Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2015

Accounting Policies [Abstract]

Organization and Basis of Presentation

Organization and Basis of Presentation

Juno Therapeutics, Inc. (the “Company”) was incorporated in Delaware on August 5, 2013 as FC Therapeutics, Inc., and changed its name to Juno Therapeutics, Inc. on October 23, 2013. The Company is building a fully-integrated biopharmaceutical company focused on revolutionizing medicine by re-engaging the body’s immune system to treat cancer. Founded on the vision that the next important phase of medicine will be driven by the use of human cells as therapeutic entities, the Company is developing cell-based cancer immunotherapies based on its chimeric antigen receptor (“CAR”) and high-affinity T cell receptor (“TCR”) technologies to genetically engineer T cells to recognize and kill cancer cells.

The Company is subject to a number of risks similar to other biopharmaceutical companies in the early stage, including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, the need to obtain marketing approval for its product candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of the Company’s products, and protection of proprietary technology. If the Company does not successfully commercialize or partner any of its product candidates, it will be unable to generate product revenue or achieve profitability. As of March 31, 2015, the Company had an accumulated deficit of $411.2 million.

The financial data as of December 31, 2014 is derived from audited financial statements, which are included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 19, 2015 (the “2014 Annual Report”), and should be read in conjunction with the audited financial statements and notes thereto.

Use of Estimates

Use of Estimates

The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from such estimates.

The Company utilizes significant estimates and assumptions in determining the estimated success payment liabilities and associated expense at each balance sheet date. A small change in the Company’s stock price or other assumptions may have a relatively large change in the estimated fair value of the success payment liability and associated expense.

Prior to becoming a public company, the Company utilized significant estimates and assumptions in determining the fair value of its common stock for financial reporting purposes. The Company recorded expense for restricted stock grants at prices not less than the fair market value of its common stock as determined by the board of directors, taking into consideration input from management and independent third-party valuation analysis, and in accordance with the AICPA Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation. The estimated fair value of the Company’s common stock was based on a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector and the prices at which the Company sold shares of convertible preferred stock, and the superior rights and preferences of securities senior to the Company’s common stock at the time.

Unaudited Interim Financial Information

Unaudited Interim Financial Information

The accompanying interim balance sheet as of March 31, 2015, the statements of operations, comprehensive loss and cash flows for the three months ended March 31, 2015 and 2014 and the related footnote disclosures are unaudited. These unaudited interim financial statements have been prepared in accordance with GAAP. In management’s opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of March 31, 2015 and its results of operations, comprehensive loss, and its cash flows for the three months ended March 31, 2015 and 2014. The results for the three months ended March 31, 2015 and 2014 are not necessarily indicative of the results expected for the full fiscal year or any other interim period.

Initial Public Offering

Initial Public Offering

On December 23, 2014, the Company closed its initial public offering (“IPO”) and issued and sold 12,676,354 shares of common stock (inclusive of 1,653,437 shares of common stock sold by the Company pursuant to the full exercise of the underwriters’ option to purchase additional shares) at a price to the public of $24.00 per share. The shares began trading on The NASDAQ Global Select Market on December 19, 2014. The aggregate net proceeds received by the Company from the offering, net of underwriting discounts and commissions and offering expenses, were $279.7 million. Upon the closing of the IPO, all then-outstanding shares of Company convertible preferred stock converted into 59,909,397 shares of common stock. The related carrying value of $387.7 million was reclassified to common stock and additional paid-in capital. Additionally, the Company amended and restated its certificate of incorporation effective December 23, 2014 to, among other things, change the authorized number of shares of common stock to 495,000,000 shares and the authorized number of shares of preferred stock to 5,000,000 shares.

Comprehensive Loss

Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive income or loss. Other comprehensive income or loss consists of unrealized gains and losses on marketable securities.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at acquisition to be cash equivalents. Cash equivalents, which consist primarily of money market funds, are stated at fair value.

Marketable Securities

Marketable Securities

The Company generally invests its excess cash in investment grade short- to intermediate-term fixed income securities. Such investments are included in cash and cash equivalents, marketable securities, or long-term marketable securities on the balance sheets, classified as available-for-sale, and reported at fair value with unrealized gains and losses included in accumulated other comprehensive income (loss).

The Company periodically evaluates whether declines in fair values of its investments below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to hold the investment until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not it will be required to sell any investment before recovery of its amortized cost basis. Factors considered include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, other publicly available information that may affect the value of our investments, duration and severity of the decline in value, and our strategy and intentions for holding the investment.

Property and Equipment, Net

Property and Equipment, Net

Property and equipment consist of laboratory equipment, computer equipment and software, leasehold improvements and build-to suit property. Property and equipment is stated at cost, and depreciated using the straight-line method over the estimated useful lives of the respective assets.

Laboratory equipment	5 years
Computer equipment and software	3 years
Leasehold improvements	Shorter of asset’s useful life or remaining term of lease
Build-to-suit property	10 years

Other Assets

Other Assets

The Company accounts for its investment in a minority interest of Stage Cell Therapeutics GmbH (“Stage”), which minority interest the Company acquired in 2014, over which the Company as of March 31, 2015 had not exercised significant influence, using the cost method in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 325-20, Cost Method Investments. Under the cost method, an investment is carried at cost until it is sold or there is evidence that changes in the business environment or other facts and circumstances suggest it may be other than temporarily impaired. This investment totaled $3.5 million as of March 31, 2015 and December 31, 2014 and has been included in other assets on the balance sheet. In May 2015, the Company acquired the remaining ownership interest in Stage. See Note 11, Subsequent Events.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

The Company regularly reviews the carrying value and estimated lives of all of its long-lived assets, including property and equipment, to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash flow in future periods as well as the strategic significance of the assets to the Company’s business objective. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the asset’s fair value. The Company has not recognized any impairment losses since inception.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:

Level 1 – Quoted prices in active markets for identical assets or liabilities

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3 – Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability

Our financial instruments, other than those presented in Note 5, Fair Value Measurements, include cash and cash equivalents, accounts payable and accrued liabilities. The carrying amount of cash and cash equivalents, accounts payable and accrued liabilities approximate fair value because of the short-term nature of these instruments.

Convertible Preferred Stock

Convertible Preferred Stock

Prior to its IPO, the Company had several series of convertible preferred stock outstanding. The carrying value of the Company’s convertible preferred stock is adjusted to reflect dividends when and if declared by the board of directors. No dividends have been declared by the board of directors since inception. The Company classified its convertible preferred stock outside of permanent equity as the redemption of such stock was not solely under the control of the Company. Upon the occurrence of the IPO in December 2014, the carrying value of the convertible preferred stock was reclassified to common stock and additional paid-in capital.

Convertible Preferred Stock Option

Convertible Preferred Stock Option

Pursuant to certain 2013 and 2014 convertible preferred stock purchase agreements, the Company had the right to sell, or “put,” additional shares of Series A and A-2 convertible preferred stock in subsequent closings as well as potential obligations to issue additional shares upon the occurrence of certain events. The Company assessed its rights and potential obligations to sell additional shares and determined them to be a single unit of accounting, with classification outside of equity in accordance with ASC 480, Distinguishing Liabilities from Equity. As of each balance sheet date, the fair value of these combined instruments was estimated using the option pricing model and assumptions that are based on the individual characteristics of the option on the valuation date, as well as assumptions for expected volatility, expected term, and risk-free interest rate.

The Company recorded these combined instruments as convertible preferred stock options as of the date of the initial closings of the Series A convertible preferred stock financing and Series A-2 convertible preferred stock financing. The options were revalued to fair value at each subsequent balance sheet date, with fair value changes recognized as increases or reductions to other income (expense), net in the statements of operations. The Company estimated the fair value of these instruments based on the Black-Scholes option pricing model. As of March 31, 2014, the estimated fair value of the convertible preferred stock option was $3.2 million. The change in fair value of the options during the period of $0.6 million was recognized in other expense in the three months ended March 31, 2014. These options were exercised during 2014.

Success Payments

Success Payments

The Company granted rights to share-based success payments to the Fred Hutchinson Cancer Research Center (“FHCRC”) and the Memorial Sloan Kettering Cancer Center (“MSK”) pursuant to the terms of its collaboration agreements with each of those entities. Pursuant to the terms of these arrangements, the Company may be required to make success payments based on increases in the per share fair market value of the Company’s common stock, payable in cash or publicly-traded equity at the Company’s discretion. See Note 2, Collaboration Agreements. The success payments are accounted for under ASC 505-50, Equity-Based Payments to Non-Employees. Once the service period is complete, the instruments will be accounted for under ASC 815, Derivatives and Hedging, and continue to be marked to market with all changes in value recognized immediately in other income or expense.

Success payment liabilities are estimated at fair value at inception and at each subsequent balance sheet date and the expense is amortized using the accelerated attribution method over the remaining term (service period) of the related collaboration agreement or related possible payment due date (whichever is sooner). To determine the estimated fair value of the success payments the Company uses a Monte Carlo simulation methodology which models the future movement of stock prices based on several key variables. The following variables were incorporated in the estimated fair value of the success payment liability: estimated term of the success payments, fair value of common stock, expected volatility, risk-free interest rate, and estimated number and timing of valuation measurement dates on the basis of which payments may be triggered. For FHCRC success payments, estimated indirect costs related to the collaboration projects conducted by FHCRC that are creditable against the success payments are also included in the calculation. The computation of expected volatility was estimated based on available information about the historical volatility of stocks of similar publicly-traded companies for a period matching the expected term assumption. In addition, prior to the Company becoming publicly traded there was one valuation measurement date on the basis of which payments may be triggered. There are several valuation measurement dates subsequent to the IPO on the basis of which payments may be triggered.

As of March 31, 2015 and December 31, 2014, the estimated fair value of the total success payment obligation was approximately $230.3 million and $195.9 million, respectively. The Company recognized research and development expense of $38.9 million and $0.2 million in the three months ended March 31, 2015 and 2014, respectively. The expense recorded for the three months ended March 31, 2015 and 2014 represents the change in the success payment liability during such period and reflects an additional three months of accrued expense. The success payment liabilities on the balance sheet as of March 31, 2015 and December 31, 2014 were $123.8 million and $84.9 million, respectively.

The assumptions used to calculate the fair value of the success payments are subject to a significant amount of judgment including the expected volatility, estimated term, and estimated number and timing of valuation measurement dates and a small change in the assumptions may have a relatively large change in the estimated valuation and associated liability and expense. For example, keeping all other variables constant, a hypothetical 10% increase in the stock price at March 31, 2015 from $60.66 per share to $66.73 per share would have increased the expense recorded in the three months ended March 31, 2015 associated with the success payment liability by $12.9 million. A hypothetical 10% decrease in the stock price from $60.66 per share to $54.59 per share would have decreased the expense recorded in the three months ended March 31, 2015 associated with the success payment liability by $13.5 million. Further, keeping all other variables constant, a hypothetical 35% increase in the stock price at March 31, 2015 from $60.66 per share to $81.89 per share would have increased the expense recorded in the three months ended March 31, 2015 associated with the success payment liability by $42.3 million. A hypothetical 35% decrease in the stock price from $60.66 per share to $39.43 per share would have decreased the expense recorded in the three months ended March 31, 2015 associated with the success payment liability by $49.5 million, resulting in a gain of $10.6 million in the first quarter of 2015.

Concentrations of Credit Risk and Off-Balance Sheet Risk

Concentrations of Credit Risk and Off-Balance Sheet Risk

The Company maintains its cash, cash equivalents, and marketable securities with high quality, accredited financial institutions. These amounts at times may exceed federally insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to significant risk on these funds. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.

Research and Development Expense

Research and Development Expense

The Company records expense for research and development costs to operations as incurred. The Company accounts for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the goods have been received or when the service has been performed rather than when the payment is made. Research and development expenses consist of costs incurred by the Company for the discovery and development of the Company’s product candidates and include:

• personnel-related expenses, including non-cash stock-based compensation expense;

• external research and development expenses incurred under arrangements with third parties, such as contract research organizations, contract manufacturing organizations, academic and non-profit institutions and consultants;

• the estimated fair value of the liability attributable to the elapsed service period as of the balance sheet date associated with the Company’s success payments to FHCRC and MSK;

• license fees; and

• other expenses, which include direct and allocated expenses for laboratory, facilities, and other costs.

General and Administrative Expense

General and Administrative Expense

General and administrative costs are expensed as incurred and include personnel-related expenses including non-cash stock-based compensation for our personnel in executive, legal, finance and accounting, and other administrative functions, non-litigation legal costs, as well as fees paid for accounting and tax services, consulting fees, and facilities costs not otherwise included in research and development expenses. Non-litigation legal costs include general corporate legal fees and patent costs.

Litigation Expense

Litigation Expense

Litigation expense includes legal expense the Company incurred with respect to Trustees of the University of Pennsylvania v. St. Jude Children’s Research Hospital, Civil Action No. 2:13-cv-01502-SD (E.D. Penn), as well as expenses the Company is required to reimburse to St. Jude Children’s Research Hospital (“St. Jude”) with respect to such litigation. See Note 9, Commitments and Contingencies and Note 11, Subsequent Events.

Stock-Based Compensation

Stock-Based Compensation

Under ASC 718, Compensation—Stock Compensation, the Company measures and recognizes expense for restricted stock awards, restricted stock unit (“RSU”) awards, and stock options granted to employees and directors based on the fair value of the awards on the date of grant. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model that requires management to apply judgment and make estimates, including:

• the expected term of the option, which is calculated using the simplified method, as permitted by the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 110, Share-Based Payment, as the Company has insufficient historical information regarding its stock options to provide a basis for an estimate;

• the expected volatility of the underlying common stock, which the Company estimates based on the historical volatility of a representative group of publicly traded biopharmaceutical companies with similar characteristics;

• the risk-free interest rate, which is based on the yield curve of U.S. Treasury securities with periods commensurate with the expected term of the options being valued;

• the expected dividend yield, which the Company estimates to be zero based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends; and

• the fair value of the Company’s common stock on the date of grant.

Stock-based compensation expense for restricted stock, RSUs, and stock options is recognized over the requisite service period, which is generally the vesting period of the respective award. The Company is required to estimate a forfeiture rate to calculate the stock-based compensation expense for its awards. The Company’s forfeiture rate is based on an analysis of its actual forfeitures since the adoption of its equity award plan. Since inception, the Company’s estimated forfeiture rate has been de minimis. The Company routinely evaluates the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and expectations of future option exercise behavior.

The Company also granted restricted stock awards that vest in conjunction with certain performance conditions to certain key employees, scientific founders, and directors. At each reporting date, the Company is required to evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon the Company’s assessment of accomplishing each performance provision. Compensation expense is measured using the fair value of the award at the grant date, net of forfeitures, and is adjusted annually to reflect actual forfeitures.

The Company also grants stock-based awards to certain service providers who are not employees, scientific founders, or directors. Stock-based awards issued to such persons, or to directors for non-board related services, are accounted for based on the fair value of such services received or of the equity instruments issued, whichever is more reliably measured. The fair value of such awards is subject to remeasurement at each reporting period until services required under the arrangement are completed, which is the vesting date.

Patent Costs

Patent Costs

The costs related to acquiring patents and to prosecuting and maintaining intellectual property rights are expensed as incurred to general and administrative due to the uncertainty surrounding the drug development process and the uncertainty of future benefits.

Income Taxes

Income Taxes

The Company determines its deferred tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be recovered. The Company applies judgment in the determination of the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of March 31, 2015 and December 31, 2014, the Company had no material unrecognized tax benefits. The Company recognizes any material interest and penalties related to unrecognized tax benefits in income tax expense.

The Company is required to file income tax returns in the U.S. federal jurisdiction. The Company currently is not under examination by the Internal Revenue Service or other jurisdictions for any tax years.

Net Loss per Share Attributable to Common Stockholders

Net Loss per Share Attributable to Common Stockholders

Basic and diluted net loss per share attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. The Company’s potentially dilutive shares, which include unvested restricted stock, unvested RSUs, options to purchase common stock, and potential shares issued for success payments, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive. The following table reconciles net loss to net loss attributable to common stockholders (in thousands, except share and per share data):

	Three Months Ended March 31,
	2015			2014
Net loss	$	(64,965	)	$	(8,949	)
Weighted average number of common shares used in net loss per share – basic and diluted		82,507,813			6,330,843
Net loss per share – basic and diluted	$	(0.79	)	$	(1.41	)

The amounts in the table below were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods indicated due to their anti-dilutive effect:

	As of March 31,
	2015		2014
Series A convertible preferred stock		—		16,930,668
Series A-1 convertible preferred stock		—		2,250,000
Unvested restricted common stock		7,598,095		7,489,162
Options to purchase common stock		3,840,931		—
Estimated shares issued if success payment valuation occurred at March 31, 2015 (1)		3,379,492		—
Total		14,818,518		26,669,830

(1) Represents the number of shares that would be issued if the success payment valuation date had been March 31, 2015. The Company’s common stock price per share was $60.66 at March 31, 2015 which would have resulted in a success payment of $205 million ($125 million for FHCRC and $80 million for MSK). The number of shares issued is calculated by dividing the $160 million success payment by the stock price of $60.66 at March 31, 2015. At March 31, 2014 the stock price was below the threshold that would require a payment to FHCRC or MSK, therefore no shares are included.

Segments

Segments

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment and one reportable segment.