fgen-10q_20150930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

þ

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

For the quarterly period ended September 30, 2015

OR

o

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

For the transition period from                to                 

Commission file number: 001-36740

 

FIBROGEN, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

77-0357827

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

409 Illinois Street

 

 

San Francisco, CA

 

94158

(Address of Principal Executive Offices)

 

(Zip Code)

(415) 978-1200

Registrant’s telephone number, including area code:

 

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

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

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

 

Large accelerated filer

¨

Accelerated filer

o

 

 

 

 

Non-accelerated filer

þ  (Do not check if a smaller reporting company)

Smaller reporting company

¨

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

The number of shares of common stock outstanding as of October 31, 2015 was 61,335,151.

 

 

 

 


 

FIBROGEN, INC.

TABLE OF CONTENTS

 

 

 

Page

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

3

 

Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

 

3

 

Condensed Consolidated Statements of Operations for the quarter and nine months ended September 30, 2015 and 2014

 

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the quarter and nine months ended September 30, 2015 and 2014

 

5

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014

 

6

 

Notes to the Condensed Consolidated Financial Statements

 

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

32

Item 4.

Controls and Procedures

 

32

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

33

Item 1A.

Risk Factors

 

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

73

Item 3.

Defaults Upon Senior Securities

 

73

Item 4.

Mine Safety Disclosures

 

73

Item 5.

Other Information

 

73

Item 6.

Exhibits

 

73

 

Signatures

 

74

 

Exhibit Index

 

75

 

2


Table of Contents

FIBROGEN, INC.

PART I—FINANCIAL INFORMATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

(Unaudited)

 

 

(Note 1)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

208,650

 

 

$

165,455

 

Short-term investments

 

 

12,873

 

 

 

14,364

 

Accounts receivable ($5,461 and $5,033 from a related party)

 

 

7,373

 

 

 

13,453

 

Prepaid expenses and other current assets

 

 

3,677

 

 

 

4,966

 

Total current assets

 

 

232,573

 

 

 

198,238

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

7,254

 

 

 

7,254

 

Long-term investments

 

 

127,974

 

 

 

144,269

 

Property and equipment, net

 

 

129,607

 

 

 

132,171

 

Other assets

 

 

1,839

 

 

 

1,596

 

Total assets

 

$

499,247

 

 

$

483,528

 

 

 

 

 

 

 

 

 

 

Liabilities, stockholders' equity and non-controlling interests

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,234

 

 

$

4,551

 

Accrued liabilities ($3,532 and $4,594 to related parties)

 

 

41,774

 

 

 

48,985

 

Deferred revenue

 

 

12,980

 

 

 

9,218

 

Total current liabilities

 

 

58,988

 

 

 

62,754

 

 

 

 

 

 

 

 

 

 

Long-term portion of lease financing obligations

 

 

96,990

 

 

 

96,818

 

Product development obligations

 

 

15,433

 

 

 

16,465

 

Deferred rent

 

 

4,814

 

 

 

5,131

 

Deferred revenue, net of current

 

 

85,720

 

 

 

60,988

 

Other long-term liabilities

 

 

747

 

 

 

696

 

Total liabilities

 

 

262,692

 

 

 

242,852

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 125,000 shares authorized at September

   30, 2015 and  December 31, 2014; no shares issued and outstanding at

   September 30, 2015 and December 31, 2014

 

 

 

 

 

 

Common stock, $0.01 par value; 225,000 shares authorized at September

   30, 2015 and December 31, 2014; 61,240 and 59,046 shares issued and

   outstanding at September 30, 2015 and December 31, 2014

 

 

612

 

 

 

590

 

Additional paid-in capital

 

 

574,979

 

 

 

546,247

 

Accumulated other comprehensive loss

 

 

(1,614

)

 

 

(3,149

)

Accumulated deficit

 

 

(356,693

)

 

 

(322,283

)

Total stockholders’ equity

 

 

217,284

 

 

 

221,405

 

Non-controlling interests

 

 

19,271

 

 

 

19,271

 

Total equity

 

 

236,555

 

 

 

240,676

 

Total liabilities and equity

 

$

499,247

 

 

$

483,528

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

3


Table of Contents

FIBROGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License and milestone revenue (includes $5,120,

   $3,506, $14,672 and $9,966 from a related party)

 

$

13,045

 

 

$

9,027

 

 

$

131,430

 

 

$

106,175

 

Collaboration services and other revenue (includes

   $868, $890, $2,221 and $2,507 from a related party)

 

 

6,493

 

 

 

4,635

 

 

 

24,956

 

 

 

15,321

 

Total revenue

 

 

19,538

 

 

 

13,662

 

 

 

156,386

 

 

 

121,496

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

52,071

 

 

 

40,617

 

 

 

154,165

 

 

 

99,536

 

General and administrative

 

 

11,237

 

 

 

10,140

 

 

 

31,399

 

 

 

24,088

 

Total operating expenses

 

 

63,308

 

 

 

50,757

 

 

 

185,564

 

 

 

123,624

 

Loss from operations

 

 

(43,770

)

 

 

(37,095

)

 

 

(29,178

)

 

 

(2,128

)

Interest expense

 

 

(2,758

)

 

 

(2,723

)

 

 

(8,278

)

 

 

(8,174

)

Interest and other income, net

 

 

1,458

 

 

 

283

 

 

 

3,008

 

 

 

1,358

 

Loss before income taxes

 

 

(45,070

)

 

 

(39,535

)

 

 

(34,448

)

 

 

(8,944

)

Provision (benefit) from income taxes

 

 

28

 

 

 

 

 

 

(38

)

 

 

 

Net loss

 

$

(45,098

)

 

$

(39,535

)

 

$

(34,410

)

 

$

(8,944

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per basic and diluted share

 

$

(0.74

)

 

$

(2.93

)

 

$

(0.57

)

 

$

(0.67

)

Weighted average number of common shares used to

   calculate net loss per basic and diluted share

 

 

60,767

 

 

 

13,503

 

 

 

59,926

 

 

 

13,355

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

4


Table of Contents

FIBROGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net loss

 

$

(45,098

)

 

$

(39,535

)

 

$

(34,410

)

 

$

(8,944

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,000

)

 

 

1,188

 

 

 

1,213

 

 

 

1,383

 

Available-for-sale investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments, net of tax effect

 

 

191

 

 

 

(232

)

 

 

534

 

 

 

(1,052

)

Reclassification from accumulated other comprehensive loss

 

 

(182

)

 

 

 

 

 

(212

)

 

 

 

Net change in unrealized gain (loss) on

   available-for-sale investments

 

 

9

 

 

 

(232

)

 

 

322

 

 

 

(1,052

)

Other comprehensive income (loss), net of taxes

 

 

(991

)

 

 

956

 

 

 

1,535

 

 

 

331

 

Comprehensive loss

 

$

(46,089

)

 

$

(38,579

)

 

$

(32,875

)

 

$

(8,613

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

5


Table of Contents

FIBROGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(34,410

)

 

$

(8,944

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

4,218

 

 

 

3,330

 

Amortization of premium on investments

 

 

2,292

 

 

 

409

 

Loss on disposal of property and equipment

 

 

100

 

 

 

 

Stock-based compensation

 

 

20,232

 

 

 

9,734

 

Tax benefit on unrealized gain on available-for-sale securities

 

 

(66

)

 

 

 

Realized gain on sales of available-for-sale securities

 

 

(89

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6,080

 

 

 

(3,930

)

Prepaid expenses and other current assets

 

 

1,289

 

 

 

435

 

Other assets

 

 

(243

)

 

 

(913

)

Accounts payable

 

 

(317

)

 

 

1,829

 

Accrued liabilities

 

 

(7,611

)

 

 

8,657

 

Deferred revenue

 

 

28,494

 

 

 

34,837

 

Lease financing liability

 

 

474

 

 

 

468

 

Other long-term liabilities

 

 

289

 

 

 

267

 

Net cash provided by operating activities

 

 

20,732

 

 

 

46,179

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,668

)

 

 

(5,542

)

Purchases of available-for-sale securities

 

 

(8,217

)

 

 

 

Proceeds from sales of available-for-sale securities

 

 

10,154

 

 

 

 

Proceeds from maturities of available-for-sale securities

 

 

14,035

 

 

 

38,546

 

Net cash provided by investing activities

 

 

14,304

 

 

 

33,004

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Repayments of lease liability

 

 

(302

)

 

 

(302

)

Proceeds from issuance of common stock, net

 

 

8,523

 

 

 

925

 

Payments of deferred offering costs

 

 

 

 

 

(2,194

)

Net cash provided by (used in) financing activities

 

 

8,221

 

 

 

(1,571

)

Effect of exchange rate change on cash and cash equivalents

 

 

(62

)

 

 

(55

)

Net increase in cash and cash equivalents

 

 

43,195

 

 

 

77,557

 

Cash and cash equivalents at beginning of period

 

 

165,455

 

 

 

76,332

 

Cash and cash equivalents at end of period

 

$

208,650

 

 

$

153,889

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

 

6


Table of Contents

 

FIBROGEN, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Description of Operations and Summary of Significant Accounting Policies

Description of Operations

FibroGen, Inc. (“FibroGen,” the “Company,” or “we” and other similar pronouns) was incorporated in 1993 in Delaware and is a research-based biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics to treat serious unmet medical needs. Our focus in the areas of fibrosis and hypoxia-inducible factor (“HIF”) biology has generated multiple programs targeting various therapeutic areas. Our most advanced product candidate, roxadustat, or FG-4592, is an oral small molecule inhibitor of HIF prolyl hydroxylases (“HIF-PHs”) in Phase 3 clinical development for the treatment of anemia in chronic kidney disease (“CKD”). FG-3019 is our monoclonal antibody in Phase 2 clinical development for the treatment of idiopathic pulmonary fibrosis (“IPF”), pancreatic cancer, Duchenne muscular dystrophy (“DMD”) and liver fibrosis. We have taken a global approach with respect to the development and future commercialization of our product candidates, and this includes development and commercialization in the People’s Republic of China (“China”).

On November 10, 2014, we effected a 1-for-2.5 reverse split of our common stock. Upon the effectiveness of the reverse stock split, (i) every 2.5 shares of outstanding common stock were combined into one share of common stock, (ii) the number of shares of common stock for which each outstanding option or warrant to purchase common stock is exercisable was proportionally decreased on a 1-for-2.5 basis, (iii) the exercise price of each outstanding option or warrant to purchase common stock was proportionately increased on a 1-for- 2.5 basis, (iv) the exchange ratio for each share of outstanding FibroGen Europe Oy (“FibroGen Europe”) share of stock which is exchangeable into our common stock was proportionately reduced on a 1-for-2.5 basis, and (v) the conversion ratio for each share of outstanding preferred stock which is convertible into our common stock was proportionately reduced on a 1-for-2.5 basis. All of the outstanding common stock share numbers (including shares of common stock which our outstanding preferred stock shares were convertible into), common stock warrants, share prices, exercise prices and per share amounts have been adjusted in these condensed consolidated financial statements, on a retroactive basis, to reflect this 1-for-2.5 reverse stock split for all periods presented. The par value per share and the authorized number of shares of common stock and preferred stock were not adjusted as a result of the reverse stock split.

On November 19, 2014, we closed the initial public offering (“IPO”) of our common stock. In our IPO, we sold 9,315,000 shares of our common stock at a public offering price of $18.00 per share. Net proceeds from our IPO and concurrent private placement were $171.8 million, after deducting underwriting discounts and commissions of $11.7 million and offering expenses of $4.1 million. Concurrent with the closing of our IPO, AstraZeneca AB (“AstraZeneca”), one of our collaboration partners, purchased shares of our common stock in a private placement at a price per share equal to the IPO price for an aggregate purchase price of $20.0 million. Upon the closing of our IPO, all outstanding shares of our convertible preferred stock automatically converted into 33,919,954 shares of common stock and 958,996 shares of FibroGen Europe convertible preferred stock were converted into shares of our common stock. Our proceeds from the sale of the common stock sold in the concurrent private placement were $20.0 million.

Basis of Presentation

The condensed consolidated financial statements include the accounts of FibroGen, its wholly owned subsidiaries and its majority-owned subsidiaries, FibroGen Europe and FibroGen China Anemia Holdings, Ltd. All inter-company transactions and balances have been eliminated in consolidation. We operate in one segment—the discovery, development and commercialization of novel therapeutics to treat serious unmet medical needs.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and footnote disclosures normally included in the annual consolidated financial statements. The December 31, 2014 condensed consolidated balance sheet data contained within this Form 10-Q was derived from audited consolidated financial statements included in our Form 10-K for the year ended December 31, 2014, but does not include all disclosures required by accounting principles generally accepted in the United States.

7


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The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In our opinion, the accompanying unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented.

Fair Value of Financial Instruments

We define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an 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.

Our valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. We classify these inputs into the following hierarchy:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3—Unobservable inputs and little, if any, market activity for the assets.

The assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and considers factors specific to the asset or liability. In addition, the categories presented do not suggest how prices may be affected by the size of the purchases or sales, particularly with the largest highly liquid financial issuers who are in markets continuously with non-equity instruments, or how any such financial assets may be impacted by other factors such as U.S. government guarantees. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Carrying amounts of certain of our financial instruments including cash equivalents, investments, receivables, accounts payable and accrued liabilities approximate fair value due to their short maturities.

Revenue Recognition

Substantially all of our revenues to date have been generated from our collaboration agreements.

Our collaboration agreements include multiple deliverables, and we, therefore, follow the guidance in Accounting Standards Codification (“ASC”) Topic 605-25, “Revenue Recognition–Multiple-Element Arrangements” (“ASC 605-25”). ASC 605-25:

 

·

provides guidance on how revenue arrangements with multiple deliverables should be separated and how the arrangement consideration should be allocated among the separate units of accounting;

 

·

requires an entity to determine the selling price of a separate deliverable using a hierarchy of (i) vendor-specific objective evidence (“VSOE”), (ii) third-party evidence (“TPE”), or (iii) best estimate of selling price (“BESP”); and

 

·

requires the allocation of the arrangement consideration, at the inception of the arrangement, to the separate units of accounting based on relative selling price.

We evaluate all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis. Based on this evaluation, the deliverables are separated into units of accounting. The arrangement consideration that is fixed or determinable at the inception of the arrangement is allocated to the separate units of accounting based on their relative selling prices. Significant judgment may be required in determining whether a deliverable provides stand-alone value, determining the amount of arrangement consideration that is fixed or determinable, and estimating the stand-alone selling price of each unit of accounting.

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To date, we have determined that the selling price for the deliverables within our collaboration agreements should be determined using BESP, as neither VSOE nor TPE is available. The process for determining BESP involves significant judgment on our part and includes consideration of multiple factors, including assumptions related to the market opportunity and the time needed to commercialize a product candidate pursuant to the relevant license, estimated direct expenses and other costs, which include the rates normally charged by contract research and contract manufacturing organizations for development and manufacturing obligations, and rates that would be charged by qualified outsiders for committee services.

For each unit of accounting identified within an arrangement, we determine the period over which the deliverables are provided and the performance obligation is satisfied. Service revenue is recognized using a proportional performance method. Direct labor hours or full time equivalents are typically used as the measurement of performance. Revenue may be recognized using a straight line method when performance is expected to occur roughly consistently over a period of time.

Payments or reimbursements resulting from our research and development efforts for those arrangements where such efforts are considered as deliverables are recognized as the services are performed and are presented on a gross basis. To the extent payments are required to be made to the collaboration partners pursuant to research and development efforts, those costs are charged to research and development using the guidance pursuant to ASC Topic 605-250, “Customer Payments and Incentives”, which states that cash consideration given by a vendor to a customer is presumed to be a reduction of the selling prices unless the vendor receives an identifiable benefit in exchange for the consideration that is sufficiently separable from the recipient’s purchase of the vendor’s products, and the vendor can reasonably estimate the fair value of the benefit.

Each of our collaboration agreements includes milestones for which we follow ASC Topic 605-28, “Revenue Recognition—Milestone Method” (“ASC 605-28”). ASC 605-28 establishes the milestone method as an acceptable method of revenue recognition for certain contingent event-based payments under research and development arrangements. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us. Determining whether a milestone is substantive is a matter of judgment and that assessment must be made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either our performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. Payments for achieving milestones which are not considered substantive are treated as additional arrangement consideration and are allocated following the relative selling price method previously described.

Net Income (Loss) per Share

Immediately prior to the IPO, the Company had authorized 125,000,000 shares of Preferred Stock with a par value of $0.01 per share. The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Royalty Acquisition Preferred Stock and Series G-1 Preferred Stock are collectively referred to as the “Junior Preferred Stock”.  The Series E Redeemable Convertible Preferred Stock and Series F Redeemable Convertible Preferred Stock are collectively referred to as the “Senior Preferred Stock”. As of December 31, 2014, there was no outstanding convertible preferred stock as all issued and outstanding preferred stock were converted to common stock at the closing of the Company’s IPO in November 2014.

Prior to the IPO, we applied the two-class method to calculate basic and diluted net income (loss) per share of common stock. The two-class method is an earnings allocation method under which earnings per share is calculated for common stock considering a participating security’s rights to undistributed earnings as if all such earnings had been distributed during the period. The Junior Preferred Stock were participating securities due to their dividend rights and the Senior Preferred Stock had stated dividend rates. During periods of net income, the calculation of basic net income per share was reclassified to exclude the income attributable to all participating securities from the numerator and exclude the dilutive impact of those shares from the denominator. During periods of net loss, all participating securities were not included in the calculation of net loss per share because the preferred stockholders had no contractual obligation to participate in losses.

Diluted net loss per share does not include the effect of 15.0 million and 48.0 million securities for the quarter ended September 30, 2015 and 2014 and 15.0 million and 48.0 million securities for the nine months ended September 30, 2015 and 2014 because their effect would have been anti-dilutive.

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Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date for ASU 2014-09 was initially for fiscal years beginning after December 15, 2016. In July 2015, the FASB approved a one year deferral of this standard with a new effective date for fiscal years beginning after December 15, 2017. The new guidelines can be implemented using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption. We are currently evaluating the impact of this guidance on our consolidated financial statements.

 

 

2.

Collaboration Agreements

Astellas Agreements

Japan Agreement

In June 2005, we entered into a collaboration agreement with Astellas Pharma Inc. (“Astellas”) for the development and commercialization (but not manufacture) of roxadustat for the treatment of anemia in Japan (“Japan Agreement”). Under this agreement, Astellas paid license fees and other consideration totaling $40.1 million (such amounts were fully received as of February 2009). The Japan Agreement also provides for additional development and regulatory approval milestone payments up to $117.5 million, a commercial sales related milestone of $15.0 million and additional consideration based on net sales (as defined) in the low 20% range after commercial launch. A clinical milestone payment of $12.5 million was received in 2013. We evaluated the criteria under ASC 605-28 (as disclosed in Note 1) and concluded that the aforementioned milestone was substantive.

Europe Agreement

In April 2006, we entered into a separate collaboration agreement with Astellas for the development and commercialization of roxadustat for the treatment of anemia in Europe, the Middle East, the Commonwealth of Independent States and South Africa (“Europe Agreement”). Under the terms of the Europe Agreement, Astellas paid license fees and other upfront consideration totaling $320.0 million (such amounts were fully received as of February 2009). The Europe Agreement also provides for additional development and regulatory approval milestone payments up to $425.0 million. Clinical milestone payments of $40.0 million and $50.0 million were received in 2010 and 2012. We evaluated the criteria under ASC 605-28 (as disclosed in Note 1) and concluded that each of the aforementioned milestones was substantive. Under the Europe Agreement, Astellas committed to fund 50% of joint development costs for Europe and North America, and all territory-specific costs. The Europe Agreement also provides for tiered payments based on net sales of product (as defined) in the low 20% range.

AstraZeneca Agreements

U.S./Rest of World Agreement

Effective July 30, 2013, we entered into a collaboration agreement with AstraZeneca for the development and commercialization of roxadustat for the treatment of anemia in the United States and all other countries in the world, other than China, not previously licensed under the Astellas Europe and Astellas Japan Agreements (“U.S./RoW Agreement”). It also excludes China, which is covered by a separate agreement with AstraZeneca described below. Under the terms of the U.S./RoW Agreement, AstraZeneca has agreed to pay upfront, non-contingent and time-based payments totaling $374.0 million, which we expect to receive in various amounts through June 2016, of which $312.0 million was received as of September 30, 2015. In addition, the U.S./RoW Agreement also provides for development and regulatory approval based milestone payments of up to $550.0 million, which include potential future indications which the companies choose to pursue, and commercial related milestone payments of up to $325.0 million. During the second quarter of 2015, we received a $15.0 million development milestone payment as a result of the finalization of our two audited pre-clinical carcinogenicity study reports. We evaluated the criteria under ASC 605-28 (as disclosed in Note 1) and concluded that the aforementioned milestone was substantive.

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Under the U.S./RoW Agreement, we and AstraZeneca will share equally in the development costs of roxadustat not already paid for by Astellas, up to a total of $233.0 million. Any additional development costs incurred by us during the development period in excess of the $233.0 million (aggregated spend) will be fully reimbursed by AstraZeneca. AstraZeneca will pay us tiered royalty payments on AstraZeneca’s future net sales (as defined in the agreement) of roxadustat in the low 20% range. In addition we will receive a transfer price for delivery of commercial product based on a percentage of AstraZeneca’s net sales (as defined in the agreement) in the low- to mid-single digit range.

China Agreement

Effective July 30, 2013, we (through our subsidiaries affiliated with China) entered into a collaboration agreement with AstraZeneca for the development and commercialization (but not manufacture) of roxadustat for the treatment of anemia in China (“China Agreement”). Under the terms of the China Agreement, AstraZeneca agreed to pay upfront consideration totaling $28.2 million (such amounts were fully received as of March 31, 2014). In addition, the China Agreement provides for AstraZeneca to pay regulatory approval and other approval related milestones of up to $161.0 million. The China Agreement also provides for sales related milestone payments of up to $167.5 million and contingent payments of $20.0 million related to possible future compounds. The China Agreement is structured as a 50/50 profit or loss share (as defined) and provides for joint development costs (including capital and equipment costs for construction of the manufacturing plant in China), to be shared equally during the development.

Accounting for the Astellas Agreements

For each of the Astellas agreements, we evaluated the deliverables within the respective arrangements and separated them into various units of accounting.

Deliverables that did not provide standalone value have been combined with other deliverables to form a unit of accounting that collectively has standalone value, with revenue being recognized on the combined unit of accounting, rather than the individual deliverables. There are no right-of-return provisions for the delivered items in the Astellas agreements.

For the Astellas agreements, we allocated arrangement consideration to various units of accounting based on BESP of each deliverable within each unit of accounting using the relative selling price method as we did not have VSOE or TPE of selling price for such deliverables. Arrangement consideration includes non-contingent upfront payments of $360.1 million and cumulative co-development billings of $119.8 million (for the Europe Agreement) as of September 30, 2015.

For the technology license under the Japan Agreement and Europe Agreement, BESP was determined primarily by using the discounted cash flow (“DCF”) method, which aggregates the present value of future cash flows to determine the valuation as of the effective date of each of the agreements. The DCF method involves the following key steps: 1) the determination of cash flow forecasts and 2) the selection of a range of comparative risk-adjusted discount rates to apply against the cash flow forecasts. The discount rates selected were based on expectations of the total rate of return, the rate at which capital would be attracted to the Company and the level of risk inherent within the Company. The discounts applied in the DCF analysis ranged from 17.5% to 20.0%. Our cash flow forecasts were derived from probability-adjusted revenue and expense projections by territory. Such projections included consideration of taxes and cash flow adjustments. The probability adjustments were made after considering the likelihood of technical success at various stages of clinical trials and regulatory approval phases. BESP also considered certain future royalty payments associated with commercial performance of our compounds, transfer prices and expected gross margins.

The units of accounting that were analyzed, along with their general timing of delivery or performance of service and general timing of revenue recognition, are as follows:

 

·

License to our technology existing at the effective date of the agreements. For both of the Astellas agreements, the license was delivered at the beginning of the agreement terms, or when the agreements were signed, and any contingencies had been removed. In both cases, we concluded at the time of the agreement that our collaboration partner, Astellas, would have the knowledge and capabilities to exploit the licenses without our further involvement. However, the Japan Agreement with Astellas has contractual limitations that might affect Astellas’ ability to exploit the license and therefore, potentially, the conclusion as to whether the license provides stand-alone value. In the Japan agreement, Astellas does not have the right to manufacture commercial supplies of the drug. In order to determine whether this characteristic of the agreement should lead to a conclusion that the license did not have stand-alone value, we considered the intent of the parties and the substantive reasons that led to that feature of the agreement.

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·

Manufacturing rights. In the case of the Japan Agreement, we retained manufacturing rights largely because of the way the parties chose for FibroGen to be compensated under the agreement. At the time the agreement was signed, we believed that it was more advantageous upon commercialization to have a transfer price revenue model in place as opposed to a traditional sales-based model. We and Astellas could have structured the arrangement with a transfer of manufacturing rights and compensated us through a royalty or other feature without significantly diminishing the prospects of the drug product. Therefore, we determined that the license in Japan provides stand-alone value to the customer despite the lack of manufacturing rights. 

 

·

License to our technology developed during the term of the agreement and development (referred to as “when and if available”) and information sharing services. These deliverables are generally delivered throughout the term of the agreements and are recognized as revenue as the services are provided.

 

·

Co-development services (Europe Agreement). This deliverable relates to co-development services that were reasonably expected to be performed by us at the time the collaboration agreement was signed. Revenue is recognized as reimbursements for such co-development services are earned. The period related to this deliverable represented our determination of the non-contingent performance period, which was estimated to be 36 months for the Europe Agreement from the signing of the agreement. There was no provision for co-development services in the Japan agreement.

 

·

Manufacturing of clinical supplies of products. This deliverable is satisfied as supplies for clinical product are delivered for use in our clinical trial programs during the development period, or pre-commercialization period. Revenue is recognized based on the estimated proportion of the development services performed during the development period. These estimates are made at the beginning of each accounting period and will likely change throughout the course of the terms of both agreements. As new information related to these estimates becomes available, we may adjust the timing of revenue recognition related to this unit of accounting.

 

·

Manufacturing commercial supplies of products. This deliverable is satisfied and revenue is recognized as supplies are shipped for commercial use during the commercialization period. As this deliverable is considered a contingent deliverable, it is outside the scope of the initial allocation of upfront and other consideration.

 

·

Committee service. This deliverable is satisfied and revenue is recognized throughout the course of the various agreements as meetings are attended.

Any consideration received for each Astellas agreement after the initial proceeds on the agreement signing date were also (and will be also) allocated to the various units of accounting above per agreement using the relative selling price method under ASC 605-25-30-2 and 30-5.

Under the Japan Agreement, we are also eligible to receive from Astellas an aggregate of approximately $132.5 million in potential milestone payments, comprised of (i) up to $22.5 million in substantive milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $95.0 million in substantive milestone payments upon achievement of specified regulatory milestone events, and (iii) up to approximately $15.0 million in milestone payments upon the achievement of specified commercial sales milestone.

Under the Europe Agreement, we are also eligible to receive from Astellas an aggregate of approximately $425.0 million in potential milestone payments, comprised of (i) up to $90.0 million in substantive milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $335.0 million in substantive milestone payments upon achievement of specified regulatory milestone events, including up to $25.0 million in milestone payments in connection with receipt of marketing approval in Russia.

Accounting for the AstraZeneca Agreements

We evaluated whether or not the U.S./RoW and China Agreements should be accounted for as a single arrangement and concluded that the agreements should be accounted for as a single arrangement with the presumption  that two or more agreements executed with a single customer at or around the same time are a single arrangement. Accordingly, upfront and other non-contingent arrangement consideration received and to be received has been and will be pooled together and allocated to each of the units of accounting in both the U.S./RoW and China Agreements based on their relative fair values.

We evaluated the deliverables within the arrangement and separated them into various units of accounting. Deliverables that did not provide stand-alone value have been combined with other deliverables to form a unit of accounting that collectively has stand-alone value, with revenue being recognized on the combined unit of accounting, rather than the individual deliverables. There are no right-of-return provisions for the delivered items in the agreements.

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For the technology license under the AstraZeneca U.S./RoW Agreement, BESP was determined based on a two-step process. The first step involved determining an implied royalty rate that would result in the net present value of future cash flows to equal to zero (i.e. where the IRR on the transaction would equal the target return for the investment). This results in an upper bound estimation of the magnitude of royalties that a hypothetical acquirer would reasonably pay for the forecasted cash flow stream. Our cash flow forecasts were derived from probability-adjusted revenue and expense projections. Such projections included consideration of taxes and cash flow adjustments. The probability adjustments were made after considering the likelihood of technical success at various stages of clinical trials and regulatory approval phases. The second step involved applying the implied royalty rate, which was determined to be 40%, against the probability-adjusted projected net revenues by territory and determining the value of the license as the net present value of future cash flows after adjusting for taxes. The discount rate utilized was 17.5%.

U.S./RoW Agreement:

The units of accounting that were analyzed, along with their general timing of delivery or performance of service and general timing of revenue recognition, are as follows:

 

·

License to our technology existing at the effective date of the agreements. For the U.S./RoW Agreement, the license was delivered at the beginning of the agreement terms as all contingencies had been removed. We concluded that AstraZeneca has the knowledge and capabilities to exploit the U.S./RoW license without our further involvement.

 

·

Co-development services. This deliverable relates to co-development services which were reasonably expected to be performed by us at the time the U.S./RoW Agreement was signed. Revenue is recognized as reimbursements for such co-development services are earned. The period related to this deliverable represented our determination of the non-contingent performance period, which was estimated to be 65 months from the signing of the U.S./RoW Agreement.

 

·

Manufacturing of clinical supplies of products. This deliverable is satisfied as supplies for clinical product are delivered for use in our clinical trial programs during the development period, or pre-commercialization period. Revenue is recognized based on the estimated proportion of the development services performed during the development period. These estimates are made at the beginning of each accounting period and will likely change throughout the course of the agreements. As new information related to these estimates becomes available, we may adjust the timing of revenue recognition related to this unit of accounting.

 

·

Manufacturing commercial supplies of products. This deliverable is satisfied and revenue is recognized as supplies are shipped for commercial use during the commercialization period. As this deliverable is considered a contingent deliverable, it is outside the scope of the initial allocation of upfront and other consideration.

 

·

Committee service. This deliverable is satisfied and revenue is recognized throughout the course of the various agreements as meetings are attended.

Under the terms of the U.S./RoW Agreement, AstraZeneca has agreed to pay upfront, non-contingent and time-based payments totaling $374.0 million, which we expect to receive in various amounts through June 2016, of which $82.0 million was received as of December 31, 2013 and was determined to be fixed and determinable upon the execution of the collaboration agreement. Out of the remaining payments of $292.0 million, which are contractually due, $230.0 million have extended payment terms and, accordingly, were not considered to be fixed or determinable upon the execution of the agreement. As such, for these remaining payments, the amount of revenue recognized is limited to the amount of cash consideration received; additionally, for each of the amounts received, the amount of revenue recognized is determined on the basis of applying the relative selling price method to each of the units of accounting underlying the agreement. Further, $62.0 million of the remaining payment is contingent upon the occurrence of a specified event and accordingly is also not considered fixed or determinable.

Under the U.S./RoW Agreement, we are also eligible to receive from AstraZeneca an aggregate of approximately $875.0 million in potential milestone payments, comprised of (i) up to $65.0 million in substantive milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $325.0 million in substantive milestone payments upon achievement of specified regulatory milestone events, (iii) up to $160.0 million in a non-substantive deferred approval milestone, which would be paid if certain competitors do not launch a HIF compound in the U.S. on or before January 1, 2023, and (iv) up to approximately $325.0 million in milestone payments upon the achievement of specified commercial sales events.

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China Agreement:

The units of accounting that were analyzed, along with their general timing of delivery or performance of service and general timing of revenue recognition, are as follows:

 

·

License to our technology existing at the effective date of the agreement. The license was delivered at the beginning of the agreement term as all contingencies had been removed. However, the China Agreement with AstraZeneca has contractual limitations that might affect AstraZeneca’s ability to exploit the license and therefore, potentially, the conclusion as to whether the license provides stand-alone value. In the China Agreement, AstraZeneca does not have the right to manufacture commercial supplies of the drug. In order to determine whether this characteristic of the arrangement should lead to a conclusion that the license did not have stand-alone value, we considered the intent of the parties and the substantive reasons that led to that feature of the agreement.

For the China Agreement, we retained manufacturing rights as an essential part of a strategy to pursue domestic regulatory pathway for product approval which requires the regulatory licensure of the manufacturing facility in order to commence commercial shipment. The prospects for the collaboration as a whole would have been substantially different had manufacturing rights been provided to AstraZeneca. Because the retention of manufacturing rights by us was a significant factor in the collaboration strategy, rather than simply a mechanism to properly compensate us, we concluded that the license and development services do not have stand-alone value apart from the manufacturing rights. Accordingly, all the deliverables identified, including co-development services, under the China Agreement have been treated as a single unit of account and all revenue allocable to this unit of account is deferred until delivery of commercial drug product has begun. Upon commencement of delivery of commercial drug product, revenue would be recognized in a pattern consistent with estimated deliveries of the commercial drug product.

Under the terms of the China Agreement, AstraZeneca agreed to pay upfront consideration totaling $28.2 million, of which $16.2 million was received as of December 31, 2013 and was determined to be fixed and determinable upon the execution of the collaboration agreement. The remainder of the upfront payments of $12.0 million had extended payment terms and, accordingly, is not considered to be fixed or determinable upon the execution of the agreement. This payment of $12.0 million was received as of March 31, 2014.

Under the China Agreement, we are also eligible to receive from AstraZeneca an aggregate of approximately $328.5 million in potential milestone payments, comprised of (i) up to $15.0 million in substantive milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $146.0 million in substantive milestone payments upon achievement of specified regulatory milestone events, and (iii) up to approximately $167.5 million in milestone payments upon the achievement of specified commercial sales events.

As we are accounting for both the U.S./RoW and China Agreements as one arrangement, any consideration received after the initial proceeds on the agreement signing date were also (and will be also) allocated to the various units of accounting above using the relative selling price method under ASC 605-25-30-2 and 30-5.

Summary of Revenue Recognized Under the Collaboration Agreements

The table below summarizes the accounting treatment for the various deliverables pursuant to each of the Astellas and AstraZeneca agreements. License amounts identified below are included in the “License and milestone revenue” line item in the condensed consolidated statements of operations. All other elements identified below are included in the “Collaboration services and other revenue” line item in the condensed consolidated statements of operations.

Amounts recognized as revenue under the Japan Agreement were as follows (in thousands): 

 

 

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

Agreement

 

Deliverable

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Japan

 

License

 

$

414

 

 

$

118

 

 

$

942

 

 

$

348

 

 

 

Milestones

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total license and milestone revenue

 

 

414

 

 

 

118

 

 

 

942

 

 

 

348

 

 

 

Collaboration services revenue*

 

$

57

 

 

$

89

 

 

$

157

 

 

$

265

 

 

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The total arrangement consideration has been allocated to each of the following deliverables under the Japan Agreement, along with any associated deferred revenue as follows (in thousands):

 

 

 

Cumulative

Revenue

Through

September 30, 2015

 

 

Deferred

Revenue at

September 30, 2015

 

 

Total

Consideration

Through

September 30, 2015

 

License

 

$

42,163

 

 

$

 

 

$

42,163

 

When and if available compounds

 

 

14

 

 

 

28

 

 

 

42

 

Manufacturing--clinical supplies

 

 

1,926

 

 

 

36

 

 

 

1,962

 

Committee services

 

 

16

 

 

 

1

 

 

 

17

 

Total license and collaboration services revenue

 

$

44,119

 

 

$

65

 

 

$

44,184

 

 

*

When and if available compounds, manufacturing—clinical supplies and committee services have each been identified as separate units of accounting with standalone value and amounts allocable to these elements have been recognized and classified within the collaboration services revenue line item within the condensed consolidated statements of operations.

Amounts recognized as revenue under the Europe Agreement were as follows (in thousands):

 

 

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

Agreement

 

Deliverable

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Europe

 

License

 

$

4,706

 

 

$

3,387

 

 

$

13,730

 

 

$

9,617

 

 

 

Milestones

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total license and milestone revenue

 

 

4,706

 

 

 

3,387

 

 

 

13,730

 

 

 

9,617

 

 

 

Collaboration services revenue*

 

$

812

 

 

$

801

 

 

$

2,065

 

 

$

2,242

 

 

The total arrangement consideration has been allocated to each of the following deliverables under the Europe Agreement, along with any associated deferred revenue as follows (in thousands):

 

 

 

Cumulative

Revenue

Through

September 30, 2015

 

 

Deferred

Revenue at

September 30, 2015

 

 

Total

Consideration

Through

September 30, 2015

 

License

 

$

397,369

 

 

$

 

 

$

397,369

 

When and if available compounds

 

 

320

 

 

 

436

 

 

 

756

 

Manufacturing--clinical supplies

 

 

9,318

 

 

 

200

 

 

 

9,518

 

Development services--in progress

 

 

31,838

 

 

 

 

 

 

31,838

 

Committee services

 

 

268

 

 

 

7

 

 

 

275

 

Total license and collaboration services revenue

 

$

439,113

 

 

$

643

 

 

$

439,756

 

 

*

When and if available compounds, manufacturing—clinical supplies, development services—in progress at the time of signing of the agreement, and committee services have each been identified as a separate unit of accounting with standalone value and amounts allocable to these units have been recognized in revenue as services are performed and classified within the collaboration services revenue line item within the condensed consolidated statements of operations.

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Amounts recognized as revenue under the U.S./RoW Agreement were as follows (in thousands):

 

 

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

Agreement

 

Deliverable

 

2015

 

 

2014

 

 

2015

 

 

2014

 

U.S. / RoW

 

License

 

$

7,925

 

 

$

5,521

 

 

$

101,758

 

 

$

96,209

 

 

 

Milestones

 

 

 

 

 

 

 

 

15,000

 

 

 

 

 

 

Total license and milestone revenue

 

 

7,925

 

 

 

5,521

 

 

 

116,758

 

 

 

96,209

 

 

 

Collaboration services revenue*

 

 

5,614

 

 

 

3,744

 

 

 

22,694

 

 

 

12,769

 

 

 

China single unit of accounting**

 

$

 

 

$

 

 

$

 

 

$

 

 

The total arrangement consideration has been allocated to each of the following deliverables under the U.S./RoW Agreement, along with any associated deferred revenue as follows (in thousands):

 

 

 

Cumulative

Revenue

Through

September 30, 2015

 

 

Deferred

Revenue at

September 30, 2015

 

 

Total

Consideration

Through

September 30, 2015

 

License

 

$

277,132

 

 

$

 

 

$

277,132

 

Co-development, information sharing

    & committee services

 

 

43,160

 

 

 

41,097

 

 

 

84,257

 

Manufacturing--clinical supplies

 

 

197

 

 

 

91

 

 

 

288

 

China-single unit of accounting

 

 

 

 

 

56,805

 

 

 

56,805

 

Total license and collaboration services revenue

 

$

320,489

 

 

$

97,993

 

 

$

418,482

 

 

*

Co-development, information sharing, and committee services have been combined into a single unit of accounting because the requirements to share information and serve on committees are useful only in combination with the development services, and because all three items are delivered over the same period while manufacturing—clinical supplies has been identified as a separate unit of accounting with standalone value and amounts allocable to this unit of accounting have been recognized and classified within the collaboration services revenue line item within the condensed consolidated statements of operations.

**

All revenues attributable to the China unit of accounting are deferred until all deliverables are met. The China license and collaboration services elements have been combined into a single unit of accounting and consideration allocable to this unit is being deferred due to FibroGen’s retention of manufacturing rights and lack of standalone value.

Other Revenues

Other revenues consist of royalty payments received, which are recorded on a monthly basis as they are reported to us, and collagen feasibility sales. Other revenues were immaterial for all periods presented.

Deferred Revenue

Deferred revenue represents amounts billed to our collaboration partners for which the related revenues have not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of deferred revenue represents the amount to be recognized within one year from the balance sheet date based on the estimated performance period of the underlying deliverables. The long term portion of deferred revenue represents amounts to be recognized after one year through the end of the non-contingent performance period of the underlying deliverables. The long term portion of deferred revenue also includes amounts allocated to the China unit of accounting under the AstraZeneca arrangement as revenue recognition associated with this unit of accounting is tied to the commercial launch of the products within China, which is not expected to occur within the next year.

 

 

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3.

Fair Value Measurements 

The fair values of our financial assets that are measured on a recurring basis are as follows (in thousands):

 

 

 

September 30, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Corporate bonds

 

$

 

 

$

132,439

 

 

$

 

 

$

132,439

 

Equity investments

 

 

186

 

 

 

 

 

 

 

 

 

186

 

Money market funds

 

 

104,694

 

 

 

 

 

 

 

 

 

104,694

 

Certificate of deposits

 

 

16,690

 

 

 

 

 

 

 

 

 

16,690

 

Total

 

$

121,570

 

 

$

132,439

 

 

$

 

 

$

254,009

 

 

 

 

December 31, 2014

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Corporate bonds

 

$

 

 

$

158,432

 

 

$

 

 

$

158,432

 

Equity investments

 

 

201

 

 

 

 

 

 

 

 

 

201

 

Money market funds

 

 

13,802

 

 

 

 

 

 

 

 

 

13,802

 

Total

 

$

14,003

 

 

$

158,432

 

 

$

 

 

$

172,435

 

 

Our Level 2 investments are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar investments, issuer credit spreads, benchmark investments, prepayment/default projections based on historical data and other observable inputs.

The fair values of our financial liabilities that are carried at historical cost are as follows (in thousands):

 

 

 

September 30, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Lease financing obligations

 

$

 

 

$

 

 

$

97,393

 

 

$

97,393

 

 

 

 

December 31, 2014

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cease-use liability

 

$

 

 

$

 

 

$

184

 

 

$

184

 

Lease financing obligations

 

 

 

 

 

 

 

 

97,221

 

 

 

97,221

 

Total

 

$

 

 

$

 

 

$

97,405

 

 

$

97,405

 

 

The fair values of our financial liabilities were derived by using an income approach, which required Level 3 inputs such as discounted estimated future cash flows.

There were no transfers of assets or liabilities between levels for any of the periods presented.

 

 

4.

Balance Sheet Components

Cash and Cash Equivalents

Cash and cash equivalents consisted of the following (in thousands):

 

 

 

September 30, 2015

 

 

December 31, 2014

 

Cash

 

$

95,488

 

 

$

151,653

 

Certificates of deposits

 

 

8,468

 

 

 

 

Money market funds

 

 

104,694

 

 

 

13,802

 

Total cash and cash equivalents

 

$

208,650

 

 

$

165,455

 

 

17


Table of Contents

 

Investments

All investments are classified as available-for-sale. The amortized cost, gross unrealized holding gains or losses, and fair value of our available-for-sale investments by major investments type are summarized in the tables below (in thousands):

 

 

 

September 30, 2015

 

 

 

Amortized Cost

 

 

Gross Unrealized

Holding Gains

 

 

Gross Unrealized

Holding Losses

 

 

Estimated

Fair Value

 

Corporate bonds

 

$

132,302

 

 

$

316

 

 

$

(179

)

 

$

132,439

 

Certificated of deposits

 

 

8,217

 

 

 

5

 

 

 

 

 

 

8,222

 

Equity investments

 

 

124

 

 

 

62

 

 

 

 

 

 

186

 

Total investments

 

$

140,643

 

 

$

383

 

 

$

(179

)

 

$

140,847

 

 

 

 

December 31, 2014

 

 

 

Amortized Cost

 

 

Gross Unrealized

Holding Gains