10-Q 1 nbix-10q_20190331.htm 10-Q nbix-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-22705

 

NEUROCRINE BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

33-0525145

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

 

12780 El Camino Real,

San Diego, California

 

92130

(Address of principal executive office)

 

(Zip Code)

 

(858) 617-7600

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 91,286,923 as of April 24, 2019.

 

 

 


NEUROCRINE BIOSCIENCES, INC.

TABLE OF CONTENTS

 

 

 

PAGE

Part I. Financial Information

 

 

 

 

 

Item 1. Financial Statements

 

3

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 

3

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2019 and 2018

 

4

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

 

5

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018

 

6

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

7

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

19

 

 

 

Item 4. Controls and Procedures

 

19

 

 

 

Part II. Other Information

 

20

 

 

 

Item 1A. Risk Factors

 

20

 

 

 

Item 6. Exhibits

 

38

 

 

 

Signatures

 

39

 

2


Part I. Financial Information

Item 1. Financial Statements

NEUROCRINE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

(in thousands, except per share data)

March 31,

2019

 

 

December 31,

2018

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

72,778

 

 

$

141,714

 

Short-term investments, available for sale

 

451,290

 

 

 

509,199

 

Accounts receivable

 

71,964

 

 

 

56,240

 

Inventory

 

13,010

 

 

 

10,864

 

Other current assets

 

24,150

 

 

 

19,760

 

Total current assets

 

633,192

 

 

 

737,777

 

Restricted cash

 

5,477

 

 

 

5,477

 

Property and equipment, net

 

36,661

 

 

 

33,869

 

Long-term investments, available for sale

 

176,689

 

 

 

216,028

 

Investment in restricted equity securities

 

56,400

 

 

 

 

Operating lease assets

 

49,304

 

 

 

 

Total assets

$

957,723

 

 

$

993,151

 

blank

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

68,280

 

 

$

86,377

 

Other current liabilities

 

3,723

 

 

 

1,856

 

Total current liabilities

 

72,003

 

 

 

88,233

 

Noncurrent operating lease liabilities

 

67,147

 

 

 

 

Convertible senior notes

 

393,435

 

 

 

388,496

 

Other long-term liabilities

 

15,863

 

 

 

10,231

 

Deferred rent

 

 

 

 

18,114

 

Deferred gain on sale of real estate

 

 

 

 

7,312

 

Total liabilities

 

548,448

 

 

 

512,386

 

blank

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000 shares authorized; no shares

   issued and outstanding

 

 

 

 

 

Common stock, $0.001 par value; 220,000 shares authorized; issued and outstanding

   shares were 91,284 as of March 31, 2019 and 90,797 as of December 31, 2018

 

91

 

 

 

91

 

Additional paid-in capital

 

1,681,244

 

 

 

1,660,361

 

Accumulated other comprehensive loss

 

(233

)

 

 

(1,932

)

Accumulated deficit

 

(1,271,827

)

 

 

(1,177,755

)

Total stockholders’ equity

 

409,275

 

 

 

480,765

 

Total liabilities and stockholders’ equity

$

957,723

 

 

$

993,151

 

See accompanying notes to the condensed consolidated financial statements.

3


NEUROCRINE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(unaudited)

 

 

For the Three Months

Ended March 31,

 

(in thousands, except per share data)

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

Product sales, net

$

136,431

 

 

$

71,086

 

Collaboration revenue

 

1,972

 

 

 

 

Total revenues

 

138,403

 

 

 

71,086

 

Operating expenses:

 

 

 

 

 

 

 

Cost of sales

 

1,129

 

 

 

950

 

Research and development

 

37,652

 

 

 

48,947

 

Acquired in-process research and development

 

113,081

 

 

 

 

Selling, general and administrative

 

87,538

 

 

 

58,636

 

Total operating expenses

 

239,400

 

 

 

108,533

 

Operating loss

 

(100,997

)

 

 

(37,447

)

Other (expense) income:

 

 

 

 

 

 

 

Interest expense

 

(7,853

)

 

 

(7,504

)

Unrealized gain on investment in restricted equity securities

 

1,680

 

 

 

 

Investment income and other, net

 

4,576

 

 

 

3,133

 

Total other expense, net

 

(1,597

)

 

 

(4,371

)

Loss before benefit from income taxes

 

(102,594

)

 

 

(41,818

)

Benefit from income taxes

 

(479

)

 

 

 

Net loss

 

(102,115

)

 

 

(41,818

)

Unrealized gain (loss) on available-for-sale securities, net of tax

 

1,699

 

 

 

(1,847

)

Comprehensive loss

$

(100,416

)

 

$

(43,665

)

Net loss per share, basic and diluted

$

(1.12

)

 

$

(0.47

)

Weighted average common shares outstanding, basic and diluted

 

91,056

 

 

 

89,526

 

See accompanying notes to the condensed consolidated financial statements.

4


NEUROCRINE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

For the Three Months Ended

March 31,

 

(in thousands)

2019

 

 

2018

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net loss

$

(102,115

)

 

$

(41,818

)

Reconciliation of net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

1,566

 

 

 

786

 

Amortization of debt discount

 

4,598

 

 

 

4,265

 

Amortization of debt issuance costs

 

341

 

 

 

326

 

(Accretion) amortization of discounts/premiums on investments, net

 

(290

)

 

 

512

 

Share-based compensation expense

 

15,764

 

 

 

19,879

 

Change in fair value of investment in restricted equity securities

 

(1,680

)

 

 

 

Other

 

116

 

 

 

(229

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(15,724

)

 

 

(13,497

)

Inventory

 

(1,753

)

 

 

(309

)

Other current assets

 

(2,110

)

 

 

(441

)

Accounts payable and accrued liabilities

 

(16,567

)

 

 

(7,870

)

Other liabilities

 

5,363

 

 

 

(90

)

Net cash used in operating activities

 

(112,491

)

 

 

(38,486

)

blank

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchases of investments

 

(116,307

)

 

 

(139,354

)

Sales and maturities of investments

 

215,936

 

 

 

84,086

 

Investment in equity securities

 

(54,720

)

 

 

 

Purchases of property and equipment

 

(3,939

)

 

 

(1,800

)

Proceeds from sales of property and equipment

 

4

 

 

 

18

 

Net cash provided by (used in) investing activities

 

40,974

 

 

 

(57,050

)

blank

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Issuance of common stock

 

2,581

 

 

 

16,135

 

Net cash provided by financing activities

 

2,581

 

 

 

16,135

 

Change in cash and cash equivalents and restricted cash

 

(68,936

)

 

 

(79,401

)

Cash and cash equivalents and restricted cash at beginning of the period

 

147,191

 

 

 

259,212

 

Cash and cash equivalents and restricted cash at end of the period

$

78,255

 

 

$

179,811

 

 

Supplemental Disclosure:

 

 

 

 

 

 

 

Non-cash capital expenditures

$

615

 

 

$

 

See accompanying notes to the condensed consolidated financial statements.

 

5


NEUROCRINE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY  

(unaudited)

 

 

Common Stock

 

 

Additional

Paid

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

(in thousands)

Shares

 

 

Amount

 

 

in Capital

 

 

(Loss) Gain

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2017

 

88,794

 

 

$

89

 

 

$

1,572,765

 

 

$

(1,850

)

 

$

(1,198,866

)

 

$

372,138

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,818

)

 

 

(41,818

)

Unrealized loss on available-for-sale investments

 

 

 

 

 

 

 

 

 

 

(1,847

)

 

 

 

 

 

(1,847

)

Share-based compensation expense

 

 

 

 

 

 

 

19,879

 

 

 

 

 

 

 

 

 

19,879

 

Issuance of common stock for vested restricted

   stock units

 

343

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for stock option exercises

 

745

 

 

 

1

 

 

 

16,134

 

 

 

 

 

 

 

 

 

16,135

 

Balance at March 31, 2018

 

89,882

 

 

$

90

 

 

$

1,608,778

 

 

$

(3,697

)

 

$

(1,240,684

)

 

$

364,487

 

blank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

90,797

 

 

$

91

 

 

$

1,660,361

 

 

$

(1,932

)

 

$

(1,177,755

)

 

$

480,765

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(102,115

)

 

 

(102,115

)

Unrealized gain on available-for-sale investments, net

   of tax

 

 

 

 

 

 

 

 

 

 

1,699

 

 

 

 

 

 

1,699

 

Share-based compensation expense

 

 

 

 

 

 

 

15,764

 

 

 

 

 

 

 

 

 

15,764

 

Cumulative-effect adjustment to equity due to adoption

   of ASU 2016-02

 

 

 

 

 

 

 

 

 

 

 

 

 

8,043

 

 

 

8,043

 

Issuance of common stock for vested restricted stock

   units

 

353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for stock option exercises

 

95

 

 

 

 

 

 

2,581

 

 

 

 

 

 

 

 

 

2,581

 

Issuance of common stock for employee stock purchase

   plan

 

39

 

 

 

 

 

 

2,538

 

 

 

 

 

 

 

 

 

2,538

 

Balance at March 31, 2019

 

91,284

 

 

$

91

 

 

$

1,681,244

 

 

$

(233

)

 

$

(1,271,827

)

 

$

409,275

 

See accompanying notes to the condensed consolidated financial statements.

6


NEUROCRINE BIOSCIENCES, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Significant Accounting Policies

 

Description of Business. Neurocrine Biosciences, Inc.  (Neurocrine, we, our or us) is a neuroscience-focused, biopharmaceutical company with more than 25 years of experience discovering and developing life-changing treatments for people with serious, challenging and under-addressed neurological, endocrine, and psychiatric disorders. We specialize in targeting and interrupting disease-causing mechanisms involving the interconnected pathways of the nervous and endocrine systems.

Our portfolio includes United States Food and Drug Administration (FDA)-approved treatments for tardive dyskinesia (TD) and endometriosis and clinical development programs in multiple therapeutic areas including Parkinson’s disease, congenital adrenal hyperplasia, and uterine fibroids. Our treatment for endometriosis and our product candidate for uterine fibroids are partnered with AbbVie, Inc. (AbbVie). In addition, in January 2019, we entered into a collaboration and license agreement with Voyager Therapeutics, Inc. (Voyager), focused on the development and commercialization of four programs using Voyager’s propriety gene therapy platform, including one clinical development program for advanced Parkinson’s disease patients, VY-AADC.

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions of the Securities and Exchange Commission (SEC) on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, the condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of our financial position and of the results of operations and cash flows for the periods presented. The accompanying unaudited condensed consolidated financial statements include the accounts of  Neurocrine and our wholly owned subsidiaries.

These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2018, included in our Annual Report on Form 10-K (2018 Form 10-K) filed with the SEC. The results of operations for the interim period shown in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The condensed consolidated balance sheet at December 31, 2018, has been derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

There were no significant changes to our significant accounting policies as disclosed in the 2018 Form 10-K.

Recently Adopted Accounting Pronouncements.

ASU 2016-02. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)”, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. ASU 2016-02 also requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. On January 1, 2019, we adopted ASU 2016-02 using the modified retrospective transition method. Under this transition method, we recognized and measured leases that existed at the application date in our condensed consolidated balance sheet as of January 1, 2019.

Arrangements that are determined to be operating leases at inception are included in operating lease assets, noncurrent operating lease liabilities, and other current liabilities in our condensed consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As none of our operating leases provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset is adjusted for any prepaid or accrued lease payments and any lease incentives received. Operating lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which we have elected to account for as a single lease component. Further, we have elected to recognize our short-term lease payments in profit or loss on a straight-line basis over the associated lease term and variable lease payments in the period in which the obligation for those payments is incurred. Short-term and variable lease payments were not material in the first quarter of 2019.

7


In connection with the adoption of ASU 2016-02, we elected the package of practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the lease classification of any expired or existing leases, or initial direct costs for any existing leases. We also made accounting policy elections not to apply the recognition requirements under ASU 2016-02 to any of our short-term leases and to account for each separate lease and associated nonlease components as a single lease component for all of our leases.

In preparation for implementation of ASU 2016-02, we finalized key accounting assessments and updated processes to appropriately recognize and present the associated financial information. Based on these efforts, the adoption of ASU 2016-02 resulted in the recognition of (1) ROU assets of $50.0 million and operating lease liabilities of $70.9 million, resulting from leases of office and laboratory space; (2) the derecognition of deferred rent of $20.9 million for certain lease incentives received; and (3) a cumulative-effect adjustment of $8.0 million to the opening balance of the accumulated deficit as of January 1, 2019, resulting from the recognition of an existing deferred gain on sale of real estate. The comparative prior period information continues to be reported under the accounting standards in effect during those periods. Further, we expect the adoption of ASU 2016-02 to be immaterial to our condensed consolidated statements of operations and comprehensive loss and statements of cash flows on an ongoing basis.

ASU 2018-07. In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. On January 1, 2019, we adopted ASU 2018-07 using the modified retrospective transition method with no impact on our condensed consolidated financial statements. Further, we expect the adoption of ASU 2018-07 to be immaterial to our condensed consolidated balance sheets, statements of operations and comprehensive loss, and statements of cash flows on an ongoing basis.

2. Significant Collaboration and Licensing Agreements

Voyager. In January 2019, we entered into a collaboration and license agreement with Voyager, a clinical-stage gene therapy company. The agreement is focused on the development and commercialization of four programs using Voyager’s proprietary gene therapy platform. The four programs consist of the VY-AADC program for Parkinson’s disease and VY-FXN program for Friedreich’s ataxia, and the rights to two programs to be determined by the parties in the future. The agreement became effective on March 11, 2019 (the date of closing), upon expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

In connection with the agreement, we paid Voyager $115.0 million upfront and purchased $50.0 million of Voyager’s common stock at $11.9625 per share, representing approximately 4.2 million shares. Pursuant to the terms of the agreement, Voyager may also be entitled to an additional $1.7 billion in development, regulatory, and commercial milestones across the four programs, as well as royalties on net sales of any collaboration product.

Pursuant to development plans agreed to by us and Voyager, unless Voyager exercises its co-development and co-commercialization rights as provided for in the agreement, we will be responsible for all development costs. Further, upon the occurrence of a specified event for each program, we will assume responsibility for the development, manufacturing, and commercialization activities of such program.

We accounted for the transaction as an asset acquisition as the set of acquired assets did not constitute a business. Our equity investment in Voyager was recorded at a fair value of $54.7 million after considering Voyager’s stock price on the date of closing and certain lock-up and voting provisions applicable to the acquired shares. The remaining $113.1 million of the purchase price, which includes the applicable transaction costs, was expensed as in-process research and development (IPR&D) as the general lack of discernable future benefits at the time the costs were incurred indicated that the immediate recognition principle of expense recognition should apply.

We may terminate the agreement upon 180 days written notice to Voyager prior to the first commercial sale of any collaboration product or upon 1 year after the date of notice if such notice is provided after the first commercial sale of any collaboration product. Unless terminated earlier, the agreement will continue in effect until the expiration of the last to expire royalty term with respect to any collaboration product or the last expiration or termination of any exercised co-development and co-commercialization rights by Voyager as provided for in the agreement.

BIAL – Portela & Ca, S.A. In February 2017, we entered into an exclusive license agreement with BIAL – Portela & Ca, S.A. (BIAL) for the development and commercialization of opicapone for the treatment of human diseases and conditions, including as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in adult Parkinson's disease patients, in the United States (U.S.) and Canada. We paid BIAL an upfront license fee of $30.0 million and have agreed to make additional regulatory event-based payments of up to $40.0 million, of which $10.0 million has been paid as of March 31, 2019, and up to an additional $75.0 million in commercial event-based payments.

Mitsubishi Tanabe Pharma Corporation. In March 2015, we entered into a collaboration and license agreement with Mitsubishi Tanabe Pharma Corporation (MTPC) for the development and commercialization of INGREZZA for movement disorders in Japan

8


and other select Asian markets. MTPC made an upfront payment of $30.0 million and has agreed to make an additional $85.0 million in development and regulatory event-based payments, payments for the manufacture of pharmaceutical products, and royalties on product sales in select territories in Asia.

 

Since inception of the agreement, we have recognized revenue of $19.8 million associated with the delivery of a technology license and existing know-how, and $15.0 million in development event-based payments resulting from MTPC’s initiation of Phase II/III clinical trials of INGREZZA in TD in Asia. In accordance with our continuing performance obligations, $10.2 million of the $30.0 million upfront payment is being deferred to be recognized in future periods. Under the terms of the agreement, there is no general obligation to return the upfront payment for any non-contingent deliverable.

AbbVie. In June 2010, we entered into an exclusive worldwide collaboration with AbbVie, to develop and commercialize elagolix and all next-generation gonadotropin-releasing factor antagonists for women’s and men’s health. AbbVie made an upfront payment of $75.0 million and has agreed to make additional development and regulatory event-based payments of up to $480.0 million, of which $115.0 million has been earned as of March 31, 2019, and up to an additional $50.0 million in commercial event-based payments.

 

3. Investments

Available-for-sale securities are carried at fair value, with any unrealized gains and losses reported in comprehensive loss. The amortized cost of debt securities in this category is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in investment income and other, net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income and other, net. Further, investments in equity securities of certain companies that are subject to holding period restrictions longer than 1 year are carried at fair value, with any unrealized gains or losses reported in other expense, net.

Investments consist of the following:

 

(in thousands)

 

March 31,

2019

 

 

December 31,

2018

 

Commercial paper

 

$

97,490

 

 

$

94,572

 

Corporate debt securities

 

 

441,615

 

 

 

544,978

 

Securities of government sponsored entities

 

 

88,874

 

 

 

85,677

 

Restricted equity securities

 

 

56,400

 

 

 

 

Total investments

 

$

684,379

 

 

$

725,227

 

 

9


Investments classified as available-for-sale securities consist of the following:

 

(in thousands)

 

Contractual

Maturity

(in years)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains(1)

 

 

Gross

Unrealized

Losses(1)

 

 

Aggregate

Estimated

Fair

Value

 

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Less than 1

 

$

97,517

 

 

$

14

 

 

$

(41

)

 

$

97,490

 

Corporate debt securities

 

Less than 1

 

 

308,363

 

 

 

79

 

 

 

(404

)

 

 

308,038

 

Securities of government-sponsored entities

 

Less than 1

 

 

45,718

 

 

 

65

 

 

 

(21

)

 

 

45,762

 

Total short-term available-for-sale securities

 

 

 

$

451,598

 

 

$

158

 

 

$

(466

)

 

$

451,290

 

Classified as non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

1 to 2

 

$

133,179

 

 

$

438

 

 

$

(40

)

 

 

133,577

 

Securities of government-sponsored entities

 

1 to 2

 

 

42,868

 

 

 

244

 

 

 

 

 

 

43,112

 

Total long-term available-for-sale securities

 

 

 

$

176,047

 

 

$

682

 

 

$

(40

)

 

$

176,689

 

blank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Less than 1

 

$

94,617

 

 

$

 

 

$

(45

)

 

$

94,572

 

Corporate debt securities

 

Less than 1

 

 

395,385

 

 

 

 

 

 

(1,598

)

 

 

393,787

 

Securities of government-sponsored entities

 

Less than 1

 

 

20,887

 

 

 

8

 

 

 

(55

)

 

 

20,840

 

Total short-term available-for-sale securities

 

 

 

$

510,889

 

 

$

8

 

 

$

(1,698

)

 

$

509,199

 

Classified as non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

1 to 2

 

$

151,594

 

 

$

66

 

 

$

(469

)

 

$

151,191

 

Securities of government-sponsored entities

 

1 to 2

 

 

64,676

 

 

 

162

 

 

 

(1

)

 

 

64,837

 

Total long-term available-for-sale securities

 

 

 

$

216,270

 

 

$

228

 

 

$

(470

)

 

$

216,028

 

 

(1)

Unrealized gains and losses, net of tax, are included in other comprehensive loss.

The following table presents gross unrealized losses and fair value for those available-for-sale investments that were in an unrealized loss position, aggregated by investment category and length of time that individual securities have been in a continuous loss position:

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

(in thousands)

 

Estimated

Fair

Value

 

 

Unrealized

Losses

 

 

Estimated

Fair

Value

 

 

Unrealized

Losses

 

 

Estimated

Fair

Value

 

 

Unrealized

Losses

 

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

31,457

 

 

$

(41

)

 

$

 

 

$

 

 

$

31,457

 

 

$

(41

)

Corporate debt securities

 

 

63,323

 

 

 

(50

)

 

 

174,206

 

 

 

(394

)

 

 

237,529

 

 

 

(444

)

Securities of government-sponsored entities

 

 

 

 

 

 

 

 

10,979

 

 

 

(21

)

 

 

10,979

 

 

 

(21

)

Total

 

$

94,780

 

 

$

(91

)

 

$

185,185

 

 

$

(415

)

 

$

279,965

 

 

$

(506

)

blank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

51,927

 

 

$

(45

)

 

$

 

 

$

 

 

$

51,927

 

 

$

(45

)

Corporate debt securities

 

 

274,696

 

 

 

(746

)

 

 

234,798

 

 

 

(1,321

)

 

 

509,494

 

 

 

(2,067

)

Securities of government-sponsored entities

 

 

4,999

 

 

 

(1

)

 

 

10,947

 

 

 

(55

)

 

 

15,946

 

 

 

(56

)

Total

 

$

331,622

 

 

$

(792

)

 

$

245,745

 

 

$

(1,376

)

 

$

577,367

 

 

$

(2,168

)

 

At each reporting date, we perform an evaluation of impairment to determine if any unrealized losses are other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer, and our intent and ability to hold the investment until recovery of the amortized cost basis. We intend and have the ability to hold our investments in unrealized loss positions until their amortized cost basis has been recovered. Further, based on our evaluation, we determined that unrealized losses were not other-than-temporary at March 31, 2019 and December 31, 2018.

10


4. Fair Value Measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1:

Observable inputs such as quoted prices in active markets;

 

Level 2:

Inputs include quoted prices for similar instruments in active markets and/or quoted prices for identical or similar instruments in markets that are not active near the measurement date; and

 

Level 3:

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

We classify our cash equivalents and available-for-sale investments within Level 1 or Level 2. The fair value of our investment grade corporate debt securities is determined using proprietary valuation models and analytical tools, which utilize market pricing or prices for similar instruments that are both objective and publicly available, such as matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, and offers.

The fair value of our investments in restricted equity securities is determined using an option pricing valuation model and classified as Level 3 within the fair value hierarchy. The most significant assumptions within the option pricing valuation model are the term of the restrictions and the stock price volatility, which is based upon the historical volatility of similar companies. Significant changes in any of those inputs in isolation would result in a significantly higher or lower fair value measurement.

The $517.5 million of 2.25% convertible senior notes due May 15, 2024 (2024 Notes) were recorded at the estimated value of a similar non-convertible instrument on the date of issuance and accretes to the face value of the 2024 Notes over their 7-year term. The fair value of the 2024 Notes, estimated utilizing market quotations from an over-the-counter trading market (Level 2), was $700.9 million as of March 31, 2019 and $616.1 million as of December 31, 2018. Refer to Note 7 for more information.

We did not reclassify any investments between levels in the fair value hierarchy during the first quarter of 2019 or 2018.

11


Investments, which were measured at fair value on a recurring basis using the inputs described above, consisted of the following:

 

 

 

blank

 

 

Fair Value Measurements Using

 

(in millions)

 

Carrying

Value

 

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

72.8

 

 

$

72.8

 

 

$

 

 

$

 

Commercial paper

 

 

97.5

 

 

 

 

 

 

97.5

 

 

 

 

Securities of government-sponsored entities

 

 

45.8

 

 

 

 

 

 

45.8

 

 

 

 

Corporate debt securities

 

 

308.0

 

 

 

 

 

 

308.0

 

 

 

 

Subtotal

 

 

524.1

 

 

 

72.8

 

 

 

451.3

 

 

 

 

Classified as long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

 

1.5

 

 

 

1.5

 

 

 

 

 

 

 

Certificates of deposit

 

 

4.0

 

 

 

4.0

 

 

 

 

 

 

 

Securities of government-sponsored entities

 

 

43.1

 

 

 

 

 

 

43.1

 

 

 

 

Corporate debt securities

 

 

133.6

 

 

 

 

 

 

133.6

 

 

 

 

Restricted equity securities

 

 

56.4

 

 

 

 

 

 

 

 

 

56.4

 

Total

 

 

762.7

 

 

 

78.3

 

 

 

628.0

 

 

 

56.4

 

Less cash and cash equivalents and restricted cash

 

 

(78.3

)

 

 

(78.3

)

 

 

 

 

 

 

Total investments

 

$

684.4

 

 

$

 

 

$

628.0

 

 

$

56.4

 

blank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

141.7

 

 

$

141.7

 

 

$

 

 

$

 

Commercial paper

 

 

94.6

 

 

 

 

 

 

94.6

 

 

 

 

Securities of government-sponsored entities

 

 

20.8

 

 

 

 

 

 

20.8

 

 

 

 

Corporate debt securities

 

 

393.8

 

 

 

 

 

 

393.8

 

 

 

 

Subtotal