2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been
prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”)
and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related
to a quarterly report on Form 10-Q. Accordingly, they do not include all of the information and
disclosures required by U.S. GAAP for a complete set of financial statements. These interim
unaudited condensed consolidated financial statements and notes thereto should be read in
conjunction with the audited consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on
March 11, 2011. The unaudited financial information for the interim periods presented herein
reflects all adjustments which, in the opinion of management, are necessary for a fair presentation
of the financial condition and results of operations for the periods presented, with such
adjustments consisting only of normal recurring adjustments. Operating results for interim periods
are not necessarily indicative of the operating results for an entire fiscal year.
The consolidated financial statements include the accounts of Halozyme Therapeutics, Inc. and
its wholly owned subsidiary, Halozyme, Inc. All intercompany accounts and transactions have been
eliminated.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in the Company’s
consolidated financial statements and accompanying notes. On an ongoing basis, the Company
evaluates its estimates and judgments, which are based on historical and anticipated results and
trends and on various other assumptions that management believes to be reasonable under the
circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as
such, actual results may differ from management’s estimates.
Adoption of Recent Accounting Pronouncements
Effective January 1, 2011, the Company adopted on a prospective basis Financial Accounting
Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2010-17, Revenue Recognition
(Topic 605): Milestone Method of Revenue Recognition (“Milestone Method”). ASU No. 2010-17 states
that the Milestone Method is a valid application of the proportional performance model when applied
to research or development arrangements. Accordingly, an entity can make an accounting policy
election to recognize a payment that is contingent upon the achievement of a substantive milestone
in its entirety in the period in which the milestone is achieved. The Milestone Method is not
required and is not the only acceptable method of revenue recognition for milestone payments. The
adoption of ASU No. 2010-17 did not have a material impact on the Company’s consolidated financial
position or results of operations.
Effective January 1, 2011, the Company adopted on a prospective basis FASB’s ASU No. 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASU No. 2009-13
requires an entity to allocate arrangement consideration at the inception of an arrangement to all
of its deliverables based on their relative selling prices. ASU No. 2009-13 eliminates the use of
the residual method of allocation and requires the relative-selling-price method in all
circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables
subject to Accounting Standards Code 605-25. The Company accounted for the collaborative
arrangements with ViroPharma and Intrexon under the provisions of ASU No. 2009-13, which resulted
in revenue recognition patterns that are materially different from those recognized for the
Company’s existing multiple-element arrangements.
Pending Adoption of Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation
of Comprehensive Income. In ASU No. 2011-05, an entity has the option to present the total of
comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. In both choices, an entity is required to present each component of net
income along with total net income, each component of other comprehensive income along with a total
for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05
eliminates the option to present the components of other comprehensive income as part of the
statement of changes in stockholders’ equity. The amendments in ASU No. 2011-05 do not change the
items that must be reported in other comprehensive income or when an item of other comprehensive
income must be reclassified to net income. The amendments in ASU No. 2011-05 are effective for
fiscal years, and interim period within those years, beginning after December 15, 2011. The Company
does not expect the adoption of ASU No. 2011-05 to have a material impact on its consolidated
financial position or results of operations.
Revenue Recognition
The Company generates revenues from product sales and collaborative agreements. The Company
recognizes revenues in accordance with the authoritative guidance for revenue recognition. The
Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of
an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s
price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured.
Product Sales — Revenue from the sales of API for ICSI Cumulase is recognized when the
transfer of ownership occurs, which is upon shipment to the Company’s distributor. The Company is
obligated to accept returns for product that does not meet product specifications. Historically,
the Company has not had any product returns as a result of not meeting product specifications.
In accordance with the HYLENEX Partnership with Baxter, the Company supplied Baxter with API
for HYLENEX at its fully burdened cost plus a margin. Baxter filled and finished HYLENEX and held
it for subsequent distribution, at which time the Company ensured it met product specifications and
released it as available for sale. Because of the Company’s continued involvement in the
development and production process of HYLENEX, the earnings process was not considered to be
complete. Accordingly, the Company deferred the revenue and related product costs on the API for
HYLENEX until the product was filled, finished, packaged and released. Baxter might only return the
API for HYLENEX to the Company if it did not conform to the specified criteria set forth in the
HYLENEX Partnership or upon termination of such agreement. In addition, the Company received
product-based payments upon the sale of HYLENEX by Baxter, in accordance with the terms of the
HYLENEX Partnership. Product sales revenues were recognized as the Company earned such revenues
based on Baxter’s shipments of HYLENEX to its distributors when such amounts could be reasonably
estimated. Effective January 7, 2011, the Company and Baxter mutually agreed to terminate the
HYLENEX Partnership and the associated agreements. See Note 9, “Deferred Revenue,” for further
discussion.
Revenues under Collaborative Agreements — The Company entered into license and collaboration
agreements under which the collaborative partners obtained worldwide exclusive rights for the use
of the Company’s proprietary recombinant human PH20 enzyme (“rHuPH20”) in the development and
commercialization of the partners’ biologic compounds. The collaborative agreements contain
multiple elements including nonrefundable payments at the inception of the arrangement, license
fees, exclusivity fees, payments based on achievement of specific milestones designated in the
collaborative agreements, reimbursements of research and development services, payments for supply
of rHuPH20 API for the partner and/or royalties on sales of products resulting from collaborative
agreements. The Company analyzes each element of its collaborative agreements and considers a
variety of factors in determining the appropriate method of revenue recognition of each element.
Prior to the adoption of ASU No. 2009-13 on January 1, 2011, in order for a delivered item to
be accounted for separately from other deliverables in a multiple-element arrangement, the
following three criteria had to be met: (i) the delivered item had standalone value to the
customer, (ii) there was objective and reliable evidence of fair value of the undelivered items and
(iii) if the arrangement included a general right of return relative to the delivered item,
delivery or performance of the undelivered items was considered probable and substantially in the
control of the vendor. For the collaborative agreements entered into prior to January 1, 2011,
there was no objective and reliable evidence of fair value of the undelivered items. Thus, the
delivered licenses did not meet all of the required criteria to be accounted for separately from
undelivered items. Therefore, the Company recognizes revenue on nonrefundable upfront payments and
license fees from these collaborative agreements over the period of significant involvement under
the related agreements.
For new collaborative agreements or material modifications of existing collaborative
agreements entered into after December 31, 2010, the Company follows the provisions of ASU No.
2009-13. In order to account for the multiple-element arrangements, the Company identifies the
deliverables included within the agreement and evaluates which deliverables represent units of
accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and
each deliverable may be an obligation to deliver services, a right or license to use an asset, or
another performance obligation. The deliverables under the Company’s collaborative agreements
include (i) the license to the Company’s rHuPH20 technology, (ii) at the collaborator’s request,
research and development services which are reimbursed at contractually determined rates, and (iii)
at the collaborator’s request, supply of rHuPH20 API which is reimbursed at the Company’s cost plus
a margin. A delivered item is considered a separate unit of accounting when the delivered item has
value to the collaborator on a standalone basis based on the consideration of the relevant facts
and circumstances for each arrangement. Factors considered in this determination include the
research capabilities of the partner and the availability of research expertise in this field in
the general marketplace. In addition, if the arrangement includes a general right of return
relative to the delivered item, delivery or performance of the undelivered item is considered
probable and substantially in the Company’s control.
Arrangement consideration is allocated at the inception of the agreement to all identified
units of accounting based on their relative selling price. The relative selling price for each
deliverable is determined using vendor specific objective evidence (“VSOE”), of selling price or
third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party
evidence of selling price exists, the Company uses its best estimate of the selling price for the
deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed
or determinable. The consideration received is allocated among the separate units of accounting,
and the applicable revenue recognition criteria are applied to each of the separate units. Changes
in the allocation of the sales price between delivered and undelivered elements can impact revenue
recognition but do not change the total revenue recognized under any agreement.
Upfront license fee payments are recognized upon delivery of the license if facts and
circumstances dictate that the license has standalone value from the undelivered items, which
generally include research and development services and the manufacture of rHuPH20 API, the
relative selling price allocation of the license is equal to or exceeds the upfront license fee,
persuasive evidence of an arrangement exists, the Company’s price to the partner is fixed or
determinable, and collectability is reasonably assured. Upfront license fee payments are deferred
if facts and circumstances dictate that the license does not have standalone value. The
determination of the length of the period over which to defer revenue is subject to judgment and
estimation and can have an impact on the amount of revenue recognized in a given period.
The terms of the Company’s collaborative agreements provide for milestone payments upon
achievement of certain development and regulatory events and/or specified sales volumes of
commercialized products by the collaborator. Prior to the Company’s adoption of the Milestone
Method, the Company recognized milestone payments upon the achievement of specified
milestones if: (1) the milestone was substantive in nature and the achievement of the milestone was
not reasonably assured at the inception of the agreement, (2) the fees were nonrefundable and (3)
the Company’s performance obligations after the milestone achievement would continue to be funded
by the Company’s collaborator at a level comparable to the level before the milestone achievement.
Effective January 1, 2011, the Company adopted on a prospective basis the Milestone Method.
Under the Milestone Method, the Company recognizes consideration that is contingent upon the
achievement of a milestone in its entirety as revenue in the period in which the milestone is
achieved only if the milestone is substantive in its entirety. A milestone is considered
substantive when it meets all of the following criteria:
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1. |
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The consideration is commensurate with either the entity’s performance to achieve the
milestone or the enhancement of the value of the delivered item(s) as a result of a
specific outcome resulting from the entity’s performance to achieve the milestone,
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2. |
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The consideration relates solely to past performance, and
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3. |
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The consideration is reasonable relative to all of the deliverables and payment terms
within the arrangement.
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A milestone is defined as an event (i) that can only be achieved based in whole or in part on
either the entity’s performance or on the occurrence of a specific outcome resulting from the
entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement
is entered into that the event will be achieved and (iii) that would result in additional payments
being due to the Company.
Reimbursements of research and development services are recognized as revenue during the
period in which the services are performed as long as there is persuasive evidence of an
arrangement, the fee is fixed or determinable and collection of the related receivable is probable.
Revenue from the manufacture of rHuPH20 API is recognized when the API has met all specifications
required for the collaborator acceptance and title and risk of loss have transferred to the
collaborator. The Company does not directly control when any collaborator will request research and
development services or supply of rHuPH20 API; therefore, the Company cannot predict when it will
recognize revenues in connection with research and development services and supply of rHuPH20 API.
Royalties to be received based on sales of licensed products by the Company’s collaborators
incorporating the Company’s rHuPH20 API will be recognized as earned.
The collaborative agreements typically provide the partners the right to terminate such
agreement in whole or on a product-by-product or target-by-target basis at any time upon 90 days
prior written notice to the Company. There are no performance, cancellation, termination or refund
provisions in any of the Company’s collaborative agreements that contain material financial
consequences to the Company.
See Note 5, “Collaborative Agreements,” and Note 9, “Deferred Revenue,” for further
discussion.
Cost of Sales
Cost of product sales consists primarily of raw materials, third-party manufacturing costs,
fill and finish costs and freight costs associated with the sales of API for ICSI Cumulase and API
for HYLENEX. Cost of sales also consists of the write-down of obsolete inventory.
Research and Development Expenses
Research and development expenses include salaries and benefits, facilities and other overhead
expenses, external clinical trials, research-related manufacturing services, contract services and
other outside expenses. Research and development expenses are charged to operations as incurred
when these expenditures relate to the Company’s research and development efforts and have no
alternative future uses. Advance payments, including nonrefundable amounts, for goods or services
that will be used or rendered for future research and development activities are deferred and
capitalized. Such amounts will be recognized as an expense as the related goods are delivered or
the related services are performed or such time when the Company does not expect the goods to be
delivered or services to be performed.
Milestone payments that the Company makes in connection with in-licensed technology or product
candidates are expensed as incurred when there is uncertainty in receiving future economic benefits
from the licensed technology or product candidates. The Company considers the future economic
benefits from the licensed technology or product candidates to be uncertain until such licensed
technology or product candidates are approved for marketing by the U.S. Food and Drug
Administration or comparable regulatory agencies in foreign countries or when other significant
risk factors are abated. Management has viewed future economic benefits for all of the Company’s
licensed technology or product candidates to be uncertain and has expensed these amounts for
accounting purposes.
Clinical Trial Expenses
Expenses related to clinical trials are accrued based on the Company’s estimates and/or
representations from service providers regarding work performed, including actual level of patient
enrollment, completion of patient studies and clinical trials progress. Other incidental costs
related to patient enrollment or treatment are accrued when reasonably certain. If the contracted
amounts are modified (for instance, as a result of changes in the clinical trial protocol or scope
of work to be performed), the Company modifies its accruals accordingly on a prospective basis.
Revisions in the scope of a contract are charged to expense in the period in which the facts that
give rise to the revision become reasonably certain. Historically, the Company has had no material
changes in its clinical trial expense accruals that would have had a material impact on its
consolidated results of operations or financial position.
Share-Based Compensation
Share-based compensation expense is measured at the grant date, based on the estimated fair
value of the award, and is recognized as expense, net of estimated forfeitures, over the employee’s
requisite service period. Total share-based compensation expense related to all of the Company’s
share-based awards was allocated as follows:
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Three Months Ended |
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Six Months Ended |
|
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June 30, |
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June 30, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Research and development
|
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$ |
653,590 |
|
|
$ |
671,667 |
|
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$ |
1,054,276 |
|
|
$ |
1,357,868 |
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Selling, general and administrative
|
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574,308 |
|
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|
519,834 |
|
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|
1,104,694 |
|
|
|
1,062,418 |
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|
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|
|
|
|
|
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Share-based compensation expense
|
|
$ |
1,227,898 |
|
|
$ |
1,191,501 |
|
|
$ |
2,158,970 |
|
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$ |
2,420,286 |
|
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Share-based compensation expense
per basic and diluted share
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
0.03 |
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|
|
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Share-based compensation expense from:
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|
|
|
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Stock options
|
|
$ |
806,037 |
|
|
$ |
1,037,626 |
|
|
$ |
1,512,650 |
|
|
$ |
2,096,392 |
|
Restricted stock awards and
restricted stock units
|
|
|
421,861 |
|
|
|
153,875 |
|
|
|
646,320 |
|
|
|
323,894 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,227,898 |
|
|
$ |
1,191,501 |
|
|
$ |
2,158,970 |
|
|
$ |
2,420,286 |
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Since the Company has a net operating loss carryforward as of June 30, 2011, no excess tax
benefits for the tax deductions related to share-based awards were recognized in the interim
unaudited condensed consolidated statements of operations. For the three months ended June 30, 2011
and 2010, employees exercised stock options to purchase 1,222,420 and 8,728 shares of common stock,
respectively, for aggregate proceeds of approximately $2.2 million, of which approximately $616,000 was included in
the current prepaid expenses and other assets at June 30, 2011 and
was received in July 2011, and $34,000, respectively. For
the six months ended June 30, 2011 and 2010, employees exercised stock options to purchase
2,675,062 and 208,542 shares of common stock, respectively, for aggregate proceeds of approximately
$4.1 million, of which approximately $616,000 was included in
the current prepaid expenses and other assets at June 30, 2011 and
was received in July 2011, and $497,000, respectively.
As of June 30, 2011, total unrecognized estimated compensation cost related to non-vested
stock options and non-vested restricted stock awards and restricted stock units granted prior to
that date was approximately $7.0 million, and $2.2 million, respectively, which is expected to be
recognized over a weighted-average period of approximately 2.6 years and approximately eleven
months, respectively.
In May 2011, the Company’s stockholders approved the Company’s 2011 Stock Plan, which provides
for the granting of up to a total of 6,000,000 shares of common stock (subject to certain
limitations as described in the 2011 Stock Plan) to selected employees, consultants and
non-employee members of the Company’s Board of Directors (“Outside Directors”) as stock options,
stock appreciation rights, restricted stock awards, restricted stock unit awards and performance
awards. The Company anticipates that the 2011 Stock Plan will be utilized for the initial
equity awards for new hires of the Company as well as for annual and performance equity awards for
existing employees. Options granted under the 2011 Stock Plan will generally have a
10-year term and vest at the rate of 1/4 of the shares on the first anniversary of the date of
grant and 1/48 of the shares monthly thereafter.
The 2011 Stock Plan replaced the Company’s prior stock plans, consisting of the Company’s 2008
Stock Plan, 2006 Stock Plan and 2004 Stock Plan (“Prior Plan”). The Prior Plans were terminated
such that no additional awards could be granted thereunder but the terms of the Prior Plans remain
in effect with respect to outstanding awards until they are exercised, settled, forfeited or
otherwise canceled in full.
Stock Options - During the three months ended June 30, 2011 and 2010, the Company granted
95,100 and 8,500 stock options, respectively, with an estimated weighted-average grant-date fair
value of $3.66 and $4.68 per share, respectively. During the six months ended June 30, 2011 and
2010, the Company granted 752,768 and 1,102,214 stock options, respectively, with an estimated
weighted-average grant-date fair value of $4.19 and $3.53 per share, respectively.
Restricted Stock Awards and Restricted Stock Units - During the three and six months ended
June 30, 2011, the Company granted to certain employees 233,508 restricted stock awards (“RSAs”)
and 148,000 restricted stock units (“RSUs”), with a grant-date fair
value of $6.67 per share (“Employee Restricted Awards”). The Employee Restricted Awards are subject
to percentage vesting based upon achievement of certain corporate goals and the employees’
continuing services through May 2012. The Company also granted to its Outside Directors annual
grants totaling 120,000 RSAs, with a grant-date fair value of $6.21,
during the three and six months ended June 30, 2011. During the three and six months ended June 30,
2010, the Company granted to the Outside Directors annual grants totaling 120,000 RSAs, with a grant-date fair value of $7.67.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. Comprehensive income (loss)
was the same as the Company’s net income (loss).
Fair Value Measurements
The Company follows the authoritative guidance for fair value measurements and disclosures,
which among other things, defines fair value, establishes a consistent framework for measuring fair
value and expands disclosure for each major asset and liability category measured at fair value on
either a recurring or nonrecurring basis. Fair value is defined as an exit price 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.
The framework for measuring fair value provides a hierarchy that prioritizes the inputs to
valuation techniques used in measuring fair value as follows:
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Level 1
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Quoted prices (unadjusted) in active markets for identical assets or liabilities; |
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Level 2
|
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Inputs other than quoted prices included within Level 1 that are either directly
or indirectly observable; and |
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Level 3
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Unobservable inputs in which little or no market activity exists, therefore
requiring an entity to develop its own assumptions about the assumptions that
market participants would use in pricing. |
Cash equivalents of approximately $76.5 million and $79.8 million at June 30, 2011 and
December 31, 2010, respectively, are carried at fair value and are classified within Level 1 of the
fair value hierarchy because they are valued based on quoted market prices for identical
securities. The Company has no instruments that are classified within Level 2 or Level 3.