Restructuring, Impairment and Costs of Terminated Program, and Impairment of Goodwill

3 Months Ended

Mar. 31, 2023

Restructuring and Related Activities [Abstract]

Restructuring, Impairment and Costs of Terminated Program, and Impairment of Goodwill

Restructuring, Impairment and Costs of Terminated Program, and Impairment of Goodwill

Restructuring, Impairment and Costs of Terminated Program

In connection with our 2022 and 2023 Restructuring Plans, we report the following costs in restructuring, impairment and costs of terminated program:

•Clinical trial expense, other third-party costs and employee costs for the wind down of the bempegaldesleukin program, net of the reimbursement from BMS, initiated in 2022;

•Severance and related benefit costs pursuant to the 2022 and 2023 Restructuring Plans;

•Non-cash impairment of right-of-use assets and property, plant and equipment; and

•Contract termination and other costs associated with these plans.

In prior periods through March 31, 2022, we reported the clinical trial costs, other third-party costs and employee costs related to the bempegaldesleukin program primarily in research and development expense. Beginning in the second quarter of 2022, we began reporting clinical trial, other third-party costs and employee costs for the wind down of the bempegaldesleukin program in restructuring, impairment and costs of terminated program.

2022 Restructuring Plan

As discussed in Note 1, because our registrational trials in bempegaldesleukin did not meet their primary endpoints, we decided to discontinue all development of bempegaldesleukin and wind down the clinical trials studying bempegaldesleukin. In April 2022, we announced the 2022 Restructuring Plan pursuant to which we completed an approximately 70% reduction of our workforce during 2022. We also sold our research facility in India in December 2022 and decided to sublease certain of our leased premises in San Francisco, CA, including our office leased space on Third St. and portions of our office and laboratory space on Mission Bay Blvd. South.

Restructuring, impairment and other costs of terminated program pertaining to the 2022 Restructuring Plan includes the following (in thousands):

	Three Months Ended March 31,
	2023		2022
Clinical trial expense, other third-party and employee costs for the wind down of the bempegaldesleukin program	$	1,598	—
Contract termination and other restructuring costs	878		1,475
Restructuring, impairment and costs of terminated program	$	2,476	$	1,475

For the three months ended March 31, 2022, restructuring, impairment and other costs primarily include cancellation fees for certain manufacturing activities for bempegaldesleukin. Through March 31, 2023, we have recognized $11.8 million cumulatively for contract termination and other costs for the 2022 Restructuring Plan.

2023 Restructuring Plan

As discussed in Note 1, pursuant to plans approved by our Board in March 2023, we announced the 2023 Restructuring Plan to further reduce our San Francisco-based workforce by approximately 60%, which is expected to be substantially completed by June 2023.

Restructuring, impairment and other costs of terminated program pertaining to the 2023 Restructuring Plan includes the following (in thousands):

	Three Months Ended March 31, 2023
Severance and benefit expense	$	5,483
Impairment of right-of-use assets and property, plant and equipment	13,200
Contract termination and other restructuring costs	34
Restructuring, impairment and costs of terminated program	$	18,717

Severance and Benefit Expense

Employees affected by the reduction in force under the 2022 and 2023 Restructuring Plans are entitled to receive severance payments and certain Company funded benefits. The restructuring charges are recorded at fair value.

For the 2022 Restructuring Plan, we recognized severance and benefit expense in full for employees who had no requirements for future service when the 2022 Restructuring Plan was approved by the Board in April 2022. We recognized severance and benefit expense for employees who were required to render services to receive their severance and benefits ratably over the service period. This service period began on the communication date in April 2022 and was completed for all employees during 2022. We recognized $30.9 million in total severance and benefit expense during 2022 and paid the remaining liability of $3.3 million in January 2023.

For the 2023 Restructuring Plan, we recognized a liability of $5.5 million of severance and benefit expense as of March 31, 2023, reflecting severance and benefits which the employees had vested into and for which payment was probable and reasonably estimable as of March 31, 2023. We expect to recognize an additional $1.9 million for severance and benefit expense for the 2023 Restructuring Plan, primarily in the second quarter of 2023.

The following table provides details regarding the severance and benefit expense for the three months ended March 31, 2023 pursuant to the 2023 Restructuring Plan and a reconciliation of the severance and benefits liability for the three months ended March 31, 2023, which we report within accrued expenses on our Condensed Consolidated Balance Sheet (in thousands):

	Three Months Ended March 31, 2023
	2023 Restructuring Plan		2022 Restructuring Plan		Total
Liability balance as of December 31, 2022	$	—	$	3,299	$	3,299
Expense recognized during the period	5,483		—		5,483
Payments during the period	—		(3,299)		(3,299)
Liability balance as of March 31, 2023	$	5,483	$	—	$	5,483

Impairment of Long-Lived Assets and Goodwill

During the three months ended March 31, 2023, our stock price and resulting market capitalization experienced a significant, sustained decline. Accordingly, we assessed our long-lived assets, including our property, plant and equipment, right-of-use assets and goodwill, for impairment.

As part of our impairment analysis, we first assessed which long-lived assets have identifiable cash flows that are largely independent of the cash flows of other groups of assets.

We concluded that the long-lived assets associated with our leased spaces that we had previously decided to sublease under our 2022 Restructuring Plan continue to have cash flows that are independent of our entity-wide group. We concluded that these assets, for which we had recognized impairment charges during 2022, were recoverable based on estimated sublease income and therefore did not record any impairment charges for these long-lived assets for the three months ended March 31, 2023.

We evaluated our remaining long-lived assets for impairment and performed a recoverability test using the undiscounted cash flows approach. We concluded that our net assets were not recoverable within the remaining useful lives. Accordingly, we estimated the fair value of the asset or asset group based on discounted future cash flows of the asset or asset group using a discount rate commensurate with the related risk. For the operating lease asset related to our Mission Bay facility, we estimated the fair value based on market participant assumptions, including the length of time to enter into a sublease, sublease payments, tenant improvement allowances and broker commissions, which we evaluated using current real estate trends and market conditions. We discounted the sublease income using the estimated borrowing rate of a market participant subtenant, which we estimated to be 7.9%. As a result of this analysis, we recorded a non-cash impairment charge of $11.5 million. We also recorded an additional non-cash impairment charge of $1.7 million for certain laboratory equipment.

We report the aggregate non-cash impairment charge of $13.2 million in restructuring, impairment and costs of terminated program in our Condensed Consolidated Statement of Operations. The following table presents a reconciliation of the non-cash impairment charge we recorded for these long-lived assets for the three months ended March 31, 2023 (in thousands):

	Three Months Ended March 31, 2023
	Property, Plant and Equipment		Operating Lease Right-of-Use Assets		Total
Net book value of impaired facilities before write-off	$	5,114	$	28,434	$	33,548
Less: Fair value of impaired facilities — Level 3 of Fair Value Hierarchy	(3,314)		(18,734)		(22,048)
Impairment expense for facilities	1,800		9,700		11,500
Impairment of other property, plant and equipment	1,700		—		1,700
Total impairment of right-of-use assets and property, plant and equipment	$	3,500	$	9,700	$	13,200

After we recorded the non-cash impairment charges for our long-lived assets, we next assessed goodwill for impairment. We had previously recognized goodwill primarily from our acquisitions of Shearwater Corp. and Aerogen, Inc. in 2001 and 2005, respectively. Accordingly, in accordance with ASC 350-20 Goodwill and ASC 820-10 Fair Value Measurement, we measured the fair value of our reporting unit utilizing both income and market approaches for our entity-wide asset impairment analysis. Based on this analysis, we wrote off all of our goodwill, resulting in a non-cash impairment charge of $76.5 million during the three months ended March 31, 2023, which we reported as impairment of goodwill in our Condensed Consolidated Statements of Operations.