bpmc_Current Folio_10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

_____________________________

FORM 10-Q

 

_____________________________

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-37359

_____________________________

 

BLUEPRINT MEDICINES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

_____________________________

 

Delaware

 

26-3632015

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

45 Sidney Street

Cambridge, Massachusetts

 

02139

(Address of Principal Executive Offices)

 

(Zip Code)

(617) 374-7580

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

_____________________________

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑     No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☑     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

Large accelerated filer  ☑ 

Non-accelerated filer  ☐

(Do not check if a smaller reporting company)

Accelerated filer  ☐

Smaller reporting company  ☐

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☑

Number of shares of the registrant’s common stock, $0.001 par value, outstanding on July 27, 2018: 43,887,732

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

Page

Part I – FINANCIAL INFORMATION 

Item 1. Financial Statements (unaudited) 

5

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

5

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2018 and 2017

6

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017

7

 

Notes to Condensed Consolidated Financial Statements

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

24

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

37

Item 4. Controls and Procedures 

37

 

 

 

Part II – OTHER INFORMATION 

Item 1. Legal Proceedings 

39

Item 1A. Risk Factors 

39

Item 6. Exhibits 

79

Signatures 

80

 

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Unless otherwise stated, all references to “us,” “our,” “Blueprint,” “Blueprint Medicines,” “we,” the “Company” and similar designations in this Quarterly Report on Form 10-Q refer to Blueprint Medicines Corporation and its consolidated subsidiary, Blueprint Medicines Security Corporation.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would” or the negative of these words or other comparable terminology, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

·

the initiation, timing, progress and results of our pre-clinical studies and clinical trials, including our ongoing clinical trials and any planned clinical trials for avapritinib, BLU-554, BLU-667 and BLU-782, and our research and development programs;

·

our ability to advance drug candidates into, and successfully complete, clinical trials;

·

the timing or likelihood of regulatory filings and approvals;

·

the commercialization of our drug candidates, if approved;

·

the pricing and reimbursement of our drug candidates, if approved;

·

the implementation of our business model, strategic plans for our business, drug candidates and technology;

·

the scope of protection we are able to establish and maintain for intellectual property rights covering our drug candidates and technology;

·

estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

·

the potential benefits of our existing cancer immunotherapy collaboration with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. and our collaboration with CStone Pharmaceuticals, as well as our ability to enter into other strategic arrangements;

·

the development of companion diagnostic tests for our drug candidates;

·

our ability to maintain and establish collaborations;

·

our financial performance; and

·

developments relating to our competitors and our industry.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or enter into.

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You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results, performance or achievements may be materially different from what we expect. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 

 

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

Blueprint Medicines Corporation

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2018

    

2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

117,751

 

$

400,304

 

Investments, available-for-sale

 

 

495,705

 

 

273,052

 

Prepaid expenses and other current assets

 

 

8,757

 

 

12,149

 

Total current assets

 

 

622,213

 

 

685,505

 

Investments, available-for-sale

 

 

3,195

 

 

 —

 

Property and equipment, net

 

 

30,250

 

 

24,363

 

Restricted cash

 

 

4,557

 

 

4,555

 

Other assets

 

 

4,898

 

 

1,314

 

Total assets

 

$

665,113

 

$

715,737

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

 

2,980

 

 

3,744

 

Accrued expenses

 

 

39,808

 

 

30,541

 

Current portion of deferred revenue

 

 

5,139

 

 

5,373

 

Current portion of lease incentive obligation

 

 

1,714

 

 

1,714

 

Current portion of term loan payable

 

 

692

 

 

1,518

 

Total current liabilities

 

 

50,333

 

 

42,890

 

Deferred rent, net of current portion

 

 

4,648

 

 

4,129

 

Deferred revenue, net of current portion

 

 

43,156

 

 

30,000

 

Lease incentive obligation, net of current portion

 

 

13,760

 

 

14,617

 

Other long term liabilities

 

 

284

 

 

131

 

Commitments (Note 10)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding

 

 

 —

 

 

 —

 

Common stock, $0.001 par value; 120,000,000 shares authorized; 43,883,774 and 43,577,526 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively;

 

 

44

 

 

43

 

Additional paid-in capital

 

 

997,770

 

 

979,785

 

Accumulated other comprehensive loss

 

 

(381)

 

 

(269)

 

Accumulated deficit

 

 

(444,501)

 

 

(355,589)

 

Total stockholders’ equity

 

 

552,932

 

 

623,970

 

Total liabilities and stockholders’ equity

 

$

665,113

 

$

715,737

 

 

 

 

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Blueprint Medicines Corporation

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

 

2018

    

2017

 

2018

    

2017

Collaboration revenue

 

$

41,439

 

$

5,890

 

$

42,393

 

$

11,730

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

58,573

 

 

33,271

 

 

108,527

 

 

61,758

General and administrative

 

 

12,333

 

 

6,833

 

 

22,244

 

 

12,516

Total operating expenses

 

 

70,906

 

 

40,104

 

 

130,771

 

 

74,274

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

2,442

 

 

861

 

 

4,836

 

 

1,286

Interest expense

 

 

(23)

 

 

(59)

 

 

(55)

 

 

(131)

Total other income

 

 

2,419

 

 

802

 

 

4,781

 

 

1,155

Net loss

 

$

(27,048)

 

$

(33,412)

 

$

(83,597)

 

$

(61,389)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments

 

 

210

 

 

(200)

 

 

(112)

 

 

(296)

Comprehensive loss

 

$

(26,838)

 

$

(33,612)

 

$

(83,709)

 

$

(61,685)

Net loss per share applicable to common stockholders — basic and diluted

 

$

(0.62)

 

$

(0.86)

 

$

(1.91)

 

$

(1.71)

Weighted-average number of common shares used in net loss per share applicable to common stockholders — basic and diluted

 

 

43,856

 

 

38,775

 

 

43,779

 

 

35,998

 

 

 

 

 

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Blueprint Medicines Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30, 

 

    

2018

    

2017
(as adjusted)

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(83,597)

 

$

(61,389)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,913

 

 

791

 

Noncash interest expense

 

 

 8

 

 

19

 

Stock-based compensation

 

 

13,311

 

 

5,219

 

Accretion of premiums and discounts on investments

 

 

(1,675)

 

 

76

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Unbilled accounts receivable

 

 

 —

 

 

502

 

Prepaid expenses and other current assets

 

 

3,088

 

 

(2,608)

 

Other assets

 

 

(3,584)

 

 

 4

 

Accounts payable

 

 

(785)

 

 

297

 

Accrued expenses

 

 

11,595

 

 

3,953

 

Deferred revenue

 

 

7,607

 

 

(5,830)

 

Deferred rent

 

 

(303)

 

 

369

 

Net cash used in operating activities

 

 

(52,422)

 

 

(58,597)

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(9,634)

 

 

(457)

 

Purchases of investments

 

 

(489,285)

 

 

(209,892)

 

Maturities of investments

 

 

265,000

 

 

96,000

 

Net cash used in by investing activities

 

 

(233,919)

 

 

(114,349)

 

Financing activities

 

 

 

 

 

 

 

Principal payments on loan payable

 

 

(833)

 

 

(1,417)

 

Principal payments on capital lease obligations

 

 

(39)

 

 

 —

 

Payment of offering costs

 

 

(281)

 

 

(716)

 

Proceeds from public offering of common stock, net of commissions and underwriting discounts

 

 

 —

 

 

216,200

 

Proceeds from issuance of common stock, net of repurchases

 

 

4,730

 

 

1,656

 

Net cash provided by financing activities

 

 

3,577

 

 

215,723

 

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

 

(282,764)

 

 

42,777

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

405,072

 

 

53,336

 

Cash, cash equivalents, and restricted cash at end of period

 

$

122,308

 

$

96,113

 

Supplemental cash flow information

 

 

 

 

 

 

 

Public offering costs incurred but unpaid at period end

 

$

 —

 

$

306

 

Property and equipment purchases unpaid at period end

 

$

2,114

 

$

1,920

 

Cash paid for interest

 

$

31

 

$

91

 

 

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows.

 

 

 

 

 

 

 

 

 

 

June 30, 

 

June 30, 

 

 

 

2018

 

2017

 

Cash and cash equivalents

 

$

117,751

 

$

91,346

 

Restricted cash

 

 

4,557

 

 

4,767

 

Total cash, cash equivalents, and restricted cash shown in condensed consolidated statements of cash flows

 

 

122,308

 

 

96,113

 

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Blueprint Medicines Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Nature of Business

Blueprint Medicines Corporation (the Company), a Delaware corporation incorporated on October 14, 2008, is a biopharmaceutical company focused on developing potentially transformational medicines to improve the lives of patients with genomically defined cancers and rare diseases. The Company’s approach is to leverage its novel target discovery engine to systematically and reproducibly identify kinases that are drivers of diseases in genomically defined patient populations and to craft highly selective and potent drug candidates that may provide significant and durable clinical responses for patients without adequate treatment options.

The Company is devoting substantially all of its efforts to research and development, conducting pre-clinical and clinical development, commencing pre-commercial activities and raising capital. The Company is subject to a number of risks similar to those of other early stage companies, including dependence on key individuals; establishing safety and efficacy in clinical trials for its drug candidates; the need to develop commercially viable drug candidates; competition from other companies, many of which are larger and better capitalized; and the need to obtain adequate additional financing to fund the development of its drug candidates. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce, eliminate or out‑license certain of its research and development programs or future commercialization efforts.

On May 5, 2015, the Company completed an initial public offering (IPO) of its common stock, which resulted in the sale of 9,367,708 shares of its common stock at a price to the public of $18.00 per share, including 1,221,874 shares of common stock sold by the Company pursuant to the exercise in full by the underwriters of their option to purchase additional shares in connection with the offering. The Company received net proceeds of $154.8 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.

On December 13, 2016, the Company closed a follow-on public offering of 5,750,000 shares of its common stock at a price to the public of $25.00 per share, including 750,000 shares of common stock sold by the Company pursuant to the exercise in full by the underwriters of their option to purchase additional shares in connection with the offering. The Company received net proceeds of $134.5 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.

On April 4, 2017, the Company closed a follow-on public offering of 5,750,000 shares of its common stock at a price to the public of $40.00 per share, including 750,000 shares of common stock sold by the Company pursuant to the exercise in full by the underwriters of their option to purchase additional shares in connection with the offering (the April 2017 follow-on public offering). The Company received net proceeds of $215.6 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.

On December 15, 2017, the Company closed its underwritten public offering of 4,259,259 shares of its common stock at a price to the public of $81.00 per share, including 555,555 shares of common stock sold by the Company pursuant to the exercise in full by the underwriters of their option to purchase additional shares in connection with the offering. The Company received net proceeds of approximately $325.7 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.

As of June 30, 2018, the Company had cash, cash equivalents and investments of $616.7 million. Based on the Company’s current plans, the Company believes its existing cash, cash equivalents and investments, excluding any potential option fees and milestone payments under its existing collaborations with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (collectively, Roche) and CStone Pharmaceuticals (CStone), will be sufficient to enable it to fund its operating expenses and capital expenditure requirements into the second half of 2020.

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2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Basis of Presentation

The unaudited interim condensed consolidated financial statements of the Company included herein have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) as found in the Accounting Standards Codification (ASC), Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB) and the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2017 and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 21, 2018.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements, except as noted below with respect to the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606), and include the accounts of the Company and its wholly-owned subsidiary, Blueprint Medicines Security Corporation, which is a Massachusetts subsidiary created to buy, sell, and hold securities. All intercompany transactions and balances have been eliminated. In the opinion of the Company’s management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments which are necessary to present fairly the Company’s financial position as of June 30, 2018, the results of its operations for the three and six months ended June 30, 2018 and 2017 and cash flows for the six months ended June 30, 2018 and 2017. Such adjustments are of a normal and recurring nature. The results for the three and six months ended June 30, 2018 are not necessarily indicative of the results for the year ending December 31, 2018, or for any future period.

Due to the underwritten public offerings completed on April 4, 2017, and December 15, 2017, there was a significant increase in shares outstanding in the year ended December 31, 2017, which impacts the period-over-period comparability of the Company’s net loss per share calculations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and in developing the estimates and assumptions that are used in the preparation of the financial statements. Management must apply significant judgment in this process. Management’s estimation process often may yield a range of potentially reasonable estimates and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following areas, among others: stock‑based compensation expense; revenue recognition; accrued expenses; and income taxes.

Significant Accounting Policies

The Company’s critical accounting policies are those policies that require the most significant judgments and estimates in the preparation of our financial statements. Management has determined that the Company’s most critical accounting policies are those relating to revenue recognition, accrued research and development expenses, available-for-sale investments and stock-based compensation.

Revenue Recognition

Effective January 1, 2018, the Company adopted ASC 606, using the modified retrospective transition method. Under this method, results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 605, Revenue Recognition (ASC 605). The Company only applied the modified retrospective transition method to contracts that were not completed as of January 1, 2018, the effective date of adoption for ASC 606. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration

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arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five 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 a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company enters into licensing agreements that are within the scope of ASC 606, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must use significant judgment to determine: (a) the number of performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; and (c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied.

Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.

Exclusive Licenses. If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other promises, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining promise, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.

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Research and Development Services. The promises under the Company’s collaboration agreements may include research and development services to be performed by the Company on behalf of the partner. Payments or reimbursements resulting from the Company’s research and development efforts are recognized as the services are performed and presented on a gross basis because the Company is the principal for such efforts. Reimbursements from and payments to the partner that are the result of a collaborative relationship with the partner, instead of a customer relationship, such as co-development activities, are recorded as a reduction to research and development expense.

Customer Options. If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services, the goods and services underlying the customer options that are not determined to be material rights are not considered to be performance obligations at the outset of the arrangement, as they are contingent upon option exercise. The Company evaluates the customer options for material rights, or options to acquire additional goods or services for free or at a discount. If the customer options are determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised.

Milestone Payments. At the inception of each arrangement that includes research or development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

Royalties. For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

For a complete discussion of accounting for collaboration revenues, see Note 6, “Collaborations.”

Collaborative Arrangements

The Company analyzes its collaboration arrangements to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities and therefore within the scope of ASC Topic 808, Collaborative Arrangements (ASC 808). This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and which elements of the collaboration are more reflective of a vendor-customer relationship and therefore within the scope of ASC 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to ASC 606. Amounts that are owed to collaboration partners are recognized as an offset to collaboration revenues has such amounts are incurred by the collaboration partner. Where amounts owed to a collaboration partner exceed the Company’s collaboration revenues in each quarterly period, such amounts are classified as research and development expense. For those elements of the arrangement that are accounted for pursuant to ASC 606, the Company applies the five-step model described above under ASC 606.

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For a complete discussion of accounting for collaboration revenues, see Note 6, “Collaborations.”

Other than as described above with respect to revenue recognition, there have been no significant changes to the Company’s critical accounting policies discussed in its Annual Report on Form 10-K for the year ended December 31, 2017.

Recent Accounting Pronouncements

Recently Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, which amends the guidance for accounting for revenue from contracts with customers. ASU No. 2014-09 superseded the revenue recognition requirements in ASC 605 and created ASC 606 described above. In 2015 and 2016, the FASB issued additional ASUs related to ASC 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identifying performance obligations, and licensing, and they include other improvements and practical expedients. Effective January 1, 2018, the Company adopted ASC 606 using the modified retrospective transition method.

As a result of adopting ASC 606, the Company has recorded a cumulative-effect increase to opening accumulated deficit of $5.3 million as of January 1, 2018 and a corresponding increase to deferred revenue primarily as a result of the treatment of the up-front consideration received from Roche in March 2016 that was recorded under ASC 605 prior to the adoption of ASC 606. A summary of the amount by which each financial statement line item was affected by the impact of the cumulative adjustment is set forth in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of ASC 606 Adoption on

Condensed Consolidated Balance Sheet

as of January 1, 2018

(in thousands)

 

 

As reported under ASC 606

 

 

Adjustments

 

 

Balances without adoption of ASC 606

Deferred revenue, current portion

 

$

4,478

 

$

(895)

 

$

5,373

Deferred revenue, net of current portion

 

$

36,210

 

$

6,210

 

$

30,000

Accumulated deficit

 

$

(360,904)

 

$

(5,315)

 

$

(355,589)

 

A summary of the amount by which each financial statement line item was affected in the current reporting period by ASC 606 as compared with the guidance that was in effect prior to the adoption of ASC 606 is set forth in the tables below.

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of ASC 606 Adoption on

Condensed Consolidated Balance Sheet

as of June 30, 2018

(in thousands)

 

 

As reported under ASC 606

 

 

Adjustments

 

 

Balances without adoption of ASC 606

Deferred revenue, current portion

 

$

5,139

 

$

(234)

 

$

5,373

Deferred revenue, net of current portion

 

$

43,156

 

$

15,843

 

$

27,313

Accumulated deficit

 

$

(444,501)

 

$

(15,608)

 

$

(428,893)

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of ASC 606 Adoption on

Condensed Consolidated Statement of Operations and Comprehensive Loss

for the Six Months Ended June 30, 2018

(in thousands)

 

 

As reported under ASC 606

 

 

Adjustments

 

 

Balances without adoption of ASC 606

Collaboration revenue

 

$

42,393

 

$

(10,294)

 

$

52,687

Net loss

 

$

(83,597)

 

$

(10,294)

 

$

(73,303)

Net loss per share - basic and diluted

 

$

(1.91)

 

$

(0.24)

 

$

(1.67)

 

 

 

 

 

 

 

 

 

 

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Impact of ASC 606 Adoption on

Condensed Consolidated Statement of Cash Flows

for the Six Months Ended June 30, 2018

(in thousands)

 

 

As reported under ASC 606

 

 

Adjustments

 

 

Balances without adoption of ASC 606

Net Loss

 

$

(83,597)

 

$

(10,294)

 

$

(73,303)

Changes in deferred revenue

 

$

7,607

 

$

4,921

 

$

2,686

The most significant change to the Company’s accounting for revenue as a result of the adoption of ASC 606 relates to its revenue recognition pattern under step (v) above for the Company’s collaboration and license agreement with Roche (as amended, the Roche agreement). Under ASC 605, the Company was recognizing the revenue allocated to each unit of accounting on straight‑line basis over the period the Company expected to complete its obligations. Under ASC 606, the Company is recognizing the revenue allocated to each performance obligation measuring progress using an input method over the period the Company expects to complete each performance obligation. ASC 606 also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. For further discussion of the adoption of this standard, see Note 6, “Collaborations.”

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (ASU No. 2016-18). The amendments in ASU No. 2016-18 require an entity to reconcile and explain the period-over-period change in total cash, cash equivalents and restricted cash within its statements of cash flows. ASU No. 2016-18 was effective for the Company on January 1, 2018. The Company adopted ASU No. 2016-18 using a full retrospective approach and it did not have a significant impact on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) (ASU No. 2016-15), which simplifies certain elements of cash flow classification. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU No. 2016-15 was effective for the Company on January 1, 2018, and it did not have a material impact on the Company’s consolidated financial statements.

In 2016, the FASB issued ASU No. 2016-01 Financial Instruments (ASU No. 2016-01) related to the recording of financial assets and financial liabilities. Under the amended guidance, equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income (loss). However, an entity has the option to either measure equity investments without readily determinable fair values either (i) at fair value or (ii) at cost adjusted for changes in observable prices minus impairment. Changes in measurement under either alternative will be recognized in net income (loss). The amended guidance became effective January 1, 2018. As the Company does not currently hold equity securities, there was no impact on the financial statements at the adoption date. The Company may hold equity securities in the future, at which time the Company will apply the provisions of ASU No. 2016-01 and record changes in the fair value of the equity securities in net income (loss).

Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU No. 2016-02), which will change the way the Company recognizes its leased assets. ASU No. 2016-02 will require organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities representing the rights and obligations created by those leases. ASU No. 2016-02 will also require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The standard is effective for annual reporting periods (including interim reporting periods within those years) beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the methods of adoption allowed by the new standard and the effect that adoption of the standard is expected to have on the Company’s consolidated financial statements and related disclosures.

3. Cash Equivalents and Investments

Cash equivalents are highly liquid investments that are readily convertible into cash with original maturities of three months or less when purchased. Investments consist of securities with original maturities greater than 90 days when purchased. The Company classifies these investments as available-for-sale and records them at fair value in the

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accompanying condensed consolidated balance sheets. Unrealized gains or losses are included in accumulated other comprehensive income (loss). Premiums or discounts from par value are amortized to investment income over the life of the underlying investment.

Cash equivalents and investments, available-for-sale, consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

June 30, 2018

Maturity

    

Cost

 

Gain

 

Losses

 

Value

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

 

 

$

117,751

 

$

 —

 

$

 —

 

$

117,751

Investments, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury obligations

 

 

282 Days

 

 

499,281

 

 

 7

 

 

(388)

 

 

498,900

Total

 

 

 

 

$

617,032

 

$

 7

 

$

(388)

 

$

616,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2017

Maturity

    

Cost

 

Gain

 

Losses

 

Value

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

 

 

$

400,304

 

$

 —

 

$

 —

 

$

400,304

Investments, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury obligations

 

 

348 Days

 

 

273,321

 

 

 —

 

 

(269)

 

 

273,052

Total

 

 

 

 

$

673,625

 

$

 —

 

$

(269)

 

$

673,356

 

Although available to be sold to meet operating needs or otherwise, securities are generally held through maturity. The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. During the three and six months ended June 30, 2018 and 2017, there were no realized gains or losses on sales of investments, and no investments were adjusted for other than temporary declines in fair value.

At June 30, 2018, the Company held 48 securities that were in an unrealized loss position. The aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months as of June 30, 2018 was $412.6 million. As of June 30, 2018, there were no securities held by the Company in an unrealized loss position for more than twelve months. The Company has the intent and ability to hold such securities until recovery. The Company determined that there was no material change in the credit risk of the above investments. As a result, the Company determined it did not hold any investments with an other-than-temporary impairment as of June 30, 2018.

4. Fair Value of Financial Instruments

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:

·

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

·

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

·

Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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Financial instruments measured at fair value as of June 30, 2018 are classified below based on the fair value hierarchy described above:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Active

    

Observable

    

Unobservable

 

 

June 30, 

 

Markets

 

Inputs

 

Inputs

Description

 

2018

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

117,751

 

$

117,751

 

$

 —

 

$

 —

Investments, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S Treasury obligations

 

 

498,900

 

 

498,900

 

 

 —

 

 

 —

Total

 

$

616,651

 

$

616,651

 

$

 —

 

$

 —

 

Financial instruments measured at fair value as of December 31, 2017 are classified below based on the fair value hierarchy described above:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Active

    

Observable

    

Unobservable

 

 

December 31, 

 

Markets

 

Inputs

 

Inputs

Description

 

2017

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

400,304

 

$

400,304

 

$

 —

 

$

 —

Investments, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S Treasury obligations

 

 

273,052

 

 

273,052

 

 

 —

 

 

 —

Total

 

$

673,356

 

$

673,356

 

$

 —

 

$

 —

The fair value of the Company’s term loan payable is determined using current applicable rates for similar instruments as of the balance sheet date. The carrying value of the Company’s term loan payable approximates fair value because the Company’s interest rate yield approximates current market rates. The Company’s term loan payable is a Level 3 liability within the fair value hierarchy.

5. Restricted Cash

At June 30, 2018 and December 31, 2017, $4.6 million and $4.8 million, respectively, of the Company’s cash is restricted by a bank. As of June 30, 2018 and December 31, 2017, $4.6 million of the restricted cash was included in long-term assets on the Company’s balance sheet related to security deposits for the lease agreements for the Company’s current and former corporate headquarters.

6. Collaborations

CStone Pharmaceuticals

On June 1, 2018, the Company entered into a Collaboration and License Agreement (the CStone agreement) with CStone pursuant to which the Company granted CStone exclusive rights to develop and commercialize the Company’s drug candidates avapritinib, BLU-554 and BLU-667, including back-up forms and certain other forms thereof, in Mainland China, Hong Kong, Macau and Taiwan (each, a CStone region and collectively, the CStone territory), either as a monotherapy or as part of a combination therapy. The Company will retain exclusive rights to the licensed products outside the CStone territory.

Subject to the terms of the CStone agreement, the Company received an upfront cash payment of $40.0 million and will be eligible to receive up to approximately $346.0 million in milestone payments, including $118.5 million related to development and regulatory milestones and $227.5 million related to sales-based milestones. In addition, CStone will be obligated to pay the Company tiered percentage royalties on a licensed product-by-licensed product basis ranging from the mid-teens to low twenties on annual net sales of each licensed product in the CStone territory, subject to adjustment in specified circumstances. CStone will be responsible for costs related to the development of the licensed products in the CStone territory, other than specified costs related to the development of BLU-554 as a combination therapy in the CStone territory that will be shared by the Company and CStone.

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Pursuant to the terms of the CStone agreement, CStone will be responsible for conducting all development and commercialization activities in the CStone territory related to the licensed products, and the Company and CStone plan to conduct a proof-of-concept clinical trial in China evaluating BLU-554 in combination with CS1001, a clinical stage anti-programmed death ligand-1 immunotherapy being developed by CStone, as a first-line therapy for the treatment of patients with hepatocellular carcinoma.

The CStone agreement will continue on a licensed product-by-licensed product and CStone region-by-CStone region basis until the later of (i) 12 years after the first commercial sale of a licensed product in a CStone region in the CStone territory and (ii) the date of expiration of the last valid patent claim related to the Company’s patent rights or any joint collaboration patent rights for the licensed product that covers the composition of matter, method of use or method of manufacturing such licensed product in such region. Subject to the terms of the CStone agreement, CStone may terminate the CStone agreement in its entirety or with respect to one or more licensed products for convenience by providing written notice to the Company after June 1, 2019, and CStone may terminate the CStone agreement with respect to a licensed product for convenience at any time by providing written notice to the Company following the occurrence of specified events. In addition, the Company may terminate the CStone agreement under specified circumstances if CStone or certain other parties challenges the Company’s patent rights or any joint collaboration patent rights or if CStone or its affiliates do not conduct any material development or commercialization activities with respect to one or more licensed products for a specified period of time, subject to specified exceptions. Either party may terminate the CStone agreement for the other party’s uncured material breach or insolvency. In certain termination circumstances, the parties are entitled to retain specified licenses to be able to continue to exploit the licensed products, and in the event of termination by CStone for the Company’s uncured material breach, the Company will be obligated to pay CStone a low single digit percentage royalty on a licensed product-by-licensed product basis on annual net sales of such licensed product in the CStone territory, subject to a cap and other specified exceptions.

The Company evaluated the CStone agreement to determine whether it is a collaborative arrangement for purposes of ASC 808. The Company determined that there were two material components of the CStone agreement: (i) the CStone territory-specific license and related activities in the CStone territory, and (ii) the parties’ participation in global development of the licensed products. The Company concluded that the CStone territory-specific license and related activities in the CStone territory are not within the scope of ASC 808 because the Company is not exposed to significant risks and rewards. The Company concluded that CStone is a customer with regard to the component that includes the CStone territory-specific license and related activities in CStone territory, which include manufacturing. For the parties’ participation in global development of the licensed products, the Company concluded that the research and development activities and cost-sharing payments related to such activities are within the scope of ASC 808 as both parties are active participants exposed to the risk of the activities under the CStone agreement. The Company concluded that CStone is not a customer with regard to the global development component in the context of the CStone agreement. Therefore, payments received by the Company for global development activities under the CStone agreement, including manufacturing, will be accounted for as a reduction of research and development expense.

The Company evaluated the CStone territory-specific license and related activities in the CStone territory under ASC 606 as these transactions are considered transactions with a customer. The Company identified the following material promises under the arrangement: (1) the three exclusive licenses granted in the CStone territory to develop, manufacture and commercialize the three licensed products; (2) the initial know-how transfer for each licensed product (3) manufacturing activities related to development and commercial supply of the licensed products; (4) participation in the joint steering committee (JSC) and joint project teams (JPT); (5) regulatory responsibilities; and (6) manufacturing technology and continuing know-how transfers. The Company determined that each licensed product is distinct from the other licensed products. In addition, the Company determined that the exclusive licenses and initial know-how transfers for each licensed product were not distinct from each other, as each exclusive license has limited value without the corresponding initial know-how transfer. For purposes of ASC 606, the Company determined that that participation on the JSC and JPTs, the regulatory responsibilities and the manufacturing technology and continuing know-how transfers are qualitatively and quantitatively immaterial in the context of the CStone agreement and therefore are excluded from performance obligations. As such, the Company determined that these six material promises, described above, should be combined into one performance obligation for each of the three candidates.

The Company evaluated the provision of manufacturing activities related to development and commercial supply of the licensed products as an option for purposes of ASC 606 to determine whether these manufacturing activities provide CStone with any material rights. The Company concluded that the manufacturing activities were not

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issued at a significant and incremental discount, and therefore do not provide CStone with any material rights. As such, the manufacturing activities are excluded as performance obligations at the outset of the arrangement.

Based on these assessments, the Company identified three distinct performance obligations at the outset of the CStone agreement, which consists of the following for each licensed product: (1) the exclusive license and (2) the initial know-how transfer.

Under the CStone agreement, in order to evaluate the transaction price for purposes of ASC 606, the Company determined that the upfront amount of $40.0 million constituted the entirety of the consideration to be included in the transaction price as of the outset of the arrangement, which was allocated to the three performance obligations. The potential milestone payments that the Company is eligible to receive were excluded from the transaction price, as all milestone amounts were fully constrained based on the probability of achievement. The Company will reevaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, and if necessary, the Company will adjust its estimate of the transaction price. Because the performance obligations have been satisfied, any addition to the transaction price would be immediately recognized as revenue.

The Company satisfied the performance obligations upon delivery of the licenses, initial know-how transfers and product trademark and recognized the upfront payment of $40.0 million as revenue in the three months ended June 30, 2018. There was no deferred revenue associated with the CStone agreement as of June 30, 2018.

F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc.

In March 2016, the Company and Roche entered into the Roche agreement, which provides for the discovery, development and commercialization of up to five small molecule therapeutics targeting kinases believed to be important in cancer immunotherapy, as single products or possibly in combination with other therapeutics. The parties are currently conducting activities for up to five programs under the collaboration, including up to two collaboration programs leveraging the Company’s novel target discovery engine and proprietary compound library to select potential targets.

Under the Roche agreement, Roche is granted up to five option rights to obtain an exclusive license to exploit products derived from the collaboration programs in the field of cancer immunotherapy. Such option rights are triggered upon the achievement of Phase 1 proof-of-concept. For up to three of the five collaboration programs, if Roche exercises its option, Roche will receive worldwide, exclusive commercialization rights for the licensed products. For up to two of the five collaboration programs, if Roche exercises its option, the Company will retain commercialization rights in the United States for the licensed products, and Roche will receive commercialization rights outside of the United States for the licensed products. The Company will also retain worldwide rights to any products for which Roche elects not to exercise its applicable option.

Prior to Roche’s exercise of an option, the Company will have the lead responsibility for drug discovery and pre-clinical development of all collaboration programs. In addition, the Company will have the lead responsibility for the conduct of all Phase 1 clinical trials other than those Phase 1 clinical trials for any product in combination with Roche’s portfolio of therapeutics, for which Roche will have the right to lead the conduct of such Phase 1 clinical trials. Pursuant to the Roche agreement, the parties will share the costs of Phase 1 development for each collaboration program. In addition, Roche will be responsible for post-Phase 1 development costs for each licensed product for which it retains global commercialization rights, and the Company and Roche will share post-Phase 1 development costs for each licensed product for which the Company retains commercialization rights in the United States.

Subject to the terms of the Roche agreement, the Company received an upfront cash payment of $45.0 million and will be eligible to receive up to approximately $965.0 million in contingent option fees and milestone payments related to specified research, pre-clinical, clinical, regulatory and sales-based milestones. Of the total contingent payments, up to approximately $215.0 million are for option fees and milestone payments for research, pre-clinical and clinical development events prior to licensing across all five potential collaboration programs, including contingent milestone payments for initiation of each of the collaboration programs for which the parties will work together to select targets (pre-option exercise milestones). In addition, for any licensed product for which Roche retains worldwide commercialization rights, the Company will be eligible to receive tiered royalties ranging from low double-digits to

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high-teens on future net sales of the licensed product. For any licensed product for which the Company retains commercialization rights in the United States, the Company and Roche will be eligible to receive tiered royalties ranging from mid-single-digits to low double-digits on future net sales in the other party’s respective territories in which it commercializes the licensed product. The upfront cash payment and any payments for milestones, option fees and royalties are non-refundable, non-creditable and not subject to set-off.

The Roche agreement will continue until the date when no royalty or other payment obligations are or will become due, unless earlier terminated in accordance with the terms of the Roche agreement. Prior to its exercise of its first option, Roche may terminate the Roche agreement at will, in whole or on a collaboration target-by-collaboration target basis, upon 120 days’ prior written notice to the Company. Following its exercise of an option, Roche may terminate the Roche agreement at will, in whole, on a collaboration target-by-collaboration target basis, on a collaboration program-by-collaboration program basis or, if a licensed product has been commercially sold, on a country-by-country basis, (i) upon 120 days’ prior written notice if a licensed product has not been commercially sold or (ii) upon 180 days’ prior written notice if a licensed product has been commercially sold. Either party may terminate the Roche agreement for the other party’s uncured material breach or insolvency and in certain other circumstances agreed to by the parties. In certain termination circumstances, the Company is entitled to retain specified licenses to be able to continue to exploit the licensed products.

The Company assessed this arrangement in accordance with ASC 606 and concluded that the contract counterparty, Roche, is a customer prior to the exercise, if any, of an option by Roche. The Company identified the following material promises under the arrangement: (1) a non-transferable, sub-licensable and non-exclusive license to use the Company’s intellectual property and collaboration compounds to conduct research activities; (2) research and development activities through Phase 1 clinical trials under the research plan; (3) five option rights for licenses to develop, manufacture, and commercialize the collaboration targets; (4) participation on a joint research committee (JRC) and joint development committee (JDC); and (5) regulatory responsibilities under Phase 1 clinical trials. The Company determined that the license and research and development activities were not distinct from another, as the license has limited value without the performance of the research and development activities. Participation on the JRC and JDC to oversee the research and development activities was determined to be quantitatively and qualitatively immaterial and therefore is excluded from performance obligations. The regulatory responsibilities related to filings and obtaining approvals related to the products that may result from each program do not represent separate performance obligations based on their dependence on the research and development efforts. As such, the Company determined that these promises should be combined into a single performance obligation.

The Company evaluated the option rights for licenses to develop, manufacture, and commercialize the collaboration targets to determine whether it provides Roche with any material rights. The Company concluded that the options were not issued at a significant and incremental discount, and therefore do not provide material rights. As such, they are excluded as performance obligations at the outset of the arrangement.

Based on these assessments, the Company identified one performance obligation at the outset of the Roche agreement, which consists of: (1) the non-exclusive license; (2) the research and development activities through Phase 1; and (3) regulatory responsibilities under Phase 1 clinical trials.

Under the Roche agreement, in order to evaluate the appropriate transaction price, the Company determined that the upfront amount of $45.0 million constituted the entirety of the consideration to be included in the transaction price as of the outset of the arrangement, which was allocated to the single performance obligation. The option exercise payments that may be received are excluded from the transaction price until each customer option is exercised as it was determined that the options are not material rights. The potential milestone payments that the Company is eligible to receive prior to the exercise of the options were initially excluded from the transaction price, as all milestone amounts were fully constrained based on the probability of achievement. The Company will reevaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, and, if necessary, adjust its estimate of the transaction price. The Company achieved and received a milestone payment of $10.0 million during the three months ended June 30, 2018 related to the Roche agreement and has included such amount in the transaction price during the three months ended June 30, 2018.

Revenue associated with the performance obligation is being recognized as revenue as the research and development services are provided using an input method, according to the costs incurred as related to the research and

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development activities on each program and the costs expected to be incurred in the future to satisfy the performance obligation. The transfer of control occurs over this time period and, in management’s judgment, is the best measure of progress towards satisfying the performance obligation. The research and development services related to this performance obligation are expected to be performed over a period of approximately eight years. The revenue recognized during the three months ended June 30, 2018 represents revenue that was previously deferred and $1.2 million related to the achievement of the milestone during the three months ended June 30, 2018. The amounts received that have not yet been recognized as revenue are recorded in deferred revenue on the Company’s condensed consolidated balance sheet.

During the three months ended June 30, 2018, it became probable that a significant reversal of cumulative revenue would not occur for the $10.0 million research milestone achieved under the Roche agreement during the three months ended June 30, 2018. At such time, the associated consideration was added to the estimated transaction price and allocated to the existing performance obligation. The Company recognized a cumulative catch-up of $1.2 million to revenue for this developmental milestone, representing the amount that would have been recognized had the milestone payment been included in the transaction price from the outset of the arrangement. The remaining $8.8 million will be recognized in the same manner as the remaining, unrecognized transaction price over the remaining research and development period until the performance obligation is satisfied.   

Through June 30, 2018, the Company had recognized revenue of $6.7 million as collaboration revenue in the Company’s consolidated statements of operations and comprehensive loss under the Roche agreement. Deferred revenue related to the Roche agreement amounted to $48.3 million as of June 30, 2018, of which $5.2 million is included in current liabilities.

Alexion

In March 2015, the Company entered into a research, development and commercialization agreement (Alexion agreement) with Alexion to research, develop and commercialize one or more drug candidates targeting the ALK2 kinase for the treatment of fibrodysplasia ossificans progressiva. On July 26, 2017, the Company received written notice from Alexion of its election to terminate the Alexion agreement for convenience, and the termination became effective on October 24, 2017. Since the Alexion agreement terminated prior to January 1, 2018, the Company recognized revenue from the Alexion collaboration in accordance with ASC 605.

Pursuant to the Alexion agreement, the Company was responsible for research and pre-clinical development activities related to any drug candidates, and Alexion was responsible for all clinical development, manufacturing and commercialization activities related to any drug candidates. In addition, Alexion was responsible for funding 100% of the Company’s research and development costs incurred under the research plan, including pass through costs and a negotiated yearly rate per full time equivalent for its employees’ time and their associated overhead expenses. As a result of the termination of the Alexion agreement, the Company will not be entitled to receive payment from Alexion for any research and development expenses incurred after the effective date of termination.

Prior to termination, the Company had received an aggregate amount of $18.8 million in upfront and milestone payments. The Company received a $15.0 million non-refundable upfront payment in March 2015 upon execution of the Alexion agreement and an aggregate amount of $3.8 million in pre-clinical milestone payments prior to the termination of the Alexion agreement. As a result of the termination, the Company was not entitled to receive payment from Alexion for any additional milestones.

The Company determined that there were three deliverables under the former Alexion collaboration: (i) an exclusive license to research, develop, manufacture and commercialize the licensed products and the compounds in the field in the territory, (ii) conducting research and development activities under the research plan and (iii) participation on a joint steering committee (JSC) and joint project team (JPT).

The Company determined that the license did not have value to Alexion on a stand-alone basis due to the specialized nature of the research services to be provided by the Company that are not available in the marketplace. Therefore, the deliverables were not separable and, accordingly, the license, undelivered research and development activities and JSC and JPT participation were a single unit of accounting. When multiple deliverables are accounted for as a single unit of accounting, the Company bases its revenue recognition model on the final deliverable. Under the

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Alexion agreement, the last deliverable to be completed is its research and development activities and participation on the JSC and JPT, which were expected to be delivered over the same performance period. The Company recognized the remaining deferred revenue balance related to the upfront payment and non-substantive milestone payment previously received under the former collaboration with Alexion, utilizing the proportional performance model over the remaining period of performance, which ended October 24, 2017.

The Company evaluated whether the milestones that it was eligible to receive in connection with the Alexion agreement were substantive or non-substantive milestones. The Company concluded that the first pre-clinical milestone payment under the former Alexion collaboration was non-substantive due to the certainty at the date the arrangement was entered into that the event will be achieved. During the three months ended June 30, 2015, the Company achieved the first pre-clinical milestone under the former Alexion collaboration and received a $1.8 million payment from Alexion. The Company recognized revenues from the related milestone payment over the remaining period of performance.

The remaining non-refundable pre-clinical milestones that the Company was eligible to achieve as a result of the Company’s efforts prior to the termination were considered substantive. The Company has recognized and received an aggregate of $2.0 million in substantive milestones through December 31, 2017.

As a result of the termination, the Company did not recognize revenue under the Alexion agreement during the three and six months ended June 30, 2018. During the three and six months ended June 30, 2017 the Company recognized revenue under the Alexion agreement of $4.5 million and $8.9 million, respectively, which represents $3.1 million and $5.9 million, respectively, of reimbursable research and development costs, as well as a portion of the $15.0 million upfront payment and the $1.8 million non-substantive milestone payment previously received under the collaboration.

7. Term Loan

In May 2013, the Company entered into a loan and security agreement with Silicon Valley Bank, which provided for up to $5.0 million in funding, to be made available in three tranches. Loan advances accrue interest at a fixed rate of 2% above the prime rate. In November 2014, the Company amended the loan to allow the Company to borrow an additional $5.0 million. The Company accounted for the amendment as a modification to the existing 2013 loan. The Company immediately drew the additional $5.0 million and was required to make interest‑only payments until December 1, 2015, and consecutive monthly payments of principal, plus accrued interest, over the remaining term through November 1, 2018. The Company is required to pay a fee of 4% of the total loan advances at the end of the term of the loan. The fee is being accreted to interest expense over the term of the loan. In the event of prepayment, the Company is obligated to pay 1% to 2% of the amount of the outstanding principal depending upon the timing of the prepayment.

The term loan is collateralized by a blanket lien on all corporate assets, excluding intellectual property, and by a negative pledge of the Company’s intellectual property. The term loan contains customary default provisions that include material adverse events, as defined therein. The Company has determined that the risk of subjective acceleration under the material adverse events clause is remote and therefore has classified the outstanding principal in current and long‑term liabilities based on scheduled principal payments.

The Company assessed all terms and features of the term loan in order to identify any potential embedded features that would require bifurcation. As part of this analysis, the Company assessed the economic characteristics and risks of the term loan, including put and call features. The Company determined that all features of each of the term loan are clearly and closely associated with a debt host and do not require bifurcation as a derivative liability, or the fair value of the feature is immaterial to the Company’s financial statements. The Company will continue to reassess the features on a quarterly basis to determine if they require separate accounting.

Future minimum payments, which include principal and interest due under the term loan, are $0.7 million, in the aggregate, for the remainder of 2018.

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8. Stock Awards

2015 Stock Option and Incentive Plan

In 2015, the Company’s board of directors and stockholders approved the 2015 Stock Option and Incentive Plan (the 2015 Plan), which replaced the Company’s 2011 Stock Option and Grant Plan, as amended (the 2011 Plan). The 2015 Plan includes incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance share awards and cash-based awards. The Company initially reserved a total of 1,460,084 shares of common stock for the issuance of awards under the 2015 Plan. The 2015 Plan provides that the number of shares reserved and available for issuance under the 2015 Plan will be cumulatively increased on January 1 of each calendar year by 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser amount as specified by the compensation committee of the board of directors. For the calendar year beginning January 1, 2018, the number of shares reserved for issuance under the 2015 Plan was increased by 1,743,101 shares. In addition, the total number of shares reserved for issuance is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. At June 30, 2018, there were 2,180,264 shares available for future grant under the 2015 Plan.

Awards

Options and restricted stock awards granted by the Company generally vest ratably over four years, with a one‑year cliff for new employee awards, and are exercisable from the date of grant for a period of ten years.

The Company did not have any unvested restricted stock as of June 30, 2018 and December 31, 2017. There were no restricted stock awards that vested during the six months ended June 30, 2018.  The total fair value of restricted stock that vested during the six months ended June 30, 2017 was $0.1 million.

A summary of the Company’s stock option activity and related information follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-

    

Remaining

    

Aggregate

 

 

 

 

 

Average

 

Contractual

 

Intrinsic

 

 

 

 

 

Exercise

 

Life

 

Value(1)

 

 

 

Shares

 

Price

 

(in Years)

 

(in thousands)

 

Outstanding at December 31, 2017

 

3,304,166

 

$

22.45

 

8.04

 

$

174,985

 

Granted

 

1,385,450

 

 

81.00

 

 

 

 

 

 

Exercised

 

(300,676)

 

 

14.28

 

 

 

 

 

 

Canceled

 

(53,585)

 

 

50.65

 

 

 

 

 

 

Outstanding at June 30, 2018

 

4,335,355

 

$

41.38

 

8.24

 

$

120,869

 

Exercisable at June 30, 2018

 

1,754,466

 

$

18.10

 

7.19

 

$

81,080

 


(1)

Intrinsic value represents the amount by which the fair market value as of June 30, 2018 of the underlying common stock exceeds the exercise price of the option.

The fair value of stock options is estimated on the grant date using the Black‑Scholes option‑pricing model based on the following weighted average assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

June 30, 

 

June 30, 

 

June 30, 

 

June 30, 

 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

Risk-free interest rate

 

2.82

%

1.93

%

2.72

%

2.07

%

 

Expected dividend yield

 

 —

%

 —

%

 —

%

 —

%

 

Expected term (years)

 

6.0

 

5.9

 

6.0

 

6.0

 

 

Expected stock price volatility

 

69.82

%

74.64

%

70.11

%

75.23

%

 

 

The weighted‑average grant date fair value of options granted in the three months ended June 30, 2018 and 2017 was $50.88 and $27.78, respectively. The total intrinsic value of options exercised in the three months ended June 30, 2018 and 2017 was $3.9 million and $2.7 million, respectively. The weighted‑average grant date fair value of options granted in the six months ended June 30, 2018 and 2017 was $51.91 and $24.91, respectively. The total intrinsic value of options exercised in the six months ended June 30, 2018 and 2017 was $21.4 million and $6.1 million, respectively.

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Total stock‑based compensation expense recognized for all stock‑based compensation awards in the condensed consolidated statements of operations and comprehensive loss is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

June 30, 

 

June 30, 

 

 

 

 

2018

    

2017

 

2018

    

2017

 

 

Research and development

 

$

4,272

    

$

1,498

    

$

7,284

    

$

2,622

 

 

General and administrative

 

 

3,489

 

 

1,481

 

 

6,027

 

 

2,597

 

 

Total stock-based compensation expense

 

$

7,761

 

$

2,979

 

$

13,311

 

$

5,219

 

 

 

At June 30, 2018, the Company had $92.1 million of total unrecognized compensation cost related to non-vested stock awards, which is expected to be recognized over a weighted‑average period of 2.88 years. Due to an operating loss, the Company does not record tax benefits associated with stock‑based compensation or option exercises. Tax benefit will be recorded when realized.

2015 Employee Stock Purchase Plan

In 2015, the Company’s board of directors and stockholders approved the 2015 Employee Stock Purchase Plan (the 2015 ESPP), which became effective upon the closing of the IPO in May 2015. The Company initially reserved a total of 243,347 shares of common stock for issuance under the 2015 ESPP. The 2015 ESPP provides that the number of shares reserved and available for issuance under the 2015 ESPP will be cumulatively increased on January 1 of each calendar year by 1% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser amount as specified by the compensation committee of the board of directors. For the calendar year beginning January 1, 2018, the number of shares reserved for issuance under the 2015 ESPP was increased by 435,775 shares. The Company issued 5,572 shares and 7,703 shares under the ESPP during the six months ended June 30, 2018 and 2017, respectively.

9. Net Loss per Share

Basic net loss per share applicable to common stockholders is calculated by dividing net loss applicable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share applicable to common stockholders is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period. For purposes of the dilutive net loss per share applicable to common stockholders calculation, stock options, and unvested restricted stock are considered to be common stock equivalents but are excluded from the calculation of diluted net loss per share applicable to common stockholders, as their effect would be anti‑dilutive; therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented as a result of the Company’s net loss. The following common stock equivalent was excluded from the calculation of diluted net loss per share applicable to common stockholders for the periods indicated because including them would have had an anti‑dilutive effect.

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2018

    

2017

 

Stock options

 

4,335,355

 

3,396,480

 

 

 

 

 

 

 

The weighted average number of common shares used in net loss per share applicable to common stockholders on a basic and diluted basis were 43,856,352 and 38,774,591 for the three months ended June 30, 2018 and 2017, respectively. The weighted average number of common shares used in net loss per share applicable to common stockholders on a basic and diluted basis were 43,778,720 and 35,997,572 for the six months ended June 30, 2018 and 2017, respectively.

10. Commitments

On February 12, 2015, the Company entered into a lease for approximately 38,500 rentable square feet of office and laboratory space in Cambridge, Massachusetts, which the Company gained control over on June 15, 2015, and occupancy commenced in October 2015. The lease ends on October 31, 2022. The Company has an option to extend the

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lease for five additional years. The lease has a total commitment of $17.8 million over the seven-year term. The Company has agreed to pay an initial annual base rent of approximately $2.3 million, which rises periodically until it reaches approximately $2.8 million. The Company is recording rent expense on a straight-line basis through the end of the lease term. The Company has recorded deferred rent on the consolidated balance sheet at December 31, 2017, accordingly. The lease provided the Company with an allowance for leasehold improvements of $4.3 million. The Company accounts for leasehold improvement incentives as a reduction to rent expense ratably over the lease term. The balance from the leasehold improvement incentives is included in lease incentive obligations on the balance sheet. The lease agreement required the Company to pay a security deposit of $1.3 million, which is recorded in restricted cash on the Company’s balance sheet.

In the first quarter of 2018, the Company subleased its former corporate headquarters at 38 Sidney Street, Cambridge, Massachusetts through October 31, 2020. Subject to the terms of the sublease agreement and the master lease agreement, including a right of recapture by the Company, the sublessee has the option to extend the sublease through October 31, 2022. The sublease includes a total commitment by the sublessee of $8.2 million over the 32 month term of the sublease agreement. During the 32 month term, the Company will be responsible for total rental payments of $6.9 million and an additional $0.7 million in total payments related to the Company’s profit on the sublease income which are payable by the Company to the landlord.

On April 28, 2017, the Company entered into a lease agreement for approximately 99,833 rentable square feet of office and laboratory space located at 45 Sidney Street in Cambridge, Massachusetts. The initial term of the lease agreement commenced on October 1, 2017 and will expire on November 30, 2029. The lease agreement also provides the Company with an option to extend the lease agreement for two consecutive five-year periods at the then fair market annual rent, as defined in the lease agreement, as well as a right of first offer with respect to leasing additional space adjacent to the existing leased premises. During the initial term of the lease agreement, the Company has agreed to pay an initial annual base rent of approximately $7.7 million, which rises periodically until it reaches approximately $10.6 million in the last year of the initial term. The Company is recording rent expense on a straight-line basis through the end of the lease term. The Company has recorded deferred rent on the consolidated balance sheet at December 31, 2017 accordingly. The landlord has also agreed to provide the Company with a tenant improvement allowance of approximately $14.2 million for improvements to be made to the premises. The Company accounts for leasehold improvement incentives as a reduction to rent expense ratably over the lease term. The lease agreements required the Company to pay a security deposit of $3.5 million, which is recorded in restricted cash on the Company’s balance sheet.

For the three months ended June 30, 2018 and 2017, rent expense was $1.7 million and $1.1 million, respectively. For the six months ended June 30, 2018 and 2017, rent expense was $3.9 million and $1.6 million, respectively.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission, or the SEC, on February 21, 2018. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results or timing of certain events could differ materially from the results or timing described in, or implied by, these forward-looking statements.

Overview

We are a biopharmaceutical company focused on developing potentially transformational medicines to improve the lives of patients with genomically defined cancers and rare diseases. Our approach is to leverage our novel target discovery engine to systematically and reproducibly identify kinases that are drivers of diseases in genomically defined patient populations and to craft highly selective and potent drug candidates that may provide significant and durable clinical responses for patients without adequate treatment options. This integrated biology and chemistry approach enables us to identify, characterize and design drug candidates to inhibit novel kinase targets that have been difficult to selectively inhibit. By focusing on diseases in genomically defined patient populations, we believe that we will have a more efficient development path with a greater likelihood of success.

Our most advanced drug candidates are avapritinib, BLU-554 and BLU-667. Our lead drug candidate, avapritinib, is an orally available, potent and highly selective inhibitor that targets KIT and PDGFRα mutations. These mutations abnormally activate receptor tyrosine kinases that are drivers of cancer and proliferative disorders, including gastrointestinal stromal tumors, or GIST, and systemic mastocytosis, or SM. GIST is a rare disease that is a sarcoma, or tumor of bone or connective tissue, of the gastrointestinal tract, or GI tract, and SM is a rare disorder that causes an overproduction of mast cells and the accumulation of mast cells in the bone marrow and other organs, which can lead to a wide range of debilitating symptoms and organ dysfunction and failure. We are currently evaluating avapritinib for the treatment of GIST in an ongoing Phase 1 clinical trial in advanced GIST, which we refer to as our NAVIGATOR trial, and an ongoing global, randomized Phase 3 clinical trial for avapritinib compared to regorafenib in third-line GIST, which we refer to as our VOYAGER trial. We plan to submit a new drug application for avapritinib for the treatment of PDGFRα D842V-driven GIST and fourth-line KIT-driven GIST in the first half of 2019. In addition, we are currently evaluating avapritinib for the treatment of SM in an ongoing Phase 1 clinical trial in advanced SM, which we refer to as our EXPLORER trial, and in the third quarter of 2018, we expect to initiate screening for our registration‑enabling Phase 2 clinical trial of avapritinib in advanced SM, which we refer to as our PATHFINDER trial. We anticipate initiating a registration‑enabling Phase 2 clinical trial of avapritinib in patients with indolent SM and smoldering SM by the end of 2018, which we refer to as our PIONEER trial.

BLU-554 is an orally available, potent and highly selective inhibitor that targets FGFR4, a kinase that is aberrantly activated in a defined subset of patients with hepatocellular carcinoma, or HCC, the most common type of liver cancer. We are currently evaluating BLU-554 in an ongoing Phase 1 clinical trial in patients with advanced HCC, and we plan to conduct a proof-of-concept clinical trial in China with CStone Pharmaceuticals, or CStone, evaluating BLU-554 in combination with CS1001, a clinical stage anti-programmed death ligand-1 immunotherapy being developed by CStone, as a first-line therapy for the treatment of patients with HCC.

BLU-667 targets RET, a receptor tyrosine kinase that is abnormally activated by mutations or fusions, and RET resistance mutations that we predict will arise from treatment with first generation therapies. RET drives disease in subsets of patients with non-small cell lung cancer, or NSCLC, and cancers of the thyroid, including medullary thyroid carcinoma, or MTC, and papillary thyroid cancer, and our research suggests that RET may drive disease in subsets of patients with colon cancer, breast cancer and other cancers. We are currently evaluating BLU-667 in an ongoing Phase 1 clinical trial in patients with RET-altered NSCLC, MTC and other advanced solid tumors, which we refer to as our ARROW trial.

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In addition, in the fourth quarter of 2017, we nominated a development candidate, BLU-782, for our discovery program targeting the kinase ALK2 for the treatment of fibrodysplasia ossificans progressiva, or FOP, a rare genetic disease caused by mutations in the ALK2 gene, ACVR1. We are currently conducting Investigational New Drug, or IND, application enabling studies for BLU-782, and we plan to file an IND for BLU-782 by the end of 2018.

We also plan to continue to leverage our discovery platform to systematically and reproducibly identify kinases that are drivers of diseases in genomically defined patient populations and craft drug candidates that potently and selectively target these kinases. We currently have three wholly-owned discovery programs for undisclosed kinase targets, and we anticipate nominating at least one additional discovery program in 2018.

In addition, we entered into collaborations with F. Hoffmann La Roche Ltd and Hoffmann La Roche Inc., which we collectively refer to as Roche, and CStone in March 2016 and June 2018, respectively. Under our collaboration agreement with Roche, we are seeking to discover, develop and commercialize up to five small molecule therapeutics targeting kinases believed to be important in cancer immunotherapy, as single products or possibly in combination with other therapeutics. Under our collaboration agreement with CStone, we are seeking to develop and commercialize avapritinib, BLU-554 and BLU-667, including back-up forms and certain other forms, in Mainland China, Hong Kong, Macau and Taiwan, or the CStone territory, either as a monotherapy or as part of a combination therapy. We will continue to evaluate additional collaborations that could maximize the value for our programs and allow us to leverage the expertise of strategic collaborators. We are also focused on engaging in collaborations to capitalize on our discovery platform outside of our primary strategic focus area of cancer.

We currently have worldwide development and commercialization rights to avapritinib, BLU-554 and BLU-667 other than the rights licensed to CStone in the CStone territory. We currently have worldwide development and commercialization rights to BLU-782 and all of our discovery programs other than the pre-clinical programs under the Roche collaboration.

In September 2015, the U.S. Food and Drug Administration, or FDA, granted orphan drug designation to BLU-554 for the treatment of HCC, and in January 2016, the FDA granted orphan drug designation to avapritinib for the treatment of GIST and mastocytosis. In October 2016, the FDA granted fast track designation to avapritinib for the treatment of patients with unresectable or metastatic GIST that progressed following treatment with imatinib and a second tyrosine kinase, or TKI, inhibitor and for the treatment of patients with unresectable or metastatic GIST with the PDGFRα D842V mutation regardless of prior therapy. In addition, in June 2017, the FDA granted breakthrough therapy designation to avapritinib for the treatment of patients with unresectable or metastatic GIST harboring the PDGFRα D842V mutation, and in July 2017, the European Commission granted orphan drug designation to avapritinib for the treatment of GIST. In April 2018, the FDA granted orphan drug designation to BLU-667 for the treatment of RET-rearranged NSCLC, JAK1/2-positive NSCLC or TRKC-positive NSCLC.

Since inception, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property, building our discovery platform, including our proprietary compound library and new target discovery engine, identifying kinase drug targets and potential drug candidates, producing drug substance and drug product material for use in pre-clinical studies and clinical trials, conducting pre-clinical studies and commencing clinical development and pre-commercial activities. We do not have any drugs approved for sale and have not generated any revenue from drug sales.

To date, we have financed our operations primarily through public offerings of our common stock, private placements of our convertible preferred stock, collaborations and a debt financing. Through June 30, 2018, we have received an aggregate of $1.1 billion from such transactions, including $887.4 million in aggregate gross proceeds from the sale of common stock in our May 2015 initial public offering, or IPO, and December 2016, April 2017 and December 2017 follow-on public offerings, $115.1 million in gross proceeds from the issuance of convertible preferred stock, $18.8 million in upfront and milestone payments under our former collaboration with Alexion Pharma Holding, or Alexion, $55.0 million in upfront and milestone payments under our existing collaboration with Roche, a $40.0 million upfront payment under our existing collaboration with CStone and $10.0 million in gross proceeds from the debt financing.

Since inception, we have incurred significant operating losses. Our net losses were $83.6 million for the six months ended June 30, 2018 and $148.1 million, $72.5 million and $52.8 million for the years ended December 31,

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2017, 2016 and 2015. As of June 30, 2018, we had an accumulated deficit of $444.5 million. We expect to continue to incur significant expenses and operating losses over the next several years. We anticipate that our expenses will increase significantly in connection with our ongoing activities, particularly as we:

·

continue to advance and initiate clinical development activities for our lead drug candidate, avapritinib, as well as our other most advanced drug candidates, BLU-554, BLU-667 and BLU-782;

·

seek marketing approvals for our drug candidates that successfully complete clinical trials;

·

establish a sales, marketing and distribution infrastructure to commercialize any medicines for which we may obtain marketing approval;

·

continue to manufacture increasing quantities of drug substance and drug product material for use in pre-clinical studies, clinical trials and for any potential commercialization;

·

continue to discover, validate and develop additional drug candidates;

·

conduct research and development activities under our collaborations with Roche and CStone;

·

conduct development and commercialization activities for companion diagnostic tests, including our companion diagnostic tests for avapritinib in order to identify GIST patients with the PDGFRα D842V mutation, BLU554 in order to identify HCC patients with FGFR4 pathway activation and BLU-667 in order to identify NSCLC patients with RET fusions;

·

maintain, expand and protect our intellectual property portfolio;

·

acquire or in-license other drug candidates or technologies;

·

hire additional research, clinical, quality, manufacturing, commercial and general and administrative personnel; and

·

incur additional costs associated with operating as a public company.

Financial Operations Overview

Revenues

To date, we have not generated any revenue from drug sales and do not expect to generate any revenue from the sale of drugs in the near future. Our revenue consists of collaboration revenue under our former collaboration with Alexion, which was terminated in October 2017, and our existing collaborations with Roche and CStone, including amounts that are recognized related to upfront payments, milestone payments and amounts due to us for research and development services. In the future, revenue may include additional milestone payments and royalties on any net product sales under our collaborations with Roche and CStone. As a result of the termination of our Alexion collaboration, we will not be entitled to receive any future payments from Alexion for any research and development expenses or milestones. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research and development services and related reimbursements, payments for manufacturing services, and milestone and other payments.

In the future, we will seek to generate revenue from a combination of drug sales and additional strategic relationships we may enter into.

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Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research and development activities, including our drug discovery efforts, and the development of our drug candidates, which include:

·

employee‑related expenses including salaries, benefits, and stock‑based compensation expense;

·

expenses incurred under agreements with third parties that conduct research and development, pre-clinical activities, clinical activities and manufacturing on our behalf;

·

expenses incurred under agreements with third parties for the development and commercialization of companion diagnostic tests;

·

the cost of consultants;

·

the cost of lab supplies and acquiring, developing and manufacturing pre-clinical study materials,  clinical trial materials and commercial supply materials; and

·

facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other operating costs.

Research and development costs are expensed as incurred. Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

The successful development of our drug candidates is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of these drug candidates. We are also unable to predict when, if ever, material net cash inflows will commence from our drug candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

·

establishing an appropriate safety profile with IND‑enabling toxicology studies;

·

successful enrollment in, and completion of clinical trials;

·

receipt of marketing approvals from applicable regulatory authorities;

·

establishing commercial manufacturing capabilities or making arrangements with third‑party manufacturers;

·

obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our drug candidates;

·

commercializing the drug candidates, if and when approved, whether alone or in collaboration with others; and

·

continued acceptable safety profile of the drugs following approval.

A change in the outcome of any of these variables with respect to the development of any of our drug candidates would significantly change the costs and timing associated with the development of that drug candidate.

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Research and development activities are central to our business model. Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later‑stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our drug candidate development programs progress. However, we do not believe that it is possible at this time to accurately project total program‑specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. In addition, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

A significant portion of our research and development expenses have been external expenses, which we track on a program‑by‑program basis following nomination as a development candidate. Our internal research and development expenses are primarily personnel‑related expenses, including stock-based compensation expense. Except for internal research and development expenses related to a collaboration agreement, we do not track our internal research and development expenses on a program‑by‑program basis as they are deployed across multiple projects under development.

The following table summarizes our external research and development expenses by program for the three and six months ended June 30, 2018 and 2017. Other development and pre‑development candidate expenses, unallocated expenses and internal research and development expenses have been classified separately.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

 

 

2018

    

2017

    

2018

    

2017

    

 

 

 

(in thousands)

 

(in thousands)

 

 

Avapritinib external expenses

 

$

21,431

 

$

10,342

 

$

39,214

 

$

16,884

 

 

BLU-554 external expenses

 

 

2,213

 

 

2,862

 

 

7,007

 

 

7,762

 

 

BLU-667 external expenses

 

 

8,870

 

 

2,541

 

 

14,455

 

 

4,559

 

 

BLU-782 external expenses

 

 

2,982

 

 

 —

 

 

4,881

 

 

 —

 

 

Other development and pre-development candidate expenses and unallocated expenses

 

 

11,336

 

 

10,729

 

 

21,068

 

 

19,783

 

 

Internal research and development expenses