LA JOLLA PHARMACEUTICAL COMPANY You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, include forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" set forth in this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Business Overview
On
In
On
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Results of Operations
The following table summarizes our results of operations for each of the periods
below (in thousands):
Year Ended
December 31,
2021 2020 Change
Net product sales $ 43,532 $ 33,419 $ 10,113
License and other revenue 32,188 - 32,188
Cost of product sales 8,976 7,819 1,157
Cost of license and other revenue 4,513 - 4,513
Selling, general and administrative expense 35,386 38,428 (3,042 ) Research and development expense
5,014 23,010 (17,996 )
Other (expense) income, net (2,122 ) (3,583 ) 1,461
Provision for income taxes 49 - 49
Net income (loss) $ 19,660 $ (39,421 ) $ 59,081 La Jolla acquired Tetraphase, which commercialized XERAVA, on
Net Product Sales
Net product sales consist of revenue recognized from sales of GIAPREZA and
XERAVA to hospitals and other healthcare organizations in the
La Jolla's net product sales were
GIAPREZA
XERAVA
La Jolla's net product sales increased during the three and twelve months ended
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License and Other Revenue
License and other revenue consists of revenue from out-license agreements with
counterparties to develop and/or commercialize our products in territories
outside of the
La Jolla's license and other revenue was
Cost of Product Sales
Cost of product sales consists primarily of expense associated with: (i)
manufacturing; (ii) royalties payable to
La Jolla's cost of product sales was
Cost of License and Other Revenue
Cost of license and other revenue consists of amounts due under in-license agreements and commercial supply agreements in connection with license and other revenue from commercially approved product. Cost of license and other revenue recognized in connection with product that is not commercially approved is recorded as research and development expense.
La Jolla's cost of license and other revenue was
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Selling, General and Administrative Expense
Selling, general and administrative expense consists of non-personnel and personnel expenses. Non-personnel-related expense includes expense related to: (i) sales and marketing costs such as speaker programs, advertising and promotion; (ii) professional fees for legal, patent, consulting, surveillance, regulatory filings and accounting; and (iii) amortization of intangible assets, information technology and facilities. Personnel-related expense includes expense related to salaries, benefits and share-based compensation for personnel engaged in sales, finance and administrative functions. We expect our selling, general and administrative expense to increase modestly in 2022 to support growing net product sales of both GIAPREZA and XERAVA.
The following table summarizes these expenses for each of the periods below (in
thousands):
Year Ended
December 31,
2021 2020 Change
Non-personnel expense:
Sales and marketing $ 5,619 $ 3,918 $ 1,701
Professional fees 5,314 5,812 (498 )
Facility 347 2,536 (2,189 )
Other 3,610 2,861 749
Total non-personnel expense 14,890 15,127 (237 )
Personnel expense:
Salaries, bonuses and benefits 16,720 16,298 422
One-time charges for reductions in headcount 143 4,195 (4,052 )
Share-based compensation expense 3,633 2,808 825
Total personnel expense 20,496 23,301 (2,805 )
Total selling, general and administrative expense
During the year ended
During the year ended
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Research and Development Expense
Research and development expense consists of non-personnel and personnel expenses. Non-personnel-related expense includes expense related to: (i) manufacturing development; (ii) amounts due under in-license agreements for drug product that is not commercially approved; (iii) facilities and information technology; and (iv) conducting clinical studies. Personnel-related expense includes expense related to salaries, benefits and share-based compensation for personnel engaged in research and development functions. We expect our research and development expense to decrease significantly.
The following table summarizes these expenses for each of the periods below (in
thousands):
Year Ended
December 31,
2021 2020 Change
Non-personnel expense:
GIAPREZA $ 929 $ 4,036 $ (3,107 )
XERAVA 898 866 32
LJPC-401 101 1,683 (1,582 )
LJPC-0118 16 926 (910 )
Facility 9 2,930 (2,921 )
Other 928 1,196 (268 )
Total non-personnel expense 2,881 11,637 (8,756 )
Personnel expense:
Salaries, bonuses and benefits 1,289 5,546 (4,257 )
One-time charges for reductions in headcount - 2,428 (2,428 ) Share-based compensation expense
844 3,399 (2,555 )
Total personnel expense 2,133 11,373 (9,240 )
Total research and development expense
During the year ended
During the year ended
Research and development expense for the year ended
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Other (Expense) Income, Net
Other (expense) income, net consists primarily of the following: (i) interest expense accrued for our deferred royalty obligation; (ii) income from distributions received in connection with our non-voting profits interest in a related party; (iii) gains and losses from changes in the fair value of contingent value rights ("CVRs"); (iv) interest income generated from cash held in savings accounts; and (v) gains and losses associated with the disposal of certain property and equipment.
During the year ended
Liquidity and Capital Resources
As of
La Jolla's net cash provided by (used for) operating activities for the three
and twelve months ended
La Jolla's net cash provided by (used for) operating activities for the three
and twelve months ended
• Upfront net receipts in connection with out-license agreements were zero and
$18.4 million for the three and twelve months ended December 31, 2021 ,
respectively, and zero for the same periods in 2020.
• Upfront net receipts in connection with commercial supply agreements were
zero and $6.8 million for the three and twelve months ended December 31,
2021 , respectively, and zero for the same periods in 2020.
• Payments related to reductions in headcount were zero and $1.6 million for
the three and twelve months ended December 31, 2021 , respectively, and $1.6
million and $9.5 million , respectively, for the same periods in 2020.
• Payments related to transaction costs associated with the Tetraphase
acquisition were zero for the three and twelve months ended December 31,
2021 , and zero and $0.9 million , respectively, for the same periods in 2020.
The amount and timing of additional future funding needs, if any, will depend on many factors, including the success of our commercialization efforts for GIAPREZA and XERAVA and our ability to control expenses. If necessary, we intend to raise additional capital through equity or debt financings. We can provide no assurance that additional financing will be available to us on favorable terms, or at all.
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Contractual Obligations
HealthCare Royalty Partners Royalty Agreement
In
In-license Agreements
In
In
Paratek Pharmaceuticals, Inc.
In
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covering XERAVA. The Company is obligated to pay Paratek a 2.25% royalty based
on direct
Out-license Agreements
PAION AG
In
In
Everest Medicines Limited
In
In
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transfer payment in
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations
are based on our audited consolidated financial statements, which have been
prepared in accordance with
While our significant accounting policies are more fully described in the notes to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K, we believe that the following accounting policies and estimates are most critical to understanding and evaluating our reported financial results.
Revenue Recognition
Pursuant to
Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, discounts, returns, rebates and administrative fees. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. Actual amounts of consideration ultimately received may differ from the Company's estimates. If actual results vary materially from the Company's estimates, the Company will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These items include:
• Chargebacks-Chargebacks are discounts the Company provides to distributors
in the event that the sales prices to end users are below the
distributors' acquisition price. This may occur due to a direct contract
with a health system, a group purchasing organization ("GPO") agreement or
a
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sale to a government facility. Chargebacks are estimated based on known
chargeback rates and recorded as a reduction of revenue on delivery to the
Company's customers.
• Discounts-The Company offers customers various forms of incentives and
consideration, including prompt-pay and other discounts. The Company
estimates discounts primarily based on contractual terms. These discounts
are recorded as a reduction of revenue on delivery to the Company's
customers.
• Returns-The Company offers customers a limited right of return, generally
for damaged or expired product. The Company estimates returns based on an
internal analysis, which includes actual experience. The estimates for
returns are recorded as a reduction of revenue on delivery to the
Company's customers.
• Rebates-The Company participates in Medicaid rebate programs, which
provide assistance to certain low-income patients based on each individual
state's guidelines regarding eligibility and services. Under the Medicaid
rebate programs, the Company pays a rebate to each participating state,
generally within three months after the quarter in which product was sold.
Additionally, the Company may offer customers incentives and consideration
in the form of volume-based or other rebates. The estimates for rebates
are recorded as a reduction of revenue on delivery to the Company's
customers.
• Administrative Fees-The Company pays administrative fees to GPOs for
services and access to data. Additionally, the Company pays an Industrial
Funding Fee as part of the U.S. General Services Administration's Federal
Supply Schedules program. These fees are based on contracted terms and are
paid after the quarter in which the product was purchased by the
applicable GPO or government agency. Administrative fees are recorded as a
reduction of revenue on delivery to customers.
The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these estimates accordingly.
Business Combinations
The Company accounts for business combinations using the acquisition method pursuant to FASB ASC Topic 805. This method requires, among other things, that results of operations of acquired companies are included in La Jolla's financial results beginning on the respective acquisition dates, and that assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. Intangible assets acquired in a business combination are recorded at fair value using a discounted cash flow model. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, the cost of capital and terminal values from the perspective of a market participant. Any excess of the fair value of consideration transferred (the "Purchase Price") over the fair values of the net assets acquired is recognized as goodwill. Contingent consideration liabilities are recognized as part of the Purchase Price at the estimated fair value on the acquisition date. Subsequent changes to the fair value of contingent consideration liabilities will be included in other (expense) income, net in the consolidated statements of operations. The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value during a period of time not to exceed 12 months from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other acquisition-related costs are expensed when incurred.
Intangible Assets
Intangible assets acquired in a business combination are initially recorded at fair value. Intangible assets with a definite useful life are amortized on a straight-line basis over the estimated useful life of the related assets. Intangible assets with an indefinite useful life are not amortized.
The Company reviews its intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If such
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circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the asset, including its eventual residual value, is compared to the carrying value to determine whether impairment exists. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Fair value is estimated through discounted cash flow models to project cash flows from the asset.
The Company reviews its goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the Company may exceed its fair value. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of the Company is less than its carrying amount, including goodwill. If that is the case, the Company performs a quantitative impairment test, and, if the carrying amount of the Company exceeds its fair value, then the Company will recognize an impairment charge for the amount by which its carrying amount exceeds its fair value, not to exceed the carrying amount of the goodwill. The Company has an option to bypass the qualitative assessment and proceed directly to performing the quantitative impairment test.
Accrued Expenses
As part of the process of preparing the financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed by service providers and estimating the level of service performed and the associated cost incurred for services that have not yet been invoiced. We make estimates of accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known at that time. We periodically confirm the accuracy of recorded estimates with the service providers and make adjustments, if necessary.
We base our accrued expenses on our estimates of the services received and efforts expended pursuant to our contractual arrangements. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepayment accordingly. The financial terms of our contractual agreements may be subject to interpretation, and the timing of payment relative to the timing of services rendered may vary.
Interest Expense
The deferred royalty obligation royalty from our financing agreement (the
"Royalty Agreement") with
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 2 to the accompanying audited consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.
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