Edgar Filing: AGIOS PHARMACEUTICALS INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 September 30, 2018


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

Commission file number 001-36014

AGIOS PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware			26-0662915
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

88 Sidney Street, Cambridge, Massachusetts			02139
(Address of Principal Executive Offices)			(Zip Code)

(617) 649-8600

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

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

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


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

Number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on October 29, 2018: 58,178,676

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AGIOS PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS


		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II. OTHER INFORMATION			36
Item 1A.	Risk Factors	36
Item 6.	Exhibits	69
	Signatures	70

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

AGIOS PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)


	September 30, 2018		December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	156,478	$	102,724
Marketable securities	513,414		321,212
Accounts receivable, net	2,631		—
Collaboration receivable – related party	3,395		2,448
Collaboration receivable – other	440		—
Royalty receivable – related party	1,863		1,222
Inventory	863		—
Prepaid expenses and other current assets	16,458		17,655
Total current assets	695,542		445,261
Marketable securities	208,508		143,814
Property and equipment, net	24,613		24,431
Other non-current assets	416		891
Total assets	$	929,079	$	614,397
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	16,616	$	22,767
Accrued expenses	25,303		34,031
Deferred revenue – related party	42,141		37,842
Deferred rent	686		301
Total current liabilities	84,746		94,941
Deferred revenue, net of current portion – related party	66,294		125,798
Deferred rent, net of current portion	17,826		18,155
Total liabilities	168,866		238,894
Stockholders’ equity:
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued or outstanding at September 30, 2018 and December 31, 2017	—		—
Common stock, $0.001 par value; 125,000,000 shares authorized; 58,167,932 and 48,826,153 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively	58		49
Additional paid-in capital	1,775,113		1,174,904
Accumulated other comprehensive loss	(2,119)		(1,389)
Accumulated deficit	(1,012,839)		(798,061)
Total stockholders’ equity	760,213		375,503
Total liabilities and stockholders’ equity	$	929,079	$	614,397

See accompanying Notes to Condensed Consolidated Financial Statements.

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AGIOS PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2018		2017		2018		2017
Revenues:
Product revenue, net	$	4,465	$	—	$	4,465	$	—
Collaboration revenue – related party	8,732		10,643		42,478		32,497
Collaboration revenue – other	—		—		12,440		—
Royalty revenue – related party	2,001		715		4,991		715
Total revenue	15,198		11,358		64,374		33,212
Cost and expenses:
Cost of sales	695		—		695		—
Research and development (net of $1,078 and $6,343 of cost reimbursement from related party for the three and nine months ended September 30, 2017)	82,561		72,917		247,515		215,465
Sales, general and administrative	31,104		17,458		82,287		48,411
Total cost and expenses	114,360		90,375		330,497		263,876
Loss from operations	(99,162)		(79,017)		(266,123)		(230,664)
Interest income	4,498		1,880		11,889		4,279
Net loss	$	(94,664)	$	(77,137)	$	(254,234)	$	(226,385)
Net loss per share – basic and diluted	$	(1.63)	$	(1.59)	$	(4.45)	$	(4.94)
Weighted-average number of common shares used in computing net loss per share – basic and diluted	58,033,386		48,459,424		57,158,492		45,851,203

See accompanying Notes to Condensed Consolidated Financial Statements.

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AGIOS PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2018		2017		2018		2017
Net loss	$	(94,664)	$	(77,137)	$	(254,234)	$	(226,385)
Other comprehensive income (loss)
Unrealized gain (loss) on available-for-sale securities	279		135		(730)		(202)
Comprehensive loss	$	(94,385)	$	(77,002)	$	(254,964)	$	(226,587)

See accompanying Notes to Condensed Consolidated Financial Statements.

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AGIOS PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2018		2017
Operating activities
Net loss	$	(254,234)	$	(226,385)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	5,261		4,778
Stock-based compensation expense	55,170		35,128
Net amortization of premium and discounts on investments	(2,540)		25
(Gain) loss on disposal of property and equipment	(20)		40
Changes in operating assets and liabilities:
Accounts receivable, net	(2,631)		—
Collaboration receivable – related party	(947)		1,397
Collaboration receivable – other	(440)		—
Royalty receivable – related party	(641)		(715)

Inventory	(863)		—
Prepaid expenses and other current and non-current assets	1,711		(1,886)
Accounts payable	(5,830)		742
Accrued expenses	(8,537)		(1,242)
Deferred revenue – related party	(15,749)		(20,141)
Deferred rent	56		(2,519)
Net cash used in operating activities	(230,234)		(210,778)
Investing activities
Purchases of marketable securities	(755,368)		(604,525)
Proceeds from maturities and sales of marketable securities	500,281		508,116
Purchases of property and equipment	(5,933)		(3,347)
Net cash used in investing activities	(261,020)		(99,756)
Financing activities
Payment of public offering costs, net of reimbursements	(391)		(89)
Proceeds from public offering of common stock, net of commissions	516,206		270,250
Net proceeds from stock option exercises and employee stock purchase plan	29,193		12,360
Net cash provided by financing activities	545,008		282,521
Net change in cash and cash equivalents	53,754		(28,013)
Cash and cash equivalents at beginning of the period	102,724		160,754
Cash and cash equivalents at end of the period	$	156,478	$	132,741
Supplemental disclosure of non-cash investing and financing transactions
Additions to property and equipment in accounts payable and accrued expenses	$	501	$	226
Proceeds from stock option exercises in other current assets	$	39	$	95
Public offering costs in other current assets, net of amounts in accounts payable and accrued expenses	$	—	$	318

See accompanying Notes to Condensed Consolidated Financial Statements.

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AGIOS PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Overview and Basis of Presentation

References to Agios

Throughout this Quarterly Report on Form 10-Q, “we,” “us,” and “our,” and similar expressions, except where the context requires otherwise, refer to Agios Pharmaceuticals, Inc. and its consolidated subsidiaries, and “our Board of Directors” refers to the board of directors of Agios Pharmaceuticals, Inc.

Overview

We are a biopharmaceutical company committed to the fundamental transformation of patients’ lives through scientific leadership in the field of cellular metabolism, with the goal of making transformative, first- or best-in-class medicines. Our therapeutic areas of focus are cancer and rare genetic diseases, or RGDs, which are diseases that are directly caused by changes in genes or chromosomes, often passed from one generation to the next. Most RGDs are often associated with severe or life-threatening features. The incidence of a single RGD can vary widely but is generally very infrequent, usually equal to or less than one per 100,000 births. In both areas of cancer and RGDs, we are seeking to unlock the biology of cellular metabolism as a platform to create transformative therapies. We are located in Cambridge, Massachusetts.

Basis of presentation

The condensed consolidated balance sheet as of September 30, 2018, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017 are unaudited. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of our management, reflect all adjustments, which include only normal recurring adjustments, necessary to fairly state our financial position as of September 30, 2018, our results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. The financial data and the other financial information disclosed in these notes to the condensed consolidated financial statements related to the three and nine-month period are also unaudited. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other future annual or interim period. The year-end condensed consolidated balance sheet data was derived from our audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles, or U.S. GAAP. Accordingly, the condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017 that was filed with the Securities and Exchange Commission, or the SEC, on February 14, 2018.

Our condensed consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries, Agios Securities Corporation, Agios International Sarl, and Agios Limited. All intercompany transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in conformity with U.S. GAAP.

Liquidity

In January 2018, we completed a public offering of 8,152,986 shares of common stock at an offering price of $67.00 per share. We received net proceeds from this offering of $516.2 million, after deducting underwriting discounts and commissions paid by us.

As of September 30, 2018, we had cash, cash equivalents and marketable securities of $878.4 million. Although we have incurred recurring losses and expect to continue to incur losses for the foreseeable future, we expect our cash, cash equivalents and marketable securities will be sufficient to fund current operations for at least the next twelve months from the issuance date of these financial statements.

2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Significant accounting policies

Accounts receivable, net

Our trade accounts receivable arise from product sales and represent amounts due from specialty distributors and specialty pharmacy providers in the U.S. We monitor the financial performance and creditworthiness of our customers so that we can

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properly assess and respond to changes in their credit profile. We reserve against these receivables for estimated losses that may arise from a customer’s inability to pay. Amounts determined to be uncollectible are charged or written-off against the reserve.

Concentrations of credit risk

Financial instruments which potentially subject us to credit risk consist primarily of cash, cash equivalents, and marketable securities. We hold these investments in highly rated financial institutions, and, by policy, limit the amounts of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits. We have not experienced any credit losses in such accounts and do not believe we are exposed to any significant credit risk on these funds. We have no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts, or other hedging arrangements.

We are also subject to credit risk on our receivables, including trade receivables from our customers and collaboration and royalty receivables from Celgene Corporation, or Celgene, and CStone Pharmaceuticals, or CStone. Concentrations of credit risk with respect to receivables, which are typically unsecured, are somewhat mitigated due to the number of customers using our products. Our trade receivables arise from product sales in the U.S. and have standard payment terms that generally require payment within 30 to 60 days. We have evaluated the creditworthiness of our customers, including Celgene, and determined them to be creditworthy. To date we have not experienced any losses with respect to our receivables.

Inventory

Inventory is stated at the lower of cost or estimated net realizable value on a first-in, first-out basis. Prior to the regulatory approval of our product candidates, we incur expenses for the manufacture of drug product that could potentially be available to support the commercial launch of those products. Until the date at which regulatory approval has been received or is otherwise considered probable, we record all such costs as research and development expenses. Our wholly owned product, TIBSOVO® (ivosidenib), received approval from the U.S. Food and Drug Administration, or FDA, on July 20, 2018 for the treatment of adult patients with relapsed or refractory acute myeloid leukemia, or R/R AML, with susceptible isocitrate dehydrogenase 1, or IDH1, mutation as detected by an FDA-approved test, and we began to capitalize inventories of TIBSOVO® beginning on July 20, 2018.

We perform an assessment of the recoverability of capitalized inventory during each reporting period and write down any excess and obsolete inventory to its estimated net realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded as a component of cost of sales in the condensed consolidated statements of operations. The determination of whether inventory costs will be realizable requires the use of estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required.

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was codified as Accounting Standards Codification 606, Revenue from Contracts with Customers, or ASC 606, and amended through subsequent ASUs. We adopted ASC 606 effective January 1, 2018 using the modified retrospective method. Under this method, we recognized the cumulative effect of the change in the opening balance of accumulated deficit in the current period condensed consolidated balance sheet.

Upon finalization of our assessment, which resulted in changes to our estimates as of December 31, 2017, the impact of the cumulative effect of the accounting changes upon the adoption of the standard (in thousands) is as follows:


	December 31, 2017		Cumulative Effect		January 1, 2018
Deferred revenue – related party, current and net of current portions	$	163,640	$	(39,456)	$	124,184
Accumulated deficit	(798,061)		39,456		(758,605)

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The following tables summarize the effects of adopting ASC 606 on our unaudited condensed consolidated financial statements (in thousands, except per share data):

Condensed Consolidated Balance Sheets


	September 30, 2018
	Under Topic 606		Under Topic 605		Effect of Change
Accounts receivable, net	$	2,631	$	2,631	$	—
Collaboration receivable – related party	3,395		3,395		—
Collaboration receivable – other	440		—		440
Total current assets	695,542		695,102		440
Total assets	929,079		928,639		440

Deferred revenue – related party	42,141		33,648		8,493
Total current liabilities	84,746		76,253		8,493
Deferred revenue, net of current portion – related party	66,294		107,714		(41,420)

Total liabilities	168,866		201,793		(32,927)
Accumulated deficit	(1,012,839)		(1,046,206)		33,367
Total stockholders’ equity	760,213		726,846		33,367
Total liabilities and stockholders’ equity	929,079		928,639		440

Condensed Consolidated Statements of Operations


	Three Months Ended September 30, 2018										Nine Months Ended September 30, 2018
	Under Topic 606		Under Topic 605		Effect of Change		Under Topic 606		Under Topic 605		Effect of Change
Product revenue, net	$	4,465	$	4,465	$	—	$	4,465	$	4,465	$	—
Collaboration revenue – related party	8,732		10,137		(1,405)		42,478		46,096		(3,618)
Collaboration revenue – other	—		—		—		12,440		12,000		440
Research and development expense	82,561		81,714		847		247,515		244,604		2,911
Total cost and expenses	114,360		113,513		847		330,497		327,586		2,911
Loss from operations	(99,162)		(96,910)		(2,252)		(266,123)		(260,034)		(6,089)
Net loss	(94,664)		(92,412)		(2,252)		(254,234)		(248,145)		(6,089)
Net loss per share – basic and diluted	(1.63)		(1.59)		(0.04)		(4.45)		(4.34)		(0.11)

Condensed Consolidated Statements of Comprehensive Loss


	Three Months Ended September 30, 2018										Nine Months Ended September 30, 2018
	Under Topic 606		Under Topic 605		Effect of Change		Under Topic 606		Under Topic 605		Effect of Change
Net loss	$	(94,664)	$	(92,412)	$	(2,252)	$	(254,234)	$	(248,145)	$	(6,089)
Comprehensive loss	(94,385)		(92,133)		(2,252)		(254,964)		(248,875)		(6,089)

Condensed Consolidated Statements of Cash Flows


	Nine Months Ended September 30, 2018
	Under Topic 606		Under Topic 605		Effect of Change
Net loss	$	(254,234)	$	(248,145)	$	(6,089)
Adjustments to reconcile net loss to net cash used in operating activities:
Accounts receivable, net	(2,631)		(2,631)		—
Collaboration receivable – related party	(947)		(947)		—
Collaboration receivable – other	(440)		—		(440)
Deferred revenue – related party	(15,749)		(22,278)		6,529

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Cost of Sales

Cost of sales consists primarily of manufacturing costs of TIBSOVO®. Based on our policy to expense costs associated with the manufacturing of our products prior to regulatory approval, certain of the manufacturing costs associated with product shipments of TIBSOVO® recorded during the three and nine months ended September 30, 2018 were expensed prior to July 20, 2018 and, therefore, are not included in costs of sales during the current period.

Recent accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which was codified as ASC 842, Leases, and amended through subsequent ASUs.

We are in the process of reviewing our existing lease contracts and continue to evaluate the accounting implications of ASC 842. We will adopt the guidance effective January 1, 2019 using the modified retrospective transition approach and we expect to elect the package of practical expedients, both provided for under ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. The package of practical expedients allows us not to reassess whether contracts are or contain leases, lease classification, and whether initial direct costs qualify for capitalization.

Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

3. Fair Value Measurements

We record cash equivalents and marketable securities at fair value. ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists of three levels:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, directly or indirectly, for substantially the full term of the asset or liability.

Level 3 – Unobservable inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.

The following table summarizes our cash equivalents and marketable securities measured at fair value on a recurring basis as of September 30, 2018 (in thousands):


	Level 1		Level 2		Level 3		Total
Cash equivalents	$	129,123	$	24,001	$	—	$	153,124
Marketable securities:
Certificates of deposit	—		954		—		954
U.S. Treasuries	—		266,119		—		266,119
Government securities	—		114,407		—		114,407
Corporate debt securities	—		340,442		—		340,442
Total cash equivalents and marketable securities	$	129,123	$	745,923	$	—	$	875,046

Cash equivalents and marketable securities have been initially valued at the transaction price and subsequently, at the end of each reporting period, valued utilizing third-party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market based approaches, and observable market inputs to determine value. After completing our validation procedures, we did not adjust or override any fair value measurements provided by the pricing services as of September 30, 2018.

There have been no changes to the valuation methods during the nine months ended September 30, 2018. We evaluate transfers between levels at the end of each reporting period. There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2018. We have no financial assets or liabilities that were classified as Level 3 at any point during the nine months ended September 30, 2018.

4. Marketable Securities

Our marketable securities are classified as available-for-sale pursuant to ASC 320, Investments – Debt and Equity Securities, and are recorded at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive loss in stockholders’ equity and a component of total comprehensive loss in the condensed consolidated statements of

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comprehensive loss, until realized. Realized gains and losses are included in investment income on a specific-identification basis. There were no realized gains or losses on marketable securities for the three and nine months ended September 30, 2018 and 2017 and, as a result, there were no reclassifications of any amounts out of accumulated other comprehensive loss for those periods.

Marketable securities at September 30, 2018 consisted of the following (in thousands):


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Current:
Certificates of deposit	$	960	$	—	$	(6)	$	954
U.S Treasuries	244,818		—		(302)		244,516
Government securities	61,522		—		(163)		61,359
Corporate debt securities	206,948		—		(363)		206,585
Non-current:
Certificates of deposit	—		—		—		—
U.S Treasuries	21,860		—		(257)		21,603
Government securities	53,301		—		(253)		53,048
Corporate debt securities	134,632		—		(775)		133,857
Total marketable securities	$	724,041	$	—	$	(2,119)	$	721,922

Marketable securities at December 31, 2017 consisted of the following (in thousands):


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Current:
Certificates of deposit	$	8,081	$	—	$	(11)	$	8,070
U.S. Treasuries	113,852		—		(119)		113,733
Government securities	44,421		—		(57)		44,364
Corporate debt securities	155,222		—		(177)		155,045
Non-current:
Certificates of deposit	960		—		(8)		952
U.S. Treasuries	36,165		—		(311)		35,854
Government securities	23,992		—		(182)		23,810
Corporate debt securities	83,722		—		(524)		83,198
Total marketable securities	$	466,415	$	—	$	(1,389)	$	465,026

At September 30, 2018 and December 31, 2017, we held both current and non-current investments. Investments classified as current have maturities of less than one year. Investments classified as non-current are those that: (i) have a maturity of one year to two years, and (ii) we do not intend to liquidate within the next twelve months, although these funds are available for use and therefore classified as available-for-sale.

At September 30, 2018 and December 31, 2017, we held 236 and 240 debt securities that were in an unrealized loss position for less than one year, respectively. The aggregate fair value of debt securities in an unrealized loss position at September 30, 2018 and December 31, 2017 was $659.8 million and $439.4 million, respectively. There were no individual securities that were in a significant unrealized loss position as of September 30, 2018 and December 31, 2017. Given our intent and ability to hold such securities until recovery, and the lack of material of change in the credit risk of these investments, we do not consider these marketable securities to be other-than-temporarily impaired as of September 30, 2018 and December 31, 2017.

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5. Inventory

Inventory consists of the following (in thousands):


	September 30, 2018
Raw materials	$	—
Work-in-process	788
Finished goods	75
Total Inventory	$	863

Inventory is related to our approved product, TIBSOVO®. There were no write downs for excess and obsolete inventory during the three months ended September 30, 2018.

6. Accrued Expenses

Accrued expenses consist of the following (in thousands):


	September 30, 2018		December 31, 2017
Accrued compensation	$	11,748	$	15,693
Accrued research and development costs	10,535		14,849
Accrued professional fees	2,509		3,140
Accrued other	511		349
Total accrued expenses	$	25,303	$	34,031

7. Product Revenue

Our wholly owned product, TIBSOVO®, received approval from the FDA on July 20, 2018 for the treatment of adult patients with R/R AML with a susceptible IDH1 mutation. Upon FDA approval of TIBSOVO® in the U.S. we began generating product revenue from sales of TIBSOVO®. We sell TIBSOVO® to a limited number of specialty distributors and specialty pharmacy providers in the U.S., or collectively, the Customers. The Customers subsequently resell TIBSOVO® to pharmacies or dispense directly to patients. In addition to distribution agreements with Customers, we enter into arrangements with healthcare providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of TIBSOVO®.

The performance obligation related to the sale of TIBSOVO® is satisfied and revenue is recognized when the Customer obtains control of the product, which occurs at a point in time, typically upon delivery to the Customer.

Reserves for Variable Consideration

Revenues from product sales are recorded at the net sales price, or transaction price, which includes estimates of variable consideration for which reserves are established and result from contractual adjustments, government rebates, returns and other allowances that are offered within the contracts with our Customers, healthcare providers, payors and other indirect customers relating to the sale of our products.

Contractual Adjustments

We generally provide Customers with discounts, including prompt pay discounts, and allowances that are explicitly stated in the contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we receive sales order management, data and distribution services from certain Customers.

Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are estimated using the expected value method, based upon a range of possible outcomes that are probability-weighted for the estimated channel mix and are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue.

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Government Rebates

Government rebates consist of Medicare, TriCare, and Medicaid rebates, which we estimate using the expected value method, based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program.

Returns

We estimate the amount of product sales that may be returned by Customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We currently estimate product return liabilities using the expected value method, based on available industry data, including our visibility into the inventory remaining in the distribution channel.

To date, our source of product revenue has been U.S. sales of TIBSOVO®. Total net product revenue was $4.5 million for the three and nine months ended September 30, 2018, respectively. The following table summarizes balances and activity in each of the product revenue allowance and reserve categories for the nine months ended September 30, 2018 (in thousands):


	Contractual Adjustments		Government Rebates		Returns		Total
Balance at December 31, 2017	$	—	$	—	$	—	$	—
Current provisions relating to sales in the current year	360		135		106		601

Payments/returns relating to sales in the current year	(180)		—		—		(180)

Balance at September 30, 2018	$	180	$	135	$	106	$	421

Total revenue-related reserves above, included in our condensed consolidated balance sheets, are summarized as follows (in thousands):


	September 30, 2018
Reduction of accounts receivable	$	98
Component of accrued expenses	323
Total revenue-related reserves	$	421

The following table presents changes in our contract assets and liabilities during the nine months ended September 30, 2018 (in thousands):


	December 31, 2017		Additions		Deductions		September 30, 2018
Contract assets (1)
Accounts receivable, net	$	—	$	5,328	$	(2,697)	$	2,631

(1) Additions to contract assets relate to amounts billed to Customers for product sales during the reporting period. Deductions to contract assets relate to collection of receivables during the reporting period.

8. Collaboration and License Agreements

Celgene Corporation

To date, our revenue has primarily been generated from our collaboration agreements with Celgene, or collectively, the Collaboration Agreements. Celgene is a related party through ownership of our common stock. In April 2010, we entered into a discovery and development collaboration and license agreement focused on cancer metabolism, or the 2010 Agreement. The 2010 Agreement was amended in October 2011 and July 2014. In April 2015, we entered into a joint worldwide development and profit share collaboration and license agreement with Celgene, and our wholly owned subsidiary, Agios International Sarl, entered into a collaboration and license agreement with Celgene International II Sarl, or collectively, the AG-881 Agreements, to establish a worldwide collaboration focused on the development and commercialization of AG-881 products. The AG-881 Agreements were terminated effective September 4, 2018. In May 2016, we entered into a master research and collaboration agreement with Celgene, or the 2016 Agreement.

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2016 Agreement

In May 2016, we entered into the 2016 Agreement focused on metabolic immuno-oncology, or MIO, a developing field which aims to modulate the activity of relevant immune cells by targeting critical metabolic nodes, thereby enhancing the immune mediated anti-tumor response. In addition to new programs identified under the 2016 Agreement, both parties also agreed that all future development and commercialization of two remaining cancer metabolism programs discovered under the 2010 Agreement, including AG-270, an inhibitor of methionine adenosyltransferase 2a, will now be governed by the 2016 Agreement.

During the research term of the 2016 Agreement, we plan to conduct research programs focused on discovering compounds that are active against metabolic targets in the immuno-oncology, or IO, field. The initial four-year research term will expire on May 17, 2020, and may be extended for up to two, or in specified cases, up to four additional one-year terms.

For each program under the 2016 Agreement, we may nominate compounds that meet specified criteria as development candidates and, in limited circumstances, Celgene may also nominate compounds as development candidates for each such program. Celgene may designate the applicable program for further development following any such nomination, after which we may conduct, at our expense, additional preclinical and clinical development for such program through the completion of an initial phase 1 dose escalation study.

At the end of the research term, Celgene may designate for continued development up to three research programs for which development candidates have yet to be nominated, which are referred to as continuation programs. We may conduct further research and preclinical and clinical development activities on any continuation program, at our expense, through the completion of an initial phase 1 dose escalation study.

We granted Celgene the right to obtain exclusive options for development and commercialization rights for each program that Celgene has designated for further development, and for each continuation program. Celgene may exercise each such option beginning on the designation of a development candidate for such program (or on the designation of such program as a continuation program) and ending on the earlier of: (i) the end of a specified period after we have furnished Celgene with specified information about the initial phase 1 dose escalation study for such program, or (ii) January 1, 2030. Research programs that have applications in the inflammation or autoimmune, or I&I, field that may result from the 2016 Agreement will also be subject to the exclusive options described above.

We will retain rights to any program that Celgene does not designate for further development or as to which it does not exercise its option.

Under the terms of the 2016 Agreement, following Celgene’s exercise of its option with respect to a program, the parties will enter into either a co-development and co-commercialization agreement if such program is in the IO field, or a license agreement if such program is in the I&I field. Under each co-development and co-commercialization agreement, the two parties will co-develop and co-commercialize licensed products worldwide. Either we or Celgene will lead development and commercialization of licensed products for the United States, and Celgene will lead development and commercialization of licensed products outside of the United States. Depending on the country, the parties will each have the right to provide a portion of field-based marketing activities. Under each license agreement, Celgene will have the sole right to develop and commercialize licensed products worldwide.

Co-development and co-commercialization agreements

Under each co-development and co-commercialization agreement entered into under the 2016 Agreement, the parties will split all post-option exercise worldwide development costs, subject to specified exceptions, as well as any profits from any net sales of, or commercialization losses related to, licensed products in the IO field. Celgene has the option to designate one program in the IO field as the 65/35 program, for which Celgene will be the lead party for the United States and will have a 65% profit or loss share. For programs in the IO field other than the 65/35 program, we and Celgene will alternate, on a program-by-program basis, being the lead party for the United States, with us having the right to be the lead party for the first such program, and each party will have a 50% profit or loss share. The lead party for the United States will book commercial sales of licensed products, if any, in the United States, and Celgene will book commercial sales of licensed products, if any, outside of the United States.

License agreements

Under each license agreement under the 2016 Agreement, Celgene will be responsible for all post-option exercise worldwide development and associated costs, subject to specified exceptions, as well as worldwide commercialization and associated costs, for licensed products in the I&I field.

Financial terms

Under the terms of the 2016 Agreement, we received an initial upfront payment in the amount of $200.0 million. The 2016 Agreement provides specified rights to extend the research term for up to two, or in specified cases, up to four, additional years

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by paying a $40.0 million per-year extension fee. Celgene will pay an $8.0 million designation fee for each program that Celgene designates for further development and for each continuation program. During the three months ended March 31, 2017, we received $8.0 million from Celgene upon the designation of AG-270 as a development candidate. For each program as to which Celgene exercises its option to develop and commercialize, subject to antitrust clearance, Celgene will pay an option exercise fee of at least $30.0 million for any designated development program and at least $35.0 million for any continuation programs. In certain cases, Celgene may exercise its option to develop and commercialize two early-stage I&I programs, prior to Celgene designating the program for further development, by paying an option exercise fee of $10.0 million.

We are eligible to receive the following milestone-based payments associated with the 2016 Agreement:

Program

Milestone

Amount

65/35 program in IO field

Specified clinical development event

$25.0 million

65/35 program in IO field

Specified regulatory milestone events

Up to $183.8 million

50/50 program in IO field

Specified clinical development event

$20.0 million

50/50 program in IO field

Specified regulatory milestone events

Up to $148.8 million

I&I field

Specified clinical development event

$25.0 million

I&I field

Specified regulatory milestone events

Up to $236.3 million

I&I field

Specified commercial milestone events

Up to $125.0 million

Additionally, for each licensed program in the I&I field, we are eligible to receive royalties at tiered, low double-digit percentage rates on Celgene’s net sales, if any.

Opt-out right

Under the 2016 Agreement, we may elect to opt out of the cost and profit share under any co-development and co-commercialization agreement, subject to specified exceptions. Upon opting out, Celgene will have the sole right to develop, manufacture and commercialize the applicable licensed products throughout the world, at its cost, and we will undertake transitional activities reasonably necessary to transfer the development, manufacture and commercialization of such licensed products to Celgene, at our expense. Further, in lieu of the profit or loss sharing described above, we would be eligible to receive royalties at tiered, low double-digit percentage rates on Celgene’s net sales, if any, of the applicable licensed products. However, we would continue to be eligible to receive the developmental and regulatory milestone-based payments described above.

Term

The term of the 2016 Agreement commenced on May 17, 2016 and, if not terminated earlier, will expire upon the later of the last-to-expire of the research term and all option exercise periods, or, if an option is exercised by Celgene for one or more programs in the collaboration, upon the termination or expiration of the last-to-exist co-development and co-commercialization agreement or license agreement, as applicable, for any such program.

Termination

Subject to specified exceptions, Celgene may terminate the 2016 Agreement in its entirety for any reason by providing us with prior written notice if there are no active co-development and co-commercialization agreements or license agreements in place or on a program-by-program basis if there are no active co-development and co-commercialization agreements or license agreements in place for the terminated program(s). Either party may terminate the 2016 Agreement for the insolvency of the other party. On a program-by-program basis, prior to the exercise of an option, either party may terminate the 2016 Agreement either in its entirety or with respect to one or more programs on prior written notice to the other party in the case of an uncured material breach by the other party that frustrates the fundamental purpose of the 2016 Agreement. Following the exercise of an option for a program, either party may terminate the 2016 Agreement with respect to such program if such party terminates the co-development and co-commercialization agreement or license agreement for such program for an uncured material breach by the other party that frustrates the fundamental purpose of such agreement. Either party may terminate a co-development and co-commercialization agreement or a license agreement upon the bankruptcy or insolvency of the other party. Either party also has the right to terminate the co-development and co-commercialization agreement or license agreement if the other party or any of its affiliates challenges the validity, scope or enforceability of or otherwise opposes, any patent included within the intellectual property rights licensed to the other party under such agreement.

Exclusivity

While any of Celgene’s options remain available under the 2016 Agreement, subject to specified exceptions, we may not directly or indirectly develop, manufacture or commercialize, outside of the 2016 Agreement, any therapeutic modality in the IO or I&I field with specified activity against a metabolic target.

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During the term of each co-development and co-commercialization agreement and license agreement, subject to specified exceptions, neither we nor Celgene may directly or indirectly develop, manufacture or commercialize outside of such agreement any therapeutic modality in any field with specified activity against the metabolic target that is the focus of the program licensed under such agreement.

Ivosidenib Letter Agreement

In May 2016, we entered into a letter agreement with Celgene regarding ivosidenib, or the Ivosidenib Letter Agreement. Under the Ivosidenib Letter Agreement, the parties agreed to terminate the 2010 Agreement, effective as of August 15, 2016, as to the program directed to the IDH1 target, for which ivosidenib is the lead development candidate. Under the 2010 Agreement, Celgene had held development and commercialization rights to the IDH1 program outside of the United States, and we held such rights inside the United States. As a result of the termination, we obtained global rights to ivosidenib and the IDH1 program. Neither party will have any further financial obligation, including royalties or milestone payments, to the other concerning ivosidenib or the IDH1 program. Under the terms of the termination, the parties also agreed to conduct specified transitional activities in connection with the termination. In addition, pursuant to the Ivosidenib Letter Agreement, the parties are released from their exclusivity obligations under the 2010 Agreement with respect to the IDH1 program. The termination did not affect the AG-881 Agreements, which were directed to both the IDH1 target and the isocitrate dehydrogenase 2, or IDH2, target, and were subsequently terminated in September 2018 as discussed below.

Termination of AG-881 Agreements

In September 2018, we and Celgene agreed to terminate the AG-881 Agreements effective as of September 4, 2018. From and after September 4, 2018, we obtained sole global rights to AG-881. Neither we nor Celgene will have any further financial obligation under the AG-881 Agreements, including milestones, royalties or other payments, except that (a) Celgene shall be eligible to receive royalties from us at a low single-digit percentage rate on worldwide net sales of products containing AG-881 and (b) we and Celgene shall split certain agreed-upon worldwide development costs for AG-881 until December 31, 2018. In addition, for a specified period and subject to specified exceptions, Celgene and its affiliates shall be prohibited from developing, manufacturing or commercializing any product that inhibits IDH1 at specified levels of binding for any indication and we shall be prohibited from developing, manufacturing or commercializing AG-881 in hematologic indications.

2010 Agreement

In April 2010, we entered into the 2010 Agreement, which was amended in October 2011 and July 2014. The goal of the collaboration was to discover, develop and commercialize disease-altering therapies in oncology based on our cancer metabolism research platform. We initially led discovery, preclinical and early clinical development for all cancer metabolism programs under the collaboration. The discovery phase of the 2010 Agreement expired in April 2016.

Upon agreement to terminate the 2010 Agreement, effective as of August 15, 2016, as to the program directed to the IDH1 target, for which ivosidenib is the lead development candidate, the sole program remaining under the 2010 Agreement is IDHIFA® (enasidenib), a co-commercialized licensed program for which Celgene leads and funds global development and commercialization activities. We have exercised our right to participate in a portion of commercialization activities in the United States for IDHIFA® in accordance with the applicable commercialization plan. On August 1, 2017, the FDA granted Celgene approval of IDHIFA® for the treatment of adult patients with R/R AML with an IDH2 mutation as detected by an FDA-approved test.

Under the remaining terms of the 2010 Agreement, we are eligible to receive up to $80.0 million in potential milestone payments for the enasidenib program. The potential milestone payments are comprised of: (i) up to $55.0 million in milestone payments upon achievement of specified ex-U.S. regulatory milestone events, and (ii) a $25.0 million milestone payment upon achievement of a specified ex-U.S. commercial milestone event.

Under the 2010 Agreement, we receive royalties at tiered, low-double digit to mid-teen percentage rates on net sales of IDHIFA®.

Unless terminated earlier by either party, the term of the 2010 Agreement will continue until the expiration of all royalty terms with respect to IDHIFA®. Celgene may terminate this agreement for convenience in its entirety upon ninety days written notice to us. If either party is in material breach and fails to cure such breach within the specified cure period, the other party may terminate the 2010 Agreement in its entirety. Either party may terminate the agreement in the event of specified insolvency events involving the other party.

Accounting analysis and revenue recognition – collaboration revenue

On January 1, 2018 we adopted ASC 606 under the modified retrospective method. Prior to January 1, 2018 we accounted for the Collaboration Agreements under ASC 605-25, Multiple Element Arrangements.

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Accounting under ASC 606

In adopting ASC 606, we applied the practical expedient that permits aggregating the effect of all contract modifications that occurred prior to January 1, 2018. No other practical expedients were used. Similar to the accounting under ASC 605-25, the 2016 Agreement was determined to be a modification of the 2010 Agreement and the AG-881 Agreements. In determining the appropriate amount of revenue to be recognized under ASC 606, we performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measured the transaction price, including the constraint on variable consideration; (iv) allocated the transaction price to the performance obligations; and (v) recognized revenue when (or as) we satisfied each performance obligation.

As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price, or SSP, for each performance obligation identified in the contract. We use key assumptions to determine the SSP, which include forecast of revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

The satisfied and unsatisfied performance obligations at the time of the ASC 606 adoption, each of which are considered by us to be distinct within the context of the contract, their SSP, the method of recognizing the allocated consideration, and the period through which they are expected to be recognized are as follows:

Performance Obligations

SSP

No. of Performance Obligation(s)

Recognition Method

Fully satisfied at time of adoption

Licenses (1)

$86.7 million

Fully satisfied; recognized upon adoption of ASC 606

Research and development services (2)

$350.7 million

Fully satisfied; recognized upon adoption of ASC 606

Partially satisfied at time of adoption

Research and development services (2)

$266.6 million

Proportionally as services are delivered over the performance period, expected to be through September 2022 (3)

(1) The SSP was developed by probability weighting multiple cash flow scenarios using the income approach. Our management estimates within the models include the expected, probability-weighted net profits from estimated future sales, an estimate of the direct cost incurred to generate future cash flows, a discount rate and other business forecast factors. There are significant judgments and estimates inherent in the determination of the SSP of these units of accounting. These judgments and estimates include assumptions regarding future operating performance, the timelines of the clinical trials and regulatory approvals, and other factors. If different reasonable assumptions are utilized, the SSP and revenue recognized would vary.

(2) The SSP was developed using our management’s best estimate of the cost of obtaining these services at arm’s length from a third-party provider and using internal full time equivalent costs to support the development services.

(3) We determined that recognizing revenue on a proportional basis using the ratio of effort incurred to date compared to the total estimated effort required to complete the performance obligation best depicts the satisfaction of our obligations under the Collaboration Agreements.

During the three and nine months ended September 30, 2018, we recognized the following as collaboration revenue (in thousands):


	Three Months Ended September 30, 2018										Nine Months Ended September 30, 2018
Performance Obligation	Under Topic 606		Under Topic 605		Effect of Change		Under Topic 606		Under Topic 605		Effect of Change
Collaboration revenue - related party
Licenses	$	—	$	—	$	—	$	15,000	$	15,000	$	—
Research and development services	7,504		8,864		(1,360)		23,698		27,184		(3,486)
Committee participation	—		45		(45)		—		132		(132)
Reduction of research and development expenses
Development services	—		847		(847)		—		2,911		(2,911)

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During the three and nine months ended September 30, 2018 and 2017, we recognized as collaboration revenue the following non-contingent consideration allocated to each performance obligation (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2018		2017		2018		2017
Licenses	$	—	$	—	$	15,000	$	—
On-going research and development services	7,504		9,708		23,698		30,374
Committee participation	—		41		—		124

Consideration for development and commercialization services performed by us, that were not considered performance obligations as of the modification dates, are recognized as collaboration revenue or a reduction of research and development expenses in the period in which they are earned. There was no impact from the adoption of ASC 606 on these obligations. For the three and nine months ended September 30, 2018 and 2017, we recognized the following collaboration revenue and reduction of research and development expenses related to such expenses (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2018		2017		2018		2017
Collaboration revenue - related party
Development activities	$	312	$	—	$	902	$	—
Commercialization activities	916		894		2,878		1,999
Reduction of research and development expenses
Research and development activities	—		—		—		14

For the three and nine months ended September 30, 2018 and 2017, we recognized the following totals of collaboration revenue and reduction of research and development expenses (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2018		2017		2018		2017
Collaboration revenue - related party	$	8,732	$	10,643	$	42,478	$	32,497
Reduction of research and development expenses	—		1,078		—