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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2022

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, or the Annual Report.

The unaudited condensed consolidated financial statements include the accounts of Epizyme, Inc. and its wholly owned, controlled subsidiary, Epizyme Securities Corporation. All intercompany transactions and balances of subsidiaries have been eliminated in consolidation. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The Company considers events or transactions that occur after the balance sheet date but before the condensed consolidated financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The three months ended March 31, 2022 and 2021 are referred to as the first quarter of 2022 and 2021, respectively. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

Use of Estimates

The preparation of these condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, as of the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results and outcomes may differ materially from management’s estimates, judgments and assumptions.

Significant Accounting Policies

The significant accounting policies used in preparation of these condensed consolidated financial statements for the three months ended March 31, 2022 are consistent with those discussed in Note 2 to the consolidated financial statements in the Annual Report and are updated below as necessary.

Going Concern

At each reporting period, the Company evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The Company is required to make certain additional disclosures if it concludes substantial doubt exists about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued and such doubt is not alleviated by the Company’s plans or when the Company's plans alleviate substantial doubt about the Company’s ability to continue as a going concern. The Company’s evaluation entails analyzing prospective operating budgets and forecasts for expectations of the Company’s cash needs, and comparing those needs to its available cash, cash equivalents and marketable securities.

The Company has recurring losses and expects to have recurring losses for the foreseeable future with the continued commercialization of TAZVERIK in ES and FL, the development of tazemetostat in other indications, and the development of the Company’s other product candidates. In addition, the Company has experienced and continues to experience challenges in the continued commercialization of TAZVERIK resulting from the ongoing COVID-19 pandemic, which the Company believes has had an adverse impact on TAZVERIK revenues. In response to the challenges that the Company has continued to face since the Company commenced its launch of TAZVERIK in FL in June 2020, the Company implemented an operational cost reduction plan in August 2021, implemented further expense reductions in March 2022, and continues to evaluate its costs on an ongoing basis with the intention to streamline such costs.

The analysis of the Company’s ability to continue as a going concern for the first quarter of 2022 included consideration of the Company’s current cash needs, including its research and development plans, commercialization activities associated with the continued commercialization of TAZVERIK in the ES and FL indications, its existing debt service obligations, anticipated cost savings resulting from its operational cost reduction plans, including ongoing efforts to eliminate costs not related to the Company’s strategic focus. The analysis included forecasted product revenues from sales of TAZVERIK. Such estimates of future sales contain significant judgment as TAZVERIK was first launched in the first half of 2020 and there is little history with which to base such estimates. In addition, the Company’s ongoing efforts to eliminate costs not related to the Company’s strategic focus contains uncertainties as to whether the Company can attain such benefits. Based on the analysis, the Company concluded that its available cash, cash equivalents and marketable securities as of March 31, 2022 will be sufficient to fund current planned operations and capital expenditure requirements and pay our debt service obligations as they become due into the third quarter of 2023, which is at least 12 months from the filing date of this Quarterly Report on Form 10-Q with the SEC. As a result, the Company concluded that it did not identify conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date these financial statements were issued. The Company’s current operating plan is based on assumptions that may prove to be wrong, and the Company could use its capital resources sooner than it expects, in which case the Company would evaluate further reductions in its expenses or obtaining additional financing sooner than it otherwise would, which additional financing may not be available or may only be available on terms that are not acceptable to the Company.

Recently Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. The Company adopted ASU 2020-06 effective as of January 1, 2022. The adoption of ASU 2020-06 did not have an impact on the Company’s financial statements.

Revenue Recognition

The Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition, the Company performs the following five 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 Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. For a further discussion of accounting for net product revenue see Note 3, Product Revenue, Net.

Other Revenue

Other revenue consists of revenue from the sales of tazemetostat active pharmaceutical ingredient ("API"), drug product to the Company’s licensees or collaborators and non-cash royalty revenue related to sale of future royalties. The Company recognizes revenue on tazemetostat API and drug product when control has transferred under the terms of each agreement.

Cost of Revenues

Cost of revenues primarily consists of costs related to the sales of TAZVERIK and sales of tazemetostat API and drug product to the Company’s licensees or collaborators. These costs include materials, labor, manufacturing overhead, amortization of milestone payments, and royalties payable on net sales of TAZVERIK. Cost of revenues for the three months ended March 31, 2021 included approximately $0.8 million related to sales of tazemetostat drug product. There were no sales of tazemetostat drug product during the three months ended March 31, 2022.

Accounts Receivable

The Company extends credit to customers based on its evaluation of the customer’s financial condition. The Company records receivables for all billings when amounts are due under standard terms. Accounts receivable are stated at amounts due net of applicable prompt pay discounts and other contractual adjustments as well as an allowance for doubtful accounts. The Company assesses the need for an allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the customer’s ability to pay its obligation and the condition of the general economy and the industry as a whole. The Company will write off accounts receivable when the Company determines that they are uncollectible. In general, the Company has experienced no significant collection issues with its customers.

Inventory

The Company outsources the manufacturing of TAZVERIK and uses contract manufacturers to produce the raw and intermediate materials used in the production of TAZVERIK as well as the finished product. The Company currently has one supplier qualified for each step in the manufacturing process and is in the process of qualifying additional suppliers.

Inventory is composed of raw materials, intermediate materials, which are classified as work-in-process, and finished goods, which are goods that are available for sale. The Company states inventory at the lower of cost or net realizable value with the cost based on the first-in, first-out method. Inventory is classified as long-term when it is expected to be utilized beyond the Company’s normal operating cycle and is included in restricted cash and other assets on the Company's condensed consolidated balance sheets. If the Company identifies excess, obsolete or unsalable items, it writes down its inventory to its net realizable value in the period in which the impairment is identified. These adjustments are recorded based upon various factors related to the product, including the level of product manufactured by the Company, the level of product in the distribution channel, current and projected demand, the expected shelf-life of the product and firm inventory purchase commitments. Shipping and handling costs incurred for inventory purchases are included in inventory costs and costs incurred for product shipments are recorded as incurred in cost of revenue.

Intangible Assets, Net

Intangible assets consist of capitalized milestone payments made to third parties under an in-license of patent rights upon receiving regulatory approval of TAZVERIK. The finite-lived intangible assets are being amortized on a straight-line basis over the expected time period the Company will benefit from the in-licensed rights, which is generally the patent life. Intangible assets are recorded at cost at the time of their acquisition and are stated in the Company’s condensed consolidated balance sheets net of accumulated amortization and impairments, if applicable. The amortization expense is recognized as cost of revenue in the Company’s condensed consolidated statement of operations and comprehensive loss. During 2020 the Company paid a total of $50.0 million in milestone payments under its agreement with Eisai, Co., Ltd. (“Eisai”) following regulatory approval of tazemetostat for ES and FL. These regulatory milestones have been capitalized as intangible assets.

The following table presents intangible assets as of March 31, 2022 (in thousands):


	March 31, 2022			Estimated useful life (years)
In-licensed rights	$	50,000			12.2
Less: accumulated amortization		(8,189	)
Total intangible asset, net	$	41,811

The Company recorded approximately $1.0 million in amortization expense related to intangible assets, using the straight-line methodology, during the three months ended March 31, 2022 and March 31, 2021. Estimated future amortization expense for intangible assets for the remainder of the year ended December 31, 2022 is $3.2 million and approximately $4.2 million per year thereafter.

The Company assesses its intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment, or trigger an interim impairment assessment, include the receipt of additional clinical or nonclinical data regarding one of the Company’s drug candidates or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug. If impairment indicators are present or changes in circumstance suggest that impairment may exist, the Company performs a recoverability test by comparing the sum of the estimated undiscounted cash flows of each intangible asset to its carrying value on the Company's condensed consolidated balance sheets. If the undiscounted cash flows used in the recoverability test are less than the carrying value, the Company would determine the fair value of the intangible asset and recognize an impairment loss if the carrying value of the intangible asset exceeds its fair value.

During the three months ended June 30, 2021, the Company concluded the lower than anticipated current and projected future revenue, due to the impact of the COVID-19 pandemic as well as other factors, was an indicator that impairment may exist related to its finite-lived intangible assets. As a result, the Company performed a recoverability test and determined that the finite-lived intangible assets were recoverable. The Company’s quantitative assessment considered significant assumptions related to estimates of future TAZVERIK sales, offset by direct costs to derive the sales. The estimates of future TAZVERIK sales and associated costs include estimates of significant growth, however, these estimates are uncertain as the product was first launched in the first half of 2020 and due to the uncertainties associated with the ongoing COVID-19 pandemic. Given the limited history of sales and the inherent difficulty in making a long-range forecast, such estimates contain significant uncertainty. If the assumptions regarding forecasted revenue or the costs to derive such revenues prove to be inaccurate, the Company may be required to perform future impairment analyses and record an impairment charge for its intangible assets in future periods.