Income Taxes

In December 2017, the U.S. Tax Cuts and Jobs Act (“TCJA”) was enacted reducing the corporate tax rate from 35% to 21% effective for tax years beginning on or after January 1, 2018. ASC 740, Income Taxes requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA’s provisions, the SEC staff issued SAB 118, which allows companies to record the tax effects of the TCJA on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The Company recorded provisional amounts and has subsequently finalized its accounting analysis based on the guidance, interpretations, and data available as of December 31, 2018.

Under the TCJA, the Corporate Alternative Minimum Tax ("AMT") was repealed. The Company's previously recorded AMT credits of approximately $3.5 million are now refundable over a four-year period beginning in 2018 and the previously recorded valuation allowance for these AMT credits was reversed during the year ended December 31, 2017. The Company does not have any offshore earnings from which to record the mandatory transition tax.

The Company utilizes the liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established against deferred tax assets when, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company's policy is to record interest and penalties on uncertain tax positions as income tax expense.

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A reconciliation of the statutory U.S. federal rate to the Company's effective tax rate is as follows:



	Years ended December 31,
	2018		2017		2016
Percent of pre-tax income:
U.S. federal statutory income tax rate	21.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	18.5	%	14.6	%	2.8	%
Permanent items	4.0	%	4.0	%	(1.4	)%
Remeasurement of deferred tax assets	—	%	49.9	%	—	%
Impact of state rate changes	(0.2	)%	(27.9	)%	(11.0	)%
Research and development credit	(2.4	)%	—	%	1.9	%
Alternative minimum tax credit	—	%	(1.3	)%	1.1	%
Change in valuation allowance	(42.6	)%	(78.6	)%	(28.2	)%
Effective income tax rate	(1.7	)%	(4.3	)%	0.2	%

The components of income tax benefit are as follows:



	Years ended December 31,
	2018			2017			2016
Current:
Federal	$	—		$	173		$	(23,393	)
State	(1,063		)	(1,356		)	21
Deferred:
Federal	—			(3,529		)	22,966
State	—			—			—
Income tax benefit	$	(1,063	)	$	(4,712	)	$	(406	)

Significant components of the Company's deferred tax assets (liabilities) for 2018 and 2017 consist of the following:



	As of December 31,
	2018			2017
Deferred tax assets (liabilities)
Deferred revenue	$	—		$	40,961
License and technology payments	7,221			8,222
Share-based compensation	20,342			17,599
Accrued expenses	371			608
Depreciation	(28		)	81
Federal and state net operating loss carryforwards	88,766			76,309
Research and development credits	5,933			3,782
Other	5			3,534
Deferred income tax assets	122,610			151,096
Valuation allowance	(122,610		)	(147,567		)
Net deferred tax assets	$	—		$	3,529

The Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible.

The Company incurred tax losses in 2018 and 2017. The Company realized its net deferred tax assets recorded as of December 31, 2017 in 2016 as a result of the Company’s carry back of its 2015 federal tax losses to 2014. The Company has carried forward its 2015 state tax losses due to various state restrictions on the use of carryback claims. The state NOLs are expected to begin to expire in 2027. Due to the Company’s history of losses and lack of other positive evidence to support taxable income after the 2014 tax year, the Company has recorded a valuation allowance against those remaining deferred tax assets that are not expected to be realized. As of December 31, 2018, the Company has federal NOL carryforwards of approximately $315.5 million. These losses are due to expire in 2036 and 2037.

For the year ended December 31, 2018, the Company recorded a benefit from income of $1.1 million which primarily related to the settlement of a local tax audit. For the year ended December 31, 2017, the Company recorded a benefit from income of $4.7 million which was related to a $3.5 million reduction in its valuation allowances for AMT credits to reflect the impact of the TCJA enactment and the settlement of a state franchise tax audit for $1.4 million, partially offset by the reversal of previously recorded benefits related to the change in unrealized gains of the Company's investment portfolio. During 2018, the Company reclassified the $3.5 million related to AMT credits to a non-current income tax receivable as it expects to receive the refunds over the next four years.

Although the Company generated net income before income taxes for the years ended December 31, 2018 and 2017, this income is due to the Novo Termination Agreement and the July 2017 Letter Agreement with Novartis which had previously been recorded on the Company's federal and state income tax returns. This recognition of income resulted in the reduction of a deferred tax asset that was completely offset by a previously recorded valuation allowance. With respect to the remaining deferred tax assets, except for the AMT credits previously discussed above, there was no change in the amount of assets realizable at December 31, 2018.

In the second quarter of 2017, the IRS concluded an audit of the Company’s U.S. federal income tax returns for the years 2013, 2014 and 2015, resulting in an immaterial amount of additional tax due. Federal NOLs for 2016 and general business credits generated between 2007 and 2016 remain subject to audit.

Pursuant to ASC 740, Income Taxes, the Company routinely evaluates the likelihood of success if challenged on income tax positions claimed on its income tax returns. During the year ended December 31, 2018, the Company reduced certain deferred tax assets by $25.0 million and reduced the corresponding valuation allowance by an equivalent amount. Additionally, the Company amended certain state income tax returns to claim a refund for taxes previously paid. These claims may result in refunds to the Company of up to approximately $5.0 million. These items have not been recognized in the financial statements and if disallowed by the tax authorities, would not result in an adjustment to the Company’s effective tax rate, its balance sheet or its cash flow statements for the current year.

The Company's position with respect to uncertain tax positions is set forth below:



Opening balance	$	16,881
Gross amount of increases in unrecognized tax benefits during the period - current year provisions	—
Gross amount of increases in unrecognized tax benefits during the period - prior year provisions	17
Gross amount of decreases in unrecognized tax benefits during the period - other	(1,413		)
Decreases due to settlement with tax authorities during the period	(1,502		)
Reduction of unrecognized tax benefits due to expiration of the state of limitations during the period	—
Closing Balance	$	13,983

As the Company is currently being audited by the New Jersey Division of Taxation, an estimate of unrecognized tax benefits that may be realized over the next twelve months is expected to be in the range of zero to approximately $5.0 million.

The Company will continue to evaluate its ability to realize its deferred tax assets on a periodic basis and will adjust such amounts in light of changing facts and circumstances including, but not limited to, future projections of taxable income, tax legislation, rulings by relevant tax authorities, the progress of ongoing tax audits and the regulatory approval of product candidates currently under development. Any additional changes to the valuation allowance recorded on deferred tax assets in the future would impact the Company’s income taxes.