be generated by these assets support the carrying value of its long-lived assets and, accordingly, has not recognized any impairment losses through March 31, 2015.

 

Income Taxes

 

The accounting guidance for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities based on the technical merits of the position.

 

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.

 

Revenue Recognition

 

The Company enters into arrangements with pharmaceutical and biotechnology partners that may involve multiple deliverables. The Company’s arrangements may contain upfront payments, license fees for research and development arrangements, research and development funding and milestone payments under collaborative agreements. Each deliverable in the arrangement is evaluated to determine whether it meets the criteria to be accounted for as a separate unit of accounting or whether it should be combined with other deliverables. Revenue is recognized separately for each unit of accounting when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.

 

Upfront Fees. When management determines the Company has a single unit of accounting under its collaborative arrangements, upfront fees received for collaborative agreements are recognized ratably over the expected performance period under each respective arrangement. As a result, management makes its best estimate of the period over which the Company expects to fulfill its performance obligations under that agreement. Any amounts received under the agreements in advance of performance, if deemed substantive, are recorded as deferred revenue and recognized as revenue as the Company completes its performance obligations.

 

Milestones. The Company evaluates all milestones at the beginning of the agreement to determine if they meet the definition of a substantive milestone. Revenue is recognized from milestone payments when earned, provided that (i) the milestone event is substantive, in that it can only be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance, and its achievability was not reasonably assured at the inception of the agreement, (ii) the Company does not have ongoing performance obligations related to the achievement of the milestone, and (iii) it would result in the receipt of additional payments. A milestone payment is considered substantive if all of the following conditions are met: (i) the milestone payment is non-refundable; (ii) achievement of the milestone was not reasonably assured at the inception of the arrangement; (iii) substantive effort is involved to achieve the milestone; and (iv) the amount of the milestone payments appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with the achievement of the milestone.

 

Deferred Revenue. Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the accompanying condensed consolidated balance sheets. Amounts not expected to be recognized within the next 12 months are classified as non-current deferred revenue.

 

Research and Development

 

Research and development (R&D) expenses include the costs associated with the Company’s R&D activities, including salaries, benefits and occupancy costs. Also included in R&D expenses are third-party costs incurred in conjunction with contract manufacturing for the Company’s R&D programs and clinical trials, including the cost of clinical trial drug supply shipped to the

 

7



 

Company’s clinical study vendors, costs incurred by contract research organizations (CROs) and regulatory expenses. R&D costs are expensed as incurred, except when accounting for nonrefundable advance payments for goods or services to be used in future R&D activities. These payments are capitalized at the time of payment and expensed as the related goods are delivered or the services are performed.

 

Clinical Trial Costs and Accruals

 

A significant portion of the Company’s clinical trial costs relate to contracts with CROs. The financial terms of its CRO contracts 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 condensed consolidated financial statements by matching those expenses with the period in which services and efforts are expended. As part of the process of preparing its condensed consolidated financial statements, the Company relies on cost information provided by its CROs (concerning monthly expenses as well as reimbursement for pass through costs). The Company is also required to estimate certain of its expenses resulting from its obligations under its CRO contracts. Accordingly, the Company’s clinical trial accrual is dependent upon the timely and accurate reporting of CROs and other third-party vendors.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation expense related to stock options granted to employees and members of its board of directors by estimating the fair value of each stock option on the date of grant using the Black-Scholes options-pricing model, net of estimated forfeitures. In estimating fair value for options issued under the Company’s 2013 Stock Incentive Plan (2013 Plan), expected volatility was based on historical volatility of comparable publicly-traded companies. As the Company’s historical option exercise experience does not provide a reasonable basis upon which to estimate the expected term, the Company used the simplified method. Expected life is calculated in two tranches based on the employment level defined as director or employee. The risk-free rate used in calculating fair value of stock options for periods within the expected term of the option is based on the U.S. Treasury yield bond curve in effect on the date of grant. For awards subject to time-based vesting conditions, stock-based compensation expense is recognized using the straight-line method. In accordance with the authoritative accounting literature, options subject to both performance and time-based vesting conditions are expensed using an accelerated multiple-option approach. Under the accelerated multiple-option approach (also known as the graded-vesting method), compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as though the award was, in substance, multiple awards, resulting in accelerated expense recognition during the earlier vesting periods. The Company accounts for stock options granted to non-employees using the fair value approach. Stock options granted to non-employees are subject to periodic revaluation over their vesting terms.

 

For performance-based awards to employees (i) the fair value of the award is determined on the grant date, (ii) the Company assesses the probability of the individual milestones under the award being achieved and (iii) the fair value of the shares subject to the milestone is expensed over the implicit service period commencing once management believes achieving the performance criteria is probable. For performance-based awards to non-employees, no expense is recognized until such time as the milestone event is achieved. Upon achievement, the portion of the milestone subject to immediate vesting is expensed based upon the then fair value of the award. For the portion of the award further subject to time-based vesting restrictions, expense is recorded quarterly, at the then fair value, as the shares vest until such time as performance is complete.

 

Comprehensive Loss

 

Comprehensive loss is defined as the change in equity during a period from transactions and other events and/or circumstances from non-owner sources.

 

Net Loss per Share

 

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration of common stock equivalents. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. The calculation of the weighted-average number of shares outstanding excludes shares which have been issued upon the early exercise of stock options and are subject to future vesting and unvested restricted stock totaling 0.1 million and 0.4 million shares as of March 31, 2015 and 2014, respectively.

 

Basic and diluted net loss per share are equivalent because the Company has incurred a net loss in all periods presented, causing any potentially dilutive securities, consisting of common stock options, to be anti-dilutive. The calculation of net loss per share excludes potentially dilutive common stock options totaled 2.1 million and 1.4 million shares as of March 31, 2015 and 2014, respectively.

 

8



 

Recent Accounting Pronouncements

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (FASB) issued accounting guidance on the recognition of revenue from customers that supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The new standard allows for two methods of adoption: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance. The amended guidance as currently issued will be effective for the Company starting in 2017. On April 29, 2015, the Financial Accounting Standards Board (FASB or Board) issued an exposure draft of a proposed Accounting Standards Update that would delay by one year the effective date of this guidance, but also permits entities to adopt one year earlier if they choose (i.e., the original effective date). The proposal will be subject to the FASB’s due process requirement, which includes a period for public comments. The Company is evaluating the alternative transition methods and the potential effects of the adoption of this update on its financial statements.

 

3.                       Short-Term Investments

 

The Company invests its excess cash in available-for-sale securities consisting of money market funds, commercial paper, government sponsored entities and debt instruments of financial institutions and corporations. Available-for-sale securities with maturities of three months or less from date of purchase are classified as part of cash equivalents in the accompanying consolidated balance sheets. Available-for-sale securities with maturities greater than three months from date of purchase are classified as part of short-term investments in the accompanying consolidated balance sheets.

 

Available-for-sale securities classified as cash equivalents amounted to $71.6 million and $411.6 million as of March 31, 2015 and December 31, 2014, respectively.

 

The carrying value of available for sale securities classified as short-term investments consisted of the following (in thousands):

 

 

 

As of March 31, 2015

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair Market

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Commercial paper

 

$

226,111

 

$

300

 

$

 

$

226,411

 

Government sponsored entities

 

59,175

 

13

 

 

59,188

 

Corporate debt securities

 

247,568

 

8

 

(63

)

247,513

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

532,854

 

$

321

 

$

(63

)

$

533,112

 

 

 

 

As of December 31, 2014

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair Market

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Commercial paper

 

$

30,164

 

$

34

 

$

 

$

30,198

 

Government sponsored entities

 

$

73,623

 

 

(9

)

73,614

 

Corporate debt securities

 

109,913

 

 

(74

)

109,839

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

213,700

 

$

34

 

$

(83

)

$

213,651

 

 

All of the Company’s available-for-sale securities held at March 31, 2015 and December 31, 2014 had maturity dates of less than 18 months. The Company has classified all of its available-for-sale investment securities, including those with maturities beyond one year, as current assets on the accompanying consolidated balance sheets based on the highly liquid nature of these investment securities and because these investment securities are considered available for use in current operations.

 

At March 31, 2015 and December 31, 2014, none of the Company’s available-for-sale securities were in a material unrealized loss position. The Company reviewed its investment holdings as of March 31, 2015 and determined that its unrealized losses were not considered to be other-than-temporary based upon (i) the financial strength of the issuing institution and (ii) the fact that all securities have been in an unrealized loss position for less than 12 months. As such, the Company has not recognized any such impairment in its

 

9



 

financial statements. The Company did not realize any significant gains or losses on sales of available-for-sale securities for the three month period ended March 31, 2015 or the year ended December 31, 2014.

 

4.                       Fair Value Measurements

 

Available-for-sale investment securities are classified within the fair-value hierarchy as defined by authoritative guidance. The Company obtains the fair value of its Level 2 financial instruments from the custodian bank or from a professional pricing service. The Company’s Level 2 financial instruments are valued using market prices on less active markets and model-derived valuations with observable valuation inputs such as interest rates and yield curves. The Company obtains the fair value of Level 2 financial instruments from quoted market price, calculated price or quotes from third-party pricing services. The Company validates fair value through independent valuation testing and review of portfolio valuations provided by the Company’s investment managers. There were no transfers between Level 1 and Level 2 securities during the three months ended March 31, 2015 or the year ended December 31, 2014.

 

The fair value of the Company’s investment holdings is summarized in the following tables (in thousands):

 

 

 

As of March 31, 2015

 

 

 

Total Fair

 

Fair Value Determined Under

 

 

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Money market funds

 

$

68,624

 

$

68,624

 

$

 

$

 

Commercial paper

 

226,411

 

 

226,411

 

 

Government sponsored entities

 

59,188

 

59,188

 

 

 

Corporate debt securities

 

250,530

 

 

250,530

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

604,753

 

$

127,812

 

$

476,941

 

$

 

 

 

 

As of December 31, 2014

 

 

 

Total Fair

 

Fair Value Determined Under

 

 

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Money market funds

 

$

67,374

 

$

67,374

 

$

 

$

 

Commercial paper

 

30,198

 

 

30,198

 

 

Government sponsored entities

 

417,814

 

417,814

 

 

 

Corporate debt securities

 

109,839

 

 

109,839

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

625,225

 

$

485,188

 

$

140,037

 

$

 

 

5.                       Balance Sheet Details

 

Prepaid Expenses and Other Current Assets

 

The following table summarizes major classes of prepaid expenses and other current assets (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Prepaid research and development services

 

$

6,143

 

$

751

 

Interest receivable

 

1,025

 

1,035

 

Prepaid insurance

 

757

 

986

 

Prepaid contract research costs

 

181

 

90

 

Other prepaid costs

 

2,137

 

741

 

 

 

 

 

 

 

Total prepaid expenses and other current assets

 

$

10,243

 

$

3,603

 

 

10



 

Property and Equipment

 

The following table summarizes major classes of property and equipment (in thousands):

 

 

 

 

 

March 31,

 

December 31,

 

 

 

Useful life

 

2015

 

2014

 

Laboratory equipment

 

3 years

 

3,319

 

3,054

 

Computer equipment and software

 

3 years

 

37

 

36

 

Furniture and fixtures

 

5 to 10 years

 

868

 

812

 

Leasehold improvements

 

5 to 10 years

 

 

880

 

 

 

 

 

4,224

 

4,782

 

Less accumulated depreciation and amortization

 

 

 

(2,858

)

(3,816

)

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

 

$

1,366

 

$

966

 

 

Accrued Expenses

 

The following table summarizes major classes of accrued liabilities (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Accrued research and development services

 

$

19,579

 

$

11,149

 

Other accrued liabilities

 

12,495

 

5,012

 

 

 

 

 

 

 

Total accrued expenses

 

$

32,074

 

$

16,161

 

 

6.                       Collaborative Arrangements

 

In December 2011, the Company entered into a co-exclusive Collaboration Agreement with Ono Pharmaceutical Co., Ltd., or Ono, to utilize the Company’s proprietary GPCR structure determination technologies for the identification of a high resolution novel protein crystal structure of an Ono proprietary GPCR drug discovery target. In December 2011, Ono paid the Company an upfront fee as consideration for technology access. The Company determined there was one unit of accounting under the Collaboration Agreement, and as such, recognized the upfront fee as collaborative revenue on a straight-line basis over the expected period of performance of the arrangement. The Collaboration Agreement also provided for certain other milestone payments which the Company concluded did not meet the definition of a substantive milestone, inasmuch as achievability was reasonably assured at the inception of the Collaboration Agreement. Such milestone payments were also deferred and were amortized over the estimated period of performance of the arrangement. In December 2013, the Collaboration Agreement was amended to allow for the early termination of the research term and the Company agreed to perform technology transfer and training with respect to, and to grant Ono a non-exclusive sublicense to, the Company’s GPCR technology platform for high-resolution crystal structure determination (the Amendment). Pursuant to the Amendment, the Company received upfront license and collaborative research termination fees totaling $3.7 million in the first quarter of 2014. The Company determined there was one unit of accounting under the Amendment. As such, the upfront fees of $3.7 million, along with the remaining deferred revenue of $0.7 million from the Collaboration Agreement, were amortized over the revised expected period of performance of 12 months.

 

The Company received notice from Ono in August 2014 that all deliverables specified by the Amendment had been satisfied in full, and as such, the Company recognized all previously deferred revenue associated with the collaboration with Ono. During the third quarter of 2014, the Company also recognized collaborative revenue of $1.3 million associated with a technology transfer milestone payment received in connection with the Amendment.

 

Revenue under the Collaboration Agreement, as amended, with Ono for the three months ended March 31, 2015 and 2014 was $0.0 and $0.3 million.

 

The Company remains eligible for (i) future technology transfer milestone payments of up to an additional $0.8 million (upon satisfaction of certain predetermined criteria), (ii) research milestones of up to another $1.8 million based on successful completion of certain research activities and (iii) development milestone payments of up to $13.5 million for the achievement of development milestones based solely upon Ono’s performance.

 

11



 

7.                       Commitments and Contingencies

 

License Agreements

 

The Company has license agreements with The Scripps Research Institute, or TSRI, that require it to make annual license maintenance payments and future payments upon the success of licensed products that include milestones and/or royalties. The Company’s agreements with TSRI include the following:

 

S1P1R Modulators License Agreement. In April 2009, the Company entered into a License Agreement with TSRI, whereby the Company received an exclusive worldwide license under the Licensed Patent Rights (as defined in the agreement) for S1P1R modulators and a non-exclusive worldwide license to the Licensed Materials (as defined in the agreement). In consideration, the Company (i) agreed to pay a nominal annual maintenance fee, (ii) is responsible for paying royalties on annual net sales of Licensed Product (as defined in the agreement) ranging between 1.5% and 2.0%, until such time as the expiration of the last valid claim in the Licensed Patent Rights, (iii) is responsible for paying royalties ranging between 0.75% and 1.0%, on annual net sales of Non-Patent Product (as defined in the agreement) until such time as one or more generic versions of such Non-Patent Product are commercially sold and the Company demonstrates to TSRI that sales of such generic products account for a specific percentage of aggregate unit sales in a calendar quarter, (iv) is responsible for paying product development milestone payments not to exceed $4.4 million, and (v) is responsible for paying a percentage of any sublicense revenue payments received by the Company.

 

Technology Platform License Agreement. In June 2009, the Company entered into a Technology Platform License Agreement with TSRI whereby the Company received an exclusive worldwide license under the Licensed Patent Rights (as defined in the agreement) and a non-exclusive worldwide license under the Know-How (as defined in the agreement). In consideration, the Company (i) agreed to pay a nominal annual maintenance fee beginning after June 18, 2011, which is credited against running royalties during the term of the agreement, (ii) agreed to pay running royalties at a de minimis rate of annual net sales of Company Products (as defined in the agreement) until June 18, 2019, (iii) agreed to pay product development milestone payments not to exceed approximately $1.0 million and (iv) is required to make non-creditable, non-refundable Aggregate Technology Income (ATI) (as defined in the agreement) payments of 7.5% of the first $100 million of cumulative ATI, except that no ATI payments is due on the first $2.5 million in cumulative ATI, and a reduced percentage of that portion of cumulative ATI that is in excess of $100 million. All product development milestone and ATI payments are payable up to June 18, 2027.

 

Royalty consideration paid to TSRI under these agreement for the three months ended March 31, 2015 and 2014, was $0.0 and $0.6 million, respectively. Royalties are expensed as incurred and are included in research and development expenses in the condensed consolidated statements of operations. As of March 31, 2015, the Company was not required to record an accrual for royalties.

 

Operating Lease

 

On December 24, 2014, the Company moved into its new laboratory and office space headquarters in San Diego, California. In February 2015, the Company amended the lease agreement for its 42,047 square foot corporate headquarters to increase the leased space by 23,478 square feet and, in connection therewith, also increased the letter of credit for the security deposit held by the landlord from $0.1 million to $0.2 million. The rent commencement date for the expansion space is the earlier to occur of: (i) the date the Company commences doing business in the expansion space, or (ii) August 2015. The amended lease extended the lease termination date of the original 42,047 square foot space so that the lease termination date of the entire 65,525 square foot premises is 10 years from the rent commencement date for the expansion space. The lease for the entire premises can be terminated by the Company after 66 months from the commencement date, subject to payment of a lease termination fee as well as certain other costs. The Company has the option to extend the term of the lease for the entire premises for an additional five year period with a base rent equal to the then market rate. As part of the amended lease agreement, the company also leased 6,477 square feet of temporary space beginning February 15, 2015 for a term of 20 months. The total estimated rent payments are $30.2 million under the amended lease for the entire premises including the temporary space.

 

Based on the terms of the amended lease agreement and applicable accounting rules, the Company was deemed to be the owner of the tenant improvements associated with the expansion space. As a result, the Company has included $3.0 million in tenant improvement allowances as a component of other long-term assets with a corresponding amount also included within long-term deferred rent on the Company’s condensed consolidated balance sheet at March 31, 2015.

 

The Company previously occupied laboratory and office space under a lease which expired in January 2015. Under the terms of the lease the Company maintained a letter of credit totaling $0.1 million.

 

The Company recognizes minimum rent payments and escalation clauses on a straight-line basis over the lease terms. The Company accounts for the difference between the minimum lease payments and the straight-line amount as deferred rent. The

 

12



 

Company also pays property taxes, maintenance and insurance, in addition to rent. Rent expense for the three months ended March 31, 2015 and 2014 was $0.7 million and $0.2 million, respectively.

 

Litigation

 

From time to time, the Company may be involved in various lawsuits, legal proceedings, or claims that arise in the ordinary course of business. Management does not believe any legal proceedings or claims pending at March 31, 2015 will have, individually or in the aggregate, a material adverse effect on its business, liquidity, financial position or results of operations. Litigation, however, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business.

 

8.                       Stockholders’ Equity

 

Common Stock

 

Restricted Common Stock

 

The Company’s 2008 Stock Plan allowed for the early exercise of options issued under the plan. As of March 31, 2015, 104,000 shares are unvested and subject to repurchase resulting from the early exercise of options. Under the authoritative guidance, early exercise is not considered an exercise for accounting purposes and, therefore, any payment for unvested shares is recognized as a liability at the original exercise price. This repurchase obligation is included in accrued expenses. During the three months ended March 31, 2015 and 2014, the Company repurchased 0 and 12,833 unvested shares, respectively, which were previously purchased pursuant to early exercised stock options.

 

Prior to 2013, the Company issued restricted common stock to certain founders and officers of the Company. As of March 31, 2015, 37,000 shares associated with these restricted stock awards were subject to repurchase by the Company.

 

Public Offerings of Common Stock

 

In May 2013, the Company completed the initial public offering of its common stock (the IPO) of 5,933,277 shares of common stock at an offering price of $14.00 per share. The Company received net proceeds of approximately $75.0 million, after deducting underwriting discounts, commissions and offering-related transaction costs of $8.1 million.

 

During January 2014, the Company completed an underwritten public offering of 3,818,000 shares of its common stock at an offering price of $30.75 per share. The Company received net proceeds from this offering of approximately $109.9 million, after deducting underwriting discounts, commissions and offering-related expenses of $7.5 million.

 

During June 2014, the Company completed an underwritten public offering of 5,097,950 shares of its common stock at an offering price of $40.25 per share. The Company received net proceeds from this offering of approximately $195.0 million, after deducting underwriting discounts, commissions and offering-related expenses of $10.1 million.

 

During November 2014, the Company completed an underwritten public offering of 4,140,000 shares of its common stock at an offering price of $100.00 per share. The Company received net proceeds from this offering of approximately $396.7 million, after deducting underwriting discounts, commissions and offering-related expenses of $17.3 million.

 

9.                       Stock Options and Stock-Based Compensation

 

The Company’s 2013 Plan provides for the granting of stock options, restricted stock, stock appreciation rights, stock unit and cash-based awards to employees, non-employee directors and consultants. The Company issues both performance-based and time-based stock options and restricted stock awards. Performance-based awards generally vest 25% upon achievement of a milestone event, with monthly time-based vesting over the subsequent 36 months, while time-based awards generally vest over a four-year period commencing on the first anniversary of the date of grant with monthly vesting thereafter. Milestone events are specific to corporate goals. Awards generally expire 10 years from the date of grant.

 

13



 

The following table summarizes stock option activity for the three months ended March 31, 2015 (share amounts in thousands):

 

 

 

#  Shares

 

Weighted
Average
Exercise
Price
per Share

 

Outstanding at December 31, 2014

 

1,927

 

$

26.31

 

Granted

 

172

 

114.77

 

Exercised

 

(32

)

26.44

 

Forfeited

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2015

 

2,067

 

$

33.68

 

 

The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of its stock options. The following table summarizes stock-based compensation expense for all equity awards granted (in thousands):

 

 

 

Three months ended March 31,

 

 

 

2015

 

2014

 

Included in research and development expense

 

$

2,115

 

$

1,037

 

Included in general and administrative expense

 

1,665

 

808

 

 

 

 

 

 

 

Total stock-based compensation expense

 

$

3,780

 

$

1,845

 

 

14


 



Exhibit 99.3

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

The unaudited pro forma condensed combined financial information presented below is based on, and should be read in conjunction with (i) our historical consolidated financial statements, and the related notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2014 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, and (ii) Receptos’ historical financial statements, and the related notes thereto, included in this Form 8-K. The unaudited pro forma condensed combined balance sheet gives effect to the proposed merger, as if it had occurred on March 31, 2015 and combines the historical balance sheets of Celgene and Receptos as of March 31, 2015. The unaudited pro forma condensed combined statements of operations are presented as if the proposed merger had occurred on January 1, 2014 and combines the historical results of operations of Celgene and Receptos for the year ended December 31, 2014 and for the three months ended March 31, 2015.

 

The historical consolidated financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the proposed merger, (2) factually supportable and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information should be read in conjunction with the accompanying notes.

 

The unaudited pro forma condensed combined financial information has been presented for informational purposes only and is not necessarily indicative of what the Company’s financial position or results of operations actually would have been had the proposed merger been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of Celgene.

 

The unaudited pro forma condensed combined financial statements do not reflect the realization of potential cost savings, or any related restructuring or integrations costs that may result from the integration of Receptos. Although Celgene believes that certain cost savings may result from the proposed merger, there can be no assurance that these cost savings will be achieved.

 

The unaudited pro forma condensed consolidated financial statements are based on estimates and assumptions, are presented for illustrative purposes only and are not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been realized if the proposed merger had been completed as of the dates indicated.

 



 

CELGENE CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED

BALANCE SHEET

As of March 31, 2015

(In millions)

 

 

 

Celgene
(Historical)

 

Receptos
(Historical)

 

Pro Forma
Adjustments

 

See Note
5

 

Pro Forma
Combined

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,367.7

 

$

111.5

 

$

(1,499.2

)

a

 

$

2,980.0

 

Marketable securities available for sale

 

2,945.8

 

533.1

 

(1,275.0

)

a

 

2,203.9

 

Accounts receivable, net

 

1,179.4

 

 

 

 

 

1,179.4

 

Inventory

 

386.7

 

 

 

 

 

386.7

 

Deferred income taxes

 

11.2

 

 

 

 

 

11.2

 

Other current assets

 

774.6

 

10.2

 

74.2

 

b

 

859.0

 

Total current assets

 

9,665.4

 

654.8

 

(2,700.0

)

 

 

7,620.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

649.7

 

1.4

 

 

 

 

651.1

 

Intangible assets, net (including goodwill)

 

6,193.6

 

 

9,445.4

 

c

 

15,639.0

 

Other assets

 

971.8

 

5.2

 

30.1

 

a

 

1,007.1

 

Total assets

 

$

17,480.5

 

$

661.4

 

$

6,775.5

 

 

 

$

24,917.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings and current portion of long-term debt

 

$

504.4

 

$

 

$

 

 

 

$

504.4

 

Accounts payable

 

204.0

 

9.6

 

 

 

 

213.6

 

Accrued expenses

 

1,039.2

 

32.0

 

 

 

 

1,071.2

 

Income taxes payable

 

13.1

 

 

 

 

 

13.1

 

Current portion of deferred revenue

 

28.6

 

 

 

 

 

28.6

 

Other current liabilities

 

308.0

 

2.1

 

62.3

 

c, d, e

 

372.4

 

Total current liabilities

 

 

2,097.3

 

 

43.7

 

 

62.3

 

 

 

 

2,203.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue, net of current portion

 

27.4

 

 

 

 

 

27.4

 

Income taxes payable

 

288.1

 

 

 

 

 

288.1

 

Deferred income taxes

 

412.8

 

 

2,557.0

 

c

 

2,969.8

 

Other non-current liabilities

 

1,587.1

 

3.6

 

 

 

 

1,590.7

 

Long-term debt, net of discount

 

6,303.0

 

 

5,000.0

 

a

 

11,303.0

 

Total liabilities

 

 

10,715.7

 

 

47.3

 

 

7,619.3

 

 

 

 

18,382.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

 

Common stock

 

9.3

 

 

 

f

 

9.3

 

Common stock in treasury, at cost

 

(11,803.7

)

 

 

 

 

(11,803.7

)

Additional paid-in capital

 

10,186.1

 

865.0

 

(865.0

)

f

 

10,186.1

 

Retained earnings

 

7,191.3

 

(251.2

)

20.5

 

g

 

6,960.6

 

Accumulated other comprehensive income

 

1,181.8

 

0.3

 

0.7

 

h

 

1,182.8

 

Total stockholders’ equity

 

6,764.8

 

614.1

 

(843.8

)

 

 

6,535.1

 

Total liabilities and stockholders’ equity

 

$

17,480.5

 

$

661.4

 

$

6,775.5

 

 

 

$

24,917.4

 

 

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 



 

CELGENE CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED

STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2015

(In millions, except per share amounts)

 

 

 

Celgene
(Historical)

 

Receptos
(Historical)

 

Pro Forma
Adjustments

 

See Note
5

 

Pro Forma
Combined

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

2,055.2

 

$

 

$

 

 

 

$

2,055.2

 

Other revenue

 

25.6

 

 

 

 

 

25.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

2,080.8

 

 

 

 

 

 

 

 

2,080.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding amortization of acquired intangible assets)

 

104.0

 

 

 

 

 

104.0

 

Research and development

 

506.0

 

36.0

 

 

 

 

542.0

 

Selling, general and administrative

 

529.2

 

5.4

 

 

 

 

534.6

 

Amortization of acquired intangible assets

 

63.6

 

 

 

 

 

63.6

 

Acquisition related charges, net

 

19.0

 

 

 

 

 

19.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

1,221.8

 

41.4

 

 

 

 

1,263.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

859.0

 

(41.4

)

 

 

 

817.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income and (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest and investment income, net

 

9.0

 

0.3

 

(4.1

)

i

 

5.2

 

Interest (expense)

 

(49.2

)

 

(47.3

)

j

 

(96.5

)

Other income (expense), net

 

8.3

 

0.8

 

 

 

 

9.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

827.1

 

(40.3

)

(51.4

)

 

 

735.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

108.2

 

 

(34.2

)

k

 

74.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

718.9

 

(40.3

)

(17.2

)

 

 

661.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.90

 

 

 

 

 

 

 

$

0.83

 

Diluted

 

$

0.86

 

 

 

 

 

 

 

$

0.79

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

798.9

 

 

 

 

 

 

 

798.9

 

Diluted

 

834.1

 

 

 

 

 

 

 

834.1

 

 

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 



 

CELGENE CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED

STATEMENT OF OPERATIONS

For the Year Ended December 31, 2014

(In millions, except per share amounts)

 

 

 

Celgene
(Historical)

 

Receptos
(Historical)

 

Pro Forma
Adjustments

 

See Note
5

 

Pro Forma
Combined

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

7,563.8

 

$

 

$

 

 

 

$

7,563.8

 

Other revenue

 

106.6

 

5.9

 

 

 

 

112.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

7,670.4

 

 

5.9

 

 

 

 

 

 

7,676.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding amortization of acquired intangible assets)

 

385.9

 

 

 

 

 

385.9

 

Research and development

 

2,430.6

 

101.7

 

 

 

 

2,532.3

 

Selling, general and administrative

 

2,027.9

 

15.8

 

 

 

 

2,043.7

 

Amortization of acquired intangible assets

 

258.3

 

 

 

 

 

258.3

 

Acquisition related charges, net

 

48.7

 

 

 

 

 

48.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

5,151.4

 

117.5

 

 

 

 

5,268.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

2,519.0

 

(111.6

)

 

 

 

2,407.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income and (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest and investment income, net

 

28.2

 

0.4

 

(16.2

)

i

 

12.4

 

Interest (expense)

 

(176.1

)

(0.9

)

(189.4

)

j

 

(366.4

)

Other income (expense), net

 

(43.7

)

(2.9

)

 

 

 

(46.6

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

2,327.4

 

(115.0

)

(205.6

)

 

 

2,006.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

327.5

 

 

(119.8

)

k

 

207.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

1,999.9

 

(115.0

)

(85.8

)

 

 

1,799.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.49

 

 

 

 

 

 

 

$

2.24

 

Diluted

 

$

2.39

 

 

 

 

 

 

 

$

2.15

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

802.7

 

 

 

 

 

 

 

802.7

 

Diluted

 

836.0

 

 

 

 

 

 

 

836.0

 

 

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 



 

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

1.              Description of Transaction

 

On July 14, 2015, Celgene Corporation (Celgene) and Receptos, Inc. (Receptos) announced the signing of a definitive agreement in which Celgene has agreed to acquire Receptos for $232.00 per share in cash, through a tender offer. Upon completion of the transaction, Receptos would become a wholly-owned subsidiary of Celgene. The total value of the equity Celgene will acquire in the transaction is approximately $7.3 billion.  In addition, Celgene will acquire all of the vested and unvested equity compensation instruments for approximately $0.5 billion and expects Receptos to have approximately $0.6 billion of cash and marketable securities on hand at the time of the proposed merger, resulting in a total transaction value of $7.2 billion, net of cash and marketable securities acquired. In connection with the proposed acquisition of Receptos, Celgene has obtained a $5.0 billion committed syndicated bridge facility (the Bridge Facility). No amounts are anticipated to be drawn under the Bridge Facility prior to the closing of the acquisition. Celgene expects to fund the transaction through a combination of existing cash and the issuance of approximately $5.0 billion of senior notes pursuant to a public offering. Upon closure of the senior notes offering, the Bridge Facility will be automatically terminated.

 

2.              Basis of Presentation

 

The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting, and was based on the historical financial statements of Celgene and Receptos. The unaudited pro forma condensed combined balance sheet gives effect to the proposed merger, as if it had occurred on March 31, 2015 and combines the historical balance sheets of Celgene and Receptos as of March 31, 2015. The unaudited pro forma condensed combined statements of operations are presented as if the proposed merger had occurred on January 1, 2014 and combines the historical results of operations of Celgene and Receptos for the year ended December 31, 2014 and for the three months ended March 31, 2015.

 

The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma combined financial information to give effect to pro forma events that are (i) directly attributable to the acquisition, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined statements of operations, are expected to have a continuing impact on the consolidated results.

 

3.              Accounting Policies

 

The unaudited pro forma condensed combined financial statements do not assume any differences in accounting policies. Upon consummation of the proposed merger, Celgene will conduct a review of Receptos’ accounting policies. As a result of that review, Celgene may identify differences between the accounting policies of the two companies that, when conformed, could have a material impact on the unaudited pro forma combined financial statements. At this time, Celgene is not aware of any differences that would have a material impact on the combined financial statements.

 

4.              Purchase Price

 

For purposes of presentation in the unaudited pro forma condensed combined financial statements, the estimated total purchase price for Receptos is $7.620 billion in cash consisting of $7.332 billion for common stock outstanding and $0.288 billion for the portion of equity compensation attributable to the pre-combination period.  The portion of equity compensation attributable to the post-combination service period is $0.197 billion.  See Note 5 (d).

 

A preliminary estimate of the fair value of the assets to be acquired and the liabilities to be assumed by Celgene for this proposed merger, reconciled to the estimate of consideration expected to be transferred is shown below. The final allocation of the purchase price will be determined at a later date and is dependent on a number of factors, including the final valuation of Receptos’ tangible and intangible assets acquired and liabilities assumed. The final valuation of assets acquired and liabilities assumed is expected to be completed as soon as possible after the acquisition date and may be materially different than the value of assets acquired and liabilities assumed for purposes of the estimated pro forma adjustments.

 



 

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

Allocation of purchase price (in millions):

 

 

 

Tangible assets and liabilities:

 

 

 

Cash and cash equivalents

 

$

55.5

 

Marketable securities available for sale

 

533.1

 

Deferred tax assets

 

174.0

 

Other current assets

 

10.2

 

Property, plant and equipment, net

 

1.4

 

Other assets

 

5.2

 

Accounts payable

 

(9.6

)

Accrued expenses

 

(32.0

)

Other current liabilities

 

(2.1

)

Deferred tax liabilities

 

(2,557.0

)

Other non-current liabilities

 

(3.6

)

 

 

 

 

Total net tangible assets

 

(1,824.9

)

 

 

 

 

Intangible assets:

 

 

 

Goodwill, IPR&D, and other intangible assets

 

9,445.4

 

Total allocated purchase price

 

$

7,620.5

 

 

5.              Pro Forma Adjustments

 

Adjustments included in the column under the heading “Pro Forma Adjustments” are primarily based on preliminary estimates of fair value.

 

For purposes of these unaudited pro forma condensed consolidated financial statements, the net book value of property, plant and equipment is assumed to approximate fair value. There are no fair value adjustments to leases or other contracts included herein. Further analysis will be performed after the completion of the merger to confirm these estimates or make adjustments in the final purchase price allocation, as necessary.

 

These unaudited pro forma condensed consolidated financial statements contemplate the use of Celgene’s cash on hand and the sale of Celgene investments in marketable securities available for sale to finance the merger, as well as Celgene’s use of financing arrangements. Celgene expects to fund the transaction through a combination of existing cash and the issuance of approximately $5.0 billion of senior notes pursuant to a public offering. Upon closure of our senior notes offering, the Bridge Facility will be automatically terminated. The debt covenants on the existing credit facility have been amended in order to accommodate Celgene’s planned additional borrowing. Celgene may issue up to an additional $3.0 billion of senior notes for general corporate purposes consistent with normal financing activity before year-end.

 

The cash consideration estimated in these unaudited pro forma condensed consolidated financial statements assumes that Receptos stock options currently outstanding will not be exercised prior to the completion of the merger and that option holders will receive a cash payment equal to the difference between the $232.00 per share offer price and the exercise price.

 



 

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

For purposes of preparing these unaudited pro forma condensed combined financial statements, we assumed the following adjustments:

 

Pro Forma Condensed Combined Balance Sheet as of March 31, 2015

 

(a) Assumes the following sources and uses of cash (in millions):

 

Assumed sources of cash:

 

 

 

Issuance of debt to fund the acquisition

 

$

5,000.0

 

Sale of short-term marketable securities available for sale

 

1,275.0

(3)

Total assumed sources of cash

 

6,275.0

 

 

 

 

 

Assumed uses of cash:

 

 

 

Long-term debt issuance costs(1)

 

30.1

 

Acquisition costs(2)

 

123.6

 

Cash purchase price

 

7,620.5

 

Total assumed uses of cash

 

7,774.2

 

 

 

 

 

Net cash adjustment

 

$

(1,499.2

)(3)

 


1 - Represents financing-related transaction fees expected to be incurred, all of which are expected to be capitalized in other assets as debt issuance costs associated with incurred debt.

 

2 - To record Celgene’s estimated acquisition-related transaction costs of $67.6 million. The unaudited pro forma condensed balance sheet reflects the costs as a reduction of cash with a corresponding decrease to retained earnings. Also to reflect Receptos’ acquisition - related transaction costs paid prior to close of $56.0 million.

 

3- These amounts will initially be funded from short-term borrowings which are expected to be settled with funds provided from international subsidiaries. Repayment of such amounts will occur via a separate subsequent transaction. The use of funds from international subsidiaries may give rise to a U.S. income tax liability. It is not practicable to compute any estimated income tax effects resulting from the potential use of funds from international subsidiaries until the amount and source of such funding is finalized.

 

(b) Reflects estimated income tax benefits related to the deductible portion of severance, acquisition-related costs, and other compensation adjustments in retained earnings.

 

(c) Reflects a preliminary estimate of $9.445 billion for the portion of the total purchase price to be allocated to intangible assets. This preliminary allocation of the purchase price assumes that the intangible assets acquired consist of in-process research and development and goodwill, neither of which are amortized. This also includes the adjustment to deferred income tax assets and liabilities resulting from pro forma acquisition adjustments for the assets and liabilities to be acquired (current deferred tax assets of $174.0 million were netted with other current liabilities and long-term deferred tax liabilities of $2.557 billion were recorded to deferred income taxes).

 

(d) Reflects a non-recurring equity compensation charge attributable to the post-combination service period of $0.197 billion. This compensation expense is related to the payment of cash to Receptos equity award holders as a result of accelerated vesting of equity awards that will be paid contingent upon the holder’s continued service with Celgene through December 31, 2015, in accordance with the proposed merger agreement.

 

(e) Reflects anticipated separation related cash payments of $6.5 million as well as reimbursement payments for excise taxes of $33.1 million.

 

(f) Reflects the elimination of Receptos’ historical common stock and additional paid in capital as part of the acquisition.

 



 

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

(g) Assumes the following changes to retained earnings (in millions):

 

 

Elimination of net unrealized loss on sale of marketable securities

 

$

(1.0

)

Elimination of Receptos’ accumulated deficit

 

251.2

 

Estimated acquisition related costs

 

(67.6

)

Estimated equity compensation attributable to post-combination service(1)

 

(196.7

)

Estimated separation related cash payments(2)

 

(39.6

)

Estimated income tax benefits related to the deductible portion of severance, acquisition-related costs, and other compensation adjustments(3)

 

74.2

 

 

 

$

20.5

 

 


1- See 5(d)

2 - See 5(e)

3 - See 5(b)

 

(h) Assumes the following changes to accumulated other comprehensive income (in millions):

 

Elimination of net unrealized loss on sale of marketable securities

 

$

1.0

 

Elimination of Receptos’ historical accumulated other comprehensive income

 

(0.3

)

 

 

$

0.7

 

 

Pro Forma Condensed Combined Statements of Operations for the Year Ended December 31, 2014 and for the Three-Month Period Ended March 31, 2015

 

(i) Reflects and estimate of foregone interest income on marketable securities.

 

(j) Interest expense consists of contractual interest expense, amortization of debt issuance costs and other recurring financing costs associated with the $5.0 billion of debt expected to be incurred to fund the proposed merger, with an assumed weighted-average annual interest rate of 3.79%, including $30.1 million in debt issuance costs. A change of 1/8 of a percent (0.125%) in the interest rate assumed for these pro forma purposes would result in a $6.3 million change in pro forma interest expense for the year ended December 31, 2014.  Celgene also expects to offer up to an additional $3.0 billion of senior notes for general corporate purposes consistent with normal financing activity before year-end. No borrowing or interest expense costs associated with this additional amount have been included in these pro forma financial statements.

 

(k) Statutory tax rates were applied, as appropriate, to each acquisition adjustment and Receptos’ historical losses based on the relevant jurisdiction. The total effective tax rate of the combined company could be significantly different depending on the post-acquisition geographical mix of income and other factors.

 


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