UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

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 001-32335

___________________________

HALOZYME THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

___________________________

Delaware	88-0488686
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
11388 Sorrento Valley Road	92121
San Diego	(Zip Code)
California
(Address of principal executive offices)

(858) 794-8889

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	HALO	The Nasdaq Stock Market LLC

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 x    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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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  x

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 135,183,040 as of October 28, 2020.

HALOZYME THERAPEUTICS, INC.

INDEX

 

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) - September 30, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended September 30, 2020 and 2019	4
	Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - Three and Nine Months Ended September 30, 2020 and 2019	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2020 and 2019	6
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) - Three and Nine Months Ended September 30, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	57
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	59
	SIGNATURES	60

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

HALOZYME THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

	September 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	65,741		$	120,179
Marketable securities, available-for-sale	280,965			301,083
Accounts receivable, net and other contract assets	62,551			59,442
Inventories	57,697			29,359
Prepaid expenses and other assets	31,941			33,373
Total current assets	498,895			543,436
Property and equipment, net	10,252			10,855
Prepaid expenses and other assets	14,382			11,083
Restricted cash	500			500
Total assets	$	524,029		$	565,874
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	433		$	6,434
Accrued expenses	25,795			55,649
Deferred revenue, current portion	748			4,012
Current portion of long-term debt, net	—			19,542
Total current liabilities	26,976			85,637
Deferred revenue, net of current portion	641			1,247
Long-term debt, net	393,631			383,045
Other long-term liabilities	3,793			4,180
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock - $0.001 par value; 20,000 shares authorized; no shares      issued and outstanding	—			—
Common stock - $0.001 par value; 300,000 shares authorized; 135,369 and 136,713 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively	135			137
Additional paid-in capital	646,184			695,066
Accumulated other comprehensive income	426			240
Accumulated deficit	(547,757		)	(603,678		)
Total stockholders’ equity	98,988			91,765
Total liabilities and stockholders’ equity	$	524,029		$	565,874

See accompanying notes to condensed consolidated financial statements.

3

HALOZYME THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenues:
Royalties	$	23,931		$	16,609		$	56,599		$	52,669
Product sales, net	9,048			29,205			23,532			43,355
Revenues under collaborative agreements	32,337			416			65,760			46,303
Total revenues	65,316			46,230			145,891			142,327
Operating expenses:
Cost of product sales	5,568			22,333			17,095			28,859
Research and development	7,747			30,455			26,856			95,693
Selling, general and administrative	11,702			17,979			35,309			53,323
Total operating expenses	25,017			70,767			79,260			177,875
Operating income (loss)	40,299			(24,537		)	66,631			(35,548		)
Other income (expense):
Investment and other income, net	961			1,613			4,764			5,653
Interest expense	(4,990		)	(2,078		)	(15,342		)	(7,896		)
Net income (loss) before income taxes	36,270			(25,002		)	56,053			(37,791		)
Income tax expense	63			13			132			52
Net income (loss)	$	36,207		$	(25,015	)	$	55,921		$	(37,843	)
Net income (loss) per share:
Basic	$	0.27		$	(0.17	)	$	0.41		$	(0.26	)
Diluted	$	0.25		$	(0.17	)	$	0.40		$	(0.26	)
Shares used in computing net income (loss) per share:
Basic	136,578			146,136			136,575			145,435
Diluted	142,081			146,136			139,971			145,435

See accompanying notes to condensed consolidated financial statements.

4

HALOZYME THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(In thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Net income (loss)	$	36,207		$	(25,015	)	$	55,921		$	(37,843	)
Other comprehensive income (loss):
Unrealized (loss) gain on marketable securities	(640		)	1			203			667
Foreign currency translation adjustment	(13		)	1			(8		)	—
Unrealized (loss) gain on foreign currency	(7		)	—			(9		)	2
Total comprehensive income (loss)	$	35,547		$	(25,013	)	$	56,107		$	(37,174	)

See accompanying notes to condensed consolidated financial statements.

5

HALOZYME THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2020			2019
Operating activities:
Net income (loss)	$	55,921		$	(37,843	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Share-based compensation	13,008			27,547
Depreciation and amortization	2,484			3,026
Amortization of debt discount	10,540			763
Accretion of discounts on marketable securities, net	477			(2,205		)
Gain on disposal of equipment	(631		)	—
Recognition of deferred revenue	(3,870		)	(4,497		)
Lease payments deferred	(759		)	(304		)
Loss on impairment of right-of-use asset	525			—
Other	(13		)	(1		)
Changes in operating assets and liabilities:
Accounts receivable, net	(3,109		)	(10,739		)
Inventories	(28,338		)	(13,426		)
Prepaid expenses and other assets	(1,567		)	(14,310		)
Accounts payable and accrued expenses	(40,134		)	(6,809		)
Net cash provided by (used in) operating activities	4,534			(58,798		)
Investing activities:
Purchases of marketable securities	(161,488		)	(241,582		)
Proceeds from maturities of marketable securities	181,345			362,250
Purchases of property and equipment	(805		)	(3,399		)
Proceeds from disposal of property and equipment	861			—
Net cash provided by investing activities	19,913			117,269
Financing activities:
Repayment of long-term debt	(19,560		)	(63,298		)
Repurchase of common stock	(109,970		)	—
Proceeds from issuance of common stock under equity incentive plans, net of taxes paid related to net share settlement	50,645			6,093
Net cash used in financing activities	(78,885		)	(57,205		)
Net increase (decrease) in cash, cash equivalents and restricted cash	(54,438		)	1,266
Cash, cash equivalents and restricted cash at beginning of period	120,679			58,436
Cash, cash equivalents and restricted cash at end of period	$	66,241		$	59,702
Supplemental disclosure of non-cash investing and financing activities:
Amounts accrued for purchases of property and equipment	$	531		$	251
Right-of-use assets obtained in exchange for lease obligation	$	1,661		$	897
Pending settlement of common stock repurchase	$	2,502		$	—

See accompanying notes to condensed consolidated financial statements.

6

HALOZYME THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited) (in thousands)

	Three Months Ended September 30, 2020
	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares		Amount
BALANCE AS OF JUNE 30, 2020	136,671		137		688,318		1,086		(583,964	)	105,577
Share-based compensation expense	—		—		4,220		—		—		4,220
Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units, net	833		—		12,546		—		—		12,546
Repurchase of common stock	(2,135	)	(2	)	(58,900	)					(58,902	)
Other comprehensive loss	—		—		—		(660	)	—		(660	)
Net income	—		—		—		—		36,207		36,207
BALANCE AS OF SEPTEMBER 30, 2020	135,369		135		646,184		426		(547,757	)	98,988
	Nine Months Ended September 30, 2020
	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares		Amount
BALANCE AS OF DECEMBER 31, 2019	136,713		137		695,066		240		(603,678	)	91,765
Share-based compensation expense	—		—		13,008		—				13,008
Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units, net	4,522		4		50,641		—				50,645
Issuance of restricted stock awards, net	61		—		—		—				—
Repurchase of common stock	(5,927	)	(6	)	(112,466	)					(112,472	)
Equity component of convertible notes					(65	)					(65	)
Other comprehensive income	—		—		—		186				186
Net income	—		—		—		—		55,921		55,921
BALANCE AS OF SEPTEMBER 30, 2020	135,369		135		646,184		426		(547,757	)	98,988
	Three Months Ended September 30, 2019
	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares		Amount
BALANCE AS OF JUNE 30, 2019	145,859		146		803,782		390		(544,266	)	260,052
Share-based compensation expense	—		—		8,239		—		—		8,239
Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units, net	604		1		2,074		—		—		2,075
Issuance of restricted stock awards, net	(6	)	—		—		—		—		—
Other comprehensive income	—		—		—		2		—		2
Net loss	—		—		—		—		(25,015	)	(25,015	)
BALANCE AS OF SPETEMBER 30, 2019	146,457		147		814,095		392		(569,281	)	245,353
	Nine Months Ended September 30, 2019
	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares		Amount
BALANCE AS OF DECEMBER 31, 2018	144,725		145		780,457		(277	)	(531,438	)	248,887
Share-based compensation expense	—		—		27,547		—		—		27,547
Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units, net	1,657		2		6,091		—		—		6,093
Issuance of restricted stock awards, net	75		—		—		—		—		—
Other comprehensive income	—		—		—		669		—		669
Net loss	—		—		—		—		(37,843	)	(37,843	)
BALANCE AS OF SPETEMBER 30, 2019	146,457		147		814,095		392		(569,281	)	245,353

See accompanying notes to condensed consolidated financial statements.

7

HALOZYME THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. 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. ENHANZE may enable more flexible treatment options such as home administration by a healthcare professional or potentially the patient. 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 three of these collaborations, including royalties from sales of one product from the Baxalta collaboration, three products from the Roche collaboration and one product from the Janssen collaboration. Future potential revenues from royalties and fees from ENHANZE collaborations and the sales and/or royalties of our approved products 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.

Except where specifically noted or the context otherwise requires, references to “Halozyme,” “the Company,” “we,” “our,” and “us” in these notes to the condensed 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.

8

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for a complete set of financial statements. These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 24, 2020. The unaudited financial information for the interim periods presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments. Operating results for interim periods are not necessarily indicative of the operating results for an entire fiscal year.

The accompanying interim unaudited condensed 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 interim unaudited condensed 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 interim unaudited condensed 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 September 30, 2020, 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 interim unaudited condensed consolidated statements of operations. We use the specific identification method for calculating realized gains and losses on marketable securities sold. None of the realized gains and losses and declines in value judged to be as a result of credit loss on marketable securities, if any, are included in investment and other income, net in the interim unaudited condensed 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 September 30, 2020 and December 31, 2019, 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.

9

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.

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.

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.

As of September 30, 2020, and December 31, 2019, inventories consisted of $1.6 million and $1.4 million, respectively, of Hylenex inventory, net and $56.1 million and $28.0 million, respectively, of bulk rHuPH20, consistent with our plan to build inventory to meet future customer demand.

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 condensed 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.     

10

Revenue Recognition

We generate revenues from payments received under collaborative agreements and product sales. 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.

Royalties and Revenues under Collaborative Agreements

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 collaboration partners and are also entitled to receive event-based payments subject to collaboration partners’ 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, collaboration partners 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, collaborations generally continue in effect until the last to expire royalty payment term, as determined on a product by product and on a country by country basis, with each royalty term starting on the first commercial sale of that product and ending the later of: (i) a specified period or term set forth in the agreement or (ii) 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. When there are no valid claims during the applicable royalty term in a given country, the royalty rate is reduced for those sales. Collaboration partners 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 collaboration partners (in total or with respect to the terminated target, as applicable) will terminate provided, however, that in the event of expiration of the agreement (as opposed to a termination), the on-going licenses granted will become perpetual, non-exclusive and fully paid.

Although these agreements are in form identified 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. Under these collaborative agreements, 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 are appropriately 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. Each of the licenses grants the collaboration partners rights to use our intellectual property as it exists and is identified 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).

11

We provide customary 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. In order to evaluate progress towards commencement of a trial, we assess the status of activities leading up to our collaboration partner’s initiation of a trial such as feedback received from the FDA (if applicable), completion of IND filings, readiness and availability of drug, readiness of study sites and our collaboration partner’s commitment of resources to the program. 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 internal estimates and available 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.

12

Refer to Note 4 Revenue, for further discussion on our collaborative arrangements.

Product Sales, Net

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.

13

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 condensed consolidated 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. 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.

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.

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

14

a fixed fee, unit price or on a time and materials basis. A portion of our obligation to make payments under these contracts depends on factors such as the successful enrollment or treatment of patients or the completion of other clinical trial milestones.

Expenses related to clinical trials are accrued based on our estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, completion of patient studies and progress of the clinical trials. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the amounts we are obligated to pay under our clinical trial agreements are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), we adjust our accruals accordingly on a prospective basis. Revisions to our contractual payment obligations are charged to expense in the period in which the facts that give rise to the revision become reasonably certain.

Share-Based Compensation

We record compensation expense associated with stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance stock units (“PSUs”) 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 until such time as we can demonstrate an ability to realize them.

In response to the coronavirus (COVID-19) pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the U.S. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income-based tax laws. One of the key tax provisions of the bill is allowing taxpayers with AMT credits to claim a refund in 2020 for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as originally enacted by the Tax Cuts and Jobs Act (“TCJA”) in 2017. Under the TCJA, we had recorded a receivable for AMT credits that was expected to be received in future years. Under the CARES Act, the remaining receivable for the AMT credit is fully refundable in 2020. Other than the refundability of the AMT credit, at this time, we do not believe that the CARES Act will have a material impact on our financial statements.

Net Income (Loss) 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, unvested PSUs 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 three and nine months ended  September 30, 2020 and 2019, approximately 3.6 million and 15.0 million shares, respectively, of outstanding stock options, unvested RSAs, unvested RSUs, unvested PSUs and the 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 does not have an impact on our diluted earnings per share when net income is reported when the average market price of our common stock is less than 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. When the average market price of our common stock exceeds the conversion price, we compute the potentially dilutive impact of the shares of common stock related to the Convertible Notes using the treasury stock method.

15

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):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2020		2019			2020		2019
Numerator:
Net income (loss)	$	36,207	$	(25,015	)	$	55,921	$	(37,843	)
Denominator:
Weighted average common shares outstanding for basic net income (loss) per share	136,578		146,136			136,575		145,435
Net effect of dilutive common stock equivalents	5,503		—			3,396		—
Weighted average common shares outstanding for diluted net income (loss) per share	142,081		146,136			139,971		145,435
Net income (loss) per share:
Basic	$	0.27	$	(0.17	)	$	0.41	$	(0.26	)
Diluted	$	0.25	$	(0.17	)	$	0.40	$	(0.26	)

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.

16

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 August 2020, the FASB issued ASU 2020-06, Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)	The new guidance eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation.	January 1, 2022 (Early adoption permitted effective January 1, 2021)	We are currently evaluating the effect the updated standard will have on our consolidated financial statements and related disclosures.
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 adopted the new guidance on January 1, 2020. The adoption did not have a material impact on our condensed consolidated financial position or results of 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 adopted the new guidance on January 1, 2020. The adoption did not have a material impact on our condensed 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 adopted the new guidance on January 1, 2020. The adoption did not have a material impact on our condensed consolidated financial position or results of operations.

17

3. Fair Value Measurement

Available-for-sale marketable securities consisted of the following (in thousands):

	September 30, 2020
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses		Estimated Fair Value
Asset-backed securities	30,653	88	—		30,741
Corporate debt securities	108,606	237	(4	)	108,839
U.S. Treasury securities	90,231	138	(1	)	90,368
Commercial paper	51,017	—	—		51,017
	280,507	463	(5	)	280,965

	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

As of September 30, 2020, 3 available-for-sale marketable securities with a fair market value of $27.4 million were in a gross unrealized loss position of $5 thousand. Based on our review of these marketable securities, we believe none of the unrealized loss is as a result of a credit loss as of September 30, 2020, 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):

	September 30, 2020		December 31, 2019
	Estimated Fair Value
Due within one year	$	277,880	$	274,805
After one but within five years	3,085		26,278
	$	280,965	$	301,083

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):

	September 30, 2020						December 31, 2019
	Level 1		Level 2		Total estimated fair value		Level 1		Level 2		Total estimated fair value
Cash equivalents:
Money market funds	$	65,544	$	—	$	65,544	$	119,949	$	—	$	119,949
Available-for-sale marketable    securities:
Asset-backed securities	—		30,741		30,741		—		30,539		30,539
Corporate debt securities	—		108,839		108,839		—		161,472		161,472
U.S. Treasury securities	90,368		—		90,368		75,227		—		75,227
Commercial paper	—		51,017		51,017		—		33,845		33,845
	$	155,912	$	190,597	$	346,509	$	195,176	$	225,856	$	421,032

We had no instruments that were classified within Level 3 as of September 30, 2020 and December 31, 2019.

18

4. Revenue

Our disaggregated revenues were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Royalties	$	23,931	$	16,609	$	56,599	$	52,669
Product sales, net
Sales of bulk rHuPH20	$	3,850	$	24,593	11,525		31,145
Sales of ENHANZE drug product	254		344		438		669
Sales of Hylenex	4,944		4,268		11,569		11,541
Total product sales, net	9,048		29,205		23,532		43,355
Revenues under collaborative agreements:
Upfront license and target nomination fees	—		—		7,264		40,000
Event-based development and regulatory milestones and other fees	32,000		—		57,500		5,000
Research and development services	337		416		996		1,303
Total revenues under collaborative agreements	32,337		416		65,760		46,303
Total revenue	$	65,316	$	46,230	$	145,891	$	142,327

During the three months ended September 30, 2020 we recognized revenue related to licenses granted to collaboration partners in prior periods in the amount of $55.9 million. This amount represents royalties earned in the current period in addition to $32.0 million of variable consideration in the contracts where uncertainties have been resolved and the development milestones were expected to be achieved or were achieved. There was no revenue recognized during the three months ended September 30, 2020 that had been included in deferred revenues at December 31, 2019.

During the nine months ended September 30, 2020 we recognized revenue related to licenses granted to collaboration partners in prior periods in the amount of $114.1 million. This amount represents royalties earned in the current period in addition to $57.5 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 recognized revenue of $3.9 million during the nine months ended September 30, 2020 that had been included in deferred revenues at December 31, 2019. We did not recognize any adjustments to reduce sales reserves and allowances liability related to Hylenex recombinant sales in prior periods.

Accounts receivable, net, and deferred revenues (contract liabilities) from contracts with customers, including collaboration partners, consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Accounts receivable, net	$	30,551	$	59,442
Other contract assets	32,000		—
Deferred revenues	1,389		5,259

As of September 30, 2020, 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 $15.1 million, of which $13.7 million relates to unfulfilled product purchase orders and $1.4 million has been collected and is reported as deferred revenues. The unfulfilled product purchase orders are estimated to be delivered during the remainder of 2020. Of the total deferred revenues of $1.4 million, $0.7 million is expected to be used by our customers within the next 12 months.

We recognized contract assets of $32.0 million at September 30, 2020, which relate to development milestones deemed probable of receipt for intellectual property licenses granted to collaboration partners in prior periods.

19

The following table presents amounts under our collaborative agreements included in the transaction price (i.e. cumulative amounts triggered or probable) as of September 30, 2020 (in thousands):

	Upfront (1)		Event-based (2)		Sales (3)		Total
Collaboration partner and agreement date:
Roche (December 2006, September 2017 and October 2018)	$	105,000	$	47,000	$	22,000	$	174,000
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		40,000		—		58,250
AbbVie (June 2015)	23,000		6,000		—		29,000
Lilly (December 2015)	33,000		—		—		33,000
BMS (September 2017)	110,000		5,000		—		115,000
Alexion (December 2017)	40,000		6,000		—		46,000
argenx (February 2019)	40,000		20,000		—		60,000
Royalties