aldr-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2018  

OR

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

For the transition period from              to             

Commission File Number: 001-36431

 

Alder BioPharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

90-0134860

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

11804 North Creek Parkway South

Bothell, WA 98011

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (425) 205-2900

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of November 1, 2018 the registrant had 68,326,613 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


 

Alder BioPharmaceuticals, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2018

INDEX

 

 

Page

 

PART I. FINANCIAL INFORMATION (Unaudited)

 

 

Item 1.

 

 

Condensed Consolidated Financial Statements

3

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

 

Condensed Consolidated Statements of Operations

4

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

5

 

 

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

6

 

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

Item 2.

 

 

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

22

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

31

 

Item 4.

 

 

Controls and Procedures

32

 

PART II. OTHER INFORMATION

 

 

Item 1.

 

 

Legal Proceedings

33

 

Item 1A.

 

 

Risk Factors

33

 

Item 6.

 

 

Exhibits

61

 

SIGNATURES

62

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Alder,” and “the Company” refer to Alder BioPharmaceuticals, Inc. and, where appropriate, its consolidated subsidiaries. “Alder,” “Alder BioPharmaceuticals” and the Alder logo are the property of Alder BioPharmaceuticals, Inc. This report contains references to our trademarks and trade names and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 

 

2


 

PART I. – FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements

Alder BioPharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands, except share and per share data)

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

94,410

 

 

$

76,896

 

 

Short-term investments

 

357,997

 

 

 

199,344

 

 

Restricted cash

 

7,500

 

 

 

 

 

Prepaid expenses and other assets

 

6,643

 

 

 

11,014

 

 

Total current assets

 

466,550

 

 

 

287,254

 

 

Long-term investments

 

22,277

 

 

 

 

 

Property and equipment, net

 

5,396

 

 

 

5,630

 

 

Restricted cash

 

2,500

 

 

 

10,000

 

 

Investment in unconsolidated entity

 

 

 

 

222

 

 

Other assets

 

30

 

 

 

30

 

 

Total assets

$

496,753

 

 

$

303,136

 

 

Liabilities, convertible preferred stock and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

$

16,231

 

 

$

7,471

 

 

Accrued liabilities

 

12,828

 

 

 

15,803

 

 

Accrued dividends on convertible preferred stock

 

1,279

 

 

 

 

 

Deferred rent

 

78

 

 

 

92

 

 

Total current liabilities

 

30,416

 

 

 

23,366

 

 

Long-term deferred rent

 

514

 

 

 

495

 

 

2025 convertible senior notes, net

 

179,038

 

 

 

 

 

Derivative liability

 

1,658

 

 

 

 

 

Total liabilities

 

211,626

 

 

 

23,861

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Series A-1 convertible preferred stock; $0.0001 par value; 10,000,000 shares authorized; 742,195 shares and no shares issued and outstanding, respectively; liquidation preference of $100,000 and zero, respectively

 

101,095

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock; $0.0001 par value; 200,000,000 shares authorized; 68,266,532 and 67,842,942 shares issued and outstanding, respectively

 

7

 

 

 

7

 

 

Additional paid-in capital

 

1,069,392

 

 

 

946,869

 

 

Accumulated deficit

 

(883,849

)

 

 

(667,509

)

 

Accumulated other comprehensive loss

 

(1,518

)

 

 

(92

)

 

Total stockholders’ equity

 

184,032

 

 

 

279,275

 

 

Total liabilities, convertible preferred stock and stockholders’ equity

$

496,753

 

 

$

303,136

 

 

 

 

 

 

 

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

 

3


 

Alder BioPharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands, except share and per share data)

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration and license agreements

$

 

 

$

 

 

$

 

 

$

683

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

683

 

 

Research and development

 

47,793

 

 

 

52,188

 

 

 

174,659

 

 

 

208,153

 

 

General and administrative

 

10,685

 

 

 

8,236

 

 

 

34,501

 

 

 

27,765

 

 

Total operating expenses

 

58,478

 

 

 

60,424

 

 

 

209,160

 

 

 

236,601

 

 

Loss from operations

 

(58,478

)

 

 

(60,424

)

 

 

(209,160

)

 

 

(235,918

)

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

2,458

 

 

 

763

 

 

 

6,634

 

 

 

1,686

 

 

Foreign currency gain

 

36

 

 

 

231

 

 

 

388

 

 

 

124

 

 

Other income

 

 

 

 

49

 

 

 

 

 

 

49

 

 

Interest expense

 

(4,783

)

 

 

 

 

 

(12,322

)

 

 

 

 

Change in fair value of derivative liability

 

(153

)

 

 

 

 

 

(1,658

)

 

 

 

 

Total other income (expense), net

 

(2,442

)

 

 

1,043

 

 

 

(6,958

)

 

 

1,859

 

 

Net loss before equity in net loss of unconsolidated entity

 

(60,920

)

 

 

(59,381

)

 

 

(216,118

)

 

 

(234,059

)

 

Equity in net loss of unconsolidated entity

 

 

 

 

(184

)

 

 

(222

)

 

 

(463

)

 

Net loss

$

(60,920

)

 

$

(59,565

)

 

$

(216,340

)

 

$

(234,522

)

 

Deemed dividends on convertible preferred stock attributable to accretion of beneficial conversion feature

 

 

 

 

 

 

 

(29,460

)

 

 

 

 

Dividends on convertible preferred stock

 

(1,279

)

 

 

 

 

 

(4,664

)

 

 

 

 

Net loss applicable to common stockholders

$

(62,199

)

 

$

(59,565

)

 

$

(250,464

)

 

$

(234,522

)

 

Net loss per share applicable to common stockholders - basic and diluted

$

(0.91

)

 

$

(0.92

)

 

$

(3.68

)

 

$

(4.25

)

 

Weighted average number of common shares used in net loss per share - basic and diluted

 

68,232,765

 

 

 

64,526,519

 

 

 

68,015,989

 

 

 

55,168,433

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

4


 

Alder BioPharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

(in thousands)

 

 

Net loss

$

(60,920

)

 

$

(59,565

)

 

$

(216,340

)

 

$

(234,522

)

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on securities available-for-sale, net of tax

 

(163

)

 

 

(4

)

 

 

(1,426

)

 

 

(24

)

 

Total other comprehensive loss

 

(163

)

 

 

(4

)

 

 

(1,426

)

 

 

(24

)

 

Comprehensive loss

$

(61,083

)

 

$

(59,569

)

 

$

(217,766

)

 

$

(234,546

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

5


 

Alder BioPharmaceuticals, Inc.

 

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

 

(unaudited)

 

 

 

Series A-1 Convertible Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Stockholders'

Equity

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except for share data)

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

 

 

 

 

$

 

 

 

67,842,942

 

 

$

7

 

 

$

946,869

 

 

$

(667,509

)

 

$

(92

)

 

$

279,275

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(216,340

)

 

 

 

 

 

(216,340

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,426

)

 

 

(1,426

)

Issuance of Series A-1 convertible preferred stock, net of issuance costs of $2.3 million

 

 

725,268

 

 

 

97,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beneficial conversion feature on Series A-1 convertible preferred stock

 

 

 

 

 

(29,460

)

 

 

 

 

 

 

 

 

29,460

 

 

 

 

 

 

 

 

 

29,460

 

Deemed dividend on convertible preferred stock attributable to accretion of beneficial conversion feature

 

 

 

 

 

29,460

 

 

 

 

 

 

 

 

 

(29,460

)

 

 

 

 

 

 

 

 

(29,460

)

Accrued dividends on convertible preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,279

)

 

 

 

 

 

 

 

 

(1,279

)

Paid-in-kind dividends on convertible preferred stock

 

 

16,927

 

 

 

3,385

 

 

 

 

 

 

 

 

 

(3,385

)

 

 

 

 

 

 

 

 

(3,385

)

Equity component of 2025 convertible senior notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

109,911

 

 

 

 

 

 

 

 

 

109,911

 

Equity component of deferred financing costs for 2025 convertible senior notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,763

)

 

 

 

 

 

 

 

 

(3,763

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,572

 

 

 

 

 

 

 

 

 

19,572

 

Exercise of stock options

 

 

 

 

 

 

 

 

347,020

 

 

 

 

 

 

751

 

 

 

 

 

 

 

 

 

751

 

Shares issued under employee stock purchase plan

 

 

 

 

 

 

 

 

76,570

 

 

 

 

 

 

716

 

 

 

 

 

 

 

 

 

716

 

Balances at September 30, 2018

 

 

742,195

 

 

$

101,095

 

 

 

68,266,532

 

 

$

7

 

 

$

1,069,392

 

 

$

(883,849

)

 

$

(1,518

)

 

$

184,032

 

 

 

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

6


 

 

Alder BioPharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

$

(216,340

)

 

$

(234,522

)

 

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

 

Equity in net loss of unconsolidated entity

 

222

 

 

 

463

 

 

Depreciation and amortization

 

2,145

 

 

 

2,238

 

 

Stock-based compensation

 

19,572

 

 

 

16,722

 

 

Accretion of discount on convertible notes

 

7,530

 

 

 

 

 

Non-cash change in fair value of derivative liability

 

1,658

 

 

 

 

 

Other non-cash charges, net

 

(2,374

)

 

 

157

 

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

4,371

 

 

 

30,790

 

 

Accounts payable

 

8,186

 

 

 

12,512

 

 

Accrued liabilities

 

(2,975

)

 

 

576

 

 

Deferred rent

 

5

 

 

 

(27

)

 

Net cash used in operating activities

 

(178,000

)

 

 

(171,091

)

 

Investing activities

 

 

 

 

 

 

 

 

Purchases of investments

 

(522,795

)

 

 

(243,822

)

 

Proceeds from maturities of investments

 

259,629

 

 

 

235,590

 

 

Proceeds from sales of investments

 

83,184

 

 

 

151

 

 

Purchases of property and equipment

 

(1,337

)

 

 

(1,996

)

 

Net cash used in investing activities

 

(181,319

)

 

 

(10,077

)

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of 2025 convertible senior notes, net of offering costs

 

277,656

 

 

 

 

 

Proceeds from issuance of convertible preferred stock, net of offering costs

 

97,710

 

 

 

 

 

Proceeds from issuance of common stock, net of offering costs

 

 

 

 

161,557

 

 

Proceeds from exercise of stock options and employee stock purchase plan

 

1,467

 

 

 

729

 

 

Net cash provided by financing activities

 

376,833

 

 

 

162,286

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

17,514

 

 

 

(18,882

)

 

Cash, cash equivalents and restricted cash

 

 

 

 

 

 

 

 

Beginning of period

 

86,896

 

 

 

116,216

 

 

End of period

$

104,410

 

 

$

97,334

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Offering costs included in accounts payable and accrued liabilities

$

 

 

$

75

 

 

Purchases of property and equipment included in accounts payable and accrued liabilities

$

550

 

 

$

140

 

 

Cash paid for interest

$

3,594

 

 

$

 

 

Dividends on convertible preferred stock paid-in-kind

$

3,385

 

 

$

 

 

 

 

 

 

 

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

 

 

 

7


 

Alder BioPharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

 

1.

Nature of Business

 

Alder BioPharmaceuticals, Inc. (the “Company”) is a clinical-stage biopharmaceutical company that discovers, develops and seeks to commercialize therapeutic antibodies with the potential to meaningfully transform the treatment paradigm in migraine. The Company has developed a proprietary antibody platform designed to select and manufacture antibodies that have the potential to maximize efficacy as well as speed of onset and durability of therapeutic response. The Company was incorporated in Delaware on May 20, 2002 and is located in Bothell, Washington.

Financings             

On January 12, 2018, the Company completed a private placement of convertible preferred stock of 725,268 shares with certain institutional and other accredited investors. The Company received $97.7 million in net proceeds, after deducting fees and offering expenses of $2.3 million.

On February 1, 2018, the Company completed an underwritten public offering of an aggregate principal amount of $250 million of 2.5% Convertible Senior Notes due 2025 (the “Convertible Notes”). In addition, on February 13, 2018, the Company issued an additional $37.5 million principal amount of Convertible Notes to cover over-allotments. The Company received $277.7 million in net proceeds, after deducting fees and offering expenses of $9.8 million.

 

2.

Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements reflect the accounts of Alder BioPharmaceuticals, Inc. and its wholly-owned subsidiaries, Alder BioPharmaceuticals Pty. Ltd., AlderBio Holdings LLC, and Alder BioPharmaceuticals Limited. All inter-company balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet data as of December 31, 2017 were derived from audited financial statements. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for unaudited condensed consolidated financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the Company’s financial position and results of its operations, as of and for the periods presented. The Company manages its business as one operating segment; however, the Company operates in three geographic regions: United States, Australia, and Ireland. Substantially all of the Company’s assets are located in the United States.

The Company has a relationship with a variable interest entity (“VIE”).  The Company evaluates VIEs to determine whether the Company is the primary beneficiary by performing a qualitative and quantitative analysis of each VIE that includes a review of, among other factors, the VIE’s capital structure, contractual terms, related party relationships, the Company’s fee arrangements and the design of the VIE.  This analysis includes determining whether the Company (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

In circumstances where the Company is not the primary beneficiary, but the Company has the ability to exercise significant influence over the operating and financial policies of a company in which it has an investment, the Company utilizes the equity method of accounting for recording investment activity. In assessing whether the Company exercises significant influence, it considers the nature and magnitude of the investment, the voting and protective rights held, any participation in the governance of the other company, and other relevant factors such as the presence of a collaboration or other business relationship. Under the equity method of accounting, the Company records in its results of operations its share of income or loss of the other company. If the Company’s share of losses exceeds the carrying value of its investment, it will suspend recognizing additional losses and will continue to do so unless the Company commits to providing additional funding. The Company monitors its investment to evaluate whether any decline in value has occurred that would be other-than-temporary, based on the implied value of recent company financings, public market prices of comparable companies, and general market conditions. The carrying value of the investment is included in the Company’s condensed consolidated balance sheet as investment in unconsolidated entity.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

8


 

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of the Company’s operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year or for any other period.

Concentrations of Credit Risk

The Company is exposed to credit risk from its deposits of cash, cash equivalents, short-term and long-term investments and restricted cash in excess of amounts insured by the Federal Deposit Insurance Corporation and Securities Investor Protection Corporation.

Restricted Cash

The Company had restricted cash of $10.0 million as of September 30, 2018, of which $7.5 million is classified as a current asset, as it will be used to satisfy commitments within the next 12 months. The funds are placed in an escrow account pursuant to a contractual agreement with a third-party manufacturer and will be used for payments under that agreement in 2019.

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the total of cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows.

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

2018

 

 

2017

 

 

 

 

(in thousands)

 

 

Cash and cash equivalents

 

$

94,410

 

 

$

76,896

 

 

Restricted cash

 

 

10,000

 

 

 

10,000

 

 

Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows

 

$

104,410

 

 

$

86,896

 

 

 

Convertible Senior Notes, net

 In accordance with accounting guidance for debt with conversion and other options, the Company separately accounted for the liability and equity components of the Convertible Notes by allocating the proceeds between the liability component and the embedded conversion option (the “Equity Component”) due to the Company’s ability to settle the Convertible Notes in cash, common stock or a combination of cash and common stock, at its option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected the Company’s non-convertible debt borrowing rate for similar debt. The Equity Component of the Convertible Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the Convertible Notes and the fair value of the liability of the Convertible Notes on their respective dates of issuance. The excess of the principal amount of the liability component over its carrying amount (the “Debt Discount”) is amortized to interest expense using the effective interest method over seven years. The Equity Component is not remeasured as long as it continues to meet the conditions for equity classification. In connection with the issuance of the Convertible Notes, the Company also incurred certain offering costs directly attributable to the offering. Such costs are deferred and amortized to interest expense over the term of the debt using the effective interest method. A portion of the deferred financing costs incurred in connection with the Convertible Notes was deemed to relate to the Equity Component and was allocated to additional paid-in capital.

 Convertible preferred stock

 The Company recorded the convertible preferred stock at fair value on the date of issuance, net of issuance costs. The convertible preferred stock is recorded outside of stockholders’ equity because, in the event of certain deemed liquidation events considered not solely within the Company’s control, such as a merger or acquisition and sale of all or substantially all of the Company’s assets, the convertible preferred stock will become redeemable at the option of the holders.

Revenue recognition

In May 2016, the Company licensed the exclusive worldwide rights to its product candidate clazakizumab to Vitaeris, Inc. (“Vitaeris”), a newly formed company based in Vancouver, British Columbia. In exchange for the rights to clazakizumab, the

9


 

Company received an equity interest in Vitaeris and is eligible to receive royalties and certain other payments including revenue from the sale of drug supply inventory. The Company did not record any revenue under this agreement in the three and nine months ended September 30, 2018 and recorded $0.7 million in revenue in the nine months ended September 30, 2017.  

In the future, the Company may generate revenue from product sales and may enter into agreements with strategic partners for the development and commercialization of the Company’s products under which revenues may consist of license fees, non-refundable upfront fees, milestones, funding of research and development activities, sales of drug supply, or other revenue. The Company could receive both fixed and variable consideration. 

On January 1, 2018, the Company adopted ASC Topic 606 and related pronouncements regarding revenue recognition using the modified retrospective method. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements. In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company will perform the following steps: (i) assess whether collectability is probable; (ii) identify the promised goods or services in the contract; (iii) determine whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iv) measure the transaction price, including the constraint on variable consideration; (v) allocate the transaction price to the performance obligations based on estimated selling prices; and (vi) recognize revenue when (or as) the Company satisfies each performance obligation.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of accounting in ASC Topic 606. The Company’s performance obligations may include license rights and development services. Significant management judgment will be required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement.

When the Company has substantive performance obligations under an arrangement accounted for as one unit of accounting, revenues will be recognized using a proportional performance-based approach. Under this approach, revenue recognition is based on costs incurred to date compared to total expected costs to be incurred over the performance period as this is considered to be representative of the delivery of service under the arrangement. Changes in estimates of total expected performance costs or service obligation time-period will be accounted for prospectively as a change in estimate. Revenues recognized at any point in time will be limited to the amount of noncontingent payments received or due.

The Company will allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation. Estimated selling prices for license rights will be calculated using vendor-specific objective evidence, (“VSOE”), of selling price, if available, third-party evidence, (“TPE”), of selling price if VSOE is not available, or best estimate of selling price, (“BESP”), if neither VSOE nor TPE is available, and include the following key assumptions: the development timeline, revenue forecast, commercialization expenses, discount rate and probabilities of technical and regulatory success.

Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company will recognize revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer, and the customer can use and benefit from the license. For licenses that are bundled with other promises, the Company will utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company will evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone payments: At the inception of each arrangement that includes milestone payments, the Company will evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission by the Company) will be included in the transaction price. Milestone payments that are not within the control of the Company, such as approvals from regulators, will not be considered probable of being achieved until those approvals are received. When the Company’s assessment of probability of achievement changes and variable consideration becomes probable, any additional estimated consideration will be allocated to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation and recorded in license, collaboration, and other revenues based upon when the customer obtains control of each element.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

Collaboration payments: The Company may also perform research and development activities on behalf of collaborative partners that are paid for by the collaborators. For research and development activities which are not determined to be separate units of accounting based on the criteria above, revenues for these research and development activities will be recognized using the single unit

10


 

of accounting method for that collaborative arrangement. For research and development activities which are determined to be separate units of accounting, arrangement consideration will be allocated and revenues will be recognized as services are delivered, assuming the general criteria for revenue recognition noted above have been met. The corresponding research and development costs incurred under these contracts will be included in research and development expense in the consolidated statements of operations. For sales of drug supply inventory at cost, the revenue will be recognized upon transfer of the inventory.

The Company expects to invoice its customers upon the completion of the effort, based on the terms of each agreement. Amounts earned, but not yet collected from the customers, if any, will be included in accounts receivable in the accompanying consolidated balance sheets. Deferred revenue will arise from payments received in advance of the culmination of the earnings process. Deferred revenue expected to be recognized within the next 12 months will be classified as a current liability. Deferred revenue will be recognized as revenue in future periods when the applicable revenue recognition criteria have been met.

Long-Term Incentive Plan

In January 2018, the Company established a long-term incentive plan (“LTIP”) which provides eligible employees with the opportunity to receive performance-based compensation comprised of restricted stock units.  The vesting of the restricted stock units is contingent upon the achievement of pre-determined regulatory milestones.  The Company records compensation expense over the estimated service period for a milestone when the achievement of the milestone is considered probable, which is assessed at each reporting date.  Once a milestone is considered probable, the Company records compensation expense based on the portion of the service period elapsed to date with respect to that milestone, with a cumulative catch-up, net of estimated forfeitures, and recognizes remaining compensation expense, if any, over the remaining estimated service period. No compensation expense has been recorded to date under the LTIP as the conditions for recognizing expense have not yet been met.  As of September 30, 2018, the estimated potential value to be delivered in restricted stock units to participants eligible for the LTIP was approximately $10.8 million. The total potential value to be delivered under the LTIP is expected to change in the future for several reasons, including the addition of more eligible employees to the LTIP.

2018 Inducement Award Plan

On June 11, 2018, the Company established the 2018 Inducement Award Plan (“Inducement Plan”). The Inducement Plan allows for the grant of options, restricted stock, restricted stock unit awards, and performance unit awards to new employees of the Company by granting an award to such new employee as an inducement to begin employment with the Company. The Company reserved 3,000,000 shares of its common stock for issuance under the Inducement Plan. As of September 30, 2018, there were 1,760,000 shares available for issuance under the Inducement Plan.

Liquidity and Going Concern

The Company has an accumulated deficit as of September 30, 2018. To date, the Company has funded its operations primarily through sales and issuances of its capital stock, Convertible Notes and payments from its former collaboration partners, and will require substantial additional capital for research and product development. In January 2018, the Company completed a private placement of 725,268 shares of convertible preferred stock resulting in net proceeds of $97.7 million. In February 2018, the Company received $277.7 million in net proceeds from the underwritten public offering of the Convertible Notes.  

The Company forecasts a significant increase in expenditures to support its planned Biologics License Application (“BLA”) submission with the U.S. Food and Drug Administration, currently anticipated to occur in the first quarter of 2019, commercial readiness activities and anticipated commercial launch of eptinezumab. The Company estimates the available cash, cash equivalents, short-term and long-term investments and restricted cash as of September 30, 2018 will be sufficient to meet the Company’s projected operating requirements into 2020. These operating requirements consist principally of expenditures related to the planned BLA submission, establishment of the eptinezumab commercial drug supply chain, continued build-out of the Company’s commercial organization (e.g., marketing, sales, medical affairs, payor access, information technology) and pre-launch market readiness activities. The Company has based its estimate of the timing for its projected expenditures on assumptions that may prove to be wrong, and it could utilize its available capital resources sooner than it currently expects. Furthermore, the Company’s operating plans may change, and it may need additional funds to meet operational needs and capital requirements sooner than planned. The Company will need additional funding to execute the commercial launch of eptinezumab. The Company will also need to obtain substantial additional sources of funding to develop and commercialize ALD1910 and its other product candidates. The Company expects to finance future cash needs through equity financings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements, but there are no assurances that the Company will be able to raise sufficient amounts of funding in the future on acceptable terms, or at all.  

The condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

11


 

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases. This ASU requires the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements and ASU 2018-11, Targeted Improvements, to Topic 842 – Leases. ASU 2016-02, ASU 2018-10 and ASU 2018-11 will become effective for annual periods beginning after December 15, 2018. The Company expects adopting this guidance will result in an increase in the assets and liabilities on its consolidated balance sheets and will have some impact on its consolidated statements of operations and statement of cash flows.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting. The amendment substantially aligns accounting for share-based payments to employees and non-employees. This ASU will become effective for annual periods beginning after December 15, 2018, including interim periods within that period, and early adoption is permitted. The Company is currently evaluating the effect of this new guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendment is intended to improve the effectiveness of disclosures in the notes to financial statements related to fair value measurements in Topic 820. This ASU will become effective for annual periods beginning after December 15, 2019, including interim periods within that period, and early adoption is permitted. The Company is currently evaluating the effect of this new guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This amendment aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This ASU will become effective for annual periods beginning after December 15, 2019, including interim periods within that period, and early adoption is permitted. The Company is currently evaluating the effect of this new guidance on its consolidated financial statements.

The Company has reviewed other recent accounting pronouncements and concluded that they are either not applicable to the business, or that no material effect is expected on the condensed consolidated financial statements as a result of future adoption.

12


 

3.

Net Loss Per Share Applicable to Common Stockholders

Basic net loss per share applicable to common stockholders is calculated by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting the weighted average common shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method.

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders (in thousands)

$

(62,199

)

 

$

(59,565

)

 

$

(250,464

)

 

$

(234,522

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

68,232,765

 

 

 

64,526,519

 

 

 

68,015,989

 

 

 

55,168,433

 

Net loss per share applicable to common stockholders - basic and diluted

$

(0.91

)

 

$

(0.92

)

 

$

(3.68

)

 

$

(4.25

)

 

 

The following weighted average numbers of securities were excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2018 and 2017 because including them would have had an anti-dilutive effect. Therefore, basic and diluted net loss per share were the same for all periods presented.

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Common shares underlying 2025 convertible senior notes

 

14,197,526

 

 

 

 

 

 

12,503,953

 

 

 

 

Common shares underlying convertible preferred stock

 

7,421,950

 

 

 

 

 

 

7,018,111

 

 

 

 

Stock options and awards

 

10,747,214

 

 

 

6,961,319

 

 

 

9,860,330

 

 

 

6,577,051

 

Employee stock purchase plan

 

74,964

 

 

 

72,998

 

 

 

257,069

 

 

 

164,911

 

 

 

32,441,654

 

 

 

7,034,317

 

 

 

29,639,463

 

 

 

6,741,962

 

 

13


 

4.

Investments

 

Investments consisted of available-for-sale securities as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

Cost

 

 

Gross unrealized

gains

 

 

Gross unrealized

losses

 

 

Fair

Value

 

 

 

(in thousands)

 

Type of security as of September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency obligations maturing in

   one year or less

 

$

359,352

 

 

$

 

 

$

(1,355

)

 

$

357,997

 

U.S. government agency obligations maturing after

   one year through two years

 

 

22,438

 

 

 

 

 

 

(161

)

 

 

22,277

 

Total available-for-sale securities

 

$

381,790

 

 

$

 

 

$

(1,516

)

 

$

380,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type of security as of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency obligations maturing in

   one year or less

 

$

199,434

 

 

$

 

 

$

(90

)

 

$

199,344

 

Total available-for-sale securities

 

$

199,434

 

 

$

 

 

$

(90

)

 

$

199,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains and losses are determined based on the specific identification method and are reported in other income in the condensed consolidated statement of operations.  During the nine months ended September 30, 2018, the Company recorded $0.3 million in realized losses related to available-for-sale securities included in the Company’s condensed consolidated statement of operations. There were no realized gains or losses on sales of available-for-sale securities in the three and nine months ended September 30, 2017.  See Note 6 for additional information about fair value disclosures.

 

5.

Investment in Unconsolidated Entity and Derivative Liability

In May 2016, the Company licensed the exclusive worldwide rights to its product candidate clazakizumab to Vitaeris. In exchange for the rights to clazakizumab, the Company received an equity stake in Vitaeris and is eligible to receive royalties and certain other payments. Since clazakizumab was developed internally by the Company, all previous expenditures to develop the compound were recognized as expense in the period incurred and there was no carrying value on the Company’s condensed consolidated balance sheet. In 2016, the Company recognized a gain on the license agreement of $1.1 million, which was determined as the initial fair value of the Company’s equity stake in Vitaeris.  

Vitaeris is a VIE for which the Company is not the primary beneficiary as the Company does not have the power to direct the activities that most significantly influence the economic performance of the entity.  In addition to the Company’s exchange of license rights for clazakizumab, Vitaeris was capitalized through cash investments by other parties. The investment in Vitaeris is accounted for under the equity method of accounting because the Company holds common stock of Vitaeris and has significant influence over the operating and financial policies of Vitaeris through its ownership, license arrangement and representation on the board of directors. Therefore, the Company records its share of any loss or income generated by Vitaeris, which is recorded on a three-month lag, within the condensed consolidated statement of operations. The investment is reflected as an investment in unconsolidated entity on the Company’s condensed consolidated balance sheet which represents the investment in Vitaeris, net of the Company’s portion of any generated loss or income. The Company recorded $0.2 million in net loss with respect to Vitaeris for the nine months ended September 30, 2018, which was the remaining balance of the carrying value of the Company’s investment in Vitaeris. The Company has no implied or unfunded commitments related to Vitaeris and its maximum exposure to loss is limited to the current carrying value of the investment.

In November 2017, the Company and Vitaeris amended the license agreement for clazakizumab and Vitaeris and its shareholders, including the Company, entered into a strategic collaboration and purchase option agreement (the “option agreement”) with a third party, CSL Limited (“CSL”), an Australian entity, to expedite the development of clazakizumab as a therapeutic option for solid organ transplant rejection.  Pursuant to the option agreement, CSL will provide research funding to Vitaeris for the development of clazakizumab and CSL received an exclusive option to acquire Vitaeris, subject to certain terms and conditions. Upon the execution of the option agreement, Vitaeris received an upfront payment of $15 million and Vitaeris will also receive future development milestone payments.  If CSL exercises its purchase option, it will be required to make to Vitaeris’ shareholders, including the Company, an immediate one-time payment and thereafter certain sales-based milestone payments. The Company will continue to be eligible to receive royalties and certain other payments following an acquisition of Vitaeris by CSL. The purchase

14


 

option created a written call on the Company’s shares in Vitaeris which was determined to have a fair value of $1.7 million as of September 30, 2018 and is considered a derivative under GAAP (see Note 6). The Company recorded a derivative liability on its condensed consolidated balance sheets and as other expense on its condensed consolidated statement of operations. Expense recorded for the three and nine months ended September 30, 2018 was $0.2 million and $1.7 million, respectively. The Company will assess the fair value of the derivative at each reporting period.

6.

Fair Value Disclosures

The Company holds financial instruments that are measured at fair value which is determined according to a fair value hierarchy that prioritizes the inputs and assumptions used, and the valuation techniques used to measure fair value. The three levels of the fair value hierarchy are described as follows:

 

Level   1

Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level   2

Inputs are quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level   3

Inputs are unobservable inputs based on the Company’s own assumptions and valuation techniques used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

The Company established the fair value of its assets and liabilities using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and established a fair value hierarchy based on the inputs used to measure fair value.


15


 

 

The following table presents the Company’s financial instruments by level within the fair value hierarchy:

 

 

 

Fair Value Measurement Using

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

As of September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets