HALOZYME THERAPEUTICS INC, 10-K filed on 2/21/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2018
Feb. 14, 2019
Jun. 30, 2018
Document Information [Line Items]      
Entity Registrant Name HALOZYME THERAPEUTICS INC.    
Trading Symbol HALO    
Entity Central Index Key 0001159036    
Document Type 10-K    
Document Period End Date Dec. 31, 2018    
Amendment Flag false    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Filer Category Large Accelerated Filer    
Entity Public Float     $ 2.1
Entity Common Stock, Shares Outstanding   145,033,173  
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 57,936 $ 168,740
Marketable securities, available-for-sale 296,590 300,474
Accounts receivable, net 30,005 22,133
Inventories 22,625 5,146
Prepaid expenses and other assets 20,693 13,879
Total current assets 427,849 510,372
Property and equipment, net 7,465 3,520
Prepaid expenses and other assets 4,434 5,553
Restricted cash 500 500
Total assets 440,248 519,945
Current liabilities:    
Accounts payable 4,079 7,948
Accrued expenses 49,529 39,601
Deferred revenue, current portion 4,247 6,568
Current portion of long-term debt, net 91,506 77,211
Total current liabilities 149,361 131,328
Deferred revenue, net of current portion 5,008 54,297
Long-term debt, net 34,874 125,140
Other long-term liabilities 2,118 814
Commitments and contingencies (Note 9)
Stockholders' equity (deficit):    
Preferred stock - $0.001 par value; 20,000 shares authorized; no shares issued and outstanding 0 0
Common stock - $0.001 par value; 200,000 shares authorized; 142,789 and 129,502 shares issued and outstanding at December 31, 2017 and 2016, respectively 145 143
Additional paid-in capital 780,457 731,044
Accumulated other comprehensive loss (277) (450)
Accumulated deficit (531,438) (522,371)
Total stockholders' equity (deficit) 248,887 208,366
Total liabilities and stockholders' equity (deficit) $ 440,248 $ 519,945
v3.10.0.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands
Dec. 31, 2018
Dec. 31, 2017
Statement of Financial Position [Abstract]    
Preferred stock, par value $ 0.001 $ 0.001
Preferred stock, shares authorized 20,000 20,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 200,000 200,000
Common stock, shares issued 142,789 142,789
Common stock, shares outstanding 142,789 142,789
v3.10.0.1
Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Revenues:      
Product sales, net $ 28,234 $ 50,396 $ 53,392
Royalty Revenue 78,981 63,507 50,984
Revenues under collaborative agreements 44,647 202,710 42,315
Total revenues 151,862 316,613 146,691
Operating expenses:      
Cost of product sales 10,136 31,152 33,206
Research and development 150,252 150,643 150,842
Selling, general and administrative 60,804 53,816 45,853
Total operating expenses 221,192 235,611 229,901
Operating income (loss) (69,330) 81,002 (83,210)
Other income (expense):      
Investment and other income, net 7,578 2,592 1,326
Interest expense (18,041) (21,984) (19,977)
Income (loss) before income taxes (79,793) 61,610 (101,861)
Income tax (benefit) expense 537 (1,361) 1,162
Net income (loss) $ (80,330) $ 62,971 $ (103,023)
Net income (loss) per share, Basic $ (0.56) $ 0.46 $ (0.81)
Net income (loss) per share, Diluted $ (0.56) $ 0.45 $ (0.81)
Shares used in computing basic net income (loss) per share 143,599 136,419 127,964
Shares used in computing diluted net income (loss) per share 143,599 139,068 127,964
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Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Comprehensive Income [Abstract]      
Net income (loss) $ (80,330) $ 62,971 $ (103,023)
Other comprehensive income (loss):      
Unrealized (loss) gain on marketable securities 182 (430) 93
Foreign currency translation adjustment (8) (14) 0
Foreign Currency Transaction Gain (Loss), Unrealized (1) 0 0
Total comprehensive income (loss) $ (80,157) $ 62,527 $ (102,930)
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Operating activities:      
Net income (loss) $ (80,330) $ 62,971 $ (103,023)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:      
Share-based compensation 35,696 30,670 25,585
Depreciation and amortization 2,388 2,161 2,410
Non-cash interest expense 1,545 1,761 2,896
Payment-in-kind Interest expense on long-term debt 0 0 552
(Accretion of discounts) amortization of premiums on marketable securities, net (3,090) (303) 13,184
Loss on disposal of equipment 5 46 8
Deferral of unearned revenue 3,000 22,759 701
Recognition of deferred revenue (2,832) (6,512) (9,304)
Deferral of rent expense 0 13 0
Recognition of deferred rent (7) (185) (370)
Other (9) (16) 0
Changes in operating assets and liabilities:      
Accounts receivable, net 11,613 (6,453) 16,730
Inventories (17,480) 9,477 (5,134)
Prepaid expenses and other assets (5,695) 2,035 5,626
Accounts payable and accrued expenses 5,696 15,629 (244)
Net cash provided by (used in) operating activities (49,500) 134,053 (50,383)
Investing activities:      
Purchases of marketable securities (311,112) (398,187) (155,412)
Proceeds from maturities of marketable securities 318,268 235,805 81,783
Purchases of property and equipment (4,663) (1,350) (3,137)
Net cash (used in) provided by investing activities 2,493 (163,732) (76,766)
Financing activities:      
Proceeds from issuance of common stock, net 0 134,874 0
Proceeds from issuance of long-term debt, net 0 0 203,006
Repayment of long-term debt (77,516) (15,995) (54,250)
Proceeds from issuance of common stock under equity incentive plans, net of taxes paid related to net share settlement 13,719 12,776 1,865
Net cash provided by financing activities (63,797) 131,655 150,621
Net increase (decrease) in cash, cash equivalents and restricted cash (110,804) 101,976 23,472
Cash, cash equivalents and restricted cash beginning of period 169,240 67,264 43,792
Cash, cash equivalents and restricted cash end of period 58,436 169,240 67,264
Interest Paid 16,891 20,295 3,886
Income Taxes Paid 220 3,015 1,441
Amounts accrued for purchases of property and equipment $ 542 $ 189 $ 75
v3.10.0.1
Consolidated Statements of Stockholders' Equity (Deficit) Statement - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
AOCI Attributable to Parent [Member]
Retained Earnings [Member]
Shares outstanding at Dec. 31, 2015   128,152      
Total stockholders' equity (deficit) at Dec. 31, 2015 $ 42,999 $ 128 $ 525,628 $ (99) $ (482,658)
Share-based Compensation 25,585   25,585    
Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units and performance restricted stock units, net   570      
Value, Stock Options Exercised 1,948 $ 1 1,947    
Shares, Restricted Stock Award   780      
Value, Restricted Stock Award (83) $ 1 (84)    
Other Comprehensive Income (Loss) 93     93  
Net income (loss) (103,023)        
Shares outstanding at Dec. 31, 2016   129,502      
Total stockholders' equity (deficit) at Dec. 31, 2016 (32,481) $ 130 552,737 (6) (585,342)
Share-based Compensation 30,670   30,670    
Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units and performance restricted stock units, net   1,796      
Value, Stock Options Exercised 12,776 $ 2 12,774    
Shares, Restricted Stock Award   (9)      
Value, Restricted Stock Award 0 $ 0 0    
Other Comprehensive Income (Loss) (444)     (444)  
Net income (loss) 62,971        
Shares outstanding at Dec. 31, 2017   142,789      
Total stockholders' equity (deficit) at Dec. 31, 2017 208,366 $ 143 731,044 (450) (522,371)
Share-based Compensation $ 35,696   35,696    
Shares, New Issues 11,500        
Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units and performance restricted stock units, net   1,932      
Value, Stock Options Exercised $ 13,719 $ 2 13,717    
Shares, Restricted Stock Award   4      
Value, Restricted Stock Award 0 $ 0 0    
Other Comprehensive Income (Loss) 173     173  
Net income (loss) (80,330)        
Shares outstanding at Dec. 31, 2018   144,725      
Total stockholders' equity (deficit) at Dec. 31, 2018 $ 248,887 $ 145 $ 780,457 $ (277) $ (531,438)
v3.10.0.1
Revenue - Contract with Customer, Asset and Liability - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Revenue from Contract with Customer [Abstract]    
Accounts receivable, net $ 30,005 $ 22,133
Deferred revenues $ 9,255 $ 60,865
v3.10.0.1
Organization and Business
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization and Business
Organization and Business
Halozyme Therapeutics, Inc. is a biotechnology company focused on developing and commercializing novel oncology therapies. We are seeking to translate our unique knowledge of the tumor microenvironment to create therapies that have the potential to improve cancer patient survival. Our research primarily focuses on human enzymes that alter the extracellular matrix and tumor microenvironment. The extracellular matrix is a complex matrix of proteins and carbohydrates surrounding the cell that provides structural support in tissues and orchestrates many important biological activities, including cell migration, signaling and survival. Over many years, we have developed unique technology and scientific expertise enabling us to pursue this target-rich environment for the development of therapies.
Our proprietary enzymes are used to facilitate the delivery of injected drugs and fluids, potentially enhancing the efficacy and the convenience of other drugs or can be used to alter tissue structures for potential clinical benefit. We exploit our technology and expertise using a two pillar strategy that we believe enables us to manage risk and cost by: (1) developing our own proprietary products in therapeutic areas with significant unmet medical needs, with a focus on oncology, and (2) licensing our technology to biopharmaceutical companies to collaboratively develop products that combine our technology with the collaborators’ proprietary compounds.
The majority of our approved product and product candidates are based on rHuPH20, our patented recombinant human hyaluronidase enzyme. rHuPH20 is the active ingredient in our first commercially approved product, Hylenex® recombinant, and it works by temporarily breaking down hyaluronan (or “HA”), a naturally occurring carbohydrate that is a major component of the extracellular matrix in tissues throughout the body such as skin and cartilage. We believe this temporary degradation creates an opportunistic window for the improved subcutaneous delivery of injectable biologics, such as monoclonal antibodies and other large therapeutic molecules, as well as small molecules and fluids. We refer to the application of rHuPH20 to facilitate the delivery of other drugs or fluids as our ENHANZE® Drug Delivery Technology (“ENHANZE”). We license the ENHANZE technology to form collaborations with biopharmaceutical companies that develop or market drugs requiring or benefiting from injection via the subcutaneous route of administration.
We currently have ENHANZE collaborations with F. Hoffmann-La Roche, Ltd. and Hoffmann-La Roche, Inc. (“Roche”), Baxalta US Inc. and Baxalta GmbH (now members of the Takeda group of companies, following the acquisition of Shire plc by Takeda Pharmaceutical Company Limited in January 2019) (“Baxalta”), Pfizer Inc. (“Pfizer”), Janssen Biotech, Inc. (“Janssen”), AbbVie, Inc. (“AbbVie”), Eli Lilly and Company (“Lilly”), Bristol-Myers Squibb Company (“BMS”), Alexion Pharma Holding (“Alexion”) ARGENX BVBA (“argenx”).We receive royalties from two of these collaborations, including royalties from sales of one product from the Baxalta collaboration and two products from the Roche collaboration. Future potential revenues from the sales and/or royalties of our approved products, product candidates, and ENHANZE collaborations will depend on the ability of Halozyme and our collaborators to develop, manufacture, secure and maintain regulatory approvals for approved products and product candidates and commercialize product candidates.
Our proprietary development pipeline consists primarily of pre-clinical and clinical stage product candidates in oncology. Our lead oncology program is Pegvorhyaluronidase alfa (PVHA), also referred to as PEGylated recombinant human hyaluronidase (“PEGPH20”), a molecular entity we are developing in combination with currently approved cancer therapies as a candidate for the systemic treatment of tumors that accumulate HA. We have demonstrated that when HA accumulates in a tumor, it can cause increased pressure in the tumor, reducing blood flow into the tumor and with that, reduced access of cancer therapies to the tumor. PEGPH20 has been demonstrated in animal models to work by temporarily degrading HA surrounding cancer cells resulting in reduced pressure and increased blood flow to the tumor thereby enabling increased amounts of anticancer treatments administered concomitantly gaining access to the tumor. Through our efforts and efforts of our partners and collaborators, we are currently in Phase 3 clinical testing for PEGPH20 with ABRAXANE® (nab-paclitaxel) and gemcitabine in stage IV pancreatic ductal adenocarcinoma (“PDA”) (HALO 109-301), in Phase 1b clinical testing for PEGPH20 with KEYTRUDA® (pembrolizumab) in non-small cell lung cancer (HALO 107-101), in Phase 1b/2 clinical testing for PEGPH20 with Tecentriq® (atezolizumab) in patients with previously treated metastatic PDA, in Phase 1b/2 clinical testing for PEGPH20 with Tecentriq in patients with gastric cancer and in Phase 1b/2 clinical testing for PEGPH20 with Tecentriq in patients with cholangiocarcinoma and gall bladder cancer (HALO 110-101/MATRIX).
Except where specifically noted or the context otherwise requires, references to “Halozyme,” “the Company,” “we,” “our,” and “us” in these notes to consolidated financial statements refer to Halozyme Therapeutics, Inc. and its wholly owned subsidiary, Halozyme, Inc., and Halozyme, Inc.’s wholly owned subsidiaries, Halozyme Holdings Ltd., Halozyme Royalty LLC, Halozyme Switzerland GmbH and Halozyme Switzerland Holdings GmbH.
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Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Halozyme Therapeutics, Inc. and our wholly owned subsidiary, Halozyme, Inc., and Halozyme, Inc.’s wholly owned subsidiaries, Halozyme Holdings Ltd., Halozyme Royalty LLC, Halozyme Switzerland GmbH and Halozyme Switzerland Holdings GmbH. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments, which are based on historical and anticipated results and trends and on various other assumptions that management believes to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from management’s estimates.
Cash Equivalents and Marketable Securities
Cash equivalents consist of highly liquid investments, readily convertible to cash, that mature within ninety days or less from the date of purchase. As of December 31, 2018, our cash equivalents consisted of money market funds and commercial paper.
Marketable securities are investments with original maturities of more than ninety days from the date of purchase that are specifically identified to fund current operations. Marketable securities are considered available-for-sale. These investments are classified as current assets, even though the stated maturity date may be one year or more beyond the current balance sheet date which reflects management’s intention to use the proceeds from the sale of these investments to fund our operations, as necessary. Such available-for-sale investments are carried at fair value with unrealized gains and losses recorded in other comprehensive gain (loss) and included as a separate component of stockholders’ equity (deficit). The cost of marketable securities is adjusted for amortization of premiums or accretion of discounts to maturity, and such amortization or accretion is included in investment and other income, net in the consolidated statements of operations. We use the specific identification method for calculating realized gains and losses on marketable securities sold. Realized gains and losses and declines in value judged to be other-than-temporary on marketable securities, if any, are included in investment and other income, net in the consolidated statements of operations.
Restricted Cash
Under the terms of the leases of our facilities, we are required to maintain letters of credit as security deposits during the terms of such leases. At December 31, 2018 and 2017, restricted cash of $0.5 million was pledged as collateral for the letters of credit.
Fair Value of Financial Instruments
The authoritative guidance for fair value measurements establishes a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Our financial instruments include cash equivalents, available-for-sale marketable securities, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses and long-term debt. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The carrying amount of cash equivalents, accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on Level 3 inputs and the borrowing rates currently available for loans with similar terms, we believe the fair value of long-term debt approximates its carrying value.
Available-for-sale marketable securities consist of asset-backed securities, corporate debt securities, U.S. Treasury securities and commercial paper, and are measured at fair value using Level 1 and Level 2 inputs. Level 2 financial instruments are valued using market prices on less active markets and proprietary pricing valuation models with observable inputs, including interest rates, yield curves, maturity dates, issue dates, settlement dates, reported trades, broker-dealer quotes, issue spreads, benchmark securities or other market related data. We obtain the fair value of Level 2 investments from our investment manager, who obtains these fair values from a third-party pricing source. We validate the fair values of Level 2 financial instruments provided by our investment manager by comparing these fair values to a third-party pricing source.
Concentrations of Credit Risk, Sources of Supply and Significant Customers
We are subject to credit risk from our portfolio of cash equivalents and marketable securities. These investments were made in accordance with our investment policy which specifies the categories, allocations, and ratings of securities we may consider for investment. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. We maintain our cash and cash equivalent balances with one major commercial bank and marketable securities with another financial institution. Deposits held with the financial institutions exceed the amount of insurance provided on such deposits. We are exposed to credit risk in the event of a default by the financial institutions holding our cash, cash equivalents and marketable securities to the extent recorded on the consolidated balance sheets.
We are also subject to credit risk from our accounts receivable related to our product sales and revenues under our license and collaborative agreements. We have license and collaborative agreements with pharmaceutical companies under which we receive payments for license fees, milestone payments for specific achievements designated in the collaborative agreements, reimbursements of research and development services and supply of bulk formulation of rHuPH20. In addition, we sell Hylenex® recombinant in the United States to a limited number of established wholesale distributors in the pharmaceutical industry. Credit is extended based on an evaluation of the customer’s financial condition, and collateral is not required. Management monitors our exposure to accounts receivable by periodically evaluating the collectibility of the accounts receivable based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experience. Based upon the review of these factors, we recorded no allowance for doubtful accounts at December 31, 2018 and 2017. Approximately 81% of the accounts receivable balance at December 31, 2018 represents amounts due from Roche and Baxalta. Approximately 86% of the accounts receivable balance at December 31, 2017 represents amounts due from Roche and Baxalta.
The following table indicates the percentage of total revenues in excess of 10% with any single customer:
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Roche
 
72%
 
38%
 
63%
Baxalta
 
7%
 
7%
 
12%
BMS
 
4%
 
32%
 
Alexion
 
3%
 
13%
 
We attribute revenues under collaborative agreements, including royalties, to the individual countries where the collaborator is headquartered. We attribute revenues from product sales to the individual countries to which the product is shipped. Worldwide revenues from external customers are summarized by geographic location in the following table (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
United States
 
$
40,475

 
$
196,274

 
$
52,292

Switzerland
 
109,890

 
119,136

 
93,067

All other foreign
 
1,497

 
1,203

 
1,332

Total revenues
 
$
151,862

 
$
316,613

 
$
146,691


As of December 31, 2018, we had no research equipment in Germany and less than $0.1 million as of December 31, 2017.
We rely on two third-party manufacturers for the supply of bulk rHuPH20 for use in the manufacture of Hylenex recombinant and our other collaboration products and product candidates. Payments due to these suppliers represented 2% and 4% of the accounts payable balance at December 31, 2018 and 2017, respectively. We also rely on a third-party manufacturer for the fill and finish of Hylenex recombinant product under a contract. Payments due to this supplier represented 0% and 1% of the accounts payable balance at December 31, 2018 and 2017, respectively.
Accounts Receivable, Net
Accounts receivable is recorded at the invoiced amount and is non-interest bearing. Accounts receivable is recorded net of allowances for doubtful accounts, cash discounts for prompt payment, distribution fees and chargebacks. We recorded no allowance for doubtful accounts at December 31, 2018 and 2017 as the collectibility of accounts receivable was reasonably assured.
Inventories
Inventories are stated at lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventories are reviewed periodically for potential excess, dated or obsolete status. We evaluate the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared to quantities on hand, the price we expect to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand.
We capitalize inventory costs associated with our drug candidates prior to receipt of regulatory approval, based on management’s judgment of probable future commercialization. We would be required to expense these capitalized costs upon a change in such judgment, due to, among other factors, a decision denying approval of the drug candidate by regulatory agencies.
Bulk rHuPH20 formulations manufactured for partner use prior to our partner receiving marketing approval from the U.S. Food and Drug Administration (“FDA”) or comparable regulatory agencies in foreign countries and with no alternative future use are recorded as research and development expense. All direct manufacturing costs incurred after the partner receives marketing approval are capitalized as inventory. Bulk rHuPH20 formulations manufactured for general partner and internal use, which can potentially be used by any collaboration partner or by us in any stage of development or in commercial product, and ENHANZE drug product used by our partners in clinical trials, is considered to have alternative future use and all manufacturing costs are capitalized as inventory. Inventories used in our clinical trials are expensed at the time the inventories are packaged for the clinical trials.
As of December 31, 2018 and 2017, inventories consisted of $2.2 million and $2.9 million, respectively, of Hylenex recombinant inventory, net, and $20.4 million and $2.2 million, respectively, of bulk rHuPH20.
Property and Equipment, Net
Property and equipment are recorded at cost, less accumulated depreciation and amortization. Equipment is depreciated using the straight-line method over its estimated useful life ranging from three to ten years and leasehold improvements are amortized using the straight-line method over the estimated useful life of the asset or the lease term, whichever is shorter.
Impairment of Long-Lived Assets
We account for long-lived assets in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. For the years ended December 31, 2018 and 2017, there was no impairment of the value of long-lived assets.
Deferred Rent
Rent expense is recorded on a straight-line basis over the initial term of the lease. The difference between rent expense accrued and amounts paid under lease agreements is recorded as deferred rent and is included in accrued expenses and other long-term liabilities, as applicable, in the accompanying consolidated balance sheets.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during the period from transactions and other events and circumstances from non-owner sources.
Revenue Recognition
We generate revenues from payments received under collaborative agreements and product sales. As of January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers (ASC 606) which affects how we recognize revenues in these arrangements. We applied the provisions of ASC 606 using the modified retrospective approach, with the cumulative effect of the adoption recognized as of January 1, 2018, to all contracts that had not been completed as of that date. Under ASC 606, we recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (i) identify the promised goods or services in the contract; (ii) identify the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) determine the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligations. Amounts reported in prior periods have not been adjusted to reflect the adoption of ASC 606. Accordingly, the reported revenue amounts for the year ended December 31, 2018 and the years ended December 31, 2017 and 2016 are based on different accounting policies.
Prior to the ASC 606 adoption, revenue was recognized when all of the following criteria were met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured. Differences between the revenue recognition policies applicable prior to the adoption and ASC 606 are described in the following sections and in Note 4.
Revenues under Collaborative Agreements - as reported under ASC 606 beginning January 1, 2018
Under these agreements, we grant the collaboration partner a worldwide license to develop and commercialize products using our ENHANZE technology to combine our patented rHuPH20 enzyme with their proprietary biologics directed at up to a specified number of targets. Targets are usually licensed on an exclusive, global basis. Targets selected subsequent to inception of the arrangement require payment of an additional license fee. The collaboration partner is responsible for all development, manufacturing, clinical, regulatory, sales and marketing costs for any products developed under the agreement. We are responsible for supply of bulk rHuPH20 based on the collaboration partner’s purchase orders, and may also be separately engaged to perform research and development services.
We collect an upfront license payment from the collaboration partner, and are also entitled to receive event-based payments subject to the collaboration partner’s achievement of specified development, regulatory and sales-based milestones. In several agreements, collaboration partners pay us annual fees to maintain their exclusive license rights if they are unable to advance product development to specified stages. We earn separate fees for bulk rHuPH20 supplies and research and development services. In addition, the collaboration partner will pay us royalties at an on average mid-single digit percent rate of their sales if products under the collaboration are commercialized. All amounts owed to us are noncancelable after the underlying triggering event occurs, and nonrefundable once paid. Unless terminated earlier in accordance with its terms, the collaboration continues in effect until the later of: (i) expiration of the last to expire of the valid claims of our patents covering rHuPH20 or other specified patents developed under the collaboration which valid claim covers a product developed under the collaboration, and (ii) expiration of the last to expire royalty term for a product developed under the collaboration, which is determined separately for each country. In the event such valid claims expire prior to the last to expire royalty term, the royalty rate is reduced for the remaining royalty term following such expiration. The collaboration partner may terminate the agreement prior to expiration for any reason in its entirety or on a target-by-target basis generally upon 90 days prior written notice to us. Upon any such termination, the license granted to the collaboration partner (in total or with respect to the terminated target, as applicable) will terminate provided, however, that in the event of expiration of the agreement, the licenses granted will become perpetual, non-exclusive and fully paid.
Although these agreements are in form structured as collaborative agreements, we concluded for accounting purposes they represent contracts with customers, and are not subject to accounting literature on collaborative arrangements. This is because we grant to collaboration partners licenses to our intellectual property, and provide supply of bulk rHuPH20 and research and development services which are all outputs of our ongoing activities, in exchange for consideration. We do not develop assets jointly with collaboration partners, and do not share in significant risks of their development or commercialization activities. Accordingly, we concluded our collaborative agreements must be accounted for pursuant to ASC Topic 606, Revenue from Contracts with Customers.
Under all of our collaborative agreements, we have identified licenses to use functional intellectual property as the only performance obligation. The intellectual property underlying the license is our proprietary ENHANZE® technology which represents application of rHuPH20 to facilitate delivery of drugs or fluids. The license grants the collaboration partners right to use our intellectual property as it exists on the effective date of the license, because there is no ongoing development of the ENHANZE technology required. Therefore, we recognize revenue from licenses at the point when the license becomes effective and the collaboration partner has received access to our intellectual property, usually at the inception of the agreement.
When collaboration partners can select additional targets to add to the licenses granted, we consider these rights to be options. We evaluate whether such options contain material rights, i.e. have exercise prices that are discounted compared to what we would charge for a similar license to a new collaboration partner. The exercise price of these options includes a combination of the target selection fees, event-based milestone payments and royalties. When these amounts in aggregate are not offered at a discount that exceeds discounts available to other customers, we conclude the option does not contain a material right, and we consider grants of additional licensing rights upon option exercises to be separate contracts (target selection contracts).
We provide standard indemnification and protection of licensed intellectual property for our customers. These provisions are part of assurance that the licenses meet the agreements representations and are not obligations to provide goods or services.
We also fulfill purchase orders for supply of bulk rHuPH20 and perform research and development services pursuant to projects authorization forms for our collaboration partners, which represent separate contracts. Additionally, we price our supply of bulk rHuPH20 and research and development services at our regular selling prices, called standalone selling price or SSP. Therefore, our collaboration partners do not have material rights to order these items at prices not reflective of SSP. Refer to the discussion below regarding recognition of revenue for these separate contracts.
Transaction price for a contract represents the amount to which we are entitled in exchange for providing goods and services to the customer. Transaction price does not include amounts subject to uncertainties unless it is probable that there will be no significant reversal of revenue when the uncertainty is resolved. Apart from the upfront license payment (or target selection fees in the target selection contracts), all other fees we may earn under our collaborative agreements are subject to significant uncertainties of product development. Achievement of many of the event-based development and regulatory milestones may not be probable until such milestones are actually achieved. This generally relates to milestones such as obtaining marketing authorization approvals and successful completion of clinical trials. With respect to other development milestones, e.g. dosing of a first patient in a clinical trial, achievement could be considered probable prior to its actual occurrence, based on the progress towards commencement of the trial. We do not include any amounts subject to uncertainties into the transaction price until it is probable that the amount will not result in a significant reversal of revenue in the future. At the end of each reporting period, we re-evaluate the probability of achievement of such milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price.
When target exchange rights are held by collaboration partners, and the amounts attributed to these rights are not refundable, they are included in the transaction price. However, they are recorded as deferred revenues because we have a potential performance obligation to provide a new target if the exchange right is exercised. These amounts are recognized in revenue when the right of exchange expires or is exercised.
Because our agreements only have one type of performance obligation (licenses) which are typically all transferred at the same time at agreement inception, allocation of transaction price often is not required. However, allocation is required when licenses for some of the individual targets are subject to rights of exchange, because revenue associated with these targets cannot be recognized. We perform an allocation of the upfront amount based on relative SSP of licenses for individual targets. We determine license SSP using income-based valuation approach utilizing risk-adjusted discounted cash flow projections of the estimated return a licensor would receive. When amounts subject to uncertainties, such as milestones and royalties, are included in the transaction price, we attribute them to the specific individual target licenses which generate such milestone or royalty amounts.
We also estimate SSP of bulk rHuPH20 and research and development services, to determine that our collaboration partners do not have material rights to order them at discounted prices. For supplies of bulk rHuPH20, because we effectively act as a contract manufacturer to our collaboration partners, we estimate and charge SSP based on the typical contract manufacturer margins consistently with all of our collaborative partners. We determine SSP of research and development services based on a fully-burdened labor rate. Our rates are comparable to those we observe in other collaborative agreements. We also have a history of charging similar rates to all of our collaboration partners.
Upfront amounts allocated to licenses to individual targets are recognized as revenue when the license is transferred to the collaboration partner, as discussed above, if the license is not subject to exchange rights, or when the exchange right expires or is exercised. Development milestones and other fees are recognized in revenue when they are included in the transaction price, because by that time we have already transferred the related license to the collaboration partner.
Sales-based milestones and royalties cannot be recognized until the underlying sales occur. We do not receive final royalty reports from our collaboration partners until after we complete our financial statements for a prior quarter. Therefore, we recognize revenue based on estimates of the royalty earned, which are based on preliminary reports provided by our collaboration partners. We will record a true-up in the following quarter if necessary, when final royalty reports are received. To date, we have not recorded any material true-ups.
In contracts to provide research and development services, such services represent the only performance obligation. The fees are charged based on hours worked by our employees and the fixed contractual rate per hour, plus third-party pass-through costs, on a monthly basis. We recognize revenues as the related services are performed based on the amounts billed, as the collaboration partner consumes the benefit of research and development work simultaneously as we perform these services, and the amounts billed reflect the value of these services to the customer.
Refer to Note 4 Revenue, for further discussion on our collaborative arrangements.
Prior to the adoption of ASC 606 on January 1, 2018, we recognized upfront amounts received under two of our collaborative agreements straight-line over the contract term in accordance with the accounting standards that were in effect in 2006-2007, when these collaborative agreements were entered into. In addition, we recognized royalty revenue in the period when we received final royalty reports from the collaboration partners, in the quarter following the quarter in which the corresponding sales occurred. There were no other adoption differences in revenue recognized due to the transition from the previously existing authoritative accounting literature to ASC 606.
Product Sales, Net - as reported under ASC 606 beginning January 1, 2018
Hylenex Recombinant
We sell Hylenex recombinant in the U.S. to wholesale pharmaceutical distributors, who sell the product to hospitals and other end-user customers. Sales to wholesalers are made pursuant to purchase orders subject to the terms of a master agreement, and delivery of individual packages of Hylenex recombinant represent performance obligations under each purchase order. We use a contract manufacturer to produce Hylenex recombinant and a third-party logistics (3PL) vendor to process and fulfill orders. We concluded we are the principal in the sales to wholesalers because we control access to services rendered by both vendors and direct their activities. We have no significant obligations to wholesalers to generate pull-through sales.
Selling prices initially billed to wholesalers are subject to discounts for prompt payment and subsequent chargebacks when wholesalers sell Hylenex recombinant at negotiated discounted prices to members of certain group purchasing organizations (“GPOs”) and government programs. We also pay quarterly distribution fees to certain wholesalers for inventory reporting and chargeback processing, and to GPOs as administrative fees for services and for access to GPO members. We concluded the benefits received in exchange for these fees are not distinct from our sales of Hylenex recombinant, and accordingly we apply these amounts to reduce revenues. Wholesalers also have rights to return unsold product nearing or past the expiration date. Because of the shelf life of Hylenex recombinant and our lengthy return period, there may be a significant period of time between when the product is shipped and when we issue credits on returned product.
We estimate the transaction price when we receive each purchase order taking into account the expected reductions of the selling price initially billed to the wholesaler arising from all of the above factors. We have compiled historical experience and data to estimate future returns and chargebacks of Hylenex recombinant and the impact of the other discounts and fees we pay. When estimating these adjustments to the transaction price, we reduce it sufficiently to be able to assert that it is probable that there will be no significant reversal of revenue when the ultimate adjustment amounts are known.
Each purchase order contains only one type of product, and is usually shipped to the wholesaler in a single shipment. Therefore, allocation of the transaction price to individual packages is not required.
We recognize revenue from Hylenex recombinant product sales and related cost of sales upon product delivery to the wholesaler location. At that time, the wholesalers take control of the product as they take title, bear the risk of loss of ownership, and have an enforceable obligation to pay us. They also have the ability to direct sales of product to their customers on terms and at prices they negotiate. Although wholesalers have product return rights, we do not believe they have a significant incentive to return the product to us.
Upon recognition of revenue from product sales of Hylenex recombinant, the estimated amounts of credit for product returns, chargebacks, distribution fees, prompt payment discounts, and GPO fees are included in sales reserves, accrued liabilities and net of accounts receivable. We monitor actual product returns, chargebacks, discounts and fees subsequent to the sale. If these amounts differ from our estimates, we make adjustments to these allowances, which are applied to increase or reduce product sales revenue and earnings in the period of adjustment.
In connection with the orders placed by wholesalers, we incur costs such as commissions to our sales representatives. However, as revenue from product sales is recognized upon delivery to the wholesaler, which occurs shortly after we receive a purchase order, we do not capitalize these commissions and other costs, based on application of a practical expedient allowed in ASC 606.
Bulk rHuPH20
We sell bulk rHuPH20 to collaboration partners for use in research and development; subsequent to receiving marketing approval, we sell it for use in collaboration commercial products. Sales are made pursuant to purchase orders subject to the terms of the collaborative agreement, and delivery of units of bulk rHuPH20 represent performance obligations under each purchase order. We provide a standard warranty that the product conforms to specifications. We use a contract manufacturer to produce bulk rHuPH20 and have concluded we are the principal in the sales to collaboration partners. The transaction price for each purchase order of bulk rHuPH20 is fixed based on the cost of production plus a contractual markup, and is not subject to adjustments. Allocation of the transaction price to individual quantities of the product is usually not required because each order contains only one type of product.
We recognize revenue from the sale of bulk rHuPH20 as product sales and related cost of sales upon transfer of title to our partners. At that time, the partners take control of the product, bear the risk of loss of ownership, and have an enforceable obligation to pay us.
There were no differences in how the previously existing authoritative accounting literature applied to our product sales transactions.
ENHANZE Drug Product
We sell ENHANZE drug product to collaboration partners for use in research and development in early phase clinical studies. Sales are made pursuant to purchase orders subject to the terms of the collaborative agreement, and delivery of units of ENHANZE drug product represent performance obligations under each purchase order. We provide a standard warranty that the product conforms to specifications. We use a contract manufacturer to produce ENHANZE drug product and we concluded we are the principal in the sales to collaboration partners. The transaction price for each purchase order of ENHANZE drug product is fixed based on the cost of production plus a contractual markup, and is not subject to adjustments. Allocation of the transaction price to individual quantities of the product is usually not required because each order contains only one type of product.
We recognize revenue from the sale of ENHANZE drug product as product sales and related cost of sales upon transfer of title to our partners. At that time, the partners take control of the product, bear the risk of loss of ownership, and have an enforceable obligation to pay us.
There were no differences in how the previously existing authoritative accounting literature applied to our product sales transactions.
Revenue Presentation
In our statements of operations, we report as revenues under collaborative agreements the upfront payments, event-based development and regulatory milestones and sales milestones. We also include in this category revenues from separate research and development contracts pursuant to project authorization forms and sales of bulk rHuPH20 that has no alternative future use. We report royalties received from collaboration partners as a separate line in our statements of operations.
Revenues from sales of Hylenex recombinant, bulk rHuPH20 that has alternative future use and ENHANZE drug product are included in product sales, net.
In footnotes to our financial statements, we provide disaggregated revenue information by type of arrangement (product sales, net, collaborative agreements and research and development services), and additionally, by type of payment stream received under collaborative agreements (upfront amounts, event-based development and regulatory milestones and other fees, sales milestones and royalties).
Cost of Product Sales
Cost of product sales consists primarily of raw materials, third-party manufacturing costs, fill and finish costs, freight costs, internal costs and manufacturing overhead associated with the production of Hylenex recombinant and bulk rHuPH20 and ENHANZE drug product that has alternative future use. Cost of product sales also consists of the write-down of excess, dated and obsolete inventories and the write-off of inventories that do not meet certain product specifications, if any. Prior to bulk rHuPH20 and ENHANZE drug product having alternative future use, all costs related to the manufacturing of those products were charged to research and development expenses in the periods such costs were incurred. During the year ended December 31, 2018, sales of bulk rHuPH20 and ENHANZE drug product included $2.6 million of cost of sales that were previously expensed as research and development. Of the bulk rHuPH20 and ENHANZE drug product that has alternative future use on hand as of December 31, 2018, approximately $1.9 million in manufacturing costs were previously recorded as research and development expenses. We expect to sell this inventory by the end of 2020.
Research and Development Expenses
Research and development expenses include salaries and benefits, facilities and other overhead expenses, external clinical trial expenses, research related manufacturing services, contract services and other outside expenses. Research and development expenses are charged to operating expenses as incurred when these expenditures relate to our research and development efforts and have no alternative future uses. When bulk rHuPH20 is manufactured for use in research and development by us or our partners and the product cannot be redirected for alternative use due to formulation and manufacturing specifications, the manufacturing costs are recorded as research and development expense. Bulk rHuPH20 that is manufactured for partner use prior to our partner receiving marketing approval from the FDA or comparable regulatory agencies in foreign countries and meet these specifications is recorded as research and development expenses. The manufacturing costs of bulk rHuPH20 for the approved collaboration products, Herceptin SC, MabThera SC (RITUXAN HYCELA™ in the U.S.) and HYQVIA, incurred after the receipt of marketing approvals are capitalized as inventory. Bulk rHuPH20 formulations manufactured for general partner and internal use, which can potentially be used by any collaboration partner or by us in any stage of development or in commercial products, is considered to have alternative future use and all manufacturing costs are capitalized as inventory. Inventories used in our clinical trials are expensed at the time the inventories are packaged for the clinical trials.
We are obligated to make upfront payments upon execution of certain research and development agreements. Advance payments, including nonrefundable amounts, for goods or services that will be used or rendered for future research and development activities are deferred. Such amounts are recognized as expense as the related goods are delivered or the related services are performed or such time when we do not expect the goods to be delivered or services to be performed.
Milestone payments that we make in connection with in-licensed technology for a particular research and development project that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic value are expensed as research and development costs at the time the costs are incurred. We currently have no in-licensed technologies that have alternative future uses in research and development projects or otherwise.
Clinical Trial Expenses
We make payments in connection with our clinical trials under contracts with contract research organizations that support conducting and managing clinical trials. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee, unit price or on a time and materials basis. A portion of our obligation to make payments under these contracts depends on factors such as the successful enrollment or treatment of patients or the completion of other clinical trial milestones.
Expenses related to clinical trials are accrued based on our estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, completion of patient studies and progress of the clinical trials. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the amounts we are obligated to pay under our clinical trial agreements are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), we adjust our accruals accordingly on a prospective basis. Revisions to our contractual payment obligations are charged to expense in the period in which the facts that give rise to the revision become reasonably certain.
Share-Based Compensation
We record compensation expense associated with stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and RSUs with performance conditions (“PRSUs”) in accordance with the authoritative guidance for stock-based compensation. The cost of employee services received in exchange for an award of an equity instrument is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period of the award. Share-based compensation expense for an award with a performance condition is recognized when the achievement of such performance condition is determined to be probable. If the outcome of such performance condition is not determined to be probable or is not met, no compensation expense is recognized and any previously recognized compensation expense is reversed. Forfeitures are recognized as a reduction of share-based compensation expense as they occur.
Income Taxes
We provide for income taxes using the liability method. Under this method, deferred income tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of existing assets and liabilities at each year end and their respective tax bases and are measured using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Significant judgment is required by management to determine our provision for income taxes, our deferred tax assets and liabilities, and the valuation allowance to record against our net deferred tax assets, which are based on complex and evolving tax regulations throughout the world. Deferred tax assets and other tax benefits are recorded when it is more likely than not that the position will be sustained upon audit. While we have begun to utilize certain of our net operating losses, we have not yet established a track record of profitability. Accordingly, valuation allowances have been recorded to reduce our net deferred tax assets to zero, with the exception of the alternative minimum tax ("AMT") credit carryover of $3.0 million. Under the Tax Cuts and Jobs Act (the “Act”) enacted in December 2017, the AMT credit carryover will either be utilized, or if unutilized fully refunded in 2022. For all other deferred tax assets the valuation allowance will reduce the net value to zero until such time as we can demonstrate an ability to realize them.
The Act reduces the U.S. federal corporate tax rate from 35% to 21%. As a result, the Company evaluated and adjusted its deferred tax assets to reflect the new corporate tax rates as of December 31, 2017. As of December 31, 2018, upon completing its analysis of the Act, the Company believes that its disclosures in its financial statements as of December 31, 2017 are still accurate.
Net (Loss) Income Per Share
Basic net (loss) income per common share is computed by dividing net (loss) income for the period by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Outstanding stock options, unvested RSAs, unvested RSUs and unvested PRSUs are considered common stock equivalents and are only included in the calculation of diluted earnings per common share when net income is reported and their effect is dilutive. For the years ended December 31, 2018, 2017 and 2016, approximately 13.8 million, 7.1 million, and 13.8 million shares, respectively, of outstanding stock options, unvested RSAs, unvested RSUs and unvested PRSUs were excluded from the calculation of diluted net (loss) income per common share because their effect was anti-dilutive. A reconciliation of the numerators and the denominators of the basic and diluted net (loss) income per common share computations is as follows (in thousands, except per share amounts):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Numerator:
 
 
 
 
 
 
Net (loss) income
 
$
(80,330
)
 
$
62,971

 
$
(103,023
)
Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding for basic
net (loss) income per share
 
143,599

 
136,419

 
127,964

Net effect of dilutive common stock equivalents
 

 
2,649

 

Weighted average common shares outstanding for diluted
net (loss) income per share
 
143,599

 
139,068

 
127,964

Net (loss) income per share:
 
 
 
 
 
 
Basic
 
$
(0.56
)
 
$
0.46

 
$
(0.81
)
Diluted
 
$
(0.56
)
 
$
0.45

 
$
(0.81
)

Segment Information
We operate our business in one segment, which includes all activities related to the research, development and commercialization of our proprietary enzymes. This segment also includes revenues and expenses related to (i) research and development and bulk rHuPH20 manufacturing activities conducted under our collaborative agreements with third parties and (ii) product sales of Hylenex recombinant. The chief operating decision-maker reviews the operating results on an aggregate basis and manages the operations as a single operating segment. Our long-lived assets located in foreign countries had no and minimal book value as of December 31, 2018 and 2017, respectively.
Adoption and Pending Adoption of Recent Accounting Pronouncements
The following table provides a brief description of recently issued accounting standards, those adopted in the current period and those not yet adopted:
Standard
 
Description
 
Effective Date
 
Effect on the Financial
Statements or Other Significant Matters
 
 
 
 
 
 
 
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall; Recognition and Measurement of Financial Assets and Financial Liabilities.
 
The new guidance supersedes the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and requires equity securities to be measured at fair value with changes in the fair value recognized through net income. The new guidance requires public business entities that are required to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion consistent with Topic 820, Fair Value Measurement.
 
January 1, 2018.
 
We currently do not hold equity securities. The adoption did not have a material impact on our consolidated financial statements.
 
 
 
 
 
 
 
In October 2016, the FASB issued ASU 2016-16, Income Taxes; Intra-Entity Transfers of Assets Other Than Inventory
 
The new guidance removes the current requirement to defer the income tax effects of intercompany transfers of assets other than inventory (e.g., intangible assets) until the asset has been sold to an outside party. As a result, the income tax consequences of an intercompany transfer of assets other than inventory will be recognized in the current period income statement rather than being deferred until the assets leave the consolidated entity.

 
January 1, 2018
 
We adopted the new guidance on January 1, 2018. The adoption did not have a material impact on our consolidated financial statements.
 
 
 
 
 
 
 
Standard
 
Description
 
Effective Date
 
Effect on the Financial
Statements or Other Significant Matters
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In March, April, May and December 2016, the FASB issued additional guidance related to Topic 606.
 
The new standard will supersede nearly all existing revenue recognition guidance. Under Topic 606, an entity is required to recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received in exchange for those goods or services. Topic 606 defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates, and also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used. The new standard also defines accounting for certain costs related to origination and fulfillment of contracts with customers, including whether such costs should be capitalized.


 
January 1, 2018.
 
We adopted the new guidance on January 1, 2018 using the modified retrospective approach. Refer to Notes 2 “Revenue Recognition” and 4 for additional detail regarding the impact of this adoption.
 
 
 
 
 
 
 
Standard
 
Description
 
Effective Date
 
Effect on the Financial
Statements or Other Significant Matters
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). In July 2018, the FASB issued additional guidance related to Topic 842.
 
The new guidance requires lessees to recognize assets and liabilities for most leases and provides enhanced disclosures.
 
January 1, 2019. Early adoption is permitted.
 
We plan to implement the guidance on January 1, 2019 using a modified retrospective transition basis for leases existing as of the period of adoption. In order to adopt the new standard, we will be using available practical expedients and newly implemented processes and internal controls for lease accounting. The practical expedients allow us to carry forward our historical assessment of whether existing agreements are or contain a lease and the classification of our existing lease arrangements. We expect all of our real-estate and automobile operating lease commitments will be recognized as lease liabilities with corresponding right-of-use assets upon adoption, resulting in an increase in the assets and liabilities of the consolidated balance sheet of approximately $7.2 million using an assumed incremental borrowing rate of 10.0%. We anticipate that the adoption will not have an impact in our consolidated statements of operations and will not require recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
 
 
 
 
 
 
 
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).
 
The new guidance removes, modifies and adds to certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement.


 
January 1, 2020
 
We plan to adopt the new guidance on January 1, 2020. We do not anticipate the adoption will have a material impact on our consolidated financial position or results of operations.
 
 
 
 
 
 
 
Standard
 
Description
 
Effective Date
 
Effect on the Financial
Statements or Other Significant Matters
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments
 
The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized.
 
January 1, 2020
 
We plan to adopt the new guidance on January 1, 2020. We do not anticipate the adoption will have a material impact on our consolidated financial position or results of operations.

v3.10.0.1
Fair Value Measurement (Notes)
12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Disclosures [Text Block]
Fair Value Measurement
Available-for-sale marketable securities consisted of the following (in thousands):
 
 
December 31, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Asset-backed securities
 
$
39,787

 
$

 
$
(40
)
 
$
39,747

Corporate debt securities
 
57,860

 
$

 
(127
)
 
57,733

U.S. Treasury securities
 
84,924

 

 
(87
)
 
84,837

Commercial paper
 
114,273

 

 

 
114,273

 
 
$
296,844

 
$

 
$
(254
)
 
$
296,590


 
 
December 31, 2017
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Corporate debt securities
 
$
117,427

 
$

 
$
(235
)
 
$
117,192

U.S. Treasury securities
 
66,601

 

 
(201
)
 
66,400

Commercial paper
 
116,882

 

 

 
116,882

 
 
$
300,910

 
$

 
$
(436
)
 
$
300,474


As of December 31, 2018, 22 available-for-sale marketable securities with a fair market value of $167.3 million were in a gross unrealized loss position of $0.3 million, all of which had been in such position for less than 12 months. Based on our review of these marketable securities, we believe we had no other-than-temporary impairments on these securities as of December 31, 2018, because we do not intend to sell these securities and it is not more-likely-than-not that we will be required to sell these securities before the recovery of their amortized cost basis.
Contractual maturities of available-for-sale debt securities are as follows (in thousands):
 
 
December 31, 2018
 
December 31, 2017
 
 
Estimated Fair Value
Due within one year
 
$
296,590

 
$
213,426

After one but within five years
 

 
87,048

 
 
$
296,590

 
$
300,474


The following table summarizes, by major security type, our cash equivalents and available-for-sale marketable securities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):
 
 
December 31, 2018
 
December 31, 2017
 
 
Level 1
 
Level 2
 
Total estimated fair value
 
Level 1
 
Level 2
 
Total estimated fair value
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
57,987

 
$

 
$
57,987

 
$
142,091

 
$

 
$
142,091

Commercial paper
 

 

 

 

 
15,700

 
15,700

Available-for-sale marketable
   securities:
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 

 
39,747

 
39,747

 

 

 

Corporate debt securities
 

 
57,733

 
57,733

 

 
117,192

 
117,192

U.S. Treasury securities
 
84,837

 

 
84,837

 
66,400

 

 
66,400

Commercial paper
 

 
114,273

 
114,273

 

 
116,882

 
116,882

 
 
$
142,824

 
$
211,753

 
$
354,577

 
$
208,491

 
$
249,774

 
$
458,265


There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2018. We had no instruments that were classified within Level 3 as of December 31, 2018 and 2017.
v3.10.0.1
Revenue
12 Months Ended
Dec. 31, 2018
Revenue from Contract with Customer [Abstract]  
Revenue
Revenue
Our disaggregated revenues were as follows (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Royalties
 
$
78,981

 
$
63,507

 
$
50,984

 
 
 
 
 
 
 
Product sales, net
 
 
 
 
 
 
  Sales of bulk rHuPH20
 
$
12,729

 
$
35,246

 
$
37,235

  Sales of ENHANZE drug product
 
460

 

 

  Sales of Hylenex
 
15,045

 
15,150

 
16,157

Total product sales, net
 
28,234

 
50,396

 
53,392

 
 
 
 
 
 
 
Revenues under collaborative agreements:
 
 
 
 
 
 
  Upfront license fees
 
26,336

 
172,806

 
1,406

  Event-based development milestones and other fees
 
16,000

 
16,317

 
18,067

  Sales-based milestones
 

 
1,417

 
1,370

  Research and development services
 
2,311

 
12,170

 
21,472

Total revenues under collaborative agreements
 
44,647

 
202,710

 
42,315

 
 
 
 
 
 
 
Total revenue
 
$
151,862

 
$
316,613

 
$
146,691


During the year ended December 31, 2018 we recognized revenue related to licenses granted to collaboration partners in prior periods in the amount of $95.0 million. This amount represents royalties earned in the current period, development milestones of $6.0 million from Roche, $5.0 million from Alexion, and $5.0 million from BMS. We also recognized revenue of $2.8 million during the year ended December 31, 2018 that had been included in deferred revenues at December 31, 2017. We did not recognize any adjustments to reduce sales reserves and allowances liability related to Hylenex recombinant sales in prior periods.
Revenue recognized during the years ended December 31, 2017 and 2016 was determined in accordance with the accounting rules applicable prior to the adoption of ASC 606 on January 1, 2018.
Upon the adoption of ASC 606, we recognized an adjustment to increase our accounts receivable by $19.4 million, decrease deferred revenues by $51.8 million, and decrease accumulated deficit by $71.2 million. The impact of applying the provisions of ASC 606 in the year ended December 31, 2018 was to decrease revenues by $4.7 million. Under the previously existing authoritative accounting literature, at December 31, 2018 our accounts receivable, net would have been $19.3 million lower, and our deferred revenue $47.4 million higher, than the amounts reported in our consolidated balance sheet. ASC 606 did not have an aggregate impact on our net cash used in operating activities, but resulted in offsetting changes in net loss and certain assets and liabilities within net cash used in operating activities in the consolidated statement of cash flows.
Accounts receivable, net and deferred revenues (contract liabilities) from contracts with customers, including collaboration partners, consisted of the following (in thousands):
 
 
December 31, 2018
 
December 31, 2017
Accounts receivable, net
 
$
30,005

 
$
22,133

Deferred revenues
 
9,255

 
60,865


As of December 31, 2018, the amounts included in the transaction price of our contracts with customers, including collaboration partners, and allocated to goods and services not yet provided were $9.3 million. This amount has been collected and is reported as deferred revenues. Of the total deferred revenues, $3.0 million represents pre-payment of bulk rHuPH20 that we estimate will be delivered in 2019. Of the remaining deferred revenues, for which the timing of when these goods and services will be provided is controlled by our customers, $4.0 million can be used by the customers at any time through 2022 and the remaining $2.3 million at any time through November 2019.
There were no contract assets related to collaborative agreements at December 31, 2018. While we may become entitled to receive additional event-based development and regulatory milestones and other fees under our collaborative agreements, which relate to intellectual property licenses granted to collaboration partners in prior periods, no amounts were probable. The following table presents amounts under our collaborative agreements included in the transaction price (i.e. cumulative amounts triggered or probable) as of December 31, 2018 (in thousands):
 
 
Upfront
(1)
 
Development
(2)
 
Sales
(3)
 
Royalty
 
Total
Collaboration partner and agreement date:
 
 
 
 
 
 
 
 
 
 
Roche (December 2006, September 2017 and October 2018)
 
$
95,000

 
$
30,000

 
$
22,000

 
$
228,780

 
$
375,780

Baxalta (September 2007)
 
10,000

 
3,000

 
9,000

 
24,608

 
46,608

Pfizer (December 2012)
 
14,500

 
2,000

 

 

 
16,500

Janssen (December 2014)
 
15,250

 
15,000

 

 

 
30,250

AbbVie (June 2015)
 
23,000

 
6,000

 

 

 
29,000

Lilly (December 2015)
 
33,000

 

 

 

 
33,000

BMS (September 2017)
 
105,000

 
5,000

 

 

 
110,000

Alexion (December 2017)
 
40,000

 
5,000

 

 

 
45,000


(1)
Upfront and additional target selection fees
(2)
Event-based development and regulatory milestone amounts and other fees
(3)
Sales-based milestone amounts
Through December 31, 2018, our collaboration partners have completed development, obtained marketing authorization approvals for certain indications and commenced commercialization of the following products:
Roche, for Herceptin SC in the European Union (“EU”) in August 2013; and MabThera SC in the EU in March 2014 and its equivalent RITUXAN HYCELA™ in the US in June 2017; and Herceptin SC in Canada in September 2018;
Baxalta, for HYQVIA in the EU and in the US in May 2013.
The remaining targets and products are currently in the process of development by the collaboration partners.
v3.10.0.1
Certain Balance Sheet Items
12 Months Ended
Dec. 31, 2018
Balance Sheet Related Disclosures [Abstract]  
Certain Balance Sheet Items
Certain Balance Sheet Items
Accounts receivable, net consisted of the following (in thousands):
 
 
December 31,
2018
 
December 31,
2017
Accounts receivable from product sales to collaborators
 
$
3,717

 
$
18,475

Accounts receivable from revenues under collaborative agreements
 
5,499

 
2,142

Accounts receivable from royalty payments
 
19,199

 

Accounts receivable from other product sales
 
2,182

 
2,075

     Subtotal
 
30,597

 
22,692

Allowance for distribution fees and discounts
 
(592
)
 
(559
)
     Total accounts receivable, net
 
$
30,005

 
$
22,133


Inventories consisted of the following (in thousands):
 
 
December 31,
2018
 
December 31,
2017
Raw materials
 
$
735

 
$
377

Work-in-process
 
11,430

 
2,131

Finished goods
 
10,460

 
2,638

     Total inventories
 
$
22,625

 
$
5,146


Prepaid expenses and other assets consisted of the following (in thousands):
 
 
December 31,
2018
 
December 31,
2017
Prepaid manufacturing expenses
 
$
8,230

 
$
2,337

Prepaid research and development expenses
 
7,922

 
7,793

Other prepaid expenses
 
2,513

 
2,585

Other assets
 
6,462

 
6,717

     Total prepaid expenses and other assets
 
25,127

 
19,432

Less long-term portion
 
4,434

 
5,553

     Total prepaid expenses and other assets, current
 
$
20,693

 
$
13,879


Prepaid manufacturing expenses include raw materials, slot reservation fees and other amounts paid to contract manufacturing organizations. Such amounts are reclassified to work-in-process inventory as materials are used or the CMO services are complete.
Property and equipment, net consisted of the following (in thousands):
 
 
December 31,
2018
 
December 31,
2017
Research equipment
 
$
9,945

 
$
9,268

Manufacturing equipment
 
3,979

 
1,702

Computer and office equipment
 
5,211

 
3,725

Leasehold improvements
 
4,569

 
2,715

     Subtotal
 
23,704

 
17,410

Accumulated depreciation and amortization
 
(16,239
)
 
(13,890
)
     Property and equipment, net
 
$
7,465

 
$
3,520

Depreciation and amortization expense was approximately $2.4 million , $2.2 million, and $2.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Accrued expenses consisted of the following (in thousands):
 
 
December 31,
2018
 
December 31,
2017
Accrued outsourced research and development expenses
 
$
21,921

 
$
18,757

Accrued compensation and payroll taxes
 
16,604

 
13,384

Accrued outsourced manufacturing expenses
 
3,975

 
2,504

Other accrued expenses
 
7,623

 
5,396

     Total accrued expenses
 
50,123

 
40,041

Less long-term portion
 
594

 
440

     Total accrued expenses, current
 
$
49,529

 
$
39,601


Deferred revenue consisted of the following (in thousands):
 
 
December 31,
2018
 
December 31,
2017
Collaborative agreements
 
 
 
 
License fees and event-based payments:
 
 
 
 
Roche
 
$

 
$
39,379

Other
 
2,264

 
15,999

 
 
2,264

 
55,378

Product sales
 
6,991

 
5,487

Total deferred revenue
 
9,255

 
60,865

Less current portion
 
4,247

 
6,568

Deferred revenue, net of current portion
 
$
5,008

 
$
54,297

v3.10.0.1
Long-Term Debt, Net
12 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
Long-term Debt
Long-Term Debt, Net
Royalty-backed Loan
In January 2016, through our wholly-owned subsidiary Halozyme Royalty LLC (“Halozyme Royalty”), we received a $150 million loan (the “Royalty-backed Loan”) pursuant to a credit agreement (the “Credit Agreement”) with BioPharma Credit Investments IV Sub, LP and Athyrium Opportunities II Acquisition LP (the “Royalty-backed Lenders”). Under the terms of the Credit Agreement, Halozyme Therapeutics, Inc. transferred to Halozyme Royalty the right to receive royalty payments from the commercial sales of ENHANZE products owed under the Roche Collaboration and Baxalta Collaboration (“Collaboration Agreements”). The royalty payments from the Collaboration Agreements will be used to repay the principal and interest on the loan (the “Royalty Payments”).  The Royalty-backed Loan bears interest at a per annum rate of 8.75% plus the three-month LIBOR rate. The three-month LIBOR rate is subject to a floor of 0.7% and a cap of 1.5%. The interest rate as of December 31, 2018 and 2017 was 10.25%.
The Credit Agreement provides that none of the Royalty Payments were required to be applied to the Royalty-backed Loan prior to January 1, 2017, 50% of the Royalty Payments are required to be applied to the Royalty-backed Loan between January 1, 2017 and January 1, 2018 and thereafter all Royalty Payments must be applied to the Royalty-backed Loan. However, the amounts available to repay the Royalty-backed Loan are subject to caps of $13.75 million per quarter in 2017, $18.75 million per quarter in 2018, $21.25 million per quarter in 2019 and $22.5 million per quarter in 2020 and thereafter. Amounts available to repay the Royalty-backed Loan will be applied first to pay interest and second to repay principal on the Royalty-backed Loan. Any accrued interest that is not paid on any applicable quarterly payment date, as defined, will be capitalized and added to the principal balance of the Royalty-backed Loan on such date. Halozyme Royalty will be entitled to receive and distribute to Halozyme any Royalty Payments that are not required to be applied to the Royalty-backed Loan or which are in excess of the foregoing caps.
Because the repayment of the term loan is contingent upon the level of Royalty Payments received, the repayment term may be shortened or extended depending on the actual level of Royalty Payments. The final maturity date of the Royalty-backed Loan will be the earlier of (i) the date when principal and interest is paid in full, (ii) the termination of Halozyme Royalty’s right to receive royalties under the Collaboration Agreements, and (iii) December 31, 2050.  Currently, we estimate that the loan will be repaid in the first quarter of 2020. This estimate could be adversely affected and the repayment period could be extended if future royalty amounts are less than currently expected. Under the terms of the Credit Agreement, at any time after January 1, 2019, Halozyme Royalty may, subject to certain limitations, prepay the outstanding principal of the Royalty-backed Loan in whole or in part, at a price equal to 105% of the outstanding principal on the Royalty-backed Loan, plus accrued but unpaid interest. The Royalty-backed Loan constitutes an obligation of Halozyme Royalty, and is non-recourse to Halozyme. Halozyme Royalty retains its right to the Royalty Payments following repayment of the loan.
As of December 31, 2018, we were in compliance with all covenants under the Royalty-backed Loan and there was no material adverse change in our business, operations or financial condition.
We began making principal and interest payments against the Royalty-backed Loan in the first quarter of 2017 and we recorded accrued interest, which is included in accrued expenses, of $0.4 million and $0.7 million as of December 31, 2018 and 2017, respectively.
In connection with the Royalty-backed Loan, we paid the Royalty-backed Lenders a fee of $1.5 million and incurred additional debt issuance costs totaling $0.4 million, which includes expenses that we paid on behalf of the Royalty-backed Lenders and expenses incurred directly by us. Debt issuance costs and the lender fee have been netted against the debt as of December 31, 2018, and are being amortized over the estimated term of the debt using the effective interest method. For the years ended December 31, 2018, 2017 and 2016, the Company recognized interest expense, including amortization of the debt discount, related to the Royalty-backed Loan of $13.1 million, $16.4 million and $14.5 million, respectively. The assumptions used in determining the expected repayment term of the debt and amortization period of the issuance costs requires that we make estimates that could impact the short- and long-term classification of these costs, as well as the period over which these costs will be amortized. The outstanding balance of the Royalty-backed Loan as of December 31, 2018 was $85.0 million, net of unamortized debt discount of $0.3 million.
Oxford and SVB Loan and Security Agreement
In June 2016, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) (collectively, the “Lenders”), providing a senior secured loan facility of up to an aggregate principal amount of $70.0 million, comprising a $55.0 million draw in June 2016 and an additional $15.0 million tranche, which we had the option to draw during the second quarter of 2017 and did not exercise. The initial proceeds were partially used to pay the outstanding principal and final payment of $4.25 million owed on a previous loan agreement with the Lenders. The remaining proceeds are being used for working capital and general business requirements. The senior secured loan facility carries a fixed interest rate of 8.25%. The repayment schedule provides for interest only payments for the first 18 months, followed by consecutive equal monthly payments of principal and interest in arrears through the maturity date of January 1, 2021. The Loan Agreement provides for a final payment equal to 5.50% of the initial $55.0 million principal amount. The final payment is due when the Loan Agreement becomes due or upon the prepayment of the facility. We have the option to prepay the outstanding balance of the Loan Agreement in full.
In connection with the Loan Agreement, the debt offering costs have been recorded as a debt discount in our consolidated balance sheets which, together with the final payment and fixed interest rate payments, are being amortized and recorded as interest expense throughout the life of the loan using the effective interest rate method.
The Loan Agreement is secured by substantially all of the assets of the Company and our subsidiary, Halozyme, Inc., except that the collateral does not include any equity interests in Halozyme, Inc., any of our intellectual property (including all licensing, collaboration and similar agreements relating thereto), and certain other excluded assets. The Loan Agreement contains customary representations, warranties and covenants by us, which covenants limit our ability to convey, sell, lease, transfer, assign or otherwise dispose of certain of our assets; engage in any business other than the businesses currently engaged in by us or reasonably related thereto; liquidate or dissolve; make certain management changes; undergo certain change of control events; create, incur, assume, or be liable with respect to certain indebtedness; grant certain liens; pay dividends and make certain other restricted payments; make certain investments; make payments on any subordinated debt; enter into transactions with any of our affiliates outside of the ordinary course of business or permit our subsidiaries to do the same; and make any voluntary prepayment of or modify certain terms of the Royalty-backed Loan. In addition, subject to certain exceptions, we are required to maintain with SVB our primary deposit accounts, securities accounts and commodities, and to do the same for our subsidiary, Halozyme, Inc.
The Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other things, our failure to fulfill certain of our obligations under the Loan Agreement and the occurrence of a material adverse change which is defined as a material adverse change in our business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan, a material impairment in the perfection or priority of the Lender’s lien in the collateral or in the value of such collateral or the occurrence of an event of default under the Royalty-backed Loan. In the event of default by us under the Loan Agreement, the Lenders would be entitled to exercise their remedies thereunder, including the right to accelerate the debt, upon which we may be required to repay all amounts then outstanding under the Loan Agreement, which could harm our financial condition.
 As of December 31, 2018, we were in compliance with all covenants under the Loan Agreement and there was no material adverse change in our business, operations or financial condition.
Interest expense, including amortization of the debt discount, related to the Loan Agreement totaled $4.9 million, $5.5 million and $20.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. Accrued interest, which is included in accrued expenses, was $0.3 million and $0.4 million as of December 31, 2018 and 2017, respectively. The outstanding term loan balance was $41.4 million as of December 31, 2018, inclusive of $2.2 million of accretion of the final payment and net of unamortized debt discount related to offering costs of $0.2 million.
Future maturities and interest payments of long-term debt as of December 31, 2018, are as follows (in thousands):
2019
 
$
100,170

2020
 
32,908

2021
 
4,755

2022
 

2023
 

Total minimum payments
 
137,833

Less amount representing interest
 
(10,191
)
Gross balance of long-term debt
 
127,642

Less unamortized debt discount
 
(1,262
)
Present value of long-term debt
 
126,380

Less current portion of long-term debt
 
(91,506
)
Long-term debt, less current portion and unamortized debt discount
 
$
34,874

v3.10.0.1
Share-based Compensation (Notes)
12 Months Ended
Dec. 31, 2018
Share-based Compensation [Abstract]  
Disclosure of Compensation Related Costs, Share-based Payments [Text Block]
Share-based Compensation
We currently grant stock options, restricted stock awards and restricted stock units under the Amended and Restated 2011 Stock Plan (“2011 Stock Plan”), which was approved by the stockholders on May 6, 2016 and provides for the grant of up to 44.2 million shares of common stock to selected employees, consultants and non-employee members of our Board of Directors as stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and performance awards. The 2011 Stock Plan was approved by the stockholders. Awards are subject to terms and conditions established by the Compensation Committee of our Board of Directors. During the year ended December 31, 2018, we granted share-based awards under the 2011 Stock Plan. At December 31, 2018, 13,400,723 shares were subject to outstanding awards and 12,299,463 shares were available for future grants of share-based awards.
Total share-based compensation expense related to share-based awards was comprised of the following (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Research and development
 
$
17,220

 
$
13,080

 
$
11,470

Selling, general and administrative
 
18,476

 
17,590

 
14,115

Share-based compensation expense
 
$
35,696

 
$
30,670

 
$
25,585


Share-based compensation expense by type of share-based award (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Stock options
 
$
18,742

 
$
19,583

 
$
16,544

RSAs, RSUs and PRSUs
 
16,954

 
11,087

 
9,041

 
 
$
35,696

 
$
30,670

 
$
25,585


Total unrecognized estimated compensation cost by type of award and the weighted-average remaining requisite service period over which such expense is expected to be recognized (in thousands, unless otherwise noted):
 
 
December 31, 2018
 
 
Unrecognized
Expense
 
Remaining
Weighted-Average
Recognition Period
(years)
Stock options
 
$
36,326

 
2.4
RSAs
 
$
1,857

 
0.8
RSUs
 
$
23,604

 
2.0

Cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) are classified as cash inflows provided by financing activities and cash outflows used in operating activities.
Stock Options. Options granted under the Plans must have an exercise price equal to at least 100% of the fair market value of our common stock on the date of grant. The options generally have a maximum contractual term of ten years and vest at the rate of one-fourth of the shares on the first anniversary of the date of grant and 1/48 of the shares monthly thereafter. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans).
A summary of our stock option award activity as of and for the years ended December 31, 2018, 2017 and 2016 is as follows: 
 
 
Shares
Underlying
Stock Options
 
Weighted
Average Exercise
Price per Share
 
Weighted
Average
Remaining
Contractual
Term (years)
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2016
 
7,993,192

 
$13.03
 
 
 
 
Granted
 
4,466,306

 
$9.03
 
 
 
 
Exercised
 
(413,248
)
 
$6.88
 
 
 
 
Canceled/forfeited
 
(955,054
)
 
$12.42
 
 
 
 
Outstanding at December 31, 2016
 
11,091,196

 
$11.70
 
 
 
 
Granted
 
2,717,614

 
$12.60
 
 
 
 
Exercised
 
(1,514,826
)
 
$9.24
 
 
 
 
Canceled/forfeited
 
(1,185,518
)
 
$11.89
 
 
 
 
Outstanding at December 31, 2017
 
11,108,466

 
$12.24
 
 
 
 
Granted
 
2,687,285

 
$18.36
 
 
 
 
Exercised
 
(1,489,138
)
 
$10.96
 
 
 
 
Canceled/forfeited
 
(1,294,232
)
 
$13.01
 
 
 
 
Outstanding at December 31, 2018
 
11,012,381

 
$13.81
 
7.1
 

$25.9
 million
Vested and expected to vest at December 31, 2018
 
11,012,381

 
$13.81
 
7.1
 

$25.9
 million
Exercisable at December 31, 2018
 
6,351,212

 
$12.71
 
6.1
 

$18.6
 million

The weighted average grant date fair values of options granted during the years ended December 31, 2018, 2017 and 2016 were $10.33 per share, $7.86 per share and $5.36 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was approximately $11.5 million, $10.0 million and $1.4 million, respectively. Cash received from stock option exercises for the years ended December 31, 2018, 2017 and 2016 was approximately $16.3 million, $14.0 million and $2.8 million, respectively.
The exercise price of stock options granted is equal to the closing price of the common stock on the date of grant. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model (“Black-Scholes model”). Expected volatility is based on historical volatility of our common stock. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The dividend yield assumption is based on the expectation of no future dividend payments. The assumptions used in the Black-Scholes model were as follows:
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Expected volatility
 
57.2-70.1%
 
69.8-71.7%
 
67.5-71.9%
Average expected term (in years)
 
5.4-5.5
 
5.6
 
5.4
Risk-free interest rate
 
2.25-2.96%
 
1.73-2.13%
 
1.00-1.90%
Expected dividend yield
 
 
 

Restricted Stock AwardsRSAs are grants that entitle the holder to acquire shares of our common stock at zero cost. The shares covered by a RSA cannot be sold, pledged, or otherwise disposed of until the award vests and any unvested shares may be reacquired by us for the original purchase price following the awardee’s termination of service. The RSAs will generally vest at the rate of one-fourth of the shares on each anniversary of the date of grant. Annual grants of RSAs to the Board of Directors typically vest in approximately one year.
The following table summarizes our RSA activity during the years ended December 31, 2018, 2017 and 2016:
 
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested at January 1, 2016
 
811,480

 
$13.13
Granted
 
968,652

 
$8.41
Vested
 
(296,831
)
 
$12.76
Forfeited
 
(180,198
)
 
$10.33
Unvested at December 31, 2016
 
1,303,103

 
$10.09
Granted
 
98,945

 
$14.15
Vested
 
(514,613
)
 
$10.23
Forfeited
 
(108,485
)
 
$9.62
Unvested at December 31, 2017
 
778,950

 
$10.59
Granted
 
67,959

 
$19.13
Vested
 
(385,678
)
 
$11.73
Forfeited
 
(63,842
)
 
$10.07
Unvested at December 31, 2018
 
397,389

 
$11.03

The estimated fair value of the RSAs was based on the closing market value of our common stock on the date of grant. The total grant date fair value of RSAs vested during the years ended December 31, 2018, 2017 and 2016 was approximately $4.5 million, $5.3 million and $3.8 million, respectively. The fair value of RSAs vested during the years ended December 31, 2018, 2017 and 2016, was approximately $7.2 million, $6.6 million and $2.5 million, respectively.
Restricted Stock Units. A RSU is a promise by us to issue a share of our common stock upon vesting of the unit. The RSUs will generally vest at the rate of one-fourth of the shares on each anniversary of the date of grant.
The following table summarizes our RSU activity during the years ended December 31, 2018, 2017 and 2016:
 
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Weighted
Average
Remaining
Contractual
Term (yrs)
 
Aggregate
Intrinsic
Value
Unvested at January 1, 2016
 
666,214

 
$13.49
 
 
 
 
Granted
 
796,582

 
$8.17
 
 
 
 
Vested
 
(218,279
)
 
$12.74
 
 
 
 
Forfeited
 
(77,948
)
 
$10.99
 
 
 
 
Outstanding at December 31, 2016
 
1,166,569

 
$10.16
 
 
 
 
Granted
 
1,378,273

 
$12.13
 
 
 
 
Vested
 
(378,406
)
 
$10.48
 
 
 
 
Forfeited
 
(251,261
)
 
$11.11
 
 
 
 
Outstanding at December 31, 2017
 
1,915,175

 
$11.39
 
 
 
 
Granted
 
1,476,382

 
$18.41
 
 
 
 
Vested
 
(582,449
)
 
$11.58
 
 
 
 
Forfeited
 
(420,766
)
 
$14.56
 
 
 
 
Outstanding at December 31, 2018
 
2,388,342

 
$15.12
 
1.1
 

$34.9
 million

The estimated fair value of the RSUs was based on the closing market value of our common stock on the date of grant. The total grant date fair value of RSUs vested during the years ended December 31, 2018, 2017 and 2016 was approximately $6.7 million, $4.0 million and $2.8 million, respectively. The fair value of RSUs vested during the years ended December 31, 2018, 2017 and 2016 was approximately $11.0 million, $4.7 million and $2.1 million, respectively.
Performance Restricted Stock Units. A PRSU is a promise by us to issue a share of our common stock upon achievement of a specific performance condition.
The following table summarizes our PRSU activity during the years ended December 31, 2018, 2017 and 2016:
 
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2016
 
309,707

 

$9.48

Granted
 

 

Vested
 
(30,037
)
 

$9.49

Forfeited
 
(79,415
)
 

$9.44

Outstanding at December 31, 2016
 
200,255

 

$9.49

Granted
 

 

Vested
 

 

Forfeited
 
(200,255
)
 

$9.49

Outstanding at December 31, 2017
 

 

Granted
 

 

Vested