Item 1. Financial Statements
See accompanying notes to the condensed consolidated financial statements.
See accompanying notes to the condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Business
La Jolla Pharmaceutical Company (collectively with its wholly owned subsidiaries, “La Jolla” or the “Company”) is dedicated to the development and commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases. GIAPREZATM (angiotensin II) for injection is approved by the U.S. Food and Drug Administration (“FDA”) as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock. XERAVATM (eravacycline) for injection is a novel fluorocycline of the tetracycline class of antibacterials that is approved by the FDA for the treatment of complicated intra-abdominal infections (“cIAI”) in patients 18 years of age and older.
On July 28, 2020, La Jolla completed its acquisition of Tetraphase Pharmaceuticals, Inc. (“Tetraphase”), a biopharmaceutical company focused on commercializing XERAVA, for $43 million in upfront cash plus potential future cash payments of up to $16 million. The Company’s consolidated financial results for periods ending September 30, 2020 and beyond include Tetraphase’s financial results subsequent to the acquisition closing date of July 28, 2020 (see Note 12).
As of September 30, 2020 and December 31, 2019, the Company had cash and cash equivalents of $27.8 million and $87.8 million, respectively. Based on the Company’s current operating plans and projections, the Company expects that its existing cash and cash equivalents will be sufficient to fund operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with the U.S. Securities and Exchange Commission (the “SEC”).
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and disclosures required by GAAP for annual financial statements have been omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020 (the “Form 10-K”). The accompanying condensed consolidated financial statements include the accounts of La Jolla Pharmaceutical Company and its wholly owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and the accompanying notes. Actual results may differ materially from these estimates. Certain amounts previously reported in the financial statements have been reclassified to conform to the current year presentation. Such reclassifications did not affect net loss, shareholders’ (deficit) equity or cash flows. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year or any future interim periods. The accompanying condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated balance sheet as of December 31, 2019 contained in the Form 10-K.
Summary of Significant Accounting Policies
During the nine months ended September 30, 2020, other than the short-term investments, business combinations, intangible assets and goodwill policies described below, there have been no changes to the Company’s significant accounting policies as described in the Form 10-K.
6
Short-term investments
Short-term investments are comprised of marketable equity securities that are “available-for-sale,” as such term is defined by the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 320. Marketable equity securities are classified as current assets. Short-term investments are measured at fair value, and unrealized gains and losses are recorded in other income (expense), net in the consolidated statements of operations. Overnight sweep accounts are classified as cash and cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and accounts receivable. The Company maintains its cash in checking and savings accounts at federally insured financial institutions in excess of federally insured limits.
During the nine months ended September 30, 2020, 468 hospitals in the U.S. purchased GIAPREZA. During the nine months ended September 30, 2020, 646 hospitals in the U.S. purchased XERAVA. Hospitals purchase our products through a network of specialty and wholesale distributors (“Customers”). The Company does not believe that the loss of one of these distributors would significantly impact the ability to distribute GIAPREZA or XERAVA, as the Company expects that sales volume would be absorbed by the remaining distributors. The following table includes the percentage of U.S. net product sales and accounts receivable balances for the Company’s three major Customers, each of which comprised 10% or more of its U.S. net product sales:
|
|
U.S. Net Product Sales
|
|
|
Accounts Receivable
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
September 30, 2020
|
|
|
As of September 30, 2020
|
|
Customer A
|
|
|
37
|
%
|
|
|
38
|
%
|
|
|
28
|
%
|
Customer B
|
|
|
33
|
%
|
|
|
32
|
%
|
|
|
34
|
%
|
Customer C
|
|
|
26
|
%
|
|
|
27
|
%
|
|
|
33
|
%
|
Total
|
|
|
96
|
%
|
|
|
97
|
%
|
|
|
95
|
%
|
Revenue Recognition
The Company has adopted FASB ASC Topic 606—Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, the Company recognizes revenue when its Customers obtain control of the Company’s product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods. To determine revenue recognition for contracts with Customers within the scope of ASC 606, the Company performs the following 5 steps: (i) identify the contract(s) with a Customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies the relevant performance obligations. There have been no contract assets or liabilities recorded to date relating to product sales.
Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, discounts, returns and administrative fees. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary materially from the Company’s estimates, the Company will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These items include:
|
•
|
Chargebacks—Chargebacks are discounts the Company provides to distributors in the event that the sales prices to end users are below the distributors’ acquisition price. This may occur due to a direct contract with a health system, a group purchasing organization (“GPO”) agreement or a sale to a government facility. Chargebacks are estimated based on known chargeback rates and recorded as a reduction of revenue on delivery to Customers.
|
7
|
•
|
Discounts—The Company offers Customers various forms of incentives and consideration, including prompt-pay and other discounts. The Company estimates discounts primarily based on contractual terms. These discounts are recorded as a reduction of revenue on delivery to Customers.
|
|
•
|
Returns—The Company offers Customers a limited right of return, generally for damaged or expired product. The Company estimates returns based on an internal analysis, which includes actual experience. The estimates for returns are recorded as a reduction of revenue on delivery to Customers.
|
|
•
|
Administrative Fees—The Company pays administrative fees to GPOs for services and access to data. Additionally, the Company pays an Industrial Funding Fee as part of the U.S. General Services Administration’s Federal Supply Schedules program. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the applicable GPO or government agency.
|
The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these estimates accordingly.
Business Combinations
The Company accounts for business combinations using the acquisition method pursuant to FASB ASC Topic 805. This method requires, among other things, that results of operations of acquired companies are included in La Jolla's financial results beginning on the respective acquisition dates, and that assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. Intangible assets acquired in a business combination are recorded at fair value using a discounted cash flow model. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, the cost of capital and terminal values from the perspective of a market participant. Any excess of the fair value of consideration transferred (the “Purchase Price”) over the fair values of the net assets acquired is recognized as goodwill. Contingent consideration liabilities are recognized as part of the Purchase Price at the estimated fair value on the acquisition date. Subsequent changes to the fair value of contingent consideration liabilities will be included in other income (expense), net in the consolidated statements of operations. The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value during a period of time not to exceed 12 months from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other acquisition-related costs are expensed when incurred.
Intangible Assets
Intangible assets acquired in a business combination are initially recorded at fair value. Intangible assets with a definite useful life are amortized on a straight-line basis over the estimated useful life of the related assets. Intangible assets with an indefinite useful life are not amortized.
The Company reviews its intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the asset, including its eventual residual value, is compared to the carrying value to determine whether impairment exists. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Fair value is estimated through discounted cash flow models to project cash flows from the asset.
Goodwill
Goodwill represents the excess of the Purchase Price over the fair value of the net assets acquired as of the acquisition date. Goodwill has an indefinite useful life and is not amortized.
The Company reviews its goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the Company may exceed its fair value. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the Company is less than its carrying amount, including goodwill. If that is not the case, the Company has completed its goodwill impairment test and does not recognize an impairment charge. However, if that is the case, the Company performs a quantitative impairment test, and, if the carrying amount of the Company exceeds its fair value, then the Company will recognize an impairment charge for the amount by which its carrying amount exceeds its fair value, not to exceed the carrying amount of the goodwill.
8
Recent Accounting Pronouncements
Management has considered all recent accounting pronouncements and has concluded that there are no recently issued accounting pronouncements that may have a material effect on the Company’s results of operations, financial condition or cash flows based on current information.
3. Net Loss per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of potential common shares. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding plus potential common shares. Convertible preferred stock and stock options are considered potential common shares and are included in the calculation of diluted net loss per share using the treasury stock method when their effect is dilutive. Potential common shares are excluded from the calculation of diluted net loss per share when their effect is anti-dilutive. As of September 30, 2020 and 2019, there were 10.0 million and 13.7 million potential common shares, respectively, that were excluded from the calculation of diluted net loss per share because their effect was anti-dilutive.
4. Balance Sheet Details
Restricted Cash
Restricted cash as of September 30, 2020 consists of: (i) a $0.5 million security deposit for the Company’s field force corporate credit card program; (ii) a $0.2 million standby letter of credit provided in lieu of a security deposit for the Watertown Lease (see Note 6); and (iii) a $40,000 security deposit for the Company’s corporate purchasing credit card. Restricted cash as of December 31, 2019 consists of a $0.9 million standby letter of credit provided in lieu of a security deposit for the San Diego Lease (see Note 6).
Inventory, Net
Inventory, net consisted of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
802
|
|
|
$
|
-
|
|
Work-in-process
|
|
|
2,340
|
|
|
|
1,505
|
|
Finished goods
|
|
|
4,132
|
|
|
|
706
|
|
Total inventory, net
|
|
$
|
7,274
|
|
|
$
|
2,211
|
|
As of September 30, 2020, inventory, net includes $2.1 million of the fair value step-up adjustment to Tetraphase’s inventory recorded in connection with the acquisition of Tetraphase (see Note 12). As of September 30, 2020 and December 31, 2019, total inventory is recorded net of inventory reserves of $0.2 million and $0.1 million, respectively.
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Software
|
|
$
|
733
|
|
|
$
|
733
|
|
Furniture and fixtures
|
|
|
598
|
|
|
|
2,598
|
|
Leasehold improvements
|
|
|
386
|
|
|
|
14,504
|
|
Computer hardware
|
|
|
310
|
|
|
|
1,296
|
|
Lab equipment
|
|
|
-
|
|
|
|
9,665
|
|
Total property and equipment, gross
|
|
|
2,027
|
|
|
|
28,796
|
|
Accumulated depreciation and amortization
|
|
|
(1,743
|
)
|
|
|
(10,407
|
)
|
Total property and equipment, net
|
|
$
|
284
|
|
|
$
|
18,389
|
|
9
The Company recorded a loss of approximately $12.9 million, net of $3.1 million of cash proceeds, in other income (expense), net, related to the disposal of tenant improvements and certain equipment in connection with the termination of the San Diego Lease. The $12.9 million loss is recorded in the consolidated statements of cash flows net of the gain from the termination of the San Diego Lease (see Note 6).
Intangible Assets, Net
Intangible assets, net consisted of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Technology
|
|
$
|
14,000
|
|
|
$
|
-
|
|
Trade name
|
|
|
1,520
|
|
|
|
-
|
|
Total intangible assets, gross
|
|
|
15,520
|
|
|
|
-
|
|
Accumulated amortization
|
|
|
(259
|
)
|
|
|
-
|
|
Total intangible assets, net
|
|
$
|
15,261
|
|
|
$
|
-
|
|
The intangible assets were recorded in connection with the acquisition of Tetraphase (see Note 12).
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued interest expense
|
|
$
|
3,870
|
|
|
$
|
2,692
|
|
Accrued manufacturing costs
|
|
|
1,449
|
|
|
|
1,339
|
|
Accrued clinical study costs
|
|
|
426
|
|
|
|
3,496
|
|
Accrued other
|
|
|
1,938
|
|
|
|
1,785
|
|
Total accrued expenses
|
|
$
|
7,683
|
|
|
$
|
9,312
|
|
Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued interest expense
|
|
$
|
16,909
|
|
|
$
|
12,790
|
|
Fair value of CVRs (see Note 12)
|
|
|
2,610
|
|
|
|
-
|
|
Paycheck Protection Program loan
|
|
|
2,286
|
|
|
|
-
|
|
Total other noncurrent liabilities
|
|
$
|
21,805
|
|
|
$
|
12,790
|
|
5. Deferred Royalty Obligation
In May 2018, the Company closed a $125.0 million royalty financing agreement (the “Royalty Agreement”) with HealthCare Royalty Partners (“HCR”). Under the terms of the Royalty Agreement, the Company received $125.0 million in exchange for tiered royalty payments on worldwide net sales of GIAPREZA. HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA beginning April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. Through December 31, 2021, the royalty rate will be a maximum of 10%. Starting January 1, 2022, the maximum royalty rate may increase by 4% if an agreed-upon, cumulative net product sales threshold has not been met, and, starting January 1, 2024, the maximum royalty rate may increase by an additional 4% if a different agreed-upon, cumulative net product sales threshold has not been met. The Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $225.0 million. The Royalty Agreement expires upon the first to occur of January 1, 2031 or when the maximum aggregate royalty payments have been made. The Royalty Agreement was entered into by the Company’s wholly owned subsidiary, La Jolla Pharma, LLC, and HCR has no recourse under the Royalty Agreement against La Jolla Pharmaceutical Company or any assets other than GIAPREZA.
10
On receipt of the $125.0 million payment from HCR, the Company recorded a deferred royalty obligation of $125.0 million, net of issuance costs of $0.7 million. For the three months ended September 30, 2020 and 2019, the Company recognized interest expense, including amortization of the obligation discount, of $2.5 million and $2.8 million, respectively. For the nine months ended September 30, 2020 and 2019, the Company recognized interest expense, including amortization of the obligation discount, of $7.4 million and $8.4 million, respectively. The carrying value of the deferred royalty obligation as of September 30, 2020 was $124.4 million, net of unamortized obligation discount of $0.6 million, and was classified as noncurrent. The related accrued interest expense was $20.8 million and $15.5 million as of September 30, 2020 and December 31, 2019, respectively, of which $16.9 million and $12.8 million was classified as other noncurrent liabilities, respectively. During the three and nine months ended September 30, 2020, the Company made royalty payments to HCR of $0.6 million and $2.1 million, respectively, and, as of September 30, 2020, the Company recorded royalty obligations payable of $0.7 million in accrued expenses. The deferred royalty obligation is classified as Level 3 in the ASC Topic 820-10, three-tier fair value hierarchy, and its carrying value approximates fair value.
Under the terms of the Royalty Agreement, La Jolla Pharma, LLC has certain obligations, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA. If La Jolla Pharma, LLC is held to not have met these obligations, HCR would have the right to terminate the Royalty Agreement and demand payment from La Jolla Pharma, LLC of either $125.0 million or $225.0 million (depending on which obligation La Jolla Pharma, LLC is held to not have met), minus aggregate royalties already paid to HCR. In the event that La Jolla Pharma, LLC fails to timely pay such amount if and when due, HCR would have the right to foreclose on the GIAPREZA-related assets. The Company concluded that certain of these contract provisions that could result in an acceleration of amounts due under the Royalty Agreement are embedded derivatives that require bifurcation from the deferred royalty obligation and fair value recognition. The Company determined the fair value of each derivative by assessing the probability of each event occurring, as well as the potential repayment amounts and timing of such repayments that would result under various scenarios. As a result of this assessment, the Company determined that the fair value of the embedded derivatives is immaterial as of September 30, 2020 and December 31, 2019. Each reporting period, the Company estimates the fair value of the embedded derivatives until the features lapse and/or the termination of the Royalty Agreement. Any change in the fair value of the embedded derivatives will be recorded as either a gain or loss on the consolidated statements of operations.
6. Commitments and Contingencies
Lease Commitments
San Diego Lease
On December 29, 2016, the Company entered into an agreement with BMR-Axiom LP (the “Landlord”) to lease office and laboratory space as its corporate headquarters located at 4550 Towne Centre Court, San Diego, California (the “San Diego Lease”) for a period of 10 years commencing on October 30, 2017 (the “Initial Lease Term”). The Company had an option to extend the San Diego Lease for an additional 5 years at the end of the Initial Lease Term.
On August 6, 2020, La Jolla received notice from the Landlord that the Landlord exercised its option to terminate the San Diego Lease effective August 31, 2020. The Landlord exercised its right to terminate the San Diego Lease and recapture the property after La Jolla provided notice to the Landlord of its intent to assign the San Diego Lease. In connection with the termination of the San Diego Lease, La Jolla will have no further obligations under the San Diego Lease after the August 31, 2020 termination date, including with respect to future payments under the San Diego Lease. The Company recorded a non-cash gain of approximately $12.9 million as other income (expense), net, in connection with the write-off of the lease liability and corresponding right-of-use lease asset. The $12.9 million gain is recorded in the consolidated statements of cash flows net of the loss on disposal of property and equipment in connection with the termination of the San Diego Lease (see Note 4).
The Company provided a standby letter of credit for $0.9 million in lieu of a security deposit. This amount decreased to $0.6 million after year two of the Initial Lease Term. As of September 30, 2020, there was no cash pledged as collateral for such letter of credit and recorded as restricted cash.
As of September 30, 2020, there was no lease liability and corresponding right-of-use asset related to the San Diego Lease. Lease expense for the San Diego Lease was $0.5 million and $1.8 million for the three and nine months ended September 30, 2020, respectively, and was $0.7 million and $2.1 million for the three and nine months ended September 30, 2019, respectively.
11
Watertown Lease
On November 16, 2006, Tetraphase entered into an agreement with ARE-480 Arsenal Street, LLC, to lease office and laboratory space as its corporate headquarters located at 480 Arsenal Way, Watertown, Massachusetts (the “Watertown Lease”). The Watertown Lease originally provided for an expiration on November 30, 2019. In November 2018, Tetraphase entered into an Eighth Amendment to the Watertown Lease to extend the term of the lease through November 30, 2022 (the “Lease Term”). In January 2020, Tetraphase entered into a Ninth Amendment to the Watertown Lease to surrender a portion of its leased space, which reduced the leased premises by a total of 15,899 square feet from approximately 37,438 square feet to approximately 21,539 square feet. Total aggregate remaining payments under the Watertown lease as of July 28, 2020 were $2.6 million.
Tetraphase provided a standby letter of credit for $0.2 million in lieu of a security deposit. As of September 30, 2020, $0.2 million of cash was pledged as collateral for such letter of credit and recorded as restricted cash. The annual rent under the Watertown Lease is subject to escalation during the Lease Term. In addition to rent, the Watertown Lease requires the Company to pay certain taxes, insurance and operating costs relating to the leased premises (collectively, “Lease Operating Costs”). The Watertown Lease contains customary default provisions, representations, warranties and covenants. The Watertown Lease is classified as an operating lease.
Future minimum lease payments, excluding Lease Operating Costs, under the Watertown Lease as of September 30, 2020 are as follows (in thousands):
2020
|
|
$
|
281
|
|
2021
|
|
|
1,138
|
|
2022
|
|
|
1,027
|
|
Thereafter
|
|
|
-
|
|
Total future minimum lease payments
|
|
|
2,446
|
|
Less: discount
|
|
|
(212
|
)
|
Total lease liabilities
|
|
$
|
2,234
|
|
As of July 28, 2020, the Company recorded a lease liability for the Watertown Lease based on the present value of the lease payments over the remaining Lease Term, discounted using the Company’s incremental borrowing rate. The Company recorded a corresponding right-of-use lease asset based on the lease liability. Subsequent to July 28, 2020 and through September 30, 2020, lease expense for the Watertown Lease was $0.2 million.
Contingencies
From time to time, the Company may become subject to claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is it aware of any material pending or threatened litigation.
7. Shareholders’ Equity
Preferred Stock
As of September 30, 2020 and December 31, 2019, 3,906 shares of Series C-12 Convertible Preferred Stock (“Series C-12 Preferred”) were issued, outstanding and convertible into 6,735,378 shares of common stock. In January 2019, the Company issued 782,031 shares of common stock upon the conversion of 2,737 shares of Series F Convertible Preferred Stock. As of September 30, 2020 and December 31, 2019, there were no shares of Series F Convertible Preferred Stock issued and outstanding.
8. Equity Incentive Plans
2013 Equity Incentive Plan
A total of 9,600,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2013 Equity Incentive Plan (the “2013 Equity Plan”). As of September 30, 2020, 6,061,242 shares of common stock remained available for future grants under the 2013 Equity Plan.
12
2018 Employee Stock Purchase Plan
A total of 750,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2018 Employee Stock Purchase Plan (the “ESPP”). As of September 30, 2020, 480,368 shares of common stock remained available for future grants under the ESPP.
Equity Awards
The activity related to equity awards, which are comprised of stock options and inducement grants, during the nine months ended September 30, 2020 is summarized as follows:
|
|
Equity
Awards
|
|
|
Weighted-average
Exercise Price
per Share
|
|
|
Weighted-average
Remaining Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2019
|
|
|
5,616,840
|
|
|
$
|
19.50
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,802,860
|
|
|
$
|
4.70
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(94,219
|
)
|
|
$
|
6.42
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(4,000,059
|
)
|
|
$
|
18.74
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
3,325,422
|
|
|
$
|
12.77
|
|
|
|
7.43
|
|
|
$
|
-
|
|
Exercisable at September 30, 2020
|
|
|
1,466,036
|
|
|
$
|
20.53
|
|
|
|
5.52
|
|
|
$
|
-
|
|
Share-based Compensation Expense
The classification of share-based compensation expense is summarized as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Research and development
|
|
$
|
691
|
|
|
$
|
4,169
|
|
|
$
|
3,218
|
|
|
$
|
12,062
|
|
Selling, general and administrative
|
|
|
697
|
|
|
|
2,250
|
|
|
|
2,167
|
|
|
|
7,460
|
|
Total share-based compensation expense
|
|
$
|
1,388
|
|
|
$
|
6,419
|
|
|
$
|
5,385
|
|
|
$
|
19,522
|
|
As of September 30, 2020, total unrecognized share-based compensation expense related to unvested equity awards was $8.0 million, which is expected to be recognized over a weighted-average period of 2.6 years. As of September 30, 2020, there was no unrecognized share-based compensation expense related to shares of common stock issued under the ESPP.
9. Other Income—Related Party
The Company has a non-voting profits interest in a related party, which provides the Company with the potential to receive a portion of the future distributions of profits, if any. Investment funds affiliated with the Chairman of the Company’s board of directors have a controlling interest in the related party. During the nine months ended September 30, 2020, the Company received distributions of $4.1 million in connection with this profits interest.
10. License Agreements
In-license Agreements
George Washington University License
In December 2014, the Company entered into a patent license agreement with George Washington University (“GW”), which was subsequently amended and restated (the “GW License”) and assigned to La Jolla Pharma, LLC. Pursuant to the GW License, GW exclusively licensed to the Company certain intellectual property rights relating to GIAPREZA, including the exclusive rights to certain issued patents and patent applications covering GIAPREZA. Under the GW License, the Company is obligated to use commercially reasonable efforts to develop, commercialize, market and sell GIAPREZA. The Company has paid a one-time license initiation fee, annual maintenance fees, an amendment fee, additional payments following the achievement of certain development and regulatory milestones and royalties. As a result of the European Commission’s approval of
13
GIAPREZA in August 2019, the Company made a milestone payment to GW in the amount of $0.5 million in the first quarter of 2020. The Company is obligated to pay a 6% royalty on net sales of GIAPREZA. The obligation to pay royalties under this agreement extends through the last-to-expire patent covering GIAPREZA. During the three and nine months ended September 30, 2020, the Company made royalty payments to GW of $0.3 million and $1.2 million, respectively.
Harvard University License
In August 2006, Tetraphase entered into a license agreement with Harvard University (“Harvard”), which was subsequently amended and restated (the “Harvard License”). Pursuant to the Harvard License, Harvard exclusively licensed to the Company certain intellectual property rights relating to tetracycline-based products, including XERAVA, including the exclusive rights to certain issued patents and patent applications covering such products. Under the Harvard License, the Company is obligated to use commercially reasonable efforts to develop, commercialize, market and sell tetracycline-based products, including XERAVA. For each product covered by the Harvard License, the Company is obligated to make certain payments totaling up to approximately $15.1 million upon the achievement of certain clinical development and regulatory milestones, and to pay Harvard tiered royalties at percentages in the single digits based on net sales, if any, of tetracycline-based products, including XERAVA, by the Company, its affiliates and sublicensees in certain circumstances. The Company is also obligated to pay Harvard a specified share of non-royalty sublicensing and other revenues that it receives from sublicensees for the grant of sublicenses in certain circumstances, including the Everest License (see below), and to reimburse Harvard for specified patent prosecution and maintenance costs. The obligation to pay royalties under this agreement extends through the last-to-expire patent covering tetracycline-based products, including XERAVA. Subsequent to July 28, 2020 and through September 30, 2020, the Company paid $0.1 million of royalties to Harvard, and did not make any payments to Harvard related to clinical development and regulatory milestone payments.
Paratek Pharmaceuticals, Inc. License
In March 2019, Tetraphase entered into a license agreement with Paratek Pharmaceuticals, Inc. (“Paratek”), which was subsequently amended and restated (the “Paratek License”). Pursuant to the Paratek License, Paratek non-exclusively licensed to the Company certain intellectual property rights relating to XERAVA, including non-exclusive rights to certain issued patents and patent applications covering XERAVA. Under the Paratek License, the Company is obligated to use commercially reasonable efforts to develop, commercialize, market and sell XERAVA. The Company is obligated to pay Paratek royalties at a low single digit percent based on net sales of XERAVA in the U.S. The obligation to pay royalties under this agreement extends through the last-to-expire patent covering XERAVA. Subsequent to July 28, 2020 and through September 30, 2020, the Company paid $33,000 of royalties to Paratek.
Out-license Agreement
Everest Medicines Limited License
In February 2018, Tetraphase entered into a license agreement with Everest Medicines Limited (“Everest”), which was subsequently amended and restated (the “Everest License”). Pursuant to the Everest License, Tetraphase granted Everest an exclusive license to develop and commercialize XERAVA for the treatment of cIAI and other indications in mainland China, Taiwan, Hong Kong, Macau, South Korea, Singapore, the Malaysian Federation, the Kingdom of Thailand, the Republic of Indonesia, the Socialist Republic of Vietnam and the Republic of the Philippines (collectively, the “Territory”). The Company is eligible to receive up to an aggregate of $11.0 million in future clinical development and regulatory milestone payments and up to an aggregate of $20.0 million in sales milestone payments. The Company is also entitled to receive tiered royalties from Everest at percentages in the low double digits on sales, if any, in the Territory of products containing eravacycline. Royalties are payable with respect to each jurisdiction in the Territory until the latest to occur of: (1) the last-to-expire of specified patent rights in such jurisdiction in the Territory; (2) expiration of marketing or regulatory exclusivity in such jurisdiction in the Territory; or (3) 10 years after the first commercial sale of a product in such jurisdiction in the Territory. In addition, royalties payable under the Everest License will be subject to reduction on account of generic competition and after patent expiration in a jurisdiction, with any such reductions capped at certain percentages of the amounts otherwise payable during the applicable royalty payment period. Pursuant to the Everest License, Everest will be solely responsible for the development and commercialization of licensed products in the Territory. The Company agreed to use commercially reasonable efforts to manufacture drug product for clinical development, which will be paid by Everest at the cost to manufacture, as well as manufacture drug product for commercial supply, which will be paid by Everest at cost plus a reasonable margin. The Company has not yet entered into a commercial supply agreement with Everest, which would set the quantity and timing of commercial supply. Subsequent to July 28,
14
2020 and through September 30, 2020, the Company has not received any payments from Everest related to either royalties or clinical development and regulatory milestones.
11. Company-wide Realignments
On December 2, 2019, the Board of Directors of the Company approved a restructuring plan (the “2019 Realignment”) that reduced the Company’s headcount. The 2019 Realignment did not result in any reductions in headcount in the Company’s commercial organization supporting its products. For the year ended December 31, 2019, total expense was comprised of $5.8 million for one-time termination benefits to the affected employees, including severance and health care benefits, offset by a $0.9 million reversal of non-cash, share-based compensation expense related to forfeited, unvested equity awards. As of September 30, 2020, the Company had paid $4.9 million of the $5.8 million cash severance and health care benefits charges, and the remaining $0.2 million of the health care benefits charges were included in accrued payroll and related expenses. The Company expects to complete making payments related to the 2019 Realignment by the end of the fourth quarter of 2020.
On May 28, 2020, the Board of Directors of the Company approved a restructuring plan (the “2020 Realignment”) to align its organization with the Company’s sole focus on the commercialization of its products. The 2020 Realignment reduced the Company’s headcount. For the nine months ended September 30, 2020, total expense was comprised of $4.1 million for one-time termination benefits to the affected employees, including severance and health care benefits, offset by a $0.4 million reversal of non-cash, share-based compensation expense related to forfeited, unvested equity awards. As of September 30, 2020, the Company had paid $2.6 million of the $4.1 million cash severance and health care benefits charges, and the remaining $1.5 million of the cash severance and health care benefits charges were included in accrued payroll and related expenses. The Company expects to complete making substantially all of the payments related to the 2020 Realignment by the end of the first quarter of 2021.
In connection with the acquisition of Tetraphase, the Company incurred one-time charges related to a reduction in the combined Company’s headcount. For the three and nine months ended September 30, 2020, total expense was comprised of $3.1 million for one-time termination benefits to the affected employees, including severance and health care benefits. As of September 30, 2020, the Company had paid $1.3 million of the $3.1 million cash severance and health care benefits charges, and the remaining $1.8 million of the cash severance and health care benefits charges were included in accrued payroll and related expenses. The Company expects to complete making substantially all of the payments related to this headcount reduction by the end of the second quarter of 2021.
12. Acquisition of Tetraphase Pharmaceuticals, Inc.
On June 24, 2020, La Jolla entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Tetraphase, a biopharmaceutical company focused on commercializing its novel tetracycline XERAVA to treat serious and life‑threatening infections, and TTP Merger Sub, Inc., a wholly owned subsidiary of La Jolla. On July 28, 2020, La Jolla completed its acquisition of Tetraphase for $43 million in upfront cash plus potential future cash payments of up to $16 million pursuant to contingent value rights (“CVRs”). The holders of the CVRs are entitled to receive potential future cash payments of up to $16 million in the aggregate upon the achievement of certain net sales of XERAVA in the U.S. as follows: (i) $2.5 million if 2021 XERAVA U.S. net sales are at least $20 million; (ii) $4.5 million if XERAVA U.S. net sales are at least $35 million during any calendar year ending on or prior to December 31, 2024; and (iii) $9 million if XERAVA U.S. net sales are at least $55 million during any calendar year ending on or prior to December 31, 2024. Following the acquisition, Tetraphase became a wholly owned subsidiary of La Jolla.
The acquisition of Tetraphase was accounted for as a business combination using the acquisition method pursuant to FASB ASC Topic 805. As the acquirer for accounting purposes, La Jolla has estimated the Purchase Price, assets acquired and liabilities assumed as of the acquisition date, with the excess of the Purchase Price over the fair value of net assets acquired recognized as goodwill. The estimated fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value.
The Purchase Price is comprised of the upfront cash of $43 million and the estimated fair value of potential future cash payments pursuant to the CVRs. The estimated fair value of assets acquired was $54.7 million, and the estimated fair value of liabilities assumed was $9.1 million.
15
The Purchase Price allocation as of the acquisition date is presented as follows (in thousands):
|
|
July 28,
|
|
|
|
2020
|
|
Cash
|
|
$
|
42,990
|
|
Fair value of CVRs
|
|
|
2,610
|
|
Total Purchase Price
|
|
$
|
45,600
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
8,778
|
|
Accounts receivable
|
|
|
1,187
|
|
Inventory
|
|
|
4,767
|
|
Prepaid expenses and other current assets
|
|
|
1,218
|
|
Property and equipment
|
|
|
58
|
|
Right-of-use lease assets
|
|
|
2,302
|
|
Restricted cash
|
|
|
699
|
|
Identifiable intangible assets
|
|
|
15,520
|
|
Goodwill
|
|
|
20,123
|
|
Accounts payable
|
|
|
(1,400
|
)
|
Accrued expenses
|
|
|
(2,979
|
)
|
Lease liabilities, current portion
|
|
|
(967
|
)
|
Lease liabilities, less current portion
|
|
|
(1,420
|
)
|
Other noncurrent liabilities
|
|
|
(2,286
|
)
|
Total Purchase Price
|
|
$
|
45,600
|
|
The estimated fair value of potential future cash payments pursuant to the CVRs was based on a Monte Carlo simulation and is classified as Level 3 in the ASC Topic 820-10, three-tier fair value hierarchy.
The Company recorded a $3.3 million fair value step-up adjustment to Tetraphase’s inventory as of the acquisition date. Raw material components and active pharmaceutical ingredients were recorded based on estimated replacement cost. Finished drug product was valued at estimated selling cost, adjusted for costs of selling effort and a reasonable profit allowance for such selling effort from the viewpoint of a market participant. This fair value step-up adjustment is recorded as cost of products sales when the inventory is sold to Customers, $1.2 million of which was included in cost of product sales subsequent to July 28, 2020 and through September 30, 2020.
Identifiable intangible assets consist of certain technology and trade names acquired from Tetraphase, and include the value of the Harvard, Paratek and Everest Licenses (see Note 10). The acquired intangible assets have definite useful lives and are being amortized on a straight-line basis over an estimated useful life of 10 years. The acquired intangible assets are classified as Level 3 in the ASC Topic 820-10, three-tier fair value hierarchy.
Goodwill represents the excess of the Purchase Price over the fair value of the net assets acquired as of the acquisition date. Goodwill represents the value of the stronger platform to increase patient access to the Company’s commercial products and the operational synergies of the combined Company. Goodwill has an indefinite useful life and is not amortized. The goodwill is only deductible for tax purposes if the Company makes a U.S. Internal Revenue Code Section 338 (“Section 338”) election. The Company is currently evaluating whether to make a Section 338 election.
Subsequent to July 28, 2020 and through September 30, 2020, XERAVA U.S. net sales were $1.9 million and operating losses attributable to Tetraphase were $6.4 million, inclusive of $0.3 million of intangible asset amortization included in selling, general and administrative expense and $1.2 million of the inventory fair value step-up adjustment included in cost of product sales.
Acquisition-related expenses, which were comprised primarily of legal fees, were $0.3 million and $0.9 million for the three and nine months ended September 30, 2020, respectively, and were included in selling, general and administrative expense.
16