fgen-10q_20170630.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 June 30, 2017

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: 001-36740

 

FIBROGEN, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

77-0357827

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

409 Illinois Street

 

 

San Francisco, CA

 

94158

(Address of Principal Executive Offices)

 

(Zip Code)

(415) 978-1200

Registrant’s telephone number, including area code:

 

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:

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

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 Exchange Act Rule 12b-2).    Yes      No  

The number of shares of common stock outstanding as of July 31, 2017 was 71,195,226.

 

 

 


 

FIBROGEN, INC.

TABLE OF CONTENTS

 

 

 

Page

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 (Unaudited)

 

3

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

5

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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

 

30

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

31

Item 1A.

Risk Factors

 

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

71

Item 3.

Defaults Upon Senior Securities

 

71

Item 4.

Mine Safety Disclosures

 

71

Item 5.

Other Information

 

71

Item 6.

Exhibits

 

71

 

Signatures

 

72

 

Exhibit Index

 

73

 

2


Table of Contents

FIBROGEN, INC.

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

(Note 1)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

290,277

 

 

$

173,782

 

Short-term investments

 

 

69,121

 

 

 

79,397

 

Accounts receivable ($4,739 and $4,102 from a related party)

 

 

8,933

 

 

 

10,448

 

Prepaid expenses and other current assets

 

 

3,013

 

 

 

2,889

 

Total current assets

 

 

371,344

 

 

 

266,516

 

 

 

 

 

 

 

 

 

 

Restricted time deposits

 

 

6,217

 

 

 

6,217

 

Long-term investments

 

 

39,204

 

 

 

71,010

 

Property and equipment, net

 

 

122,591

 

 

 

123,657

 

Other assets

 

 

3,282

 

 

 

2,152

 

Total assets

 

$

542,638

 

 

$

469,552

 

 

 

 

 

 

 

 

 

 

Liabilities, stockholders’ equity and non-controlling interests

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,261

 

 

$

6,223

 

Accrued liabilities ($269 and $1,615 to related parties)

 

 

48,534

 

 

 

50,914

 

Deferred revenue

 

 

7,979

 

 

 

7,988

 

Total current liabilities

 

 

59,774

 

 

 

65,125

 

 

 

 

 

 

 

 

 

 

Long-term portion of lease financing obligations

 

 

97,451

 

 

 

97,352

 

Product development obligations

 

 

16,284

 

 

 

14,854

 

Deferred rent

 

 

3,936

 

 

 

4,212

 

Deferred revenue, net of current

 

 

109,579

 

 

 

106,709

 

Other long-term liabilities

 

 

6,245

 

 

 

6,191

 

Total liabilities

 

 

293,269

 

 

 

294,443

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 125,000 shares authorized at June 30, 2017 and

   December 31, 2016; no shares issued and outstanding at June 30, 2017 and

   December 31, 2016

 

 

 

 

 

 

Common stock, $0.01 par value; 225,000 shares authorized at June 30, 2017

   and December 31, 2016; 70,969 and 63,665 shares issued and outstanding at

   June 30, 2017 and December 31, 2016

 

 

710

 

 

 

637

 

Additional paid-in capital

 

 

766,861

 

 

 

625,903

 

Accumulated other comprehensive loss

 

 

(1,387

)

 

 

(960

)

Accumulated deficit

 

 

(536,086

)

 

 

(469,742

)

Total stockholders’ equity

 

 

230,098

 

 

 

155,838

 

Non-controlling interests

 

 

19,271

 

 

 

19,271

 

Total equity

 

 

249,369

 

 

 

175,109

 

Total liabilities, stockholders’ equity and non-controlling interests

 

$

542,638

 

 

$

469,552

 

 

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

3


Table of Contents

FIBROGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      License and milestone revenue (includes $4,278, $13,043,

        $7,527 and $16,356 from a related party)

 

$

21,352

 

 

$

73,197

 

 

$

40,933

 

 

$

92,935

 

      Collaboration services and other revenue (includes $445,

         $326,  $785 and $678 from a related party)

 

 

7,645

 

 

 

16,083

 

 

 

14,955

 

 

 

24,628

 

Total revenue

 

 

28,997

 

 

 

89,280

 

 

 

55,888

 

 

 

117,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

46,981

 

 

 

52,392

 

 

 

93,713

 

 

 

96,041

 

General and administrative

 

 

13,425

 

 

 

10,376

 

 

 

24,955

 

 

 

21,794

 

Total operating expenses

 

 

60,406

 

 

 

62,768

 

 

 

118,668

 

 

 

117,835

 

Income (loss) from operations

 

 

(31,409

)

 

 

26,512

 

 

 

(62,780

)

 

 

(272

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(2,757

)

 

 

(2,438

)

 

 

(5,132

)

 

 

(5,215

)

Interest income and other, net

 

 

1,031

 

 

 

129

 

 

 

1,677

 

 

 

1,545

 

Total interest and other, net

 

 

(1,726

)

 

 

(2,309

)

 

 

(3,455

)

 

 

(3,670

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(33,135

)

 

 

24,203

 

 

 

(66,235

)

 

 

(3,942

)

Provision for (benefit from) income taxes

 

 

48

 

 

 

(113

)

 

 

109

 

 

 

(418

)

Net income (loss)

 

$

(33,183

)

 

$

24,316

 

 

$

(66,344

)

 

$

(3,524

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.48

)

 

$

0.39

 

 

$

(0.99

)

 

$

(0.06

)

Diluted

 

$

(0.48

)

 

$

0.35

 

 

$

(0.99

)

 

$

(0.06

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares used to

     calculate net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

69,638

 

 

 

62,582

 

 

 

66,853

 

 

 

62,383

 

Diluted

 

 

69,638

 

 

 

69,022

 

 

 

66,853

 

 

 

62,383

 

 

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

4


Table of Contents

FIBROGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income (loss)

 

$

(33,183

)

 

$

24,316

 

 

$

(66,344

)

 

$

(3,524

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(994

)

 

 

380

 

 

 

(1,249

)

 

 

(262

)

Available-for-sale investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments, net of tax effect

 

 

654

 

 

 

300

 

 

 

832

 

 

 

889

 

Reclassification from accumulated other comprehensive loss

 

 

(26

)

 

 

 

 

 

(10

)

 

 

 

Net change in unrealized gain on available-for-sale investments

 

 

628

 

 

 

300

 

 

 

822

 

 

 

889

 

Other comprehensive income (loss), net of taxes

 

 

(366

)

 

 

680

 

 

 

(427

)

 

 

627

 

Comprehensive income (loss)

 

$

(33,549

)

 

$

24,996

 

 

$

(66,771

)

 

$

(2,897

)

 

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

 

5


Table of Contents

FIBROGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(66,344

)

 

$

(3,524

)

Adjustments to reconcile net loss to net cash provided by

        (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

3,072

 

 

 

3,007

 

Amortization of premium on investments

 

 

1,064

 

 

 

1,391

 

Unrealized loss (gain) on short-term investments

 

 

(1

)

 

 

(273

)

Gain on disposal of property and equipment

 

 

(4

)

 

 

 

Stock-based compensation

 

 

17,980

 

 

 

15,744

 

Tax benefit on unrealized gain on available-for-sale securities

 

 

 

 

 

(479

)

Realized gain on sales of available-for-sale securities

 

 

(95

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,515

 

 

 

(2,683

)

Prepaid expenses and other current assets

 

 

(124

)

 

 

283

 

Other assets

 

 

(1,130

)

 

 

254

 

Accounts payable

 

 

(2,962

)

 

 

(3,047

)

Accrued liabilities

 

 

(3,061

)

 

 

537

 

Deferred revenue

 

 

2,861

 

 

 

15,114

 

Lease financing liability

 

 

401

 

 

 

554

 

Other long-term liabilities

 

 

(65

)

 

 

542

 

Net cash provided by (used in) operating activities

 

 

(46,893

)

 

 

27,420

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,612

)

 

 

(1,019

)

Proceeds from sale of property and equipment

 

 

5

 

 

 

 

Purchases of available-for-sale securities

 

 

(66

)

 

 

(46

)

Proceeds from sales of available-for-sale securities

 

 

18,152

 

 

 

 

Proceeds from maturities of available-for-sale securities

 

 

23,849

 

 

 

8,217

 

Net cash provided by investing activities

 

 

40,328

 

 

 

7,152

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Repayments of lease liability

 

 

(201

)

 

 

(201

)

Proceeds from follow-on offering, net of underwriting discounts and

   commission costs

 

 

115,050

 

 

 

 

Cash paid for payroll taxes on restricted stock unit releases

 

 

(3,673

)

 

 

(1,791

)

Proceeds from issuance of common stock

 

 

12,244

 

 

 

4,496

 

Payments of deferred offering costs

 

 

(386

)

 

 

 

Net cash provided by financing activities

 

 

123,034

 

 

 

2,504

 

Effect of exchange rate change on cash and cash equivalents

 

 

26

 

 

 

11

 

Net increase in cash and cash equivalents

 

 

116,495

 

 

 

37,087

 

Total cash and cash equivalents at beginning of period

 

 

173,782

 

 

 

153,324

 

Total cash and cash equivalents at end of period

 

$

290,277

 

 

$

190,411

 

 

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

 

 

6


Table of Contents

FIBROGEN, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

Significant Accounting Policies

Description of Operations

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.

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 $0.6 million in total.

Basis of Presentation and Principles of Consolidation

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.

Use of Estimates

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.

7


Table of Contents

Net Income per Share

The following is a reconciliation of the basic and diluted net income (loss) per share calculation for the periods presented (in thousands, except per share data):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income (loss)

 

$

(33,183

)

 

$

24,316

 

 

$

(66,344

)

 

$

(3,524

)

Weighted average shares used to compute net income

      (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

69,638

 

 

 

62,582

 

 

 

66,853

 

 

 

62,383

 

Dilutive effect of potential common shares

 

 

 

 

 

6,440

 

 

 

 

 

 

 

Diluted

 

 

69,638

 

 

 

69,022

 

 

 

66,853

 

 

 

62,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.48

)

 

$

0.39

 

 

$

(0.99

)

 

$

(0.06

)

Diluted

 

$

(0.48

)

 

$

0.35

 

 

$

(0.99

)

 

$

(0.06

)

Diluted shares did not include 6.6 million for the three months ended June 30, 2016 as they were anti-dilutive.

Recently Issued and Adopted Accounting Guidance

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 from these retrospective adjustments was zero to the Company’s accumulated deficit. The adoption of this guidance had no impact to the Company’s consolidated financial statements for the three and six months ended June 30, 2017.

Recently Issued Accounting Guidance Not Yet Adopted

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This guidance provides guidance about which changes to the terms or conditions of a stock-based payment award require an entity to apply modification accounting in Topic 718. This guidance is effective for annual reporting period beginning after December 15, 2017, including interim periods, with early adoption permitted. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this guidance.

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.

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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.

2.

Collaboration Agreements

Astellas Agreements

Japan Agreement

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.

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Europe Agreement

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.

AstraZeneca Agreements

U.S./Rest of World (“RoW”) Agreement

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.

China Agreement

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.

Summary of Revenue Recognized Under the Collaboration Agreements

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.

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

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Agreement

 

Deliverable

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Japan

 

    License

 

$

279

 

 

$

43

 

 

$

491

 

 

$

118

 

 

 

    Milestones

 

 

 

 

 

10,000

 

 

 

 

 

 

10,000

 

 

 

Total license and milestone revenue

 

 

279

 

 

$

10,043

 

 

$

491

 

 

$

10,118

 

 

 

Collaboration services revenue*

 

 

13

 

 

$

3

 

 

$

24

 

 

$

7

 

 

*

When and if available compounds, manufacturing — clinical supplies and committee services have each been identified as separate units of accounting with standalone value and amounts allocable to these elements have been recognized and classified within the Collaboration services revenue line item within the condensed consolidated statements of operations.

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

June 30, 2017

 

 

Deferred

Revenue at

June 30, 2017

 

 

Total

Consideration

Through

June 30, 2017

 

License

 

$

46,201

 

 

$

 

 

$

46,201

 

When and if available compounds

 

 

23

 

 

 

25

 

 

 

48

 

Manufacturing--clinical supplies

 

 

2,144

 

 

 

 

 

 

2,144

 

Committee services

 

 

20

 

 

 

 

 

 

20

 

Total license and collaboration services revenue

 

$

48,388

 

 

$

25

 

 

$

48,413

 

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

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Agreement

 

Deliverable

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Europe

 

    License

 

$

3,999

 

 

$

3,000

 

 

$

7,036

 

 

$

6,238

 

 

 

    Milestones

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total license and milestone revenue

 

 

3,999

 

 

 

3,000

 

 

 

7,036

 

 

 

6,238

 

 

 

Collaboration services revenue*

 

$

432

 

 

$

323

 

 

$

761

 

 

$

671

 

 

 

*

When and if available compounds, manufacturing — clinical supplies, development services — in progress at the time of signing of the agreement, and committee services have each been identified as a separate unit of accounting with standalone value and amounts allocable to these units have been recognized in revenue as services are performed and classified within the Collaboration services revenue line item within the condensed consolidated statements of operations.

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

June 30, 2017

 

 

Deferred

Revenue at

June 30, 2017

 

 

Total

Consideration

Through

June 30, 2017

 

License

 

$

419,308

 

 

$

 

 

$

419,308

 

When and if available compounds

 

 

399

 

 

 

399

 

 

 

798

 

Manufacturing--clinical supplies

 

 

10,043

 

 

 

 

 

 

10,043

 

Development services--in progress

 

 

33,596

 

 

 

 

 

 

33,596

 

Committee services

 

 

290

 

 

 

 

 

 

290

 

Total license and collaboration services revenue

 

$

463,636

 

 

$

399

 

 

$

464,035

 

 

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

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Agreement

 

Deliverable

 

2017

 

 

2016

 

 

2017

 

 

2016

 

U.S. / RoW

and China

 

    License

 

$

17,074

 

 

$

60,154

 

 

$

33,406

 

 

$

76,579

 

 

 

    Milestones

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total license and milestone revenue

 

 

17,074

 

 

 

60,154

 

 

 

33,406

 

 

 

76,579

 

 

 

Collaboration services revenue*

 

 

7,197

 

 

 

15,755

 

 

 

14,167

 

 

 

23,939

 

 

 

China single unit of accounting**

 

$

 

 

$

 

 

$

 

 

$

 

 

*

Co-development, information sharing, and committee services have been combined into a single unit of accounting because the requirements to share information and serve on committees are useful only in combination with the development services, and because all three items are delivered over the same period while manufacturing — clinical supplies has been identified as a separate unit of accounting with standalone value and amounts allocable to this unit of accounting have been recognized and classified within the Collaboration services revenue line item within the condensed consolidated statements of operations.

**

All revenues attributable to the China unit of accounting are deferred until all deliverables are met. The China license and collaboration services elements have been combined into a single unit of accounting and consideration allocable to this unit is being deferred due to FibroGen’s retention of manufacturing rights and lack of standalone value.

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

June 30, 2017

 

 

Deferred

Revenue at

June 30, 2017

 

 

Total

Consideration

Through

June 30, 2017

 

License

 

$

436,103

 

 

$

 

 

$

436,103

 

Co-development, information sharing &

  committee services

 

 

104,888

 

 

 

27,701

 

 

 

132,589

 

Manufacturing--clinical supplies

 

 

410

 

 

 

43

 

 

 

453

 

China-single unit of accounting

 

 

 

 

 

89,390

 

 

 

89,390

 

Total license and collaboration services revenue

 

$

541,401

 

 

$

117,134

 

 

$

658,535

 

 

Other Revenues

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

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.

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3.

Fair Value Measurements

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

 

 

 

June 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Corporate bonds

 

$

 

 

$

86,305

 

 

$

 

 

$

86,305

 

Bond and mutual funds

 

 

20,797

 

 

 

 

 

 

 

 

 

20,797

 

Equity investments

 

 

187

 

 

 

 

 

 

 

 

 

187

 

Money market funds

 

 

85,259

 

 

 

 

 

 

 

 

 

85,259

 

Certificate of deposits

 

 

 

 

 

1,036

 

 

 

 

 

 

1,036

 

Total

 

$

106,243

 

 

$

87,341

 

 

$

 

 

$

193,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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