On February 28, 2019, the Company entered into a development funding agreement (the “SFJ agreement”), with SFJ Pharmaceuticals Group (“SFJ”), under which SFJ agreed to provide funding to the Company to support the development of pegcetacoplan for the treatment of patients with PNH. Pursuant to the SFJ agreement, SFJ paid the Company $60.0 million following the signing of the agreement and agreed to pay the Company up to an additional $60.0 million in the aggregate in three equal installments upon the achievement of specified development milestones with respect to the Company’s Phase 3 program for pegcetacoplan in PNH.

On June 7, 2019, the Company and SFJ amended the development funding agreement, (the “SFJ amendment”). Under the SFJ amendment, SFJ agreed to make an additional $20.0 million funding payment to the Company to support the development of systemic pegcetacoplan for the treatment of patients with PNH.

As of January 29, 2020, the Company had received a total of $140.0 million from SFJ as the Company met milestones as identified in the SFJ agreement. The Company did not receive any additional funds from SFJ after January 29, 2020.

Under the SFJ agreement, following regulatory approval by the FDA for the use of systemic pegcetacoplan as a treatment for PNH, the Company is obligated to pay SFJ an initial payment of $4.0 million and then an additional $226.0 million in the aggregate in six additional annual payments with the majority of the payments being made from the third anniversary to the sixth anniversary of regulatory approval. The Company obtained regulatory approval by the FDA on May 14, 2021 and paid to SFJ the initial payment of $4.0 million in June 2021 and the first annual payment of $11.5 million in May 2022. The subsequent annual payments remaining are due and payable in May of each year from 2023 through 2027.

Under the SFJ agreement, following regulatory approval by the European Medicines Agency (the “EMA”) for the use of systemic pegcetacoplan as a treatment for PNH, the Company is obligated to pay SFJ an initial payment of $5.0 million and then an additional $225.0 million in the aggregate in six additional annual payments with the majority of the payments being made from the third anniversary to the sixth anniversary of regulatory approval. The Company obtained regulatory approval by the EMA on December 15, 2021 and paid to SFJ the initial payment of $5.0 million in January 2022. The subsequent annual payments are due and payable in December of each year from 2022 through 2027.

Additionally, the Company granted a security interest to SFJ in all of its assets, excluding intellectual property and license agreements to which it is a party. In connection with the grant of the security interest, the Company agreed to certain affirmative and negative covenants, including restrictions on its ability to pay dividends, incur additional debt or enter into licensing transactions with respect to its intellectual property, other than specified types of licenses.

Prior to EMA approval on December 15, 2021, the SFJ agreement was presented as a derivative liability on the consolidated balance sheet and, as such, was recorded at fair value and remeasured each quarter. As the variability of the future payments derived from the underlying contingency (i.e., EMA approval and FDA approval) no longer exists, the Company remeasured the development derivative liability on December 15, 2021 and reclassified it from a development derivative liability to a development liability, with subsequent accounting to follow an effective interest accretion schedule to the fixed payment amounts.

From December 15, 2021 to the final annual payment due in December 2027, the development liability will be accreted from its initial carrying amount to the total payment amount using the effective interest rate method under FASB ASC Topic 835, Interest, over the remaining life of the SFJ agreement. The difference between the carrying amount and the total payment amount is presented as a discount to the development liability. The accretion is recorded as interest expense in the unaudited condensed consolidated statement of operations.

The following table summarizes the development liability (in thousands):


	June 30, 2022			December 31, 2021			Effective Interest Rate
Development liability	$	439,500		$	456,000			7.91	%
Less: Unamortized discount to development liability		(89,929	)		(103,265	)
Less: Current portion of development liability, net of discount		(15,842	)		(7,584	)
Total long term development liability	$	333,729		$	345,151

For the three and six months ended June 30, 2022, interest expense of $6.6 million and $13.3 million, respectively, was recorded for the accretion of the development liability.

The following table presents a rollforward of the development derivative liability for the six months ended June 30, 2021 (in thousands):


Balance at fair market value, January 1, 2021	$	257,868
Loss from remeasurement of development derivative liability		17,084
Balance at fair market value, March 31, 2021	$	274,952
Amount repaid under the SFJ agreement and SFJ amendment		(4,000	)
Loss from remeasurement of development derivative liability		21,180
Balance at fair market value, June 30, 2021	$	292,132

For the six months ended June 30, 2021, the total change in fair value of $38.3 million was recorded in loss from remeasurement of development derivative liability in the unaudited condensed consolidated statement of operations.

The derivative fair value as of June 30, 2021 was a Level 3 fair value measurement and was valued using a scenario-based discounted cash flow method, whereby each scenario made assumptions about the probability and timing of cash flows, and such cash flows are present valued using a risk-adjusted discount rate. The analysis is calibrated such that the value of the derivative as of the date of the SFJ agreement was consistent with an arm’s-length transaction. Key inputs to the Level 3 fair value model included (i) the probability and timing of achieving stated development milestones to receive the next tranches of funding, (ii) the probability and timing of achieving FDA and EMA approval, (iii) SFJ’s cost of borrowing (8.0%), and (iv) the Company’s cost of borrowing (11.15%).

SFJ’s implied cost of borrowing was 8.0% and the Company’s implied cost of borrowing was 11.15% as of June 30, 2021. These implied costs of borrowing were determined assuming the SFJ agreement was initially executed with arm’s-length terms. If the SFJ agreement was instead not determined to be an arm’s-length transaction, then implied discount rates could differ.