You should read the following discussion and analysis of our financial condition
and results of operations together with our audited financial statements and the
related notes and other financial information included elsewhere in this Annual
Report on Form 10-K. Some of the information contained in this discussion and
analysis or elsewhere in this Annual Report on Form 10-K, including information
with respect to our plans and strategy for our business, include forward-looking
statements that involve risks and uncertainties. You should review the "Risk
Factors" set forth in this Annual Report on Form 10-K for a discussion of
important factors that could cause our actual results to differ materially from
the results described in or implied by the forward-looking statements contained
in the following discussion and analysis.
Business Overview
La Jolla Pharmaceutical Company is dedicated to the commercialization of
innovative therapies that improve outcomes in patients suffering from
life-threatening diseases. GIAPREZA® (angiotensin II) injection is approved by
the U.S. Food and Drug Administration ("FDA") as a vasoconstrictor indicated to
increase blood pressure in adults with septic or other distributive shock.
XERAVA® (eravacycline) for injection is approved by the FDA as a tetracycline
class antibacterial indicated for the treatment of complicated intra-abdominal
infections ("cIAI") in patients 18 years of age and older.
On July 28, 2020, La Jolla completed its acquisition of Tetraphase
Pharmaceuticals, Inc. and its subsidiaries ("Tetraphase"), a biopharmaceutical
company focused on commercializing XERAVA, for $43 million in upfront cash plus
potential future cash payments of up to $16 million. La Jolla's consolidated
financial results exclude Tetraphase's financial results prior to the
acquisition closing date of July 28, 2020.
In January 2021, La Jolla and certain of its wholly owned subsidiaries entered
into an exclusive license agreement with PAION AG to commercialize GIAPREZA and
XERAVA in the European Economic Area, the United Kingdom and Switzerland.
Pursuant to the agreement: (i) the Company has received an upfront cash payment
of $22.5 million, less a 15% refundable withholding tax; and (ii) the Company is
entitled to receive potential commercial milestone payments of up to $109.5
million and royalties on net sales of GIAPREZA and XERAVA.
On November 2, 2021, La Jolla consummated the change of its corporate domicile
from California to Delaware, as described in more detail in La Jolla's
Definitive Proxy Statement on Schedule 14A filed with the U.S. Securities and
Exchange Commission (the "SEC") on June 4, 2021.
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Results of Operations
The following table summarizes our results of operations for each of the periods
below (in thousands):
Year Ended
December 31,
2021 2020 Change
Net product sales $ 43,532 $ 33,419 $ 10,113
License and other revenue 32,188 - 32,188
Cost of product sales 8,976 7,819 1,157
Cost of license and other revenue 4,513 - 4,513
Selling, general and administrative expense 35,386 38,428 (3,042 )
Research and development expense
5,014 23,010 (17,996 )
Other (expense) income, net (2,122 ) (3,583 ) 1,461
Provision for income taxes 49 - 49
Net income (loss) $ 19,660 $ (39,421 ) $ 59,081
La Jolla acquired Tetraphase, which commercialized XERAVA, on July 28, 2020. La
Jolla's consolidated financial results for the year ended December 31, 2020
exclude the financial results of Tetraphase prior to July 28, 2020.
Net Product Sales
Net product sales consist of revenue recognized from sales of GIAPREZA and
XERAVA to hospitals and other healthcare organizations in the U.S., generally
through a network of specialty and wholesale distributors. These specialty and
wholesale distributors are considered our customers for accounting purposes.
La Jolla's net product sales were $12.1 million and $43.5 million for the three
and twelve months ended December 31, 2021, respectively, compared to $11.0
million and $33.4 million, respectively, for the same periods in 2020. La Jolla
acquired Tetraphase, which commercialized XERAVA, on July 28, 2020. Net product
sales for the year ended December 31, 2020 exclude XERAVA for the period prior
to July 28, 2020.
GIAPREZA U.S. net sales were $9.2 million and $33.4 million for the three and
twelve months ended December 31, 2021, respectively, compared to $8.7 million
and $29.3 million, respectively, for the same periods in 2020.
XERAVA U.S. net sales were $2.9 million and $10.1 million for the three and
twelve months ended December 31, 2021, respectively, compared to $2.3 and $4.2
million, respectively, for the same periods in 2020. XERAVA U.S. net sales were
$8.2 million for the year ended December 31, 2020, including the period prior to
the acquisition of Tetraphase.
La Jolla's net product sales increased during the three and twelve months ended
December 31, 2021, compared to the same periods in 2020 due to an increase in
the number of vials sold to our customers.
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License and Other Revenue
License and other revenue consists of revenue from out-license agreements with
counterparties to develop and/or commercialize our products in territories
outside of the U.S. in exchange for: (i) nonrefundable, upfront license fees;
(ii) development, regulatory or commercial milestone payments; and/or (iii)
sales-based royalties. License and other revenue also consists of revenue from
commercial supply agreements with our out-licensees to supply a minimum quantity
of our products in territories outside the U.S. in exchange for: (i)
nonrefundable, upfront fees; and/or (ii) the reimbursement of manufacturing
costs, plus a margin in certain cases.
La Jolla's license and other revenue was $32.2 million for the year ended
December 31, 2021, which consists of: (i) a $22.5 million upfront cash payment
in connection with the PAION License; (ii) $5.0 million for the transfer of
certain XERAVA-related manufacturing know-how to Everest in connection with the
Everest commercial supply agreement; (iii) a $3.0 million regulatory milestone
cash payment in connection with the Everest License; and (iv) $1.7 million for
the reimbursement of manufacturing costs in connection with commercial supply
agreements with our out-licensees. La Jolla did not record license and other
revenue during the year ended December 31, 2020.
Cost of Product Sales
Cost of product sales consists primarily of expense associated with: (i)
manufacturing; (ii) royalties payable to George Washington University, Harvard
University and Paratek Pharmaceuticals, Inc.; (iii) the inventory fair value
step-up adjustment recorded in connection with the acquisition of Tetraphase;
and (iv) shipping and distribution.
La Jolla's cost of product sales was $9.0 million for the year ended December
31, 2021, compared to $7.8 million, for the same period in 2020. Cost of product
sales for the year ended December 31, 2020 exclude XERAVA prior to July 28,
2020. For the year ended December 31, 2021, cost of product sales includes $0.9
million of the inventory fair value step-up adjustment recorded in connection
with the acquisition of Tetraphase, compared to $2.5 million for the same period
in 2020.
Cost of License and Other Revenue
Cost of license and other revenue consists of amounts due under in-license
agreements and commercial supply agreements in connection with license and other
revenue from commercially approved product. Cost of license and other revenue
recognized in connection with product that is not commercially approved is
recorded as research and development expense.
La Jolla's cost of license and other revenue was $4.5 million for the year
ended December 31, 2021, which consists of: (i) $3.6 million for amounts due
under the George Washington University and Harvard University license agreements
in connection with the upfront cash payment received from the PAION License; and
(ii) $0.9 million for manufacturing costs in connection with commercial supply
agreements with our out-licensees. La Jolla did not record cost of license and
other revenue during the year ended December 31, 2020.
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Selling, General and Administrative Expense
Selling, general and administrative expense consists of non-personnel and
personnel expenses. Non-personnel-related expense includes expense related to:
(i) sales and marketing costs such as speaker programs, advertising and
promotion; (ii) professional fees for legal, patent, consulting, surveillance,
regulatory filings and accounting; and (iii) amortization of intangible assets,
information technology and facilities. Personnel-related expense includes
expense related to salaries, benefits and share-based compensation for personnel
engaged in sales, finance and administrative functions. We expect our selling,
general and administrative expense to increase modestly in 2022 to support
growing net product sales of both GIAPREZA and XERAVA.
The following table summarizes these expenses for each of the periods below (in
thousands):
Year Ended
December 31,
2021 2020 Change
Non-personnel expense:
Sales and marketing $ 5,619 $ 3,918 $ 1,701
Professional fees 5,314 5,812 (498 )
Facility 347 2,536 (2,189 )
Other 3,610 2,861 749
Total non-personnel expense 14,890 15,127 (237 )
Personnel expense:
Salaries, bonuses and benefits 16,720 16,298 422
One-time charges for reductions in headcount 143 4,195 (4,052 )
Share-based compensation expense 3,633 2,808 825
Total personnel expense 20,496 23,301 (2,805 )
Total selling, general and administrative expense $ 35,386 $ 38,428 $ (3,042 )
During the year ended December 31, 2021, total selling, general and
administrative non-personnel expense decreased compared to the same period in
2020 primarily as a result of: (i) decreases in facility-related expenses as a
result of the termination of our lease for office and laboratory space in San
Diego, California effective August 31, 2020; and (ii) decreases in professional
fee-related expenses; partially offset by increases in expenses resulting from
the inclusion of Tetraphase-related costs, which are excluded from La Jolla's
financial results for the year ended December 31, 2020 prior to July 28, 2020.
During the year ended December 31, 2020, La Jolla incurred acquisition-related
expenses of $0.9 million.
During the year ended December 31, 2021, total selling, general and
administrative personnel expense decreased compared to the same period in 2020
primarily as a result of one-time charges in 2020 resulting from: (i) a
reduction of headcount from a Company-wide realignment in May 2020; and (ii) a
reduction of headcount combining La Jolla and Tetraphase personnel in July 2020;
partially offset by an increase in headcount and the average cost per employee.
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Research and Development Expense
Research and development expense consists of non-personnel and personnel
expenses. Non-personnel-related expense includes expense related to: (i)
manufacturing development; (ii) amounts due under in-license agreements for drug
product that is not commercially approved; (iii) facilities and information
technology; and (iv) conducting clinical studies. Personnel-related expense
includes expense related to salaries, benefits and share-based compensation for
personnel engaged in research and development functions. We expect our research
and development expense to decrease significantly.
The following table summarizes these expenses for each of the periods below (in
thousands):
Year Ended
December 31,
2021 2020 Change
Non-personnel expense:
GIAPREZA $ 929 $ 4,036 $ (3,107 )
XERAVA 898 866 32
LJPC-401 101 1,683 (1,582 )
LJPC-0118 16 926 (910 )
Facility 9 2,930 (2,921 )
Other 928 1,196 (268 )
Total non-personnel expense 2,881 11,637 (8,756 )
Personnel expense:
Salaries, bonuses and benefits 1,289 5,546 (4,257 )
One-time charges for reductions in headcount - 2,428 (2,428 )
Share-based compensation expense
844 3,399 (2,555 )
Total personnel expense 2,133 11,373 (9,240 )
Total research and development expense $ 5,014 $ 23,010 $ (17,996 )
During the year ended December 31, 2021, total research and development
non-personnel expense decreased compared to the same period in 2020 primarily as
a result of decreases in: (i) program-related expenses as we de-prioritized our
product candidates and focused on the commercialization of GIAPREZA and XERAVA;
(ii) manufacturing development-related expenses for GIAPREZA; and (iii)
facility-related expenses primarily as a result of the termination of our lease
for office and laboratory space in San Diego, California effective August 31,
2020.
During the year ended December 31, 2021, total research and development
personnel expense, including share-based compensation expense, decreased
compared to the same period in 2020 as a result of: (i) reduced headcount; and
(ii) one-time charges in 2020 resulting from: (1) a reduction of headcount from
a Company-wide realignment in May 2020; and (2) a reduction of headcount
combining La Jolla and Tetraphase personnel in July 2020.
Research and development expense for the year ended December 31, 2020 excludes
Tetraphase-related costs prior to July 28, 2020.
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Other (Expense) Income, Net
Other (expense) income, net consists primarily of the following: (i) interest
expense accrued for our deferred royalty obligation; (ii) income from
distributions received in connection with our non-voting profits interest in a
related party; (iii) gains and losses from changes in the fair value of
contingent value rights ("CVRs"); (iv) interest income generated from cash held
in savings accounts; and (v) gains and losses associated with the disposal of
certain property and equipment.
During the year ended December 31, 2021, other (expense) income, net was $(2.1)
million, compared to $(3.6) million for the same period in 2020. This $1.5
million decrease in other (expense) income, net was due to: (i) a $1.3 million
increase in the receipt of distributions in connection with the Company's
non-voting profits interest in a related party; and (ii) a $0.8 million decrease
in loss on short-term investments; partially offset by: (i) a $0.4
million increase in interest expense for our deferred royalty obligation; and
(ii) a $0.2 million decrease in interest income generated from cash held in
savings accounts.
Liquidity and Capital Resources
As of December 31, 2021 and 2020, La Jolla had cash and cash equivalents of
$46.7 million and $21.2 million, respectively. Based on our current operating
plans and projections, we believe that our existing cash and cash equivalents
will be sufficient to fund operations for at least one year from the date this
Annual Report on Form 10-K is filed with the SEC. The Company expects to fund
future operations with existing cash or cash generated from operations.
La Jolla's net cash provided by (used for) operating activities for the three
and twelve months ended December 31, 2021 was $3.1 million and $28.2 million,
respectively, compared to $(7.2) million and $(37.6) million, respectively, for
the same periods in 2020.
La Jolla's net cash provided by (used for) operating activities for the three
and twelve months ended December 31, 2021, excluding upfront net receipts in
connection with out-license agreements and commercial supply agreements,
payments related to reductions in headcount, and transaction costs associated
with the Tetraphase acquisition, was $3.1 million and $4.6 million,
respectively, compared to $(5.6) million and $(27.2) million, respectively, for
the same periods in 2020. The exclusions above are comprised of the following:
• Upfront net receipts in connection with out-license agreements were zero and
$18.4 million for the three and twelve months ended December 31, 2021,
respectively, and zero for the same periods in 2020.
• Upfront net receipts in connection with commercial supply agreements were
zero and $6.8 million for the three and twelve months ended December 31,
2021, respectively, and zero for the same periods in 2020.
• Payments related to reductions in headcount were zero and $1.6 million for
the three and twelve months ended December 31, 2021, respectively, and $1.6
million and $9.5 million, respectively, for the same periods in 2020.
• Payments related to transaction costs associated with the Tetraphase
acquisition were zero for the three and twelve months ended December 31,
2021, and zero and $0.9 million, respectively, for the same periods in 2020.
The amount and timing of additional future funding needs, if any, will depend on
many factors, including the success of our commercialization efforts for
GIAPREZA and XERAVA and our ability to control expenses. If necessary, we intend
to raise additional capital through equity or debt financings. We can provide no
assurance that additional financing will be available to us on favorable terms,
or at all.
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Contractual Obligations
HealthCare Royalty Partners Royalty Agreement
In May 2018, we closed a $125.0 million royalty financing agreement (the
"Royalty Agreement") with HealthCare Royalty Partners ("HCR"). Under the terms
of the Royalty Agreement, we received $125.0 million in exchange for tiered
royalty payments on worldwide net sales of GIAPREZA. HCR is entitled to receive
quarterly royalties on worldwide net sales of GIAPREZA beginning April 1, 2018.
Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty
rate, with step-downs based on the achievement of annual net product sales
thresholds. Through December 31, 2021, the maximum royalty rate was 10%.
Starting January 1, 2022, the maximum royalty rate increased by 4%, and starting
January 1, 2024, the maximum royalty rate may increase by an additional 4% if an
agreed-upon, cumulative net product sales threshold has not been met. The
Royalty Agreement is subject to maximum aggregate royalty payments to HCR
of $225.0 million. The Royalty Agreement expires upon the first to occur of
January 1, 2031 or when the maximum aggregate royalty payments have been made.
The Royalty Agreement was entered into by our wholly owned subsidiary, La Jolla
Pharma, LLC, and HCR has no recourse under the Royalty Agreement against La
Jolla Pharmaceutical Company or any assets other than GIAPREZA.
In-license Agreements
George Washington University
In December 2014, the Company entered into a patent license agreement with
George Washington University ("GW"), which was subsequently amended and restated
(the "GW License") and assigned to La Jolla Pharma, LLC. Pursuant to the GW
License, GW exclusively licensed to the Company certain intellectual property
rights relating to GIAPREZA, including the exclusive rights to certain issued
patents and patent applications covering GIAPREZA. Under the GW License, La
Jolla Pharma, LLC is obligated to use commercially reasonable efforts to
develop, commercialize, market and sell GIAPREZA. The Company has paid
a one-time license initiation fee, annual maintenance fees, an amendment fee,
additional payments following the achievement of certain development and
regulatory milestones and royalties. The Company is obligated to pay a 6%
royalty on net sales of GIAPREZA and 15% on payments received from sublicensees.
The obligation to pay royalties under this agreement extends through the
last-to-expire patent covering GIAPREZA.
Harvard University
In August 2006, the Company entered into a license agreement with Harvard
University ("Harvard"), which was subsequently amended and restated (the
"Harvard License"). Pursuant to the Harvard License, Harvard exclusively
licensed to the Company certain intellectual property rights relating to
tetracycline-based products, including XERAVA, including the exclusive rights to
certain issued patents and patent applications covering such products. Under the
Harvard License, the Company is obligated to use commercially reasonable efforts
to develop, commercialize, market and sell tetracycline-based products,
including XERAVA. For each product covered by the Harvard License, the Company
is obligated to make certain payments for the following: (i) up to approximately
$15.1 million upon the achievement of certain clinical development and
regulatory milestones; (ii) a 5% royalty on direct U.S. net sales of XERAVA;
(iii) a single-digit tiered royalty on direct ex-U.S. net sales of XERAVA,
starting at a minimum royalty rate of 4.5%, with step-ups to a maximum royalty
of 7.5% based on the achievement of annual net product sales thresholds; and
(iv) 20% on payments received from sublicensees. The obligation to pay royalties
under this agreement extends through the last-to-expire patent covering
tetracycline-based products, including XERAVA.
Paratek Pharmaceuticals, Inc.
In March 2019, the Company entered into a license agreement with Paratek
Pharmaceuticals, Inc. ("Paratek"), which was subsequently amended and restated
(the "Paratek License"). Pursuant to the Paratek License, Paratek
non-exclusively licensed to the Company certain intellectual property rights
relating to XERAVA, including non-exclusive rights to certain issued patents and
patent applications
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covering XERAVA. The Company is obligated to pay Paratek a 2.25% royalty based
on direct U.S. net sales of XERAVA. The Company's obligation to pay royalties
with respect to the licensed product is retroactive to the date of the first
commercial sale of XERAVA and shall continue until there are no longer any valid
claims of the Paratek patents, which will expire in October 2023.
Out-license Agreements
PAION AG
In January 2021, La Jolla Pharmaceutical Company and certain of its wholly owned
subsidiaries, including La Jolla Pharma, LLC and Tetraphase Pharmaceuticals,
Inc., entered into an exclusive license agreement (the "PAION License") with
PAION AG and its wholly owned subsidiary (collectively, "PAION"). Pursuant to
the PAION License, La Jolla granted PAION an exclusive license to commercialize
GIAPREZA and XERAVA in the European Economic Area, the United Kingdom and
Switzerland (collectively, the "PAION Territory"). La Jolla has received an
upfront cash payment of $22.5 million, less a 15% refundable withholding tax,
and is entitled to receive potential commercial milestone payments of up to
$109.5 million and double-digit tiered royalty payments. In addition, royalties
payable under the PAION License will be subject to reduction on account of
generic competition and after patent expiration in a jurisdiction. La Jolla
recognized the upfront cash payment of $22.5 million as license and other
revenue for the year ended December 31, 2021, and the 15% refundable withholding
tax of $3.4 million was recorded as an other current asset as of December 31,
2021. Pursuant to the PAION License, PAION will be solely responsible for the
future development and commercialization of GIAPREZA and XERAVA in the PAION
Territory. PAION is required to use commercially reasonable efforts to
commercialize GIAPREZA and XERAVA in the PAION Territory. The Company has not
received any payments from PAION related to either royalties or commercial
milestones.
In July 2021, the Company entered into a commercial supply agreement with PAION
whereby the Company will supply PAION a minimum quantity of GIAPREZA and XERAVA
through July 13, 2024. The supply agreement will automatically renew until the
earlier of July 13, 2027, or until a new supply agreement is executed. During
the initial 3-year term of the supply agreement, the Company will be reimbursed
for direct and certain indirect manufacturing costs at cost.
Everest Medicines Limited
In February 2018, the Company entered into a license agreement with Everest,
which was subsequently amended and restated (the "Everest License"). Pursuant to
the Everest License, the Company granted Everest an exclusive license to develop
and commercialize XERAVA for the treatment of cIAI and other indications in
mainland China, Taiwan, Hong Kong, Macau, South Korea, Singapore, the Malaysian
Federation, the Kingdom of Thailand, the Republic of Indonesia, the Socialist
Republic of Vietnam and the Republic of the Philippines (collectively, the
"Everest Territory"). The Company is eligible to receive an additional $8.0
million regulatory milestone payment and up to an aggregate of $20.0 million in
sales milestone payments. The Company is also entitled to receive tiered
royalties from Everest at percentages in the low double digits on sales, if any,
in the Everest Territory of products containing eravacycline. Royalties are
payable with respect to each jurisdiction in the Everest Territory until the
latest to occur of: (i) the last-to-expire of specified patent rights in such
jurisdiction in the Everest Territory; (ii) expiration of marketing or
regulatory exclusivity in such jurisdiction in the Everest Territory; or (iii)
10 years after the first commercial sale of a product in such jurisdiction in
the Everest Territory. In March 2021, the Company received a $3.0 million
milestone payment associated with the submission of an NDA with the China NMPA
for XERAVA for the treatment of cIAI in patients in China. XERAVA was approved
in Singapore by the Health Science Authority in April 2020.
In May 2021, the Company entered into a commercial supply agreement with Everest
whereby the Company will supply Everest a minimum quantity of XERAVA through
December 31, 2023 and will transfer to Everest certain XERAVA-related
manufacturing know-how. Pursuant to the supply agreement: (i) the Company has
received $6.8 million of upfront payments comprised of: (1) a $4.0 million
upfront technology transfer payment; and (2) a $2.8 million partial prepayment
for XERAVA that is expected to be delivered to Everest during 2022; (ii) the
Company has received an additional $1.0 million technology
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transfer payment in January 2022; and (iii) the Company will be reimbursed for
direct and certain indirect manufacturing costs at 110% of cost through December
31, 2023. The Company recognized the $5.0 million of technology transfer-related
payments as license and other revenue during the year ended December 31, 2021 as
Everest obtained control of the XERAVA-related manufacturing know-how prior to
December 31, 2021. The Company recognized the $2.8 million partial prepayment
for XERAVA that is expected to be delivered to Everest during 2022 as deferred
revenue as of December 31, 2021 as the performance obligation to deliver XERAVA
has not yet been satisfied.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have, or are reasonably likely to
have, a current or future effect on our financial condition, changes in our
financial condition, expenses, results of operations, liquidity, capital
expenditures or capital resources.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations
are based on our audited consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP"). The preparation of these audited consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. We evaluate our estimates on an ongoing basis. We base
our estimates on historical experience and on other assumptions that we believe
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ
materially from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in the notes
to our consolidated financial statements included in Item 15 of this Annual
Report on Form 10-K, we believe that the following accounting policies and
estimates are most critical to understanding and evaluating our reported
financial results.
Revenue Recognition
Pursuant to Financial Accounting Standards Board (the "FASB") Accounting
Standards Codification ("ASC") Topic 606-Revenue from Contracts with Customers
("ASC 606"), the Company recognizes revenue when its customers obtain control of
the Company's product, which typically occurs on delivery. Revenue is recognized
in an amount that reflects the consideration that the Company expects to receive
in exchange for those goods. To determine revenue recognition for contracts with
customers within the scope of ASC 606, the Company performs the following 5
steps: (i) identify the contract(s) with a customer; (ii) identify the
performance obligations in the contract; (iii) determine the transaction price;
(iv) allocate the transaction price to the performance obligations in the
contract; and (v) recognize revenue when (or as) the entity satisfies the
relevant performance obligations.
Revenue from product sales is recorded at the transaction price, net of
estimates for variable consideration consisting of chargebacks, discounts,
returns, rebates and administrative fees. Variable consideration is estimated
using the expected-value amount method, which is the sum of probability-weighted
amounts in a range of possible consideration amounts. Actual amounts of
consideration ultimately received may differ from the Company's estimates. If
actual results vary materially from the Company's estimates, the Company will
adjust these estimates, which will affect revenue from product sales and
earnings in the period such estimates are adjusted. These items include:
• Chargebacks-Chargebacks are discounts the Company provides to distributors
in the event that the sales prices to end users are below the
distributors' acquisition price. This may occur due to a direct contract
with a health system, a group purchasing organization ("GPO") agreement or
a
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sale to a government facility. Chargebacks are estimated based on known
chargeback rates and recorded as a reduction of revenue on delivery to the
Company's customers.
• Discounts-The Company offers customers various forms of incentives and
consideration, including prompt-pay and other discounts. The Company
estimates discounts primarily based on contractual terms. These discounts
are recorded as a reduction of revenue on delivery to the Company's
customers.
• Returns-The Company offers customers a limited right of return, generally
for damaged or expired product. The Company estimates returns based on an
internal analysis, which includes actual experience. The estimates for
returns are recorded as a reduction of revenue on delivery to the
Company's customers.
• Rebates-The Company participates in Medicaid rebate programs, which
provide assistance to certain low-income patients based on each individual
state's guidelines regarding eligibility and services. Under the Medicaid
rebate programs, the Company pays a rebate to each participating state,
generally within three months after the quarter in which product was sold.
Additionally, the Company may offer customers incentives and consideration
in the form of volume-based or other rebates. The estimates for rebates
are recorded as a reduction of revenue on delivery to the Company's
customers.
• Administrative Fees-The Company pays administrative fees to GPOs for
services and access to data. Additionally, the Company pays an Industrial
Funding Fee as part of the U.S. General Services Administration's Federal
Supply Schedules program. These fees are based on contracted terms and are
paid after the quarter in which the product was purchased by the
applicable GPO or government agency. Administrative fees are recorded as a
reduction of revenue on delivery to customers.
The Company will continue to assess its estimates of variable consideration as
it accumulates additional historical data and will adjust these estimates
accordingly.
Business Combinations
The Company accounts for business combinations using the acquisition method
pursuant to FASB ASC Topic 805. This method requires, among other things, that
results of operations of acquired companies are included in La Jolla's financial
results beginning on the respective acquisition dates, and that assets acquired
and liabilities assumed are recognized at fair value as of the acquisition date.
Intangible assets acquired in a business combination are recorded at fair value
using a discounted cash flow model. The discounted cash flow model requires
assumptions about the timing and amount of future net cash flows, the cost of
capital and terminal values from the perspective of a market participant. Any
excess of the fair value of consideration transferred (the "Purchase Price")
over the fair values of the net assets acquired is recognized as goodwill.
Contingent consideration liabilities are recognized as part of the Purchase
Price at the estimated fair value on the acquisition date. Subsequent changes to
the fair value of contingent consideration liabilities will be included in other
(expense) income, net in the consolidated statements of operations. The fair
value of assets acquired and liabilities assumed in certain cases may be subject
to revision based on the final determination of fair value during a period of
time not to exceed 12 months from the acquisition date. Legal costs, due
diligence costs, business valuation costs and all other acquisition-related
costs are expensed when incurred.
Intangible Assets
Intangible assets acquired in a business combination are initially recorded at
fair value. Intangible assets with a definite useful life are amortized on a
straight-line basis over the estimated useful life of the related assets.
Intangible assets with an indefinite useful life are not amortized.
The Company reviews its intangible assets for impairment at least annually or
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. If such
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circumstances are determined to exist, an estimate of undiscounted future cash
flows produced by the asset, including its eventual residual value, is compared
to the carrying value to determine whether impairment exists. In the event that
such cash flows are not expected to be sufficient to recover the carrying amount
of the assets, the assets are written down to their estimated fair values. Fair
value is estimated through discounted cash flow models to project cash flows
from the asset.
Goodwill
Goodwill represents the excess of the Purchase Price over the fair value of the
net assets acquired as of the acquisition date. Goodwill has an indefinite
useful life and is not amortized.
The Company reviews its goodwill for impairment at least annually or whenever
events or changes in circumstances indicate that the carrying amount of the
Company may exceed its fair value. The Company may first assess qualitative
factors to determine whether it is more likely than not that the fair value of
the Company is less than its carrying amount, including goodwill. If that is the
case, the Company performs a quantitative impairment test, and, if the carrying
amount of the Company exceeds its fair value, then the Company will recognize an
impairment charge for the amount by which its carrying amount exceeds its fair
value, not to exceed the carrying amount of the goodwill. The Company has an
option to bypass the qualitative assessment and proceed directly to performing
the quantitative impairment test.
Accrued Expenses
As part of the process of preparing the financial statements, we are required to
estimate accrued expenses. This process involves reviewing open contracts and
purchase orders, communicating with our personnel to identify services that have
been performed by service providers and estimating the level of service
performed and the associated cost incurred for services that have not yet been
invoiced. We make estimates of accrued expenses as of each balance sheet date in
the financial statements based on facts and circumstances known at that time. We
periodically confirm the accuracy of recorded estimates with the service
providers and make adjustments, if necessary.
We base our accrued expenses on our estimates of the services received and
efforts expended pursuant to our contractual arrangements. In accruing service
fees, we estimate the time period over which services will be performed and the
level of effort to be expended in each period. If the actual timing of the
performance of services or the level of effort varies from our estimate, we
adjust the accrual or prepayment accordingly. The financial terms of our
contractual agreements may be subject to interpretation, and the timing of
payment relative to the timing of services rendered may vary.
Interest Expense
The deferred royalty obligation royalty from our financing agreement (the
"Royalty Agreement") with HealthCare Royalty Partners, which was entered into by
our wholly owned subsidiary, La Jolla Pharma, LLC, is repaid based on the net
sales of GIAPREZA. Interest expense and the amortization of issuance costs
related to the deferred royalty obligation are recognized over the expected
repayment term using the effective interest method. The assumptions used in
determining the expected repayment term of the deferred royalty obligation
require us to make estimates that could impact the effective interest rate. Each
reporting period, we update our estimate of accrued interest expense under the
Royalty Agreement based on actual and forecasted net sales of GIAPREZA. Changes
in interest expense resulting from changes in the effective interest rate, if
any, are recorded on a prospective basis.
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 2 to the accompanying
audited consolidated financial statements included in Item 15 of this Annual
Report on Form 10-K.
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