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 September 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 every Interactive Data File required to be submitted 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 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  ☐ 

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 October 26, 2018: 43,950,375

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

Page

Part I – FINANCIAL INFORMATION 

Item 1. Financial Statements (unaudited) 

5

 

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

5

 

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

6

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

38

Item 4. Controls and Procedures 

39

 

 

 

Part II – OTHER INFORMATION 

Item 1. Legal Proceedings 

40

Item 1A. Risk Factors 

40

Item 6. Exhibits 

80

Signatures 

81

 

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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 subsidiaries.

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 maintain these collaborations and establish other strategic collaborations;

·

the development of companion diagnostic tests for our drug candidates;

·

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)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2018

    

2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

78,641

 

$

400,304

 

Investments, available-for-sale

 

 

480,995

 

 

273,052

 

Prepaid expenses and other current assets

 

 

6,021

 

 

12,149

 

Total current assets

 

 

565,657

 

 

685,505

 

Property and equipment, net

 

 

29,720

 

 

24,363

 

Restricted cash

 

 

5,154

 

 

4,555

 

Other assets

 

 

5,579

 

 

1,314

 

Total assets

 

$

606,110

 

$

715,737

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

 

3,988

 

 

3,744

 

Accrued expenses

 

 

45,181

 

 

30,541

 

Current portion of deferred revenue

 

 

5,119

 

 

5,373

 

Current portion of lease incentive obligation

 

 

1,714

 

 

1,714

 

Current portion of term loan payable

 

 

277

 

 

1,518

 

Total current liabilities

 

 

56,279

 

 

42,890

 

Deferred rent, net of current portion

 

 

4,906

 

 

4,129

 

Deferred revenue, net of current portion

 

 

42,081

 

 

30,000

 

Lease incentive obligation, net of current portion

 

 

13,332

 

 

14,617

 

Other long term liabilities

 

 

216

 

 

131

 

Total liabilities

 

 

116,814

 

 

91,767

 

Commitments (Note 11)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; 120,000,000 shares authorized; 43,945,316 and 43,577,526 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively;

 

 

44

 

 

43

 

Additional paid-in capital

 

 

1,006,812

 

 

979,785

 

Accumulated other comprehensive loss

 

 

(337)

 

 

(269)

 

Accumulated deficit

 

 

(517,223)

 

 

(355,589)

 

Total stockholders’ equity

 

 

489,296

 

 

623,970

 

Total liabilities and stockholders’ equity

 

$

606,110

 

$

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

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

 

2018

    

2017

 

2018

    

2017

Collaboration revenue

 

$

1,095

 

$

8,068

 

$

43,488

 

$

19,798

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

64,562

 

 

39,300

 

 

173,089

 

 

101,058

General and administrative

 

 

12,041

 

 

7,378

 

 

34,285

 

 

19,894

Total operating expenses

 

 

76,603

 

 

46,678

 

 

207,374

 

 

120,952

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

2,799

 

 

954

 

 

7,635

 

 

2,240

Interest expense

 

 

(14)

 

 

(47)

 

 

(69)

 

 

(178)

Total other income

 

 

2,785

 

 

907

 

 

7,566

 

 

2,062

Net loss

 

$

(72,723)

 

$

(37,703)

 

$

(156,320)

 

$

(99,092)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments

 

 

44

 

 

89

 

 

(68)

 

 

(147)

Comprehensive loss

 

$

(72,679)

 

$

(37,614)

 

$

(156,388)

 

$

(99,239)

Net loss per share — basic and diluted

 

$

(1.66)

 

$

(0.96)

 

$

(3.57)

 

$

(2.67)

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

 

 

43,915

 

 

39,130

 

 

43,825

 

 

37,053

 

 

 

 

 

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Blueprint Medicines Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

    

2018

    

2017
(as adjusted)

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(156,320)

 

$

(99,092)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,076

 

 

1,187

 

Stock-based compensation

 

 

21,702

 

 

8,818

 

Accretion of premiums and discounts on investments

 

 

(2,934)

 

 

(34)

 

Other

 

 

10

 

 

27

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Unbilled accounts receivable

 

 

(345)

 

 

142

 

Prepaid expenses and other current assets

 

 

6,421

 

 

(172)

 

Other assets

 

 

(4,265)

 

 

(800)

 

Accounts payable

 

 

244

 

 

(125)

 

Accrued expenses

 

 

18,926

 

 

9,076

 

Deferred revenue

 

 

6,512

 

 

(10,463)

 

Deferred rent

 

 

(454)

 

 

6,321

 

Net cash used in operating activities

 

 

(107,427)

 

 

(85,115)

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(12,252)

 

 

(4,932)

 

Purchases of investments

 

 

(648,902)

 

 

(315,288)

 

Maturities of investments

 

 

443,825

 

 

198,000

 

Net cash used in by investing activities

 

 

(217,329)

 

 

(122,220)

 

Financing activities

 

 

 

 

 

 

 

Principal payments on loan payable

 

 

(1,250)

 

 

(2,000)

 

Principal payments on capital lease obligations

 

 

(120)

 

 

 —

 

Payment of offering costs

 

 

(281)

 

 

(923)

 

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

 

 

 —

 

 

216,200

 

Proceeds from issuance of common stock, net of repurchases

 

 

5,341

 

 

2,818

 

Net cash provided by financing activities

 

 

3,690

 

 

216,095

 

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

 

 

(321,066)

 

 

8,760

 

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

 

 

405,072

 

 

53,336

 

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

 

$

84,006

 

$

62,096

 

Supplemental cash flow information

 

 

 

 

 

 

 

Public offering costs incurred but unpaid at period end

 

$

 —

 

$

100

 

Property and equipment purchases unpaid at period end

 

$

128

 

$

3,196

 

Cash paid for interest

 

$

61

 

$

125

 

 

 

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.

 

 

 

 

 

 

 

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

 

2017

 

Cash and cash equivalents

 

$

78,641

 

$

57,329

 

Restricted cash included in prepaid expenses and other current assets

 

 

211

 

 

 -

 

Restricted cash

 

 

5,154

 

 

4,767

 

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

 

 

84,006

 

 

62,096

 

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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 September 30, 2018, the Company had cash, cash equivalents and investments of $559.6 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). 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 September 30, 2018, the results of its operations for the three and nine months ended September 30, 2018 and 2017 and cash flows for the nine months ended September 30, 2018 and 2017. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 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.

The condensed consolidated financial statements include the Company’s accounts and the accounts of its wholly-owned subsidiaries, Blueprint Medicines Security Corporation and Blueprint Medicines (Switzerland) GmbH. All intercompany transactions have been eliminated in consolidation.

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

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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 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 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

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and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.

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 7, “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 as 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

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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.

For a complete discussion of accounting for collaboration revenues, see Note 7, “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

      From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed below, the Company does not believe that the adoption of recently issued standards have or may have a material impact on its condensed consolidated financial statements and disclosures.

Revenue recognition

In May 2014, the 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. 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 September 30, 2018

 

(in thousands)

 

 

As reported under ASC 606

 

 

Adjustments

 

 

Balances without adoption of ASC 606

 

Deferred revenue, current portion

 

$

5,119

 

$

(175)

 

$

5,294

 

Deferred revenue, net of current portion

 

$

42,081

 

$

15,831

 

$

26,250

 

Accumulated deficit

 

$

(517,223)

 

$

(15,656)

 

$

(501,567)

 

 

 

 

 

 

 

 

 

 

 

 

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Impact of ASC 606 Adoption on Condensed Consolidated Statement of Operations and Comprehensive Loss for the Three Months Ended September 30, 2018

 

(in thousands)

 

 

As reported under ASC 606

 

 

Adjustments

 

 

Balances without adoption of ASC 606

 

Collaboration revenue

 

$

1,095

 

$

(49)

 

$

1,144

 

Net loss

 

$

(72,723)

 

$

(49)

 

$

(72,674)

 

Net loss per share - basic and diluted

 

$

(1.66)

 

$

(0.01)

 

$

(1.65)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of ASC 606 Adoption on Condensed Consolidated Statement of Operations and Comprehensive Loss for the Nine Months Ended September 30, 2018

 

(in thousands)

 

 

As reported under ASC 606

 

 

Adjustments

 

 

Balances without adoption of ASC 606

 

Collaboration revenue

 

$

43,488

 

$

(10,341)

 

$

53,829

 

Net loss

 

$

(156,320)

 

$

(10,341)

 

$

(145,979)

 

Net loss per share - basic and diluted

 

$

(3.57)

 

$

(0.24)

 

$

(3.33)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of ASC 606 Adoption on Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2018

 

(in thousands)

 

 

As reported under ASC 606

 

 

Adjustments

 

 

Balances without adoption of ASC 606

 

Net Loss

 

$

(156,320)

 

$

(10,341)

 

$

(145,979)

 

Changes in deferred revenue

 

$

6,512

 

$

2,683

 

$

3,829

 

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 7, “Collaborations.”

Leasing

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new standard establishes a right-of-use (ROU) model that requires all lessees to recognize ROU assets and liabilities on their balance sheet that arise from leases with terms longer than 12 months as well as provide disclosures with respect to certain qualitative and quantitative information related to their leasing arrangements. This new standard will become effective for the Company on January 1, 2019.

 

The FASB subsequently issued the following amendments to ASU 2016-02, Leases (Topic 842), which have the same effective date and transition date of January 1, 2019:

 

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·

ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends certain narrow aspects of the guidance issued in ASU 2016-02; and

 

·

ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows for a transition approach to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption as well as an additional practical expedient for lessors to not separate non-lease components from the associated lease component.

 

The Company is in the process of reviewing its existing lease contracts and continues to evaluate the impact that these new leasing standards may have on its consolidated results of operations, financial position and disclosures. The Company expects that the adoption of the new leasing standards will result in the recognition of material ROU assets and liabilities in its condensed consolidated balance sheets. The Company does not expect the adoption of the new leasing standards will have a material impact to its condensed consolidated statements of income.

 

The Company will adopt the new leasing standards using a modified retrospective transition approach to be applied to leases existing as of, or entered into after, January 1, 2019.  

   

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 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 September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

September 30, 2018

Cost

 

Gain

 

Losses

 

Value

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

78,641

 

$

 —

 

$

 —

 

$

78,641

Investments, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury obligations

 

 

481,332

 

 

 —

 

 

(337)

 

 

480,995

Total

 

$

559,973

 

$

 —

 

$

(337)

 

$

559,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2017

Cost

 

Gain

 

Losses

 

Value

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

400,304

 

$

 —

 

$

 —

 

$

400,304

Investments, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury obligations

 

 

273,321

 

 

 —

 

 

(269)

 

 

273,052

Total

 

$

673,625

 

$

 —

 

$

(269)

 

$

673,356

 

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 nine months ended September 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 September 30, 2018, the Company held 60 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 September 30, 2018 was $471.0 million. As of September 30, 2018, there were 2 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

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Company determined it did not hold any investments with an other-than-temporary impairment as of September 30, 2018.

 

No available-for-sale securities held as of September 30, 2018 or December 31, 2017 had remaining maturities greater than one year.

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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Active

    

Observable

    

Unobservable

 

 

September 30, 

 

Markets

 

Inputs

 

Inputs

Description

 

2018

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

78,641

 

$

78,641

 

$

 —

 

$

 —

Investments, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S Treasury obligations

 

 

480,995

 

 

480,995

 

 

 —

 

 

 —

Total

 

$

559,636

 

$

559,636

 

$

 —

 

$

 —

 

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 September 30, 2018 and December 31, 2017, $5.4 million and $4.8 million, respectively, of the Company’s cash is restricted by a bank related to security deposits for the lease agreements for the Company’s current and former corporate headquarters.  

For additional information on these security deposits, see Note 11, Commitments.

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6. Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2018

    

2017

 

External research and development

 

$

31,239

 

$

17,493

 

Employee compensation

 

 

6,590

 

 

5,766

 

Accrued professional fees

 

 

4,005

 

 

1,394

 

Property and equipment costs

 

 

1,192

 

 

4,176

 

Pre-commercial accrual

 

 

647

 

 

261

 

Other

 

 

1,508

 

 

1,451

 

 

 

$

45,181

 

$

30,541

 

 

 

7. 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.

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

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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 related expenses. Accordingly, the Company recorded a reduction of expenses of $0.3 million for the three and nine months ended September 30, 2018.  

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 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 during the second quarter of 2018. No revenue was recognized during the three months ended September 30, 2018 and there was no deferred revenue associated with the CStone agreement as of September 30, 2018. 

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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 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

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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.

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 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.

During the second quarter of 2018, the Company achieved and received a milestone payment of $10.0 million related to the Roche agreement, and it became probable that a significant reversal of cumulative revenue would not occur for the $10.0 million research milestone achieved. 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 during the second quarter of 2018, 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 balance is being recognized in the same manner as the remaining, unrecognized transaction price over the remaining research and development period until the performance obligation is satisfied.   

The Company recognized revenue that was previously deferred of $1.1 million and $3.5 million during three and nine months ended September 30, 2018, respectively, related to both the upfront and milestone payments. The amounts received that have not yet been recognized as revenue are recorded in deferred revenue on the Company’s condensed consolidated balance sheet.

Through September 30, 2018, the Company had recognized, in the aggregate, $7.8 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 $42.1 million as of September 30, 2018, of which $5.1 million is included in current liabilities.

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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. Prior to the termination, the Company had received an aggregate amount of $18.8 million in upfront and milestone payments, which consistent of 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. As a result of the termination of the Alexion agreement, the Company was not entitled to receive payment from Alexion for any research and development expenses incurred after the effective date of termination.

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. The Company recognized revenue for the $15.0 million upfront payment and a $1.8 million non-substantive milestone payment utilizing the proportional performance model over the period of performance, which ended October 24, 2017.

The Company recognized the remaining $2.0 million substantive milestone payments upon achievement.

As a result of the termination, the Company did not recognize revenue under the Alexion agreement during the three and nine months ended September 30, 2018. During the three and nine months ended September 30, 2017 the Company recognized revenue under the Alexion agreement of $6.7 million and $15.6 million, respectively, which represents $3.4 million and $9.3 million, respectively, of reimbursable research and development costs.

8. 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

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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.

Future minimum payments, which include principal and interest due under the term loan, are $0.3 million, in the aggregate, for the remainder of 2018.

9. Stock-based compensation

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 September 30, 2018, there were 1,983,374 shares available for future grant under the 2015 Plan.

Stock options

       The following table summarizes the stock option activity for the nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-

    

 

 

 

 

 

Average

 

 

 

 

 

 

Exercise

 

 

 

 

Shares

 

Price

 

 

Outstanding at December 31, 2017

 

3,304,166

 

$

22.45

 

 

Granted

 

1,610,370

 

 

78.91

 

 

Exercised

 

(362,218)

 

 

13.65

 

 

Canceled

 

(93,810)

 

 

52.55

 

 

Outstanding at September 30, 2018

 

4,458,508

 

$

42.93

 

 

Exercisable at September 30, 2018

 

1,942,891

 

$

20.93

 

 

 

At September 30, 2018, the total unrecognized compensation expense related to unvested stock option awards was $91.6 million, which is expected to be recognized over a weighted-average period of approximately 2.8 years.

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Restricted stock units

       The following table summarizes the restricted stock units activity for the nine months ended September 30,2018:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

Grant Date

 

 

    

Shares

    

Fair Value

 

Unvested shares at December 31, 2017

 

 —

 

$

 —

 

Granted

 

12,195

 

 

66.09

 

Vested

 

 —

 

 

 —

 

Forfeited

 

 —

 

 

 —

 

Unvested shares at September 30, 2018

 

12,195

 

 

66.09

 

 

At September 30, 2018, the total unrecognized compensation expense related to unvested restricted stock units was $0.8 million, which we expect to recognize over a weighted-average period of approximately 3.8 years.

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 nine months ended September 30, 2018 and 2017, respectively.

Stock-based compensation expense

The Company recognized stock-based compensation expense totaling $8.4 million and $21.7 million for the three and nine months ended September 30, 2018, respectively.  The Company recognized stock-based compensation expense totaling $3.6 million and $8.8 million for the three and nine months ended September 30, 2017, respectively. Stock-based compensation expense by award type included within the condensed consolidated statements of operations and comprehensive loss was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

    

2017

 

2018

    

2017

 

Stock options

 

$

8,278

 

$

3,538

    

$

21,468

 

$

8,667

 

Restricted stock units

 

 

42

 

 

 —

 

 

42

 

 

 —

 

Employee stock purchase plan

 

 

71

 

 

61

 

 

192

 

 

151

 

Total stock-based compensation expense

 

$

8,391

 

$

3,599

 

$

21,702

 

$

8,818

 

Stock‑based compensation expense by classification within the condensed consolidated statements of operations and comprehensive loss is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

2018

    

2017

 

2018

    

2017

 

 

Research and development

 

$

4,770

 

$

1,811

    

$

12,054

 

$

4,433

 

 

General and administrative

 

 

3,621

 

 

1,788

 

 

9,648

 

 

4,385

 

 

Total stock-based compensation expense

 

$

8,391

 

$

3,599

 

$

21,702

 

$

8,818

 

 

 

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10. Net Loss per Share

Basic net loss per share is calculated by dividing net loss by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share 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 calculation, stock options, unvested restricted stock units and ESPP shares are considered to be common stock equivalents but are excluded from the calculation of diluted net loss per share, as their effect would be anti‑dilutive; therefore, basic and diluted net loss per share were the same for all periods presented as a result of the Company’s net loss.

The following common stock equivalents were excluded from the calculation of diluted net loss per share for the periods indicated because including them would have had an anti‑dilutive effect.

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2018

    

2017

 

Stock options

 

4,458,508

 

3,350,223

 

Restricted stock units

 

12,195

 

 —

 

ESPP shares

 

5,860

 

9,417

 

Total common stock equivalents

 

4,476,563

 

3,359,640

 

 

 

 

 

 

 

The weighted average number of common shares used in net loss per share on a basic and diluted basis were 43,915,376 and 39,130,101 for the three months ended September 30, 2018 and 2017, respectively. The weighted average number of common shares used in net loss per share on a basic and diluted basis were 43,824,773 and 37,053,202 for the nine months ended September 30, 2018 and 2017, respectively.

11. Commitments

38 Sidney Street

On February 12, 2015, the Company entered into a lease for approximately 38,500 rentable square feet of office and laboratory space at 38 Sidney Street in Cambridge, Massachusetts, which the Company gained control over on June 15, 2015, and occupancy commenced in October 2015. The initial term of the lease agreement will expire on October 31, 2022, unless terminated sooner. The Company has an option to extend the lease for five additional years. The lease has a total commitment of $17.8 million over the initial 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 September 30, 2018, 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, of which $0.2 million was released in February 2018.  The remaining $1.1 million is recorded in restricted cash on the Company’s balance sheet as of September 30, 2018, and an additional $0.2 million is due to be released in October 2018 in accordance with the terms of the lease agreement.

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.

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45 Sidney Street

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, unless terminated sooner. 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 increases annually 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 September 30, 2018 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 agreement required the Company to pay a security deposit of $3.5 million, which is recorded in restricted cash on the Company’s balance sheet.

On September 19, 2018, the Company entered into an amendment to the lease agreement for its office and laboratory space located at 45 Sidney Street in Cambridge, Massachusetts to expand the rentable square footage from approximately 99,833 square feet to approximately 139,216 square feet. The initial term of the lease with respect to the expansion premises will commence on March 1, 2019 and will expire on November 30, 2029, unless terminated sooner. Pursuant to the lease amendment, the date on which the Company will become responsible for paying rent with respect to the expansion space will be the earlier of (i) the date upon which the Company first occupies the expansion premises for business purposes or (ii) July 1, 2019. The Company currently anticipates the rent commencement date for the expansion premises will be approximately July 1, 2019. The Company has agreed to pay an initial annual base rent of approximately $3.2 million for the expansion premises, which increases annually until it reaches approximately $4.2 million in the last year of the initial term for the expansion premises. Pursuant to the lease amendment, the landlord has also agreed to provide the Company with a tenant improvement allowance of approximately $3.2 million for improvements to be made to the expansion premises. The lease amendment required the Company to pay an additional security deposit of $0.8 million to the landlord for the expansion premises, which is recorded in restricted cash on the Company’s balance sheet.

For the three months ended September 30, 2018 and 2017, rent expense was $1.7 million and $2.4 million, respectively. For the nine months ended September 30, 2018 and 2017, rent expense was $5.6 million and $3.9 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 present updated data from our ongoing NAVIGATOR trial at the Connective Tissue Oncology Society Annual Meeting on November 15, 2018. We plan to submit a new drug application for avapritinib for the treatment of PDGFRα Exon 18 mutant GIST and fourth-line 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 we have initiated 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. In September 2018, we and CStone Pharmaceuticals, or CStone, submitted an investigational new drug, or IND, application for BLU-554 to Chinese health authorities, and subject to approval of the IND application, we and CStone plan to expand our ongoing Phase 1 clinical trial of BLU-554 to include clinical sites in Mainland China in the first half of 2019. In addition, we and CStone plan to initiate a proof-of-concept clinical trial in the CStone territory 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

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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. We plan to present updated data from the ongoing ARROW trial in the first half of 2019. Based on written feedback from the FDA, we plan to submit an NDA for BLU-667 in the first half of 2020 based on additional data from the ongoing ARROW trial and currently expect the NDA submission will be for separate potential indications: (1) patients with RET-fusion positive NSCLC and papillary thyroid cancer who have progressed following prior systemic therapy and (2) patients with RET-mutant MTC who have progressed following treatment with a tyrosine kinase inhibitor, or TKI.

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 plan to file an IND application for BLU-782 by the end of 2018, and subject to approval of the IND application, we plan to initiate a Phase 1 clinical trial in healthy volunteers in the first quarter of 2019. Upon completion of the Phase 1 clinical trial, we plan to advance BLU-782 into a registration-enabling Phase 2 clinical trial in patients with FOP.

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 January 2016, the U.S. Food and Drug Administration, or FDA, granted orphan drug designation to avapritinib for the treatment of GIST and mastocytosis, in July 2017, the European Medicines Agency, or EMA, granted orphan drug designation to avapritinib for the treatment of GIST, and in October 2018, the EMA granted orphan drug designation to avapritinib for the treatment of mastocytosis. In October 2016, the FDA granted fast track designation to avapritinib for (i) the treatment of patients with unresectable or metastatic GIST that progressed following treatment with imatinib and a second TKI and (ii) 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 October 2018, the FDA granted breakthrough therapy designation to avapritinib for the treatment of advanced SM, including the subtypes of aggressive SM, SM with an associated hematologic neoplasm and mast cell leukemia. In September 2015, the FDA granted orphan drug designation to BLU-554 for the treatment of HCC, and 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-

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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 September 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 $156.3 million for the nine months ended September 30, 2018 and $148.1 million, $72.5 million and $52.8 million for the years ended December 31, 2017, 2016 and 2015. As of September 30, 2018, we had an accumulated deficit of $517.2 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;

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maintain, expand and protect our intellectual property portfolio;

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acquire or in-license other drug candidates or technologies;

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