fgen-10q_20170331.htm

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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:

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 Exchange Act Rule 12b-2). Yes ☐ No ☑

The number of shares of common stock outstanding as of April 28, 2017 was 69,944,209.

	March 31, 2017			December 31, 2016
				(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	170,598		$	173,782
Short-term investments		72,824			79,397
Accounts receivable ($3,604 and $4,102 from a related party)		7,248			10,448
Prepaid expenses and other current assets		5,911			2,889
Total current assets		256,581			266,516

Restricted time deposits		6,217			6,217
Long-term investments		53,155			71,010
Property and equipment, net		122,818			123,657
Other assets		2,985			2,152
Total assets	$	441,756		$	469,552

Liabilities, stockholders’ equity and non-controlling interests
Current liabilities:
Accounts payable	$	2,950		$	6,223
Accrued liabilities ($289 and $1,615 to related parties)		49,179			50,914
Deferred revenue		7,984			7,988
Total current liabilities		60,113			65,125

Long-term portion of lease financing obligations		97,536			97,352
Product development obligations		15,152			14,854
Deferred rent		4,075			4,212
Deferred revenue, net of current		108,068			106,709
Other long-term liabilities		5,840			6,191
Total liabilities		290,784			294,443

Commitments and Contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value; 125,000 shares authorized at March 31, 2017 and December 31, 2016; no shares issued and outstanding at March 31, 2017 and December 31, 2016		—			—
Common stock, $0.01 par value; 225,000 shares authorized at March 31, 2017 and December 31, 2016; 64,422 and 63,665 shares issued and outstanding at March 31, 2017 and December 31, 2016		644			637
Additional paid-in capital		634,980			625,903
Accumulated other comprehensive loss		(1,020	)		(960	)
Accumulated deficit		(502,903	)		(469,742	)
Total stockholders’ equity		131,701			155,838
Non-controlling interests		19,271			19,271
Total equity		150,972			175,109
Total liabilities, stockholders’ equity and non-controlling interests	$	441,756		$	469,552

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

	Three Months Ended March 31,
	2017			2016
Revenue:
License and milestone revenue (includes $3,249 and $3,313 from a related party)	$	19,581		$	19,738
Collaboration services and other revenue (includes $340 and $352 from a related party)		7,310			8,544
Total revenue		26,891			28,282

Operating expenses:
Research and development		46,732			43,650
General and administrative		11,530			11,417
Total operating expenses		58,262			55,067
Loss from operations		(31,371	)		(26,785	)

Interest and other, net
Interest expense		(2,375	)		(2,777	)
Interest income and other, net		645			1,416
Total interest and other, net		(1,730	)		(1,361	)

Loss before income taxes		(33,101	)		(28,146	)
Provision for (benefit from) income taxes		60			(305	)
Net loss	$	(33,161	)	$	(27,841	)

Net loss per share - basic and diluted	$	(0.52	)	$	(0.45	)
Weighted average number of common shares used to calculate net loss per share - basic and diluted		64,037			62,184

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

	Three Months Ended March 31,
	2017			2016
Net loss	$	(33,161	)	$	(27,841	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(255	)		(642	)
Available-for-sale investments:
Unrealized gain on investments, net of tax effect		179			589
Reclassification from accumulated other comprehensive loss		16			—
Net change in unrealized gain on available-for-sale investments		195			589
Other comprehensive loss, net of taxes		(60	)		(53	)
Comprehensive loss	$	(33,221	)	$	(27,894	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

	Three Months Ended March 31,
	2017			2016
Operating activities
Net loss	$	(33,161	)	$	(27,841	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,525			1,502
Amortization of premium on investments		613			695
Unrealized loss (gain) on short-term investments		1			(620	)
Loss on disposal of property and equipment		(4	)		—
Stock-based compensation		8,409			7,340
Tax benefit on unrealized gain on available-for-sale securities		—			(339	)
Realized gain on sales of available-for-sale securities		(30	)		—
Changes in operating assets and liabilities:
Accounts receivable		3,200			9,468
Prepaid expenses and other current assets		(2,943	)		(663	)
Other assets		(833	)		358
Accounts payable		(3,273	)		(4,978	)
Accrued liabilities		(1,916	)		(3,214	)
Deferred revenue		1,355			190
Lease financing liability		335			136
Other long-term liabilities		(413	)		708
Net cash used in operating activities		(27,135	)		(17,258	)

Investing activities
Purchases of property and equipment		(636	)		(898	)
Proceeds from sale of property and equipment		5			—
Purchases of available-for-sale securities		(30	)		(19	)
Proceeds from sales of available-for-sale securities		10,205			—
Proceeds from maturities of available-for-sale securities		13,864			5,976
Net cash provided by investing activities		23,408			5,059

Financing activities
Repayments of lease liability		(101	)		(101	)
Cash paid for payroll taxes on restricted stock unit releases		(2,424	)		(1,261	)
Proceeds from issuance of common stock		3,099			1,213
Net cash provided by (used in) financing activities		574			(149	)
Effect of exchange rate change on cash and cash equivalents		(31	)		(17	)
Net decrease in cash and cash equivalents		(3,184	)		(12,365	)
Total cash and cash equivalents at beginning of period		173,782			153,324
Total cash and cash equivalents at end of period	$	170,598		$	140,959

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

FibroGen, Inc. (“FibroGen” or the “Company”) was incorporated in 1993 in Delaware and is a research-based biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics agents to treat serious unmet medical needs. The Company’s focus in the areas of fibrosis and hypoxia-inducible factor (“HIF”) biology has generated multiple programs targeting various therapeutic areas. The Company’s most advanced product candidate, roxadustat, or FG-4592, is an oral small molecule inhibitor of HIF prolyl hydroxylases (“HIF-PHs”) in Phase 3 clinical development for the treatment of anemia in chronic kidney disease (“CKD”). Pamrevlumab, or FG-3019, is the Company’s monoclonal antibody in Phase 2 clinical development for the treatment of idiopathic pulmonary fibrosis (“IPF”), pancreatic cancer, Duchenne muscular dystrophy (“DMD”) and liver fibrosis. The Company has taken a global approach with respect to the development and future commercialization of its product candidates, and this includes development and commercialization in the People’s Republic of China (“China”). The Company is capitalizing on its extensive experience in fibrosis and hypoxia inducible factor (“HIF”) biology and clinical development to advance a pipeline of innovative medicines for the treatment of anemia, fibrotic disease cancer, corneal blindness and other serious unmet medical needs.

The condensed consolidated financial statements include the accounts of FibroGen, its wholly owned subsidiaries and its majority-owned subsidiaries, FibroGen Europe Oy and FibroGen China Anemia Holdings, Ltd. (“FibroGen China”). All inter-company transactions and balances have been eliminated in consolidation. The Company operates in one segment — the discovery, development and commercialization of novel therapeutics to treat serious unmet medical needs.

The unaudited condensed consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) applicable to interim financial reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the United States (“U.S.”) Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and footnote disclosures normally included in the annual consolidated financial statements. The December 31, 2016 condensed consolidated balance sheet data contained within this Form 10-Q was derived from audited consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2016 (“2016 Form 10-K”), but does not include all disclosures required by U.S. GAAP.

The financial information included herein should be read in conjunction with the consolidated financial statements and related notes in the 2016 Form 10-K. The accounting policies used by the Company in its presentation of interim financial results are consistent with those presented in Note 2 to the consolidated financial statements included in the 2016 Form 10-K.

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions include valuation and recognition of revenue, estimates of accruals related to clinical trial costs, valuation allowances for deferred tax assets, and valuation and recognition of stock-based compensation. On an ongoing basis, management reviews these estimates and assumptions. Changes in facts and circumstances may alter such estimates and actual results could differ from those estimates. In our opinion, the accompanying unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718). This guidance identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This guidance was effective for the annual reporting period beginning after December 15, 2016, including interim periods within that reporting period. The Company adopted this guidance as of January 1, 2017 and has elected to continue with its existing policy to estimate forfeitures expected to occur when calculating stock compensation expense. Upon adoption, the Company recorded a retrospective increase of $19.5 million in deferred tax assets for previously unrecognized excess tax benefits that existed as of December 31, 2016, and a corresponding increase of $19.5 million in the valuation allowance against these deferred tax assets, as substantially all of the Company’s U.S. and foreign deferred tax assets, net of deferred tax liabilities, are subject to a full valuation allowance. As such, the net impact to the Company’s accumulated deficit was zero, resulted from these retrospective adjustments. The adoption of this guidance had no impact to the Company’s consolidated financial statements for the three months ended March 31, 2017.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability. This guidance is effective for the annual reporting period beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for the annual reporting period beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this guidance.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10). This guidance requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income, simplifies the impairment assessment of certain equity investments, and updates certain presentation and disclosure requirements. This guidance is effective for the annual reporting period beginning after December 15, 2017 and interim periods within those annual periods. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this guidance.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”). The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective). The Company has commenced its implementation activities related to the adoption of ASU 2014-09 and is in the process of applying the five-step model of the new standard to its various revenue related arrangements. The Company has completed step 1 (Identify the contract(s) with a customer) and concluded that its collaboration agreements with Astellas Pharma Inc. and AstraZeneca AB are the only material contracts which

will be impacted by the adoption of the new revenue standards. The Company is in the process of completing step 2 (Identify the performance obligations in the contract) and has not yet reached a conclusion on whether the distinct criteria evaluated under ASC 605-25 for each performance obligation would result in a similar conclusion under the new revenue standards. With respect to milestones that were previously recognized under ASC 605-28, the milestone method is not applicable under the new revenue standards, and they are considered part of the overall arrangement consideration which will result in a deferral of revenue under the new revenue standards as part of the adoption. The Company will adopt the new revenue standards in the first quarter of 2018 and apply the full retrospective method to restate each prior reporting period presented in the consolidated financial statements. The new revenue standard is principle based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice, and guidance may evolve as companies and the accounting profession work to implement this new standard. As the Company completes its evaluation of this new standard, new information may arise that could change the Company's current understanding of the impact to revenues recognized and its views on the expected impact to the periods prior to adoption.

In June 2005, the Company entered into a collaboration agreement with Astellas Pharma Inc. (“Astellas”) for the development and commercialization (but not manufacture) of roxadustat for the treatment of anemia in Japan (“Japan Agreement”). Under this agreement, Astellas paid license fees and other consideration totaling $40.1 million (such amounts were fully received as of February 2009). The Japan Agreement also provides for additional development and regulatory approval milestone payments up to $117.5 million, a commercial sales related milestone of $15.0 million and additional consideration based on net sales (as defined) in the low 20% range after commercial launch. A clinical milestone payment of $12.5 million was received in 2013. During the second quarter of 2016, the Company recognized $10.0 million of revenue as a result of the initiation by Astellas of the first Phase 3 clinical study in Japan of roxadustat for treatment of anemia associated with chronic kidney disease in patients on dialysis. The amount was received in early July 2016. The Company evaluated the criteria under ASC 605-28 and concluded that the aforementioned milestone was substantive.

In April 2006, the Company entered into a separate collaboration agreement with Astellas for the development and commercialization of roxadustat for the treatment of anemia in Europe, the Middle East, the Commonwealth of Independent States and South Africa (“Europe Agreement”). Under the terms of the Europe Agreement, Astellas paid license fees and other upfront consideration totaling $320.0 million (such amounts were fully received as of February 2009). The Europe Agreement also provides for additional development and regulatory approval milestone payments up to $425.0 million. Clinical milestone payments of $40.0 million and $50.0 million were received in 2010 and 2012, respectively. The Company evaluated the criteria under ASC 605-28 and concluded that each of those milestones was substantive. Under the Europe Agreement, Astellas committed to fund 50% of joint development costs for Europe and North America, and all territory-specific costs. The Europe Agreement also provides for tiered payments based on net sales of product (as defined) in the low 20% range.

Effective July 30, 2013, the Company entered into a collaboration agreement with AstraZeneca AB (“AstraZeneca”) for the development and commercialization of roxadustat for the treatment of anemia in the U.S. and all other countries in the world, other than China, not previously licensed under the Astellas Europe and Astellas Japan Agreements (“U.S./RoW Agreement”). It also excludes China, which is covered by a separate agreement with AstraZeneca described below. Under the terms of the U.S./RoW Agreement, AstraZeneca has agreed to pay upfront, non-contingent and time-based payments totaling $374.0 million, which were fully received in various amounts through June 2016. In addition, the U.S./RoW Agreement also provides for development and regulatory approval based milestone payments of up to $550.0 million, which include potential future indications which the companies choose to pursue, and commercial related milestone payments of up to $325.0 million. During 2015, the Company received a $15.0 million development milestone payment as a result of the finalization of its two audited pre-clinical carcinogenicity study reports. The Company evaluated the criteria under ASC 605-28 and concluded that the aforementioned milestone was substantive.

Under the U.S./RoW Agreement, the Company and AstraZeneca will share equally in the development costs of roxadustat not already paid for by Astellas, up to a total of $233.0 million (i.e. the Company’s share of development costs is $116.5 million, which was reached during the fourth quarter of 2015). Any additional development costs incurred by FibroGen during the development period in excess of the $233.0 million (aggregated spend) will be fully reimbursed by AstraZeneca. AstraZeneca will pay the Company tiered royalty payments on AstraZeneca’s future net sales (as defined in the agreement) of roxadustat in the low 20% range. In addition, the Company will receive a transfer price for delivery of commercial product based on a percentage of AstraZeneca’s net sales (as defined in the agreement) in the low- to mid-single digit range.

Effective July 30, 2013, the Company (through its subsidiaries affiliated with China) entered into a collaboration agreement with AstraZeneca for the development and commercialization (but not manufacture) of roxadustat for the treatment of anemia in China (“China Agreement”). Under the terms of the China Agreement, AstraZeneca agreed to pay upfront consideration totaling $28.2 million, which were fully received in 2014. In addition, the China Agreement provides for AstraZeneca to pay regulatory approval and other approval related milestones of up to $161.0 million. The China Agreement also provides for sales related milestone payments of up to $167.5 million and contingent payments of $20.0 million related to possible future compounds. The China Agreement is structured as a 50/50 profit or loss share (as defined) and provides for joint development costs (including capital and equipment costs for construction of the manufacturing plant in China), to be shared equally during the development.

In September 2016, AstraZeneca approved the protocol related to the development of roxadustat for the treatment of anemia in patients with myelodysplastic syndromes (“MDS”), for which the Company has received approval from the China Food and Drug Administration for its clinical trial application for a Phase 2/3 trial and acceptance of its investigational new drug application from the U.S. Food and Drug Administration for a Phase 3 trial. As a result, for revenue recognition purposes, during the third quarter of 2016, the Company extended the estimated joint development service period for the AstraZeneca agreements from the end of 2018 to the end of 2020, to allow for development of MDS.

The table below summarizes the accounting treatment for the various deliverables pursuant to each of the Astellas and AstraZeneca agreements. License amounts identified below are included in the “License and milestone revenue” line item in the condensed consolidated statements of operations. All other elements identified below are included in the “Collaboration services and other revenue” line item in the condensed consolidated statements of operations.

Amounts recognized as revenue under the Japan Agreement were as follows (in thousands):

The total arrangement consideration has been allocated to each of the following deliverables under the Japan Agreement, along with any associated deferred revenue as follows (in thousands):

	Cumulative Revenue Through March 31, 2017		Deferred Revenue at March 31, 2017		Total Consideration Through March 31, 2017
License	$	45,922	$	—	$	45,922
When and if available compounds		22		25		47
Manufacturing--clinical supplies		2,131		—		2,131
Committee services		20		—		20
Total license and collaboration services revenue	$	48,095	$	25	$	48,120

Amounts recognized as revenue under the Europe Agreement were as follows (in thousands):

The total arrangement consideration has been allocated to each of the following deliverables under the Europe Agreement, along with any associated deferred revenue as follows (in thousands):

	Cumulative Revenue Through March 31, 2017		Deferred Revenue at March 31, 2017		Total Consideration Through March 31, 2017
License	$	415,309	$	—	$	415,309
When and if available compounds		387		404		791
Manufacturing--clinical supplies		9,948		—		9,948
Development services--in progress		33,275		—		33,275
Committee services		287		—		287
Total license and collaboration services revenue	$	459,206	$	404	$	459,610

Amounts recognized as revenue under the U.S./RoW Agreement were as follows (in thousands):

The total arrangement consideration has been allocated to each of the following deliverables under the U.S./RoW Agreement, along with any associated deferred revenue as follows (in thousands):

	Cumulative Revenue Through March 31, 2017		Deferred Revenue at March 31, 2017		Total Consideration Through March 31, 2017
License	$	419,029	$	—	$	419,029
Co-development, information sharing & committee services		97,719		29,680		127,399
Manufacturing--clinical supplies		383		53		436
China-single unit of accounting		—		85,890		85,890
Total license and collaboration services revenue	$	517,131	$	115,623	$	632,754

Other revenues consist of royalty payments received, which are recorded on a monthly basis as they are reported to the Company, and collagen feasibility sales. Other revenues were immaterial for all periods presented.

Deferred revenue represents amounts billed to the Company’s collaboration partners for which the related revenues have not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of deferred revenue represents the amount to be recognized within one year from the balance sheet date based on the estimated performance period of the underlying deliverables. The long term portion of deferred revenue represents amounts to be recognized after one year through the end of the non-contingent performance period of the underlying deliverables. The long term portion of deferred revenue also includes amounts allocated to the China unit of accounting under the AstraZeneca arrangement as revenue recognition associated with this unit of accounting is tied to the commercial launch of the products within China, which is not expected to occur within the next year.

The fair values of our financial assets that are measured on a recurring basis are as follows (in thousands):

	March 31, 2017
	Level 1		Level 2		Level 3		Total
Corporate bonds	$	—	$	102,004	$	—	$	102,004
Bond and mutual funds		22,734		—		—		22,734
Equity investments		205		—		—		205
Money market funds		83,919		—		—		83,919
Certificate of deposits		—		1,036		—		1,036
Total	$	106,858	$	103,040	$	—	$	209,898

	December 31, 2016
	Level 1		Level 2		Level 3		Total
Corporate bonds	$	—	$	126,683	$	—	$	126,683
Bond and mutual funds		22,462		—		—		22,462
Equity investments		225		—		—		225
Money market funds		94,543		—		—		94,543
Certificate of deposits		—		1,037		—		1,037
Total	$	117,230	$	127,720	$	—	$	244,950

Our Level 2 investments are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar investments, issuer credit spreads, benchmark investments, prepayment/default projections based on historical data and other observable inputs.

The fair values of our financial liabilities that are carried at historical cost are as follows (in thousands):

	March 31, 2017
	Level 1		Level 2		Level 3		Total
Lease financing obligations	$	—	$	—	$	98,090	$	98,090

	December 31, 2016
	Level 1		Level 2		Level 3		Total
Lease financing obligations	$	—	$	—	$	97,856	$	97,856

The fair values of our financial liabilities were derived by using an income approach, which required Level 3 inputs such as discounted estimated future cash flows.

There were no transfers of assets or liabilities between levels for any of the periods presented.

At March 31, 2017 and December 31, 2016, a total of $24.4 million and $24.3 million, respectively, of our cash and cash equivalents were held outside of the U.S. in our foreign subsidiaries to be used primarily for our China operations.

All investments are classified as available-for-sale. The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s available-for-sale investments by major investments type are summarized in the tables below (in thousands):

	March 31, 2017
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Corporate bonds	$	101,898	$	147	$	(41	)	$	102,004
Certificate of deposits		1,036		—		—			1,036
Bond and mutual funds		22,704		205		(175	)		22,734
Equity investments		126		79		—			205
Total investments	$	125,764	$	431	$	(216	)	$	125,979

	December 31, 2016
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Corporate bonds	$	126,550	$	182	$	(49	)	$	126,683
Certificate of deposits		1,037		—		—			1,037
Bond and mutual funds		22,305		157		—			22,462
Equity investments		125		100		—			225
Total investments	$	150,017	$	439	$	(49	)	$	150,407

At March 31, 2017, all of the available-for-sale investments had contractual maturities within two years. The Company periodically reviews its available-for-sale investments for other-than-temporary impairment. The Company considers factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. For debt securities, the Company also considers whether (i) it is more likely than not that the Company will be required to sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. During the three months ended March 31, 2017, the Company did not recognize any other-than-temporary impairment loss.

Stock-based compensation expense was allocated to research and development and general and administrative expense as follows (in thousands):

The assumptions used to estimate the fair value of stock options granted and purchases under the Company’s 2014 Employee Share Purchase Plan (“ESPP”) using the Black-Scholes option valuation model were as follows:

	Three Months Ended March 31,
	2017			2016
Stock Options
Expected term (in years)		5.8			5.3
Expected volatility		71.7	%		69.5	%
Risk-free interest rate		2.3			1.4
Expected dividend yield		—			—
Weighted average estimated fair value	$	16.16		$	11.46

ESPPs
Expected term (in years)	0.5 - 2.0			0.5 - 2.0
Expected volatility	63.7 - 77.2		%	69.1 - 70.3		%
Risk-free interest rate	0.5 - 1.0		%	0.2 - 0.9		%
Expected dividend yield		—			—
Weighted average estimated fair value	$	8.86		$	13.70

The provision for income taxes for the three months ended March 31, 2017 was due to foreign taxes. The benefit from income taxes for the three months ended March 31, 2016 was primarily due to the discrete tax effect arising from other comprehensive income related to available-for-sale securities.

Based upon the weight of available evidence, which includes its historical operating performance, reported cumulative net losses since inception and expected continuing net loss, the Company has established and continue to maintain a full valuation allowance against its deferred tax assets as it does not currently believe that realization of those assets is more likely than not.

Astellas is an equity investor in the Company and considered a related party. The Company recorded revenue related to collaboration agreements with Astellas of $3.6 million and $3.7 million during the three months ended March 31, 2017 and 2016, respectively.

The Company recorded expense related to collaboration agreements with Astellas of $0.3 million and $1.6 million during the three months ended March 31, 2017 and 2016, respectively.

As of March 31, 2017 and December 31, 2016, accounts receivable from Astellas were $3.6 million and $4.1 million, respectively, and amounts due to Astellas were $0.3 million and $1.6 million, respectively.

Julian N. Stern, a director of the Company since November 1996, is of counsel to the law firm of Goodwin Procter LLP, which he joined in 2008. He has received, and continues to receive, no compensation from Goodwin Procter LLP since joining it as of counsel. The Company retains Goodwin Procter LLP as legal counsel for various matters, primarily consisting of intellectual property matters. During the three months ended March 31, 2017 and 2016, the Company’s payments to Goodwin Procter LLP were immaterial. As of March 31, 2017 and December 31, 2016, the balance of the accrued liability for Goodwin Proctor LLP was immaterial.

On April 11, 2017, the Company closed the follow-on offering of its common stock. In this offering, the Company sold 5,228,750 shares of its common stock at a public offering price of $22.95 per share. Net proceeds from this offering were $115.1 million, after deducting underwriting discounts and commissions of $4.9 million. In addition, the offering expenses were approximately $0.4 million.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and in our Securities and Exchange Commission (“SEC”) filings, including our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 1, 2017.

The following discussion and information contained elsewhere in this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), Section 27A of the Securities Act of 1933, as amended (“Securities Act”) and within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,

409 Illinois Street
San Francisco, CA		94158
(Address of Principal Executive Offices)		(Zip Code)

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	☐

		Page
PART I—FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (Unaudited)	3
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	4
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	6
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	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	29
Item 4.	Controls and Procedures	29

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3.	Defaults Upon Senior Securities	70
Item 4.	Mine Safety Disclosures	70
Item 5.	Other Information	70
Item 6.	Exhibits	70
	Signatures	71
	Exhibit Index	72

		Three Months Ended March 31,
Agreement	Deliverable	2017		2016
Europe	License	$	3,037	$	3,238
	Milestones		—		—
	Total license and milestone revenue		3,037		3,238
	Collaboration services revenue*	$	329	$	348

		Three Months Ended March 31,
Agreement	Deliverable	2017		2016
U.S. / RoW and China	License	$	16,332	$	16,425
	Milestones		—		—
	Total license and milestone revenue		16,332		16,425
	Collaboration services revenue*		6,970		8,184
	China single unit of accounting**	$	—	$	—

	March 31, 2017		December 31, 2016
Cash	$	86,679	$	79,239
Money market funds		83,919		94,543
Total cash and cash equivalents	$	170,598	$	173,782

	March 31, 2017		December 31, 2016
Preclinical and clinical trial accruals	$	31,052	$	29,550
Payroll and related accruals		9,050		14,232
Professional services		1,434		1,252
Other		7,643		5,880
Total accrued liabilities	$	49,179	$	50,914