Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes

Income Taxes

G.Income Taxes

The difference between the Company’s expected tax benefit, as computed by applying the applicable U.S. federal corporate tax rate to loss before the benefit for income taxes, and actual tax is reconciled in the following chart (in thousands):

	Years Ended December 31,
	2019		2018		2017
Loss before income tax expense	$	(104,133)	$	(168,843)	$	(96,012)
Expected tax benefit at 21%, 34%, 34% and 34%, respectively	$	(21,868)	$	(35,457)	$	(32,644)
Permanent differences		320		(103)		25
Incentive stock options		569		1,144		1,528
State tax benefit net of federal benefit		(6,726)		(10,622)		(3,537)
Change in valuation allowance, net		27,812		53,706		(63,238)
Federal research credit		(1,652)		(2,466)		(2,204)
Federal orphan drug credit		(4,426)		(6,934)		(7,118)
Expired loss and credit carryforwards		500		—		—
Change in U.S. tax law		—		—		97,479
Debt inducement		—		—		8,044
Lease incentive		—		109		—
Stock option expirations		5,471		623		1,665
Benefit for income taxes	$	—	$	—	$	—

At December 31, 2019, the Company has net operating loss, or NOL, carryforwards of $471.6 million available to reduce federal taxable income, if any, that begin to expire in 2028 through 2037 and $269.2 million of the federal NOL carryforwards can be carried forward indefinitely. The Company has $572.6 million of NOL carryforwards available to reduce state taxable income, if any, that expire in 2033 through 2039. The Company also has federal and state credit carryforwards of $64.4 million and $13.6 million, respectively, available to offset federal and state income taxes, which expire beginning in 2020. Due to the degree of uncertainty related to the ultimate use of the loss carryforwards and tax credits, the Company has established a valuation allowance to fully reserve these tax benefits.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows (in thousands):

	December 31,
	2019		2018
Deferred tax assets:
Net operating loss carryforwards	$	191,744	$	171,437
Research and development tax credit carryforwards		75,084		69,710
Property and other intangible assets		809		297
Deferred revenue		36,008		22,075
Stock-based compensation		9,630		12,849
Operating Lease Liability		6,767		2,639
Other liabilities		2,255		2,920
Royalty sale		30,030		38,593
Total deferred tax assets	$	352,327	$	320,520
Deferred tax liabilities:
Stock-based compensation		(110)		(156)
Operating lease right of use asset		(4,258)		—
Royalty sale transaction costs		(408)		(625)
Total deferred tax liabilities	$	(4,776)	$	(781)
Valuation allowance		(347,551)		(319,739)
Net deferred tax assets/(liabilities)	$	—	$	—

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. As required by the provisions of ASC 740, the Company has determined that it is not more-likely-than-not that the tax benefits related to the federal and state deferred tax assets will be realized for financial reporting purposes. Accordingly, the deferred tax assets have been fully reserved at December 31, 2019 and 2018. The valuation allowance increased by $27.8 million during the year ended December 31, 2019 due primarily to additional net loss incurred during the year.

In December 2017, the Tax Cuts and Jobs Act, or the Tax Act (“TCJA”), was signed into law. Among other things, the Tax Act permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate federal income tax rate to 21%, U.S. GAAP requires companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. For 2017, this revaluation resulted in a provision of $97.5 million to income tax expense in continuing operations and a corresponding reduction in the valuation allowance. As a result, there was no impact to the Company’s income statement as a result of the reduction in tax rates. The other provisions of the TCJA did not have a material impact on the consolidated financial statements.

Utilization of the NOL and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future as provided by Sections 382 and 383 of the Internal Revenue Code of 1986, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and credit carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the Company’s formation, it has raised capital through the issuance of capital stock on several occasions (both pre and post initial public offering) which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. During fiscal year 2015, the Company completed a study to assess whether a change of control has occurred or whether there have been multiple changes of control since its formation and determined no ownership change occurred under Section 382. The study has not been updated beyond fiscal year 2015. Additionally, the Company has not completed a detailed Research and Development Credit Study (including the Orphan Drug Credit); accordingly, it is probable that a portion of the tax credit carryforward may not be available to offset future income.

The Company accounts for uncertain tax positions under the recognition and measurement criteria of ASC 740-10. For those tax positions for which it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. If the Company does not believe that it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized. As of December 31, 2019 and 2018, no uncertain tax positions have been recorded. Interest and penalties related to the settlement of uncertain tax positions, if any, will be reflected in income tax expense. The Company did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying consolidated financial statements. The Company does not expect any material changes to the unrecognized benefits within 12 months of the reporting date. Due to existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact our effective tax rate.

The statute of limitations for assessment by the Internal Revenue Service, or IRS, and state tax authorities is open for tax years ending after June 30, 2014, although carryforward attributes that were generated prior to fiscal year 2014 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period.