EDGAR 10-K Filing

Company CIK: 1466301
Filing Year: 2021
Filename: 1466301_10-K_2021_0001558370-21-001668.json

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ITEM 1. BUSINESS
ITEM 1.
BUSINESS
Overview
We are a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, Europe and additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, for those indications that require them, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use.
Our marketed product Rubraca® (rucaparib), an oral small molecule inhibitor of poly ADP-ribose polymerase (“PARP”), is marketed in the United States for two indications specific to recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer and also an indication specific to metastatic castration-resistant prostate cancer (“mCRPC”). The initial indication received approval from the United States Food and Drug Administration (“FDA”) in December 2016 and covers the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic)-associated epithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with two or more chemotherapies and selected for therapy based on an FDA-approved
companion diagnostic for Rubraca. In April 2018, the FDA also approved Rubraca for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The approval in this second, broader and earlier-line indication on a priority review timeline was based on positive data from the phase 3 ARIEL3 clinical trial. Diagnostic testing is not required for patients to be prescribed Rubraca in this maintenance treatment indication.
In May 2020, the FDA approved Rubraca for the treatment of adult patients with mCRPC associated with a deleterious BRCA mutation (germline and/or somatic) who have been treated previously with androgen receptor-directed therapy and a taxane-based chemotherapy. The FDA approved this third indication under accelerated approval based on objective response rate and duration of response data from the TRITON2 clinical trial. We launched Rubraca for this indication in the U.S. following receipt of the approval. As an accelerated approval, continued approval for this indication may be contingent upon verification and description of clinical benefit in confirmatory trials. The TRITON3 clinical trial is expected to serve as the confirmatory study for Rubraca’s approval in mCRPC. In August 2020, the FDA approved the use of Foundation Medicine’s blood-based diagnostic test, FoundationOne Liquid CDx, as a companion diagnostic for the detection of deleterious BRCA mutation (germline and/or somatic) to select mCRPC patients for treatment with Rubraca.
In Europe, the European Commission granted a conditional marketing authorization in May 2018 for Rubraca as monotherapy treatment of adult patients with platinum-sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have been treated with two or more prior lines of platinum-based chemotherapy, and who are unable to tolerate further platinum-based chemotherapy. In January 2019, the European Commission granted a variation to the marketing authorization to include the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. With this approval, Rubraca is authorized in Europe for certain patients in the recurrent ovarian cancer maintenance setting regardless of their BRCA mutation status. Following successful reimbursement negotiations, Rubraca has been launched in each of Germany, United Kingdom, Italy, France, Spain and the Netherlands, and reimbursement is pending in Switzerland.
In December 2020, Rubraca met the primary study endpoint of significantly improving progression-free survival (“PFS”) versus chemotherapy in the ARIEL4 confirmatory study. An interim analysis of overall survival, a secondary endpoint in the study in which 51% of events had occurred in the intent-to-treat population, showed a trend toward an overall survival advantage in the chemotherapy arm, but was confounded by the high rate (64%) of per-protocol crossover to Rubraca following progression on chemotherapy. Additional ARIEL4 study results are expected to be submitted for presentation at a medical congress meeting in 2021. ARIEL4 is a Phase 3 multicenter, randomized study of Rubraca versus chemotherapy, which enrolled relapsed ovarian cancer patients with BRCA mutations (inclusive of germline and/or somatic) who had received two or more prior lines of chemotherapy. Completion of ARIEL4 is a post-marketing commitment in the U.S. and Europe.
Beyond our labeled indications, we have a clinical development program underway to further evaluate Rubraca in a variety of solid tumor types, either as monotherapy or in combination with other agents, including several studies as part of our ongoing clinical collaboration with Bristol Myers Squibb Company (“Bristol Myers Squibb”) to evaluate its immunotherapy Opdivo® (nivolumab) in combination with Rubraca. We anticipate initial data of Rubraca monotherapy versus placebo from our ATHENA study in the second half of 2021, with the results of Rubraca versus Opdivo in all study populations a year or more later. However, the timing of the ATHENA data readouts is dependent on the timing of data maturity driven by PFS events.
We initiated the Phase 2 LODESTAR study in December 2019 to evaluate Rubraca as monotherapy treatment in patients with recurrent solid tumors associated with a deleterious mutation in homologous recombination repair genes. Based on our interactions with the FDA, we believe that this study may be registration-enabling for a targeted gene- and tumor-agnostic label, if data from the trial support the potential for an accelerated approval. Assuming enrollment in this study continues as planned, and subject to the data, we may potentially file a supplemental New Drug Application (“sNDA”) with the FDA for this indication in the second half of 2021 or the first half of 2022.
We hold worldwide rights to Rubraca.
Pursuant to our license and collaboration agreement with 3B Pharmaceuticals GmbH (“3BP”), entered into in September 2019, we have initiated development of a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent
targeting fibroblast-activating protein (“FAP”). We have completed sufficient preclinical work to support an investigational new drug application (“IND”) for the lead candidate under our license and collaboration agreement, designated internally as FAP-2286. Accordingly, we submitted two INDs for FAP-2286 for use as imaging and treatment agents in December 2020 to support an initial Phase 1 study to determine the dose and tolerability of FAP-2286 as a therapeutic agent with expansion cohorts planned in multiple tumor types as part of a global development program. The INDs are expected to become effective following receipt and submission, and acceptance by the FDA, of satisfactory chemistry, manufacturing and controls (“CMC”) data for the imaging agent from clinical sites. The FAP-targeting imaging agent will be utilized to identify tumors that contain FAP for treatment in the Phase 1 LuMIERE clinical study, which we anticipate initiating in the first half of 2021.
In addition to our planned studies, the University of California San Francisco is sponsoring a separate, investigator-initiated, imaging-only study with gallium-68 labeled FAP-2286 (NCT04621435) to evaluate FAP expression in multiple tumor types; their study is currently recruiting. We hold U.S. and global rights to FAP-2286, excluding Europe (defined to include Russia, Turkey and Israel), where 3BP retains rights. We are also collaborating with 3BP on a discovery program directed to up to three additional, undisclosed targets for targeted radionuclide therapy, to which we would obtain global rights for any resulting product candidates.
Lucitanib, our second product candidate currently in clinical development, is an investigational, oral, potent angiogenesis inhibitor which inhibits vascular endothelial growth factor receptors 1 through 3 (“VEGFR1-3”), platelet-derived growth factor receptors alpha and beta (“PDGFR α/β”) and fibroblast growth factor receptors 1 through 3 (“FGFR1-3”). Lucitanib inhibits the same three pathways as Lenvima® (lenvatinib), which has received an FDA approval for use in endometrial cancer in combination with Keytruda® (pembrolizumab), a PD-1 inhibitor. This, together with preclinical data for lucitanib in combination with a PD-1 inhibitor that demonstrated enhanced anti-tumor activity compared to that of single agents, represent a scientific rationale for development of lucitanib in combination with a PD-1 inhibitor, and in February 2019, lucitanib was added to our clinical collaboration with Bristol Myers Squibb. The Clovis-sponsored LIO-1 study of lucitanib in combination with nivolumab in advanced solid tumors and gynecologic cancers is currently enrolling patients in the Phase 2 part of the study. We expect to present interim data from this study at medical meetings in 2021, which are expected to include interim results from the ovarian and endometrial cancer expansion cohorts. We hold the global (excluding China) development and commercialization rights for lucitanib.
Clovis was founded in 2009. We have built our organization to support innovative oncology drug development for the treatment of specific subsets of cancer populations. To implement our strategy, we have assembled an experienced team with core competencies in global clinical and non-clinical development, regulatory operations and commercialization in oncology, as well as establishing collaborative relationships with companies specializing in companion diagnostic development.
Clinical Development Pipeline
We continue to evaluate the use of Rubraca for selected patient populations and, where appropriate, collaborate with partners for companion diagnostic development. We have focused our development strategy for Rubraca on indications where we believe patient populations exhibit higher frequencies of mutant BRCA tumors or tumors with other homologous recombination deficiencies (“HRD”), where PARP inhibitors have demonstrated clinical or pre-clinical activity in tumors. We are also developing lucitanib in combinations, including with Rubraca, based on encouraging data in clinical studies of other similar oncology compounds. FAP-2286 is currently the subject of IND-enabling preclinical studies and we submitted two INDs in December 2020. The following table summarizes the principal ongoing or planned Clovis- or collaborator-sponsored studies:
In certain of these trials, we or our collaborators may have access to interim data on a periodic or continuing basis that will not be made available publicly on the same timeframe as such data becomes available to us, or at all.
Rubraca - a PARP Inhibitor
Overview
Rubraca is an oral, small molecule inhibitor of PARP1, PARP2 and PARP3. We in-licensed Rubraca from Pfizer, Inc. in June 2011 and hold exclusive worldwide rights. Rubraca has received regulatory approvals in the United States and Europe for patients with recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. Rubraca also received regulatory approval in the United States as a monotherapy treatment of adult patients with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer.
In the United States, Rubraca is approved by the FDA for the treatment of adult patients with deleterious BRCA mutation (germline and/or somatic)-associated epithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with two or more chemotherapies and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. BRCA mutations are believed to occur in approximately 25% of women with ovarian cancer. In April 2018, the FDA granted a second approval for Rubraca for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy, a broader and earlier-line indication. Diagnostic testing is not required for patients to be prescribed Rubraca in this maintenance treatment indication.
In the United States, Rubraca is approved for the treatment of adult patients with mCRPC associated with a deleterious BRCA mutation (germline and/or somatic) who have been treated previously with androgen receptor-directed therapy and a taxane-based chemotherapy. The FDA approved this indication in May 2020 under accelerated approval based on objective response rate and duration of response data from the TRITON2 clinical trial. We launched Rubraca for this indication in the U.S. following receipt of the approval. As an accelerated approval, continued approval
for this indication may be contingent upon verification and description of clinical benefit in confirmatory trials. The TRITON3 clinical trial is expected to serve as the confirmatory study for Rubraca’s approval in mCRPC. In August 2020, the FDA approved the use of Foundation Medicine’s blood-based diagnostic test, FoundationOne Liquid CDx, as a companion diagnostic for the detection of deleterious BRCA mutation (germline and/or somatic) to select mCRPC patients for treatment with Rubraca.
In Europe, Rubraca is authorized for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy regardless of their BRCA mutation status. Following successful reimbursement negotiations, Rubraca has been launched in each of Germany, United Kingdom, Italy, France, Spain and the Netherlands, and reimbursement is pending in Switzerland.
The Role of PARP Inhibition in Cancer Therapy
Cells in the human body are under constant attack from agents that can cause damage to DNA, including sunlight and other forms of radiation, as well as DNA-binding chemicals that can cause changes in the composition of DNA. Cells have evolved multiple mechanisms to enable such DNA repair, and these mechanisms are complementary to each other, each driving repair of specific types of DNA damage. If a cell’s DNA damage repair system is overwhelmed, then the cell will die undergoing a form of suicide termed apoptosis. A fundamental principle of cancer therapy is to damage cells profoundly with radiation or DNA-binding drugs, such as alkylating agents or platinums, to induce apoptosis, and thus cancer cell death. Multiple DNA repair mechanisms active in the cell may reduce the activity of these anti-cancer therapies.
The PARP family comprises 17 structurally related proteins that have been identified on the basis of sequence similarity. PARP1, PARP2, and PARP3 play a central role in DNA repair. They are rapidly recruited to the sites of DNA damage and catalyze the recruitment of additional proteins that initiate the repair of damaged DNA. The breast cancer 1 (“BRCA1”) and breast cancer 2 (“BRCA2”) genes also have important roles in DNA repair pathways such as homologous recombination. According to the National Cancer Institute, BRCA1 and BRCA2 mutations are associated with an increased risk of ovarian, breast, prostate, and pancreatic cancers.
Rubraca is an inhibitor of PARP enzymes, including PARP1, PARP2, and PARP3. PARP inhibitors have shown activity in BRCA1/2 mutant and homologous recombination (“HR”) repair deficient cancer cell lines through a mechanism known as synthetic lethality in which the loss of two genes/pathways is required for cell death. The inhibition/inactivation of repair pathways by administration of a PARP inhibitor in the context of an underlying genetic defect such as a BRCA mutation results in tumor cell death through accumulation of unrepaired DNA damage.
Alterations in DNA repair genes other than BRCA1/2 have been observed in, and contribute to the hereditary risk of, ovarian, breast, prostate and pancreatic cancers. PARP inhibitors have shown evidence of nonclinical and clinical activity in tumors with alterations in non-BRCA HR genes. DNA repair deficiencies resulting from genetic and epigenetic alterations can result in a “BRCA-like” phenotype that may also render tumor cells sensitive to PARP inhibitors. One approach to identify patients with DNA repair deficiencies due to mechanisms other than a mutation in BRCA or other non-BRCA HR genes is to assess loss of heterozygosity (“LOH”), or the loss of one normal copy of a gene, which arises from error-prone DNA repair pathways when HR is compromised.
On the basis of these scientific observations, we initially developed Rubraca in ovarian cancer patients with tumors having BRCA mutations or other HRD. These molecular markers also may be used to select patients with other tumors for treatment with Rubraca. Thus, in addition to ovarian trials, studies open for enrollment or under consideration to further evaluate Rubraca, either alone or in combination with other agents, include prostate, breast, pancreatic, bladder and gastroesophageal cancers.
Ovarian cancer
According to the American Cancer Society, an estimated more than 21,000 women will be diagnosed with ovarian cancer in the United States and there will be an estimated nearly 14,000 deaths from ovarian cancer in 2021, and according to GLOBOCAN in 2020, an estimated 66,000 women in Europe are diagnosed each year with ovarian cancer, and ovarian cancer is among those cancers with the highest rate of deaths. According to the American Cancer Society, more than 75% of women are diagnosed with ovarian cancer at an advanced stage, and patients who are diagnosed with
advanced ovarian cancer have a 70-95% chance of recurrence according to the Ovarian Cancer Research Alliance. According to a Clinical Cancer Research 2010 publication, up to 60% of patients with ovarian cancer may be HR-deficient.
Rubraca’s approvals in the U.S. and Europe in the recurrent BRCA mutant ovarian cancer treatment setting were based on data from two multicenter, single-arm, open-label clinical trials, Study 10 (NCT01482715) and ARIEL2 (NCT01891344), in women with advanced BRCA-mutant ovarian cancer who had progressed after two or more prior chemotherapies. All patients received Rubraca orally 600 mg twice daily as monotherapy. Treatment continued until disease progression or unacceptable toxicity. The primary efficacy outcome measure of both studies was objective response rate (ORR) as assessed by the investigator according to Response Evaluation Criteria in Solid Tumors (“RECIST”) version 1.1. Results from a blinded independent radiology review (“BICR”) were consistent.
The efficacy of Rubraca in the ovarian cancer maintenance treatment setting was investigated in ARIEL3 (NCT01968213), a double-blind, multicenter clinical trial in which 564 patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who were in response to platinum-based chemotherapy were randomized (2:1) to receive Rubraca tablets 600 mg orally twice daily (n=375) or placebo (n=189). Treatment was continued until disease progression or unacceptable toxicity. All patients had achieved a response (complete or partial) to their most recent platinum-based chemotherapy. Randomization was stratified by best response to last platinum (complete or partial), time to progression following the penultimate platinum therapy (6 to < 12 months and ≥ 12 months), and tumor biomarker status. The major efficacy outcome was investigator-assessed PFS evaluated according to RECISTv1.1.
The primary efficacy analysis evaluated three prospectively defined molecular sub-groups in a step-down manner: 1) tumor BRCA mutant (“tBRCAmut”) patients, inclusive of germline and somatic BRCA mutations (n=196); 2) HRD patients, including tBRCAmut patients and BRCA wild-type with high LOH (n=354), and, finally, 3) the intent-to-treat population, or all patients treated in ARIEL3 (n=564). ARIEL3 demonstrated a statistically significant improvement in PFS for patients randomized to Rubraca as compared with placebo in all patients, and in the HRD and tBRCAmut subgroups. Median PFS in the tBRCAmut patients was 16.6 months (95% CI: 13.4-22.9) in the Rubraca group (n=130) versus 5.4 months (95% CI: 3.4-6.7) in the placebo group (n=66) (Hazard Ratio, or HR: 0.23 [95% CI: 0.16-0.34]; p<0.0001). Median PFS in the HRD patients was 13.6 months (95% CI: 10.9-16.2) in the Rubraca group (n=236) versus 5.4 months (95% CI: 5.1-5.6) in the placebo group (n=118) (HR: 0.32 [95% CI: 0.24-0.42]; p<0·0001). Median PFS in the intent-to-treat population was 10.8 months (95% CI: 8.3-11.4) in the Rubraca group (n=375) versus 5.4 months (95% CI: 5.3-5.5) in the placebo group (n=189) (HR: 0.36 [95% CI: 0.30-0.45]; p<0·0001). An exploratory analysis in the HRD/BRCA wild-type population demonstrated a median PFS of 9.7 months (95% CI: 7.9-13.1) in the Rubraca group (n=106) versus 5.4 months (95% CI: 4.1-5.7) in the placebo group (n=52) (HR: 0.44 [95% CI: 0.29-0.66]); p<0.0001).
BICR results were consistent. In a pre-specified analysis of the key stand-alone secondary endpoint of progression-free survival assessed by BICR, PFS was also improved in the Rubraca group compared with placebo in all three populations. Median PFS in the tBRCAmut patients was 26.8 months (95% CI: 19.2 to not reached) in the Rubraca group versus 5.4 months (95% CI: 4.9-8.1) in the placebo group (HR: 0.20 [95% CI: 0.13-0.32]; p<0.0001). Median PFS in the HRD patients was 22.9 months (95% CI: 16.2 to not reported) in the Rubraca group versus 5.5 months (95% CI: 5.1-7.4) in the placebo group (HR: 0.34 [95% CI: 0.24-0.47]; p<0.0001). Median PFS in the intent-to-treat population was 13.7 months (95% CI: 11.0-19.1) versus 5.4 months (95% CI: 5.1-5.5) in the placebo group (HR: 0.35 [0.28-0.45]; p<0.0001). An exploratory analysis in the HRD/BRCA wild-type population demonstrated a median PFS of 11.1 months (95% CI: 8.2-NR) in the Rubraca group (n=106) versus 5.6 months (95% CI: 2.9-8.2) in the placebo group (n=52) (HR: 0.55 [95% CI: 0.35-0.89]; p=0.0135).
Enrollment in ARIEL3 included one-third of patients who had achieved a complete response to their prior platinum-based therapy, and two-thirds of patients who had achieved a partial response to their prior platinum-based therapy. Of those with a partial response, 37% had measurable disease at the time of enrollment and were therefore evaluable for response. The confirmed overall response rate by investigator-assessed RECISTv1.1 in the tBRCAmut group treated with Rubraca was 37.5% (15/40), of these, 17.5% (7/40) were complete responses. This compared with 9% (2/23) in the placebo group (p=0.0055). No complete responses were seen in the tBRCAmut placebo group. RECIST responses were also observed in BRCA wild-type HRD-positive and BRCA wild-type HRD-negative subgroups. In a subsequent post hoc exploratory analysis of ARIEL3 data, a higher response rate was also seen in patients without measurable disease in both the tBRCAmut group and the intent to treat population (inclusive of BRCAmut patients) as compared to placebo. RECIST responses were not assessed by independent blinded review.
Safety data from ARIEL3 demonstrated consistency with prior Rubraca studies. Treatment emergent adverse events (“TEAEs”) in the ARIEL3 Rubraca group were generally managed with dose modifications and not associated with increased mortality or morbidity compared with the placebo group. The most common (occurring in ≥5% of patients) TEAEs of grade ≥3 reported in patients treated with Rubraca in the ARIEL3 study were anemia/decreased hemoglobin (21%), increase in ALT/AST (10%), neutropenia (7%), asthenia/fatigue (7%) and thrombocytopenia (5%). The discontinuation rate for TEAEs (excluding disease progression) was 15% for Rubraca-treated patients and 2% for the placebo arm. In ARIEL3, the rate of treatment-emergent myelodysplastic syndrome (“MDS”)/acute myeloid leukemia (“AML”) in the Rubraca arm was <1% (3/372), and no patients on the placebo arm experienced treatment-emergent MDS/AML. In approximately 1,100 patients treated with Rubraca, MDS/AML occurred in 10 patients (0.9%), including those in long term follow-up. Of these, 5 occurred during treatment or during the 28-day safety follow-up (0.5%). The duration of Rubraca treatment prior to the diagnosis of MDS/AML ranged from 1 month to approximately 28 months. The cases were typical of secondary MDS/cancer therapy-related AML; in all cases, patients had received previous platinum containing chemotherapy regimens and/or other DNA damaging agents.
At the time of the analysis of PFS, overall survival (OS) data were not mature (with 22% of events). The comprehensive dataset for ARIEL3 was presented at the 2017 European Society of Medical Oncology (“ESMO”) Congress in early September 2017 and subsequently published in The Lancet. The ARIEL3 dataset formed the basis for sNDA filed with the FDA as well as the marketing authorization variation filed with the EMA supporting the approval of Rubraca in the US in April 2018 and Europe in January 2019 respectively, as maintenance treatment in adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy.
The ARIEL4 confirmatory study (NCT 02855944) is a Phase 3 multicenter, randomized study of Rubraca versus chemotherapy, which enrolled relapsed ovarian cancer patients with BRCA mutations (inclusive of germline and/or somatic) who had received two or more prior lines of chemotherapy. The primary endpoint of the study is investigator-assessed progression-free survival (“InvPFS”), with a step-down analysis from the efficacy population (if significant) to the intent to treat (“ITT”) population. The efficacy population comprised the group of patients with a deleterious tumor BRCA mutation and excluded those with a BRCA reversion mutation as determined by a blood test. Development of reversion mutations that restore BRCA protein function are associated with resistance to platinum-based chemotherapies and PARP inhibitors in BRCA-mutant cancers, and these occur more frequently in platinum-resistant vs platinum-sensitive patients (13% and 2% respectively in the ARIEL2 study). In December 2020, Rubraca met the primary study endpoint of significantly improving InvPFS versus chemotherapy. Patients with a BRCA reversion mutation represented 7% of patients enrolled in the study and as anticipated, InvPFS results for those patients showed limited benefit from Rubraca therapy. An interim analysis of overall survival, a secondary endpoint in the study in which 51% of events had occurred in the intent-to-treat population, showed a trend toward an overall survival advantage in the chemotherapy arm, but was confounded by the high rate (64%) of per-protocol crossover to Rubraca following progression on chemotherapy. An analysis of the ITT population of patients showed a trend toward an OS advantage for those patients who received Rubraca at any point in the trial versus those who did not. Additional ARIEL4 study results are expected to be submitted for presentation at a medical congress meeting in 2021. Completion of ARIEL4 is a post-marketing commitment in the U.S. and Europe.
Prostate cancer
The American Cancer Society estimates that approximately 248,000 men in the United States will be diagnosed with prostate cancer in 2021, and the GLOBOCAN Cancer Fact Sheets estimated that approximately 473,000 men in Europe were diagnosed with prostate cancer in 2020. Castrate-resistant prostate cancer has a high likelihood of developing metastases. Metastatic castrate-resistant prostate cancer (“mCRPC”) is an incurable disease, usually associated with poor prognosis. Approximately 43,000 men in the U.S. are expected to be diagnosed with mCRPC in 2020. According to the American Cancer Society, the five-year survival rate for mCRPC is approximately 30%. A number of publications have reported germline or somatic mutations in BRCA1 or BRCA2 are approximately 12% in mCRPC according to an article published in JCO Precision Oncology in 2017. These molecular markers may be used to select patients for treatment with a PARP inhibitor.
The TRITON (Trial of Rucaparib in Prostate Indications) program in prostate cancer initiated in the second half of 2016, and currently includes two Clovis-sponsored studies. Enrollment is complete for TRITON2; TRITON3 continues to enroll patients.
The TRITON2 study (NCT02952534) is a multicenter Phase 2 single-arm study of Rubraca in men with mCRPC that enrolled patients with BRCA mutations (inclusive of germline and/or somatic) or other deleterious mutations in other homologous recombination repair genes. Patients in the TRITON2 study have received prior treatment with at least one androgen receptor (“AR”)-directed therapy and one previous line of taxane-based chemotherapy and were screened for a deleterious germline or somatic mutation in BRCA1, BRCA2 or one of 13 other pre-specified homologous recombination (“HR”) genes. Study participants were allocated into three cohorts based on the type of gene mutation and disease status, as determined by genomic sequencing and RECIST criteria, respectively. Each cohort receives 600 mg Rubraca twice daily and are grouped based on the following criteria: A) mutation in either BRCA1, BRCA2 or ATM genes, with tumors that can be measured with visceral and/or nodal disease; B) mutation in either BRCA1, BRCA2 or ATM genes, with tumors that cannot be measured with visceral and/or nodal disease, or C) mutation in another HR gene associated with sensitivity to PARP inhibition, with or without measurable disease. The primary study endpoints include confirmed ORR and duration of response (“DOR”) per modified RECIST v.1.1/PCWG3 criteria assessed by BICR in patients with measurable disease at baseline by independent review and PSA response in patients with no measurable disease at baseline. Secondary endpoints include overall survival (“OS”), clinical benefit rate, and safety and tolerability.
Efficacy and safety data from TRITON2 formed the basis of a sNDA that was submitted to FDA in late 2019. Evaluable patient populations in the sNDA dataset included the following: 62 RECIST-evaluable patients with a BRCA (germline and/or somatic) mutation and measurable disease (BICR); 115 patients with a BRCA (germline and/or somatic) mutation and measurable or non-measurable disease; and 209 patients with HRD-positive mCRPC. The RECIST-evaluable patient population demonstrated a 44% ORR (N=62; 95% CI 31, 57) by BICR. Objective response rates were similar for patients with a germline BRCA versus somatic BRCA mutation. Median DOR was not evaluable at data cut-off. Additionally, a 55% confirmed PSA response rate (95% CI 45, 64) was observed in an analysis of 115 patients with a deleterious BRCA mutation (germline and/or somatic) and measurable or non-measurable disease.
TRITON2 evaluated the safety of Rubraca 600 mg twice daily as monotherapy treatment in the 209 patients with HRD-positive mCRPC enrolled in the study, including the 115 with BRCA-mutated mCRPC. The most common adverse reactions (greater than or equal to 20% of patients; CTCAE Grade 1-4) occurring in the BRCA mutant population (n=115) were asthenia/fatigue, nausea, anemia, ALT/AST increased, decreased appetite, constipation, rash, thrombocytopenia, vomiting, and diarrhea. The most common laboratory abnormalities (greater than or equal to 35% of patients; CTCAE Grade 1-4) were increase in ALT, decrease in leukocytes, decrease in phosphate, decrease in absolute neutrophil count, decrease in hemoglobin, increase in alkaline phosphatase, increase in creatinine, increase in triglycerides, decrease in lymphocytes, decrease in platelets, and decrease in sodium.
In May 2020, the FDA approved Rubraca for the treatment of adult patients with mCRPC associated with a deleterious BRCA mutation (germline and/or somatic) who have been treated previously with androgen receptor-directed therapy and a taxane-based chemotherapy. The FDA approved this indication under accelerated approval based on objective response rate and duration of response data from the TRITON2 clinical trial. We launched Rubraca for this indication in the U.S. following receipt of the approval. As an accelerated approval, continued approval for this indication may be contingent upon verification and description of clinical benefit in confirmatory trials. The TRITON3 clinical trial is expected to serve as the confirmatory study for Rubraca’s approval in mCRPC. In August 2020, the FDA approved the use of Foundation Medicine’s blood-based diagnostic test, FoundationOne Liquid CDx, as a companion diagnostic for the detection of deleterious BRCA mutation (germline and/or somatic) to select mCRPC patients for treatment with Rubraca.
The TRITON3 study (NCT02975934) is a Phase 3 comparative study in men with mCRPC enrolling BRCA mutant and ATM (both inclusive of germline and/or somatic) patients who have progressed on AR-targeted therapy and who have not yet received chemotherapy in the castrate-resistant setting. TRITON3 will compare Rubraca to physician’s choice of AR-targeted therapy or chemotherapy in these patients. The planned primary endpoint of the study is radiologic PFS. TRITON3 initiated during the first quarter of 2017.
The Alliance for Clinical Trials in Oncology is sponsoring the Phase 3 CASPAR study (NCT04455750) comparing the combination of enzalutamide and Rubraca to enzalutamide alone in mCRPC. The study is expected to enroll approximately 1,000 patients in the United States at National Clinical Trials Network (“NCTN”) sites nationally and is currently the only study evaluating the combination of a PARP inhibitor and a novel anti-androgen with an overall survival endpoint. The Alliance is part of the NCTN sponsored by the National Cancer Institute. CASPAR is expected to begin enrolling patients in the near-term.
LODESTAR tumor-agnostic study
The LODESTAR clinical study (NCT04171700) is a Phase 2 study evaluating Rubraca as monotherapy treatment in patients with recurrent solid tumors associated with a deleterious homologous recombination repair (“HRR”) gene mutation across a variety of tumor types. These gene mutations include BRCA1, BRCA2, PALB2, RAD51C, RAD51D in the primary cohort, as well as several additional genes in an exploratory cohort. We anticipate that this study may potentially be registration-enabling for a targeted gene- and tumor-agnostic label. The study initiated in late 2019 and is currently enrolling.
Opdivo combination trials
Our ongoing collaboration with Bristol Myers Squibb involves the evaluation of the combination of Rubraca with Bristol Myers Squibb’s immunotherapy Opdivo® (nivolumab) in multiple tumor types.
We believe that a preclinical rationale supports the conduct of clinical trials of the combination of our PARP inhibitor Rubraca with immune checkpoint inhibitors such as the PD-1 inhibitor Opdivo. BRCA1 and BRCA2 and other HRD mutations are associated with increased tumor mutational burden, which may create additional tumor-specific antigens or “neoepitopes.” Increased tumor mutation burden has been shown to correlate with increased benefit from immune checkpoint blockade. In addition, cell death that is induced by a PARP inhibitor is considered immunogenic and stimulates a “STING-like” pathway due to fragmented DNA release into cytosol. In mice studies, rucaparib and an anti-PD-1 antibody demonstrated anti-tumor activity in BRCA1 mutant ovarian tumors. The combination of rucaparib and either an anti-PD-L1 or anti-CTLA-4 antibody were equally compelling in preclinical studies.
Three combination trials of Rubraca and Opdivo are currently underway sponsored by Clovis or Bristol Myers Squibb, and in February 2019, lucitanib was added to the clinical collaboration in combinations with Opdivo.
ATHENA is the Clovis-sponsored four-arm first-line maintenance treatment study (NCT03522246) to evaluate Rubraca and Opdivo, Rubraca, Opdivo and placebo in approximately 1,000 newly diagnosed patients with stage III/IV high-grade ovarian, fallopian tube, or primary peritoneal cancer who have completed platinum-based chemotherapy. The primary objectives are first, to determine if Rubraca extends PFS versus placebo, and second, to determine if the combination of Rubraca and Opdivo meaningfully extends PFS versus Rubraca monotherapy, or versus placebo. The ATHENA study, which initiated in 2018 and completed enrollment in the second quarter of 2020, evaluates Rubraca in terms of two key outcomes in a step-down manner: monotherapy versus placebo in the first-line maintenance setting in the HRD population, inclusive of BRCA, and in the all comers (intent-to-treat) population, and later, any potential advantage for the combination of Rubraca and Opdivo in the same patient populations. ATHENA is the first front-line switch maintenance study to evaluate a PARP inhibitor as monotherapy and in combination with an anti-PD-1 in one study design. We anticipate the results of the Rubraca monotherapy arm versus placebo in all study populations in the second half of 2021, and then a year or more later, the results of Rubraca plus Opdivo versus Rubraca in all study populations. However, the timing of the ATHENA readouts is dependent on the timing of data maturity driven by PFS events. Each of the analyses will first evaluate outcomes in the HRD population, inclusive of BRCA, and then step down to the entire intent-to-treat population.
Bristol Myers Squibb is sponsoring CheckMate 9KD (NCT03338790), a Phase 2 three-arm study in mCRPC, evaluating Opdivo + Rubraca, Opdivo + docetaxel + prednisone, and Opdivo + enzalutamide, with the objective of determining how the combinations affects objective response rate and PSA response. The study has completed enrollment of patients with biomarker negative or positive disease, for whom tumor tissue samples were used to determine biomarker status. Bristol Myers Squibb initiated the study in the fourth quarter of 2017.
Bristol Myers Squibb is also sponsoring FRACTION-GC (NCT02935634), a Phase 2 multi-arm study evaluating Opdivo in combination with other therapies in advanced gastric cancer. The trial includes, among other combinations, an evaluation of Opdivo + Rubraca, Yervoy + Rubraca and the triplet combination of Opdivo + Yervoy + Rubraca. This is the first sponsored study to explore this triplet combination, and it is now enrolling patients into the safety lead-in part of the Rubraca-containing portion of the study.
Pancreatic cancer
Interim results from an investigator-initiated Phase 2 trial of Rubraca as first-line maintenance therapy in platinum-sensitive patients with advanced pancreatic cancer reported at the American Association for Cancer Research (“AACR”) annual meeting in April 2019 suggest that first-line maintenance therapy with Rubraca following induction with platinum-based chemotherapy provides disease control with no new safety signals among patients with a pathogenic mutation in BRCA1, BRCA2 or PALB2. Based on these data as well as the earlier Clovis-sponsored RUCAPANC study, we plan to enroll patients with pancreatic cancer and selected genetic mutations in the LODESTAR pan-tumor study of rucaparib that initiated in late 2019.
Bladder cancer
In April 2019, we discontinued our Clovis-sponsored ATLAS Phase 2 open-label monotherapy clinical trial evaluating rucaparib in recurrent, metastatic bladder cancer. The decision was based on recommendations by an independent data monitoring committee (“DMC”) following its review of preliminary efficacy data for 62 patients enrolled and treated in the study, which demonstrated that the objective response rate in the intent-to-treat population did not meet the protocol-defined continuance criteria, and suggested that monotherapy treatment may not provide a meaningful clinical benefit in the all-comer patient population enrolled in the trial. Following the DMC’s recommendation to stop enrollment in the study, we terminated the ATLAS study early. We plan to enroll patients with advanced bladder cancer and selected genetic mutations in the LODESTAR pan-tumor study of rucaparib that initiated in late 2019.
Companion Diagnostics
Three FDA-approved companion diagnostic tests are commercially available to select cancer patients for treatment with Rubraca.
Foundation Medicine, Inc. (“Foundation”) markets its comprehensive companion diagnostic test for solid tumors, FoundationOne®CDx (“F1CDx”), a next generation sequencing-based in vitro diagnostic device for detection of substitutions, insertion and deletion alterations, and copy number alterations in 324 genes (including BRCA1/2), select gene rearrangements, as well as genomic signatures, including LOH, microsatellite instability and tumor mutational burden using tumor tissue specimens.CDx is approved as a companion diagnostic to select ovarian cancer patients with BRCA1/2 mutations for treatment with Rubraca.
In August 2020, Foundation received approval for FoundationOne Liquid CDx, a qualitative next generation sequencing-based in vitro diagnostic test that analyzes mutations in 311 genes (including BRCA1/2) utilizing circulating cell-free DNA isolated from plasma derived from peripheral whole blood. FoundationOne Liquid CDx is approved as a companion diagnostic to select mCRPC and ovarian cancer patients with BRCA1/2 mutations for treatment with Rubraca.
BRACAnalysis CDx®, is a blood-based assay for the qualitative detection and classification of germline mutations in BRCA1/2 genes commercialized by Myriad Genetics Laboratories, Inc. BRACAnalysis CDx is approved as a companion diagnostic to select ovarian cancer patients with BRCA1/2 mutations for treatment with Rubraca.
FAP-2286 and Radionuclide Therapy Development Program
FAP-2286 is a preclinical candidate discovered by 3BP under investigation as a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast activation protein alpha (“FAP”). In September 2019, we acquired U.S. and global rights to FAP-2286, excluding Europe (inclusive of Russia, Turkey and Israel), where 3BP retains rights. We are also collaborating with 3BP on a discovery program directed to up to three additional, undisclosed targets for targeted radionuclide therapy, to which we would obtain global rights for any resulting product candidates.
Patent applications are pending that claim FAP-2286 generically and specifically (including with respect to composition of matter) that, if issued, would have expiration dates in 2040.
The Role of Fibroblast Activation Protein Alpha as a Radiopharmaceutical Target
FAP is highly expressed in cancer-associated fibroblasts (“CAFs”) which are found in the majority of cancer types, potentially making it a suitable target across a wide array of solid tumors. FAP is highly expressed in many epithelial cancers, including more than 90% of breast, lung, colorectal and pancreatic carcinomas. CAFs are highly prevalent in the tumor microenvironment of many cancers and persist through all malignant stages of a tumor, from primary tumor to metastasis. FAP has limited expression on normal fibroblasts, reducing the potential for effects in normal tissue.
PTRT is an emerging class of drugs and it involves the administration via intravenous injection of a small amount of radioactive material - a radionuclide - that is combined with a peptide for use as a targeted pharmaceutical. The peptide is able to recognize and bind to specific targets on the cancer cells or in their microenvironment, and the intended result is to deliver a high dose of radiation to the tumor while sparing normal tissue because of its rapid systemic clearance. Radionuclides with different emission properties, primarily beta particles or more potent alpha particles, are used to deliver cytotoxic radiation to the tumor-associated targets. In order for the targeted radiopharmaceutical to be safe and efficacious, it must rapidly attach to cancer cells or in close vicinity to the cancer cells, be retained in or at the tumor site for a sufficient period of time that the radionuclide can have activity on the cancer cells, have minimal attachment to non-cancer cells, and then be rapidly cleared from the body. In most cases, the radionuclides may be visualized by using nuclear medicine imaging techniques to evaluate the specificity of the agent, supporting a precision medicine approach to delivery of the therapeutic form of the agent.
Clinical studies of small molecule imaging agents targeting FAP have validated this target in a diverse number of cancer indications and support the further evaluation of peptide-targeted radionuclide therapy. FAP-targeted radiopharmaceuticals have at least two potential modes of anti-tumor activity: radiation crossfire, in which tumor cells are irradiated due to their close proximity to CAFs; and depletion of CAFs, disrupting the communication between the tumor cells and the tumor stroma. In addition, in certain tumor types, such as sarcoma and mesothelioma, FAP is expressed on the tumor cells themselves, and in those tumors, FAP-targeted radiopharmaceuticals may have a direct antitumor effect.
In addition, an evident biological rationale supports the combination of targeted radionuclide therapy with cancer therapies including PARP inhibitors and anti-PD(L)-1 agents. While our initial development focus will be on monotherapy with FAP-2286, we intend to explore these types of combinations pre-clinically and clinically as well.
The FAP-2286 product candidate consists of a peptide that selectively binds to FAP and a linker and site to which radioactive medical isotopes can be attached for use as an imaging agent or therapeutic agent. Our initial development plans include the use of gallium-68 (68Ga) as an imaging agent and lutetium-177 (177Lu) as a therapeutic agent.
The anti-tumor efficacy of 177Lu-FAP-2286 has been evaluated preclinically in FAP-expressing tumor models. Data presented at the 2020 ESMO Virtual Congress demonstrated that a single, IV dose of 177Lu-FAP-2286 resulted in statistically significant tumor growth inhibition in two different mouse xenograft models: (1) HEK293 cells stably transfected with human FAP (HEK-FAP); and (2) Sarc4809 sarcoma patient-derived xenograft model with endogenous FAP expression.
First Clinical Experience Reported from FAP-2286 Named Patient Use
Physicians in Germany and certain other countries may treat patients suffering from life-threatening diseases or disease leading to severe disability with experimental drugs if no other appropriate options are available under named-patient or similar programs. A physician may initiate treatment for specific patients until there is commercial product available and patients are encouraged to enroll in clinical trials where possible. Named patient programs are not clinical trials and the treating physician is solely responsible for, and makes all decisions independently, including dose and assessment of efficacy and safety, and the drug sponsor has no role in decisions.
In December 2019, Professor Dr. Richard P. Baum reported his initial independent clinical experience with FAP-2286 in named-patient use in eleven patients at the International Centers for Precision Oncology Foundation Symposium in Bad Berka, Germany. At Prof. Dr. Baum’s clinic, FAP-2286 was linked to gallium-68 as a tumor-imaging compound using PET/CT scanning and to lutetium-177 as a therapeutic agent. While we were not provided the data behind his results and have not verified those results, we were encouraged by his presentation, and believe that his reported experience supports our pre-clinical and development plans.
As the early named patient use in Germany suggests, significant interest already exists within the academic community to explore the potential of FAP as an imaging and treatment target.
Our FAP-2286 Clinical Development Plan
In December 2020, we submitted two INDs for FAP-2286 for use as imaging and treatment agents, respectively, to support an initial Phase 1 study, designated the LuMIERE study, to determine the dose and tolerability of 177Lu-FAP-2286 as a therapeutic agent. Expansion cohorts are planned in multiple tumor types as part of a global development program. The INDs are expected to become effective following receipt and submission of satisfactory CMC data for the gallium-68 labeled imaging agent from clinical sites. The FAP-targeting imaging agent will be utilized to identify tumors that contain FAP for treatment in the Phase 1 clinical study, which we anticipate initiating in the first half of 2021. Studies of FAP-2286 linked to an alpha-emitter are also under consideration.
In addition to our planned study, the University of California San Francisco is sponsoring a separate, investigator-initiated imaging-only study with gallium-68 labelled FAP-2286 to evaluate FAP expression in multiple tumor types (NCT04621435); this study is enrolling patients. Data from the study is expected to inform indication selection for the LuMIERE Phase 2 expansion cohorts.
Lucitanib - a VEGFR, PDGFR and FGFR Inhibitor
Lucitanib is an investigational, oral, potent angiogenesis inhibitor which inhibits vascular endothelial growth factor receptors 1 through 3 (“VEGFR1-3”), platelet-derived growth factor receptors alpha and beta (“PDGFR α/β”) and fibroblast growth factor receptors 1 through 3 (“FGFR1-3”).
The composition of matter patent for lucitanib expires in 2030 in the U.S. and 2028 in Europe, with up to five years patent term extension available. We hold the global (excluding China) development and commercialization rights for lucitanib.
VEGF, PDGF and FGF: The Role of these Tyrosine Kinase Inhibitors in Cancer
The VEGFs are a family of related extracellular proteins that normally regulate blood and lymphatic vessel development in humans. They act by binding to and activating VEGF receptors, which are cell surface proteins that transmit growth signals to specific cells that are involved in the development of new blood vessels. Certain VEGFs promote growth of multiple solid tumors by stimulating the formation of new blood vessels to feed the tumor and allow it to grow and metastasize. Tumors produce an excessive amount of VEGF. This results in excess VEGFR signaling and the formation of new blood vessels within the tumor. The VEGF ligands that induce angiogenesis are often present in a wide range of cancer indications, including a type of kidney cancer called renal cell carcinoma, a type of liver cancer called hepatocellular carcinoma, gastric cancer, head and neck cancers and other solid tumors.
The PDGF family consists of five different isoforms of PDGF ligand that bind to and activate cellular responses through two different receptors (PDGFRα/ß). In tumors, PDGF signaling plays a diverse role in many aspects of tumor development promoting cell proliferation, invasion, migration and angiogenesis. Amplification and/or mutation of the gene encoding the PDGFRα receptor is observed in a wide range of cancers, including lung cancer, an aggressive form of brain cancer called glioblastoma and a cancer of the gastrointestinal tract known as gastrointestinal stromal tumors. Amplification of the PDGFRα gene results in excess production, or the over-expression, of PDGFRα protein on the surface of the tumor cell. The over-expression of PDGFRα on the tumor cell surface leads to an increased receptor signaling, which stimulates uncontrolled proliferation of some types of tumor cells.
The FGFs are a family of related extracellular proteins that normally regulate cell proliferation and survival in humans. The FGF family consists of 22 ligands that exert their physiological effect on cells by binding to four FGFRs (FGFR1- 4). As with the PDGF family, some cancers display FGF/FGFR gene amplification/mutation resulting in continual activation of the FGFR signaling pathway leading to uncontrolled cell division. Tumors with a relatively high incidence of FGF aberrations, which include amplification of the FGFR1 gene and amplification of a region of chromosome 11q that contains several FGF ligands, include breast and lung cancers. In addition, FGFR gene amplification/mutation is also observed in a wide range of cancer indications including sarcoma, ovarian cancer, adenocarcinoma of the lung, bladder cancer, colorectal cancer and endometrial cancer.
As an inhibitor of VEGFR1-3, PDGFRα/ß and FGFR1-3 and given the role that each of these receptor kinases plays in tumor progression and metastasis formation, lucitanib has the potential benefit of targeting three relevant pro-angiogenic growth factors in targeted patient populations identified by molecular markers. Data from earlier studies suggest that lucitanib’s VEGF inhibition may be the primary driver of its activity, and both preclinical and clinical data provide a scientific rationale for further development on lucitanib in combination with other agents.
Targeting angiogenesis and immune checkpoint pathways may have a synergistic effect on antitumor activity. Angiogenesis has been shown to be immunosuppressive within the tumor microenvironment, dampening anti-tumor immune responses, according to Nature Reviews in Clinical Oncology (Fukumura 2018). Immune effects of angiogenesis include modulation of T-cell infiltration into the tumor, inhibition of dendritic cell maturation, and the modulation of cell adhesion molecules and immune cell populations. Inhibition of angiogenesis by small molecule RTK inhibitors or monoclonal antibodies may reverse immunosuppression. These data suggest the clinical activity of PD-(L)1 inhibitors may be enhanced through the inhibition of angiogenesis by lucitanib. Clovis preclinical studies of multiple syngeneic tumor models have shown that lucitanib in combination with a PD-1 inhibitor delivers superior activity. Multiple Phase 1-3 studies are examining the combination of angiogenesis and PD-(L)1 inhibitors in different indications.
Lucitanib inhibits the same three pathways as Lenvima (lenvatinib), which has shown encouraging results when combined with the PD-1 inhibitor Keytruda (pembrolizumab), and this combination has been approved by the FDA on an accelerated basis for the treatment of certain forms of endometrial cancer. This, together with preclinical data for lucitanib in combination with a PD(L)-1 inhibitor as described above, represent a scientific rationale for development of lucitanib in combination with a PD(L)-1 inhibitor, and in February 2019, lucitanib was added to our clinical collaboration with Bristol Myers Squibb evaluating combinations with Opdivo.
LIO-1 is an open-label, Phase 1b/2 study (NCT04042116) of lucitanib in combination with Opdivo in advanced gynecologic cancers and other solid tumors to determine the recommended dose of lucitanib in combination with Opdivo in patients with an advanced solid tumor (Phase 1b); followed by evaluation of the safety and efficacy of lucitanib and Opdivo in patients with an advanced gynecological solid tumor (Phase 2), including ovarian, endometrial and cervical cancers. The primary efficacy endpoint of the LIO-1 study is ORR as assessed by the investigator according to RECIST v1.1.
Initial data presented at the 2020 ESMO Virtual Congress from the Phase 1b part of the study in patients with an advanced solid tumor (n=17) identified the recommended starting Phase 2 dose of oral lucitanib to be used in combination with Opdivo and showed promising signs of antitumor activity. The recommended oral starting dose of lucitanib was established as 6 mg once daily, to be given in combination with Opdivo at a fixed dose of 480 mg intravenously (IV) once every 28 days. Across three dose levels studied (6 mg, 8 mg and 10 mg) of lucitanib in combination with Opdivo at (480 mg once every 28 days), only one dose-limiting toxicity of Grade 3 proteinuria was observed among 17 patients, and there were no apparent differences in TEAE frequencies between dose levels. In this small patient population, TEAEs were consistent with those expected for lucitanib and Opdivo. The Phase 2 part of the study is currently enrolling. We expect to present interim data from LIO-1 at medical meetings in 2021, which are expected to include interim results from the ovarian and endometrial cancer expansion cohorts.
Preclinical and clinical data also support the potential activity of combining angiogenesis and PARP inhibition. According to Cancer Research and Molecular and Cellular Biology, there is a link between PARP inhibition and suppression of angiogenesis: chronic hypoxia induces down-regulation of BRCA1 and RAD51 and decreases homologous recombination in cancer cells. Clovis preclinical data in an ovarian tumor BRCA1mut syngeneic model showed the combination of lucitanib and rucaparib is more active than monotherapy than either lucitanib or rucaparib as a single agent and showed similar anti-tumor activity to rucaparib in combination with another oral VEGFR inhibitor. Published clinical data for the combination of another oral VEGFR inhibitor and PARP inhibitor in development further demonstrate the potential activity of the combination.
Competition
The development and commercialization of new drugs is intensely competitive, and we face competition from major pharmaceutical companies, biotechnology companies, universities and other research institutions worldwide. Our competitors may develop or market products or other novel technologies that are more effective, safer or less costly than
any that have been or will be commercialized by us, or may obtain regulatory approval for their products more rapidly than we may obtain approval for ours.
The acquisition or licensing of pharmaceutical products is also very competitive. More established companies, which have acknowledged strategies to license or acquire products, may have competitive advantages over us, as may other emerging companies that take similar or different approaches to product acquisitions. Many of our competitors have substantially greater financial, technical and human resources than we have. Our competitors also compete with us in recruiting and retaining qualified scientific, management and commercial personnel as well as in establishing clinical trial sites and patient enrollment for clinical trials.
Additional mergers and acquisitions in the pharmaceutical industry may result in even more resources being concentrated in our competitors. Competition may increase further because of advances made in the commercial applicability of technologies and greater availability of capital for investment in these fields. Our success will be based in part on our ability to build and actively manage a portfolio of drugs that addresses unmet medical needs and creates value in patient therapy.
Rubraca Competition
Lynparza®/olaparib (AstraZeneca UK Limited) was the first PARP inhibitor to market and has been approved in the US in the following indications:
● for the maintenance treatment of adult patients with deleterious or suspected deleterious germline or somatic BRCA-mutated (“gBRCAm” or “sBRCAm”) advanced epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in complete or partial response to first-line platinum-based chemotherapy;
● in combination with bevacizumab for the maintenance treatment of adult patients with advanced epithelial ovarian, fallopian tube or primary peritoneal cancer who are in a complete or partial response to first-line platinum-based chemotherapy and whose cancer is associated with HRD-positive status defined by either:
o a deleterious or suspected deleterious BRCA mutation, and/or
o genomic instability;
● for the treatment of adult patients who have deleterious or suspected deleterious gBRCAm advanced ovarian cancer who have been treated with three or more prior lines of chemotherapy;
● for the maintenance treatment of adult patients with recurrent epithelial, fallopian tube or primary peritoneal cancer, who are in a complete or partial response to platinum-based chemotherapy;
● for the treatment of adult patients with deleterious or suspected deleterious gBRCAm, human epidermal growth factor receptor 2 (“HER2”)-negative metastatic breast cancer who have been treated with chemotherapy in the neoadjuvant, adjuvant, or metastatic setting;
● for the maintenance treatment of adult patients with deleterious or suspected deleterious gBRCAm metastatic pancreatic adenocarcinoma whose disease has not progressed on at least 16 weeks of a first-line platinum-based chemotherapy regimen; and
● for the treatment of adult patients with deleterious or suspected deleterious germline or somatic homologous recombination repair (“HRR”) gene-mutated mCRPC who have progressed following prior treatment with enzalutamide or abiraterone.
Lynparza is approved in Europe as monotherapy for the:
● maintenance treatment of adult patients with advanced (FIGO stages III and IV) BRCA1/2-mutated (germline and/or somatic) high-grade epithelial ovarian, fallopian tube or primary peritoneal cancer who are in response (complete or partial) following completion of first-line platinum-based chemotherapy;
● maintenance treatment of adult patients with platinum-sensitive relapsed high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in response (complete or partial) to platinum-based chemotherapy;
● in combination with bevacizumab for the maintenance treatment of adult patients with advanced (FIGO stages III and IV) high-grade epithelial ovarian, fallopian tube or primary peritoneal cancer who are in response
(complete or partial) following completion of first-line platinum-based chemotherapy in combination with bevacizumab and whose cancer is associated with homologous recombination deficiency HRD-positive status defined by either a BRCA1/2 mutation and/or genomic instability;
● treatment of adult patients with germline BRCA1/2-mutations, who have HER2 negative locally advanced or metastatic breast cancer. Patients should have previously been treated with an anthracycline and a taxane in the (neo)adjuvant or metastatic setting unless patients were not suitable for these treatments. Patients with hormone receptor-positive breast cancer should also have progressed on or after prior endocrine therapy, or be considered unsuitable for endocrine therapy;
● for the maintenance treatment of adult patients with germline BRCA1/2-mutations who have metastatic adenocarcinoma of the pancreas and have not progressed after a minimum of 16 weeks of platinum treatment within a first-line chemotherapy regimen; and
● for the treatment of adult patients with metastatic castration-resistant prostate cancer and BRCA1/2-mutations (germline and/or somatic) who have progressed following prior therapy that included a new hormonal agent.
AstraZeneca and Merck & Co., Inc. have a global strategic oncology collaboration to co-develop and co-commercialize Lynparza for multiple cancer types. Lynparza is being investigated, alone and in combination with other agents, in multiple indications across several tumor types.
Zejula®/niraparib (GlaxoSmithKline plc) was the first PARP inhibitor approved for maintenance in the recurrent setting and is approved in the United States in the following indications:
● for the maintenance treatment of adult patients with advanced epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to first-line platinum-based chemotherapy;
● for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy; and
● for the treatment of adult patients with advanced ovarian, fallopian tube, or primary peritoneal cancer who have been treated with three or more prior chemotherapy regimens and whose cancer is associated with HRD-positive status defined by either:
o a deleterious or suspected deleterious BRCA mutation, or
o genomic instability and who have progressed more than six months after response to the last platinum-based chemotherapy.
Zejula is approved in Europe:
● as monotherapy for the maintenance treatment of adult patients with platinum-sensitive relapsed high grade serous epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in response (complete or partial) to platinum-based chemotherapy; and
● as monotherapy for the maintenance treatment of adult patients with advanced epithelial (FIGO Stages III and IV) high-grade ovarian, fallopian tube or primary peritoneal cancer who are in response (complete or partial) following completion of first-line platinum-based chemotherapy.
Additional clinical investigations of Zejula in ovarian, breast prostate and lung cancers are ongoing or planned. Janssen Pharmaceuticals has licensed rights to develop and commercialize niraparib specifically for patients with prostate cancer worldwide, except in Japan. Preliminary results announced in February and September 2019 for Janssen’s Phase 2 GALAHAD study evaluating niraparib in patients with mCRPC and DNA-repair pathway defects showed that approximately 40% of patients with a BRCA1/2 mutation demonstrated a RECIST response. In October 2019, niraparib was granted Breakthrough Therapy Designation based on data from the Phase 2 GALAHAD study.
TALZENNA™/talazoparib (Pfizer Inc.) is approved in the US and EU for the treatment of adult patients with deleterious or suspected deleterious germline BRCA-mutated (gBRCAm) HER2-negative locally advanced or metastatic breast cancer.
There are several PARP inhibitors in clinical development including AbbVie Inc.’s veliparib and ABT-767, BeiGene, Ltd.’s pamiparib, Checkpoint Therapeutics Inc.’s CK-102, and Oncology Venture A/S’s 2X-121. While most PARP
inhibitor development focuses on ovarian, breast and prostate cancers, additional efforts are aimed toward bladder, lung, and pancreatic cancers as well.
In addition, combination approaches that include PARP inhibitors, including Lynparza and Zejula, with other anticancer agents are in various phases of clinical development across a variety of oncology indications. These combination therapies may result in future competitive pressure on Rubraca.
Outside of the PARP class, Avastin®/bevacizumab is approved in the US in ovarian cancer for the following indications:
● epithelial ovarian, fallopian tube, or primary peritoneal cancer in combination with carboplatin and paclitaxel, followed by Avastin as a single agent, for Stage III or IV disease following initial surgical resection;
● epithelial ovarian, fallopian tube, or primary peritoneal cancer in combination with paclitaxel, pegylated liposomal doxorubicin, or topotecan for platinum-resistant recurrent disease who received no more than 2 prior chemotherapy regimens; and
● epithelial ovarian, fallopian tube, or primary peritoneal cancer in combination with carboplatin and paclitaxel or carboplatin and gemcitabine, followed by Avastin as a single agent, for platinum-sensitive recurrent disease.
Additionally, Avastin®/bevacizumab is approved in the EU in ovarian cancer for the following indications:
● in combination with carboplatin and paclitaxel for the front-line treatment of adult patients with advanced (International Federation of Gynecology and Obstetrics (FIGO) stages III B, III C and IV) epithelial ovarian, fallopian tube, or primary peritoneal cancer;
● in combination with carboplatin and gemcitabine or in combination with carboplatin and paclitaxel, for treatment of adult patients with first recurrence of platinum-sensitive epithelial ovarian, fallopian tube or primary peritoneal cancer who have not received prior therapy with bevacizumab or other VEGF inhibitors or VEGF receptor-targeted agents; and
● in combination with paclitaxel, topotecan, or pegylated liposomal doxorubicin is indicated for the treatment of adult patients with platinum-resistant recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who received no more than two prior chemotherapy regimens and who have not received prior therapy with bevacizumab or other VEGF inhibitors or VEGF receptor-targeted agents.
Other out-of-class agents approved for use in advanced ovarian cancer include chemotherapeutic agents (e.g. platinum-based doublets, platinum monotherapy, non-platinum chemotherapy, etc.), Doxil® (Janssen Biotech, Inc.), and Hycamtin® (Novartis Pharmaceuticals Corporation). There are additional out-of-class agents in clinical development that may pose a future competitive threat to Rubraca.
Lucitanib Competition
Competitive threats to lucitanib include other inhibitors of VEGFR, PDGFR and FGFR, but most significantly Eisai Inc.’s Lenvima/lenvatinib. Lenvima is approved for the following indications in the United States:
● for the treatment of patients with locally recurrent or metastatic, progressive, radioactive iodine-refractory differentiated thyroid cancer;
● in combination with everolimus, for the treatment of patients with advanced renal cell carcinoma following one prior anti-angiogenic therapy;
● for the first-line treatment of patients with unresectable hepatocellular carcinoma; and
● in combination with Merck & Co., Inc.’s PD-1 inhibitor Keytruda (pembrolizumab), for the treatment of patients with advanced endometrial carcinoma that is not microsatellite instability-high or mismatch repair deficient, who have disease progression following prior systemic therapy and are not candidates for curative surgery or radiation.
In addition, Eisai and Merck have established a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, and have a broad clinical program underway to evaluate Lenvima, alone and in combination with Keytruda, in a wide variety of tumor types.
FAP-2286 Competition
Competitive threats to our product candidate FAP-2286 include those that are currently approved and widely available or are established as standards of care for treatment indications that may be relevant for FAP-2286.
More generally, there is an increasing commitment of resources in the pharmaceutical industry to emerging areas such as antibody drug conjugate therapies and radio-labeled therapeutics and screening agents, which may in the future compete in the indications for which we choose to develop FAP-2286. For example, in June 2019, Sofie Biosciences licensed rights including small molecule inhibitors of FAP for imaging use from University Medical Centre Heidelberg. More recently, Point Biopharma has entered into an exclusive licensing agreement with Avacta to use their technology in the development of a range of FAP-activated radiopharmaceuticals.
In addition, other potential FAP-directed radionuclide therapeutics, small molecules, biologics, immunotherapies, and other treatment modalities that target FAP are at various stages of development. For example, AMG506 (also known as MP0310) is a multi-specific FAP x 4-1BB-targeting DARPin® biologic that is being developed by Amgen in collaboration with Molecular Partners, AG. AMG506 is being investigated in at least one clinical trial (NCT04049903 ) in patients with advanced solid tumors.
Roche also has several compounds that are being investigated. RO6874281 is a targeted immunocytokine that combines an engineered interleukin-2 variant (IL2v) with an antibody against FAP. RO6874813 (RG7386), a bispecific antibody that binds to FAP and death receptor 5 (DR5), is being studied in patients with advanced or metastatic solid tumors (NCT02558140).
PSIOxus Therapeutics is developing an oncolytic adenoviral vector (NG-641) designed to deliver genes to tumor cells that produce proteins targeting tumor-associated stromal fibroblasts. The NG-641 virus encodes genes for FAP-targeting bispecific T-cell activator (FAP-TAc), the chemokines CXCL9 and CXCL10, and interferon alpha. NG-641 is being investigated in patients with advanced solid tumors (NCT04053283).
Bioxcel Therapeutics is developing talabostat (BXCL701), a molecule that is designed to inhibit dipeptidyl peptidase (DPP) 8/9 and block immune evasion by targeting FAP. BXCL is being investigated in combination with pembrolizumab in patients with aggressive prostate cancer (NCT03910660) and pancreatic cancer (NCT04123574).
In addition, radionuclide therapeutics with targets other than FAP may compete with FAP-2286 if they target the same tumor type. For example, in September 2017, Endocyte, Inc. licensed rights to develop and commercialize agents targeting prostate-specific membrane antigen, including the drug candidate 177Lu-PSMA-617, a radioligand therapeutic, from ABX GmbH. Endocyte was acquired by Novartis in 2018, and 177Lu-PSMA-617 is currently in a phase 3 trial (NCT03511664) for the treatment of metastatic castration-resistant prostate cancer. In addition, other targeted radionuclide therapeutics are in earlier stage clinical development, including but not limited to 3BP-227 (Ipsen) which targets neurotensin receptor type 1, BAY2287411 (Bayer) which targets mesothelin, BAY2701439 (Bayer) which targets HER-2, and BAY 2315497 (Bayer) which targets PSMA.
Furthermore, universities and private and public research institutes are active in cancer research, the results of which may result in direct competition with FAP-2286. For example, the German Center of Cancer Research and University Medical Center Heidelberg, the owners of the patent rights to PSMA 617 (which were licensed to ABX and, in turn, to Novartis), are continuing to engage in research relating to radioligand therapeutics.
License Agreements
Pfizer Inc.
In June 2011, we entered into a license agreement with Pfizer, Inc. (“Pfizer”) to obtain the exclusive global rights to develop and commercialize Rubraca. The exclusive rights are exclusive even as to Pfizer and include the right to grant sublicenses. Pursuant to the terms of the license agreement, we made a $7.0 million upfront payment to Pfizer and are required to make additional payments to Pfizer for the achievement of certain development and regulatory and sales milestones and royalties on sales as required by the license agreement. Prior to the FDA approval of Rubraca, we made milestone payments of $1.4 million, which were recognized as acquired in-process research and development expense.
On August 30, 2016, we entered into a first amendment to the worldwide license agreement with Pfizer, which amends the June 2011 existing worldwide license agreement to permit us to defer payment of the milestone payments payable upon (i) FDA approval of an NDA for 1st Indication in US and (ii) EMA approval of an MAA for 1st Indication in the EU, to a date that is 18 months after the date of achievement of such milestones.
On December 19, 2016, Rubraca received its initial FDA approval. This approval resulted in a $0.75 million milestone payment to Pfizer as required by the license agreement, which was paid in the first quarter of 2017. This FDA approval also resulted in an obligation to pay a $20.0 million milestone payment, for which we exercised the option to defer payment by agreeing to pay $23.0 million within 18 months after the date of the FDA approval. We paid the $23.0 million milestone payment in June 2018.
In April 2018, Rubraca received a second FDA approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in April 2018.
In May 2018, Rubraca received its initial European Commission marketing authorization. This approval resulted in an obligation to pay a $20.0 million milestone payment, which we paid in June 2018.
In January 2019, Rubraca received a second European Commission approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in February 2019.
In June 2019, we paid a $0.75 million milestone payment due to the launch of Rubraca as maintenance therapy in Germany in March 2019.
In May 2020, Rubraca received a third FDA approval for Rubraca as a monotherapy treatment of adult patients with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer. This approval resulted in an obligation to pay an $8.0 million milestone payment, which we paid in June 2020.
These milestone payments were recognized as intangible assets and are amortized over the estimated remaining useful life of Rubraca.
We are obligated under the license agreement to use commercially reasonable efforts to develop and commercialize Rubraca and we are responsible for all ongoing development and commercialization costs for Rubraca. We are required to make regulatory milestone payments to Pfizer of up to an additional $8.0 million in aggregate if specified clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we are obligated to make sales milestone payments to Pfizer if specified annual sales targets for Rubraca are met, which relate to annual sales targets of $250.0 million and above, which, in the aggregate, could amount to total milestone payments of $170.0 million, and tiered royalty payments at a mid-teen percentage rate on net sales, with standard provisions for royalty offsets to the extent we need to obtain any rights from third parties to commercialize Rubraca.
The license agreement with Pfizer will remain in effect until the expiration of all of our royalty and sublicense revenue obligations to Pfizer, determined on a product-by-product and country-by-country basis, unless we elect to terminate the license agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Pfizer can terminate the agreement, resulting in a loss of our rights to Rubraca and an obligation to assign or license to Pfizer any intellectual property rights or other rights we may have in Rubraca, including our regulatory filings, regulatory approvals, patents and trademarks for Rubraca.
AstraZeneca UK Limited
In April 2012, we entered into a license agreement with AstraZeneca UK Limited (“AstraZeneca”) to acquire exclusive rights associated with Rubraca under a family of patents and patent applications that claim methods of treating patients with PARP inhibitors in certain indications. The license enables the development and commercialization of Rubraca for the uses claimed by these patents. AstraZeneca also receives royalties on net sales of Rubraca.
Advenchen Laboratories LLC
On November 19, 2013, we acquired all of the issued and outstanding capital stock of EOS pursuant to the terms set forth in that certain Stock Purchase Agreement, dated as of November 19, 2013 (the “Stock Purchase Agreement”), by and among the Company, EOS, its shareholders (the “Sellers”) and Sofinnova Capital V FCPR, acting in its capacity as the Sellers’ representative. Following the acquisition, EOS became a wholly-owned subsidiary of the Company. Under the terms of the Stock Purchase Agreement, in addition to the initial purchase price paid at the time of the closing of the acquisition and other license fees due to Advenchen described below, we will also be obligated to pay to the Sellers a milestone payment of $65.0 million upon obtaining the first NDA approval from the FDA with respect to lucitanib.
In October 2008, Ethical Oncology Science, S.p.A. (“EOS”) (now known as Clovis Oncology Italy S.r.l.) entered into an exclusive license agreement with Advenchen Laboratories LLC (“Advenchen”) to develop and commercialize lucitanib on a global basis, excluding China.
We are obligated to pay Advenchen tiered royalties at percentage rates in the mid-single digits on net sales of lucitanib, based on the volume of annual net sales achieved. In addition, after giving effect to the first and second amendments to the license agreement, we are required to pay to Advenchen 25% of any consideration, excluding royalties, we receive from sublicensees, in lieu of the milestone obligations set forth in the agreement. We are obligated under the agreement to use commercially reasonable efforts to develop and commercialize at least one product containing lucitanib, and we are also responsible for all remaining development and commercialization costs for lucitanib.
The license agreement with Advenchen will remain in effect until the expiration of all our royalty obligations to Advenchen, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Advenchen can terminate the agreement, resulting in a loss of our rights to lucitanib.
3B Pharmaceuticals GmbH (“3BP”)
In September 2019, we entered into a global license and collaboration agreement with 3BP to develop and commercialize a PTRT and imaging agent targeting FAP. The lead candidate, designated internally as FAP-2286, is being developed pursuant to a global development plan agreed to by the parties. We are responsible for the costs of all preclinical and clinical development activities described in the plan, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the preclinical development phase of the collaboration. Upon the signing of the license and collaboration agreement in September 2019, we made a $9.4 million upfront payment to 3BP, which we recognized as acquired in-process research and development expense.
Pursuant to the terms of the FAP agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP single- to low-double-digit royalties on net sales of the FAP-targeted therapeutic product and imaging agent, based on the volume of annual net sales achieved. In addition, 3BP is entitled to receive 34% of any consideration, excluding royalties on the therapeutic product, pursuant to any sublicenses we may grant.
We are obligated under the license and collaboration agreement to use diligent efforts to develop FAP-2286 and commercialize a FAP-targeted therapeutic product and imaging agent, and we are responsible for all commercialization costs in our territory. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights. 3BP also has the right to terminate the agreement under certain circumstances in connection with our change of control in which the acquiring party retains a product competitive with the FAP-targeted therapeutic product or, in the event marketing authorization has not yet been obtained, does not agree to the then-current global development plan.
In February 2020, we finalized the terms of a drug discovery collaboration agreement with 3BP to identify up to three additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we will obtain global rights for any resulting product candidates. We are responsible for the costs of all preclinical and clinical development activities conducted under the discovery program, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the discovery and preclinical development phase for each collaboration target. The discovery collaboration agreement was effective December 31, 2019, for which we incurred a $2.1 million technology access fee, which we accrued and recognized as a research and development expense.
Pursuant to the terms of the discovery collaboration agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP a 6% royalty on net sales of License Products (as defined in the agreement), based on the volume of quarterly net sales achieved.
We are obligated under the discovery collaboration agreement to use diligent efforts to develop and commercialize the product candidates, if any, that result from the discovery program, and we are responsible for all clinical development and commercialization costs. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights.
Government Regulation
Government authorities in the United States (including federal, state and local authorities) and in other countries, extensively regulate, among other things, the manufacturing, research and clinical development, marketing, labeling and packaging, storage, distribution, post-approval monitoring and reporting, advertising and promotion, pricing and export and import of pharmaceutical products such as Rubraca and our other product candidates. Our product candidates must be approved by the FDA through the NDA process before they may be legally placed on the market in the United States. In the European Union, a product requires approval from the European Commission (“EC”) following a favorable assessment from the European Medicines Agency (“EMA”) through the marketing authorization application (“MAA”) process for a product falling within the scope of the centralized procedure or a national MAA process (albeit through
mutual recognition or decentralized procedure). Our product candidates will be subject to similar requirements in other countries prior to marketing in those countries. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Moreover, failure to comply with applicable regulatory requirements may result in, among other things, warning letters, clinical holds, civil or criminal penalties, recall or seizure of products, injunction, disbarment, partial or total suspension of production or withdrawal of the product from the market.
U.S. Government Regulation
In the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act (“FDCA”) and its implementing regulations. Drugs are also subject to other federal, state and local statutes and regulations. The process required by the FDA before product candidates may be marketed in the United States generally involves the following:
● completion of extensive non-clinical laboratory tests (evaluations of product chemistry, toxicity and formulation) and non-clinical animal studies, all performed in accordance with the FDA’s Good Laboratory Practice regulations;
● submission to the FDA of an IND which must become effective before human clinical trials may begin and must be updated at least annually;
● performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for each proposed indication;
● submission to the FDA of a marketing authorization application in the form of an NDA for the initial commercial sale of a product, or of a sNDA, for approval of a new indication if the product is already approved for another indication;
● satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities at which the active pharmaceutical ingredient (“API”) and finished drug product are produced and tested to assess compliance with current Good Manufacturing Practices (“cGMP”) and/or sites involved in clinical studies to assess compliance with Good Clinical Practices (“GCP”);
● if FDA convenes an advisory committee, satisfactory completion of the advisory committee review; and
● FDA review and approval of the marketing authorization application and product prescribing information prior to any commercial marketing or sale of the drug for the intended use.
An IND is a request for authorization from the FDA to administer a product candidate to humans for further research of the drug candidate’s safety and/or efficacy. The central focus of an IND submission is on the general investigational plan for the drug candidate and the protocol(s) for human studies. The IND also includes results of animal studies or other human studies, as appropriate, as well as manufacturing information, analytical data and any available clinical data or literature to support the use of the product candidate. An IND must become effective before human clinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to the proposed clinical trials, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND may be placed on clinical hold requiring delay of a proposed clinical investigation, and the IND sponsor and the FDA must resolve any outstanding concerns or questions before clinical trials can begin. Accordingly, submission of an IND may or may not result in the FDA allowing clinical trials to commence.
Clinical trials involve the administration of the drug candidate to human subjects under the supervision of qualified investigators and in accordance with GCP, which include the requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the efficacy criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. Additionally, approval must also be obtained from an Institutional Review Board (“IRB”) for each medical center proposing to conduct the clinical trial before the trials may be initiated, and the IRB must monitor the study until completed. Clinical trials are subject to central registration and results reporting requirements, such as on www.clinicaltrials.gov.
The clinical investigation of a product candidate is generally divided into three phases. Although the phases are usually conducted sequentially, they may overlap or be combined. The three phases of an investigation are as follows:
● Phase 1. Phase 1 includes the initial introduction of the product candidate into humans. Phase 1 clinical trials are typically closely monitored and may be conducted in patients with the target disease or condition or in healthy volunteers. These studies are designed to evaluate the safety, dosage tolerance, metabolism and pharmacologic actions of product candidate in humans, the side effects associated with increasing doses, and if possible, to gain early evidence on effectiveness. During Phase 1 clinical trials, sufficient information about the product candidate’s pharmacokinetics and pharmacological effects may be obtained to permit the design of well-controlled and scientifically valid Phase 2 clinical trials. The total number of participants included in Phase 1 clinical trials varies but is generally in the range of 20 to 80.
● Phase 2. Phase 2 includes controlled clinical trials conducted to preliminarily or further evaluate the effectiveness of the product candidate for a particular indication(s) in patients with the disease or condition under study, to determine dosage tolerance and optimal dosage, and to identify possible adverse side effects and safety risks associated with the drug. Phase 2 clinical trials are typically well-controlled, closely monitored, and conducted in a limited patient population, usually involving no more than several hundred participants.
● Phase 3. Phase 3 clinical trials are generally controlled clinical trials conducted in an expanded patient population generally at geographically dispersed clinical trial sites. They are performed after preliminary evidence suggesting effectiveness of the drug has been obtained and are intended to further evaluate dosage, clinical effectiveness and safety, to establish the overall benefit-risk relationship of the investigational drug product and to provide an adequate basis for product approval. Phase 3 clinical trials usually involve several hundred to several thousand participants.
A pivotal study is a clinical study which adequately meets regulatory agency requirements for the evaluation of a drug candidate’s efficacy and safety such that it can be used to justify the approval of the product. Generally, pivotal studies are also Phase 3 studies but may be Phase 2 studies if the trial design provides a well-controlled and reliable assessment of clinical benefit, particularly in situations where there is an unmet medical need.
Human clinical trials are inherently uncertain, and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed. The FDA, an IRB or the clinical trial sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as an Independent Data Monitoring Committee (“IDMC”). The IDMC receives special access to un-blinded data during the clinical trial and may halt the clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy. We may also suspend or terminate a clinical trial based on evolving business objectives and/or competitive climate.
Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, detailed product development information is submitted to the FDA in the form of an NDA or sNDA requesting approval to market the product for one or more indications.
The application includes all relevant data available from pertinent non-clinical and clinical trials, including negative or ambiguous results, as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed labeling, among other things. Data can come from company-sponsored clinical trials intended to test the safety and effectiveness of a use of a product, or from a number of alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and effectiveness of the product candidate to the satisfaction of the FDA.
Once the marketing application submission has been accepted for filing, the FDA’s goal is to review applications within 10 months of acceptance for filing or, if the sponsor has been granted priority review designation, on the basis of an improvement in the treatments of a serious condition, six months from acceptance for filing. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it typically follows such recommendations.
After the FDA evaluates the NDA or sNDA and conducts inspections of clinical research facilities and/or manufacturing facilities where the drug product and/or its API will be produced, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete, and the application is not ready for approval. A Complete Response Letter may require additional clinical data and/or an additional pivotal Phase 3 clinical trial(s), and/or other significant, expensive and time-consuming requirements related to clinical trials, non-clinical studies or manufacturing. Even if such additional information is submitted, the FDA may ultimately decide that the application does not satisfy the criteria for approval. The FDA could also approve the NDA with a Risk Evaluation and Mitigation Strategies plan to mitigate risks, which could include medication guides, physician communication plans or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling, development of adequate controls and specifications or a commitment to conduct one or more post-market studies or clinical trials. Such post-market testing may include Phase IV clinical trials and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization. Regulatory approval of oncology products often requires that patients in clinical trials be followed for long periods to determine the overall survival benefit of the drug.
Products manufactured or distributed pursuant to FDA approvals are subject to continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences with the drug. Adverse event experience with the product must be reported to the FDA in a timely fashion and pharmacovigilance programs to proactively look for these adverse events are mandated by the FDA. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications and also may require the implementation of other risk management measures.
Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and certain state agencies for quality and compliance, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Following such inspections, the FDA may issue notices on Form FDA 483 and Warning Letters that could cause us to modify certain activities. A Form FDA 483 notice, if issued at the conclusion of an FDA inspection, can list conditions the FDA investigators believe may have violated cGMP or other FDA regulations or guidance. Failure to adequately and promptly correct the observations(s) can result in further regulatory enforcement action. In addition to Form FDA 483 notices and Warning Letters, failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product, injunctive action or possible civil penalties. In addition, changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.
Government Regulation Outside of the United States
In addition to regulations in the United States, we are subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our products. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing, and reimbursement vary greatly from country to country, and the time may be longer or shorter than that required for FDA approval.
Regardless of whether we hold FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the product in those countries. Certain countries outside of the United States have a similar process that requires the submission of a clinical trial application much like the IND prior to the commencement of human clinical trials. In Europe, for example, a clinical trial application, (“CTA”) must be submitted to each country’s national health authority and an independent ethics committee, much like the FDA and IRB, respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed.
Medicines can be authorized in the EU by using either the centralized authorization procedure or national authorization procedures. Under the centralized procedure, marketing authorization applications are submitted to the
EMA whose CHMP reviews the application and issues an opinion on it. The opinion is considered by the EC which is responsible for deciding applications. If the application is approved, the EC grants a single marketing authorization that is valid for all EU member states as well as Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for human medicines that contain a new active substance indicated for the treatment of certain diseases, including cancer.
The national authorization procedures, the decentralized and mutual recognition procedures, are available for products for which the centralized procedure is not compulsory. Using the decentralized procedure, an applicant may apply for simultaneous authorization in more than one EU country of medicinal products that have not yet been authorized in any EU country and that do not fall within the mandatory scope of the centralized procedure. Under the mutual recognition procedure, a medicine is first authorized in one EU Member State, in accordance with the national procedures of that country. Following this, further marketing authorizations can be sought from other EU countries in a procedure whereby the countries concerned agree to recognize the validity of the original, national marketing authorization.
As result of the United Kingdom (“UK”) leaving the EU, the UK is no longer part of the harmonized EU medicines network. The UK government introduced legislation to allow the continued registration, sale and access to medicinal products including regulation to allow implementation of the Northern Ireland Protocol. A comprehensive national regime for the authorization of medicinal products for human use; for the manufacture, import, distribution, sale and supply of those products; for their labelling and advertising; and for pharmacovigilance have been introduced. In Northern Ireland the, EU regulations will continue to apply in accordance with the Northern Ireland Protocol.
Available Special Regulatory Procedures
Formal Meetings
We are encouraged to engage and seek guidance from health authorities relating to the development and review of investigational drugs, as well as marketing applications. In the United States, there are different types of official meetings that may occur between us and the FDA. Each meeting type is subject to different procedures. Conclusions and agreements from each of these meetings are captured in the official final meeting minutes issued by the FDA.
The EMA also provides the opportunity for dialogue with us. This is usually done in the form of Scientific Advice, which is given by the Scientific Advice Working Party of CHMP. A fee is incurred with each Scientific Advice meeting.
Advice from either the FDA or EMA is typically provided based on questions concerning, for example, quality (chemistry, manufacturing and controls testing), nonclinical testing and clinical studies and pharmacovigilance plans and risk-management programs. Such advice is not legally binding on the sponsor. To obtain binding commitments from the FDA in the United States, Special Protocol Assessment (“SPA”) procedures are available. A SPA is an evaluation by the FDA of a protocol with the goal of reaching an agreement with the sponsor that the protocol design, clinical endpoints and statistical analyses are acceptable to support regulatory approval of the product candidate with respect to effectiveness in the indication studied. The FDA’s agreement to a SPA is binding upon the FDA except in limited circumstances, such as if the FDA identifies a substantial scientific issue essential to determining the safety or effectiveness of the product after clinical studies begin, or if the study sponsor fails to follow the protocol that was agreed upon with the FDA. There is no guarantee that a study will ultimately be adequate to support an approval even if the study is subject to a SPA.
Orphan Drug Designation
The FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United States, or if it affects more than 200,000 individuals in the United States and there is no reasonable expectation that the cost of developing and making the drug for this type of disease or condition will be recovered from sales in the United States. In the EU, the EMA’s Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than five in 10,000 persons in the EU Community. Additionally, designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that
sales of the drug in the EU would be sufficient to justify the necessary investment in developing the drug or biological product.
In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers. In addition, if a product receives the first FDA approval for the indication for which it has orphan designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity.
In Europe, orphan drug designation also entitles a party to financial incentives such as reduction of fees or fee waivers and 10 years of market exclusivity is granted following drug or biological product approval. This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity.
Orphan drug designation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.
Pediatric Development
In the United States, the FDCA provides for an additional six months of marketing exclusivity for a drug if reports are filed of investigations studying the use of the drug product in a pediatric population in response to a written request from the FDA. Separate from this potential exclusivity benefit, NDAs must contain data (or a proposal for post-marketing activity) to assess the safety and effectiveness of an investigational drug product for the claimed indications in all relevant pediatric populations in order to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults or full or partial waivers if certain criteria are met. Discussions about pediatric development plans can be discussed with the FDA at any time, but usually occur any time between the end-of-Phase II meeting and submission of the NDA.
For the EMA, a Pediatric Investigation Plan, and/or a request for waiver or deferral, has to be agreed prior to submitting an initial marketing authorization application and prior to submitting a variation to an existing Marketing Authorization to add an additional indication.
Breakthrough Therapy Designation in the United States
The U.S. Congress created the Breakthrough Therapy designation program as a result of the passage of the Food and Drug Administration Safety and Innovation Act of 2012. FDA may grant Breakthrough Therapy status to a drug intended for the treatment of a serious condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. The Breakthrough Therapy designation, which may be requested by a sponsor when filing or amending an IND, is intended to facilitate and expedite the development and FDA review of a product candidate. Specifically, the Breakthrough Therapy designation may entitle the sponsor to more frequent meetings with the FDA during drug development, intensive guidance on clinical trial design and expedited FDA review by a cross-disciplinary team comprised of senior managers. The designation does not guarantee a faster development or review time as compared to other drugs, however, nor does it assure that the drug will obtain ultimate marketing approval by the FDA. Once granted, the FDA may withdraw this designation at any time.
Expedited Review and Approval in the United States
The FDA has various programs, including Fast Track, priority review and accelerated approval, which are intended to expedite or simplify the process for reviewing drugs and biologics, and/or provide for the approval of a drug or biologic on the basis of a surrogate endpoint. Even if a drug qualifies for one or more of these programs, the FDA may later decide that the drug no longer meets the conditions for qualification or that the time period for FDA review or approval will be shortened. Generally, drugs that are eligible for these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs and those that offer meaningful benefits over existing treatments. For example, based on results of the Phase 3 clinical trial(s) submitted in an NDA, upon the request
of an applicant, the FDA may grant the NDA a priority review designation, which sets the target date for FDA action on the application at six months from the 60-day filing date, if the drug is a new molecular entity, rather than to the standard FDA review period of 10 months. Priority review is granted where preliminary estimates indicate that a product, if approved, has the potential to provide a safe and effective therapy where no satisfactory alternative therapy exists, or a significant improvement compared to marketed products is possible. Priority review designation does not change the scientific/medical standard for approval or the quality of evidence necessary to support approval.
Fast Track is a designation which is more similar to the Breakthrough Therapy designation, but is granted based on preliminary data including non-clinical or mechanistic data, and allows more frequent communication with FDA to expedite drug development
Accelerated approval provides for an earlier approval for a new drug that is intended to treat a serious or life-threatening disease or condition upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit and is better than available therapy. A surrogate endpoint is a laboratory measurement or physical sign used as an indirect or substitute measurement representing a clinically meaningful outcome. The FDA will also consider the severity, rarity or prevalence of the condition. As a condition of approval for drugs granted accelerated approval, one or more post-marketing confirmatory studies are required to confirm as predicted by the surrogate marker trial an effect on clinical benefit, which is defined as having a positive effect on how a patient feels, functions or survives.
Accelerated Review in the European Union
Under the Centralized Procedure in the EU, the maximum timeframe for the evaluation of a marketing authorization application is 210 days (excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the CHMP). Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal product is expected to be of a major public health interest, defined by three cumulative criteria: the seriousness of the disease (e.g. heavy disabling or life-threatening diseases) to be treated; the absence or insufficiency of an appropriate alternative therapeutic approach; and anticipation of high therapeutic benefit. In this circumstance, EMA ensures that the opinion of the CHMP is given within 150 days of submission of the MAA, excluding clock stops.
Pharmaceutical Coverage, Pricing and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of Rubraca and any other drug products for which we obtain regulatory approval. In the United States and markets in other countries, sales of approved pharmaceutical products depend in part on the availability of reimbursement from third-party payors. Third-party payors include government health administrative authorities, managed care providers, public and private health insurers and other organizations. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the drug product. Third-party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved or European Commission/specific country-approved drugs for a particular indication (or all indications for an approved drug). Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services and imposing controls to manage costs. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost effectiveness of our products, in addition to the costs required to obtain approvals. The development of a product dossier and a Budget Impact Model may be helpful in assisting the payors in evaluating cost effectiveness. In any event, our approved products may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be established. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Third-party payors impose price protection in their contracts with manufacturers to limit the manufacturer’s ability to increase price in exchange of providing equal access to the drug product vs. other competing drugs.
There have been a number of federal and state proposals in recent years regarding the pricing of pharmaceutical products, government control and other changes to the healthcare system of the United States. The U.S. government enacted legislation providing a partial prescription drug benefit for Medicare beneficiaries. Government payment for some of the costs of prescription drugs may increase demand for any products for which we receive marketing approval;
however, to obtain payments under this program, we are required to sell products to Medicare recipients through prescription drug plans operating pursuant to this legislation. These plans will likely negotiate discounted prices for our products. Additionally, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Affordable Care Act”) was enacted in 2010 with a goal of reducing the cost of healthcare and substantially changing the way healthcare is financed by both government and private insurers. Among other cost containment measures, the Affordable Care Act established:
● An annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents;
● A Medicare Part D coverage gap discount program, in which pharmaceutical manufacturers who wish to have their drugs covered under Part D must offer discounts to eligible beneficiaries during their coverage gap period (the “donut hole”); and
● A formula that increases the rebates a manufacturer must pay under the Medicaid Drug Rebate Program.
Since its enactment, there have been legal and Congressional challenges to repeal and replace certain aspects of the Affordable Care Act . Most recently, the Tax Cuts and Jobs Act was enacted, which, among other things, removed penalties for not complying with Affordable Care Act’s individual mandate to carry health insurance. The Trump administration pursued several initiatives designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. There is uncertainty with respect to the impact President Biden’s administration and the U.S. Congress may have, if any, and any changes will likely take time to unfold, and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that were authorized by the Affordable Care Act.
Recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, reform government program reimbursement methodologies. Individual states in the United States have also become increasingly active in implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We expect that federal, state and local governments in the United States will continue to consider legislation to limit the growth of healthcare costs, including the cost of prescription drugs. Future legislation could limit payments for pharmaceuticals such as our products.
Moreover, payment methodologies, including payment for companion diagnostics, have been subject to changes due to healthcare legislation and regulatory initiatives. For example, the Centers for Medicare and Medicaid Services(“CMS”) began bundling the Medicare payments for certain laboratory tests ordered while a patient received services in a hospital outpatient setting. Additionally, on April 1, 2014, the Protecting Access to Medicare Act of 2014, or PAMA, was signed into law, which, among other things, significantly alters the current payment methodology under the Clinical Laboratory Fee Schedule. Beginning on January 1, 2018, the Medicare payment rate for each clinical diagnostic lab test, with some exceptions, is equal to the weighted median private payer payment for the test, as calculated using data collected by applicable laboratories during the data collection period and reported to CMS during a specified data reporting period. Also under PAMA, CMS is required to adopt temporary billing codes to identify new clinical diagnostic laboratory tests and advanced diagnostic laboratory tests that do not already have unique diagnostic codes, and that have been cleared or approved by the FDA.
Different pricing and reimbursement schemes exist in other countries and vary widely from country to country. In Europe, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund the cost of those products to consumers. These jurisdictions operate a system under which products may only be marketed once a reimbursement price has been agreed for a defined population that, depending on country-specific negotiations, could be equal to European Commission-granted indication or a restricted population. To obtain reimbursement and pricing approval in Europe, some of these European countries may require additional economic evidence. In European countries, repeating price/reimbursement negotiations take place depending on local healthcare situations and can lead to lower reimbursed prices over time.
The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasing high barriers are being erected to the entry of new products. In addition, in some countries, especially in Europe, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country. In
particular, for each new indication, new negotiations are required to obtain reimbursement in European countries; also, pricing negotiations in European countries are often linked to baskets of comparator countries; due to Brexit, it is currently unclear whether changes in country baskets will take place anytime soon. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in Europe do not follow price structures of the United States and generally prices tend to be significantly lower.
The marketability of any products for which we receive regulatory approval for commercial sale may be impacted by government and third-party coverage and reimbursement decisions. In addition, emphasis on reducing the rate of healthcare spending in the United States has increased, and we expect will continue to increase the pressure on pharmaceutical pricing. There has been particular and increasing legislative interest in the United States with respect to drug pricing practices, particularly with respect to drugs that have been subject to relatively large price increases over relatively short time periods. Certain independent charitable foundations operate programs that provide grants to defray medical expenses (including cost-sharing obligations for drug treatments and health insurance premiums) for patients who meet certain financial need criteria and suffer from specific chronic illnesses or rare disorders. There has been recent enforcement interest regarding donations by pharmaceutical manufacturers to such foundations on the bases that such donations were used in part to guide patients to those donors’ products or that the donors obtained data on how the donations were used, including how often donations correlate to the frequency of referrals to donors’ products. There have been several U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs.
Coverage policies and third-party reimbursement rates may change at any time in the U.S. and Europe. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our products.
Advertising and Promotion
The FDA and other U.S. federal regulatory agencies closely regulate the marketing and promotion of drugs through, among other things, the FDCA and the FDA’s implementing regulations and standards. The FDA’s review of marketing and promotional activities encompasses, but is not limited to, direct-to-consumer advertising, healthcare provider-directed advertising and promotion, sales representative communications to healthcare professionals, communications regarding unapproved or “off-label” uses, industry sponsored scientific and educational activities and promotional activities involving the internet. A product cannot be commercially promoted before it is approved. After approval, product promotion can include only those claims relating to safety and effectiveness that are consistent with the labeling approved by the FDA. FDA regulations also impose stringent restrictions on manufacturers’ communications regarding off-label uses. Failure to comply with applicable FDA requirements and restrictions regarding unapproved uses of a drug or for other violations of its advertising and labeling laws and regulations, may result in adverse publicity and enforcement action by the FDA, the Department of Justice or the Office of the Inspector General of the Department of Health and Human Services, as well as state authorities. A range of penalties are possible that could have significant commercial consequences, including product seizures, injunctions, administrative remedies, civil and/or criminal fines, agreements that materially restrict the manner in which a company promotes or distributes its products, or regulatory enforcement letters which may require corrective advertising or other corrective communications to healthcare professionals or consumers.
Other Healthcare Laws and Compliance Requirements
We are subject to various laws targeting fraud and abuse in the healthcare industry, including federal and state anti-kickback laws and false-claims laws. Violations of these laws can lead to civil and criminal penalties, including fines, imprisonment and administrative remedies such as exclusion from participation in federal healthcare programs.
The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal healthcare program, such as Medicare and Medicaid. The reach of the Anti-Kickback Statute was broadened by the Affordable Care Act,
which, among other things, amended the intent requirement of the federal Anti-Kickback Statute and criminal healthcare fraud statutes contained within 42 U.S.C. § 1320a-7b. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert that a claim submitted in violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute. Many states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.
The federal civil False Claims Act imposes liability on any person who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal program, including federal healthcare programs. The “qui tam” provisions of the False Claims Act allow a private individual to bring civil actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In addition, various states have enacted false claims laws analogous to the False Claims Act. Many of these state laws apply where a claim is submitted to any third-party payor and not merely a federal healthcare program. When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil fines and penalties.
In addition, a person who offers or transfers to a Medicare or Medicaid beneficiary any remuneration, including waivers of co-payments and deductible amounts (or any part thereof), that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid-payable items or services, may be liable for civil monetary penalties of up to $20,000 for each wrongful act. Moreover, in certain cases, providers who routinely waive copayments and deductibles for Medicare and Medicaid beneficiaries can also be held liable under the federal Anti-kickback Statute and False Claims Act, which can impose additional penalties. One of the statutory exceptions to this prohibition is non-routine, unadvertised waivers of copayments or deductible amounts based on individualized determinations of financial need or exhaustion of reasonable collection efforts. The Office of Inspector General of the Department of Health and Human Services emphasizes, however, that this exception should only be used occasionally to address special financial needs of a particular patient. Although this prohibition applies only to federal healthcare program beneficiaries, the routine waivers of copayments and deductibles offered to patients covered by commercial payers may implicate applicable state laws related to, among other things, unlawful schemes to defraud, excessive fees for services, tortious interference with patient contracts and statutory or common law fraud. To the extent our patient assistance programs are found to be inconsistent with applicable laws, we may be required to restructure or discontinue such programs or be subject to significant penalties.
In addition to the laws described above, drug manufacturers must report to CMS payments made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit required information to CMS may result in civil monetary penalties of up to an aggregate of $176,495 per year (or up to an aggregate of $1.176 million per year for “knowing failures”), adjusted for inflation, for all payments, transfers of value, or ownership or investment interests that are not timely, accurately and completely reported in an annual submission. Applicable drug manufacturers are required to collect data for each calendar year and submit reports to CMS by March 31st of each subsequent calendar year. In addition, there is also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. These laws impose administrative and compliance burdens that may affect our sales, marketing, and other promotional activities.
For marketed products which are covered in the United States by the Medicaid program, we have various obligations, including government price calculation and reporting and rebate requirements which generally require products be offered at substantial rebates/discounts to Medicaid and certain purchasers (including “covered entities” purchasing under the 340B Drug Discount Program). We are also required to discount such products to authorized users of the Federal Supply Schedule of the General Services Administration, under which additional laws and requirements apply. These programs require submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the execution of government procurement contracts governed by the Federal Acquisition Regulations. The guidance governing such calculations is not always clear and may require significant investment in personnel, systems and resources in order to comply. Failure to properly calculate our prices, or offer required discounts or rebates could subject us to substantial penalties.
One component of the rebate and discount calculations under the Medicaid and 340B programs is the “additional rebate”, a complex calculation which is based, in part, on the rate at which a branded drug’s price increases over time as
compared to the rate of inflation (based on the CPI-U published by the United States Department of Labor). This calculation is based on the baseline pricing data for the first full quarter of sales associated with a branded drug’s NDA, and baseline data cannot generally be reset, even on transfer of the NDA to another manufacturer. This “additional rebate” calculation can, in some cases where price increases have been relatively high versus the first quarter of sales of the NDA, result in Medicaid rebates up to 100% of a drug’s “average manufacturer price” and 340B prices of one penny. Separately, subject to the control of Directive 89/105/EEC, pricing and reimbursement in the EU/EEA (“European Economic Area”) is governed by national rules and policies and may vary from Member State to Member State.
Also, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) outlines several federal crimes, including health care fraud and false statements relating to health care matters. Most healthcare providers who are expected to prescribe our products and from whom we obtain patient health information are subject to privacy and security requirements under HIPAA. Although we are not directly subject to HIPAA, we could be subject to criminal penalties if we knowingly obtain individually identifiable health information from a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
The privacy and protection of consumer information remains a developing area and we continue to monitor legislative and regulatory developments both in the United States as well as Europe. For example, the California Consumer Privacy Act (“CCPA”) became effective on January 1, 2020 and, as enacted, requires us to make new disclosures to consumers about our data collection, use, and sharing practices. It also provides a cause of action for data breaches. Beyond California, many other states are developing their own data privacy protections, which, along with the CCPA, could create liability for us or increase our cost of doing business. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information. For example, the General Data Protection Regulation (Regulation (EU) 2016/679), the U.K.’s Data Protection Act 2018 and the Swiss Federal Data Protection Act and Data Protection Ordinance, regulate the processing of personal data within the U.K., the EU and between countries in the EU, U.K. and countries outside of the EU and U.K., including the U.S. Failure to provide adequate privacy protections and maintain compliance with the EU, U.K. and Swiss Privacy Laws, could jeopardize business transactions across borders and result in significant penalties. Similar to the impact of the CCPA or other U.S. state frameworks, these European laws could create liability for us or increase our cost of doing business.
Regulation of Diagnostic Tests
In the United States, the FDCA and its implementing regulations, and other federal and state statutes and regulations govern, among other things, medical device design and development, non-clinical and clinical testing, premarket clearance or approval, registration and listing, manufacturing, labeling, storage, advertising and promotion, sales and distribution, export and import, and post-market surveillance. Diagnostic tests are classified as medical devices under the FDCA. Unless an exemption applies, diagnostic tests require marketing clearance or approval from the FDA prior to commercial distribution, depending on their classification by FDA.
In the United States, devices are classified into one of three classes (Class I, II, or III) based on the controls deemed necessary by the FDA to reasonably ensure their safety and effectiveness. Class I and II devices are subject to general controls including, but not limited to, performance standards, premarket notification, also called 510(k) clearance, and post market surveillance. Class III devices are those that either support or sustains human life, are of substantial importance in preventing impairment of human health, or present a potential, unreasonable risk of illness or injury. Class III devices are subject to more rigorous review and approval requirements than Class I or II, known as a premarket approval, or PMA approval. Because the diagnostic tests being developed by our third-party collaborators are of substantial importance in preventing impairment of human health, they are considered Class III devices, subject to the PMA approval process.
PMA applications must be supported by valid scientific evidence, which typically requires extensive data, including technical, non-clinical, clinical and manufacturing data, to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. For diagnostic tests, a PMA application typically includes data regarding analytical and clinical validation studies. As part of its review of the PMA, the FDA will conduct a pre-approval inspection of the manufacturing facility or facilities to ensure compliance with the Quality System Regulation, or QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures. FDA review of an initial PMA application is required by statute to take between six to ten months, although the process typically takes longer, and may require several years to complete. If the FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either issue an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure the final approval of the PMA. If the FDA’s evaluation of the PMA or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. A not approvable letter will outline the deficiencies in the application and, where practical, will identify what is necessary to make the PMA approvable. The FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and then the data submitted in an amendment to the PMA. Once granted, PMA approval may be withdrawn by the FDA if compliance with post approval requirements, conditions of approval or other regulatory standards is not maintained, or problems are identified following initial marketing.
We and our third-party collaborators who are developing companion diagnostics work cooperatively to generate the data required for submission with a PMA application, and remain in close contact with the Center for Devices and Radiological Health (“CDRH”) at the FDA to ensure that any changes in requirements are incorporated into the development plans. Meetings with the FDA with regard to our drug product candidates, as well as companion diagnostic product candidates, typically include representatives from the Center for Drug Evaluation and Research and CDRH when appropriate to ensure that the NDA and PMA submissions are coordinated to enable FDA to conduct a parallel review of both submissions. The FDA has issued guidance documents addressing the development and approval process for “In Vitro Companion Diagnostic Devices.” According to these guidance documents, for novel therapeutic products such as our product candidates, the PMA for a companion diagnostic device should generally be developed and approved or cleared contemporaneously with the therapeutic.
In the EEA, in vitro medical devices are required to conform to the essential requirements of the E.U. Directive on in vitro diagnostic medical devices (Directive No 98/79/EC, as amended). To demonstrate compliance with the essential requirements, the manufacturer must undergo a conformity assessment procedure. The conformity assessment varies according to the type of medical device and its classification. For low-risk devices, the conformity assessment can be carried out internally, but for higher risk devices it requires the intervention of an accredited EEA Notified Body. If successful, the conformity assessment concludes with the drawing up by the manufacturer of an EC Declaration of Conformity entitling the manufacturer to affix the CE mark to its products and to sell them throughout the EEA. The data generated for the U.S. registration will be sufficient to satisfy the regulatory requirements for the EU and other countries.
Patents and Proprietary Rights
The proprietary nature of, and protection for, our product candidates, technology and know-how are important to our business. Our success depends in part on our ability to protect the proprietary nature of our product candidates, technology, and know-how, to operate without infringing on the proprietary rights of others, and to prevent others from infringing our proprietary rights. We seek patent protection in the United States and internationally for our product candidates and other technology. Our policy is to patent or in-license the technology, inventions and improvements that we consider important to the development of our business. We also rely on trade secrets, know-how and continuing innovation to develop and maintain our competitive position. We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents granted to us in the future will be commercially useful in protecting our technology.
In June 2011, we obtained an exclusive, worldwide license from Pfizer to develop and commercialize rucaparib. In April 2012, we obtained an exclusive license from AstraZeneca under a family of patents and patent applications which permits the development and commercialization of rucaparib for certain methods of treating patients with PARP inhibitors.
We were granted patent term extension to November 22, 2023 under the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”) for U.S. Patent 6,495,541 directed to the rucaparib composition of matter. Additionally, other patents and patent applications are directed to methods of making, methods of using, dosing regimens, various salt and polymorphic forms, and formulations with expiration dates through potentially 2035. These patents and patent applications include the rucaparib camsylate salt/polymorph patent family licensed from Pfizer, which expires in 2031, and a patent family directed to high dosage strength rucaparib tablets, which expires in 2035. To date, the rucaparib camsylate salt/polymorph patents issued in 51 jurisdictions (including the United States and Europe), with applications pending in 7 jurisdictions. Patents directed to the high dosage strength rucaparib tablets, including all
commercial dosage strengths, issued in the United States and 5 other jurisdictions, and applications are pending in 13 jurisdictions, including before the European Patent Office. United States patents with claims that cover Rubraca and its uses are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book.
Because Rubraca does not contain a previously approved active ingredient, the Hatch-Waxman Act provides a five-year period of new chemical entity (“NCE”) exclusivity following its December 19, 2016 approval during which time generic competitors cannot file an Abbreviated New Drug Application (“ANDA”) for a generic version of Rubraca, unless the submission contains a Paragraph IV Certification that one or more patents listed in the Orange Book for Rubraca are invalid, unenforceable or will not be infringed by a proposed ANDA product, in which case the submission may be made four years following the original drug approval. That is, under the provisions of the Hatch-Waxman Act, December 19, 2020 was the earliest date that a generic competitor could submit an ANDA to the FDA requesting permission to market a generic version of Rubraca. To date, we do not have an indication that an ANDA has been filed. However, a generic company may have submitted an ANDA, for which we would receive a Paragraph IV Notice Letter in the future. If a Paragraph IV Certification is made, the generic company is required to provide a Paragraph IV Notice Letter advising Clovis of the certification. If that occurs, Clovis will have the opportunity to bring a patent infringement action against the generic company. If such a suit is filed within the 45-day period following receipt of the Paragraph IV Notice Letter, the Hatch-Waxman Act provides for a 30-month stay on FDA’s ability to grant final approval of the proposed generic product. The 30-month stay generally runs from the date the Paragraph IV Notice Letter is received. However, when a Paragraph IV certification is received during the five-year period of NCE exclusivity following the date of first NDA approval, the thirty-month stay extends from five years after the date that product was first approved. The 30-month stay may be shortened or lengthened, including due to a settlement of a lawsuit, a court order (including a decision by the district court on the merits of the case), or patent expiration.
Two European patents in the rucaparib camsylate salt/polymorph patent family (European Patent 2534153 and its divisional European Patent 3150610) were opposed. In particular, opposition notices against European Patent 2534153 were filed by two parties on June 20, 2017. During an oral hearing that took place on December 4, 2018, the European Patent Office’s Opposition Division maintained European Patent 2534153 in amended and narrowed form with claims to certain crystalline forms of rucaparib camsylate, including, but not limited to, rucaparib S-camsylate Form A, the crystalline form in Rubraca. Clovis and one opponent, Hexal AG, appealed the written decision of the European Opposition Division and filed reply appeal briefs in November 2019. An opposition against European Patent 3150610 was filed by Generics (UK) Limited on April 30, 2020 on grounds similar to those raised in the opposition notices against European Patent 2534153, which grounds are common in such proceedings. Moreover, these grounds of opposition, as well as documents based on which lack of patentability has been alleged, were considered by the European Patent Office during the examination stage, and the claims were deemed to comply with the applicable law when granting the patent. Clovis responded to the opposition notice in European Patent 3150610 on January 8, 2021, amending the claims to be directed to the use of rucaparib maleate in a method of inhibiting PARP activity or treating cancer. A preliminary opinion and summons to oral proceedings were issued on January 26, 2021. The oral hearing is scheduled for November 18, 2021. The preliminary opinion provides a non-binding indication of the Opposition Division’s initial view based on the documents that have thus far been submitted, which agrees with our positions on a number of grounds of opposition and agrees with an objection made by the opponent, but only with respect to some of the claims. We have the opportunity to submit further arguments and pursue alternative claims in the form of auxiliary requests. While the ultimate results of patent challenges can be difficult to predict, it is our view that a number of factors support patentability, and we believe a successful challenge of all claims would be difficult.
We have filed for patent term extension under a supplementary protection certificate for Rubraca based on European Patent 2534153 and believe that extension could be available to 2033. Additionally, in Europe, regulatory exclusivity is available for ten years, plus one year for a new indication; therefore, we have regulatory exclusivity for Rubraca in Europe until 2028, and if an additional indication is approved, until 2029.
We obtained rights to lucitanib by acquiring EOS in November 2013, along with its license agreement with Advenchen. We have rights to develop and commercialize lucitanib on a global basis, excluding China. Composition of matter and method of use patent protection for lucitanib and a group of structurally-related compounds is issued in the United States, Europe, and Japan and is issued or pending in other jurisdictions. In the United States, the composition of matter patent will expire in 2030, and in other jurisdictions, it expires in 2028. We believe that patent term extension could be available to extend our composition of matter patent up to five years beyond the scheduled expiration under the
Hatch-Waxman Act in the United States, and similar provisions in other jurisdictions. Additionally, patents directed to methods of manufacturing lucitanib are issued in the United States, Europe, Japan, and China.
In September 2019, we acquired rights from 3BP to develop and commercialize a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast activation protein alpha (“FAP”), including FAP-2286. We hold global development rights, and U.S. and global commercialization rights, excluding Europe (inclusive of Russia, Turkey and Israel), where 3BP retains rights. Patent applications are pending that claim FAP-2286 generically and specifically (including with respect to composition of matter) that, if issued, would have expiration dates in 2040.
In addition, we intend to seek patent protection whenever available for any products or product candidates and related technology we acquire in the future.
The patent positions of pharmaceutical firms like us are generally uncertain and involve complex legal, scientific and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued. Consequently, we do not know whether any of the product candidates we acquire, or license will gain patent protection or, if any patents are issued, whether they will provide significant proprietary protection or will be challenged, circumvented or invalidated. Because patent applications in the United States and certain other jurisdictions are maintained in secrecy for 18 months, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, until that time we cannot be certain that we were the first to file any patent application related to our product candidates. Moreover, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office (“U.S. PTO”) to determine priority of invention or in opposition or other third-party proceedings in the U.S. or a foreign patent office, either of which could result in substantial cost to us, even if the eventual outcome is favorable to us. There can be no assurance that the patents, if issued, would be held valid by a court of competent jurisdiction. An adverse outcome in a third-party patent dispute could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using specific compounds or technology.
The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries or jurisdictions in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. PTO in granting a patent or may be shortened if a patent is terminally disclaimed over another patent.
The patent term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent term restoration as compensation for the patent term lost during the FDA regulatory review process. The Hatch-Waxman Act permits a patent term extension of up to five years beyond the expiration of the patent. The length of the patent term extension is related to the length of time the drug is under regulatory review. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended. Similar provisions are available in Europe and other non-U.S. jurisdictions to extend the term of a patent that covers an approved drug. In the future, if and when our pharmaceutical products receive FDA approval, we expect to apply for patent term extensions on patents covering those products.
To protect our rights to any of our issued patents and proprietary information, we may need to litigate against infringing third parties, or avail ourselves of the courts or participate in hearings to determine the scope and validity of those patents or other proprietary rights. These types of proceedings are often costly and could be very time-consuming to us, and we cannot assure you that the deciding authorities will rule in our favor. An unfavorable decision could allow third parties to use our technology without being required to pay us licensing fees or may compel us to license needed technologies to a third-party. Such a decision could even result in the invalidation or a limitation in the scope of our patents or forfeiture of the rights associated with our patents or pending patent applications. To the extent prudent, we intend to bring litigation against third parties that we believe are infringing one or more of our patents.
In addition, we have sought and intend to continue seeking orphan drug status whenever it is available. If a product which has an orphan drug designation subsequently receives the first regulatory approval for the indication for which it has such designation, the product is entitled to orphan exclusivity, meaning that the applicable regulatory authority may not approve any other applications to market the same drug for the same indication, except in certain very limited
circumstances, for a period of seven years in the United States and ten years in Europe. Orphan drug designation does not prevent competitors from developing or marketing different drugs for an indication.
We also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our trade secrets. However, we believe that the substantial costs and resources required to develop technological innovations will help us to protect the competitive advantage of our products.
It is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual shall be our exclusive property. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.
Manufacturing
We currently contract with third parties for the manufacture of our product candidates for commercial use, or non-clinical studies and clinical trials and intend to do so in the future. We currently have long-term agreements with third-party contract manufacturing organizations (“CMOs”) for the production of the active ingredient and final product for Rubraca. We do not own or operate manufacturing facilities for the production of commercial and clinical quantities of our product candidates. We currently have no plans to build our own clinical or commercial scale manufacturing capabilities. To meet our projected needs for commercial manufacturing, we are working with our current third-party suppliers to ensure sufficient capacity to meet our manufacturing requirements. Although we rely on contract manufacturers, we have personnel with extensive manufacturing experience to oversee the relationships with our contract manufacturers.
We have developed the process for manufacturing Rubraca’s active pharmaceutical ingredient (“API”) to a degree sufficient to meet clinical demands and projected commercial requirements. Manufacturing of Rubraca API is being performed by Lonza Ltd (“Lonza”). Manufacturing operations for an advanced intermediate, which is the inventory prior to conversion to API, was expanded to a second Lonza site during 2019. The Rubraca drug product formulation and manufacturing process to produce that formulation have been developed to a degree sufficient to meet clinical demands and projected commercial requirements. A single third-party CMO capable of both formulation development and drug product manufacturing is currently producing the Rubraca drug product.
To date, our third-party manufacturers have met our manufacturing requirements and we expect them to meet anticipated full-scale commercial demands.
Lonza Agreement - Rubraca
On October 3, 2016, we entered into an agreement with Lonza for the long-term manufacture and supply of the API for rucaparib. Under this agreement, Lonza is a non-exclusive manufacturer of the Rubraca API during the 10-year term of the agreement. Lonza constructed, in an existing Lonza facility, a production train that is exclusively dedicated to the manufacture of the Rubraca API. The dedicated production train provides manufacturing capacity to meet our currently anticipated needs for commercial supply of Rubraca API. We are obligated to make scheduled capital program fee payments toward capital equipment and other costs associated with the construction of the dedicated production train. Further, once the production train became operational in October 2018, we are obligated to pay a fixed facility fee each quarter for the duration of the Agreement, which expires on December 31, 2025, unless extended by mutual consent of the parties.
Either party may terminate the agreement due to a material breach of the agreement by the other party, subject to prior written notice and a cure period. We may terminate the agreement, subject to 90 days’ prior written notice, in the event Rubraca is withdrawn from the market for certain reasons. In the event of such a termination by us, or termination by Lonza due to material breach by us, we are obligated to compensate Lonza for any services rendered, or for which costs have been incurred by Lonza in anticipation of services to be provided to us, and to pay to Lonza the remaining
amount of any capital program fees and quarterly fixed facility fees for the remainder of the term of the agreement. In the event we terminate the agreement due to material breach by Lonza, Lonza is obligated to repay all or a portion of the capital program fees previously paid by us.
Lucitanib
The API for lucitanib is currently being produced by a CMO. To date, the current production process has been sufficient to satisfy immediate clinical demands. We may undertake additional development work to further optimize the active pharmaceutical ingredient manufacturing process. The finished drug product for lucitanib is currently being manufactured at a CMO. The current product and process are sufficiently developed to meet immediate clinical demands. Additional scale-up work and/or additional production capacity will be necessary to support larger clinical development or commercialization requirements.
Commercial Operations
Our commercial organizations in the U.S. and Europe are in place and supporting the commercial sale of Rubraca. We believe the oncology market for Rubraca is addressable with a targeted sales and marketing organization, with capabilities that include the management of key accounts such as managed care organizations, group-purchasing organizations, oncology group networks and government accounts. We sell Rubraca through a limited distribution network consisting of select number of specialty pharmacies and distributors. Healthcare providers prescribe Rubraca to patients and the specialty pharmacies and distributors dispense Rubraca directly to patients. We intend to continue promoting Rubraca ourselves for its current indications and any additional indications we may obtain in the future. We retain the rights to Rubraca in the rest of the world.
In October 2020, we adopted a new U.S. commercial strategy to address a challenging sales environment resulting from a trend toward reduced in-person access for oncology commercial teams to oncology practices in general, which has been further accelerated by COVID-19, which has severely limited oncology patient visits and cancer diagnoses. Physicians increasingly prefer digital communications and virtual peer-to-peer interactions which they can access when they choose. The new hybrid strategy elevates digital programming, virtual communication and peer-to-peer interactions while reducing in-person promotion, and the remaining in-person activities will be much more targeted. This hybrid strategy does not require as large a U.S. commercial organization, and in early November the size of the organization was reduced by approximately 45 employees, resulting in a U.S. commercial team of approximately 85 employees.
Customers
We are currently approved to sell Rubraca in the U.S. and Europe markets. We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently sell our products to patients and health care providers. We do not believe the loss of one of these customers would significantly impact the ability to distribute our product as we expect that sales volume would be absorbed evenly by the remaining customers. Separately, we have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts.
Employees
As of February 12, 2021, we had 429 employees, of which 291 were employed in the U.S. and 138 were employed outside of the U.S. None of our U.S. employees are represented by labor unions, and a very small number of international employees are covered by collective bargaining agreements.
Our success depends upon our ability to retain and attract highly qualified management and technical personnel. Talent management is critical to our ability to execute on our long-term growth strategy. We appreciate the importance of retention, growth and development of our employees. We continue to be committed to an inclusive culture which values equality, opportunity and respect. In support of our inclusive culture, we believe we offer competitive compensation and benefits, including an annual pay gap assessment; provide respectful workplace training to strengthen employee understanding; and strive to recruit a diverse talent pool across all levels of the organization.
Employee safety and wellbeing is of paramount importance to us in any year and was of particular focus in our fiscal year 2020 in light of COVID-19. In response to the pandemic, we provided productivity and collaboration tools and resources for employees working remotely, including training and toolkits to help leaders effectively lead and manage remote teams. In addition, we enhanced and promoted programs to support our employees’ physical and mental wellbeing.
About Clovis
We were incorporated under the laws of the State of Delaware in April 2009 and completed our initial public offering of our common stock in November 2011. Our common stock is listed on the NASDAQ Global Select Market under the symbol “CLVS.” Our principal executive offices are located at 5500 Flatiron Parkway, Suite 100, Boulder, Colorado 80301, and our telephone number is (303) 625-5000. We maintain additional offices in San Francisco, California, Oakland, California, Cambridge, UK, London, UK, Milan, Italy and in several other locations in Europe. Our website address is www.clovisoncology.com. Our website and the information contained on, or that can be accessed through, the website will not be deemed to be incorporated by reference in, and are not considered part of, this report.
Available Information
As a public company, we file reports and proxy statements with the Securities and Exchange Commission (“SEC”). These filings include our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements on Schedule 14A, as well as any amendments to those reports and proxy statements, and are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC. Once at www.clovisoncology.com, go to Investors & News/SEC Filings to locate copies of such reports. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding us and other issuers that file electronically with the SEC.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Our business faces significant risks and uncertainties. Certain factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors, in its entirety, in addition to other information contained in or incorporated by reference into this Annual Report on Form 10-K and our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations.
Risk Factor Summary
Our business operations are subject to numerous risks and uncertainties, including those outside of our control, that could cause our business, financial condition or operating results to be harmed, including risks regarding the following:
● the impact of the COVID-19 pandemic on our revenues and our ability to continue to operate our business;
● we will require substantial additional funding which may not be available to us on acceptable terms, or at all, and failure to obtain additional funding may impact our ability to continue our development programs and successfully commercialize Rubraca;
● servicing our long-term debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt, a portion of which is due this year;
● we have incurred significant losses since our inception and anticipate that we will continue to incur losses for the foreseeable future;
● we may not be able to raise the funds necessary to repay our debt upon a fundamental change, and provisions in our debt could delay or prevent an otherwise beneficial takeover of us;
● we are highly dependent on revenues from the sale of Rubraca, and the rate and degree of market acceptance and commercial viability, including the safety, efficacy and potency of Rubraca and our other product candidates may limit the commercial success of Rubraca;
● if our sales, marketing and distribution capabilities for Rubraca or other product candidates for which we obtain marketing approval are inadequate, we may be unable to generate sufficient revenue from sales of our products;
● we cannot give any assurance that the Rubraca development program in other lines of therapies and indications will be successful or that our other product candidates will receive regulatory approval;
● our expectations regarding the FDA and other regulatory authorities’ interpretation of our data and information on our product candidates and the impact on our business of the FDA’s and other regulatory authorities’ interpretation of our submissions, filing decisions by the FDA and other regulatory authorities, potential advisory committee meeting dates and advisory committee recommendations, and FDA and other regulatory authorities product approval decisions and related timelines;
● the success of competing drugs that are or become available;
● the success and timing of our non-clinical studies and clinical trials;
● our ability to verify the clinical benefit of Rubraca through our confirmatory trials and to satisfy other post-marketing requirements and post-marketing commitments, our ability to obtain and maintain regulatory approval of Rubraca and our other product candidates, and the labeling under Rubraca and any other approval we may obtain;
● our ability to engage and retain third-party manufacturers with sufficient capability and capacity to support the commercialization of Rubraca and our other product candidates, and the performance of such third-party manufacturers;
● our ability to obtain and maintain intellectual property protection for our product candidates, including our ability to defend our intellectual property against challenges;
● our ability to maintain our collaborations with our licensing partners to develop our product candidates;
● the size and growth of potential markets for our product candidates and our ability to serve those markets;
● the loss of key scientific or management personnel;
● regulatory developments in the United States and foreign countries;
● our operating results are difficult to predict and may fluctuate, and if our operating results are below the expectations of investors or analysts, the trading price of our stock could decline;
● the price of our stock has been, and may continue to be volatile, which will impact the value of your investment and our ability to raise additional capital on favorable terms, or at all;
● future sales and issuances of our common stock or rights to purchase our common stock, including through our equity incentive plans, could result in dilution of your investment and cause our stock price to fall.
Risks Related to the COVID-19 Pandemic
The outbreak of COVID-19 could materially adversely affect our business.
On January 30, 2020, the World Health Organization (the “WHO”) declared that the recent novel coronavirus disease (COVID-19) outbreak was a public health emergency of international concern, and on March 11, 2020 the WHO declared the COVID-19 outbreak a pandemic. This has resulted in increased travel restrictions, quarantines, “work-at-home” and “shelter-in-place” orders and extended shutdown of certain non-essential businesses in the United States, and European and Asia-Pacific countries, including countries in which we commercialize Rubraca and countries in which we have planned or active clinical trials. With a renewed rise in the number of cases of the coronavirus in certain parts of the United States and Europe and the ongoing uncertainty regarding future trends in cases, these restrictions, quarantines, shutdowns and other disruption to businesses globally continue to evolve and, in many areas, increase. The effects of the coronavirus are difficult to assess or predict.
Our ability to generate product revenue for the year and quarter ended December 31, 2020 was negatively affected by the COVID-19 pandemic due to fewer diagnoses and fewer patients going to in-person office visits as oncology practices and patients continue to adapt to the impact of the virus. We anticipate that the outbreak will likely have a significant impact on our business in future quarters, and cannot currently predict the extent or duration of that impact.
The outbreak of COVID-19 has had a major impact on the financial markets, the global economy or the economies of particular countries or regions. Specifically, the COVID-19 outbreak could result in reduced operations of third-party manufacturers upon whom we rely, disrupt our supply chain, or otherwise limit our ability to obtain sufficient materials to manufacture Rubraca and our product candidates. While we believe that we have sufficient supply of Rubraca and our product candidates to continue our commercial and clinical operations as planned, Rubraca and our product candidates, or materials contained therein, come from facilities located in areas impacted by COVID-19 or that may be impacted, as the COVID-19 outbreak or its disruption worsens. If any third party in our supply or distribution chain for materials or finished product are adversely impacted by restrictions resulting from the COVID-19 outbreak, including staffing shortages, production slowdowns and disruptions in delivery systems, our supply chain may be disrupted, limiting our ability to manufacture and distribute Rubraca for commercial sales and our product candidates for our clinical trials and research and development operations. There is no guarantee that the recent COVID-19, or any potential future, outbreak would not impact our future supply chain, which could have a material adverse impact on our clinical trial plans and business operations.
Our sales force has had physical access to hospitals, clinics, doctors and pharmacies curtailed and/or has been limited, which may have a material adverse effect on our future sales. While digital tools are available to our field employees to facilitate remote meetings with healthcare providers, we cannot ensure that these methods will be effective. Additionally, patients who might be currently using Rubraca, or might otherwise be eligible to use our products, may be unable to meet with their healthcare providers in-person, which may reduce the number of prescription refills or new patient starts, affecting our revenues from Rubraca both in our currently approved ovarian cancer indications, as well as impacting our current launch in BRCA-mutant metastatic castration-resistant prostate cancer, which was approved during the second quarter of 2020.
Furthermore, our clinical trials may be affected by the COVID-19 outbreak. Although we did not see material disruption to our clinical trials as a result of the COVID-19 pandemic for the year ended December 31, 2020, we could see material disruption during 2021. During the second quarter of 2020, we observed a slight decrease in the rate of enrollment in ATHENA, our largest clinical trial, however we completed target enrollment in ATHENA in that quarter. As the outbreak persists in countries in which we conduct or plan to conduct our clinical trials, activities such as site initiation, patient enrollment, trial data collection, and site monitoring visits may be delayed or stalled due to travel and access restrictions, diversion of healthcare resources toward the COVID-19 outbreak, which we have already seen in certain of our trial sites, patient or staff unwillingness to visit hospitals and clinics and participate in our trials, or quarantines and other restrictions that may impede patient or staff movement and study drug availability at trial sites, interrupt healthcare services or otherwise prevent patient compliance with clinical trial protocols. Additionally, we may slow or delay enrollment in certain trials to manage expenses.
In addition, COVID-19 could affect our employees, our agents and their employees or the employees of companies with which we do business, thereby disrupting our business operations. We have implemented work-at-home policies and may experience limitations in employee resources. Our increased reliance on personnel working from home may negatively impact productivity, or disrupt, delay, or otherwise adversely impact our business. The effects of working from home and other burdens imposed by COVID-19 on individuals may impact our employee retention. In addition, our reliance on personnel working from home could increase our cyber security risk, create data accessibility concerns, and make us more susceptible to communication disruptions, any of which could adversely impact our business operations or delay necessary interactions with local and federal regulators, manufacturing sites, research or clinical trial sites and other important agencies and contractors.
On March 18, 2020, the Families First Coronavirus Response Act (“FFCR Act”), and on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. We evaluated the impact of this legislation and the income tax provisions did not result in a material cash benefit to us. Future regulatory guidance under the FFCR Act and the CARES Act (as well as under the Tax Cuts and Jobs Act) remains forthcoming, and such guidance could ultimately increase or lessen their impact on our business and financial condition. It is also highly possible that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could impact us.
The trading prices for our common stock and of other biopharmaceutical companies have been highly volatile as a result of the coronavirus pandemic. As a result, we may face difficulties raising capital or which may be on unfavorable terms. In addition, a recession, depression or other sustained adverse market event resulting from the spread of the coronavirus could materially and adversely affect our business and the value of our common stock. A number of governments in places where we have operations have adopted stimulus programs to assist businesses effected by COVID-19, including by facilitating lending arrangements. We may access these loan programs for additional working capital although there can be no guarantee that we will obtain any such loans and we do not currently know the terms of such loan programs.
The effectiveness of external parties, including governmental and non-governmental organizations, in combating the spread and severity of COVID-19 could have a material impact on the losses we experience. These events could cause a material adverse effect on our results of operations in any period and, depending on their severity, could also materially and adversely affect our financial condition.
Risks Related to Our Financial Position and Capital Requirements
We will require substantial additional funding which may not be available to us on acceptable terms, or at all. If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our products or continue our development programs.
Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to advance the clinical development of our products and launch and commercialize our products.
Based on current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund our operating plan through at least the next 12 months. We do not have any material committed external source of funds or other support for our development efforts, other than the ATHENA clinical trial financing agreement with certain affiliates of Sixth Street Partners, LLC (“Sixth Street”) to support the funding of the ATHENA trial.
Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do in sufficient amounts, we expect to finance future cash needs through a combination of public or private equity or debt offerings, and collaborations, strategic alliances and other similar licensing arrangements. We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our products, or our plans for acquisition or in-license of new product candidates. We may also seek collaborators for one or more of our current or future product candidates on terms that are less favorable than might otherwise be available. Any of these events could significantly harm our business, financial condition and prospects.
Servicing our long-term debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
As of December 31, 2020, we had $64.4 million outstanding aggregate principal amount of 2.5% convertible senior notes due 2021 (the “2021 Notes”), $300.0 million outstanding aggregate principal amount of 1.25% convertible senior notes due 2025 (the “2025 Notes”), $85.8 million outstanding aggregate principal amount of 4.50% convertible senior notes due 2024 (the “2024 Notes (2019 Issuance)”), and $57.5 million outstanding aggregate principal amount of a new series of 4.50% Convertible Senior Notes due 2024 (the “2024 Notes (2020 Issuance)” and together with the 2021 Notes, 2024 Notes and 2025 Notes, the “Notes”). In addition, as of December 31, 2020, we had $99.8 million outstanding aggregate principal amount pursuant to our ATHENA clinical trial financing agreement. The $64.4 million in outstanding aggregate principal amount of the 2021 Notes is due on September 15, 2021, and we are obligated to begin repaying the ATHENA clinical trial financing on a quarterly basis, beginning on the earliest to occur of (i) the termination of the ATHENA Trial, (ii) the approval by the FDA of an update to the label portion of the Rubraca new drug application (“NDA”) to include in such label the treatment of an indication resulting from the ATHENA Trial, (iii) the date on which we determine that the results of the ATHENA Trial are insufficient to achieve such an expansion of the Rubraca label to cover an indication based on the ATHENA Trial and (iv) September 30, 2022 (the “Repayment Start Date”).
Our ability to make scheduled payments of interest and principal on the Notes, to pay the repurchase price for the Notes on a fundamental change or to begin repaying the ATHENA clinical trial financing when due, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. We may not have sufficient cash in the future to service our debt. If we are unable to generate such cash flow or secure additional sources of funding, we may be required to adopt one or more alternatives, such as restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. For example, we were able to refinance a portion of the 2021 Notes from the proceeds of the issuance of the 2024 Notes, but the terms of the 2024 Notes are not as favorable from a financial perspective as the 2021 Notes and our stock price declined significantly upon the issuance of the 2024 Notes in part as a result of the assumed significant dilutive impact any future conversion of these Notes would have on our common stock. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms. If we fail to meet our obligations under the Notes, we will be in default, which may also cause a default under, and an acceleration of, our other debt obligations.
We have incurred significant losses since our inception and anticipate that we will continue to incur losses for the foreseeable future, which makes it difficult to assess our future viability.
We are a biopharmaceutical company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We have focused primarily on in-licensing and developing our products. We are not profitable and have incurred losses in each year since our inception in April 2009. We have only a limited operating history upon which you can evaluate our business and prospects. There are many risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. Two of our earlier product candidates, CO-101 and CO-1686, encountered development and/or regulatory setbacks after initial promising data, leading us to discontinue enrollment in then-ongoing clinical trials. We have received regulatory approval to market Rubraca in the U.S. and in Europe, but do not know whether Rubraca will be approved in other jurisdictions or in additional tumor types and indications, or whether it will achieve market acceptance and be commercially successful in the long run. We have only recently started to generate revenues from product sales, but these revenues have not been sufficient and won’t be sufficient in the near term, to support our operations. We continue to incur significant research and development and other expenses related to our ongoing operations. For the years ended December 31, 2020, 2019 and 2018, we had net losses of $369.2 million, $400.4 million and $368.0 million, respectively. As of December 31, 2020, we had an accumulated deficit of $2,612.7 million. We expect to continue to incur losses for the foreseeable future. As such, we are subject to all of the risks incident to the development of new biopharmaceutical products and related companion diagnostics, and we may encounter unforeseen expenses, difficulties, complications, regulatory scrutiny, delays and other unknown factors that may adversely affect our business. If any of our product candidates fail in clinical trials or do not gain regulatory approval, or if Rubraca or any of our product candidates, if approved, fail to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
We may not be able to raise the funds necessary to repurchase the Notes upon a fundamental change, or the ATHENA clinical trial financing agreement upon a change of control, and our future and current debt may contain limitations on our ability to repurchase the Notes.
If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the Notes, holders may require us to repurchase for cash all or any portion of the Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, in the event of a change of control of us, we must pay to the lenders under the ATHENA clinical trial financing agreement, 1.75 times the amount we have borrowed thereunder if the change of control occurs prior to the Repayment Start Date, or 2 times the amount we have borrowed thereunder if the change of control occurs after the Repayment Start Date (minus the amount of all quarterly payments previously paid to the lenders) (the “Discharge Amount”). We may not have or be able to borrow the funds required to repurchase the Notes on the fundamental change repurchase date. In addition, our ability to repurchase the Notes may otherwise be limited by law, regulatory authority or agreements governing our future indebtedness, including limitations on repurchase of certain debt set forth in the ATHENA clinical trial financing agreement. Our failure to repurchase the Notes at a time when the repurchase is required by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing
other current indebtedness, such as the ATHENA clinical trial financing agreement, or our future indebtedness. For example, an event of default under the ATHENA clinical trial financing agreement (which includes, among other events, breaches or defaults under or terminations of our material in-license agreements related to Rubraca and defaults under our other material indebtedness), the lenders have the right to declare the Discharge Amount to be immediately due and payable. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes when required.
We may incur substantially more debt or take other actions which would intensify the risks discussed above; and we may not generate cash flow from operations in the future sufficient to satisfy our obligations under the Notes, the ATHENA clinical trial financing agreement and any future indebtedness we may incur.
We may incur substantial additional debt in the future, subject to the restrictions contained in any debt instruments that we enter into in the future, some of which may be secured debt, such as the ATHENA clinical trial financing agreement. We are not restricted under the terms of the indenture governing the Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes or the ATHENA clinical trial financing agreement when due. Our ability to refinance the Notes or future indebtedness will depend on the capital markets and our financial condition at such time. In addition, agreements that govern any future indebtedness that we may incur may contain financial and other restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of some or all of our debt.
Provisions in the indenture and the ATHENA clinical trial financing agreement could delay or prevent an otherwise beneficial takeover of us.
Certain provisions in the Notes and the indentures governing the Notes, and in the ATHENA clinical trial financing agreement, could make a third-party attempt to acquire us more difficult or expensive. For example, if a takeover constitutes a fundamental change, then holders will have the right to require us to repurchase their notes for cash. In addition, if a takeover constitutes a make-whole fundamental change, then we may be required to temporarily increase the conversion rate. In either case, and in other cases, our obligations under the Notes, the indentures governing the Notes and the ATHENA clinical trial financing agreement could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management, including in a transaction that holders or holders of our common stock may view as favorable.
Risks Related to Our Business and Industry
We are highly dependent on the commercial success of Rubraca; Rubraca may not achieve market acceptance and may not be commercially successful and we may not attain profitability and positive cash flow from operations.
Rubraca is commercially available in the U.S. and Europe. The degree of market acceptance and the commercial success of Rubraca will depend on a number of factors, including:
● the effectiveness of our sales and marketing strategy and operations;
● maintaining compliance with all regulatory requirements applicable to Rubraca and our commercial activities, including the post­-marketing requirements and post­-marketing commitments required by the FDA and the EMA, to verify Rubraca’s clinical benefit or safety by completing certain confirmatory trials, pharmacology studies and additional diagnostic development;
● the acceptance of Rubraca by patients and the medical community and the availability, perceived advantages and relative cost, safety and efficacy of alternative and competing products and therapies;
● the continued acceptable safety profile of Rubraca and the occurrence of any unexpected side effects, adverse reactions or misuse, or any unfavorable publicity in these areas;
● the ability of our third­-party manufacturers to manufacture commercial supplies of Rubraca, to remain in good standing with regulatory agencies, and to develop, validate and maintain commercially viable manufacturing processes that are, to the extent required, compliant with cGMP regulations;
● the availability of coverage and adequate reimbursement from managed care plans, private health insurers and other third-party payors and the willingness and ability of patients to pay for Rubraca;
● the development or commercialization of competing products or therapies;
● marketing and distribution support for Rubraca, including the degree to which the approved labeling supports promotional initiatives for commercial success;
● the actual market­ size for Rubraca, which may be different than expected;
● our ability to enforce our intellectual property rights in and to Rubraca;
● our ability to avoid third party patent interference or patent infringement claims; and
● our ability to obtain regulatory approvals, including for pricing and reimbursement, to commercialize Rubraca in markets outside of the U.S. and Europe.
As many of these factors are beyond our control, we cannot assure you that we will be able to continue to grow meaningful revenue through the sale of Rubraca. In addition, we may experience significant fluctuations in sales of Rubraca from period to period. We have two other product candidates, lucitanib, in clinical development and FAP-2286 in pre-clinical development. Any inability on our part to successfully commercialize Rubraca in the United States, Europe and any other territories where it may be approved, or any significant delay in such approvals, could have a material adverse impact on our ability to execute upon our business strategy and, ultimately, to generate sufficient revenues from Rubraca to reach or maintain profitability or sustain our anticipated levels of operations.
If our sales, marketing and distribution capabilities for Rubraca or our product candidates for which we obtain marketing approval are inadequate, we may be unable to generate revenue from sales of our products.
Prior to the launch of Rubraca, we had not commercialized any drug products as a company. To achieve commercial success for Rubraca and any product candidate that may be approved by the FDA or comparable foreign regulatory authorities, we must continue to expand our sales, marketing, managerial and other non­technical capabilities or make arrangements with third parties to perform these services. We are competing with companies that currently have extensive, well­-funded, and more experienced sales and marketing operations. We may be unable to compete successfully against these more established companies.
We have built a field organization and other capabilities for the sales, marketing and distribution of Rubraca in the United States and in Europe, and there are significant risks involved with building and managing a sales organization. Factors that may inhibit our efforts to effectively commercialize Rubraca on our own include:
● our inability to recruit, train, retain and incentivize adequate numbers of qualified and effective sales and marketing personnel;
● the inability of sales personnel to generate sufficient sales leads and to obtain access to physicians or persuade adequate numbers of physicians to use or prescribe Rubraca; and
● our inability to effectively manage a geographically dispersed sales and marketing team.
If we are unable to maintain effective sales, marketing and distribution capabilities for Rubraca or if we are unable to fully establish and maintain sales, marketing and distribution capabilities for Rubraca outside of the United States or for any other product candidate for which we obtain marketing approval, whether independently or with third parties, we may not be able to generate product revenue or may not become profitable. If the cost of establishing and maintaining a sales and marketing organization exceeds the cost­-effectiveness of doing so, we may not become profitable.
With respect to our product candidates, we may elect to collaborate with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems in certain territories. To the extent that we enter into licensing or co-promotion arrangements for any of our product candidates, our product revenue may be lower than if we directly marketed or sold our approved products. In addition, any revenue we receive as a result of such arrangements would depend in whole or in part upon the efforts of such third parties, which may not be successful and are generally not within our control. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to successfully commercialize our product candidates that receive regulatory approval. If we are not successful in commercializing our
product candidates, either on our own or through collaborations with one or more third parties, our future product revenue will suffer, and we may incur significant additional losses.
We cannot give any assurance that the Rubraca development program in other lines of therapies and indications will be successful or that our other product candidates will receive regulatory approval.
To date, we have invested a significant portion of our efforts and financial resources in the acquisition and development of our product candidates. Our business depends entirely on the successful development and commercialization of our product candidates.
Each of our product candidates requires clinical development, management of clinical, non-clinical and manufacturing activities, regulatory approval in multiple jurisdictions, obtaining manufacturing supply, building of a commercial organization and significant marketing efforts in order to generate any revenues from product sales. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities. To date, we have received regulatory approval from the FDA and EMA to market Rubraca in the United States and Europe, respectively. We may not receive regulatory approvals for Rubraca for broader indications and lines of therapy or other tumor types and we may never receive regulatory approval for other product candidates. In addition, certain of our product development plans may contemplate the development of companion diagnostics by third-party collaborators. Companion diagnostics are subject to regulation as medical devices and must themselves be approved for marketing by the FDA or certain other foreign regulatory agencies before our product candidates may be commercialized.
We cannot be certain that Rubraca will be successfully developed to expand its current label to include other indications or that any of our product candidates will be successful in clinical trials or receive regulatory approval. Further, our product candidates may not receive regulatory approval even if they are successful in clinical trials. Two of our product candidates, CO-101 and rociletinib, encountered development and regulatory setbacks after initial promising data, leading us to discontinue enrollment in ongoing clinical trials. Even if we successfully obtain regulatory approvals to market one or more of our other product candidates, our revenues will be dependent, in part, upon our diagnostic collaborators’ ability to obtain regulatory approval of the companion diagnostics, where required, to be used with our product candidates, as well as the size of the markets in the territories for which we gain regulatory approval and have commercial rights. If the markets that we are targeting are not as significant as we estimate, we may not generate significant revenues from sales of such products, if approved.
We plan to seek regulatory approval to commercialize our product candidates, and for other indications for Rubraca, in the United States, Europe and in additional foreign countries. While the scope of regulatory approval is similar in other countries, obtaining separate regulatory approval in many other countries requires compliance with numerous and varying regulatory requirements of such countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales, pricing and distribution of our product candidates, and we cannot predict success in these jurisdictions.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.
Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of non-clinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through non-clinical studies and initial clinical trials. It is not uncommon for companies in the biopharmaceutical industry to suffer significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Indeed, based on the negative results of a pivotal study, we ceased further development of our previous product candidate CO-101, and we decided to discontinue ongoing development of rociletinib as a result of the issuance of a Complete Response Letter by the FDA. Additionally, our future clinical trial results may not be successful.
Although we have clinical trials ongoing, we may experience delays in our ongoing clinical trials, and we do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays related to:
● obtaining regulatory approval to commence a trial;
● reaching agreement on acceptable terms with prospective contract research organizations (“CROs”) and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
● obtaining institutional review board (“IRB”) approval at each site;
● recruiting suitable patients to participate in a trial;
● developing and validating companion diagnostics on a timely basis;
● having patients complete a trial or return for post-treatment follow-up;
● clinical sites deviating from trial protocol or dropping out of a trial;
● adding new clinical trial sites; or
● manufacturing sufficient quantities of product candidate for use in clinical trials.
Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Furthermore, we rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials, and while we have agreements governing their committed activities, we have limited influence over their actual performance.
We could encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Board for such trial or by the FDA or other regulatory authorities. Such authorities may impose a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenue from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
The regulatory approval processes of the FDA, EMA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for Rubraca in other indications and lines of therapy or for our other product candidates, our business will be substantially harmed.
The time required to obtain approval by the FDA, EMA and comparable foreign authorities is unpredictable, but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have obtained regulatory approval for Rubraca in the United States and Europe, and it is possible that Rubraca may not obtain regulatory approval for broader indications and lines of therapy or other tumor types or that any of our other existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval. Indeed, with the issuance of a Complete Response Letter by the FDA with respect to the rociletinib NDA, we decided to discontinue ongoing development of rociletinib.
Our product candidates could fail to receive regulatory approval or approval may be delayed for many reasons, including the following:
● the FDA, EMA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
● we may be unable to demonstrate to the satisfaction of the FDA, EMA or comparable foreign regulatory authorities that a product candidate is safe and effective for its proposed indication;
● the results of clinical trials may not meet the level of statistical significance required by the FDA, EMA or comparable foreign regulatory authorities for approval;
● the FDA, EMA or comparable foreign regulatory authorities may disagree with our interpretation of data from non-clinical studies or clinical trials;
● the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA, MAA or other submission or to obtain regulatory approval in the United States, the EU or elsewhere;
● the FDA, EMA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies;
● the FDA, EMA or comparable foreign regulatory authorities may fail to approve the companion diagnostics we contemplate developing with partners; and
● the approval policies or regulations of the FDA, EMA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.
This lengthy approval process, as well as the unpredictability of future clinical trial results, may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects.
Even if we receive regulatory approval for our product candidates, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates, if and when approved, could be subject to labeling and other restrictions and market withdrawal, and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.
Any regulatory approvals that we receive for our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing and clinical trials and surveillance to monitor the safety and efficacy of the product candidate. In addition, if the FDA, EMA or comparable foreign regulatory authority approves any of our product candidates, the manufacturing processes, pricing, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practices and good clinical practices for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes or failure to comply with regulatory requirements, may result in, among other things:
● restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market or voluntary or mandatory product recalls;
● fines, warning letters or holds on clinical trials;
● refusal by the FDA, EMA and comparable foreign authorities to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product license approvals;
● product seizure or detention, or refusal to permit the import or export of products; and
● injunctions or the imposition of civil or criminal penalties.
All of the foregoing limitations, obligations, and requirements also apply to Rubraca, for which we have received regulatory approval in the United States and the EU for certain indications.
We may seek approval from U.S. and foreign regulatory authorities for one or more product candidates on a conditional basis with full approval conditioned upon fulfilling the requirements of regulators. For example, we received accelerated approval from the FDA for the initial indication for Rubraca and conditional marketing authorization from
the EMA for the initial indication for Rubraca. Each of these approval pathways has certain conditions to approval, some of which may be post-approval, such as the conduct of a post-approval, or confirmatory, trial using due diligence. If we are unable to fulfill the requirements of regulators that are conditions of a product’s accelerated or conditional approval, if the confirmatory trial shows unfavorable results or increased or additional undesirable side effects, or if regulators re-evaluate the data or risk-benefit profile of our product candidate, the availability of accelerated or conditional approval may be withdrawn or our conditional approval may not result in full approval or may be revoked or not renewed. Alternatively, we may be required to change a product candidate’s labeled indications or even withdraw the product, if approved, from the market.
The FDA’s, EMA’s and comparable foreign authorities’ policies may change, and additional government regulations may be enacted that could prevent, limit, or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States, the EU or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, and we may not achieve or sustain profitability, which would adversely affect our business. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.
Rubraca and our other product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following marketing approval, if any.
Adverse events (“AEs”) attributable to our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, EMA or other comparable foreign authorities. Clinical studies conducted to date have generated AEs related to our product candidates, some of which have been serious. Patients treated with Rubraca have commonly experienced nausea, vomiting, constipation, dysgeusia, anemia/decreased hemoglobin, decreased appetite, diarrhea, abdominal pain, thrombocytopenia and fatigue/asthenia. In studies of lucitanib, hypertension, proteinuria and subclinical hypothyroidism requiring supplementation are the most common AEs observed. As is the case with all oncology drugs, it is possible that there may be other potentially harmful characteristics associated with their use in future trials, including larger and lengthier Phase III clinical trials. As we evaluate the use of our product candidates in combination with other active agents, we may encounter safety issues as a result of the combined safety profiles of each agent, which could pose a substantial challenge to that development strategy.
Results of our trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA, EMA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The drug-related AEs could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.
Additionally, if we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:
● sales of such product may decline;
● regulatory authorities may withdraw or restrict approvals of such product;
● regulatory authorities may require additional warnings on the label;
● we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
● additional nonclinical or clinical studies, changes in labeling or changes to manufacturing processes, specifications and/or facilities may be required
● we could be sued and held liable for harm caused to patients; and
● our reputation may suffer.
Any of the above occurrences would harm or prevent sales of such product, prevent us from achieving or maintain market acceptance of a product candidate, increase our expenses and impair our ability to successfully commercialize Rubraca. As Rubraca is commercially available, it may be used in a wider population and in a less rigorously controlled environment than in clinical studies. As a result, regulatory authorities, healthcare practitioners, third-party payors or patients may perceive or conclude that the use of Rubraca is associated with previously unknown serious adverse effects, undermining our commercialization efforts.
Failure to successfully validate, develop and obtain regulatory approval for companion diagnostics could harm our drug development strategy.
Where appropriate in the context of our clinical development strategy, we seek to identify patient subsets within a disease category who may derive selective and meaningful benefit from the product candidates we are developing. In collaboration with partners, we may develop companion diagnostics to help us to more accurately identify patients within a particular subset, both during our clinical trials and in connection with the commercialization of our product candidates. Companion diagnostics are subject to regulation by the FDA, EMA and comparable foreign regulatory authorities as medical devices and require separate regulatory approval prior to commercialization. We do not develop companion diagnostics internally and thus we are dependent on the sustained cooperation and effort of our third-party collaborators in developing and obtaining approval for these companion diagnostics. We and our collaborators may encounter difficulties in developing and obtaining approval for the companion diagnostics, including issues relating to selectivity/specificity, analytical validation, reproducibility, or clinical validation. Any delay or failure by our collaborators to develop or obtain regulatory approval of the companion diagnostics could delay or prevent approval of our product candidates. In addition, our collaborators may encounter production difficulties that could constrain the supply of the companion diagnostics, and both they and we may have difficulties gaining acceptance of the use of the companion diagnostics in the clinical community. If such companion diagnostics fail to gain market acceptance, it would have an adverse effect on our ability to derive revenues from sales of our products. In addition, the diagnostic company with whom we contract may decide to discontinue selling or manufacturing the companion diagnostic that we anticipate using in connection with development and commercialization of our product candidates or our relationship with such diagnostic company may otherwise terminate. We may not be able to enter into arrangements with another diagnostic company to obtain access to an alternative diagnostic test for use in connection with the development and commercialization of our product candidates or do so on commercially reasonable terms, which could adversely affect and/or delay the development or commercialization of our product candidates.
We rely on third parties to conduct our non-clinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.
We have relied upon and plan to continue to rely upon third-party CROs to monitor and manage data for our ongoing non-clinical and clinical programs. We rely on these parties for execution of our non-clinical and clinical studies, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with GCP, which are regulations and guidelines enforced by the FDA, the EMA and comparable foreign regulatory authorities for all of our products in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, the EMA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with product produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.
Our CROs have the right to terminate their agreements with us in the event of an uncured material breach. In addition, some of our CROs have an ability to terminate their respective agreements with us if it can be reasonably demonstrated that the safety of the subjects participating in our clinical trials warrants such termination, if we make a general assignment for the benefit of our creditors or if we are liquidated.
If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on commercially reasonable terms. In addition, our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our on-going clinical and non-clinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.
Switching or adding additional CROs involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially influence our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse effect on our business, financial condition and prospects.
We rely completely on third parties to manufacture our clinical drug supplies and our commercial supplies of Rubraca, and our development and commercialization of any of our product candidates could be stopped, delayed or made less profitable if those third parties fail to maintain approval of the FDA, EMA or comparable foreign regulatory authorities, fail to provide us with sufficient quantities of drug product or fail to do so at acceptable quality levels or prices.
We do not currently have nor do we plan to acquire the infrastructure or capability internally to manufacture our clinical drug supplies for use in the conduct of our clinical trials, and we lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. We do not control the manufacturing operations of, and are completely dependent on our contract manufacturing partners for compliance with the cGMP regulatory requirements for manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to the strict regulatory requirements of the FDA, EMA or comparable foreign regulatory authorities, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have limited control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly affect our ability to develop, obtain regulatory approval for or market our product candidates, if approved.
We rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce our products. There are a limited number of suppliers of raw materials that we use to manufacture our drugs, including Chinese suppliers, and there may be a need to assess alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce our products for clinical trials and for commercial sale. We do not have direct control over the process or timing of the acquisition of these raw materials by our manufacturers. Moreover, we currently do not have any direct agreements for the commercial production of these raw materials. Any significant delay in the supply of a product or product candidate, or the raw material components thereof, due to the need to replace a third-party manufacturer, could considerably delay completion of our clinical trials and potential regulatory approval of our product candidates. If our manufacturers or we are unable to purchase these raw materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of our product candidates.
We are dependent on our third-party manufacturers to conduct process development and scale-up work necessary to support greater clinical development and commercialization requirements for our product candidates. Carrying out these activities in a timely manner, and on commercially reasonable terms, is critical to the successful development and commercialization of our product candidates. We expect that our third-party manufacturers are capable of providing sufficient quantities of our product candidates to meet anticipated clinical and full-scale commercial demands, however if third parties with whom we currently work are unable to meet our supply requirements, we will need to secure alternate suppliers. While we believe that there are other contract manufacturers having the technical capabilities to manufacture our product candidates, we cannot be certain that identifying and establishing relationships with such sources would not result in significant delay or material additional costs. It may also take a significant period of time to
establish an alternative source of supply for our products, product candidates and components and to have any such new source approved by the FDA or any applicable foreign regulatory authorities.
We expect to continue to depend on third-party contract manufacturers for the foreseeable future. While we have long-term agreements with Lonza for the manufacture of API for Rubraca and with the manufacturer of the finished drug product, those are our single sources for the supply of Rubraca API and finished drug product, respectively, and we have not entered into agreements with any alternate suppliers. We currently obtain our supplies of finished drug product through individual purchase orders as described in the current supply agreement.
We are subject to risks associated with the availability of key raw materials, such as the radioisotopes used in the manufacture of our product candidates.
The manufacture of our product candidate 177Lu-FAP-2286 and companion imaging agent 68Ga-FAP-2286 will require the use of raw materials that are subject, at times, to global supply constraints that have the potential to delay our work on the products incorporating those raw materials. For example, any limitation on our ability to source adequate supply of lutetium-177 for 177Lu-FAP-2286 could prevent us from gathering sufficient data in clinical trials, or to the extent that we obtain regulatory approval for marketing for this product candidate, a limited supply may prevent us from meeting commercial demands. Supply constraints for lutetium-177 could also materially increase the manufacturing costs of 177Lu-FAP-2286, which would increase the cost of our clinical trials and reduce the commercial potential of the product candidate.
In addition, we plan to use gallium-68 in our development of imaging agent 68Ga-FAP-2286. Increased future demand for gallium-68 may exceed current production capacities. If we are not able to obtain sufficient quantities of gallium-68 for use in 68Ga-FAP-2286, we may not be able to gather sufficient data on 68Ga-FAP-2286 to use in clinical trials or to possibly seek the approval of 68Ga-FAP-2286. In addition, to the extent the approval of our product candidates depends on the screening and monitoring of the patient population with a companion imaging agent such as 68Ga-FAP-2286 in our clinical trials, we would experience a corresponding delay in approval and commercialization of these product candidates if we are not able to obtain sufficient gallium-68.
Our commercial success depends upon attaining significant market acceptance of our product candidates, if approved, among physicians, patients, healthcare payors and major operators of cancer clinics.
Even if we obtain regulatory approval for our other product candidates, the product may not gain market acceptance among physicians, health care payors, patients and the medical community, which are critical to commercial success. Market acceptance of any product candidate for which we receive approval depends on a number of factors, including:
● the efficacy and safety as demonstrated in clinical trials;
● the timing of market introduction of such product candidate as well as competitive products;
● the clinical indications for which the drug is approved, and the product label approved by regulatory authorities, including any warnings that may be required on the label;
● the approval, availability, market acceptance and reimbursement for the companion diagnostic;
● acceptance by physicians, major operators of cancer clinics and patients of the drug as a safe and effective treatment;
● the potential and perceived advantages of such product candidate over alternative treatments, especially with respect to patient subsets that we are targeting with such product candidate;
● the safety of such product candidate seen in a broader patient group, including its use outside the approved indications;
● the cost, safety and efficacy of the product in relation to alternative treatments;
● the availability of adequate reimbursement and pricing by third-party payors and government authorities;
● relative convenience and ease of administration;
● the prevalence and severity of adverse side effects; and
● the effectiveness of our sales and marketing efforts.
If our product candidates are approved but fail to achieve an adequate level of acceptance by physicians, healthcare payors and patients, we will not be able to generate significant revenues, and we may not become or remain profitable.
We face significant competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to compete effectively.
The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. In addition, the competition in the oncology market is intense. We have competitors both in the United States and internationally, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions (see Part I, Item 1 - Business, Competition section).
Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations. GlaxoSmithKline plc gained rights to Zejula through its acquisition of Tesaro Inc., which was completed in January 2019. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. As a result, these companies may obtain regulatory approval more rapidly than we are able and may be more effective in selling and marketing their products as well. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing, on an exclusive basis, drug products that are more effective or less costly than any drug candidate that we are currently developing or that we may develop. If approved, our product candidates will face competition from commercially available drugs, as well as drugs that are in the development pipelines of our competitors and later enter the market.
Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make our product candidates less competitive. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA, European Commission or other regulatory approval or discovering, developing and commercializing medicines before we do, which would have a material adverse effect on our business.
Reimbursement may be limited or unavailable in certain market segments for our product candidates, which could make it difficult for us to sell our products profitably.
There is significant uncertainty related to the third-party coverage and reimbursement of newly approved drugs. We have received marketing authorization for Rubraca in the United States and the EU for multiple indications. We intend to seek additional approvals to market Rubraca and other product candidates in the United States, Europe and other selected foreign jurisdictions. Market acceptance and sales of our products in both domestic and international markets will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for any of our products and may be affected by existing and future healthcare reform measures. Government and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new drugs and, as a result, they may not cover or provide adequate payment for our products. These payors may conclude that our products are less safe, less effective or less cost-effective than existing or later introduced products, and third-party payors may not approve our products for coverage and reimbursement or may cease providing coverage and reimbursement for these products.
Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time consuming and costly process that could require us to provide to the payor supporting scientific, clinical and cost-effectiveness data for the use of our products. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for any of our products. Even if we obtain coverage for our products, third-party payors may not establish adequate reimbursement amounts, which may reduce the demand for, or the price of, our products. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
In both the United States and certain foreign jurisdictions, there have been, and we expect there will continue to be a number of legislative and regulatory changes to the health care system that could affect our ability to sell our products profitably. The U.S. government and other governments have shown significant interest in pursuing healthcare reform. In particular, the Medicare Modernization Act of 2003 revised the payment methodology for many products under the Medicare program in the United States. This has resulted in lower rates of reimbursement. In 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Affordable Care Act”), was enacted. The Affordable Care Act substantially changed the way healthcare is financed by both governmental and private insurers. Such government-adopted reform measures may adversely affect the pricing of healthcare products and services in the United States or internationally and the amount of reimbursement available from governmental agencies or other third-party payors.
Moreover, payment methodologies, including payment for companion diagnostics, may be subject to changes in healthcare legislation and regulatory initiatives. For example, the CMS has begun bundling the Medicare payments for certain laboratory tests ordered while a patient received services in a hospital outpatient setting and, in 2018, the CMS began paying for clinical laboratory services based on a weighted average of reported prices that private payors, Medicare Advantage plans, and Medicaid Managed Care plans pay for laboratory services.
There have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. Recently there has also been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, reform government program reimbursement methodologies. Individual states in the United States have also become increasingly active in implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect the demand for any drug products for which we may obtain regulatory approval, as well as our ability to set satisfactory prices for our products, to generate revenues, and to achieve and maintain profitability.
In some foreign countries, particularly in Europe, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct additional clinical trials that compare the cost-effectiveness of our product candidates to other available therapies. If reimbursement of our product candidates is unavailable or limited in scope or amount in a particular country, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability of our products in such country.
If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy. Further, we will need to grow our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.
Our industry has experienced a high rate of turnover of management personnel in recent years. Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical personnel, especially Patrick J. Mahaffy, our President and Chief Executive Officer, Dr. Lindsey Rolfe, our Executive Vice President of Clinical Development and Pharmacovigilance and Chief Medical Officer, Gillian C. Ivers-Read, our Executive Vice President, Technical Operations and Chief Regulatory Officer and Dr. Thomas Harding, our Chief Scientific Officer, Translational Medicine whose services are critical to the successful implementation of our product candidate acquisition, development and regulatory strategies.
Despite our efforts to retain valuable employees, members of our management, scientific, development and commercial teams may terminate their employment with us on short notice. Pursuant to their employment arrangements, each of our executive officers may voluntarily terminate their employment at any time by providing as little as thirty days advance notice. Our employment arrangements with all of our employees provide for at-will employment, which means that any of our employees could leave our employment at any time, with or, other than our executive officers,
without notice. The loss of the services of any of our executive officers or other key employees and our inability to find suitable replacements could potentially harm our business, financial condition and prospects. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel.
As of February 12, 2021, we employed 429 employees. As our development plans and strategies develop, we expect to expand our employee base for managerial, operational, financial and other resources. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate revenues could be reduced and we may not be able to implement our business strategy.
We may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for a limited number of qualified personnel among biopharmaceutical, biotechnology, pharmaceutical and other businesses. Many of the other pharmaceutical companies that we compete against for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than what we have to offer. In order to induce valuable employees to continue their employment with us, we have provided stock options that vest over time. The value to employees of stock options that vest over time is significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers from other companies. If we are unable to continue to attract and retain high quality personnel, the rate and success at which we can develop and commercialize product candidates will be limited.
Our employees and independent contractors, including principal investigators, CROs, consultants and vendors, may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.
We are exposed to the risk that our employees and independent contractors, including principal investigators, CROs, consultants and vendors, may engage in misconduct or other illegal activity. Misconduct by those parties could include intentional, reckless and/or negligent failures to comply with the laws and regulations of the FDA and other similar regulatory agencies, provide accurate information to such authorities, comply with manufacturing standards we have established, including cGMP requirements, comply with federal and state data privacy, securities, fraud and abuse and other healthcare laws and regulations in the United States and abroad, report financial information or data accurately, or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee or contractor misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Ethics and other compliance policies, but it is not always possible to identify and deter misconduct by employees and contractors, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant effect on our business and results of operations, including the imposition of significant fines or other sanctions.
Our relationships with healthcare professionals, investigators, consultants, customers (actual and potential) and third-party payors are and will continue to be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws, transparency and disclosure (or “sunshine”) laws, government price reporting, and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.
Our operations may be directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act. These laws may affect, among other things, our current activities with clinical study investigators and research subjects, as well as proposed and future sales, marketing, disease awareness, and patient assistance programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include, but are not limited to:
● the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, including any kickback, bribe, or certain rebate, directly or indirectly, to induce, or in return for, either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item or service for which payment will be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or special intent to violate the law in order to have committed a violation; in addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act;
● federal false claims laws, including the False Claims Act, which impose criminal and civil penalties, including through civil “qui tam” or “whistleblower” actions, against individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval from federal programs, such as Medicare and Medicaid, that are false or fraudulent, or knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government;
● the Health Insurance Portability and Accountability Act of 1996, or HIPAA which imposes criminal and civil liability for, among other things, willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
● HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, which also imposes certain requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses, as well as their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
● the federal civil monetary penalties statute, which prohibits, among other things, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s election of a particular supplier of items or services reimbursable by a Federal or state governmental program;
● the federal Physician Payment Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Centers for Medicare and Medicaid Services, or CMS, information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members;
● federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;
● federal government price reporting laws, which require drug manufacturers to calculate and report complex pricing metrics to government agencies, including CMS, where such reported prices may be used in the calculation of reimbursement and/or discounts on marketed products. Participation in these programs and compliance with the applicable requirements may result in potentially significant discounts on products subject
to reimbursement under federal healthcare programs and increased infrastructure costs, and may potentially limit a drug manufacturer’s ability to offer certain marketplace discounts; and
● analogous state laws and regulations, such as state anti-­kickback, false claims, consumer protection and unfair competition laws which may apply to pharmaceutical business practices, including but not limited to, research, distribution, sales and marketing arrangements as well as submitting claims involving healthcare items or services reimbursed by any third-­party payer, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government that otherwise restricts payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers to file reports with states regarding pricing and marketing information, such as the tracking and reporting of gifts, compensations and other remuneration and items of value provided to healthcare professionals and entities; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
In addition, the research and development of our product candidates outside the United States, and any sales of our products or product candidates once commercialized outside the United States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.
Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs, including investments in infrastructure and additional resources. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities, including our consulting agreements and other relationships with physicians, could be subject to challenge under one or more of such laws. Governmental and enforcement authorities may conclude that our business practices do not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to, without limitation, civil, criminal, and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
Compliance with data privacy laws and regulations is complex and could expose us to a variety of risks.
We operate in an environment that relies on the collection, processing, analysis and interpretation of large sets of individuals’ personal information, and that also, in many situations, requires that data to be transferred across borders of numerous countries in which there are different, and potentially conflicting, data privacy laws in effect. For example, the EU General Data Protection Regulation (“GDPR”), which took effect in May 2018, and the California Consumer Privacy Act, which took effect in January 2020, impose stringent requirements on how we and third parties with whom we contract collect, share, export or otherwise process personal information, and provide for significant penalties for noncompliance. Breaches of our systems or those of our third-party contractors, or other failures to protect the data we collect from misuse or breach by third parties, could expose such personal information to unauthorized persons.
Any event involving the substantial loss of personal information or other privacy violations could give rise to significant liability, reputational harm, damaged relationships with business partners, and potentially substantial monetary penalties under laws enacted or being enacted around the world. Such events could also lead to restrictions on our ability to use personal information and/or transfer personal information across country borders.
Our business activities may be subject to the Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery and anti-corruption laws.
We are subject to a number of anti-corruption laws, including the U.S. FCPA and the U.K. Bribery Act. Our failure to comply with anti-corruption laws applicable to us could result in penalties, which could harm our reputation and harm our business, financial condition, results of operations, cash flows or prospects. The FCPA generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. The FCPA also requires public companies to maintain accurate books and records and devise a system of sufficient internal accounting controls. We regularly review and update our policies and
procedures and internal controls designed to provide reasonable assurance that we, our employees, distributors and other intermediaries comply with the anti-corruption laws to which we are subject. However, there are inherent limitations to the effectiveness of any policies, procedures and internal controls, including the possibility of human error and the circumvention or overriding of the policies, procedures and internal controls. There can be no assurance that such policies or procedures or internal controls will work effectively at all times or protect us against liability under these or other laws for actions taken by our employees, distributors and other intermediaries with respect to our business.
The SEC and the Department of Justice continue to view FCPA enforcement activities as a high priority. There is no certainty that all of our employees, agents, contractors or collaborators, or those of our affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs and prohibitions on the conduct of our business. Any such violations could materially damage our reputation, our brand, our international operations, our ability to attract and retain employees, and our business, prospects, operating results, and financial condition.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.
We face an inherent risk of product liability. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates, if approved. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
● decreased demand for our product candidates or products that we may develop;
● injury to our reputation;
● withdrawal of clinical trial participants;
● initiation of investigations by regulators;
● costs to defend the related litigation;
● a diversion of management’s time and our resources;
● substantial monetary awards to trial participants or patients;
● increase in insurance premiums;
● product recalls, withdrawals or labeling, marketing or promotional restrictions;
● loss of revenues from product sales;
● the inability to commercialize our product candidates; and
● a decline in our stock price.
Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We have a program of product liability insurance covering our ongoing clinical trials; however, the amount of insurance we maintain may not be adequate to cover all liabilities that we may incur. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
Our internal computer systems, or those used by our CROs or other contractors or consultants, may fail or suffer security breaches.
We and our business partners maintain sensitive company data on our computer networks, including our intellectual property and proprietary business information, as well as certain clinical trial information. Cybersecurity attacks are becoming more commonplace and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, misappropriation of information and corruption of data. Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. In addition, in response to the COVID-19 pandemic, a majority of our workforce is currently working remotely. This could increase our cybersecurity risk, create data accessibility concerns and make us more susceptible to communication disruptions. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and business operations. For example, the loss of, or inability to access, even temporarily, clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third parties for the manufacture of our products and product candidates, including clinical trial supply, and similar events relating to their computer systems could also have a material adverse effect on our business and development programs. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed.
Our business is subject to complex and evolving U.S. and foreign laws and regulations, information security policies and contractual obligations relating to privacy and data protection, including the use, processing, and cross-border transfer of personal information. These laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, or monetary penalties, and otherwise may harm our business. We receive, generate and store significant and increasing volumes of sensitive information and business-critical information, including employee and personal data, research and development information, commercial information, and business and financial information. Cyber-attacks, breaches, interruptions or other data security incidents could result in legal claims or proceedings, liability under federal or state laws that protect the privacy of personal information, regulatory penalties, significant remediation costs, disrupt key business operations and divert attention of management and key information technology resources. In the United States and Europe, notice of breaches of personal information must be made to affected individuals, and for extensive breaches, notice may need to be made to the media or U.S. state attorneys general or other governmental authorities. Such a notice could harm our reputation and ability to compete.
The United Kingdom’s departure from the EU could be costly and difficult to comply with and could harm our business.
The United Kingdom (“UK”) formally left the EU on January 31, 2020. We have based in the UK a significant portion of our non-U.S. clinical, regulatory affairs, and pharmacovigilance operations, as well as our European commercial organization. In anticipation of Brexit, we have taken steps to relocate certain activities from the UK in order to remain in compliance, post-Brexit, with certain laws and regulations in the EU. While the regulatory environment in the UK is currently consistent with that of the EU, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate. As such, we could be required to comply with regulatory requirements in the UK that are in addition to, or inconsistent with, the regulatory requirements of the EU, resulting in the duplication of certain costs and new challenges to operate in Europe. The full effect of Brexit is uncertain, and consequently, we cannot at this time fully predict what the outcome may have on our business, particularly if our European operations or presence become a more significant part of our business.
Fluctuations in the value of the Euro or UK pound sterling could negatively impact our results of operations and increase our costs.
We generate revenues from sales of Rubraca in the UK and the EU. We also conduct research and development activities in the UK and other European countries and some of the payments for these activities are denominated in Euros and UK pounds sterling. As a result, we are exposed to foreign exchange risk, and our results of operations may be impacted by fluctuations in the exchange rate between the U.S. dollar and the Euro or UK pound sterling, such as the decline in value of the UK pound sterling following the results of the UK’s referendum on withdrawal from the EU. We
currently have not entered into any foreign currency hedging contracts to reduce the effect of changes in foreign currency exchange rates, and foreign currency hedging is inherently risky and may result in unanticipated losses.
Our business involves the use of hazardous materials and we and our third-party manufacturers and suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.
Our research and development activities and our third-party manufacturers’ and suppliers’ activities involve the controlled storage, use and disposal of hazardous materials owned by us, including the components of our product candidates and other hazardous compounds, and which is expected to include radioactive material contained in FAP-2286. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers’ facilities, pending use and disposal. We cannot completely eliminate the risk of contamination, which could cause an interruption of our research and development efforts and business operations, injury to our employees and others, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources. We do not currently carry biological or hazardous waste insurance coverage.
Environmental, social and governance matters may impact our business and reputation.
Increasingly, in addition to the importance of their financial performance, companies are being judged by their performance on a variety of environmental, social and governance (“ESG”) matters, which are considered to contribute to the long-term sustainability of companies’ performance.
A variety of organizations measure the performance of companies on such ESG topics, and the results of these assessments are widely publicized. In addition, investment in funds that specialize in companies that perform well in such assessments are increasingly popular, and major institutional investors have publicly emphasized the importance of such ESG measures to their investment decisions. Topics taken into account in such assessments include, among others, the company’s efforts and impacts on climate change and human rights, ethics and compliance with law, and the role of the company’s board of directors in supervising various sustainability issues. In addition to the topics typically considered in such assessments, in our healthcare industry, issues of the public’s ability to access our medicines are of particular importance.
In light of investors’ increased focus on ESG matters, there can be no certainty that we will manage such issues successfully, or that we will successfully meet society’s expectations as to our proper role. Any failure or perceived failure by us in this regard could have a material adverse effect on our reputation and on our business, share price, financial condition, or results of operations, including the sustainability of our business over time.
Climate change, extreme weather events, earthquakes and other natural disasters could adversely affect our business.
In recent years, extreme weather events and changing weather patterns such as storms, flooding, droughts, fires and temperature changes have become more common. As a result, we are potentially exposed to varying natural disaster or extreme weather risks such as hurricanes, tornadoes, fires, droughts or floods, or other events that may result from the impact of climate change on the environment, such as sea level rise. For example, in the event of a major earthquake, we could experience business interruptions, destruction of facilities, and loss of life, all of which could have a material adverse effect on our business, financial condition, or results of operations.
The potential impacts of climate change may also include increased operating costs associated with additional regulatory requirements and investments in reducing energy, water use and greenhouse gas emissions.
Risks Related to Our Intellectual Property
If our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, we may not be able to compete effectively in our market.
We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our technologies. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.
The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications that we own or license may fail to result in issued patents in the United States or in other foreign countries. Even if the patents do successfully issue, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims. If the breadth or strength of protection provided by the patent applications we hold or pursue with respect to our product candidates is threatened, it could threaten our ability to commercialize our product candidates. Further, if we encounter delays in our clinical trials, the period of time during which we could market our product candidates under patent protection would be reduced. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our product candidates. Furthermore, an interference proceeding can be provoked by a third-party or instituted by the United States Patent and Trademark Office (“U.S. PTO”) to determine who was the first to invent any of the subject matter covered by the patent claims of our applications.
In addition to the protection afforded by patents, we seek to rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our drug development processes that involve proprietary know-how, information or technology that is not covered by patents. Although we require all of our employees to assign their inventions to us, and all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.
Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly and could put our patent applications at risk of not issuing.
Because Rubraca does not contain a previously approved active ingredient, the Hatch-Waxman Act provides a five-year period of new chemical entity (“NCE”) exclusivity following its December 19, 2016 approval during which time generic competitors cannot file an Abbreviated New Drug Application (ANDA) for a generic version of Rubraca, unless the submission contains a Paragraph IV Certification that one or more patents listed in the Orange Book for Rubraca are invalid, unenforceable or will not be infringed by a proposed ANDA product, in which case the submission may be made four years following the original drug approval. That is, under the provisions of the Hatch-Waxman Act, December 19, 2020 was the earliest date that a generic competitor could submit an ANDA to the FDA requesting permission to market
a generic version of Rubraca. To date, we do not have an indication that an ANDA has been filed. However, a generic company may have submitted an ANDA, for which we would receive a Paragraph IV Notice Letter in the future. If a Paragraph IV Certification is made, the generic company is required to provide a Paragraph IV Notice Letter advising Clovis of the certification. If that occurs, Clovis will have the opportunity to bring a patent infringement action against the generic company. If such a suit is filed within the 45-day period following receipt of the Paragraph IV Notice Letter, the Hatch-Waxman Act provides for a 30-month stay on FDA’s ability to grant final approval of the proposed generic product. The 30-month stay generally runs from the date the Paragraph IV Notice Letter is received. However, when a Paragraph IV certification is received during the five-year period of NCE exclusivity following the date of first NDA approval, the thirty-month stay extends from five years after the date that product was first approved. The 30-month stay may be shortened or lengthened, including due to a settlement of a lawsuit, a court order (including a decision by the district court on the merits of the case), or patent expiration. The party filing the ANDA may also counterclaim in the litigation that one or more of our patents are invalid, unenforceable, and/or not infringed. If all of the Orange-Book listed patents were found invalid, enforceable, and/or not infringed, a competing generic product could be marketed prior to expiration of those patents, which would harm our business.
Interference proceedings provoked by third parties or brought by the U.S. PTO may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees.
We may not be able to prevent, alone or with our licensors, misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the United States. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.
Third-party claims of intellectual property infringement may prevent or delay our drug discovery and development efforts.
Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including interference, inter parties review and reexamination proceedings before the U.S. PTO or oppositions and other comparable proceedings in foreign jurisdictions. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may give rise to claims of infringement of the patent rights of others.
Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications, which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our product candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtain a license under the applicable patents, or until such patents expire or they are finally determined to be held invalid or unenforceable. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy or patient selection methods, the holders of any such patent may be able to block our ability to develop and commercialize the applicable product candidate unless we obtain a license, limit our uses, or until such patent expires or is finally determined to be held invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all.
Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, limit our uses, pay royalties or redesign our infringing product candidates, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize one or more of our product candidates, which could harm our business significantly.
The patent protection, patent prosecution and patent enforcement for some of our product candidates is dependent on third parties.
While we normally seek and gain the right to fully prosecute, maintain and enforce the patents relating to our product candidates, there may be times when platform technology patents that relate to our product candidates are controlled by our licensors. This is the case with the method of use patents licensed under the AstraZeneca license. If AstraZeneca or any of our future licensing partners fail to appropriately prosecute, maintain or enforce, as applicable, patent protection for patents covering any of our product candidates, our ability to develop and commercialize those product candidates may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on all of our product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
If we breach any of the agreements under which we license commercialization rights to our product candidates from third parties, we could lose license rights that are important to our business.
We license the use, development and commercialization rights for all of our product candidates, and may enter into similar licenses in the future. Under each of our existing license agreements we are subject to commercialization and development, diligence obligations, milestone payment obligations, royalty payments and other obligations. If we fail to comply with any of these obligations or otherwise breach our license agreements, including by failing to use commercially reasonable efforts to develop or commercialize the product candidate, our licensing partners may have the right to terminate the license in whole or in part. Generally, the loss of any one of our licenses or other licenses in the future could materially harm our business, prospects, financial condition and results of operations.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:
● others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of the patents that we own or have exclusively licensed;
● we or our licensors or strategic partners might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed;
● we or our licensors or strategic partners might not have been the first to file patent applications covering certain of our inventions;
● others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;
● it is possible that our pending patent applications will not lead to issued patents;
● issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;
● our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;
● we may not develop additional proprietary technologies that are patentable; and
● the patents of others may have an adverse effect on our business.
Should any of these events occur, they could significantly harm our business, results of operations and prospects.
Risks Related to Ownership of our Common Stock, Convertible Senior Notes and Long-term Debt
Our operating results are difficult to predict and may fluctuate. If our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.
Our operating results are difficult to predict and may fluctuate significantly from quarter to quarter and year to year. As a result, although we may provide sales guidance for Rubraca from time to time, you should not rely on Rubraca sales results in any period as being indicative of future performance. In addition, such guidance is based on assumptions that may be incorrect or that may change from quarter to quarter, and it may be particularly difficult to correctly forecast sales in indications for which we have recently received marketing approval. Moreover, sales of Rubraca have, on occasion, been below the expectations of securities analysts and investors and have been below prior period sales, and sales of Rubraca in the future may also be below prior period sales, our own guidance and/or the expectations of securities analysts and investors. To the extent that we do not meet any guidance we may give or the expectations of analysts or investors, our stock price may be adversely impacted, perhaps significantly. We believe that our quarterly and annual results of operations may be affected by a variety of factors, including:
● customer ordering patterns for Rubraca, which may vary significantly from period to period;
● the overall level of demand for Rubraca, including the impact of any competitive products and the duration of therapy for patients receiving Rubraca;
● the extent to which coverage and reimbursement for Rubraca is available from government and health administration authorities, private health insurers, managed care programs and other third-party payors;
● our ability to establish or demonstrate to patients and the medical community the safety, efficacy or value of Rubraca and its perceived advantages compared to existing and future therapies in the recurrent ovarian cancer indications and other indications for which Rubraca may receive approval in the future;
● changes in the amount of deductions from gross sales, including government-mandated rebates, chargebacks and discounts that can vary because of changes to the government discount percentage, including increases in the government discount percentage resulting from price increases we have taken or may take in the future, or due to different levels of utilization by entities entitled to government rebates and discounts and changes in patient demographics;
● increases in the scope of eligibility for customers to purchase Rubraca at the discounted government price or to obtain government-mandated rebates on purchases of Rubraca;
● changes in our cost of sales;
● the incidence rate of new patients in Rubraca’s approved indications;
● the timing, cost and level of investment in our sales and marketing efforts to support Rubraca sales; and
● the timing, cost and level of investment in our research and development and other activities involving Rubraca, lucitanib and our other product candidates by us or our collaborators.
Further, changes in our operations, such as increased development, manufacturing and clinical trial expenses in connection with our development programs, or our undertaking of additional programs, or business activities, or entry into strategic transactions, including potential future acquisitions of products, technologies or businesses may also cause significant fluctuations in our expenses.
For these and other reasons, it is difficult for us to accurately forecast future sales of Rubraca, operating expenses or future profits or losses. As a result, our operating results in future periods could be below any guidance we may give or the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline, perhaps substantially.
The price of our stock has been, and may continue to be, volatile, and you could lose all or part of your investment.
The trading price of our common stock has been, and may continue to be, volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. During the 12-month period ended December 31, 2020, the price of our common stock on the NASDAQ Global Select Market ranged from $3.62 per share to $11.63 per share. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this report, these factors include:
● adverse results of regulatory actions or decisions;
● our failure to successfully commercialize our products;
● actual or anticipated adverse results or delays in our clinical trials;
● unanticipated serious safety concerns related to the use of any of our products;
● changes in laws or regulations applicable to our products, including but not limited to clinical trial requirements for approvals;
● disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our products;
● our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;
● inability to obtain adequate product supply for any approved drug product or inability to do so at acceptable prices;
● our dependence on third parties, including CMOS and CROs, as well as our partners that provide us with companion diagnostic products;
● additions or departures of key scientific or management personnel;
● failure to meet or exceed any financial guidance or expectations regarding development milestones that we may provide to the public;
● actual or anticipated variations in quarterly operating results;
● failure to meet or exceed the estimates and projections of the investment community;
● overall performance of the equity markets and other factors that may be unrelated to our operating performance or the operating performance of our competitors, including changes in market valuations of similar companies;
● conditions or trends in the biotechnology and biopharmaceutical industries;
● introduction of new products offered by us or our competitors;
● announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
● issuances of debt or equity securities and perceptions of our ability to issue additional debt and equity securities to refinance our debt obligations and to fund our operations;
● significant lawsuits, including patent or stockholder litigation;
● sales of our common stock by us or our stockholders in the future;
● trading volume of our common stock;
● publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;
● ineffectiveness of our internal controls;
● general political and economic conditions;
● effects of natural or man-made catastrophic events; and
● other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the NASDAQ Global Select Market and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have a dramatic and material adverse effect on the market price of our common stock.
Because our outstanding Notes are convertible into shares of our common stock, volatility or depressed prices of our common stock could have a similar effect on the trading price of our Notes. In addition, the existence of the Notes may encourage short selling in our common stock by market participants because the conversion of the Notes could depress the price of our common stock.
The conversion of some or all of the Notes may dilute the ownership interest of existing stockholders. Holders of the outstanding 2021 Notes are able to convert them at any time prior to the close of business on the business day immediately preceding September 15, 2021. Holders of the outstanding 2025 Notes are able to convert them at any time prior to the close of business on the business day immediately preceding May 1, 2025. Holders of the outstanding 2024 Notes are able to convert them at any time prior to the close of business on the business day immediately preceding August 1, 2024. Upon conversion, holders of the Notes will receive shares of common stock. Any sales in the public market of shares of common stock issued upon conversion of such Notes could adversely affect the trading price of our common stock. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price of our common stock. The issuance and sale of substantial amounts of common stock, or the perception that such issuances and sales may occur, could adversely affect the market price of our common stock and impair our ability to raise capital through the sale of additional equity or convertible debt securities.
Following periods of volatility in a company’s stock price, litigation has often been initiated against companies. Following the decline in our stock price related to the rociletinib regulatory update in November 2015, a number of lawsuits have been filed against us and settled. The remaining litigation related to rociletinib are discussed in Part I, Item 3 - Legal Proceedings. These proceedings and other similar litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business and financial condition.
Our ATHENA clinical trial financing agreement contains a number of covenants and other provisions, which, if violated, could result in the immediate acceleration of our outstanding indebtedness.
Pursuant to our ATHENA clinical trial financing agreement, we are required to repay amounts we borrow from the lenders, capped at specific quarterly amounts, based upon the revenues generated from the sales of Rubraca and other amounts we receive in connection with any out-licensing arrangement or settlement we may enter into with respect to Rubraca. If the total payments made on or prior to December 30, 2025 are less than the total amount borrowed prior to
such time, we also would be required to make an additional lump-sum payment to the lenders equal to the amount of that shortfall on that date. Following that date, quarterly payments continue until the lenders have received payments equal to twice the amount borrowed under the financing agreement.
Pursuant to the financing agreement, we have agreed to certain limitations on our operations, including limitations on dividends, stock repurchases and repayments of certain indebtedness, and to certain covenants, including with respect to the conduct of the ATHENA trial. Our obligations under the financing agreement are secured by first priority security interests in all of our assets related to Rubraca, including intellectual property rights.
If an event of default (including a breach or default under, or termination of, any of our material in-license agreements and defaults under our other material indebtedness) occurs under the financing agreement, the lenders have the right to demand immediate repayment of our obligations, which may be as high as the greater of (x) twice the amount borrowed thereunder and (y) the amount borrowed thereunder plus either $35.0 million (if the payment is made in 2019) or $50.0 million (if the payment is made after 2019).
In addition, if we do not pay our obligations under the financing agreement when due, including at maturity or upon the occurrence of a liquidity event, which includes a change of control of us or upon demand following the occurrence of an event of default, the lenders would have the right to foreclose on the assets we have pledged as collateral and sell those assets, with the proceeds of the sale being applied to repay the indebtedness.
There can be no assurance that we will not breach the covenants or other terms of, or that an event of default will not occur under, the financing agreement and, if a breach or event of default occurs, there can be no assurance that we will be able to obtain necessary waivers or amendments from the lenders or refinance the related indebtedness on terms we find acceptable, or at all. A default under the financing agreement may also trigger defaults under the indentures governing our senior convertible notes.
As a result, any failure to pay our obligations when due, any breach or default of our covenants or other obligations under the financing agreement, or any other event that allows any lender to demand immediate repayment of borrowings, could have a material adverse effect on our business, results of operations, financial condition and prospects. Furthermore, the financing agreement may make us less attractive to potential acquirers; and in the event of a change of control of us, the required discharge of the financing agreement out of our available cash or acquisition proceeds would reduce proceeds available to our stockholders.
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We expect that significant additional capital will be needed in the future to continue our planned operations. To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to those of holders of our common stock.
Shares of common stock that are reserved for future issuance under the Notes will become eligible for sale in the public market to the extent permitted by the terms of the Notes. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
Pursuant to our equity incentive plan(s), our compensation committee (or its designee) is authorized to grant equity-based incentive awards to our employees, directors and consultants. See Part II, Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for the number of shares of our common stock available for future grant under our 2011 Stock Incentive Plan. Future option and restricted stock unit grants and issuances of common stock under our 2011 Plan may have an adverse effect on the market price of our common stock. In addition, a substantial number of shares of our common stock are reserved for issuance upon conversion of the Notes.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third-party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management. These provisions include:
● authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;
● limiting the removal of directors by the stockholders;
● creating a staggered board of directors;
● prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
● eliminating the ability of stockholders to call a special meeting of stockholders;
● permitting our board of directors to accelerate the vesting of outstanding option grants upon certain transactions that result in a change of control; and
● establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware, which may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. Additionally, certain provisions of our outstanding Notes could make it more difficult or more expensive for a third party to acquire us. The repurchase price of the Notes must be paid in cash, and this obligation may have the effect of discouraging, delaying or preventing an acquisition of the Company that would otherwise be beneficial to our security holders.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
There may not be a viable public market for our common stock and as a result it may be difficult for you to sell your shares of our common stock.
Our common stock had not been publicly traded prior to our initial public offering in November 2011. An active trading market for our common stock on the NASDAQ Global Select Market may not be sustained. As a result of these and other factors, you may be unable to resell your shares at a price that is attractive to you or at all. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
Our principal offices are located at five leased facilities, a 29,256 square foot facility in Boulder, Colorado used primarily for corporate functions, a 24,877 square foot facility in San Francisco, CA used for clinical development operations, a 32,660 square foot facility in Oakland, CA used for clinical development operations and research laboratory space, a 11,805 square foot facility in Cambridge, United Kingdom used for our European regulatory and clinical operations and a 393 square foot facility in Milan, Italy used for commercial activities. These leases expire in January 2023, December 2026, April 2028, July 2029 and November 2022, respectively. We also lease office space in several locations throughout Europe. We believe that our existing facilities are sufficient for our needs for the foreseeable future.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS
See Note 13, Commitments and Contingencies.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
Our common stock trades on the NASDAQ Global Select market under the symbol “CLVS”.
On February 12, 2021, there were 23 holders of record of our common stock. The holders of record number do not include a substantially greater number of holders whose shares are held of record in nominee or street name accounts through banks, brokers and/or other financial institutions.
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant. Pursuant to our ATHENA clinical trial financing agreement, we have agreed to limitations on making certain junior payments, including the payment of dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan Information
As of December 31, 2020
Number of
securities
remaining
available
for issuance
under equity
compensation
Weighted-
plans
Number of securities to
average
(excluding
be issued upon exercise
exercise price
securities
of outstanding options
of outstanding
reflected
and restricted stock
options
in column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security holders (1) (2)
9,464,216
$
37.79
6,310,938
Equity compensation plans not approved by security holders
-
-
-
Total
9,464,216
$
37.79
6,310,938
(1)
As of December 31, 2020, 6,470,00 shares were authorized for issuance under our 2020 Stock Incentive Plan (“2020 Plan”), which became effective on April 22, 2020, which is the date the 2020 Plan was approved by our board of directors.
(2)
As of December 31, 2020, 361,656 shares were reserved for issuance under our 2011 Employee Stock Purchase Plan (“ESPP”), which became effective upon closing of our initial public offering in November 2011. The number of shares of our common stock reserved for issuance under the ESPP will be increased at the discretion of our board of directors, on the date of each annual meeting of our stockholders, by up to the lesser of (x) a number of additional shares of our common stock representing 1% of our then-outstanding shares of common stock on such date and (y) 344,828 shares of our common stock.
Performance Graph (1)
The following graph shows a comparison from December 31, 2015 through December 31, 2020 of the cumulative total return on an assumed investment of $100 in cash in our common stock, the NASDAQ Composite Index and the NASDAQ Biotechnology Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the NASDAQ Composite Index and the NASDAQ Biotechnology Index assume reinvestment of dividends.
(1)
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section, and shall not be deemed incorporated by reference into any filing of Clovis Oncology, Inc. under the Securities Act of 1933, as amended.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
SELECTED FINANCIAL DATA
Not required.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, Europe and additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, for those indications that
require them, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use.
Our marketed product Rubraca® (rucaparib), an oral small molecule inhibitor of poly ADP-ribose polymerase (“PARP”), is marketed in the United States for two indications specific to recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer and also an indication specific to metastatic castration-resistant prostate cancer (“mCRPC”). The initial indication received approval from the FDA in December 2016 and covers the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic)-associated epithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with two or more chemotherapies and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. In April 2018, the FDA also approved Rubraca for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The approval in this second, broader and earlier-line indication on a priority review timeline was based on positive data from the phase 3 ARIEL3 clinical trial. Diagnostic testing is not required for patients to be prescribed Rubraca in this maintenance treatment indication.
In May 2020, the FDA approved Rubraca for the treatment of adult patients with mCRPC associated with a deleterious BRCA mutation (germline and/or somatic) who have been treated previously with androgen receptor-directed therapy and a taxane-based chemotherapy. The FDA approved this third indication under accelerated approval based on objective response rate and duration of response data from the TRITON2 clinical trial. We launched Rubraca for this indication in the U.S. following receipt of the approval. As an accelerated approval, continued approval for this indication may be contingent upon verification and description of clinical benefit in confirmatory trials. The TRITON3 clinical trial is expected to serve as the confirmatory study for Rubraca’s approval in mCRPC. In August 2020, the FDA approved the use of Foundation Medicine’s blood-based diagnostic test, FoundationOne Liquid CDx, as a companion diagnostic for the detection of deleterious BRCA mutation (germline and/or somatic) to select mCRPC patients for treatment with Rubraca.
In Europe, the European Commission granted a conditional marketing authorization in May 2018 for Rubraca as monotherapy treatment of adult patients with platinum-sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have been treated with two or more prior lines of platinum-based chemotherapy, and who are unable to tolerate further platinum-based chemotherapy. In January 2019, the European Commission granted a variation to the marketing authorization to include the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. With this approval, Rubraca is authorized in Europe for certain patients in the recurrent ovarian cancer maintenance setting regardless of their BRCA mutation status. Following successful reimbursement negotiations, Rubraca has been launched in each of Germany, United Kingdom, Italy, France, Spain and the Netherlands, and reimbursement is pending in Switzerland.
In December 2020, Rubraca met the primary study endpoint of significantly improving PFS versus chemotherapy in the ARIEL4 confirmatory study. Additional ARIEL4 study results are expected to be submitted for presentation at a medical congress meeting in 2021. ARIEL4 is a Phase 3 multicenter, randomized study of Rubraca versus chemotherapy, which enrolled relapsed ovarian cancer patients with BRCA mutations (inclusive of germline and/or somatic) who had received two or more prior lines of chemotherapy. Completion of ARIEL4 is a post-marketing commitment in the U.S. and Europe.
Beyond our labeled indications, we have a clinical development program underway to further evaluate Rubraca in a variety of solid tumor types, either as monotherapy or in combination with other agents, including several studies as part of our ongoing clinical collaboration with Bristol Myers Squibb to evaluate its immunotherapy Opdivo (nivolumab) in combination with Rubraca. We anticipate initial data of Rubraca monotherapy versus placebo from our ATHENA study in the second half of 2021, with the results of Rubraca versus Opdivo in all study populations a year or more later. However, the timing of the ATHENA data readouts is dependent on the timing of data maturity driven by PFS events.
We initiated the Phase 2 LODESTAR study in December 2019 to evaluate Rubraca as monotherapy treatment in patients with recurrent solid tumors associated with a deleterious mutation in homologous recombination repair genes. Based on our interactions with the FDA, we believe that this study may be registration-enabling for a targeted gene- and tumor-agnostic label, if data from the trial support the potential for an accelerated approval. Assuming enrollment in this
study continues as planned, and subject to the data, we may potentially file an sNDA with the FDA for this indication in the second half of 2021 or the first half of 2022.
Pursuant to our license and collaboration agreement with 3BP, entered into in September 2019, we have initiated development of a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast-activating protein (“FAP”). We have completed sufficient preclinical work to support an IND for the lead candidate under our license and collaboration agreement, designated internally as FAP-2286. Accordingly, we submitted two INDs for FAP-2286 for use as imaging and treatment agents in December 2020 to support an initial Phase 1 study to determine the dose and tolerability of FAP-2286 as a therapeutic agent with expansion cohorts planned in multiple tumor types as part of a global development program. The INDs are expected to become effective following receipt and submission, and acceptance by the FDA, of satisfactory chemistry, manufacturing and controls (“CMC”) data for the imaging agent from clinical sites. The FAP-targeting imaging agent will be utilized to identify tumors that contain FAP for treatment in the Phase 1 LuMIERE clinical study, which we anticipate initiating in the first half of 2021.
In addition to our planned studies, the University of California San Francisco is sponsoring a separate, investigator-initiated, imaging-only study with gallium-68 labeled FAP-2286 (NCT04621435) to evaluate FAP expression in multiple tumor types; their study is currently recruiting. We hold U.S. and global rights to FAP-2286, excluding Europe (defined to include Russia, Turkey and Israel), where 3BP retains rights. We are also collaborating with 3BP on a discovery program directed to up to three additional, undisclosed targets for targeted radionuclide therapy, to which we would obtain global rights for any resulting product candidates.
Lucitanib, our second product candidate currently in clinical development, is an investigational, oral, potent angiogenesis inhibitor which inhibits vascular endothelial growth factor receptors 1 through 3 (“VEGFR1-3”), platelet-derived growth factor receptors alpha and beta (“PDGFR α/β”) and fibroblast growth factor receptors 1 through 3 (“FGFR1-3”). Lucitanib inhibits the same three pathways as Lenvima® (lenvatinib), which has received an FDA approval for use in endometrial cancer in combination with Keytruda® (pembrolizumab), a PD-1 inhibitor. This, together with preclinical data for lucitanib in combination with a PD-1 inhibitor that demonstrated enhanced anti-tumor activity compared to that of single agents, represent a scientific rationale for development of lucitanib in combination with a PD-1 inhibitor, and in February 2019, lucitanib was added to our clinical collaboration with Bristol Myers Squibb. The Clovis-sponsored LIO-1 study of lucitanib in combination with nivolumab in advanced solid tumors and gynecologic cancers is currently enrolling patients in the Phase 2 part of the study. We expect to present interim data from this study at medical meetings in 2021, which are expected to include interim results from the ovarian and endometrial cancer expansion cohorts. We hold the global (excluding China) development and commercialization rights for lucitanib.
We commenced operations in April 2009. To date, we have devoted substantially all of our resources to identifying and in-licensing product candidates, performing development activities with respect to those product candidates and the general and administrative support of these operations. For the year ended December 31, 2020, we generated $164.5 million product revenue related to sales of Rubraca. We have principally funded our operations using the net proceeds from public offerings of our common stock, convertible senior notes offerings and our financing agreement related to our ATHENA trial.
We have never been profitable and, as of December 31, 2020, we had an accumulated deficit of $2,612.7 million. We incurred net losses of $369.2 million, $400.4 million and $368.0 million for the years ended December 31, 2020, 2019 and 2018, respectively, and had cash and cash equivalents totaling $240.2 million at December 31, 2020.
We expect to incur significant losses for the foreseeable future, as we incur costs related to commercial activities associated with Rubraca. Based on current estimates, we believe that our cash, cash equivalents and liquidity available under our financing agreement related to our ATHENA trial will allow us to fund our operating plan through at least the next 12 months. Until we can generate a sufficient amount of revenue from Rubraca, we expect to finance our operations in part through additional public or private equity or debt offerings and may seek additional capital through arrangements with strategic partners or from other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so.
Product License Agreements
For a discussion of our product license agreements, see Note 14, License Agreements, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Financial Operations Overview
Revenue
During 2020, we recorded $164.5 million in revenue related to sales of Rubraca. For further discussion of our revenue recognition policy, see “Critical Accounting Policies and Significant Judgments and Estimates” below. Our ability to generate revenue and become profitable depends upon our ability to successfully commercialize products. Any inability on our part to successfully commercialize Rubraca in the United States, Europe and any foreign territories where it may be approved, or any significant delay in such approvals, could have a material adverse impact on our ability to execute upon our business strategy and, ultimately, to generate sufficient revenues from Rubraca to reach or maintain profitability or sustain our anticipated levels of operations.
We supply commercially labeled Rubraca free of charge to eligible patients who qualify due to financial need through our patient assistance program and the majority of these patients are on Medicare. This product is distributed through a separate vendor who administers the program on our behalf. It is not distributed through our specialty distributor and specialty pharmacy network. This product is neither included in the transaction price nor the variable considerations to arrive at product revenue. Manufacturing costs associated with this free product is included in selling, general and administrative expenses. For the year ended December 31, 2020 and 2019, the supply of this free drug was approximately 17% and 20%, respectively, of the overall commercial supply or the equivalent of $30.4 million and $34.8 million, respectively, in commercial value.
Our ability to generate product revenue for the year ended December 31, 2020 was negatively affected by the COVID-19 pandemic due to fewer diagnoses and fewer patients going to in-person office visits as oncology practices and patients continue to adapt to the impact of the virus. As a result of the COVID-19 pandemic, our U.S. and European sales forces have had physical access to hospitals, clinics, doctors and pharmacies curtailed and/or have been limited. Our European launches in Italy, Spain and France occurred in an environment in which our field-based personnel in those countries have not been allowed to visit hospitals since late February 2020. Similarly, we launched Rubraca for prostate cancer in the U.S beginning in May 2020, but our physical access to hospital, clinics, doctors and pharmacies has been limited.
Research and Development Expenses
Research and development expenses consist of costs incurred for the development of our product candidates and companion diagnostics, which include:
● license fees and milestone payments related to the acquisition of in-licensed products, which are reported on our Consolidated Statements of Operations and Comprehensive Loss as acquired in-process research and development;
● employee-related expenses, including salaries, benefits, travel and share-based compensation expense;
● expenses incurred under agreements with CROs and investigative sites that conduct our clinical trials;
● the cost of acquiring, developing and manufacturing clinical trial materials;
● costs associated with non-clinical activities and regulatory operations;
● market research and disease education; and
● activities associated with the development of companion diagnostics for our product candidates.
Research and development costs are expensed as incurred. License fees and milestone payments related to in-licensed products and technology are expensed if it is determined that they have no alternative future use. Costs for certain development activities, such as clinical trials and manufacturing of clinical supply, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors. Our research and development expenses decreased for 2020 compared to 2019. We expect research and development costs to be lower in the full year 2021 compared to 2020.
We did not see material disruption to our clinical trials as a result of the COVID-19 pandemic for the year ended December 31, 2020 as we completed target enrollment of ATHENA, our largest clinical trial, during the second quarter. However, we may see disruption during 2021. For example, new patient recruitment in certain clinical studies may be affected and the conduct of clinical trials may vary by geography as some regions are more adversely affected. Additionally, we may slow or delay enrollment in certain trials to manage expenses.
The following table identifies research and development and acquired in-process research and development costs on a program-specific basis for our products under development. Personnel-related costs, depreciation and share-based compensation are not allocated to specific programs, as they are deployed across multiple projects under development and, as such, are separately classified as personnel and other expenses in the table below.
Year Ended December 31,
(in thousands)
Rucaparib Expenses
Research and development
$
159,364
$
184,617
$
153,083
Rucaparib Total
159,364
184,617
153,083
FAP Expenses
Research and development
6,928
3,633
Acquired in-process research and development
-
9,440
-
FAP Total
6,928
13,073
-
Lucitanib Expenses
Research and development
6,860
5,128
Lucitanib Total
6,860
5,128
Rociletinib Expenses
Research and development
(1,089)
1,101
2,391
Rociletinib Total
(1,089)
1,101
2,391
Personnel and other expenses
85,644
88,667
75,087
Total
$
257,707
$
292,586
$
231,347
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of salaries and related costs for personnel in executive, commercial, finance, legal, investor relations, human resources and information technology functions. Other general and administrative expenses include facilities expenses, communication expenses, information technology costs, corporate insurance and professional fees for legal, consulting and accounting services. With the FDA approval of Rubraca on December 19, 2016, all sales and marketing expenses associated with Rubraca are included in selling, general and administrative expenses. As a result of the COVID-19 pandemic, our U.S. and European sales forces have had physical access to hospitals, clinics, doctors and pharmacies curtailed and/or have been limited, which have decreased sales and marketing expenses during 2020 and will extend to 2021. In addition, due to increased travel restrictions, quarantines, “work-at-home” and “shelter-in-place” orders and extended shutdown of certain non-essential business in the United States, and European and Asia-Pacific countries, in-person conferences and meetings requiring travel have and will continue to decrease resulting in a decrease of our selling, general and administrative expenses.
The COVID-19 pandemic has accelerated a preference by oncology practices for more digital programming, including digital, peer-to-peer interactions and reduced in-person promotion. In order to meet these changing preferences, we are adopting a hybrid commercial strategy combining increased digital promotion activities, greater online resources and more peer-to-peer interactions with reduced and more targeted in-person promotion. Accordingly, new tools and performance indicators based on this hybrid approach were rolled out during the fourth quarter, and the U.S. commercial organization was reduced in size by approximately 45 employees during the fourth quarter. Despite increased investment in digital promotion, we anticipate an effect of adopting this hybrid model will result in annual cost-savings of approximately $10.0 million. We are adopting this strategy in order to better reach customers in the way they want to be reached with the goal of returning to growth, especially as the ongoing impact of COVID-19 is reduced.
Acquired In-Process Research and Development Expenses
Acquired in-process research and development expenses consist of upfront payments to acquire a new drug compound, as well as subsequent milestone payments. Acquired in-process research and development payments are immediately expensed provided that the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use. Once regulatory approval is received, payments to acquire rights, and the related milestone payments, are capitalized and the amortization of such assets recorded to product cost of sales.
Other Income and Expense
Other income and expense are primarily comprised of foreign currency gains and losses resulting from transactions with CROs, investigational sites and contract manufacturers where payments are made in currencies other than the U.S. dollar. Other expense also includes interest expense recognized related to our convertible senior notes.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, revenue and related disclosures. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue, intangible asset impairment, clinical trial accruals and share-based compensation expense. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. We believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We are currently approved to sell Rubraca in the United States and the EU markets. We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently sell our products to patients and health care providers. Separately, we have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts.
Revenue from product sales are recognized when the performance obligation is satisfied, which is when customers obtain control of our product at a point in time, typically upon delivery. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less.
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from price concessions that include rebates, chargebacks, discounts, co-pay assistance, estimated product returns and other allowances that are offered within contracts between us and our customers, health care providers, payors and other indirect customers relating to the sales of our product. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable or a current liability. Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we adjust these estimates, which would affect product revenue and earnings in the period such variances become known.
For the year ended December 31, 2020, we recognized $164.5 million of product revenue. For a complete discussion of the accounting for product revenue, see Note 3, Revenue Recognition.
Accrued Research and Development Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include:
● fees paid to CROs in connection with clinical studies;
● fees paid to investigative sites in connection with clinical studies;
● fees paid to vendors in connection with non-clinical development activities;
● fees paid to vendors associated with the development of companion diagnostics; and
● fees paid to vendors related to product manufacturing, development and distribution of clinical supplies.
We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.
Share-Based Compensation
Determining the amount of share-based compensation to be recorded requires us to develop estimates of the fair value of stock options as of their grant date. Compensation expense is recognized over the vesting period of the award. Calculating the fair value of share-based awards requires that we make highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Use of this valuation methodology requires that we make assumptions as to the expected dividend yield, price volatility of our common stock, the risk-free interest rate for a period that approximates the expected term of our stock options and the expected term of our stock options. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends.
The fair value of stock options for the years ended December 31, 2020, 2019 and 2018 was estimated at the grant date using the following weighted average assumptions for the respective periods:
Year Ended December 31,
Dividend yield
-
-
-
Volatility (a)
%
%
%
Risk-free interest rate (b)
0.49
%
1.67
%
2.92
%
Expected term (years) (c)
6.0
5.9
5.9
(a)
Volatility: The expected volatility was estimated using our historical data.
(b)
Risk-free interest rate: The rate is based on the yield on the grant date of a zero-coupon U.S. Treasury bond whose maturity period approximates the option’s expected term.
(c)
Expected term: The expected term of the award was estimated using our historical data.
We recognized share-based compensation expense of approximately $50.8 million, $54.3 million and $49.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, the unrecognized share-based compensation expense related to unvested options, adjusted for expected forfeitures, was $18.1 million, which is expected to be recognized over a weighted-average remaining vesting period of 1.5 years. As of December 31, 2020, the unrecognized share-based compensation expense related to RSUs, adjusted for expected forfeitures, was $33.6 million, which is expected to be recognized over an estimated weighted-average remaining vesting period of 2.2 years. We expect our share-based compensation to continue to grow in future periods due to the potential increases in the value of our common stock and headcount.
We estimate the level of forfeitures expected to occur and record compensation expense only for those awards that we ultimately expect will vest.
Inventory
Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out (“FIFO”) basis. Inventories include active pharmaceutical ingredient (“API”), contract manufacturing costs and overhead allocations. We begin capitalizing incurred inventory related costs upon regulatory approval. Prior to regulatory approval, incurred costs for the manufacture of drugs that could potentially be available to support the commercial launch of our products are recognized as research and development expense.
We regularly analyze our inventory levels for excess quantities and obsolescence (expiration), considering factors such as historical and anticipated future sales compared to quantities on hand and the remaining shelf-life of Rubraca. Rubraca finished goods have a shelf-life of four years from the date of manufacture. We expect to sell the finished goods prior to expiration. The API currently has a shelf-life of four years from the date of manufacture but can be retested at an immaterial cost with no expected reduction in potency, thereby extending its shelf-life as needed. We expect to consume substantially all of the API over a period of approximately seven years based on our long-range sales projections of Rubraca.
We write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and/or inventory in excess of expected sales requirements. Expired inventory would be disposed of and the related costs would be written off as cost of product revenue. Inventories that are not expected to be consumed within 12 months following the balance sheet date are classified as long-term inventories. Long-term inventories primarily consist of API.
API is currently produced by Lonza. As the API has undergone significant manufacturing specific to its intended purpose at the point it is purchased by us, we classify the API as work-in-process inventory. In addition, we currently manufacture Rubraca finished goods with a single third-party manufacturer. The disruption or termination of the supply of API or the disruption or termination of the manufacturing of our commercial products could have a material adverse effect on our business, financial position and results of operations. API that is written off due to damage and certain costs related to our dedicated production train at Lonza are included in Other Operating Expenses in the Consolidated Statements of Operations and Comprehensive Loss.
Inventory used in clinical trials is expensed as research and development expense when it has been identified for such use.
At December 31, 2020, we had $30.7 million of current inventory and $104.1 million of long-term inventory.
Intangible Assets
Definite-lived intangible assets related to capitalized milestones under license agreements are amortized on a straight-line basis over their remaining useful lives, which are estimated to be the remaining patent life. If our estimate of the product’s useful life is shorter than the remaining patent life, then a shorter period is used. Amortization expense is recorded as a component of cost of sales in the Consolidated Statements of Operations and Comprehensive Loss.
Intangible assets are evaluated for impairment at least annually in the fourth quarter or more frequently if impairment indicators exist. Events that could result in an impairment, or trigger an interim impairment assessment, include the decision to discontinue the development of a drug, the receipt of additional clinical or nonclinical data regarding our drug candidate or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug. In connection with any impairment assessment, the fair value of the intangible assets as of the date of assessment is compared to the carrying value of the intangible asset. Impairment losses are recognized if the carrying value of an intangible asset is both not recoverable and exceeds its fair value.
Results of Operations
Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019 (in thousands)
Year ended December 31,
U.S.
ex-U.S.
Total
U.S.
ex-U.S.
Total
Transaction price
$
178,427
$
36,035
$
214,462
$
160,450
$
7,867
$
168,317
Sales deductions:
Government rebates and chargebacks
(19,620)
(16,312)
(35,932)
(13,437)
(1,771)
(15,208)
Discounts and fees
(12,548)
(1,460)
(14,008)
(9,826)
(277)
(10,103)
Total sales deductions
(32,168)
(17,772)
(49,940)
(23,263)
(2,048)
(25,311)
Product revenue
146,259
18,263
164,522
137,187
5,819
143,006
Operating expenses:
External cost of sales - product
29,526
6,602
36,128
28,179
1,747
29,926
Cost of sales - intangible asset amortization
2,287
2,890
5,177
1,956
2,804
4,760
Research and development
249,444
8,263
257,707
275,518
7,628
283,146
Selling, general and administrative
139,455
24,439
163,894
161,132
21,637
182,769
Acquired in-process research and development
-
-
-
9,440
-
9,440
Other operating expenses
3,804
-
3,804
9,711
-
9,711
Total expenses
424,516
42,194
466,710
485,936
33,816
519,752
Operating loss
(278,257)
(23,931)
(302,188)
(348,749)
(27,997)
(376,746)
Other income (expense):
Interest expense
(30,508)
(19,405)
Foreign currency loss
(72)
(547)
(Loss) gain on extinguishment of debt
(3,277)
18,480
Loss on convertible senior notes conversion
(35,075)
-
Legal settlement loss
-
(26,750)
Other income
1,361
6,342
Other income (expense), net
(67,571)
(21,880)
Loss before income taxes
(369,759)
(398,626)
Income tax benefit (expense)
(1,798)
Net loss
$
(369,212)
$
(400,424)
Product Revenue. Product revenue for the year ended December 31, 2020 increased compared to the same period in the prior year primarily due to continued growth in sales of Rubraca, which is approved for sale in the United States and Europe markets. Following successful reimbursement negotiations, Rubraca has been launched in countries in Europe throughout 2019 and 2020. In May 2020, the FDA approved Rubraca as a monotherapy treatment of adult patients with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer and we have launched Rubraca for prostate
cancer in the U.S. Product revenue is recorded net of variable considerations comprised of rebates, chargebacks and other discounts. Product revenue for the year ended December 31, 2020 was $146.3 million in the United States and $18.2 million outside of the United States. Variable considerations represented 23.3% and 15.0% of the transaction price recognized in the year ended December 31, 2020 and 2019, respectively. The increase in variable considerations is primarily due to the European National Health Service rebates related to our sales in Europe. Countries in Europe contract larger government rebates and discounts compared to the U.S. contributing to the overall increase in variable considerations. As sales in Europe increase in percentage terms compared to the U.S., variable considerations will also increase. In the United States, PHS chargebacks increased during the year ended December 31, 2020 compared to the prior year. In addition, in the United States, GPO discounts increased during the year ended December 31, 2020 and beginning in January 2020, we began providing payor rebates, which is included in discounts and fees for the year ended December 31, 2020.
Cost of Sales - Product. Product cost of sales for the year ended December 31, 2020 increased primarily due to the increase in product revenue. Product cost of sales primarily relate to manufacturing, freight and royalties costs associated with Rubraca sales in the period.
U.S. product cost of sales for the year ended December 31, 2020 increased $1.3 million compared to the same period in the prior year due to the increase in product revenue.
Ex-U.S. product cost of sales for the year ended December 31, 2020 increased $4.9 million compared to the same period in the prior year due to the increase in product revenue.
Cost of Sales - Intangible Asset Amortization. For the year ended December 31, 2020 and 2019, we recognized cost of sales of $5.2 million and $4.8 million, respectively, associated with the amortization of capitalized milestone payments related to the approvals of Rubraca by the FDA and the European Commission.
Research and Development Expenses. Except for activities related to medical research and disease education, research and development expenses are attributable to our U.S. segment. Research and development expenses decreased during the year ended December 31, 2020 compared to the same period in the prior year primarily due to lower research and development costs for Rubraca. The decrease related to our TRITON studies for prostate cancer, our ARIEL studies for ovarian cancer, discontinuation of our ATLAS study, diagnostic development costs and personnel costs. These decreases were partially offset by increased costs related to our ATHENA combination study with Bristol Myers Squibb’s immunotherapy OPDIVO for ovarian cancer. The ATHENA study was initiated in the second quarter of 2018 and we completed target enrollment during the second quarter of 2020. In addition, research and development costs related to FAP and lucitanib have increased since the prior year.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased during the year ended December 31, 2020 compared to the same period in the prior year due to a decrease of $13.1 million in marketing costs and $3.2 million in share-based compensation expense. In addition, there was a decrease of $4.0 million in travel due to the COVID-19 pandemic.
U.S. selling, general and administrative expenses decreased $21.7 million during the year ended December 31, 2020 compared to the same period in the prior year due to decreases in marketing costs, share-based compensation expense and a decrease in travel due to the COVID-19 pandemic.
Ex-U.S. selling, general and administrative expenses increased $2.8 million during the year ended December 31, 2020 compared to the same period in the prior year due to the commercial activities related to the Rubraca launches in European countries during 2020.
Acquired In-Process Research and Development Expenses. Upon the signing of the license and collaboration agreement with 3BP in September 2019, we made a $9.4 million upfront payment to 3BP, which is related to our U.S. segment.
Other Operating Expenses. During the year ended December 31, 2020, we recognized other operating expenses related to the write off of some damaged API and certain costs related to our dedicated production train at Lonza, which is related to our U.S. segment. We expect these expenses to increase during 2021 related to our fixed facility fee each quarter since we expect to have sufficient inventory and do not plan to produce inventory at Lonza during 2021.
Interest Expense. Interest expense increased during the year ended December 31, 2020 compared to the same period in the prior year due to the May 2019 financing agreement related to our ATHENA trial. In addition, our convertible senior notes transactions during the year resulted in the write off of $4.3 million of unamortized debt issuance costs, which was recorded as interest expense.
Loss/Gain on Extinguishment of Debt. In April 2020, we entered into a privately negotiated exchange agreement with a Holder of our 2021 Notes, pursuant to which we issued to such Holder of the 2021 Notes approximately $36.1 million in additional 2024 Notes (2019 Issuance) of our currently outstanding 2024 Notes (2019 Issuance) in exchange for approximately $32.8 million in aggregate principal of 2021 Notes held by such Holder, which resulted in a $3.3 million loss on extinguishment of debt.
In August 2019, we repurchased $190.3 million aggregate principal amount of our outstanding 2021 Notes and $2.0 million of accrued interest for an aggregate repurchase price of $171.8 million. This repurchase resulted in the write off of $2.0 million in unamortized debt issuance costs and the recognition of $18.5 million gain on extinguishment of debt.
Loss on Convertible Senior Notes Conversion. In January 2020, we completed a registered direct offering of an aggregate 17,777,679 shares of our common stock at a price of $9.25 per share. We used the proceeds of the share offering to repurchase an aggregate of $123.4 million principal amount of 2024 Notes (2019 Issuance) in privately negotiated transactions. In addition, we paid customary fees and expenses in connection with the transactions. These transactions resulted in a loss of $7.8 million for the year ended December 31, 2020.
In November 2020, we entered into a privately negotiated exchange and purchase agreement with a holder of our 2024 Notes (2019 Issuance). Pursuant to the agreement, in exchange for approximately $64.8 million aggregate principal amount of 2024 Notes (2019 Issuance) held by the holder, we agreed to issue to the holder a number shares of our common stock (the “Exchanged Shares”) utilizing an exchange ratio that is based in part on the daily volume-weighted average prices (“VWAPs”) per share of our common stock during a seven-day pricing period following execution of the agreement.
The number of Exchanged Shares was calculated utilizing an exchange ratio that is based in part on the average VWAPs of our common stock (subject to a floor) during a seven-day pricing period beginning on November 5, 2020 and ending on, and including, November 13, 2020. In November 2020, we issued 15,112,848 Exchanged Shares pursuant to the debt exchange transaction. As a result, we recognized a $27.3 million loss on the transactions.
Legal Settlement Loss. During the second quarter of 2019, we recorded a charge of $26.8 million to settle a complaint filed by Antipodean Domestic Partners.
Other Income. Other income decreased during the year ended December 30, 2020 due to interest income earned on our available-for-sale securities. We did not have available-for-sale securities starting with the quarter ended June 30, 2020 through December 31, 2020.
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018 (in thousands)
Year ended December 31,
U.S.
ex-U.S.
Total
U.S.
ex-U.S.
Total
Transaction price
$
160,450
$
7,867
$
168,317
$
106,479
$
-
$
106,479
Sales deductions:
Government rebates and chargebacks
(13,437)
(1,771)
(15,208)
(6,379)
-
Discounts and fees
(9,826)
(277)
(10,103)
(4,712)
-
Total sales deductions
(23,263)
(2,048)
(25,311)
(11,091)
-
(11,091)
Product revenue
137,187
5,819
143,006
95,388
-
95,388
Operating expenses:
Cost of sales - product
28,179
1,747
29,926
19,444
-
19,444
Cost of sales - intangible asset amortization
1,956
2,804
4,760
1,954
2,630
Research and development
275,518
7,628
283,146
226,925
4,422
231,347
Selling, general and administrative
161,132
21,637
182,769
161,743
14,038
175,781
Acquired in-process research and development
9,440
-
9,440
-
-
-
Other operating expenses
9,711
-
9,711
-
-
-
Total expenses
485,936
33,816
519,752
410,066
19,136
429,202
Operating loss
(348,749)
(27,997)
(376,746)
(314,678)
(19,136)
(333,814)
Other income (expense):
Interest expense
(19,405)
(13,183)
Foreign currency loss
(547)
(346)
Gain on extinguishment of debt
18,480
-
Legal settlement loss
(26,750)
(27,975)
Other income
6,342
7,917
Other income (expense), net
(21,880)
(33,587)
Loss before income taxes
(398,626)
(367,401)
Income tax benefit (expense)
(1,798)
(608)
Net loss
$
(400,424)
$
(368,009)
Product Revenue. Product revenue for the year ended December 31, 2019 increased primarily due to continued growth in sales of Rubraca, which is approved for sale in the United States and Europe markets. We completed our launch of Rubraca as maintenance therapy in Germany and the UK in March 2019. Product revenue is recorded net of variable considerations comprised of rebates, chargebacks and other discounts. Product revenue for the year ended December 31, 2019 was $137.2 million in the United States and $5.8 million outside of the United States. Variable considerations represented 15.0% and 10.4% of the transaction price recognized in the year ended December 31, 2019 and 2018, respectively. This increase is primarily due to government and group purchasing organization rebates; in addition, our launch in Germany and the UK in March 2019 contributed to the increase.
U.S. product revenue for the year ended December 31, 2019 increased $41.8 million compared to the same period in the prior year due to continued growth in sales of Rubraca.
Ex-U.S. product revenue for the year ended December 31, 2019 increased $5.8 million compared to the same period in the prior year due to our launch of Rubraca as maintenance therapy in Germany and the UK in March 2019.
Cost of Sales - Product. Product cost of sales for the year ended December 31, 2019 increased due to the increase in product revenue. Product cost of sales primarily relate to manufacturing, freight and royalties costs associated with Rubraca sales in the period.
U.S. product cost of sales for the year ended December 31, 2019 increased $8.7 million compared to the same period in the prior year due to the increase in product revenue.
Ex-U.S. product cost of sales for the year ended December 31, 2019 increased $1.7 million compared to the same period in the prior year due to the increase in product revenue.
Cost of Sales - Intangible Asset Amortization. For the year ended December 31, 2019 and 2018, we recognized cost of sales of $4.8 million and $2.6 million, respectively, associated with the amortization of capitalized milestone payments related to the approvals of Rubraca by the FDA and the European Commission.
Research and Development Expenses. Except for activities related to medical research and disease education, research and development expenses are attributable to our U.S. segment. Research and development expenses increased during the year ended December 31, 2019 due to higher research and development costs for Rubraca. Clinical trial costs for Rubraca were higher compared to the same period a year ago due to increased enrollment in our TRITON3 study for prostate cancer. We have increased costs related to our new ATLAS study for bladder cancer and our ATHENA combination study with Bristol Myers Squibb Company’s immunotherapy OPDIVO for ovarian cancer. Since our ATLAS study for bladder cancer was discontinued in April 2019, costs for this study decreased during the remainder of 2019. In addition, personnel costs increased during the year ended December 31, 2019 due to higher headcount to support increased Rubraca clinical trial activities.
Clinical trial costs for lucitanib were $4.3 million higher than the year ended December 31, 2018 primarily due to increase enrollment in our Phase 1b/2 studies. In addition, we incurred $3.6 million for FAP-2286 as we have begun to pursue a clinical development program in multiple tumor types.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased during the year ended December 31, 2019 primarily due to increased commercialization activities for Rubraca and the increase of costs associated with building out the European infrastructure for commercialization which began in March 2019. This includes an increase of $4.3 million in personnel costs and $3.6 million in marketing costs. These increases were primarily related to our ex-U.S. segment.
Acquired In-Process Research and Development Expenses. Upon the signing of the license and collaboration agreement with 3BP in September 2019, we made a $9.4 million upfront payment to 3BP, which is related to our U.S. segment.
Other Operating Expenses. During the year ended December 31, 2019, we recognized other operating expenses related to the write off of some damaged API and certain costs related to our dedicated production train at Lonza, which is related to our U.S. segment.
Interest Expense. Interest expense increased during the year ended December 31, 2019 due to the issuance of the 2025 Notes in April 2018 and the 2024 Notes in August 2019.
Legal Settlement Loss. During the second quarter of 2019, we recorded a charge of $26.8 million to settle a complaint filed by Antipodean Domestic Partners (the “Antipodean Complaint”). During the first quarter of 2018, we recorded a charge of $8.0 million related to an agreement to resolve a potential litigation claim against us and our officers. We also recorded a charge of $20.0 million related to an agreement reached with the SEC to resolve its investigation.
Gain on Extinguishment of Debt. In August 2019, we repurchased $190.3 million principal amount of the outstanding 2021 Notes and $2.0 million of accrued interest for an aggregate repurchase price of $171.8 million. This repurchase resulted in the write off of $2.0 million in unamortized debt issuance costs and the recognition of $18.5 million gain on extinguishment of debt.
Other Income. Other income decreased during the year ended December 31, 2019 due to interest income earned on our available-for-sale securities.
Liquidity and Capital Resources
To date, we have principally funded our operations using the net proceeds from public offerings of our common stock, convertible senior notes offerings and our financing agreement related to our ATHENA trial.
The following table sets forth the primary sources and uses of cash for each of the periods set forth below:
Year Ended December 31,
(in thousands)
Net cash used in operating activities
$
(252,728)
$
(323,615)
$
(365,997)
Net cash provided by (used in) investing activities
126,328
143,398
(264,242)
Net cash provided by financing activities
203,644
119,888
388,464
Effect of exchange rate changes on cash and cash equivalents
1,152
(547)
Net increase (decrease) in cash and cash equivalents
$
78,396
$
(60,043)
$
(242,322)
Operating Activities
Net cash used in operating activities resulted primarily from our net losses adjusted for non-cash items and changes in components of working capital. Net cash used in operating activities was lower during the year ended December 31, 2020 compared to the same period in the prior year primarily due to a lower net loss, as adjusted for non-cash items related to our debt transactions. In addition, there was a reduction in payments made for inventory during the period partially offset by payments made for prepaid and accrued research and development expenses.
Net cash used in operating activities resulted primarily from our net losses adjusted for non-cash items and changes in components of working capital. Net cash used in operating activities was lower during the year ended December 31, 2019 compared to prior year primarily due to higher amounts paid for inventory during the year ended December 31, 2018, partially offset by a higher net loss as adjusted for non-cash items primarily due to legal settlement loss and gain on extinguishment of debt.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2020 included sales of available-for-sale securities of $144.6 million, partially offset by purchases of available-for-sale securities of $10.0 million and a milestone payment of $8.0 million.
Net cash provided by investing activities for the year ended December 31, 2019 included sales of available-for-sale securities of $622.0 million partially offset by purchases of available-for-sale securities of $459.8 million and milestone payments of $15.8 million.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2020 included proceeds of $246.7 million from the issuance of common stock, proceeds of $56.6 million from the issuance of our 2024 Notes (2020 Issuance), partially offset by a $164.4 million payment of our 2024 Notes. In addition, we had $65.1 million proceeds from borrowings under our financing agreement.
Net cash provided by financing activities for the year ended December 31, 2019 included proceeds of $254.9 million from the issuance of our 2024 Notes (2019 Issuance), $32.9 million proceeds from borrowings under our financing agreement and $3.3 million received from employee stock option exercises and issuance of stock under the employee stock purchase plan, partially offset by the $170.0 million extinguishment of a portion of our 2021 Notes.
Operating Capital Requirements
Rubraca is approved in the United States and Europe for multiple indications. We expect to incur significant losses for the foreseeable future, as we commercialize Rubraca and as we complete research and development activities related to FAP-2286 and lucitanib.
As of December 31, 2020, we had cash and cash equivalents totaling $240.2 million and total current liabilities of $184.9 million.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including but not limited to:
● the number and characteristics of the product candidates, companion diagnostics and indications we pursue;
● the achievement of various development, regulatory and commercial milestones resulting in required payments to partners pursuant to the terms of our license agreements;
● the scope, progress, results and costs of researching and developing our product candidates and related companion diagnostics and conducting clinical and non-clinical trials;
● the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates and companion diagnostics;
● the cost of commercialization activities, including marketing and distribution costs;
● the cost of manufacturing any of our product candidates we successfully commercialize;
● the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and outcome of such litigation; and
● the timing, receipt and amount of sales, if any, of our products.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations at December 31, 2020 (in thousands):
Less than 1
More Than 5
Year
1 to 3 Years
3 to 5 Years
Years
Total
Convertible senior notes
$
64,418
$
-
$
443,282
$
-
$
507,700
Interest on convertible senior notes
11,338
20,396
8,789
-
40,523
Financing agreement (principal and interest)
-
50,025
94,259
55,227
199,511
Operating lease commitments
5,796
10,167
9,893
9,938
35,794
Finance lease commitments
2,287
4,574
4,574
-
11,435
Purchase and other commitments (a)
13,616
27,232
27,232
-
68,080
Total
$
97,455
$
112,394
$
588,029
$
65,165
$
863,043
(a)
On October 3, 2016, we entered into a Manufacturing and Services Agreement (the “Agreement”) with a non-exclusive third-party supplier for the production of the active ingredient for Rubraca. Under the terms of the Agreement, we will provide the third-party supplier a rolling forecast for the supply of the active ingredient in Rubraca that will be updated by us on a quarterly basis. We are obligated to order material sufficient to satisfy an initial quantity specified in any forecast. In addition, the third-party supplier constructed, in its existing facility, a production train that is exclusively dedicated to the manufacture of the Rubraca active ingredient. We are obligated to make scheduled capital program fee payments toward capital equipment and other costs associated with the construction of the dedicated production train. Once the facility became operational in October 2018, we are obligated to pay a fixed facility fee each quarter for the duration of the Agreement, which expires on December 31, 2025, unless extended by mutual consent of the parties.
Royalty and License Fee Commitments
Rubraca. We have certain obligations under licensing agreements with third parties contingent upon achieving various development, regulatory and commercial milestones. On August 30, 2016, we entered into a first amendment to the worldwide license agreement with Pfizer, which amends the June 2011 existing worldwide license agreement to permit us to defer payment of the milestone payments payable upon (i) FDA approval of an NDA for 1st Indication in US and (ii) European Commission approval of an MAA for 1st Indication in the EU, to a date that is 18 months after the date of achievement of such milestones.
On December 19, 2016, Rubraca received its initial FDA approval. This approval resulted in a $0.75 million milestone payment to Pfizer as required by the license agreement, which was paid in the first quarter of 2017. This FDA approval also resulted in an obligation to pay a $20.0 million milestone payment, for which we exercised the option to defer payment by agreeing to pay $23.0 million within 18 months after the date of the FDA approval. We paid the $23.0 million milestone payment in June 2018.
In April 2018, Rubraca received a second FDA approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in April 2018.
In May 2018, Rubraca received its initial European Commission marketing authorization. This approval resulted in an obligation to pay a $20.0 million milestone payment, which we paid in June 2018.
In January 2019, Rubraca received a second European Commission approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in February 2019.
In June 2019, we paid a $0.75 million milestone payment due to the launch of Rubraca as maintenance therapy in Germany in March 2019.
In May 2020, Rubraca received a third FDA approval for Rubraca as a monotherapy treatment of adult patients with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer. This approval resulted in an obligation to pay an $8.0 million milestone payment, which we paid in June 2020.
These milestone payments were recognized as intangible assets and are amortized over the estimated remaining useful life of Rubraca.
We are obligated under the license agreement to use commercially reasonable efforts to develop and commercialize Rubraca and we are responsible for all ongoing development and commercialization costs for Rubraca. We are required to make regulatory milestone payments to Pfizer of up to an additional $8.0 million in aggregate if specified clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we are obligated to make sales milestone payments to Pfizer if specified annual sales targets for Rubraca are met, which relate to annual sales targets of $250.0 million and above, which, in the aggregate, could amount to total milestone payments of $170.0 million, and tiered royalty payments at a mid-teen percentage rate on net sales, with standard provisions for royalty offsets to the extent we need to obtain any rights from third parties to commercialize Rubraca.
Lucitanib. On November 19, 2013, we acquired all of the issued and outstanding capital stock of EOS pursuant to the terms set forth in that certain Stock Purchase Agreement, dated as of November 19, 2013 (the “Stock Purchase Agreement”), by and among the Company, EOS, its shareholders (the “Sellers”) and Sofinnova Capital V FCPR, acting in its capacity as the Sellers’ representative. Following the acquisition, EOS became a wholly-owned subsidiary of the Company. Under the terms of the Stock Purchase Agreement, in addition to the initial purchase price paid at the time of the closing of the acquisition and other license fees due to Advenchen described below, we will also be obligated to pay to the Sellers a milestone payment of $65.0 million upon obtaining the first NDA approval from the FDA with respect to lucitanib.
In October 2008, Ethical Oncology Science, S.p.A. (“EOS”) (now known as Clovis Oncology Italy S.r.l.) entered into an exclusive license agreement with Advenchen Laboratories LLC (“Advenchen”) to develop and commercialize lucitanib on a global basis, excluding China.
We are obligated to pay Advenchen tiered royalties at percentage rates in the mid-single digits on net sales of lucitanib, based on the volume of annual net sales achieved. In addition, after giving effect to the first and second amendments to the license agreement, we are required to pay to Advenchen 25% of any consideration, excluding royalties, we receive from sublicensees, in lieu of the milestone obligations set forth in the agreement. We are obligated under the agreement to use commercially reasonable efforts to develop and commercialize at least one product containing lucitanib, and we are also responsible for all remaining development and commercialization costs for lucitanib.
The license agreement with Advenchen will remain in effect until the expiration of all of our royalty obligations to Advenchen, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Advenchen can terminate the agreement, resulting in a loss of our rights to lucitanib.
FAP. In September 2019, we entered into a global license and collaboration agreement with 3BP to develop and commercialize a PTRT and imaging agent targeting FAP. The lead candidate, designated internally as FAP-2286, is being developed pursuant to a global development plan agreed to by the parties. We are responsible for the costs of all
preclinical and clinical development activities described in the plan, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the preclinical development phase of the collaboration. Upon the signing of the license and collaboration agreement in September 2019, we made a $9.4 million upfront payment to 3BP, which we recognized as acquired in-process research and development expense.
Pursuant to the terms of the FAP agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP single- to low-double-digit royalties on net sales of the FAP-targeted therapeutic product and imaging agent, based on the volume of annual net sales achieved. In addition, 3BP is entitled to receive 34% of any consideration, excluding royalties on the therapeutic product, pursuant to any sublicenses we may grant.
We are obligated under the license and collaboration agreement to use diligent efforts to develop FAP-2286 and commercialize a FAP-targeted therapeutic product and imaging agent, and we are responsible for all commercialization costs in our territory. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights. 3BP also has the right to terminate the agreement under certain circumstances in connection with our change of control in which the acquiring party retains a product competitive with the FAP-targeted therapeutic product or, in the event marketing authorization has not yet been obtained, does not agree to the then-current global development plan.
In February 2020, we finalized the terms of a drug discovery collaboration agreement with 3BP to identify up to three additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we will obtain global rights for any resulting product candidates. We are responsible for the costs of all preclinical and clinical development activities conducted under the discovery program, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the discovery and preclinical development phase for each collaboration target. The agreement was effective December 31, 2019, for which we incurred a $2.1 million technology access fee, which we accrued and recognized as a research and development expense.
Pursuant to the terms of the discovery collaboration agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP a 6% royalty on net sales of License Products (as defined in the agreement), based on the volume of quarterly net sales achieved.
We are obligated under the discovery collaboration agreement to use diligent efforts to develop and commercialize the product candidates, if any, that result from the discovery program, and we are responsible for all clinical development and commercialization costs. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights.
Impact of COVID-19 Pandemic
Our ability to generate product revenue for the year ended December 31, 2020 was negatively affected by the COVID-19 pandemic due to fewer diagnoses and fewer patients going to in-person office visits as oncology practices and patients continue to adapt to the impact of the virus. As a result of the COVID-19 pandemic, our U.S. and European sales forces have had physical access to hospitals, clinics, doctors and pharmacies curtailed and/or have been limited. Our European launches in Italy, Spain and France occurred in an environment in which our field-based personnel in those countries have not been allowed to visit hospitals since as early as late February. Similarly, we launched Rubraca for prostate cancer in the U.S. beginning in May 2020, but our physical access to hospitals, clinics, doctors and pharmacies has been limited. It is difficult to discern or predict any trend in new patient starts due to the unpredictability of the COVID-19 situation and the changing competitive landscape.
This curtailment of and/or limited physical access has decreased sales and marketing expenses during 2020 and will likely extend to 2021. In addition, due to increased travel restrictions, quarantines, “work-at-home” and “shelter-in-place” orders and extended shutdown of certain non-essential business in the United States, and European and Asia-
Pacific countries, in-person conferences and meetings requiring travel will decrease, resulting in a decrease of our selling, general and administrative expenses. We believe that we have sufficient supply of Rubraca and our product candidates to continue our commercial and clinical operations as planned.
The COVID-19 pandemic has accelerated a preference by oncology practices for more digital programming, including digital, peer-to-peer interactions and reduced in-person promotion. In order to meet these changing preferences, we are adopting a hybrid commercial strategy combining increased digital promotion activities, greater online resources and more peer-to-peer interactions with reduced and more targeted in-person promotion. Accordingly, new tools and performance indicators based on this hybrid approach were rolled out beginning in the fourth quarter, and the U.S. commercial organization was reduced in size by approximately 45 employees. Despite increased investment in digital promotion, we anticipate an effect of adopting this hybrid model will result in annual cost-savings of approximately $10.0 million. We are adopting this strategy in order to better reach customers in the way they want to be reached with the goal of returning to growth, especially as the ongoing impact of COVID-19 is reduced.
We did not see material disruption to our clinical trials as a result of the COVID-19 pandemic for the year ended December 31, 2020 as we completed target enrollment of ATHENA, our largest clinical trial, during the second quarter. However, we may see disruption during 2021. For example, new patient recruitment in certain clinical studies may be affected and the conduct of clinical trials may vary by geography as some regions are more adversely affected. Additionally, we may slow or delay enrollment in certain trials to manage expenses.
On March 18, 2020, the Families First Coronavirus Response Act (“FFCR Act”), and on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. We evaluated the impact of this legislation and the income tax provisions did not result in a material cash benefit to us. Future regulatory guidance under the FFCR Act and the CARES Act (as well as under the Tax Cuts and Jobs Act) remains forthcoming, and such guidance could ultimately increase or lessen their impact on our business and financial condition. It is also highly possible that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could impact us.
The trading prices for our common stock and of other biopharmaceutical companies have been highly volatile as a result of the coronavirus pandemic. As a result of this volatility and uncertainties regarding future impact of COVID-19 on our business and operations, we may face difficulties raising capital or may only be able to raise capital on unfavorable terms.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the rules promulgated by the U.S. Securities and Exchange Commission.
Tax Loss Carryforwards
As of December 31, 2020, we have net operating loss (“NOL”) carryforwards of approximately $1.7 billion to offset future federal income taxes. We also have research and development and orphan drug tax credit carryforwards of $254.5 million to offset future federal income taxes. The federal net operating loss carryforwards and research and development and orphan drug tax credit carryforwards expire at various times through 2040.
We believe that a change in ownership as defined under Section 382 of the U.S. Internal Revenue Code occurred as a result of our public offering of common stock completed in April 2012. Future utilization of the federal net operating losses and tax credit carryforwards accumulated from inception to the change in ownership date will be subject to annual limitations to offset future taxable income. It is possible that a change in ownership will occur in the future, which will limit the NOL amounts generated since the last estimated change in ownership. At December 31, 2020, we recorded a 100% valuation allowance against our net deferred tax assets in the U.S. of $801.5 million, as we believe it is more likely than not that the tax benefits will not be fully realized. In the future, if we determine that a portion or all of the tax benefits associated with our tax carryforwards will be realized, net income would increase in the period of determination.
Recently Adopted and Issued Accounting Standards
For a discussion of recently adopted and issued accounting standards, see Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates. As of December 31, 2020, we had cash, cash equivalents of $240.2 million, consisting of bank demand deposits and money market funds. The primary objectives of our investment policy are to preserve principal and maintain proper liquidity to meet operating needs. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Our available-for-sale securities are subject to interest rate risk and will decline in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair value of our portfolio.
We contract with contract research organizations, investigational sites and contract manufacturers globally where payments are made in currencies other than the U.S. dollar. In addition, on October 3, 2016, we entered into a Manufacturing and Services Agreement with a Swiss company for the production and supply of the active ingredient for Rubraca. Under the terms of this agreement, payments for the supply of the active ingredient in Rubraca as well as scheduled capital program fee payment toward capital equipment and other costs associated with the construction of a dedicated production train will be made in Swiss francs. Once the production facility became operational in October 2018, we are obligated to pay a fixed facility fee each quarter for the duration of the agreement, which expires on December 31, 2025.
As of December 31, 2020, $68.1 million of purchase commitments exist under the Swiss Manufacturing and Services Agreement and we are required to remit amounts due in Swiss francs. Due to other variables that may exist, it is difficult to quantify the impact of a particular change in exchange rates. However, we estimate that if the value of the US dollar was to strengthen by 10% compared to the value of Swiss franc as of December 31, 2020, it would decrease the total US dollar purchase commitment under the Swiss Manufacturing and Services Agreement by approximately $20.0 million. Similarly, a 10% weakening of the US dollar compared to the Swiss franc would increase the total US dollar purchase commitment by approximately $9.3 million.
While we periodically hold foreign currencies, primarily Euro, Pound Sterling and Swiss Franc, we do not use other financial instruments to hedge our foreign exchange risk. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. As of December 31, 2020, and 2019, approximately 3% and 4%, respectively, of our total liabilities were denominated in currencies other than the functional currency.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are included in Item 15 of this report and are presented beginning on page.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Principal Financial and Accounting Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective.
As of December 31, 2020, our management, with the participation of our Chief Executive Officer and Chief Finance Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Finance Officer concluded that, as of December 31, 2020, the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive officer and principal financial officer and affected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2020, our management, with the participation of our Chief Executive Officer and Chief Finance Officer, assessed the effectiveness of our internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act. In making its assessment, management used the criteria established in Internal Control-Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, our management determined that, as of December 31, 2020, we maintained effective internal control over financial reporting based on those criteria.
In addition, the effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by Ernst & Young, LLP, an independent registered public accounting firm.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Clovis Oncology, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Clovis Oncology, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Clovis Oncology, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company, as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Denver, Colorado
February 24, 2021

---

ITEM 9B. OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION
None.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K and is incorporated herein by reference from our definitive proxy statement relating to our 2020 annual meeting of stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, also referred to in this Form 10-K as our 2020 Proxy Statement, which we expect to file with the SEC no later than April 30, 2021.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our directors, including the audit committee and audit committee financial experts, and executive officers and compliance with Section 16(a) of the Exchange Act will be included in our 2020 Proxy Statement and is incorporated herein by reference.
We have adopted a Code of Business Ethics for all of our directors, officers and employees as required by NASDAQ governance rules and as defined by applicable SEC rules. Stockholders may locate a copy of our Code of Business Ethics on our website at www.clovisoncology.com or request a copy without charge from:
Clovis Oncology, Inc.
Attention: Investor Relations
5500 Flatiron Parkway, Suite 100
Boulder, CO 80301
We will post to our website any amendments to the Code of Business Ethics and any waivers that are required to be disclosed by the rules of either the SEC or NASDAQ.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item regarding executive compensation will be included in our 2021 Proxy Statement and is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item regarding security ownership of certain beneficial owners and management will be included in the 2021 Proxy Statement and is incorporated herein by reference.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item regarding certain relationships and related transactions and director independence will be included in the 2021 Proxy Statement and is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item regarding principal accounting fees and services will be included in the 2021 Proxy Statement and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The following documents are being filed as part of this report:
(1) Financial Statements.
Reference is made to the Index to Financial Statements of Clovis Oncology, Inc. appearing on page of this report.
(2) Financial Statement Schedules.
All financial statement schedules have been omitted because they are not applicable or not required or because the information is included elsewhere in the Financial Statements or the Notes thereto.
(3) Exhibits.
Reference is made to the Index to Exhibits filed as a part of this Annual Report on Form 10-K.
INDEX TO EXHIBITS
Exhibit
Number
Exhibit Description
3.1(5)
Amended and Restated Certificate of Incorporation of Clovis Oncology, Inc.
3.2(19)
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Clovis Oncology, Inc.
3.3(5)
Amended and Restated Bylaws of Clovis Oncology, Inc.
3.4(22)
Amendment No. 1 to the Amended and Restated Bylaws of Clovis Oncology, Inc.
4.1(3)
Form of Common Stock Certificate of Clovis Oncology, Inc.
4.2(7)
Indenture, dated as of September 9, 2014, by and between the Company and The Bank of New York Mellon Trust Company, N.A.
4.3(14)
Indenture dated as of April 19, 2018, by and between Clovis Oncology, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee.
4.4(14)
First Supplemental Indenture dated as of April 19, 2018, by and between Clovis Oncology, Inc. and The Bank of New York Mellon Trust Company, N.A.
4.5(20)
Indenture dated as of August 13, 2019, by and between Clovis Oncology, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee.
4.6(21)
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.
4.7(26)
Indenture dated as of November 17, 2020, by and between Clovis Oncology, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the 2024 Notes (2020 Issuance).
10.1*(4)
License Agreement, dated as of June 2, 2011, by and between Clovis Oncology, Inc. and Pfizer Inc.
10.2+(1)
Clovis Oncology, Inc. 2009 Equity Incentive Plan.
10.3+(4)
Clovis Oncology, Inc. 2011 Stock Incentive Plan.
10.4+(24)
Clovis Oncology, Inc. 2020 Stock Incentive Plan.
10.5+(1)
Form of Clovis Oncology, Inc. 2009 Equity Incentive Plan Stock Option Agreement.
10.6+(4)
Form of Clovis Oncology, Inc. 2011 Stock Incentive Plan Stock Option Agreement.
10.7+(23)
Form of Clovis Oncology, Inc. 2020 Stock Incentive Plan Option Agreement.
10.8+(23)
Form of Clovis Oncology, Inc. 2020 Stock Incentive Plan Restricted Stock Unit Agreement.
10.9+(3)
Employment Agreement, dated as of August 24, 2011, by and between Clovis Oncology, Inc. and Patrick J. Mahaffy.
10.10+(3)
Employment Agreement, dated as of August 24, 2011, by and between Clovis Oncology, Inc. and Gillian C. Ivers-Read.
10.11+(1)
Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Paul Klingenstein.
Exhibit
Number
Exhibit Description
10.12+(1)
Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and James C. Blair.
10.13+(1)
Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Edward J. McKinley.
10.14+(1)
Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Thorlef Spickschen.
10.15+(1)
Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and M. James Barrett.
10.16+(1)
Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Brian G. Atwood.
10.17+(1)
Indemnification Agreement, dated as of May 12, 2009, between Clovis Oncology, Inc. and Patrick J. Mahaffy.
10.18(25)
Exchange and Purchase Agreement dated as of November 4, 2020, by and among Clovis Oncology, Inc. and a holder of its outstanding 2024 Notes (2019 Issuance).
10.19+(1)
Indemnification Agreement, dated as of May 12, 2009, between Clovis Oncology, Inc. and Gillian C. Ivers-Read.
10.20+(15)
Clovis Oncology, Inc. 2011 Employee Stock Purchase Plan, as amended.
10.21+(4)
Clovis Oncology, Inc. 2011 Cash Bonus Plan.
10.22+(2)
Indemnification Agreement, dated as of June 13, 2013, between Clovis Oncology, Inc. and Ginger L. Graham.
10.23+(2)
Indemnification Agreement, dated as of June 13, 2013, between Clovis Oncology, Inc. and Keith Flaherty.
10.24(6)
Stock Purchase Agreement, dated as of November 19, 2013, by and among the Company, EOS, the Sellers listed on Exhibit A thereto and Sofinnova Capital V FCPR, acting in its capacity as the Sellers’ Representative.
10.25*(6)
Development and Commercialization Agreement, dated as of October 24, 2008, by and between Advenchen Laboratories LLC and Ethical Oncology Science S.P.A., as amended by the First Amendment, dated as of April 13, 2010 and the Second Amendment, dated as of July 30, 2012.
10.26+(10)
Indemnification Agreement, effective as of August 3, 2015, between Clovis Oncology, Inc. and Lindsey Rolfe.
10.27+(17)
Amended and Restated Employment Agreement, dated as of February 27, 2019, by and between Clovis Oncology UK Limited, Clovis Oncology, Inc. and Dr. Lindsey Rolfe.
10.28+(8)
Indemnification Agreement, dated as of February 17, 2016, between Clovis Oncology, Inc. and Daniel W. Muehl.
10.29+(13)
Employment Agreement, dated as of July 6, 2017, by and between Clovis Oncology, Inc. and Daniel Muehl.
10.30*(9)
First Amendment to License Agreement, between Clovis Oncology, Inc. and Pfizer Inc., dated as of August 30, 2016.
10.31+(11)
Form of Clovis Oncology, Inc. 2011 Stock Incentive Plan RSU Agreement.
Exhibit
Number
Exhibit Description
10.32*(11)
Manufacturing Services Agreement, by and between Clovis Oncology, Inc. and Lonza Ltd, dated as of October 3, 2016.
10.33*(12)
Strata Trial Collaboration Agreement, by and between Clovis Oncology, Inc. and Strata Oncology, Inc., dated as of January 30, 2017.
10.34+(16)
Indemnification Agreement, dated as of October 11, 2018, between Clovis Oncology, Inc. and Robert W. Azelby.
10.35+(16)
Indemnification Agreement, dated as of October 11, 2018, between Clovis Oncology, Inc. and Richard A. Fair.
10.36+(17)
Employment Agreement, dated as of July 6, 2017, by and between Clovis Oncology, Inc. and Paul Gross.
10.37+(17)
Indemnification Agreement, dated as of September 9, 2016, between Clovis Oncology, Inc. and Paul E. Gross.
10.38 (18)
Financing Agreement, dated as of May 1, 2019 among Clovis Oncology, Inc., certain of its subsidiaries named therein, as Guarantors, the Lenders from time to time party thereto, and the Administrative Agent party thereto.
10.39(18)
Pledge and Security Agreement, dated as of May 1, 2019 among each of the Grantors party thereto and the Administrative Agent party thereto.
10.40#
License and Collaboration Agreement, dated September 20, 2019 by and between 3B Pharmaceuticals GmbH and Clovis Oncology, Inc.
21.1(15)
List of Subsidiaries of Clovis Oncology, Inc.
23.1
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2
Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1
Certification of principal executive officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of principal financial officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from Clovis Oncology, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2020 formatted in Inline Extensible Business Reporting Language (“iXBRL”): (i) the Consolidated Statements of Operations and Comprehensive Loss, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Stockholders’ Equity (Deficit), (iv) the Consolidated Statement of Cash Flows and (v) Notes to Consolidated Financial Statements
The cover page from Clovis Oncology, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2020 is formatted in iXBRL.
(1) Filed as an exhibit with the Registrant’s Registration Statement on Form S-1 (File No. 333-175080) on June 23, 2011.
(2) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on June 14, 2013.
(3) Filed as an exhibit with Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-175080) on August 31, 2011.
(4) Filed as an exhibit with Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-175080) on October 31, 2011.
(5) Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on March 15, 2012.
(6) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on November 19, 2013.
(7) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on September 9, 2014.
(8) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on April 1, 2016.
(9) Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on November 4, 2016.
(10) Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 29, 2016.
(11) Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 23, 2017.
(12) Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on May 4, 2017.
(13) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on July 7, 2017.
(14) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on April 19, 2018.
(15) Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on August 2, 2018.
(16) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on October 12, 2018.
(17) Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 28, 2019.
(18) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on May 2, 2019.
(19) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on June 6, 2019.
(20) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on August 13, 2019.
(21) Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 26, 2020.
(22) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on April 16, 2020.
(23) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on June 4, 2020.
(24) Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on August 7, 2020.
(25) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on November 5, 2020.
(26) Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on November 17, 2020.
+ Indicates management contract or compensatory plan.
* Confidential treatment has been sought or granted with respect to portions of this exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission.
# Confidential portions of this Exhibit were redacted pursuant to Item 601(b)(10) of Regulation S-K and Clovis
Oncology, Inc. agrees to furnish supplementary to the Securities and Exchange Commission a copy of any redacted information or omitted schedule and/or exhibit upon request.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Balance Sheets
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Clovis Oncology, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Clovis Oncology, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Research and development accrual
Description of the Matter
At December 31, 2020, the Company accrued $43.5 million of research and development costs. The completeness and valuation of certain clinical study fees incurred in the Company's accrued research and development costs are subject to risk of estimation uncertainty related to services received and efforts expended. As discussed in Note 2 of the Company’s consolidated financial statements, costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to the Company by its vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred.
Auditing management’s accrual of research and development costs was complex and judgmental due to the significant estimation required by management in determining the time period over which services will be performed, enrollment of patients, number
of sites activated and the level of effort to be expended in each period. The Company has contracts with multiple contract research organizations (“CROs”) that conduct and manage clinical studies on its behalf. The financial terms of these agreements are subject to negotiation and amendment, vary from contract to contract and may result in uneven payment flows.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for accrued research and development costs. For example, we tested controls over management’s review of the research and development accrual calculation, including review of the confirmations from CROs, patient enrollment, sites activated, and the associated contract costs.
To test the estimated accrued research and development, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above, testing the underlying data used by management, and assessing the historical accuracy of management’s estimates. We performed inquiries of clinical research managers to understand the status of significant trials, discussed any delays or new developments with the studies to understand the impact of the activity on the accounting for the studies, and confirmed directly with CROs the status of significant cost drivers, such as patient enrollment and site activation.
Sixth Street Financing Agreement
Description of the Matter
At December 31, 2020, the Company has drawn $99.8 million in principal and incurred $12.6 million in interest expense in relation to the Sixth Street Financing Arrangement. As discussed in Note 10 to the consolidated financial statements, the Company entered into a financing agreement in 2019 in which they plan to borrow amounts required to reimburse actual costs and expenses incurred in clinical trials during each fiscal quarter. They are obligated to make loan payments on a quarterly basis and timing and amount of repayment is dependent on several defined events. The payments are based on a certain percentage of revenues, with a maximum repayment amount each quarter. Therefore, the amounts borrowed and amounts repaid under the loan are variable. Each period, the Company will determine a new effective interest rate based on the revised estimate of expected remaining cash flows. The new effective interest rate will be used to recognize interest expense prospectively for the remaining periods.
Auditing the financing agreement is complex, and the estimation of future expected cash flows is subjective, and is affected by expected future market or economic conditions. The assessment of these terms and future cash flows has a significant effect on the accounting for the agreement.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the financing agreement, including management’s review of the probabilities of certain conditions or events and certain other assumptions used in the calculation of the interest rate, including the revenue growth rates and projected clinical expenses incurred.
To test the financing agreement, we performed audit procedures that included, among others, testing the assumptions underlying the expected cash flows used to calculate the interest rate, including the revenue growth rates and projected clinical expenses incurred. We compared the assumptions used by management to current industry and economic trends and evaluated whether changes to the Company’s customer base or product approvals and other factors would affect the assumptions. We also evaluated management’s estimation of the probability of whether certain conditions or events, which drive certain accounting conclusions, were probable at December 31, 2020. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of the significant assumptions to evaluate the changes in the calculated interest expense that would result from changes in those assumptions.
We have served as the Company’s auditor since 2009.
/s/ Ernst & Young LLP
Denver, Colorado
February 24, 2021
CLOVIS ONCOLOGY, INC.
Consolidated Statements of Operations and Comprehensive Loss
`
Year ended December 31,
(in thousands, except per share amounts)
Revenues:
Product revenue
$
164,522
$
143,006
$
95,388
Operating expenses:
Cost of sales - product
36,128
29,926
19,444
Cost of sales - intangible asset amortization
5,177
4,760
2,630
Research and development
257,707
283,146
231,347
Selling, general and administrative
163,894
182,769
175,781
Acquired in-process research and development
-
9,440
-
Other operating expenses
3,804
9,711
-
Total expenses
466,710
519,752
429,202
Operating loss
(302,188)
(376,746)
(333,814)
Other income (expense):
Interest expense
(30,508)
(19,405)
(13,183)
Foreign currency loss
(72)
(547)
(346)
(Loss) gain on extinguishment of debt
(3,277)
18,480
-
Loss on convertible senior notes conversion
(35,075)
-
-
Legal settlement loss
-
(26,750)
(27,975)
Other income
1,361
6,342
7,917
Other income (expense), net
(67,571)
(21,880)
(33,587)
Loss before income taxes
(369,759)
(398,626)
(367,401)
Income tax benefit (expense)
(1,798)
(608)
Net loss
(369,212)
(400,424)
(368,009)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax
(272)
(2,543)
Net unrealized (loss) gain on available-for-sale securities, net of tax
(6)
Other comprehensive income (loss):
(231)
(2,461)
Comprehensive loss
$
(368,651)
$
(400,655)
$
(370,470)
Loss per basic and diluted common share:
Basic and diluted net loss per common share
$
(4.38)
$
(7.43)
$
(7.07)
Basic and diluted weighted average common shares outstanding
84,307
53,873
52,066
See accompanying Notes to Consolidated Financial Statements.
CLOVIS ONCOLOGY, INC.
Consolidated Balance Sheets
December 31,
December 31,
ASSETS
Current assets:
Cash and cash equivalents
$
240,229
$
161,833
Accounts receivable, net
26,511
20,562
Inventories, net
30,714
26,519
Available-for-sale securities
-
134,826
Prepaid research and development expenses
4,245
3,881
Other current assets
9,130
18,847
Total current assets
310,829
366,468
Inventories
104,123
98,053
Deposit on inventory
-
12,350
Property and equipment, net
12,085
15,287
Right-of-use assets, net
30,438
28,141
Intangible assets, net
65,743
62,920
Goodwill
63,074
63,074
Other assets
19,262
23,311
Total assets
$
605,554
$
669,604
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable
$
26,692
$
32,237
Accrued research and development expenses
43,500
53,214
Lease liabilities
5,330
5,405
Convertible senior notes
64,198
-
Other accrued expenses
45,208
42,228
Total current liabilities
184,928
133,084
Long-term lease liabilities - less current portion
31,640
29,479
Convertible senior notes - less current portion
434,846
644,751
Borrowings under financing agreement
110,917
34,991
Other long-term liabilities
1,971
1,556
Total liabilities
764,302
843,861
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized, no shares issued and outstanding at December 31, 2020 and December 31, 2019
-
-
Common stock, $0.001 par value per share, 200,000,000 shares authorized at December 31, 2020 and December 31, 2019, respectively; 103,699,109 and 54,956,341 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively
Additional paid-in capital
2,498,179
2,114,068
Accumulated other comprehensive loss
(44,304)
(44,865)
Accumulated deficit
(2,612,727)
(2,243,515)
Total stockholders' deficit
(158,748)
(174,257)
Total liabilities and stockholders' equity (deficit)
$
605,554
$
669,604
See accompanying Notes to Consolidated Financial Statements.
CLOVIS ONCOLOGY, INC.
Consolidated Statements of Stockholders’ Equity (Deficit)
Accumulated
Additional
Other
Common Stock
Paid-In
Comprehensive
Accumulated
Shares
Amount
Capital
Income (Loss)
Deficit
Total
(in thousands, except for share amounts)
Balance at January 1, 2018
50,565,119
$
$
1,887,196
$
(42,173)
$
(1,477,439)
$
367,635
Issuance of common stock, net of issuance costs
1,837,898
93,888
-
-
93,890
Issuance of common stock under employee stock purchase plan
82,820
-
2,097
-
-
2,097
Exercise of stock options
72,886
-
1,870
-
-
1,870
Issuance of common stock from vesting of restricted stock units
238,793
-
-
-
-
-
Share-based compensation expense
-
-
49,090
-
-
49,090
Net unrealized gain on available-for-sale securities
-
-
-
-
Foreign currency translation adjustments
-
-
-
(2,543)
-
(2,543)
Adoption of new revenue recognition standard
-
-
-
-
2,357
2,357
Net loss
-
-
-
-
(368,009)
(368,009)
Balance at December 31, 2018
52,797,516
2,034,141
(44,634)
(1,843,091)
146,469
Issuance of common stock under employee stock purchase plan
175,634
-
1,905
-
-
1,905
Exercise of stock options
188,829
-
1,361
-
-
1,361
Issuance of common stock from vesting of restricted stock units
312,304
-
-
-
-
-
Share-based compensation expense
-
-
54,304
-
-
54,304
Legal settlement
1,482,058
22,745
-
-
22,747
Net unrealized gain on available-for-sale securities
-
-
-
-
Foreign currency translation adjustments
-
-
-
(272)
-
(272)
Other financing costs
-
-
(388)
-
-
(388)
Net loss
-
-
-
-
(400,424)
(400,424)
Balance at December 31, 2019
54,956,341
2,114,068
(44,865)
(2,243,515)
(174,257)
Issuance of common stock, net of issuance costs
11,090,000
83,416
-
-
83,427
Issuance of common stock under employee stock purchase plan
283,588
1,419
-
-
1,420
Exercise of stock options
34,599
-
(57)
-
-
(57)
Issuance of common stock from vesting of restricted stock units
1,012,699
(1)
-
-
-
Share-based compensation expense
-
-
50,794
-
-
50,794
Net unrealized loss on available-for-sale securities
-
-
-
(6)
-
(6)
Foreign currency translation adjustments
-
-
-
-
Convertible senior notes conversion
36,321,882
248,599
-
-
248,635
Other financing costs
-
-
(59)
-
-
(59)
Net loss
-
-
-
-
(369,212)
(369,212)
Balance at December 31, 2020
103,699,109
$
$
2,498,179
$
(44,304)
$
(2,612,727)
$
(158,748)
See accompanying Notes to Consolidated Financial Statements.
CLOVIS ONCOLOGY, INC.
Consolidated Statements of Cash Flows
Year ended December 31,
(in thousands)
Operating activities
Net loss
$
(369,212)
$
(400,424)
$
(368,009)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation expense
50,794
54,304
49,090
Depreciation and amortization
8,198
7,768
4,601
Amortization of premiums and discounts on available-for-sale securities
(174)
(1,521)
1,345
Amortization of debt issuance costs
2,672
2,858
2,178
Write-off of debt issuance costs related to convertible senior notes transactions
4,345
-
-
Loss (gain) on extinguishment of debt
3,277
(18,480)
-
Loss on convertible senior notes conversion
35,075
-
-
Legal settlement loss
-
22,747
-
Acquired in-process research and development
-
-
-
Other
-
Changes in operating assets and liabilities:
Accounts receivable
(5,407)
(7,518)
(3,371)
Inventory
5,321
(26,160)
(49,936)
Prepaid and accrued research and development expenses
(8,313)
23,233
9,145
Deposit on inventory
-
-
(12,350)
Other operating assets and liabilities
10,831
(6,837)
(8,750)
Accounts payable
(5,852)
12,289
5,770
Other accrued expenses
15,377
13,322
4,290
Net cash used in operating activities
(252,728)
(323,615)
(365,997)
Investing activities
Purchases of property and equipment
(354)
(3,290)
(9,242)
Proceeds from sale of property and equipment
-
-
Purchases of available-for-sale securities
(9,962)
(459,835)
(500,000)
Sales of available-for-sale securities
144,644
621,998
300,000
Acquired in-process research and development - milestone payment
(8,000)
(15,750)
(55,000)
Net cash provided by (used in) investing activities
126,328
143,398
(264,242)
Financing activities
Proceeds from sale of common stock, net of issuance costs
246,668
-
93,890
Proceeds from issuance of convertible senior notes, net of issuance costs
56,619
254,879
290,887
Payment of convertible senior notes
(164,443)
-
-
Extinguishment of convertible senior notes
-
(169,853)
-
Proceeds from borrowings under ATHENA financing agreement
65,119
32,871
-
Proceeds from the exercise of stock options and employee stock purchases
1,362
3,266
3,967
Payments on finance leases
(1,470)
(1,115)
(245)
Payments on other long-term liabilities
(211)
(160)
(35)
Net cash provided by financing activities
203,644
119,888
388,464
Effect of exchange rate changes on cash and cash equivalents
1,152
(547)
Increase (decrease) in cash and cash equivalents
78,396
(60,043)
(242,322)
Cash and cash equivalents at beginning of period
161,833
221,876
464,198
Cash and cash equivalents at end of period
$
240,229
$
161,833
$
221,876
Supplemental disclosure of cash flow information:
Cash paid for interest
$
12,075
$
10,515
$
9,188
Non-cash investing and financing activities:
Vesting of restricted stock units
$
7,493
$
5,442
$
10,808
See accompanying Notes to Consolidated Financial Statements.
CLOVIS ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
We are a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, Europe and additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, for those indications that require them, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use.
Our marketed product Rubraca® (rucaparib), an oral small molecule inhibitor of poly ADP-ribose polymerase (“PARP”), is marketed in the United States for two indications specific to recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer and also an indication specific to metastatic castration-resistant prostate cancer (“mCRPC”). The initial indication received approval from the FDA in December 2016 and covers the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic)-associated epithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with two or more chemotherapies and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. In April 2018, the FDA also approved Rubraca for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The approval in this second, broader and earlier-line indication on a priority review timeline was based on positive data from the phase 3 ARIEL3 clinical trial. Diagnostic testing is not required for patients to be prescribed Rubraca in this maintenance treatment indication.
In May 2020, the FDA approved Rubraca for the treatment of adult patients with mCRPC associated with a deleterious BRCA mutation (germline and/or somatic) who have been treated previously with androgen receptor-directed therapy and a taxane-based chemotherapy. The FDA approved this third indication under accelerated approval based on objective response rate and duration of response data from the TRITON2 clinical trial. We launched Rubraca for this indication in the U.S. following receipt of the approval. As an accelerated approval, continued approval for this indication may be contingent upon verification and description of clinical benefit in confirmatory trials. The TRITON3 clinical trial is expected to serve as the confirmatory study for Rubraca’s approval in mCRPC. In August 2020, the FDA approved the use of Foundation Medicine’s blood-based diagnostic test, FoundationOne Liquid CDx, as a companion diagnostic for the detection of deleterious BRCA mutation (germline and/or somatic) to select mCRPC patients for treatment with Rubraca.
In Europe, the European Commission granted a conditional marketing authorization in May 2018 for Rubraca as monotherapy treatment of adult patients with platinum-sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have been treated with two or more prior lines of platinum-based chemotherapy, and who are unable to tolerate further platinum-based chemotherapy. In January 2019, the European Commission granted a variation to the marketing authorization to include the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. With this approval, Rubraca is authorized in Europe for certain patients in the recurrent ovarian cancer maintenance setting regardless of their BRCA mutation status. Following successful reimbursement negotiations, Rubraca has been launched in each of Germany, United Kingdom, Italy, France, Spain and the Netherlands, and reimbursement is pending in Switzerland.
In December 2020, Rubraca met the primary study endpoint of significantly improving PFS versus chemotherapy in the ARIEL4 confirmatory study. Additional ARIEL4 study results are expected to be submitted for presentation at a medical congress meeting in 2021. ARIEL4 is a Phase 3 multicenter, randomized study of Rubraca versus chemotherapy, which enrolled relapsed ovarian cancer patients with BRCA mutations (inclusive of germline and/or somatic) who had received two or more prior lines of chemotherapy. Completion of ARIEL4 is a post-marketing commitment in the U.S. and Europe.
Beyond our labeled indications, we have a clinical development program underway to further evaluate Rubraca in a variety of solid tumor types, either as monotherapy or in combination with other agents, including several studies as part of our ongoing clinical collaboration with Bristol Myers Squibb to evaluate its immunotherapy Opdivo (nivolumab) in combination with Rubraca. We anticipate initial data of Rubraca monotherapy versus placebo from our ATHENA study in the second half of 2021, with the results of Rubraca versus Opdivo in all study populations a year or more later. However, the timing of the ATHENA data readouts is dependent on the timing of data maturity driven by PFS events.
We initiated the Phase 2 LODESTAR study in December 2019 to evaluate Rubraca as monotherapy treatment in patients with recurrent solid tumors associated with a deleterious mutation in homologous recombination repair genes. Based on our interactions with the FDA, we believe that this study may be registration-enabling for a targeted gene- and tumor-agnostic label, if data from the trial support the potential for an accelerated approval. Assuming enrollment in this study continues as planned, and subject to the data, we may potentially file an sNDA with the FDA for this indication in the second half of 2021 or the first half of 2022.
We hold worldwide rights to Rubraca.
Pursuant to our license and collaboration agreement with 3BP, entered into in September 2019, we have initiated development of a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast-activating protein (“FAP”). We have completed sufficient preclinical work to support an IND for the lead candidate under our license and collaboration agreement, designated internally as FAP-2286. Accordingly, we submitted two INDs for FAP-2286 for use as imaging and treatment agents in December 2020 to support an initial Phase 1 study to determine the dose and tolerability of FAP-2286 as a therapeutic agent with expansion cohorts planned in multiple tumor types as part of a global development program. The INDs are expected to become effective following receipt and submission, and acceptance by the FDA, of satisfactory chemistry, manufacturing and controls (“CMC”) data for the imaging agent from clinical sites. The FAP-targeting imaging agent will be utilized to identify tumors that contain FAP for treatment in the Phase 1 LuMIERE clinical study, which we anticipate initiating in the first half of 2021.
We hold U.S. and global rights to FAP-2286, excluding Europe (defined to include Russia, Turkey and Israel), where 3BP retains rights. We are also collaborating with 3BP on a discovery program directed to up to three additional, undisclosed targets for targeted radionuclide therapy, to which we would obtain global rights for any resulting product candidates.
Lucitanib, our second product candidate currently in clinical development, is an investigational, oral, potent angiogenesis inhibitor which inhibits vascular endothelial growth factor receptors 1 through 3 (“VEGFR1-3”), platelet-derived growth factor receptors alpha and beta (“PDGFR α/β”) and fibroblast growth factor receptors 1 through 3 (“FGFR1-3”). Lucitanib inhibits the same three pathways as Lenvima® (lenvatinib), which has received an FDA approval for use in endometrial cancer in combination with Keytruda® (pembrolizumab), a PD-1 inhibitor. This, together with preclinical data for lucitanib in combination with a PD-1 inhibitor that demonstrated enhanced anti-tumor activity compared to that of single agents, represent a scientific rationale for development of lucitanib in combination with a PD-1 inhibitor, and in February 2019, lucitanib was added to our clinical collaboration with Bristol Myers Squibb. The Clovis-sponsored LIO-1 study of lucitanib in combination with nivolumab in advanced solid tumors and gynecologic cancers is currently enrolling patients in the Phase 2 part of the study. We expect to present interim data from this study at medical meetings in 2021, which are expected to include interim results from the ovarian and endometrial cancer expansion cohorts. We hold the global (excluding China) development and commercialization rights for lucitanib.
Liquidity
We have incurred significant net losses since inception and have relied on our ability to fund our operations through debt and equity financings. We expect operating losses and negative cash flows to continue for the foreseeable future. As we continue to incur losses, transition to profitability is dependent upon achieving a level of revenue from Rubraca adequate to support our cost structure. We may never achieve profitability, and unless and until we do, we will continue to need to raise additional cash.
Based on current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund our operating plan through at least the next 12 months.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The consolidated financial statements include our accounts and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and revenue and related disclosures. On an ongoing basis, we evaluate our estimates, including estimates related to revenue deductions, intangible asset impairment, clinical trial accruals and share-based compensation expense. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.
Revenue Recognition
We are currently approved to sell Rubraca in the United States and the Europe markets. We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently sell our products to patients and health care providers. Separately, we have arrangements with certain payors and other third-parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts. See Note 3, Revenue Recognition.
Cost of Sales - Product
Product cost of sales consists primarily of materials, third-party manufacturing costs as well as freight and royalties owed to our licensing partners for Rubraca sales.
Cost of Sales - Intangible Asset Amortization
Cost of sales for intangible asset amortization consists of the amortization of capitalized milestone payments made to our licensing partners upon FDA approval of Rubraca. Milestone payments are amortized on a straight-line basis over the estimated remaining patent life of Rubraca.
Fair Value of Financial Instruments
Cash, cash equivalents, available-for-sale securities and contingent purchase consideration are carried at fair value. Financial instruments, including other current assets and accounts payable, are carried at cost, which approximates fair value given their short-term nature (see Note 5, Fair Value Measurements).
Cash, Cash Equivalents and Available-for-Sale Securities
We consider all highly liquid investments with original maturities at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include bank demand deposits and money market funds that invest primarily in certificate of deposits, commercial paper and U.S. government and U.S. government agency obligations.
Marketable securities are considered to be available-for-sale securities and consist of U.S. treasury securities. Available-for-sale securities are reported at fair value on the Consolidated Balance Sheets and unrealized gains and losses are included in accumulated other comprehensive income/loss on the Consolidated Balance Sheets. Realized gains and losses, amortization of premiums and discounts and interest and dividends earned are included in other income (expense) on the Consolidated Statements of Operations and Comprehensive Loss. The cost of investments for purposes of computing realized and unrealized gains and losses is based on the specific identification method. Investments with maturities beyond one year are classified as short-term based on our intent to fund current operations with these securities or to make them available for current operations.
We determine whether a decline in the fair value below the amortized cost basis (i.e., impairment) of an available-for-sale debt is security is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in accumulated other comprehensive loss, net of applicable taxes. When evaluating an impairment, entities may not use the length of time a security has been in an unrealized loss position as a factor, either by itself or in combination with other factors, to conclude that a credit loss does not exist.
Accounts Receivable
We provide an allowance for credit losses based on experience and specifically identified risks. Accounts receivable are charged off against the allowance when we determine that recovery is unlikely and we cease collection efforts.
Inventory
Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out (“FIFO”) basis. Inventories include active pharmaceutical ingredient (“API”), contract manufacturing costs and overhead allocations. We begin capitalizing incurred inventory related costs upon regulatory approval. Prior to regulatory approval, incurred costs for the manufacture of drugs that could potentially be available to support the commercial launch of our products are recognized as research and development expense.
We regularly analyze our inventory levels for excess quantities and obsolescence (expiration), considering factors such as historical and anticipated future sales compared to quantities on hand and the remaining shelf-life of Rubraca. Rubraca finished goods have a shelf-life of four years from the date of manufacture. We expect to sell the finished goods prior to expiration. The API currently has a shelf-life of four years from the date of manufacture but can be retested at an immaterial cost with no expected reduction in potency, thereby extending its shelf-life as needed. We expect to consume substantially all of the API over a period of approximately seven years based on our long-range sales projections of Rubraca.
We write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and/or inventory in excess of expected sales requirements. Expired inventory would be disposed of and the related costs would be written off as cost of product revenue. Inventories that are not expected to be consumed within 12 months following the balance sheet date are classified as long-term inventories. Long-term inventories primarily consist of API.
API is currently produced by Lonza. As the API has undergone significant manufacturing specific to its intended purpose at the point it is purchased by us, we classify the API as work-in-process inventory. In addition, we currently manufacture Rubraca finished goods with a single third-party manufacturer. The disruption or termination of the supply of API or the disruption or termination of the manufacturing of our commercial products could have a material adverse effect on our business, financial position and results of operations. API that is written off due to damage and certain costs related to our dedicated production train at Lonza are included in Other Operating Expenses in the Consolidated Statements of Operations and Comprehensive Loss.
Inventory used in clinical trials is expensed as research and development expense when it has been identified for such use.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Equipment purchased for use in manufacturing and clinical trials is evaluated to determine whether the equipment is solely beneficial for a drug candidate in the development stage or whether it has an alternative use. Equipment with an alternative use is capitalized. Leased assets meeting certain finance lease criteria are capitalized and the present value of the related lease payments is recorded as a liability. Assets under finance lease arrangements are depreciated using the straight-line method over the estimated useful lives. Leasehold improvements are amortized over the economic life of the asset or the lease term,
whichever is shorter. Maintenance and repairs are expensed as incurred. The estimated useful lives of our capitalized assets are as follows:
Estimated
Useful Life
Computer hardware and software
3 to 5 years
Leasehold improvements
6 years
Laboratory, manufacturing and office equipment
5 to 7 years
Furniture and fixtures
10 years
Long-Lived Assets
We review long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Recoverability is measured by comparison of the assets’ book value to future net undiscounted cash flows that the assets are expected to generate. If the carrying value of the assets exceed their future net undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying value of the assets exceeds the fair value of the assets.
Intangible Assets, Net
Definite-lived intangible assets related to capitalized milestones under license agreements are amortized on a straight-line basis over their remaining useful lives, which are estimated to be the remaining patent life. If our estimate of the product’s useful life is shorter than the remaining patent life, then a shorter period is used. Amortization expense is recorded as a component of cost of sales on the Consolidated Statements of Operations and Comprehensive Loss.
Intangible assets are evaluated for impairment at least annually in the fourth quarter or more frequently if impairment indicators exist. Events that could result in an impairment, or trigger an interim impairment assessment, include the decision to discontinue the development of a drug, the receipt of additional clinical or nonclinical data regarding our drug candidate or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug. In connection with any impairment assessment, the fair value of the intangible assets as of the date of assessment is compared to the carrying value of the intangible asset. Impairment losses are recognized if the carrying value of an intangible asset is both not recoverable and exceeds its fair value.
Goodwill
Goodwill was recorded as a result of the EOS acquisition in November 2013. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination accounted for under the acquisition method of accounting and is not amortized, but is subject to impairment testing at least annually in the fourth quarter or when a triggering event is identified that could indicate a potential impairment. We are organized as two reporting units based on our operating segments, U.S. and ex-U.S. We determined that our goodwill was allocated to the U.S. reporting unit and performed impairment testing by assessing qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. Based on our qualitative assessment, we determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. Therefore, the quantitative goodwill impairment test is not necessary. There is no goodwill impairment as of December 31, 2020.
Other Current Assets
Other current assets are comprised of the following (in thousands):
December 31,
December 31,
Prepaid insurance
$
$
Prepaid IT
Prepaid variable considerations
1,191
Prepaid expenses - other
2,193
2,821
Value-added tax ("VAT") receivable
2,202
11,920
Receivable - other
1,884
2,176
Other
Total
$
9,130
$
18,847
Other Accrued Expenses
Other accrued expenses are comprised of the following (in thousands):
December 31,
December 31,
Accrued personnel costs
$
18,334
$
16,915
Accrued interest payable for convertible senior notes
2,991
5,903
Income tax payable
3,505
Accrued corporate legal fees and professional services
Accrued royalties
6,617
6,038
Accrued variable considerations
11,701
5,748
Accrued expenses - other
4,199
3,809
Total
$
45,208
$
42,228
Segment Information
As of December 31, 2020, we determined that we have two operating and reportable segments, U.S. and ex-U.S., based on product revenue by geographic areas since our product revenue outside of the United States represented 11% of total product revenue. We designated our reporting segments based on the internal reporting used by the Chief Operating Decision Maker (“CODM”), which is our Chief Executive Officer, for making decisions and assessing performance as the source of our reportable segments. The CODM allocates resources and assesses the performance of each operating segment based on product revenue by geographic areas. Accordingly, we view our business as two reportable operating segments to evaluate performance, allocate resources, set operational targets and forecast our future period financial results.
We manage our assets on a company basis, not by segments, as many of our assets are shared or commingled. Our CODM does not regularly review asset information by reportable segment. The majority of long-lived assets for both segments are located in the United States.
Research and Development Expense
Research and development costs are charged to expense as incurred and include, but are not limited to, salary and benefits, share-based compensation, clinical trial activities, drug development and manufacturing, companion diagnostic development and third-party service fees, including contract research organizations and investigative sites.
Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred and are reflected on the Consolidated Balance Sheets as prepaid or accrued research and development expenses.
Acquired In-Process Research and Development Expense
We have acquired and expect to continue to acquire the rights to develop and commercialize new drug candidates. The upfront payments to acquire a new drug compound, as well as subsequent milestone payments, are immediately expensed as acquired in-process research and development provided that the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use. Once regulatory approval is received, payments to acquire rights, and the related milestone payments, are capitalized and the amortization of such assets recorded to product cost of sales.
Share-Based Compensation Expense
Share-based compensation is recognized as expense for all share-based awards made to employees and directors and is based on estimated fair values. We determine equity-based compensation at the grant date using the Black-Scholes option pricing model. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period. Any changes to the estimated forfeiture rates are accounted for prospectively.
Advertising Expense
In connection with the FDA approval and commercial launch of Rubraca in 2016, we began to incur advertising costs. Advertising costs are expense when services are performed, or goods are delivered. We incurred $17.0 million, $21.2 million and $15.9 million in expense for the years ended December 31, 2020, 2019 and 2018, respectively.
Legal Settlement Loss
Following our regulatory announcement in November 2015 of adverse developments in our ongoing clinical trials for rociletinib, we and certain of our current and former executives were named in various securities lawsuits. As a result of these lawsuits, during 2019, we recorded a charge of $26.8 million to settle the Antipodean Complaint. During 2018, we recorded a charge of $8.0 million related to an agreement to resolve a potential litigation claim against us and our officers and we also recorded a charge of $20.0 million related to an agreement reached with the SEC to resolve its investigation. For the remaining actions related to rociletinib, see Note 13, Commitments and Contingencies, for additional information.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk are primarily cash, cash equivalents and available-for-sale securities. We maintain our cash and cash equivalent balances in the form of money market accounts with financial institutions that we believe are creditworthy. Available-for-sale securities are invested in accordance with our investment policy. The investment policy includes guidelines on the quality of the institutions and financial instruments and defines allowable investments that we believe minimizes the exposure to concentration of credit risk. We have no financial instruments with off-balance sheet risk of accounting loss.
Foreign Currency
The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates and the results of operations are translated at the average exchange rates for the reported periods. The resulting translation adjustments are included in accumulated other comprehensive loss on the Consolidated Balance Sheets. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Transaction gains and losses are recorded to foreign currency gains (losses) on the Consolidated Statements of Operations and Comprehensive Loss. As of December 31, 2020, and 2019, approximately 3% and 4%, respectively, of our total liabilities were denominated in currencies other than the functional currency.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Tax benefits are recognized when it is more likely than not that a tax position will be sustained during an audit. Deferred tax assets are reduced by a valuation allowance if current evidence indicates that it is considered more likely than not that these benefits will not be realized.
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2016-13 as of January 1, 2020. Upon the adoption of ASU 2016-13 on January 1, 2020, we are required to determine whether a decline in the fair value below the amortized cost basis (i.e., impairment) of an available-for-sale debt is security is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in accumulated other comprehensive loss, net of applicable taxes. When evaluating an impairment, entities may not use the length of time a security has been in an unrealized loss position as a factor, either by itself or in combination with other factors, to conclude that a credit loss does not exist. We applied this impairment model for available-for-sale debt securities as of January 1, 2020 and no impairment was recognized upon adoption. In addition, no impairment was recognized for the year ended December 31, 2020. We recognized a minimal allowance for credit losses related to our accounts receivable at December 31, 2020. The adoption of ASU 2016-13 did not materially impact our consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted ASU 2018-13 as of January 1, 2020 and there was no material impact on our consolidated financial statements and related disclosures.
Recently Issued Accounting Standards
From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an ASU.
In August 2020, the FASB issued guidance that simplifies an issuer’s accounting for debt and equity instruments. The guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early application is permitted. We plan to adopt this guidance on January 1, 2022. We will evaluate the impact this guidance may have on our consolidated financial statements and related disclosures as the adoption date approaches.
3. Revenue Recognition
We are currently approved to sell Rubraca in the United States and Europe markets. We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently sell our products to patients and health care providers. We do not believe the loss of one of these customers would significantly impact the ability to distribute our product as we expect that sales volume would be absorbed evenly by the remaining customers. Separately, we have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts.
Product Revenue
Revenue from product sales are recognized when the performance obligation is satisfied, which is when customers obtain control of our product at a point in time, typically upon delivery. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from price concessions that include rebates, chargebacks, discounts, co-pay assistance, estimated product returns and other allowances that are offered within contracts between us and our customers, health care providers, payors and other indirect customers relating to the sales of our product. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable or a current liability. Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we adjust these estimates, which would affect product revenue and earnings in the period such variances become known.
Government Rebates. Rebates include mandated discounts under the Medicaid Drug Rebate Program, the Medicare coverage gap program, the Tricare health program and various European National Health Service, Sick Fund and Clawback programs. Rebates are amounts owed after the final dispensing of products to a benefit plan participant and are based upon contractual agreements or legal requirements with the public-sector benefit providers. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the Consolidated Balance Sheets. Our rebate estimates are based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. The accrual for rebates is based on the expected utilization from historical data we have accumulated since the Rubraca product launch.
GPO and Payor Rebates. We contract with various private payor organizations and group purchasing organizations (“GPO”), primarily insurance companies, pharmacy benefit managers and hospitals, for the payment of rebates with respect to utilization of our products. We estimate these rebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.
Chargebacks. Chargebacks are discounts that occur when contracted customers, which currently consist primarily of group purchasing organizations, Public Health Service (“PHS”) organizations and federal government entities purchasing via the Federal Supply Schedule, purchase directly from our specialty distributors at a discounted price. The specialty distributor, in turn, charges back the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by the healthcare provider. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. The accrual for specialty distributor chargebacks is estimated based on known chargeback rates and known sales to specialty distributors adjusted for the estimated utilization by healthcare providers.
Discounts and Fees. Our payment terms are generally 30 days. Specialty distributors and specialty pharmacies are offered various forms of consideration, including service fees and prompt pay discounts for payment within a specified period. We expect these customers will earn prompt pay discounts and therefore, we deduct the full amount of these discounts and service fees from product sales when revenue is recognized.
Co-pay assistance. Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance. The intent of this program is to reduce the patient’s out of pocket costs. Liabilities for co-pay assistance are based on actual program participation provided by third-party administrators at month end.
Returns. Consistent with industry practice, we generally offer customers a right of return limited only to product that will expire in six months or product that is six months beyond the expiration date. To date, we have had minimal product returns and we currently do not have an accrual for product returns. We will continue to assess our estimate for product returns based on additional historical experience.
For the year ended December 31, 2020, and 2019, we recognized $164.5 million and $143.0 million, respectively, of product revenue. Based on our policy to expense costs associated with the manufacture of our products prior to regulatory approval, certain of the costs of Rubraca units recognized as revenue during the year ended December 31, 2017 were expensed prior to the December 19, 2016 FDA approval, and a minimal amount was included in cost of sales during the year ended December 31, 2017. The majority of product sales were of pre-commercialization inventory in 2017. Cost of sales increased in 2018 in relation to product revenue as we depleted these inventories.
Product revenue from each of our customers who individually accounted for 10% or more of total revenues, which were all customers in the U.S. segment, consisted of the following:
December 31,
December 31,
Customer A
21%
25%
Customer B
14%
20%
Customer C
18%
15%
Customer D
11%
12%
Customer E
10%
10%
4. Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31,
Laboratory, manufacturing and office equipment
$
1,267
$
1,290
Leasehold improvements
17,256
16,946
Furniture and fixtures
2,782
2,805
Computer hardware and software
1,835
1,699
Total property and equipment
23,140
22,740
Less: accumulated depreciation
(11,055)
(7,453)
Total property and equipment, net
$
12,085
$
15,287
Depreciation expense related to property and equipment was approximately $3.0 million, $3.0 million and $2.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.
5. Fair Value Measurements
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (at exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three levels of inputs that may be used to measure fair value include:
Level 1:
Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets consist of money market investments. We do not have Level 1 liabilities.
Level 2:
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 assets consist of U.S. treasury securities. We do not have Level 2 liabilities.
Level 3:
Unobservable inputs that are supported by little or no market activity. We do not have Level 3 assets or liabilities.
The following table identifies our assets that were measured at fair value on a recurring basis (in thousands):
Balance
Level 1
Level 2
Level 3
December 31, 2020
Assets:
Money market
$
147,921
$
147,921
$
-
$
-
U.S. treasury securities
-
-
-
-
Total assets at fair value
$
147,921
$
147,921
$
-
$
-
December 31, 2019
Assets:
Money market
$
61,882
$
61,882
$
-
$
-
U.S. treasury securities
189,736
54,910
134,826
-
Total assets at fair value
$
251,618
$
116,792
$
134,826
$
-
There were no liabilities that were measured at fair value on a recurring basis as of December 31, 2020.
Financial instruments not recorded at fair value include our convertible senior notes. At December 31, 2020, the carrying amount of the 2021 Notes was $64.2 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $59.8 million. At December 31, 2020, the carrying amount of the 2024 Notes (2019 Issuance) was $83.9 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $75.4 million. At December 31, 2020, the carrying amount of the 2024 Notes (2020 Issuance) was $56.6 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $49.1 million. At December 31, 2020, the carrying amount of the 2025 Notes was $294.3 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $211.1 million. The fair value was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of the convertible senior notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. See Note 10, Debt for discussion of the convertible senior notes. The carrying amounts of accounts payable and accrued expenses approximate their fair value due to their short-term maturities.
6. Available-for-Sale Securities
We did not have available-for-sale securities as of December 31, 2020.
As of December 31, 2019, available-for-sale securities consisted of the following (in thousands):
Gross
Gross
Aggregate
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
U.S. treasury securities
$
134,826
$
-
$
-
$
134,826
7. Inventories
The following table presents inventories as of December 31, 2020 and December 31, 2019 (in thousands):
December 31,
December 31,
Work-in-process
$
102,507
$
104,139
Finished goods, net
32,330
20,433
Total inventories
$
134,837
$
124,572
At December 31, 2020, we had $30.7 million of current inventory and $104.1 million of long-term inventory.
8. Intangible Assets
At December 31, 2020 and 2019, intangible assets related to capitalized milestones under license agreements consisted of the following (in thousands):
December 31,
December 31,
Intangible asset - milestones
$
79,850
$
71,850
Accumulated amortization
(14,107)
(8,930)
Total intangible asset, net
$
65,743
$
62,920
The increase in our intangible asset - milestones since December 31, 2019 is due to an $8.0 million milestone payment to Pfizer related to the May 2020 FDA approval. See Note 14, License Agreements for further discussion of this approval.
The estimated useful lives of these intangible assets are based on the estimated remaining patent life of Rubraca and extend through 2031 in Europe and 2035 in the U.S.
We recorded amortization expense of $5.2 million and $4.8 million related to capitalized milestone payments during the year ended December 31, 2020 and December 31, 2019, respectively. Amortization expense is included in cost of sales - intangible asset amortization on the Consolidated Statements of Operations and Comprehensive Loss.
Estimated future amortization expense for intangible assets as of December 31, 2020 is as follows (in thousands):
$
5,371
5,371
5,371
5,371
5,371
Thereafter
38,888
$
65,743
9. Leases
At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. We elected not to recognize on the balance sheet leases with terms of one year or less. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
The components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, maintenance, consumables, etc.) and non-components (e.g. property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values assigned to the lease components and non-lease components.
Our facilities operating leases have lease components, non-lease components and non-components, which we have separated because the non-lease components and non-components have variable lease payments and are excluded from the measurement of the lease liabilities. The lease component results in a right-of-use asset being recorded on the balance sheet and amortized as lease expense on a straight-line basis to the statements of operations.
We lease all of our office facilities in the U.S. and Europe. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. Our
lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We have a finance lease for certain equipment at the dedicated production train at Lonza, our non-exclusive manufacturer of the Rubraca API.
The components of lease expense and related cash flows were as follows (in thousands):
Year ended December 31,
Year ended December 31,
Lease cost
Finance lease cost:
Amortization of right-of-use assets
$
1,895
$
1,898
Interest on lease liabilities
Operating lease cost
4,649
4,003
Short-term lease cost
Variable lease cost
2,071
2,261
Total lease cost
$
9,832
$
9,222
Operating cash flows from finance leases
$
$
Operating cash flows from operating leases
$
4,649
$
4,003
Financing cash flows from finance leases
$
1,470
$
1,115
The weighted-average remaining lease term and weighted-average discount rate were as follows:
December 31, 2020
December 31, 2019
Weighted-average remaining lease term (years)
Operating leases
6.6
6.9
Finance leases
5.0
6.0
Weighted-average discount rate
Operating leases
8%
8%
Finance leases
8%
8%
Future minimum commitments due under these lease agreements as of December 31, 2020 are as follows (in thousands):
Operating Leases
Finance Leases
Total
5,796
2,287
8,083
5,308
2,287
7,595
4,859
2,287
7,146
4,868
2,287
7,155
5,025
2,287
7,312
Thereafter
9,938
-
9,938
Present value adjustment
(8,223)
(2,036)
(10,259)
Present value of lease payments
$
27,571
$
9,399
$
36,970
10. Debt
The following is a summary of our convertible senior notes at December 31, 2020 and 2019 (principal amount in thousands):
Principal Amount
Principal Amount
December 31, 2020
December 31, 2019
Interest Rate
Due Date
2021 Notes
$
64,418
$
97,188
2.50%
September 15, 2021
2024 Notes (2019 Issuance)
85,782
263,000
4.50%
August 1, 2024
2024 Notes (2020 Issuance)
57,500
-
4.50%
August 1, 2024
2025 Notes
300,000
300,000
1.25%
May 1, 2025
Total
$
507,700
$
660,188
2021 Notes
In September 2014, we completed a private placement of $287.5 million aggregate principal amount of 2.5% convertible senior notes due 2021 (the “2021 Notes”) resulting in net proceeds of $278.3 million after deducting offering expenses. In accordance with the accounting guidance, the conversion feature did not meet the criteria for bifurcation, and the entire principal amount was recorded as a long-term liability on the Consolidated Balance Sheets.
The 2021 Notes are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2021 Notes are senior unsecured obligations and bear interest at a rate of 2.5% per year, payable semi-annually in arrears on March 15 and September 15 of each year. The 2021 Notes will mature on September 15, 2021, unless earlier converted, redeemed or repurchased.
Holders may convert all or any portion of the 2021 Notes at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 16.1616 shares per $1,000 in principal amount of 2021 Notes, equivalent to a conversion price of approximately $61.88 per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the 2021 Notes in connection with such a corporate event or during the related redemption period in certain circumstances.
On or after September 15, 2018, we may redeem the 2021 Notes, at our option, in whole or in part, if the last reported sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending not more than two trading days preceding the date on which we provide written notice of redemption at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2021 Notes.
If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the 2021 Notes, holders may require us to repurchase for cash all or any portion of the 2021 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2021 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The 2021 Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2021 Notes; equal in right of payment to all of our liabilities that are not so subordinated; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
In connection with the issuance of the 2021 Notes, we incurred $9.2 million of debt issuance costs, of which $2.0 million of unamortized debt issuance costs were derecognized in connection with the repurchase of the 2021 Notes. The remaining debt issuance costs are presented as a deduction from the convertible senior notes on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the 2021 Notes using the effective interest method. We determined the expected life of the debt was equal to the seven-year term of the 2021 Notes.
In August 2019, we entered into privately negotiated transactions with a limited number of holders to repurchase $190.3 million aggregate principal amount of our outstanding 2021 Notes for an aggregate repurchase price of $171.8 million, including accrued interest. This repurchase resulted in the recognition of $18.5 million gain on extinguishment of debt.
In April 2020, we entered into a privately negotiated exchange agreement with a holder (“Holder”) of our 2021 Notes, pursuant to which we issued to such Holder of the 2021 Notes approximately $36.1 million in aggregate principal amount of our currently outstanding 2024 Notes (2019 Issuance) in exchange for approximately $32.8 million in aggregate principal of 2021 Notes held by such Holder (the “Exchange Transaction”), which resulted in a $3.3 million loss on extinguishment of debt. We did not receive any cash proceeds from the Exchange Transaction.
2024 Notes (2019 Issuance)
In August 2019, we completed a private placement to qualified institutional buyers of $263.0 million aggregate principal amount of 4.50% convertible senior notes due 2024 (the “2024 Notes (2019 Issuance)”) resulting in net proceeds of $254.9 million, after deducting underwriting discounts and commissions and offering expenses. In accordance with the accounting guidance, the conversion feature did not meet the criteria for bifurcation, and the entire principal amount was recorded as a long-term liability on the Consolidated Balance Sheets.
The 2024 Notes (2019 Issuance) are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2024 Notes (2019 Issuance) are senior unsecured obligations and bear interest at a rate of 4.50% per year, payable semi-annually in arrears on February 1 and August 1 of each year. The 2024 Notes (2019 Issuance) will mature on August 1, 2024, unless earlier repurchased or converted.
Holders may convert all or any portion of the 2024 Notes (2019 Issuance) at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 137.2213 shares per $1,000 in principal amount of 2024 Notes (2019 Issuance), equivalent to a conversion price of approximately $7.29 per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the 2024 Notes (2019 Issuance) in connection with such a corporate event or during the related redemption period in certain circumstances.
We will not have the right to redeem the 2024 Notes (2019 Issuance) prior to their maturity. If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the 2024 Notes (2019 Issuance), holders may require us to repurchase for cash all or any portion of the 2024 Notes (2019 Issuance) at a fundamental change repurchase price equal to 100% of the principal amount of the 2024 Notes (2019 Issuance) to be repurchased plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. No sinking fund is provided for the 2024 Notes (2019 Issuance).
The 2024 Notes (2019 Issuance) rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2024 Notes (2019 Issuance); equal in right of payment to all of our liabilities that are not so subordinated, including the 2021 Notes and 2025 Notes; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness, including our borrowing under the Sixth Street financing agreement; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
In connection with the issuance of the 2024 Notes (2019 Issuance), we incurred $8.0 million of debt issuance costs. The debt issuance costs are presented as a deduction from the convertible senior notes on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the 2024 Notes (2019 Issuance) using the effective interest method. We determined the expected life of the debt was equal to the five-year term of the 2024 Notes (2019 Issuance).
In January 2020, we completed a registered direct offering of an aggregate 17,777,679 shares of our common stock at a price of $9.25 per share to a limited number of holders of our 2024 Notes (2019 Issuance). We used the proceeds of the share offering to repurchase from such holders an aggregate of $123.4 million principal amount of 2024 Notes (2019 Issue) in privately negotiated transactions. In addition, we paid customary fees and expenses in connection with the
transactions. As a result, $3.6 million of unamortized debt issuance costs were derecognized and we recognized a $7.8 million loss on the transactions.
In April 2020, we completed the Exchange Transaction discussed in the 2021 Notes section above.
The additional 2024 Notes (2019 Issuance) issued in the Exchange Transaction were issued as additional notes under that certain Indenture, dated as of August 13, 2019 (the “Indenture”), by and between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee, and have substantially identical terms to our currently outstanding 2024 Notes (2019 Issuance), except that the additional 2024 Notes (2019 Issuance) will accrue interest from February 1, 2020 and the initial interest payment date on the additional 2024 Notes (2019 Issuance) was August 1, 2020. The Holder paid to the Company accrued interest on the additional 2024 Notes (2019 Issue) from February 1, 2020 to and including April 20, 2020. The additional 2024 Notes (2019 Issuance) will be treated as a single series of securities with the currently outstanding 2024 Notes (2019 Issuance).
In April and May 2020, approximately $24.3 million in principal amount of 2024 Notes (2019 Issuance) were converted into 3,331,870 shares of our common stock at the conversion rate of 137.2213 shares per $1,000 in principal amount of 2024 Notes (2019 Issuance).
In November 2020, we entered into a privately negotiated exchange and purchase agreement with a holder of our 2024 Notes (2019 Issuance). Pursuant to the agreement, in exchange for approximately $64.8 million aggregate principal amount of 2024 Notes (2019 Issuance) held by the holder, we agreed to issue to the holder a number shares of our common stock (the “Exchanged Shares”) utilizing an exchange ratio that is based in part on the daily volume-weighted average prices (“VWAPs”) per share of our common stock during a seven-day pricing period following execution of the agreement.
In addition, pursuant to the agreement, we sold to the holder $57.5 million aggregate principal amount of a new series of 4.50% Convertible Senior Notes due 2024 (the “2024 Notes (2020 Issuance)”) at a purchase price of $1,000 per $1,000 principal amount thereof.
The number of Exchanged Shares was calculated utilizing an exchange ratio that is based in part on the average VWAPs of our common stock (subject to a floor) during a seven-day pricing period beginning on November 5, 2020 and ending on, and including, November 13, 2020. In November 2020, we issued 15,112,848 Exchanged Shares pursuant to the debt exchange transaction. As a result, $1.4 million of unamortized debt issuance costs were derecognized and we recognized a $27.3 million loss on the transactions.
2024 Notes (2020 Issuance)
The 2024 Notes (2020 Issuance) are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2024 Notes (2020 Issuance) are senior unsecured obligations and bear interest at a rate of 4.50% per year, payable semi-annually in arrears on February 1 and August 1 of each year. The 2024 Notes (2020 Issuance) will mature on August 1, 2024, unless earlier repurchased or converted.
Holders may convert all or any portion of the 2024 Notes (2020 Issuance) at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 160.3334 shares per $1,000 in principal amount of 2024 Notes (2020 Issuance), equivalent to a conversion price of approximately $6.24 per share. The initial conversion price represents a premium of approximately 10% to the last reported sale price of $5.67 per share on November 4, 2020. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the 2024 Notes (2020 Issuance) in connection with such a corporate event or during the related redemption period in certain circumstances.
We will not have the right to redeem the 2024 Notes (2020 Issuance) prior to their maturity. If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the 2024 Notes (2020 Issuance), holders may require us to repurchase for cash all or any portion of the 2024 Notes (2020 Issuance) at a fundamental change repurchase price equal to 100% of the principal amount of the 2024 Notes (2020 Issuance) to be repurchased, plus
accrued and unpaid interest to, but excluding, the fundamental change repurchase date. No sinking fund is provided for the 2024 Notes (2020 Issuance).
The 2024 Notes (2020 Issuance) rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2024 Notes (2020 Issuance); equal in right of payment to all of our liabilities that are not so subordinated, including the 2021 Notes, 2024 Notes (2019 Issuance) and 2025 Notes; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness, including our borrowing under the Sixth Street financing agreement; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
In connection with the issuance of the 2024 Notes (2020 Issuance), we incurred $0.9 million of debt issuance costs. The debt issuance costs are presented as a deduction from the convertible senior notes on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the 2024 Notes (2020 Issuance) using the effective interest method. We determined the expected life of the debt was equal to the four-year term of the 2024 Notes (2020 Issuance).
2025 Notes
In April 2018, we completed an underwritten public offering of $300.0 million aggregate principal amount of 1.25% convertible senior notes due 2025 (the “2025 Notes”) resulting in net proceeds of $290.9 million, after deducting underwriting discounts and commissions and offering expenses. In accordance with the accounting guidance, the conversion feature did not meet the criteria for bifurcation, and the entire principal amount was recorded as a long-term liability on the Consolidated Balance Sheets.
The 2025 Notes are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, as supplemented by the terms of that certain first supplemental indenture thereto. The 2025 Notes are senior unsecured obligations and bear interest at a rate of 1.25% per year, payable semi-annually in arrears on May 1 and November 1 of each year. The 2025 Notes will mature on May 1, 2025, unless earlier converted, redeemed or repurchased.
Holders may convert all or any portion of the 2025 Notes at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 13.1278 shares per $1,000 in principal amount of 2025 Notes, equivalent to a conversion price of approximately $76.17 per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the 2025 Notes in connection with such a corporate event or during the related redemption period in certain circumstances.
On or after May 2, 2022, we may redeem the 2025 Notes, at our option, in whole or in part, if the last reported sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending not more than two trading days preceding the date on which we provide written notice of redemption at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2025 Notes.
If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the 2025 Notes, holders may require us to repurchase for cash all or any portion of the 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The 2025 Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2025 Notes; equal in right of payment to all of our liabilities that are not so subordinated, including the 2021 Notes; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
In connection with the issuance of the 2025 Notes, we incurred $9.1 million of debt issuance costs. The debt issuance costs are presented as a deduction from the convertible senior notes on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the 2025 Notes using the effective interest method. We determined the expected life of the debt was equal to the seven-year term of the 2025 Notes.
As of December 31, 2020, and 2019, the balance of unamortized debt issuance costs related to the convertible senior notes was $8.7 million and $15.4 million, respectively.
Maturities of our convertible notes consisted of the following as of December 31, 2020 (in thousands):
$
64,418
-
-
143,282
300,000
Thereafter
-
507,700
Less debt issuance costs
(8,656)
Current portion
(64,198)
Long-term portion
$
434,846
Sixth Street Financing Agreement
On May 1, 2019, we entered into a financing agreement (the “Financing Agreement”) with certain affiliates of Sixth Street Partners, LLC (“Sixth Street”) in which we plan to borrow from Sixth Street amounts required to reimburse our actual costs and expenses incurred during each fiscal quarter (limited to agreed budgeted amounts), as such expenses are incurred, related to the ATHENA clinical trial, in an aggregate amount of up to $175 million (the amount actually borrowed, the “Borrowed Amount”). ATHENA is our largest clinical trial, with a planned target enrollment of 1,000 patients across more than 270 sites in at least 25 countries. The Clovis-sponsored phase 3 ATHENA study in advanced ovarian cancer is the first-line maintenance treatment setting evaluating Rubraca plus nivolumab (PD-1 inhibitor), Rubraca, nivolumab and a placebo in newly-diagnosed patients who have completed platinum-based chemotherapy. This study initiated in the second quarter of 2018 and completed enrollment during the second quarter of 2020.
We incur borrowings under the Financing Agreement on a quarterly basis, beginning with such expenses incurred during the quarter ended March 31, 2019 and ending generally on the earliest to occur of (i) the termination of the ATHENA Trial, (ii) the date of completion of all activities under the ATHENA Trial Clinical Study Protocol, (iii) the date on which we pay the Discharge Amount (as defined in the Financing Agreement), (iv) the date of the occurrence of a change of control of us (or a sale of all or substantially all of our assets related to Rubraca) or our receipt of notice of certain breaches by us of our obligations under material in-license agreements related to Rubraca and (v) September 30, 2022.
We are obligated to repay on a quarterly basis, beginning on the earliest to occur of (i) the termination of the ATHENA Trial, (ii) the approval by the FDA of an update to the label portion of the Rubraca new drug application (“NDA”) to include in such label the treatment of an indication resulting from the ATHENA Trial, (iii) the date on which we determine that the results of the ATHENA Trial are insufficient to achieve such an expansion of the Rubraca label to cover an indication based on the ATHENA Trial and (iv) September 30, 2022 (the “Repayment Start Date”).
● 9.75% (which rate may be increased incrementally up to approximately 10.25% in the event the Borrowed Amount exceeds $166.5 million) of the direct Rubraca net sales recorded by us and our subsidiaries worldwide and our future out-licensees in the United States, if any, during such quarter;
● 19.5% of any royalty payments received by us and our subsidiaries during such quarter based on the sales of Rubraca by our future out-licensees outside the United States, if any; and
● 19.5% of any other amounts received by us and our subsidiaries in connection with any other commercialization arrangement for Rubraca, including any upfront and milestone payments and proceeds of infringement claims (which payments are not subject to the caps described below).
Quarterly payments are capped at $8.5 million, unless the label portion of the Rubraca NDA is expanded by the FDA to include such label the treatment of an indication resulting from the ATHENA Trial, in which case the quarterly payment is capped at $13.5 million. In the event the aggregate Borrowed Amount exceeds $166.5 million, such quarterly limits will be incrementally increased to a maximum of approximately $8.94 million and $14.19 million, respectively. The maximum amount required to be repaid under the agreement is two times the aggregate Borrowed Amount, which may be $350 million in the event we borrow the full $175 million under the Financing Agreement.
In the event we have not made payments on or before December 30, 2025 equal to at least the Borrowed Amount, we are required to make a lump sum payment in an amount equal to such Borrowed Amount less the aggregate of all prior quarterly payments described above. All other payments are contingent on the performance of Rubraca. There is no final maturity date on the Financing Agreement.
Our obligations under the Financing Agreement are secured under a Pledge and Security agreement by a first priority security interest in all of our assets related to Rubraca, including intellectual property rights and a pledge of the equity of our wholly owned subsidiaries, Clovis Oncology UK Limited and Clovis Oncology Ireland Limited. In addition, the obligations are guaranteed by Clovis Oncology UK Limited and Clovis Oncology Ireland Limited, secured by a first priority security interest in all the assets of those subsidiaries.
Pursuant to the Financing Agreement, we have agreed to certain limitations on our operations, including limitations on making certain restricted junior payments, including payment of dividends, limitation on liens and certain limitations on the ability of our non-guarantor subsidiaries to own certain assets related to Rubraca and to incur indebtedness.
We may terminate the Financing Agreement at any time by paying the lenders an amount (the “Discharge Amount”) equal to the sum of (a) (A) the greater of (x) the Borrowed Amount plus (i) if such date is during calendar year 2019, $35.0 million or (ii) if such date is during calendar year 2020 or thereafter, $50.0 million and (y) (i) if such date is prior to the Repayment Start Date, 1.75 times the Borrowed Amount or (ii) if such date is after the Repayment Start Date, 2.00 times the Borrowed Amount minus (B) the aggregate amount of all quarterly payments previously paid to the lenders plus (b) all other obligations which have accrued but which have not been paid under the loan documents, including expense reimbursement.
In the event of (i) a change of control of us, we must pay the Discharge Amount to the lenders and (ii) an event of default under the Financing Agreement (which includes, among other events, breaches or defaults under or terminations of our material in-license agreements related to Rubraca and defaults under our other material indebtedness), the lenders have the right to declare the Discharge Amount to be immediately due and payable.
For the year ended December 31, 2020, we recorded $110.9 million as a long-term liability on the Consolidated Balance Sheets and future quarterly draws will be recorded as a long-term liability on the Consolidated Balance Sheets. In connection with the transaction, we incurred $1.8 million of debt issuance costs. The debt issuance costs are presented as a deduction from the Sixth Street financing liability on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the Financing Agreement using the straight-line method. As of December 31, 2020, the balance of unamortized debt issuance costs was $1.5 million.
For the year ended December 31, 2020, we used an effective interest rate of 14.6%. For subsequent periods, we will use the prospective method whereby a new effective interest rate is determined based on the revised estimate of remaining cash flows. The new rate is the discount rate that equates the present value of the revised estimate of remaining cash flows with the carrying amount of the debt, and it will be used to recognize interest expense for the remaining periods. Under this method, the effective interest rate is not constant, and any change in expected cash flows is recognized prospectively as an adjustment to the effective yield.
Expected maturities of our Financing Agreement consisted of the following as of December 31, 2020 (in thousands):
$
-
8,934
41,091
45,532
16,820
Thereafter
-
112,377
Less debt issuance costs
(1,460)
Current portion
-
Long-term portion
$
110,917
The following table sets forth total interest expense recognized during the years ended December 31, 2020, 2019 and 2018 (in thousands):
Year ended December 31,
Interest on convertible notes
$
11,934
$
13,680
$
9,812
Amortization of debt issuance costs
2,672
2,858
2,178
Debt issuance cost derecognized related to convertible debt transactions
4,345
-
-
Interest on finance lease
-
Interest on borrowings under ATHENA financing agreement
10,624
1,997
-
Accretion of interest on milestone liability
-
-
Interest on capital lease liability
-
-
Other interest
-
Total interest expense
$
30,508
$
19,405
$
13,183
11. Stockholders’ Equity
Common Stock
In April 2018, we sold 1,837,898 shares of our common stock in a public offering at $54.41 per share. The net proceeds from the offering were $93.9 million, after deducting underwriting discounts and commissions and offering expenses.
In May 2020, we sold 11,090,000 shares of our common stock in a public offering at $8.05 per share. The net proceeds from the offering were $82.8 million, after deducting underwriting discounts and commissions and offering expenses.
The holders of common stock are entitled to one vote per share on all matters to be voted upon by our stockholders. Subject to the preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by our board of directors.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of changes in foreign currency translation adjustments, which includes changes in a subsidiary’s functional currency, and unrealized gains and losses on available-for-sale securities.
The changes in accumulated balances related to each component of other comprehensive income (loss) are summarized as follows (in thousands):
Foreign Currency
Unrealized
Total Accumulated
Translation Adjustments
(Losses) Gains
Other Comprehensive Loss
Balance at December 31, 2018
$
(44,460)
$
(174)
$
(44,634)
Other comprehensive income (loss)
(272)
(231)
Total before tax
(44,732)
(133)
(44,865)
Tax effect
-
-
-
Balance at December 31, 2019
(44,732)
(133)
(44,865)
Other comprehensive income (loss)
(6)
Total before tax
(44,165)
(139)
(44,304)
Tax effect
-
-
-
Balance at December 31, 2020
$
(44,165)
$
(139)
$
(44,304)
The period change in each of the periods was primarily due to the foreign currency translation of the goodwill and deferred income taxes associated with the acquisition of EOS in November 2013. There were no reclassifications out of accumulated other comprehensive loss in the years ended December 31, 2020, 2019 and 2018.
Effective October 1, 2018, substantially all assets and activities related to EOS were transferred from our Italian subsidiary to the U.S. This had the impact of changing the functional currency of goodwill from the Euro to USD. Therefore, the balance of goodwill will no longer change due to foreign currency gains and losses.
12. Share-Based Compensation
Stock Options
In April 2020, our board of directors approved the 2020 Stock Incentive Plan (the “2020 Plan”), which became effective upon approval. The 2020 Plan provides for the grant of nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other share-based awards to our employees and directors (collectively, “awards”). Common shares authorized for issuance under the 2020 Plan were 6,470,00 at December 31, 2020, which represents the initial reserve. Stock options granted vest ratably over either a one-year period or three-year period for Board of Director grants. Employee stock options generally vest over a three- or four-year period with 33% or 25%, respectively, of the options cliff-vesting after year one and the remaining options vesting ratably over each subsequent month. All stock options expire 10 years from the date of grant.
In August 2011, our board of directors approved the 2011 Stock Incentive Plan (the “2011 Plan”), which became effective upon the closing of our initial public offering in November 2011. The 2011 Plan provides for the granting of incentive and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other share-based awards to our employees and directors. Stock options granted vest ratably over either a one-year period or three-year period for Board of Director grants. Employee stock options generally vest over a four-year period with 25% of the options cliff-vesting after year one and the remaining options vesting ratably over each subsequent month. All stock options expire 10 years from the date of grant.
The adoption of the 2020 Plan did not affect the terms and conditions of any outstanding awards granted under the 2011 Plan. Upon the adoption of the 2020 Plan, no future grants will be granted under the 2011 Plan, but the 2011 Plan will remain in effect with respect to outstanding awards granted thereunder.
Share-based compensation expense for the years ended December 31, 2020, 2019 and 2018, respectively, was recognized in the accompanying Consolidated Statements of Operations and Comprehensive Loss as follows (in thousands):
Year ended December 31,
Research and development
$
25,577
$
25,838
$
20,489
Selling, general and administrative
25,217
28,466
28,601
Total share-based compensation expense
$
50,794
$
54,304
$
49,090
We did not recognize a tax benefit related to share-based compensation expense during the years ended December 31, 2020, 2019 and 2018 as we maintain net operating loss carryforwards and have established a valuation allowance against the entire net deferred tax asset as of December 31, 2020.
The following table summarizes the activity relating to our options to purchase common stock:
Weighted
Weighted
Average
Aggregate
Average
Remaining
Intrinsic
Number of
Exercise
Contractual
Value
Options
Price
Term (Years)
(Thousands)
Outstanding at December 31, 2019
6,287,025
$
42.24
Granted
980,592
7.35
Exercised
(117,932)
3.23
Forfeited
(649,016)
41.15
Outstanding at December 31, 2020
6,500,669
$
37.79
5.6
$
Vested and expected to vest at December 31, 2020
6,371,758
$
38.24
5.5
$
Vested and exercisable at December 31, 2020
5,026,455
$
43.87
4.7
$
The aggregate intrinsic value in the table above represents the pretax intrinsic value, based on our closing stock price of $4.80 as of December 31, 2020, which would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date.
The following table summarizes information about our stock options as of and for the years ended December 31, 2020, 2019 and 2018 (in thousands, except weighted-average grant date fair value per share):
Year ended December 31,
Weighted-average grant date fair value per share
$
5.67
$
13.53
$
32.09
Intrinsic value of options exercised
$
$
1,525
$
1,714
Cash received from stock option exercises
$
$
1,361
$
1,869
As of December 31, 2020, the unrecognized share-based compensation expense related to unvested options, adjusted for expected forfeitures, was $18.1 million and the estimated weighted-average remaining vesting period was 1.5 years.
The fair value of each share-based award is estimated on the grant date using the Black-Scholes option pricing model based upon the weighted-average assumptions provided in the following table:
Year ended December 31,
Dividend yield
-
-
-
Volatility (a)
%
%
%
Risk-free interest rate (b)
0.49
%
1.67
%
2.92
%
Expected term (years) (c)
6.0
5.9
5.9
(a) Volatility: The expected volatility was estimated using our historical data.
(b) Risk-free interest rate: The rate is based on the yield on the grant date of a zero-coupon U.S. Treasury bond whose maturity period approximates the option’s expected term.
(c) Expected term: The expected term of the award was estimated using our historical data.
The total fair value of stock options vested during the years ended December 31, 2020, 2019 and 2018 was $22.4 million, $32.8 million and $43.3 million, respectively.
Restricted Stock
Beginning in 2016, we issued restricted stock units (“RSUs”) to certain employees under the 2011 Plan and 2020 Plan. The RSUs vest either (i) over two years, with 50% vesting one year from the date of grant and the remaining 50% vesting two years from the date of grant or (ii) over four years, with 25% vesting one year from the date of grant and the remaining 75% vesting ratably each subsequent quarter over the following three years, as defined in the grant agreement. Vested RSUs are payable in shares of our common stock at the end of the vesting period. RSUs are measured based on the fair value of the underlying stock on the grant date. The minimum statutory tax on the value of common stock shares issued to employees upon vesting are paid by us through the sale of registered shares of our common stock.
The following table summarizes the activity related to our unvested RSUs:
Weighted
Average
Number of
Grant Date
Units
Fair Value
Unvested at December 31, 2019
2,171,347
$
28.37
Granted
2,441,804
8.21
Vested
(1,012,699)
28.85
Forfeited
(636,905)
15.51
Unvested at December 31, 2020
2,963,547
$
14.36
Expected to vest after December 31, 2020
2,862,148
$
14.09
As of December 31, 2020, the unrecognized share-based compensation expense related to RSUs, adjusted for expected forfeitures, was $33.6 million and the estimated weighted-average remaining vesting period was 2.2 years.
Common Stock Reserved for Issuance
As of December 31, 2020, we reserved shares of common stock for future issuance as follows:
Available for
Grant
Total Shares of
Common Stock
or Future
Common Stock
Outstanding
Issuance
Reserved
2009 Equity Incentive Plan
64,522
-
64,522
2011 Stock Incentive Plan
8,878,976
-
8,878,976
2020 Stock Incentive Plan
520,718
5,949,282
6,470,000
2011 Employee Stock Purchase Plan
-
361,656
361,656
Total
9,464,216
6,310,938
15,775,154
Employee Stock Purchase Plan
In August 2011, our board of directors approved the Clovis Oncology, Inc. 2011 Employee Stock Purchase Plan (the “Purchase Plan”). Each year, on the date of our annual meeting of stockholders and at the discretion of our board of directors, the amount of shares reserved for issuance under the Purchase Plan may be increased by up to the lesser of (1) a number of additional shares of our common stock representing 1% of our then-outstanding shares of common stock, (2) 344,828 shares of our common stock and (3) a lesser number of shares as approved by the Board. The Purchase Plan provides for consecutive six-month offering periods, during which participating employees may elect to have up to 10% of their compensation withheld and applied to the purchase of common stock at the end of each offering period. The purchase price of the common stock is 85% of the lower of the fair value of a share of common stock on the first trading date of each offering period or the fair value of a share of common stock on the last trading day of the
offering period. The Purchase Plan will terminate on August 24, 2021, the tenth anniversary of the date of initial adoption of the Purchase Plan. We sold 283,588 and 175,634 shares to employees in 2020 and 2019, respectively. There were 361,656 shares available for sale under the Purchase Plan as of December 31, 2020. The weighted-average estimated grant date fair value of purchase awards under the Purchase Plan during the years ended December 31, 2020 and 2019 was $4.63 and $6.60 per share, respectively. The total share-based compensation expense recorded as a result of the Purchase Plan was approximately $1.1 million, $1.0 million and $0.9 million during the years ended December 31, 2020, 2019 and 2018, respectively.
The fair value of purchase awards granted to our employees during the years ended December 31, 2020, 2019 and 2018 was estimated using the Black-Scholes option pricing model based upon the weighted-average assumptions provided in the following table:
Year ended December 31,
Dividend yield
-
-
-
Volatility (a)
%
%
%
Risk-free interest rate (b)
0.90
%
2.20
%
1.90
%
Expected term (years) (c)
0.5
0.5
0.5
(a) Volatility: The expected volatility was estimated using our historical data.
(b) Risk-free interest rate: The rate is based on the U.S. Treasury yield in effect at the time of grant with terms similar to the contractual term of the purchase right.
(c) Expected term: The expected life of the award represents the six-month offering period for the Purchase Plan.
13. Commitments and Contingencies
Manufacture and Services Agreement Commitments
On October 3, 2016, we entered into a Manufacturing and Services Agreement (the “Agreement”) with a non-exclusive third-party supplier for the production of the active ingredient for Rubraca. Under the terms of the Agreement, we will provide the third-party supplier a rolling forecast for the supply of the active ingredient in Rubraca that will be updated by us on a quarterly basis. We are obligated to order material sufficient to satisfy an initial quantity specified in a forecast. In addition, the third-party supplier has constructed, in its existing facility, a production train that will be exclusively dedicated to the manufacture of the Rubraca active ingredient. We made scheduled capital program fee payments toward capital equipment and other costs associated with the construction of the dedicated production train. Beginning in the fourth quarter of 2018, once the facility was operational, we were obligated to pay a fixed facility fee each quarter for the duration of the Agreement, which expires on December 31, 2025, unless extended by mutual consent of the parties. As of December 31, 2020, $68.1 million of purchase commitments remain under the Agreement.
At the time we entered into the Agreement, we evaluated the Agreement as a whole and bifurcated into lease and non-lease components, which consisted of an operating lease of warehouse space, capital lease of equipment, purchase of leasehold improvements and manufacturing costs based upon the relative fair values of each of the deliverables. During October 2018, the production train was placed into service and we recorded the various components of the Agreement.
Legal Proceedings
We and certain of our officers were named as defendants in several lawsuits, as described below. We cannot reasonably predict the outcome of these legal proceedings, nor can we estimate the amount of loss or range of loss, if any, that may result. An adverse outcome in these proceedings could have a material adverse effect on our results of operations, cash flows or financial condition.
Rociletinib-Related Litigation
Following Clovis’ regulatory announcement in November 2015 of adverse developments in its ongoing clinical trials for rociletinib, Clovis and certain of its current and former executives were named in various securities lawsuits, the largest of which was a putative class action lawsuit in the District of Colorado (the “Medina Action”) which was settled on October 26, 2017 (the “Medina Settlement”). The remaining actions are discussed below.
In March 2017, two putative shareholders of the Company, Macalinao and McKenry (the “Derivative Plaintiffs”), filed shareholder derivative complaints against certain directors and officers of the Company in the Court of Chancery of the State of Delaware. On May 4, 2017, the Macalinao and McKenry actions were consolidated for all purposes in a single proceeding under the caption In re Clovis Oncology, Inc. Derivative Litigation, Case No, 2017-0222 (the “Consolidated Derivative Action”).
On May 18, 2017, the Derivative Plaintiffs filed a Consolidated Verified Shareholder Derivative Complaint (the “Consolidated Derivative Complaint”). The Consolidated Derivative Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by allegedly causing or allowing misrepresentations of the Company’s business operations and prospects, failing to ensure that the TIGER-X clinical trial was being conducted in accordance with applicable rules, regulations and protocols, and engaging in insider trading. The Consolidated Derivative Complaint sought, among other things, an award of money damages.
On July 31, 2017, the defendants filed a motion to dismiss the Consolidated Derivative Complaint. Plaintiffs filed an opposition to the motion to dismiss on August 31, 2017, and the defendants filed a reply in further support of the motion to dismiss on September 26, 2017.
While the motion to dismiss remained pending, on November 19, 2018, Plaintiffs filed a motion for leave to file a supplemental consolidated complaint, and on November 20, 2018, the Court granted that motion. On November 27, 2018, Plaintiffs filed their supplemental complaint (the “Supplemental Derivative Complaint”), which adds allegations concerning the Company’s, Mr. Mahaffy’s and Mr. Mast’s settlements with the United States Securities and Exchange Commission. Pursuant to a briefing schedule entered by the Court, the defendants filed a supplemental motion to dismiss the Supplemental Derivative Complaint on February 6, 2019; plaintiffs filed an opposition brief on February 22, 2019; and the defendants filed a reply brief on March 5, 2019. The Court held oral arguments on the defendants’ motions to dismiss on June 19, 2019. At the oral arguments, the Court ordered the parties to submit supplemental letter briefs on the motion to dismiss.
On October 1, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Chancery Court, issued a Memorandum Opinion granting in part and denying in part defendants’ motions to dismiss. The Supplemental Derivative Complaint was dismissed as to Plaintiffs’ derivative claims for unjust enrichment and insider trading. The Court allowed Plaintiffs’ remaining derivative claim for breach of fiduciary duty to proceed. Defendants filed an answer to the Supplemental Derivative Complaint on December 27, 2019.
On December 17, 2019, the parties participated in a mediation, which did not result in a settlement. On December 22, 2019, the Company’s board of directors formed a Special Litigation Committee (the “SLC”) to conduct an investigation of the claims asserted in the Supplemental Derivative Complaint. On February 18, 2020, the SLC moved to stay all proceedings in the Consolidated Derivative Action pending completion of its investigation. Plaintiffs filed their opposition to the motion to stay on March 3, 2020 and the SLC filed its reply on March 13, 2020. On May 12, 2020, after hearing oral argument, Vice Chancellor Slights granted the SLC’s motion to stay proceedings until September 18, 2020 so that the SLC may complete its investigation. On September 11, 2020, Vice Chancellor Slights granted the parties’ request to extend the stay until October 31, 2020, to allow the SLC further time to complete its investigation. On October 26, 2020, Vice Chancellor Slights granted the parties’ request to further extend the stay until November 15, 2020. On November 13, 2020, vice Chancellor Slights granted the parties’ request to further extend the stay until December 15, 2020.
On December 16, 2020, the SLC filed a report (the “SLC Report”) containing the findings of its investigation. The SLC Report concludes that the claims asserted in the Consolidated Derivative Action lack merit. Specifically, the SLC Report finds that the defendants did not breach their fiduciary duties in connection with the Company’s TIGER-X clinical trial. Accordingly, on the same date that the SLC Report was filed, the SLC filed a motion to terminate the Consolidated Derivative Action in Delaware Chancery Court. A briefing schedule on the motion to terminate has not yet been set.
While the motion to terminate remains pending before Vice Chancellor Slights, the Company does not believe this litigation will have a material impact on its financial position or results of operations.
European Patent Opposition
Two European patents in the rucaparib camsylate salt/polymorph patent family (European Patent 2534153 and its divisional European Patent 3150610) were opposed. In particular, opposition notices against European Patent 2534153 were filed by two parties on June 20, 2017. During an oral hearing that took place on December 4, 2018, the European Patent Office’s Opposition Division maintained European Patent 2534153 in amended and narrowed form with claims to certain crystalline forms of rucaparib camsylate, including, but not limited to, rucaparib S-camsylate Form A, the crystalline form in Rubraca. Clovis and one opponent, Hexal AG, appealed the written decision of the European Opposition Division and filed reply appeal briefs in early November 2019. An opposition against European Patent 3150610 was filed by Generics (UK) Limited on April 30, 2020 on grounds similar to those raised in the opposition notices against European Patent 2534153, which grounds are common in such proceedings. Moreover, these grounds of opposition, as well as documents based on which lack of patentability has been alleged, were considered by the European Patent Office during the examination stage, and the claims were deemed to comply with the applicable law when granting the patent. Clovis responded to the opposition notice in European Patent 3150610 on January 8, 2021, amending the claims to be directed to the use of rucaparib maleate in a method of inhibiting PARP activity or treating cancer. A preliminary opinion and summons to oral proceedings were issued on January 26, 2021. The oral hearing is scheduled for November 18, 2021. The preliminary opinion provides a non-binding indication of the Opposition Division’s initial view based on the documents that have thus far been submitted, which agrees with our positions on a number of grounds of opposition and agrees with an objection made by the opponent, but only with respect to some of the claims. As part of the opposition proceedings, we have the opportunity to submit further arguments and pursue alternative claims in the form of auxiliary requests. While the ultimate results of patent challenges can be difficult to predict, it is our view that a number of factors support patentability, and we believe a successful challenge of all claims would be difficult.
14. License Agreements
Rubraca
In June 2011, we entered into a license agreement with Pfizer to obtain the exclusive global rights to develop and commercialize Rubraca. The exclusive rights are exclusive even as to Pfizer and include the right to grant sublicenses. Pursuant to the terms of the license agreement, we made a $7.0 million upfront payment to Pfizer and are required to make additional payments to Pfizer for the achievement of certain development and regulatory and sales milestones and royalties on sales as required by the license agreement. Prior to the FDA approval of Rubraca, we made milestone payments of $1.4 million, which were recognized as acquired in-process research and development expense.
On August 30, 2016, we entered into a first amendment to the worldwide license agreement with Pfizer, which amends the June 2011 existing worldwide license agreement to permit us to defer payment of the milestone payments payable upon (i) FDA approval of an NDA for 1st Indication in US and (ii) European Commission approval of an MAA for 1st Indication in the EU, to a date that is 18 months after the date of achievement of such milestones.
On December 19, 2016, Rubraca received its initial FDA approval. This approval resulted in a $0.75 million milestone payment to Pfizer as required by the license agreement, which was paid in the first quarter of 2017. This FDA approval also resulted in an obligation to pay a $20.0 million milestone payment, for which we exercised the option to defer payment by agreeing to pay $23.0 million within 18 months after the date of the FDA approval. We paid the $23.0 million milestone payment in June 2018.
In April 2018, Rubraca received a second FDA approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in April 2018.
In May 2018, Rubraca received its initial European Commission marketing authorization. This approval resulted in an obligation to pay a $20.0 million milestone payment, which we paid in June 2018.
In January 2019, Rubraca received a second European Commission approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in February 2019.
In June 2019, we paid a $0.75 million milestone payment due to the launch of Rubraca as maintenance therapy in Germany in March 2019.
In May 2020, Rubraca received a third FDA approval for Rubraca as a monotherapy treatment of adult patients with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer. This approval resulted in an obligation to pay an $8.0 million milestone payment, which we paid in June 2020.
These milestone payments were recognized as intangible assets and are amortized over the estimated remaining useful life of Rubraca.
We are obligated under the license agreement to use commercially reasonable efforts to develop and commercialize Rubraca and we are responsible for all ongoing development and commercialization costs for Rubraca. We are required to make regulatory milestone payments to Pfizer of up to an additional $8.0 million in aggregate if specified clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we are obligated to make sales milestone payments to Pfizer if specified annual sales targets for Rubraca are met, which relate to annual sales targets of $250.0 million and above, which, in the aggregate, could amount to total milestone payments of $170.0 million, and tiered royalty payments at a mid-teen percentage rate on net sales, with standard provisions for royalty offsets to the extent we need to obtain any rights from third parties to commercialize Rubraca.
The license agreement with Pfizer will remain in effect until the expiration of all of our royalty and sublicense revenue obligations to Pfizer, determined on a product-by-product and country-by-country basis, unless we elect to terminate the license agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Pfizer can terminate the agreement, resulting in a loss of our rights to Rubraca and an obligation to assign or license to Pfizer any intellectual property rights or other rights we may have in Rubraca, including our regulatory filings, regulatory approvals, patents and trademarks for Rubraca.
In April 2012, we entered into a license agreement with AstraZeneca to acquire exclusive rights associated with Rubraca under a family of patents and patent applications that claim methods of treating patients with PARP inhibitors in certain indications. The license enables the development and commercialization of Rubraca for the uses claimed by these patents. AstraZeneca also receives royalties on net sales of Rubraca.
Lucitanib
On November 19, 2013, we acquired all of the issued and outstanding capital stock of EOS pursuant to the terms set forth in that certain Stock Purchase Agreement, dated as of November 19, 2013 (the “Stock Purchase Agreement”), by and among the Company, EOS, its shareholders (the “Sellers”) and Sofinnova Capital V FCPR, acting in its capacity as the Sellers’ representative. Following the acquisition, EOS became a wholly-owned subsidiary of the Company. Under the terms of the Stock Purchase Agreement, in addition to the initial purchase price paid at the time of the closing of the acquisition and other license fees due to Advenchen described below, we will also be obligated to pay to the Sellers a milestone payment of $65.0 million upon obtaining the first NDA approval from the FDA with respect to lucitanib.
In October 2008, Ethical Oncology Science, S.p.A. (“EOS”) (now known as Clovis Oncology Italy S.r.l.) entered into an exclusive license agreement with Advenchen Laboratories LLC (“Advenchen”) to develop and commercialize lucitanib on a global basis, excluding China.
We are obligated to pay Advenchen tiered royalties at percentage rates in the mid-single digits on net sales of lucitanib, based on the volume of annual net sales achieved. In addition, after giving effect to the first and second amendments to the license agreement, we are required to pay to Advenchen 25% of any consideration, excluding royalties, we receive from sublicensees, in lieu of the milestone obligations set forth in the agreement. We are obligated under the agreement to use commercially reasonable efforts to develop and commercialize at least one product containing lucitanib, and we are also responsible for all remaining development and commercialization costs for lucitanib.
The license agreement with Advenchen will remain in effect until the expiration of all of our royalty obligations to Advenchen, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Advenchen can terminate the agreement, resulting in a loss of our rights to lucitanib.
FAP-2286 and the Radionuclide Therapy Development Program
In September 2019, we entered into a global license and collaboration agreement with 3BP to develop and commercialize a PTRT and imaging agent targeting FAP. The lead candidate, designated internally as FAP-2286, is being developed pursuant to a global development plan agreed to by the parties. We are responsible for the costs of all preclinical and clinical development activities described in the plan, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the preclinical development phase of the collaboration. Upon the signing of the license and collaboration agreement in September 2019, we made a $9.4 million upfront payment to 3BP, which we recognized as acquired in-process research and development expense.
Pursuant to the terms of the FAP agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP single- to low-double-digit royalties on net sales of the FAP-targeted therapeutic product and imaging agent, based on the volume of annual net sales achieved. In addition, 3BP is entitled to receive 34% of any consideration, excluding royalties on the therapeutic product, pursuant to any sublicenses we may grant.
We are obligated under the license and collaboration agreement to use diligent efforts to develop FAP-2286 and commercialize a FAP-targeted therapeutic product and imaging agent, and we are responsible for all commercialization costs in our territory. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights. 3BP also has the right to terminate the agreement under certain circumstances in connection with our change of control in which the acquiring party retains a product competitive with the FAP-targeted therapeutic product or, in the event marketing authorization has not yet been obtained, does not agree to the then-current global development plan.
In February 2020, we finalized the terms of a drug discovery collaboration agreement with 3BP to identify up to three additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we will obtain global rights for any resulting product candidates. We are responsible for the costs of all preclinical and clinical development activities conducted under the discovery program, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the discovery and preclinical development phase for each collaboration target. The discovery collaboration agreement was effective December 31, 2019, for which we incurred a $2.1 million technology access fee, which we accrued and recognized as a research and development expense.
Pursuant to the terms of the discovery collaboration agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP a 6% royalty on net sales of License Products (as defined in the agreement), based on the volume of quarterly net sales achieved.
We are obligated under the discovery collaboration agreement to use diligent efforts to develop and commercialize the product candidates, if any, that result from the discovery program, and we are responsible for all clinical development and commercialization costs. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights.
15. Net Loss Per Common Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding using the treasury-stock method for the stock options and RSUs and the if-converted method for the convertible senior notes. As a result of our net losses for the periods presented, all potentially dilutive common share equivalents were considered anti-dilutive and were excluded from the computation of diluted net loss per share.
The shares outstanding at the end of the respective periods presented in the table below were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect (in thousands):
Year ended December 31,
Common shares under stock incentive plans
3,095
2,480
1,319
Convertible senior notes
25,969
41,598
8,584
Total potential dilutive shares
29,064
44,078
9,903
16. Income Taxes
We are subject to U.S. federal, state and foreign income tax. The geographical components of loss before income taxes consisted of the following (in thousands):
Year ended December 31,
Domestic
$
(370,839)
$
(399,497)
$
(368,402)
Foreign
1,080
1,001
Total loss before income taxes
$
(369,759)
$
(398,626)
$
(367,401)
The income tax provision consists of the following current and deferred tax expense (benefit) amounts (in thousands):
Year ended December 31,
Current tax:
U.S. Federal & State
$
$
$
Foreign
(597)
1,795
Total current expense (benefit)
(547)
1,798
Deferred tax:
U.S. Federal & State
-
-
-
Foreign
-
-
-
Total deferred (benefit)
-
-
-
Total income tax expense (benefit)
$
(547)
$
1,798
$
A reconciliation of the U.S. federal statutory income tax rate to our effective tax rate is provided below:
Year ended December 31,
Federal income tax benefit at statutory rate
(21.0)
%
(21.0)
%
(21.0)
%
State income tax benefit, net of federal benefit
(1.6)
(2.9)
(3.1)
Tax credits
(1.5)
(1.1)
(1.3)
Change in uncertain tax positions
0.1
(4.3)
0.1
SEC settlement costs
-
-
1.1
Convertible debt transactions
2.2
-
-
Prior year true ups
0.9
0.1
(0.8)
Share based compensation
2.6
2.3
0.8
Tax rate changes
1.4
0.1
0.3
Change in valuation allowance
16.1
26.5
23.2
Other
0.6
0.8
0.9
Effective income tax rate
(0.2)
%
0.5
%
0.2
%
The significant components of our deferred tax assets and liabilities are as follows (in thousands):
December 31,
Deferred tax assets:
Net operating loss carryforward
$
414,932
$
396,100
Tax credit carryforwards
247,064
243,901
Interest expense limitation carryforward
5,371
4,449
Intangible assets
94,558
61,459
Share-based compensation expense
33,169
34,006
Product acquisition costs
4,992
6,288
Lease liabilities
6,122
5,317
Accrued liabilities and other
7,488
5,817
Total deferred tax assets
813,696
757,337
Valuation allowance
(806,622)
(750,508)
Deferred tax assets, net of valuation allowance
7,074
6,829
Deferred tax liabilities:
Right-of-use assets
(6,799)
(6,337)
Prepaid expenses and fixed assets
(275)
(492)
Total deferred tax liabilities
(7,074)
(6,829)
Net deferred tax liability
$
-
$
-
The Tax Cuts and Jobs Act (the “Act”), enacted in the U.S. on December 22, 2017, subjects a U.S. shareholder to tax on the Global Intangible Low-Taxed Income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, “Accounting for Global Intangible Low-Taxed Income”, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI in the year the tax is incurred.
The realization of deferred tax assets is dependent upon a number of factors including future earnings, the timing and amount of which is uncertain. A valuation allowance was established for the net deferred tax asset balance due to management’s belief that the realization of these assets is not likely to occur in the foreseeable future. We recorded a net increase to the valuation allowance of $56.1 million and $102.6 million for the years ended December 31, 2020 and 2019, respectively, primarily due to the growth in net operating losses and amortizable research and development expenses incurred during the year.
In addition, the Company recognizes tax benefits if it is more likely than not to be sustained under audit by the relevant taxing authority based on technical merits. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained during audit. If the threshold is met, the tax benefit is measured and recognized at the largest amount above the greater than 50% likelihood threshold at time of settlement. The balance of unrecognized tax benefits at December 31, 2020 of $8.0 million, if recognized, would not impact the Company’s effective tax rate as long as we remain subject to a full valuation allowance. The following table summarizes the gross amounts of unrecognized tax benefits (in thousands):
Year ended December 31,
Balance at beginning of year
$
7,525
$
24,775
Changes related to prior period tax positions
(35)
Additions related to current period tax positions
Settlements with tax authorities
-
(17,613)
Expiration of statute of limitations
-
-
Balance at end of year
$
8,004
$
7,525
As of December 31, 2020, we had approximately $1.7 billion, $1.6 billion and $2.0 million of U.S., federal, state and foreign net operating loss carryforwards, respectively. The U.S. federal net operating losses, generated prior to the enactment of the Act, totaling $1.1 billion, will expire from 2029 to 2037 if not utilized and the U.S. federal net operating losses generated after the enactment of the Act, totaling $0.6 billion, do not expire and are carried forward
indefinitely. U.S. state net operating losses will expire from 2024 to 2040 if not utilized. We have research and development and orphan drug tax credit carryforwards of $254.5 million that will expire from 2030 through 2040 if not utilized.
We believe that a change in ownership as defined under Section 382 of the U.S. Internal Revenue Code occurred as a result of our public offering of common stock completed in April 2012. Future utilization of the federal net operating losses (“NOL”) and tax credit carryforwards accumulated from inception to the change in ownership date will be subject to annual limitations to offset future taxable income. It is possible that a change in ownership will occur in the future, which will limit the NOL amounts generated since the last estimated change of ownership. As of December 31, 2019, our audit by the Internal Revenue Service was finalized for the year ended December 31, 2015. The amount of orphan drug tax credit for years 2009 and 2010 was adjusted, but no additional taxes are due as a result of our net operating losses; this also resulted in a release of the uncertain tax position (“UTP”) of $17.6 million and a decrease to the U.S. federal net operating loss carryforward due to the release of the UTP recorded against the credit. Our federal and state income taxes for the period from January 1, 2009 to December 31, 2014, other than the orphan drug tax credit, and January 1, 2016 through December 31, 2020 remain open to an audit. Our foreign subsidiaries are also subject to tax audits by tax authorities in the jurisdictions where they operate for the periods from December 31, 2016 to December 31, 2020.
We may be assessed interest and penalties related to the settlement of tax positions and such amounts will be recognized within income tax expense when assessed. To date, no interest and penalties have been recognized.
17. Employee Benefit Plans
We maintain a retirement plan, which is qualified under section 401(k) of the Internal Revenue Code for our U.S. employees. The plan allows eligible employees to defer, at the employee’s discretion, pretax compensation up to the IRS annual limits. We matched contributions up to 4% of the eligible employee’s compensation or the maximum amount permitted by law. Total expense for contributions made to U.S. employees was approximately $2.1 million, $2.2 million and $2.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. Our international employees participate in retirement plans or postretirement life insurance plans governed by the local laws in effect for the country in which they reside. We made contributions to the retirement plans or postretirement life insurance plans of international employees of approximately $1.5 million, $1.1 million and $0.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.
18. Segment Information
The following table presents information about our reportable segments for the year months ended December 31, 2020, 2019 and 2018 (in thousands):
Year ended December 31,
U.S.
Ex-U.S.
Total
U.S.
Ex-U.S.
Total
U.S.
Ex-U.S.
Total
Product revenue
$
146,259
$
18,263
$
164,522
$
137,187
$
5,819
$
143,006
$
95,388
$
-
$
95,388
Operating expenses:
Cost of sales - product
29,526
6,602
36,128
28,179
1,747
29,926
19,444
-
19,444
Cost of sales - intangible asset amortization
2,287
2,890
5,177
1,956
2,804
4,760
1,954
2,630
Research and development
249,444
8,263
257,707
275,518
7,628
283,146
226,925
4,422
231,347
Selling, general and administrative
139,455
24,439
163,894
161,132
21,637
182,769
161,743
14,038
175,781
Acquired in-process research and development
-
-
-
9,440
-
9,440
-
-
-
Other operating expenses
3,804
-
3,804
9,711
-
9,711
-
-
-
Total expenses
424,516
42,194
466,710
485,936
33,816
519,752
410,066
19,136
429,202
Operating loss
(278,257)
(23,931)
(302,188)
(348,749)
(27,997)
(376,746)
(314,678)
(19,136)
(333,814)
19. Quarterly Information (Unaudited)
The results of operations on a quarterly basis for the years ended December 31, 2020 and 2019 were as follows (in thousands):
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
September 30,
December 31,
Revenues:
`
Product revenue
$
42,564
$
39,887
$
38,772
$
43,299
$
33,118
$
32,978
$
37,603
$
39,307
Operating expenses:
Cost of sales - product
9,096
9,120
8,438
9,474
7,405
6,445
8,134
7,942
Cost of sales - intangible asset amortization
1,212
1,280
1,343
1,342
1,120
1,217
1,212
1,211
Research and development
68,221
69,878
62,902
56,706
62,031
70,746
77,896
72,473
Selling, general and administrative
42,598
41,902
38,636
40,758
47,761
48,029
41,811
45,168
Acquired in-process research and development
-
-
-
-
-
-
9,440
-
Other operating expenses
3,449
-
-
-
-
5,539
4,172
Total expenses
124,576
122,535
111,319
108,280
118,317
126,437
144,032
130,966
Operating loss
(82,012)
(82,648)
(72,547)
(64,981)
(85,199)
(93,459)
(106,429)
(91,659)
Other income (expense):
Interest expense
(9,561)
(6,739)
(6,859)
(7,349)
(3,590)
(3,817)
(5,278)
(6,720)
Foreign currency (loss) gain
(877)
(192)
(226)
(229)
(Loss) gain on extinguishment of debt
-
(3,277)
-
-
-
-
18,480
-
Loss on convertible senior notes conversion
(7,791)
-
-
(27,284)
-
-
-
-
Legal settlement loss
-
-
-
-
-
(25,000)
(1,750)
-
Other income
2,400
1,899
1,262
Other income (expense), net
(17,388)
(9,635)
(6,147)
(34,401)
(1,382)
(27,144)
12,004
(5,358)
Loss before income taxes
(99,400)
(92,283)
(78,694)
(99,382)
(86,581)
(120,603)
(94,425)
(97,017)
Income tax benefit (expense)
(2,484)
Net loss
$
(99,332)
$
(92,247)
$
(78,676)
$
(98,957)
$
(86,421)
$
(120,427)
$
(94,075)
$
(99,501)
Basic and diluted net loss per common share
$
(1.39)
$
(1.15)
$
(0.89)
$
(1.02)
$
(1.63)
$
(2.27)
$
(1.72)
$
(1.81)
Basic and diluted weighted average common shares outstanding
71,662
80,453
88,255
96,681
52,891
53,028
54,707
54,834