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As of July 31, 2019, there were 52,833,604 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.
Condensed Consolidated Statements of Stockholders Equity for the three and six months ended June 30, 2019 and 2018
Collaboration receivables (all amounts are with a related party)
Right-of-use - Operating leases
Common stock, $0.001 par value: 175,000,000 shares authorized; 52,752,854 and 46,260,747 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
Total revenue (all amounts are with a related party)
Net unrealized holding gains (losses) on short-term and long-term investments during the period, net of tax of $128 and $204 for the three and six months ended June 30, 2019, respectively
Issuance of common stock, net of expense $500
Operating lease obligations (Note 13)
Proceeds from issuance of common stock from public offering, net of issuance costs
Payments for capital lease expenditures
Net proceeds from exercises and vesting of stock awards, ESPP contributions, and exercise of warrants to purchase common stock
Acceleron Pharma Inc. (Acceleron or the Company) is a Cambridge, Massachusetts-based clinical stage biopharmaceutical company dedicated to the discovery, development, and commercialization of therapeutics to treat serious and rare diseases. The Company’s leadership in the understanding of TGF-beta biology and protein engineering generates innovative compounds that engage the body’s ability to regulate cellular growth and repair.
The Company is subject to risks common to companies in the biotechnology industry, including, but not limited to, the risk that the Company never achieves profitability, the need for substantial additional financing, risk of relying on third parties, risks of clinical trial failures, dependence on key personnel, protection of proprietary technology and compliance with government regulations.
The accompanying interim condensed consolidated financial statements are unaudited and reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the financial statements. As of June 30, 2019, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, have not changed, and the unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements as of and for the year ended December 31, 2018, except for the adoption of Accounting Standards Updates (ASU) No. 2016-02, Leases (Topic 842), as discussed further in Note 13. In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of June 30, 2019, the results of its operations for the three and six months ended June 30, 2019 and 2018, and its cash flows for the six months ended June 30, 2019 and 2018.
The results for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, any other interim periods, or any future year or period. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2018, and the notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these consolidated financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including: expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results differing materially from those estimated amounts used in the preparation of the consolidated financial statements if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. In preparing these consolidated financial statements, management used significant estimates in the following areas, among others: revenue recognition related to estimation of variable consideration and accrued clinical expenses.
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer. The Company and the chief executive officer view the Company’s operations and manage its business as one operating segment, which is the discovery, development, and commercialization of highly innovative therapeutics to treat serious and rare diseases.
The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. Cash and cash equivalents include cash held in banks and amounts held in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair value.
The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified all of its marketable securities at June 30, 2019 as “available-for-sale” pursuant to ASC 320, Investments – Debt and Equity Securities. The Company records available-for-sale securities at fair value, with the unrealized gains and losses included in accumulated other comprehensive income (loss) in stockholders’ equity. There were no realized gains or losses on marketable securities for the three and six months ended June 30, 2019 and 2018.
In March 2017, the FASB issued issued Accounting Standards Update 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). This standard amends the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period to the earliest call date. The Company adopted ASU 2017-08 effective January 1, 2019 with no material impact on its consolidated financial statements and related disclosures.
The aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months as of June 30, 2019 and December 31, 2018 was $15.7 million and $51.2 million, respectively. The aggregate fair value of securities held by the Company in an unrealized loss position for more than twelve months as of June 30, 2019 and December 31, 2018 was $30.3 million and $94.3 million, respectively. The aggregate unrealized loss for those securities in an unrealized loss position for more than twelve months is $32,000 and $0.4 million, respectively. The Company determined it did not hold any investments with any other-than-temporary impairment as of June 30, 2019 and December 31, 2018.
The following is a summary of cash, cash equivalents and available-for-sale securities as of June 30, 2019 and December 31, 2018, (in thousands):
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same such amounts shown in the statement of cash flows (in thousands):
As of June 30, 2019 and December 31, 2018, the Company maintained letters of credit totaling $1.6 million held in the form of certificates of deposit and money market funds as collateral for the Company's facility lease obligation and its credit cards.
The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, restricted cash, short-term and long-term investments and receivables. The Company maintains its cash and cash equivalent balances and short-term and long-term investments with financial institutions that management believes are creditworthy. Short-term and long-term investments consist of investment grade corporate obligations, treasury notes, asset backed securities, and certificates of deposit. The Company’s investment policy includes guidelines on the quality of the institutions and financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentrations of credit risk.
The Company routinely assesses the creditworthiness of its collaboration partner. The Company has not experienced any material losses related to receivables from individual customers and collaboration partners, or groups of customers. The
Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s collaboration receivables.
The following tables set forth the Company’s financial instruments carried at fair value using the lowest level of input applicable to each financial instrument as of June 30, 2019 and December 31, 2018 (in thousands):
The money market funds noted above are included in cash and cash equivalents in the accompanying condensed consolidated balance sheets. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the six months ended June 30, 2019 or the year ended December 31, 2018.
Items measured at fair value on a recurring basis include short-term and long-term investments (Note 5), and warrants to purchase common stock (Note 12). During the periods presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value using Level 3 inputs.
The fair value of the warrants to purchase common stock on the date of issuance and on each re-measurement date for those warrants classified as liabilities was estimated using either the Monte Carlo simulation framework, which incorporates future financing events over the remaining life of the warrants to purchase common stock, or for certain re-measurement dates, due to the warrants being deeply in the money, the Black-Scholes option pricing model. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement. At each reporting period, the Company evaluates the best valuation methodology. At June 30, 2019, the Black-Scholes option pricing model was used.
The Company measures eligible assets and liabilities at fair value, with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its existing financial assets or liabilities, and did not elect the fair value option for any financial assets and liabilities transacted in the six months ended June 30, 2019 or the year ended December 31, 2018.
Outstanding restricted stock units (1)
This balance is comprised of both the restricted stock units and performance-based restricted stock units described in Note 17.
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions, other events, and circumstances from non-owner sources. Comprehensive loss consists of net loss and other comprehensive loss, which includes certain changes in equity that are excluded from net loss. Comprehensive loss has been disclosed in the accompanying consolidated statements of operations and comprehensive loss. Accumulated other comprehensive loss is presented separately on the consolidated balance sheets and consists entirely of unrealized holding gains and losses on investments as of June 30, 2019 and December 31, 2018.
11. Recent Accounting Pronouncements - Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 will become effective for the Company for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued Accounting Standards Codification Topic 842, Leases (ASC 842), which replaces the existing guidance for leases. ASC 842 requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASC 842 also requires certain qualitative and quantitative disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases.
The Company has adopted ASC 842 effective January 1, 2019. The Company has elected to employ the transitionary relief recently offered by the FASB under ASU 2018-11 and implement the new standard without the restatement of comparative periods' financial information. ASU-2018-11 also provides for recognizing the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of January 1, 2019; however, no such adjustment was recorded as of January 1, 2019.
The Company has elected to employ the package of practical expedients offered under ASC 842, which allow the Company to not reassess the following:
•the presence of a lease in any expired or existing contracts;
•the lease classification for any existing or expired leases; and
•the initial direct costs for any existing leases.
The Company currently leases approximately 125,000 square feet of office and laboratory space in five adjacent buildings in Cambridge, Massachusetts (the Leases). The Leases were classified as operating leases under ASC 840. The Leases are also classified as operating leases under ASC 842 in accordance with the Company's election of the practical expedient under ASC 842. Pursuant to the package of practical expedients, the Company also did not reassess initial direct costs for the Leases. Additionally, the Company elected to account for the lease components and non-lease components as a single lease component.
The Company occupied the premises of the Leases at various points in time prior to January 1, 2019 under non-cancelable agreements which expire at various dates through September 2023. Each of the Leases have options to renew for periods ranging from three to five years, which are not included in the measurement of these leases. All of the Company's leases contain escalating rent clauses, which require higher rent payments in future years. There are no variable payments, exercise purchase options, penalties, fees, or residual value guarantees under the Leases. The Company is also obligated to pay the Landlord for certain costs, taxes, and operating expenses related to the premises. However, the Company has concluded that these payments are not in-substance fixed payments and therefore are not included in the calculation of the related lease liability and asset under ASC 842.
The Company recorded the liability associated with the Leases at the present value of the lease payments not yet paid, discounted using the discount rate for the Leases established at the adoption date. As the discount rate implicit in the Leases was typically not readily determinable, the Company utilized its incremental borrowing rate (IBR). In transition to ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rates.
The IBR for the Leases was determined by establishing a credit rating of the Company using the Ordered Logit (oLogit) model. The oLogit Model is a quantitative method to assess the credit rating of a company. Based on the established credit rating, the Company determined a borrowing rate using regression analysis on selected financial ratios of publicly traded comparable companies and the companies' credit ratings, adjusted for the risk-free rate, which resulted in an IBR of approximately 10%.
The Company recorded the liability associated with the Leases at the present value of the lease payments not yet paid, discounted using the incremental borrowing rate for each lease established at the adoption date. On January 1, 2019, the Company recorded a right-of-use asset in the amount of $29.1 million, which represented a lease liability of $31.0 million, adjusted for previously recognized lease-related balances, including deferred rent of $2.7 million and prepaid rent of $0.7 million. This lease liability will be reduced over the remaining lease term based on cash payments made offset by accretion of monthly interest calculated on the lease liability. The right-of-use asset will be amortized over the remaining lease term in an amount equal to the difference between the calculated straight-line expense of the total lease payments less the monthly interest calculated on the remaining lease liability.
The Company recognizes rent expense, calculated as the remaining cost of the lease allocated over the remaining lease term on a straight-line basis. Rent expense is presented as part of continuing operations in the condensed statement of consolidated operations and comprehensive loss. For the three and six months ended June 30, 2019, the Company recognized rent expense of $2.0 million and $4.1 million, respectively.
For the three and six months ended June 30, 2019, the Company paid $2.1 million and $4.1 million, respectively, in rent relating to the Leases. As payments resulting from an operating lease, the $4.1 million is classified within operating activities in the condensed consolidated statements of cash flows.
The following table contains supplemental balance sheet information pertaining to the Company's leases as of June 30, 2019:
Future minimum lease payments under the Company's non-cancelable operating leases as of June 30, 2019 are as follows, (in thousands):
The Company, from time to time, may be party to litigation arising in the ordinary course of its business. The Company was not subject to any material legal proceedings during the three months ended June 30, 2019, and, to the best of its knowledge, no material legal proceedings are currently pending or threatened.
The Company is also party to various agreements, principally relating to licensed technology, that require future payments relating to milestones not met at June 30, 2019 and December 31, 2018, or royalties on future sales of specified products. No milestones or royalty payments under these agreements are expected to be payable in the immediate future. See Note 15 for discussion of these arrangements.
The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to the agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any U.S. patent
or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements.
On February 20, 2008, the Company entered into an agreement with Celgene relating to sotatercept (the Original Sotatercept Agreement), which was amended on August 2, 2011 (as amended, the Amended Sotatercept Agreement). The Company further amended and restated the Original Sotatercept Agreement in its entirety on September 18, 2017, (the Restated Sotatercept Agreement). On August 2, 2011, the Company entered into a second agreement with Celgene for luspatercept, (the Luspatercept Agreement).
Since December 31, 2018, there have been no material changes to the key terms of the above agreements. For further information on the terms of the agreements, please see the notes to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2018.
As of the ASC 606 adoption date, the only remaining undelivered element was participation in the Joint Development Committee (JDC). The transaction price allocated to participation in the JDC based on the established standalone selling price of all performance obligations was de minimis as the sotatercept and luspatercept licenses carried the most significant portion of the value included in the agreements, and the Company's remaining effort on the JDC is minimal. Therefore, the Company recorded a cumulative-effect reduction to opening accumulated deficit of $3.7 million as the adoption date and a corresponding decrease to deferred revenue, of which $0.5 million was recorded to current deferred revenue and $3.2 million was recorded to long-term deferred revenue.
On June 4, 2019, the Company and Celgene announced that the U.S. Food and Drug Administration (FDA) accepted Celgene's Biologics Licensing Application (BLA), and the European Medicines Agency (EMA) validated Celgene’s marketing authorization application (MAA), for luspatercept for both myelodysplastic syndromes and beta-thalassemia. As a result, the $25.0 million milestone for acceptance of the BLA by the FDA or MAA by the EMA for use of a Licensed Product is no longer constrained. As the Company does not have any remaining performance obligations under the agreement with Celgene, the full $25.0 million was recognized as revenue during the three months ended June 30, 2019.
The FDA has granted Priority Review to the BLA for the evaluation of the beta-thalassemia indication and set a Prescription Drug User Fee Act (PDUFA), or target action, date of December 4, 2019. The FDA has also set a PDUFA date of April 4, 2020 for the evaluation of the MDS indication. The next likely milestone payment for luspatercept would be $35.0 million and result from FDA approval of the BLA for luspatercept in beta-thalassemia, which could occur as early as the fourth quarter of 2019 and would result in the recognition of the milestone during that period. As of June 30, 2019, the approval of the application is not within the control of the Company or the licensee, and therefore, the Company could not determine if it is probable that a regulatory agency will approve the application.
Through June 30, 2019, under all Celgene arrangements the Company has received net cost-share payments and milestones of $141.6 million and $44.6 million for luspatercept and sotatercept, respectively. The Company recorded net cost-sharing revenue of $2.7 million and $3.7 million during the three months ended June 30, 2019 and 2018, respectively, and $5.4 million and $6.9 million during the six months ended June 30, 2019 and 2018, respectively.
In 2004, the Company entered into a license agreement with a non-profit institution for an exclusive, sublicensable, worldwide, royalty-bearing license to certain patents developed by the institution (Primary Licensed Products). In addition, the Company was granted a non-exclusive, non-sub-licensable license for Secondary Licensed Products. As compensation for the licenses, the Company issued 62,500 shares of its common stock to the institution, the fair value of which was $25,000, and was expensed during 2004 to research and development expense. The Company also agreed to pay specified development milestone payments totaling up to $2.0 million for sotatercept and $0.7 million for luspatercept. In addition, the Company is
obligated to pay milestone fees based on the Company’s research and development progress, and U.S. sublicensing revenue ranging from 10%-25%, as well as royalties ranging from 1.0%-3.5% of net sales on any products under the licenses. During the three months ended June 30, 2019 and 2018, the Company expensed $1.6 million and $0.1 million, respectively, and during the six months ended June 30, 2019 and 2018, the Company expensed $1.6 million and $0.1 million, respectively, of milestones and fees defined under this agreement.
In May 2014, the Company executed a collaboration agreement with a research technology company. The Company paid an upfront research fee of $0.3 million upon execution of the agreement. The Company also received an option to obtain a commercial license to the molecules developed during the collaboration. During the three months ended June 30, 2019 and 2018, the Company expensed $1.7 million and zero, respectively, and during the six months ended June 30, 2019 and 2018, the Company expensed $1.9 million and zero, respectively, of milestones and fees defined under the agreement.
On January 18, 2019, the Company completed the sale of its underwritten public offering of 5,348,838 shares of common stock at public offering price of $43.00 per share, resulting in net proceeds of $215.8 million. In connection with the January 2019 public offering, on February 12, 2019, the underwriters fully exercised their over-allotment option to purchase an additional 802,325 shares of the Company's common stock. The total net proceeds from the January 2019 public offering and the underwriters' exercise of their option to purchase additional shares of common stock was $248.2 million.
The Company recognized stock-based compensation expense related to the 2003 Stock Option and Restricted Stock Plan (the 2003 Plan), the 2013 Equity Incentive Plan (the 2013 Plan), and the 2013 Employee Stock Purchase Plan (the 2013 ESPP) in the consolidated statements of operations and comprehensive loss during the three and six months ended June 30, 2019 and 2018, respectively, as follows (in thousands):
The fair value of each option issued to employees was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
The following table summarizes the stock option activity under the Company’s stock option plans during the six months ended June 30, 2019 (in thousands, except per share amounts and years):
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the estimated fair value of the common stock for the options that were in the money at June 30, 2019.
The aggregate intrinsic value of options exercised during the six months ended June 30, 2019 was $1.7 million.
As of June 30, 2019, there was $34.6 million of unrecognized compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of 2.57 years.
The following table summarizes the restricted stock unit (RSU) activity under the 2013 Plan during the six months ended June 30, 2019 (in thousands, except per share amounts):
As of June 30, 2019, there was approximately $10.3 million of related unrecognized compensation cost, which the Company expects to recognize over a remaining weighted-average period of 1.76 years.
The Company has granted performance-based restricted stock units (PSU) whereby vesting accelerates upon the occurrence of certain milestone events. In September 2019, any of these PSUs that remain unvested will vest. When achievement of a milestone becomes probable, compensation cost is recognized from the grant date through the estimated date of achievement. If achievement is not considered probable the expense is recognized from the grant date through September 2019. The following table summarizes PSU activity under the 2013 Plan during the six months ended June 30, 2019 (in thousands, except per share amounts):