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Summary of Significant Accounting Policies and Recent Accounting Pronouncements

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 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 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 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)

		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:

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.

Cash Equivalents and Investments

9 Months Ended

Sep. 30, 2018

Cash Equivalents and Investments

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 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.

Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2018

Fair Value of Financial Instruments

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.

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

Restricted Cash	9 Months Ended
Restricted Cash	Sep. 30, 2018
Disclosure Text Block
Restricted Cash	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.

Accrued Expenses

9 Months Ended

Sep. 30, 2018

Accrued Expenses

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

Collaborations	9 Months Ended
Collaborations	Sep. 30, 2018
Disclosure Text Block
Collaborations	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 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. 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 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. 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.

Term Loan	9 Months Ended
Term Loan	Sep. 30, 2018
Disclosure Text Block
Term Loan	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 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.

Stock-based compensation

9 Months Ended

Sep. 30, 2018

Stock-based compensation

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.

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

Net Loss per Share

9 Months Ended

Sep. 30, 2018

Significant Accounting Policies

Net Loss per Share

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.

Commitments	9 Months Ended
Commitments	Sep. 30, 2018
Disclosure Text Block
Commitments	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. 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.

Summary of Significant Accounting Policies and Recent Accounting Pronouncements (Policies)

9 Months Ended

Sep. 30, 2018

Policy Text Blocks

Basis of Presentation

Use of Estimates

Revenue recognition

Revenue Recognition

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

Collaborative Arrangements

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

Recent Accounting Pronouncements

Revenue recognition


		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)


		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)

		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

Leasing

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:

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

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.

Summary of Significant Accounting Policies and Recent Accounting Pronouncements (Tables)

9 Months Ended

Sep. 30, 2018

Accounting Standards Update 2014-09

Revenue, Initial Application Period Cumulative Effect Transition [Line Items]

Schedule of financial statement impact of the cumulative adjustment


		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)


		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)

		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

Cash Equivalents and Investments (Tables)

9 Months Ended

Sep. 30, 2018

Schedule of cash equivalents and investments, available-for-sale

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

Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2018

Schedule of financial instruments measured at fair value

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	$	—	$	—

Tabular disclosure of financial instruments measured at fair value, including those classified in shareholders' equity measured on a recurring or nonrecurring basis. Disclosures include, but are not limited to, fair value measurements recorded and the reasons for the measurements, level within the fair value hierarchy in which the fair value measurements are categorized and transfers between levels 1 and 2. Nonrecurring fair value measurements are those that are required or permitted in the statement of financial position in particular circumstances.

+ References + Details

Accrued Expenses (Tables)

9 Months Ended

Sep. 30, 2018

Schedule of 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

Stock-based compensation (Tables)

9 Months Ended

Sep. 30, 2018

Summary of stock option activity


		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

Summary of restricted stock units activity


		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

Summary of Stock-based compensation expense allocation by type of awards

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

Summary of stock-based compensation expense recognized in statements of operations

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

Net Loss per Share (Tables)

9 Months Ended

Sep. 30, 2018

Schedule of common stock equivalents excluded from calculation of diluted net loss per share applicable to common stockholders


	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

Nature of Business - Stock Offerings (Details) - USD ($) $ / shares in Units, $ in Thousands					9 Months Ended
	Dec. 15, 2017	Apr. 04, 2017	Dec. 13, 2016	May 05, 2015	Sep. 30, 2018	Sep. 30, 2017
Nature of Business
Proceeds from public offering of common stock, net of commissions and underwriting discounts						$ 216,200
Proceeds from issuance of common stock					$ 5,341	$ 2,818
IPO
Nature of Business
Stock sold (in shares)				9,367,708
Share price (in dollars per share)				$ 18.00
Proceeds from public offering of common stock, net of commissions and underwriting discounts				$ 154,800
Follow-on Offering
Nature of Business
Stock sold (in shares)	4,259,259	5,750,000	5,750,000
Share price (in dollars per share)	$ 81.00	$ 40.00	$ 25.00
Proceeds from issuance of common stock	$ 325,700	$ 215,600	$ 134,500
Underwriters' Option
Nature of Business
Stock sold (in shares)	555,555	750,000	750,000	1,221,874

Nature of Business - Cash, Cash Equivalents and Investments (Details) $ in Millions	Sep. 30, 2018 USD ($)
Cash, cash equivalents and investments
Cash, cash equivalents and investments	$ 559.6

Summary of Significant Accounting Policies and Recent Accounting Pronouncements - Cumulative Effect of ASC 606 Adoption - General Information (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jan. 01, 2018	Dec. 31, 2017
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Accumulated deficit	$ (517,223)	$ (360,904)	$ (355,589)
Accounting Standards Update 2014-09 \| Restatement Adjustment
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Accumulated deficit		(5,315)
Deferred revenue		$ 5,300

Summary of Significant Accounting Policies and Recent Accounting Pronouncements - Cumulative Effect of ASC 606 Adoption - Tabular Disclosure (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jan. 01, 2018	Dec. 31, 2017
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Deferred revenue, current portion	$ 5,119	$ 4,478	$ 5,373
Deferred revenue, net of current portion	42,081	36,210	30,000
Accumulated deficit	$ (517,223)	(360,904)	$ (355,589)
Accounting Standards Update 2014-09 \| Restatement Adjustment
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Deferred revenue, current portion		(895)
Deferred revenue, net of current portion		6,210
Accumulated deficit		(5,315)
Accounting Standards Update 2014-09 \| Previously Reported
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Deferred revenue, current portion		5,373
Deferred revenue, net of current portion		30,000
Accumulated deficit		$ (355,589)

Summary of Significant Accounting Policies and Recent Accounting Pronouncements - Impact of ASC 606 Adoption - Condensed Consolidated Balance Sheet (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jan. 01, 2018	Dec. 31, 2017
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Deferred revenue, current portion	$ 5,119	$ 4,478	$ 5,373
Deferred revenue, net of current portion	42,081	36,210	30,000
Accumulated deficit	(517,223)	$ (360,904)	$ (355,589)
Difference between Revenue Guidance in Effect before and after Topic 606 \| Accounting Standards Update 2014-09
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Deferred revenue, current portion	(175)
Deferred revenue, net of current portion	15,831
Accumulated deficit	(15,656)
Calculated under Revenue Guidance in Effect before Topic 606 \| Accounting Standards Update 2014-09
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Deferred revenue, current portion	5,294
Deferred revenue, net of current portion	26,250
Accumulated deficit	$ (501,567)

Summary of Significant Accounting Policies and Recent Accounting Pronouncements - Impact of ASC 606 Adoption - Condensed Consolidated Statement of Operations and Comprehensive Loss (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Collaboration revenue	$ 1,095	$ 8,068	$ 43,488	$ 19,798
Net loss	$ (72,723)	$ (37,703)	$ (156,320)	$ (99,092)
Net loss per share - basic and diluted (in dollars per share)	$ (1.66)	$ (0.96)	$ (3.57)	$ (2.67)
Accounting Standards Update 2014-09 \| Calculated under Revenue Guidance in Effect before Topic 606
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Collaboration revenue	$ 1,144		$ 53,829
Net loss	$ (72,674)		$ (145,979)
Net loss per share - basic and diluted (in dollars per share)	$ (1.65)		$ (3.33)
Accounting Standards Update 2014-09 \| Difference between Revenue Guidance in Effect before and after Topic 606
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Collaboration revenue	$ (49)		$ (10,341)
Net loss	$ (49)		$ (10,341)
Net loss per share - basic and diluted (in dollars per share)	$ (0.01)		$ (0.24)

The portion of profit or loss for the period, net of income taxes, which is attributable to the parent.

+ References + Details

Summary of Significant Accounting Policies and Recent Accounting Pronouncements - Impact of ASC 606 Adoption - Condensed Consolidated Statement of Cash Flows (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Net loss	$ (156,320)	$ (99,092)
Changes in deferred revenue	6,512	$ (10,463)
Accounting Standards Update 2014-09 \| Difference between Revenue Guidance in Effect before and after Topic 606
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Net loss	(10,341)
Changes in deferred revenue	2,683
Accounting Standards Update 2014-09 \| Calculated under Revenue Guidance in Effect before Topic 606
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Net loss	(145,979)
Changes in deferred revenue	$ 3,829