Long Term Obligations

9 Months Ended

Sep. 30, 2019

BMS and Pfizer Promissory Notes

In December 2016, we entered into a supplemental funding support agreement with BMS and Pfizer whereby we received $50.0 million in exchange for two promissory notes totaling $65.0 million that become due in December 2024 (“Notes”). We may reduce the repayment amount to $62.5 million if such amount is paid by December 31, 2023. The use of funds is restricted to development activities needed for regulatory approval of Andexxa by the FDA and the EMA as provided in the agreement. Pursuant to the terms of the agreement, we are required to pay down the Notes each quarter in an amount equal to 5% of net sales of Andexxa in the United States and the EU.

The upfront cash receipt of $50.0 million is recorded as Notes payable at issuance. We are accruing for interest over the term of the Notes. The carrying values of the Notes payable includes accrued interest of $10.0 million and $7.6 million at September 30, 2019 and December 31, 2018, respectively.

Our payment obligations for BMS and Pfizer Promissory Notes are as follows (in thousands):



	September 30, 2019			December 31, 2018
Total repayment obligations	$	62,500		$	62,500
Less: interests to be accreted in future periods	(6,191		)	(8,643		)
Less: payments made	(3,564		)	(497		)
Carrying value of notes payable	52,745			53,360
Less: current portion of royalties	(10,817		)	(5,062		)
Non-current portion of notes payable	$	41,928		$	48,298

We evaluated the features of the Notes and determined that certain features require acceleration of payments such as pursuant to a change of control. We determined that these features (embedded derivatives) require bifurcation and fair value recognition. We determined the fair value of each derivative using a Monte Carlo simulation model taking into account the probability of these events occurring and potential repayment amounts and timing of such payments that would result under various scenarios (see Note 4, “Fair Value Measurements”, to these condensed consolidated financial statements). We will remeasure the embedded derivatives to fair value each reporting period until the repayment, termination or maturity of the Notes. For the three and nine months ended September 30, 2019, we recognized a gain of $0.2 million and a gain of $1.4 million, respectively, upon remeasurement of the embedded derivatives. For the three and nine months ended September 30, 2018, we recognized a gain of $0.2 million and a loss of $0.6 million, respectively, upon remeasurement of the embedded derivatives.

The estimated fair value of the Notes at September 30, 2019 and December 31, 2018 was $50.7 million and $53.2 million, respectively, and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using a Monte Carlo simulation model with inputs consistent with those used in determining the embedded derivative values as described in Note 4, “Fair Value Measurements”, to these condensed consolidated financial statements.

Royalty-based Financing

In February 2017, we entered into a purchase and sale agreement (the “Royalty Sales Agreement”) with HCR whereby HCR acquired a term royalty interest in future worldwide net sales of Andexxa. We received $50.0 million upon closing and received an additional $100.0 million following the U.S. regulatory approval of Andexxa in May 2018. We are required to pay royalties to HCR based on tiered net worldwide sales of Andexxa in a range of 8.46% to 4.19%. The applicable rate decreases starting at worldwide net annual sales levels above $150.0 million. Total royalty payments are capped at 195% of the funding received less certain transaction expenses, or $290.6 million.

Upon the closing of the Royalty Sales Agreement in February 2017, we incurred a fee to HCR of $2.0 million and paid additional debt issuance costs totaling $0.6 million, which included expenses that we paid on behalf of HCR and expenses incurred directly by us. Upon the subsequent funding of $100.0 million in May 2018, we incurred fees to HCR of $5.0 million. Fees and debt issuance costs have been netted against the debt and are being amortized over the estimated term of the debt using the effective interest method.

The effective interest rate as of September 30, 2019 was 14.0%. We are accruing for interest over the term of the royalty-based debt. The carrying value of the royalty-based debt includes accrued interest of $39.7 million and $22.9 million, net of unamortized debt discount of $6.1 million and $6.8 million, at September 30, 2019 and December 31, 2018, respectively.

Our payment obligations for HCR royalty-based debt are as follows (in thousands):



	September 30, 2019			December 31, 2018
Total repayment obligations	$	290,550		$	290,550
Less: interests to be accreted in future periods	(109,060		)	(125,851		)
Less: payments made	(6,006		)	(816		)
Carrying value of long term royalty-based debt	175,484			163,883
Less: current portion of royalties	(18,302		)	(8,627		)
Non-current portion of long term royalty-based debt	$	157,182		$	155,256

We determined that certain features, such as the variability in the royalty payments based upon the timing of regulatory approval, were embedded derivatives that required bifurcation from the royalty-based debt instrument. Upon the Andexxa Gen 2 FDA approval on December 31, 2018, it was determined that there was no longer a derivative associated with the debt contract. For the three months and nine months ended September 30, 2018, we recognized gains of $1.9 million and $4.3 million, respectively, upon remeasurement of the embedded derivative.

The estimated fair value of royalty-based debt at September 30, 2019 and December 31, 2018 was $170.6 million and $154.2 million, respectively, and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using a Monte Carlo simulation model with inputs as described in Note 4, “Fair Value Measurements”, to these condensed consolidated financial statements.

Secured Term Loan

In February 2019, we entered into a credit agreement (the “Credit Agreement”) with HCR and Athyrium Opportunities III Acquisition LP (“Athyrium”) whereby we received the first tranche of $62.5 million (“Secured Term Loan”) in March 2019 and we have access to the second tranche of $62.5 million at our option. We have until November 15, 2019 to exercise our option to access the second tranche.

All obligations under the Credit Agreement are due on February 28, 2025 with certain scheduled payments of the principal starting from March 31, 2022. The outstanding principal balance of the loan bears interest at 9.75% per annum. The loan is secured by substantially all of our assets. The Credit Agreement contains certain covenants that, among others, require us to deliver financial reports at designated times of the year and limit or restrict our ability to incur additional indebtedness or liens, acquire, own or make any investments, pay cash dividends or enter into certain corporate transactions, including mergers and changes of control, and require us to maintain $31.3 million of cash, such amount to be increased if we draw on the second tranche of funding. Violating covenants would put us in default and that the lenders would then have the option to demand repayment plus certain penalties or allow us to continue to service the loan but at the default interest rate of 12.75%. As of September 30, 2019, we were not in violation of any covenants.

For the three and nine months ended September 30, 2019, we accrued interest of $1.8 million and $3.8 million, respectively. Upon the closing of the Credit Agreement, we incurred fees of $2.8 million to HCR and Athyrium and other debt issuance cost of $0.5 million. Loan origination fees and debt issuance costs are netted against the loan balance and are amortized over the contractual term of the loan using the effective interest method. The effective interest rate as of September 30, 2019 was 12.3%.

As of September 30, 2019, the future principal maturities of our Secured Term Loan for each of the next five years are as follows (in thousands):



Year ended December 31,
2022	$	9,615
2023	9,615
2024	9,615
Thereafter	33,655
Total	$	62,500

We evaluated the terms of the loan and determined that one feature could require acceleration of payments and a prepayment penalty (make-whole provision) upon a change of control if it occurs prior to the 30-month anniversary period from the funding date in March 2019. We determined that this feature (embedded derivative) requires bifurcation from the debt instrument and fair value recognition. We determined the fair value of the derivative using a discounted cash flow model taking into account the probability of a change of control occurring and potential repayment amounts and timing of such payments that would result under various scenarios, as further described in Note 4, “Fair Value Measurements”, to these condensed consolidated financial statements. We will remeasure the embedded derivative to fair value each reporting period until the feature with make-whole provision lapses after 30 months from the funding date in March 2019. For the three and nine months ended September 30, 2019, we recognized a gain of $0.4 million and $2.1 million, respectively, upon remeasurement of the embedded derivatives.

The estimated fair value of long-term debt at September 30, 2019 was $71.2 million, and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using a discounted cash flow model with inputs consistent with those used in determining the embedded derivative values as described in Note 4, “Fair Value Measurements”, to these condensed consolidated financial statements.