HALOZYME THERAPEUTICS, INC., 10-K filed on 2/24/2020
Annual Report
v3.19.3.a.u2
Cover - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2019
Feb. 14, 2020
Jun. 30, 2019
Cover page.      
Document Type 10-K    
Document Annual Report true    
Document Period End Date Dec. 31, 2019    
Document Transition Report false    
Entity File Number 001-32335    
Entity Registrant Name HALOZYME THERAPEUTICS, INC.    
Entity Incorporation, State or Country Code DE    
Entity Tax Identification Number 88-0488686    
Entity Address, Address Line One 11388 Sorrento Valley Road    
Entity Address, Postal Zip Code 92121    
Entity Address, City or Town San Diego    
Entity Address, State or Province CA    
City Area Code 858    
Local Phone Number 794-8889    
Title of 12(b) Security Common Stock, $0.001 Par Value    
Trading Symbol HALO    
Security Exchange Name NASDAQ    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Public Float     $ 2.5
Entity Common Stock, Shares Outstanding   138,226,070  
Entity Central Index Key 0001159036    
Amendment Flag false    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Current Fiscal Year End Date --12-31    
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Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 120,179 $ 57,936
Marketable securities, available-for-sale 301,083 296,590
Accounts receivable, net 59,442 30,005
Inventories 29,359 22,625
Prepaid expenses and other assets 33,373 20,693
Total current assets 543,436 427,849
Property and equipment, net 10,855 7,465
Prepaid expenses and other assets 11,083 4,434
Restricted cash 500 500
Total assets 565,874 440,248
Current liabilities:    
Accounts payable 6,434 4,079
Accrued expenses 55,649 49,529
Deferred Credits and Other Liabilities, Current 4,012  
Deferred revenue, current portion   4,247
Current portion of long-term debt, net 19,542 91,506
Total current liabilities 85,637 149,361
Deferred Credits and Other Liabilities, Noncurrent 1,247  
Deferred revenue, net of current portion 1,247 5,008
Long-term debt, net 383,045 34,874
Other long-term liabilities 4,180 2,118
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 137 145
Additional paid-in capital 695,066 780,457
Accumulated other comprehensive loss 240 (277)
Accumulated deficit (603,678) (531,438)
Total stockholders' equity (deficit) 91,765 248,887
Total liabilities and stockholders' equity (deficit) $ 565,874 $ 440,248
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Consolidated Balance Sheets (Parenthetical) - $ / shares
Dec. 31, 2019
Dec. 31, 2018
Preferred stock, par value $ 0.001  
Preferred stock, shares authorized 20,000,000 20,000,000
Preferred stock, shares issued 0  
Preferred stock, shares outstanding 0  
Common stock, par value $ 0.001  
Common stock, shares authorized 300,000,000 200,000,000
Common stock, shares issued 136,712,480  
Common stock, shares outstanding 136,712,480 144,725,164
Common Stock    
Shares, Outstanding 136,713,000 144,725,164
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Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Revenues:      
Total revenues $ 195,992 $ 151,862 $ 316,613
Operating expenses:      
Cost of product sales 45,546 10,136 31,152
Research and development 140,804 150,252 150,643
Selling, general and administrative 77,252 60,804 53,816
Total operating expenses 263,602 221,192 235,611
Operating income (loss) (67,610) (69,330) 81,002
Other income (expense):      
Investment and other income, net 6,986 7,578 2,592
Interest expense (11,627) (18,041) (21,984)
Income (loss) before income taxes (72,251) (79,793) 61,610
Income tax (benefit) expense (11) 537 (1,361)
Net income (loss) $ (72,240) $ (80,330) $ 62,971
Earnings Per Share, Basic and Diluted $ (0.50) $ (0.56)  
Net income (loss) per share, Basic     $ 0.46
Net income (loss) per share, Diluted $ (0.50) $ (0.56) $ 0.45
Weighted Average Number of Shares Outstanding, Basic and Diluted 144,329 143,599  
Shares used in computing basic net income (loss) per share 144,329 143,599 136,419
Shares used in computing diluted net income (loss) per share 144,329 143,599 139,068
Royalties      
Revenues:      
Total revenues $ 69,899 $ 78,981 $ 63,507
Product sales, net      
Revenues:      
Total revenues 66,048 28,234 50,396
Revenues under collaborative agreements      
Revenues:      
Total revenues $ 60,045 $ 44,647 $ 202,710
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Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Comprehensive Income [Abstract]      
Net income (loss) $ (72,240) $ (80,330) $ 62,971
Other comprehensive income (loss):      
Unrealized (loss) gain on marketable securities 508 182 (430)
Foreign currency translation adjustment 9 (8) (14)
Foreign Currency Transaction Gain (Loss), Unrealized 0 (1) 0
Total comprehensive income (loss) $ (71,723) $ (80,157) $ 62,527
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Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Operating activities:      
Net income (loss) $ (72,240) $ (80,330) $ 62,971
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:      
Share-based compensation 34,776 35,696 30,670
Depreciation and amortization 4,068 2,388 2,161
Amortization of Debt Discount (Premium) 2,484 1,545  
Non-cash interest expense     1,761
(Accretion of discounts) amortization of premiums on marketable securities, net (2,469) (3,090) (303)
Loss on disposal of equipment 1,431 5 46
Deferral of unearned revenue 0 3,000 22,759
Recognition of deferred revenue (3,996) (2,832) (6,512)
Deferred Rent Expense (459) (7)  
Deferral of rent expense     13
Operating Lease, Impairment Loss 1,127 0 0
Recognition of deferred rent 0 0 (185)
Gain (Loss) on Extinguishment of Debt 401 0 0
Other (7) (9) (16)
Changes in operating assets and liabilities:      
Accounts receivable, net (29,437) 11,613 (6,453)
Inventories (6,734) (17,480) 9,477
Prepaid expenses and other assets (19,006) (5,695) 2,035
Accounts payable and accrued expenses 4,638 5,696 15,629
Net cash provided by (used in) operating activities (85,423) (49,500) 134,053
Investing activities:      
Purchases of marketable securities (389,759) (311,112) (398,187)
Proceeds from maturities of marketable securities 388,250 318,268 235,805
Purchases of property and equipment (4,040) (4,663) (1,350)
Net cash (used in) provided by investing activities (5,549) 2,493 (163,732)
Financing activities:      
Proceeds from issuance of common stock, net 0 0 134,874
Proceeds from issuance of long-term debt, net 447,350 0 0
Repayment of long-term debt (108,082) (77,516) (15,995)
Payments of Debt Issuance Costs (279) 0 0
Payments for Repurchase of Common Stock (199,998) 0 0
Proceeds from issuance of common stock under equity incentive plans, net of taxes paid related to net share settlement 14,224 13,719 12,776
Net cash provided by financing activities 153,215 (63,797) 131,655
Net increase (decrease) in cash, cash equivalents and restricted cash 62,243 (110,804) 101,976
Cash, cash equivalents and restricted cash beginning of period 58,436 169,240 67,264
Cash, cash equivalents and restricted cash end of period 120,679 58,436 169,240
Interest Paid, Including Capitalized Interest, Operating and Investing Activities 9,029 16,891 20,295
Income Taxes Paid 188 220 3,015
Amounts accrued for purchases of property and equipment 61 542 189
Debt Issuance Costs Incurred During Noncash or Partial Noncash Transaction 68 0 0
Right-of-Use Asset Obtained in Exchange for Operating Lease Liability 897 0 0
Payments for Tenant Improvements $ 0 $ 1,322 $ 13
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Consolidated Statements of Stockholders' Equity (Deficit) Statement - USD ($)
$ in Thousands
Total
Common Stock
Additional Paid-in Capital [Member]
AOCI Attributable to Parent [Member]
Retained Earnings [Member]
Shares outstanding at Dec. 31, 2016   129,502,000      
Total stockholders' equity (deficit) at Dec. 31, 2016 $ (32,481) $ 130 $ 552,737 $ (6) $ (585,342)
Share-based Compensation 30,670   30,670    
Shares, New Issues   11,500,000      
Stock Issued During Period, Value, New Issues 134,874 $ 11 134,863    
Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units and performance restricted stock units, net   1,796,000      
Value, Stock Options Exercised 12,776 $ 2 12,774    
Shares, Restricted Stock Award   (9,000)      
Value, Restricted Stock Award 0 $ 0 0    
Other Comprehensive Income (Loss) (444)     (444)  
Net income (loss) 62,971        
Shares outstanding at Dec. 31, 2017   142,789,000      
Total stockholders' equity (deficit) at Dec. 31, 2017 208,366 $ 143 731,044 (450) (522,371)
Share-based Compensation 35,696   35,696    
Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units and performance restricted stock units, net   1,932,000      
Value, Stock Options Exercised 13,719 $ 2 13,717    
Shares, Restricted Stock Award   4,000      
Value, Restricted Stock Award 0 $ 0 0    
Other Comprehensive Income (Loss) 173     173  
Net income (loss) (80,330)       (80,330)
Shares outstanding at Dec. 31, 2018   144,725,164      
Total stockholders' equity (deficit) at Dec. 31, 2018 248,887 $ 145 780,457 (277) (531,438)
Share-based Compensation $ 34,776   34,776    
Shares, New Issues 11,500,000        
Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units and performance restricted stock units, net   2,493,000      
Value, Stock Options Exercised $ 14,224 $ 2 14,222    
Shares, Restricted Stock Award   74,000      
Value, Restricted Stock Award $ 0 $ 0 0    
Stock Repurchased and Retired During Period, Shares (10,579,000)        
Stock Repurchased and Retired During Period, Value $ (199,998) $ (10) (199,988)    
Adjustments to Additional Paid in Capital, Equity Component of Convertible Debt 65,599        
Other Comprehensive Income (Loss) 517     517  
Net income (loss) (72,240)       (72,240)
Shares outstanding at Dec. 31, 2019   136,713,000      
Total stockholders' equity (deficit) at Dec. 31, 2019 $ 91,765 $ 137 $ 695,066 $ 240 $ (603,678)
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Organization and Business
12 Months Ended
Dec. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization and Business Organization and Business
Halozyme Therapeutics Inc. is a biopharma technology platform company that provides innovative and disruptive solutions with the goal of improving patient experience and outcomes. Our proprietary enzyme rHUPH20 is used to facilitate the delivery of injected drugs and fluids. We license our technology to biopharmaceutical companies to collaboratively develop products that combine our ENHANZE® drug delivery technology with the collaborators’ proprietary compounds. 
Our approved product and our collaborators’ approved products 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 (“Hylenex”), and it works by 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. This temporarily increases dispersion and absorption allowing for 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. In the development of proprietary intravenous (IV) drugs combined with our ENHANZE technology, data have been generated supporting the potential for ENHANZE to reduce treatment burden, as a result of shorter duration of subcutaneous (SC) administration. ENHANZE may enable fixed-dose SC dosing compared to weight-based dosing required for IV administration, and potentially allow for lower rates of infusion related reactions. Lastly, certain proprietary drugs co-formulated with ENHANZE have been granted additional exclusivity, extending the patent life of the product beyond the one of the proprietary IV drug.
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”) and 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.
On November 4, 2019, we announced that our HALO-301 Phase 3 clinical study evaluating PEGPH20 in combination with ABRAXANE and gemcitabine as a first-line therapy for treatment of patients with metastatic pancreatic cancer failed to reach the primary endpoint of overall survival. The study failed to demonstrate an improvement in overall survival compared to gemcitabine and nab-paclitaxel alone (11.2 months median overall survival compared to 11.5 months, HR=1.00, p=0.9692). Due to the results of the study, we halted development activities for PEGPH20, closed our oncology operations and implemented an organizational restructuring to focus our operations on ENHANZE.
We closed all ongoing oncology clinical studies including the Phase 3 clinical testing for PEGPH20 with ABRAXANE and gemcitabine in stage IV pancreatic ductal adenocarcinoma (“PDA”) (HALO-301) and the Phase 1b/2 clinical testing for PEGPH20 with Tecentriq in patients with cholangiocarcinoma and gall bladder cancer (HALO 110-101/MATRIX). The Roche -Genentech sponsored MORPHEUS PDA and gastric cancer studies closed the arms containing PEGPH20 to enrollment. All patients who were treated in PEGPH20 arms are off PEGPH20 treatment and are in follow up, per study protocol.
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, 2019
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, 2019, our cash equivalents consisted of money market funds.
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 income (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, 2019 and 2018, 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 royalties, 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, 2019 and 2018. Approximately 93% of the accounts receivable balance at December 31, 2019 represents amounts due from Janssen, Roche and Baxalta. Approximately 81% of the accounts receivable balance at December 31, 2018 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,
 
 
2019
 
2018
 
2017
Roche
 
40%
 
72%
 
38%
argenx
 
23%
 
—%
 
—%
Janssen
 
18%
 
2%
 
6%
BMS
 
1%
 
4%
 
32%
Alexion
 
1%
 
3%
 
13%
We attribute revenues under collaborative agreements, including royalties, to the individual countries where the customer 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,
 
 
2019
 
2018
 
2017
United States
 
$
116,083

 
$
40,475

 
$
196,274

Switzerland
 
78,413

 
109,890

 
119,136

All other foreign
 
1,496

 
1,497

 
1,203

Total revenues
 
$
195,992

 
$
151,862

 
$
316,613


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 47% and 2% of the accounts payable balance at December 31, 2019 and 2018, 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 8% and 0% of the accounts payable balance at December 31, 2019 and 2018, 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, 2019 and 2018 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.
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 Hylenex, 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, 2019 and 2018, inventories consisted of $1.4 million and $2.2 million, respectively, of Hylenex recombinant inventory, net, and $28.0 million and $20.4 million, respectively, of bulk rHuPH20.
Leases

The Company has entered into operating leases primarily for real estate and automobiles. These leases have terms which range from 3 years to 6 years. We determine if an arrangement contains a lease at inception. Right of use (“ROU”) assets and liabilities resulting from operating leases are included in property and equipment, accrued expenses and other long-term liabilities on our consolidated balance sheets. Operating lease ROU assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the discount rate to calculate the present value of future payments. The operating lease ROU asset also includes any lease payments made and
excludes lease incentives and initial direct costs incurred. Our leases often include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that we will exercise that option. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as automobiles, we account for the lease and non-lease components as a single lease component.
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 years 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.
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, 2019 and 2018 and the year ended December 31, 2017 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. While these collaboration agreements are similar in that they originate from the same framework, each one is the result of an arms-length negotiation and thus may vary from one to the other.
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 generally 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 on-going 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.
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 upon an exchange right being exercised. These amounts are recognized in revenue when the right of exchange expires or is exercised.
Because our agreements 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 the practical expedient allowed within the applicable guidance.
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 contract manufacturers 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.
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 contract manufacturers 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.
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. 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 the 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 license fees, 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, 2019, sales of bulk rHuPH20 and ENHANZE drug product included $1.5 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, 2019, approximately $0.1 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. Bulk rHuPH20 formulations manufactured for general partner and internal use, which can potentially be used by any collaboration partner or by us in Hylenex, is considered to have alternative future use and all manufacturing costs are capitalized as inventory. Inventories used in our clinical trials were expensed at the time the inventories were 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”), and restricted stock units (“RSUs”) 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 $1.7 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 2015 and 2016 federal returns were selected for audit by the IRS. The audit was completed in September 2019 with no material adjustments.
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 the Convertible Notes 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, 2019, 2018 and 2017, approximately 33.1 million, 13.8 million, and 7.1 million shares, respectively, of outstanding stock options, unvested RSAs, unvested RSUs and Convertible Notes were excluded from the calculation of diluted net (loss) income per common share because their effect was anti-dilutive.
The 19.3 million shares underlying the conversion option of the Convertible Notes will not have an impact on our diluted earnings per share when net income is reported until the average market price of our common stock exceeds the conversion price of $23.85 per share, as we intend and have the ability to settle the principal amount of the Convertible Notes in cash upon conversion. We compute the potentially dilutive impact of the shares of common stock related to the Convertible Notes using the treasury stock method.
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,
 
 
2019
 
2018
 
2017
Numerator:
 
 
 
 
 
 
Net (loss) income
 
$
(72,240
)
 
$
(80,330
)
 
$
62,971

Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding for basic
net (loss) income per share
 
144,329

 
143,599

 
136,419

Net effect of dilutive common stock equivalents
 

 

 
2,649

Weighted average common shares outstanding for diluted
net (loss) income per share
 
144,329

 
143,599

 
139,068

Net (loss) income per share:
 
 
 
 
 
 
Basic
 
$
(0.50
)
 
$
(0.56
)
 
$
0.46

Diluted
 
$
(0.50
)
 
$
(0.56
)
 
$
0.45


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 book value as of December 31, 2019, 2018 and 2017.
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 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
 
We implemented 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 used the available practical expedients and newly implemented processes and internal controls for lease accounting. The practical expedients allowed us to carry forward our historical assessment of whether existing agreements are or contain a lease and the classification of our existing lease arrangements. All of our real-estate and automobile operating lease commitments are recognized as lease liabilities with corresponding right-of-use assets, which resulted in an increase in the assets and liabilities of the consolidated balance sheet of $7.2 million, using an assumed weighted average discount rate of 10.0%. The adoption did not have an impact on our consolidated statements of operations and did not require recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We elected to continue applying the guidance under ASC 840 for comparative periods, as allowed through ASC 2018-11.
 
 
 
 
 
 
 

Standard
 
Description
 
Effective Date
 
Effect on the Financial
Statements or Other Significant Matters
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes

 
The new guidance removes certain exceptions to the general principles of ASC 740 in order to simplify the complexities of its application. These changes include eliminations to the exceptions for intraperiod tax allocation, recognizing deferred tax liabilities related to outside basis differences, and year-to-date losses in interim periods among others.

 
January 1, 2019

 
We early adopted the new guidance on January 1, 2019. With the adoption we no longer apply the exception to the general rule for intraperiod tax allocations under the incremental method. During the period, we would have recorded a $14.7 million tax expense to APIC fully offset by a $14.7 million tax benefit in continuing operations.

 
 
 
 
 
 
 
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and other Internal-Use Software (Subtopic 350-40)

 
The new guidance aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirement for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

 
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 condensed consolidated financial position or results of operations.

 
 
 
 
 
 
 
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.
 
 
 
 
 
 
 
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.


v3.19.3.a.u2
Fair Value Measurement (Notes)
12 Months Ended
Dec. 31, 2019
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, 2019
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Asset-backed securities
 
$
30,484

 
$
55

 
$

 
$
30,539

Corporate debt securities
 
161,308

 
178

 
(14
)
 
161,472

U.S. Treasury securities
 
75,192

 
40

 
(5
)
 
75,227

Commercial paper
 
33,845

 

 

 
33,845

 
 
$
300,829

 
$
273

 
$
(19
)
 
$
301,083


 
 
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


As of December 31, 2019, 11 available-for-sale marketable securities with a fair market value of $82.9 million were in a gross unrealized loss position of $19 thousand, 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, 2019, 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, 2019
 
December 31, 2018
 
 
Estimated Fair Value
Due within one year
 
$
274,805

 
$
296,590

After one but within five years
 
26,278

 

 
 
$
301,083

 
$
296,590


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, 2019
 
December 31, 2018
 
 
Level 1
 
Level 2
 
Total estimated fair value
 
Level 1
 
Level 2
 
Total estimated fair value
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
119,949

 
$

 
$
119,949

 
$
57,987

 
$

 
$
57,987

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

 
30,539

 
30,539

 

 
39,747

 
39,747

Corporate debt securities
 

 
161,472

 
161,472

 

 
57,733

 
57,733

U.S. Treasury securities
 
75,228

 

 
75,228

 
84,837

 

 
84,837

Commercial paper
 

 
33,845

 
33,845

 

 
114,273

 
114,273

 
 
$
195,177

 
$
225,856

 
$
421,033

 
$
142,824

 
$
211,753

 
$
354,577


There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2019. We had no instruments that were classified within Level 3 as of December 31, 2019 and 2018.
v3.19.3.a.u2
Revenue
12 Months Ended
Dec. 31, 2019
Revenue from Contract with Customer [Abstract]  
Revenue Revenue
Our disaggregated revenues were as follows (in thousands):
 
 
Year Ended December 31,
 
 
2019
 
2018
 
2017
Royalties
 
$
69,899

 
$
78,981

 
$
63,507

 
 
 
 
 
 
 
Product sales, net
 
 
 
 
 
 
  Sales of bulk rHuPH20
 
$
48,285

 
$
12,729

 
$
35,246

  Sales of ENHANZE drug product
 
768

 
460

 

  Sales of Hylenex
 
16,995

 
15,045

 
15,150

Total product sales, net
 
66,048

 
28,234

 
50,396

 
 
 
 
 
 
 
Revenues under collaborative agreements:
 
 
 
 
 
 
  Upfront license and target nomination fees
 
53,000

 
26,336

 
172,806

  Event-based development milestones and regulatory milestone and other fees
 
5,500

 
16,000

 
16,317

  Sales-based milestones
 

 

 
1,417

  Research and development services
 
1,545

 
2,311

 
12,170

Total revenues under collaborative agreements
 
60,045

 
44,647

 
202,710

 
 
 
 
 
 
 
Total revenue
 
$
195,992

 
$
151,862

 
$
316,613


During the year ended December 31, 2019 we recognized revenue related to licenses granted to collaboration partners in prior periods in the amount of $74.9 million. This amount represents royalties earned in the current period, in addition to $5.0 million of variable consideration in the contracts where uncertainties have been resolved and the development milestones were expected to be achieved or were achieved. We also recognized revenue of $4.0 million during the year ended December 31, 2019 that had been included in deferred revenues at December 31, 2018. 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 year ended December 31, 2017 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, 2019
 
December 31, 2018
Accounts receivable, net
 
$
59,442

 
$
30,005

Deferred revenues
 
5,259

 
9,255


As of December 31, 2019, 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 $12.3 million of which $7.0 million relates to unfulfilled product purchase orders and $5.3 million has been collected and reported as deferred revenues. The unfulfilled product purchase orders are estimated to be delivered in 2020. Of the total deferred revenues of $5.3 million, $4.0 million is expected to be used by our customers within the next 12 months.
There were no contract assets related to collaborative agreements at December 31, 2019. 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, 2019 (in thousands):
 
 
Upfront
(1)
 
Development
(2)
 
Sales
(3)
 
 
Total
Collaboration partner and agreement date:
 
 
 
 
 
 
 
 
 
Roche (December 2006, September 2017 and October 2018)
 
$
105,000

 
$
30,000

 
$
22,000

 
 
$
157,000

Baxalta (September 2007)
 
10,000

 
3,000

 
9,000

 
 
22,000

Pfizer (December 2012)
 
14,500

 
2,000

 

 
 
16,500

Janssen (December 2014)
 
18,250

 
15,000

 

 
 
33,250

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

 
6,000

 

 
 
46,000

argenx (February 2019)
 
40,000

 
5,000

 
 
 
 
45,000

Royalties
 
 
 
 
 
 
 
 
323,285

Total amounts under our collaborative agreements included in the transaction price
 
 
 
 
 
 
 
 
815,035


(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, 2019, 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; Herceptin SC in Canada in September 2018; and Herceptin Hylecta in the US in February 2019.
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.
v3.19.3.a.u2
Certain Balance Sheet Items
12 Months Ended
Dec. 31, 2019
Balance Sheet Related Disclosures [Abstract]  
Certain Balance Sheet Items Certain Balance Sheet Items
Accounts receivable, net consisted of the following (in thousands):
 
 
December 31,
2019
 
December 31,
2018
Accounts receivable from product sales to collaborators
 
$
35,649

 
$
3,717

Accounts receivable from revenues under collaborative agreements
 
3,850

 
5,499

Accounts receivable from royalty payments
 
17,149

 
19,199

Accounts receivable from other product sales
 
3,591

 
2,182

     Subtotal
 
60,239

 
30,597

Allowance for distribution fees and discounts
 
(797
)
 
(592
)
     Total accounts receivable, net
 
$
59,442

 
$
30,005


Inventories consisted of the following (in thousands):
 
 
December 31,
2019
 
December 31,
2018
Raw materials
 
$
2,769

 
$
735

Work-in-process
 
15,710

 
11,430

Finished goods
 
10,880

 
10,460

     Total inventories
 
$
29,359

 
$
22,625


Prepaid expenses and other assets consisted of the following (in thousands):
 
 
December 31,
2019
 
December 31,
2018
Prepaid manufacturing expenses
 
$
30,156

 
$
8,230

Prepaid research and development expenses
 
4,964

 
7,922

Other prepaid expenses
 
3,655

 
2,513

Other assets
 
5,681

 
6,462

     Total prepaid expenses and other assets
 
44,456

 
25,127

Less long-term portion
 
11,083

 
4,434

     Total prepaid expenses and other assets, current
 
$
33,373

 
$
20,693


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,
2019
 
December 31,
2018
Research equipment
 
$
7,403

 
$
9,945

Manufacturing equipment
 
3,858

 
3,979

Computer and office equipment
 
4,859

 
5,211

Leasehold improvements
 
1,628

 
4,569

     Subtotal
 
17,748

 
23,704

Accumulated depreciation and amortization
 
(10,742
)
 
(16,239
)
Subtotal
 
$
7,006

 
$
7,465

Right of use of assets
 
$
3,849

 
$

     Property and equipment, net
 
$
10,855

 
$
7,465

Depreciation and amortization expense was approximately $4.1 million , $2.4 million, and $2.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. The depreciation and amortization expense for the year ended December 31, 2019 is inclusive of $1.8 million ROU asset amortization. As discussed in Note 9, we have recorded a ROU impairment charge of $1.1 million as a result of the organizational restructuring. We also recorded an impairment charge of $1.4 million related to property and equipment as a result of the organizational restructuring (Refer to Note 13 for further details on the organizational restructuring).
Accrued expenses consisted of the following (in thousands):
 
 
December 31,
2019
 
December 31,
2018
Accrued outsourced research and development expenses
 
$
8,423

 
$
21,921

Accrued compensation and payroll taxes
 
27,888

 
16,604

Accrued outsourced manufacturing expenses
 
9,173

 
3,975

Other accrued expenses
 
7,876

 
7,623

Lease liability
 
6,469

 

     Total accrued expenses
 
59,829

 
50,123

Less long-term portion
 
4,180

 
594

     Total accrued expenses, current
 
$
55,649

 
$
49,529


Expense associated with the accretion of the lease liabilities was approximately $0.8 million and zero for the twelve months ended December 31, 2019 and 2018, respectively. Total lease expense for the twelve months ended December 31, 2019 and 2018 $2.6 million and $2.4 million respectively.
Cash paid for amounts related to leases for the twelve months ended December 31, 2019 and 2018 was $3.1 million and $2.4 million respectively.
Deferred revenue consisted of the following (in thousands):
 
 
December 31,
2019
 
December 31,
2018
Collaborative agreements
 
 
 
 
License fees and event-based payments:
 
2,764

 
2,264

Product sales
 
2,495

 
6,991

Total deferred revenue
 
5,259

 
9,255

Less current portion
 
4,012

 
4,247

Deferred revenue, net of current portion
 
$
1,247

 
$
5,008


v3.19.3.a.u2
Long-Term Debt, Net
12 Months Ended
Dec. 31, 2019
Debt Disclosure [Abstract]  
Long-term Debt Long-Term Debt, Net
Convertible Notes
In November 2019, we completed the sale of $460.0 million in aggregate principal amount of 1.25% Convertible Senior Notes due 2024 (“Convertible Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (“Securities Act”). The Convertible Notes were issued under an indenture, dated as of November 18, 2019, (“Indenture”) with The Bank of New York Mellon Trust Company, N.A., as trustee. The offer and sale of the Convertible Notes and the shares of common stock issuable upon conversion of the Convertible Notes have not been registered under the Securities Act, or the securities laws of any other jurisdiction, and the Convertible Notes and such shares may not be offered or sold absent registration or an applicable exemption from registration requirements, or in a transaction not subject to, such registration requirements.
We received net proceeds from the offering of approximately $447.4 million. We used $200.0 million of the net proceeds from the offering to repurchase shares of common stock, including approximately $143.1 million to repurchase approximately 8.1 million shares of common stock concurrently with the offering in privately negotiated transactions, $6.9 million in open market purchases and $50.0 million to repurchase a total of approximately 2.6 million shares of common stock through an accelerated share repurchase agreement.
We used approximately $26.1 million of the net proceeds from the offering to repay all outstanding amounts under its loan agreement with Oxford Finance and Silicon Valley Bank and intend to use the remainder of the net proceeds for general corporate purposes, including additional share repurchases subsequent to the offering and working capital.
The Convertible Notes will pay interest semi-annually in arrears on June 1st and December 1st of each year, beginning on June 1, 2020, at an annual rate of 1.25% and will be convertible into cash, shares of common stock or a combination of cash and shares of common stock, at our election, based on the applicable conversion rate at such time. The Convertible Notes are general unsecured obligations and will rank senior in right of payment to all indebtedness that is expressly subordinated in right of payment to the Convertible Notes, will rank equally in right of payment with all existing and future liabilities that are not so subordinated, will be effectively junior to any secured indebtedness to the extent of the value of the assets securing such indebtedness and will be structurally subordinated to all indebtedness and other liabilities (including trade payables) of the our current or future subsidiaries. The Convertible Notes have a maturity date of December 1, 2024.
Holders may convert their Convertible Notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2020, if the last reported sale price per share of common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of Company’s common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on Company’s common stock, as described in the offering memorandum; (4) if we call such notes for redemption; and (5) at any time from, and including, June 1, 2024 until the close of business on the scheduled trading day immediately before the maturity date.
Upon conversion, we will pay or deliver, as applicable, cash, shares of common stock or a combination of cash and shares of common stock, at our election. The initial conversion rate for the Convertible Notes will be 41.9208 shares of common stock per $1,000 in principal amount of Convertible Notes, equivalent to a conversion price of approximately $23.85 per share of our common stock. The conversion rate is subject to adjustment as described in the Indenture.
In accordance with accounting guidance for debt with conversion and other options, we accounted for the debt and equity components of the Convertible Notes separately. The estimated fair value of the debt component at the date of issuance was $381.8 million, which was computed based on our non-convertible borrowing rate for similar debt of 5.19%, derived from independent valuation analysis. The equity component was allocated a value of $65.6 million and represents the difference
between the $447.4 million of net proceeds from the issuance of the Convertible Notes and the $381.8 million estimated fair value of the debt component at the date of issuance.
In connection with the Convertible Notes, we paid the initial purchasers of the Convertible Notes a fee of $12.7 million and incurred additional debt issuance costs totaling $0.3 million, which includes expenses that we paid on behalf of the initial purchasers and expenses incurred directly by us. Debt issuance costs, the initial purchasers’ fee and the equity component is presented as a debt discount as of December 31, 2019 in the amount of $76.9 million, and will be amortized over the remaining estimated term of 5 years using the effective interest method, utilizing an effective interest rate of 5.10%. The net carrying amount of the debt as of December 31, 2019 is $383.1 million. For the year ended December 31, 2019, we recognized interest expense of $2.3 million, including contractual coupon interest of $0.7 million and amortization of the debt discount of $1.6 million.
As of December 31, 2019, we were in compliance with all covenants under the Indenture and there was no material adverse change in our business, operations or financial condition.
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, 2019 and 2018 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 second 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, 2019, 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 therefore had zero capitalized interest for the twelve months ended December 31, 2019. In addition, we recorded accrued interest, which is included in accrued expenses, of $0.1 million and $0.4 million as of December 31, 2019 and 2018, 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, 2019, and are being amortized over the estimated term of the debt using the effective interest method. For the years ended December 31, 2019, 2018 and 2017, we recognized interest expense, including amortization of the debt discount, related to the Royalty-backed Loan of $6.2 million, $13.1 million and $16.4 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, 2019 was $19.5 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 were used for working capital and general business requirements. The senior secured loan facility carried a fixed interest rate of 8.25%. The repayment schedule provided 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 provided for a final payment equal to 5.50% of the initial $55.0 million principal amount, which was due when the Loan Agreement becomes due or upon the prepayment of the facility. We had the option to prepay the outstanding balance of the Loan Agreement in full and exercised this option in November 2019, at which point we paid the full remaining balance and final payment of $26.1 million.
Interest expense, including amortization of the debt discount, related to the Loan Agreement totaled $3.0 million, $4.9 million and $5.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Future maturities and interest payments of long-term debt as of December 31, 2019, are as follows (in thousands):
2020
 
$
26,100

2021
 
5,750

2022
 
5,750

2023
 
5,750

2024
 
465,750

Total minimum payments
 
509,100

Less amount representing interest
 
(29,540
)
Gross balance of long-term debt
 
479,560

Less unamortized debt discount
 
(76,973
)
Present value of long-term debt
 
402,587

Less current portion of long-term debt
 
(19,542
)
Long-term debt, less current portion and unamortized debt discount
 
$
383,045


v3.19.3.a.u2
Share-based Compensation (Notes)
12 Months Ended
Dec. 31, 2019
Share-based Payment Arrangement, Noncash Expense [Abstract]  
Share-based Payment Arrangement [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. Awards are subject to terms and conditions established by the Compensation Committee of our Board of Directors. During the year ended December 31, 2019, we granted share-based awards under the 2011 Stock Plan. At December 31, 2019, 13,640,668 shares were subject to outstanding awards and 9,352,360 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,
 
 
2019
 
2018
 
2017
Research and development
 
$
15,107

 
$
17,220

 
$
13,080

Selling, general and administrative
 
19,669

 
18,476

 
17,590

Share-based compensation expense
 
$
34,776

 
$
35,696

 
$
30,670


Share-based compensation expense by type of share-based award (in thousands):
 
 
Year Ended December 31,
 
 
2019
 
2018
 
2017
Stock options
 
$
17,624

 
$
18,742

 
$
19,583

RSAs and RSUs
 
17,152

 
16,954

 
11,087

 
 
$
34,776

 
$
35,696

 
$
30,670


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, 2019
 
 
Unrecognized
Expense
 
Remaining
Weighted-Average
Recognition Period
(years)
Stock options
 
$
16,524

 
2.59
RSAs
 
$
570

 
0.16
RSUs
 
$
11,600

 
2.32

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 year ended December 31, 2019 is as follows: 
 
 
Shares
Underlying
Stock Options
 
Weighted
Average Exercise
Price per Share
 
Weighted
Average
Remaining
Contractual
Term (years)
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2018
 
11,012,381

 
$13.81
 
 
 
 
Granted
 
3,056,191

 
$16.46
 
 
 
 
Exercised
 
(1,540,690
)
 
$10.73
 
 
 
 
Canceled/forfeited
 
(979,653
)
 
$16.19
 
 
 
 
Outstanding at December 31, 2019
 
11,548,229

 
$14.72
 
3.98
 

$39.8
 million
Vested and expected to vest at December 31, 2019
 
11,548,229

 
$14.72
 
3.98
 

$39.8
 million
Exercisable at December 31, 2019
 
6,962,972

 
$13.64
 
3.59
 

$32.7
 million

The weighted average grant date fair values of options granted during the years ended December 31, 2019, 2018 and 2017 were $16.46 per share, $10.33 per share and $7.86 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was approximately $10.6 million, $11.5 million and $10.0 million, respectively. Cash received from stock option exercises for the years ended December 31, 2019, 2018 and 2017 was approximately $16.5 million, $16.3 million and $14.0 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,
 
 
2019
 
2018
 
2017
Expected volatility
 
51.56-56.94%
 
57.18-70.06%
 
69.81-71.73%
Average expected term (in years)
 
5.5
 
5.5
 
5.6
Risk-free interest rate
 
1.35-2.56%
 
2.25-2.96%
 
1.73-2.13%
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 year ended December 31, 2019:
 
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested at December 31, 2018
 
397,389

 
$11.03
Granted
 
85,211

 
$16.43
Vested
 
(260,086
)
 
$12.57
Forfeited
 
(11,391
)
 
$8.11
Unvested at December 31, 2019
 
211,123

 
$11.47

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, 2019, 2018 and 2017 was approximately $3.3 million, $4.5 million and $5.3 million, respectively. The fair value of RSAs vested during the years ended December 31, 2019, 2018 and 2017, was approximately $4.2 million, $7.2 million and $6.6 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 year ended December 31, 2019:
 
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Weighted
Average
Remaining
Contractual
Term (yrs)
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2018
 
2,388,342

 
$15.12
 
 
 
 
Granted
 
1,151,464

 
$16.55
 
 
 
 
Vested
 
(1,092,648
)
 
$15.35
 
 
 
 
Forfeited
 
(354,719
)
 
$16.22
 
 
 
 
Outstanding at December 31, 2019
 
2,092,439

 
$15.60
 
1.23
 

$37.1
 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, 2019, 2018 and 2017 was approximately $19.1 million, $6.7 million and $4.0 million, respectively. The fair value of RSUs vested during the years ended December 31, 2019, 2018 and 2017 was approximately $18.5 million, $11.0 million and $4.7 million, respectively.
v3.19.3.a.u2
Stockholders' Equity (Deficit)
12 Months Ended
Dec. 31, 2019
Equity [Abstract]  
Stockholders' Equity (Deficit) Stockholders’ Equity (Deficit)
In May 2017, we completed an underwritten public offering pursuant to which we sold 11.5 million shares of common stock, including 1.5 million shares sold pursuant to the full exercise of an option to purchase additional shares granted to the underwriters. All of the shares were offered at a public offering price of $12.50 per share, generating $134.9 million in net proceeds, after deducting underwriting discounts and commissions and other offering expenses.
During the years ended December 31, 2019, 2018 and 2017, we issued an aggregate of 1,540,690, 1,489,138 and 1,514,826 shares of common stock, respectively, in connection with the exercises of stock options, for net proceeds of approximately $16.5 million, $16.3 million and $14.0 million, respectively. For the years ended December 31, 2019, 2018 and 2017, we issued 952,182, 442,599 and 281,398 shares of common stock, respectively, upon vesting of certain RSUs for which the RSU holders surrendered 140,466, 139,850 and 97,008 RSUs, respectively, to pay for minimum withholding taxes totaling approximately $7.0 million, $4.2 million and $1.9 million, respectively. Stock options and unvested restricted units totaling approximately 13.6 million, 13.4 million and 13.0 million shares of our common stock were outstanding as of December 31, 2019, 2018 and 2017, respectively.
Share Repurchases
The Board of Directors approved a share repurchase program, pursuant to which we may repurchase issued and outstanding shares of common stock from time to time. We may utilize a variety of methods including open market purchases, privately negotiated transactions, accelerated share repurchase programs or any combination of such methods.
In November 2019, we announced that the Board of Directors has authorized the initiation of a capital return program to repurchase up to $550.0 million of outstanding common stock over a three-year period. The Board will regularly review this capital return program in connection with a balanced capital allocation strategy. In November 2019, we repurchased approximately 8.1 million shares of common stock concurrently with the Convertible Notes issuance in privately negotiated transactions for $143.1 million and 0.4 million shares of common stock in open market purchases for $6.9 million. Also in November 2019, we entered into an Accelerated Share Repurchase (ASR) agreement with Bank of America to repurchase $50.0 million of common stock. At inception, pursuant to the agreement, we paid $50.0 million to Bank of America and took an initial delivery of 2.1 million shares. In February 2020 we finalized the transaction and received an additional 0.5 million shares. We retired the repurchased shares and they resumed the status of authorized and unissued shares.
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Commitments and Contingencies
12 Months Ended
Dec. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Operating Leases
Our administrative offices and research facilities are located in San Diego, California. We lease an aggregate of approximately 80,000 square feet of office and research space in five buildings. The leases commenced in June 2011, November 2013 and June 2018 and continue through January 2023. The leases are subject to approximately 3.0% annual increases throughout the terms of the leases. We also pay a pro rata share of operating costs, insurance costs, utilities and real property taxes.
We lease approximately 10,000 square feet of office space for a satellite office located in South San Francisco, California. The lease commenced in November 2015 and continues through January 2021. The lease is subject to approximately 3.0% annual increases throughout the term of the lease. We also pay a pro rata share of operating costs, insurance costs, utilities and real property taxes.
As a result of the restructuring we announced on November 4, 2019, we abandoned two of our buildings in San Diego and our satellite office located in San Francisco. As a result, we have reassessed the likelihood of exercising contractual options impacting the term of these leases. These considerations have been reflected in the recognition of impairment charges of $1.1 million in accordance with ASC 360 during the year ended December 31, 2019.
Additionally, we lease certain office equipment under operating leases. Total rent expense was approximately $2.7 million, $2.5 million and $2.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Approximate annual future minimum operating lease payments as of December 31, 2019 are as follows (in thousands): 
Year:
 
Operating
Leases
2020
 
$
3,355

2021
 
2,260

2022
 
1,559

2023
 
70

2024
 

Total minimum lease payments
 
$
7,244

Less imputed interest
 
(775
)
Total
 
$
6,469


The weighted-average remaining lease term of our operating leases is approximately 2.36 years.
Other Commitments
We have existing supply agreements with contract manufacturing organizations Avid Bioservices, Inc. (“Avid”) and Catalent Indiana LLC (formerly Cook Pharmica LLC) (“Catalent”) to produce supplies of bulk rHuPH20. Under the terms of the agreements, we are committed to certain minimum annual purchases of bulk rHuPH20. At December 31, 2019, we had a $35.7 million minimum purchase obligation in connection with these agreements.
In June 2011, we entered into a services agreement with Patheon for the technology transfer and manufacture of Hylenex recombinant. At December 31, 2019, we had a $0.6 million minimum purchase obligation in connection with this agreement. 

Legal Contingencies
From time to time, we may be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of our business. Any of these claims could subject us to costly legal expenses and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our consolidated results of operations and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations or financial position.
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Income Taxes (Notes)
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Tax Disclosure [Text Block]
Total (loss) income before income taxes summarized by region were as follows (in thousands):
 
 
Year Ended December 31,
 
 
2019
 
2018
 
2017
United States
 
$
(70,737
)
 
$
(45,819
)
 
$
160,938