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Table of Contents    

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-30235
exellogo2017aa02.jpg
EXELIXIS, INC.
(Exact name of registrant as specified in its charter)
Delaware
04-3257395
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1851 Harbor Bay Parkway
Alameda, CA 94502
(650) 837-7000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
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  ý 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  ý 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
ý
 
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 7(a)(2)(B) of the Securities Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨ No ý
As of July 24, 2018, there were 298,035,458 shares of the registrant’s common stock outstanding.

Table of Contents    

EXELIXIS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXELIXIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
 
June 30,
2018
 
December 31, 2017*
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
248,407

 
$
183,164

Short-term investments
251,516

 
204,607

Short-term restricted cash and investments
504

 
504

Trade and other receivables, net
167,161

 
81,192

Inventory, net
8,371

 
6,657

Prepaid expenses and other current assets
10,327

 
8,750

Total current assets
686,286

 
484,874

Long-term investments
94,396

 
64,255

Long-term restricted cash and investments
1,100

 
4,646

Property and equipment, net
64,744

 
25,743

Goodwill
63,684

 
63,684

Other long-term assets
948

 
12,092

Total assets
$
911,158

 
$
655,294

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
13,023

 
$
9,575

Accrued compensation and benefits
21,538

 
21,073

Accrued clinical trial liabilities
16,801

 
19,849

Rebates and fees due to customers
11,143

 
7,565

Accrued collaboration liabilities
7,713

 
8,974

Current portion of deferred revenue
5,939

 
31,984

Other current liabilities
23,787

 
16,150

Total current liabilities
99,944

 
115,170

Long-term portion of deferred revenue
11,970

 
238,520

Financing obligation for build-to-suit lease
20,646

 
14,530

Other long-term liabilities
3,630

 
2,113

Total liabilities
136,190

 
370,333

Commitments

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized and no shares issued
—

 
—

Common stock, $0.001 par value; 400,000,000 shares authorized; issued and outstanding: 297,892,180 and 296,209,426 at June 30, 2018 and December 31, 2017, respectively
298

 
296

Additional paid-in capital
2,142,717

 
2,114,184

Accumulated other comprehensive loss
(731
)
 
(347
)
Accumulated deficit
(1,367,316
)
 
(1,829,172
)
Total stockholders’ equity
774,968

 
284,961

Total liabilities and stockholders’ equity
$
911,158

 
$
655,294

*
The Condensed Consolidated Balance Sheet as of December 31, 2017 has been derived from the audited financial statements as of that date.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Net product revenues
$
145,836

 
$
88,004

 
$
280,108

 
$
156,881

Collaboration revenues
40,272

 
11,004

 
119,719

 
23,014

Total revenues
186,108

 
99,008

 
399,827

 
179,895

Operating expenses:
 
 
 
 
 
 
 
Cost of goods sold
5,997

 
3,014

 
11,636

 
6,217

Research and development
42,488

 
28,214

 
80,245

 
51,424

Selling, general and administrative
51,853

 
40,667

 
105,869

 
74,955

Total operating expenses
100,338

 
71,895

 
197,750

 
132,596

Income from operations
85,770

 
27,113

 
202,077

 
47,299

Other income (expense), net:
 
 
 
 
 
 
 
Interest income
2,697

 
1,251

 
4,592

 
2,364

Interest expense
—

 
(4,259
)
 
—

 
(8,679
)
Other, net
(72
)
 
(5,868
)
 
97

 
(5,913
)
Total other income (expense), net
2,625

 
(8,876
)
 
4,689

 
(12,228
)
Income before income taxes
88,395

 
18,237

 
206,766

 
35,071

Provision for income taxes
901

 
581

 
3,415

 
715

Net income
$
87,494

 
$
17,656

 
$
203,351

 
$
34,356

Net income per share, basic
$
0.29

 
$
0.06

 
$
0.68

 
$
0.12

Net income per share, diluted
$
0.28

 
$
0.06

 
$
0.65

 
$
0.11

Shares used in computing net income per share, basic
297,336

 
293,188

 
296,874

 
292,029

Shares used in computing net income per share, diluted
312,241

 
311,219

 
313,024

 
310,759

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
87,494

 
$
17,656

 
$
203,351

 
$
34,356

Other comprehensive income (loss) (1)
156

 
207

 
(384
)
 
297

Comprehensive income
$
87,650

 
$
17,863

 
$
202,967

 
$
34,653

____________________
(1)
Other comprehensive income (loss) consisted solely of unrealized gains or losses, net, on available-for-sale securities arising during the periods presented. Reclassification adjustments to net income resulting from realized gains or losses on the sale of securities were nominal and there was no income tax expense related to other comprehensive income during those periods.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
Net income
$
203,351

 
$
34,356

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,176

 
563

Stock-based compensation
18,588

 
9,740

401(k) matching contributions made in common stock
2,723

 
998

Loss on extinguishment of debt
—

 
6,239

Amortization of debt discounts and debt issuance costs
—

 
182

Interest paid in kind
—

 
(11,825
)
Gain on other equity investments
(209
)
 
(639
)
Other
(490
)
 
148

Changes in assets and liabilities:
 
 
 
Trade and other receivables, net
(85,969
)
 
(2,581
)
Inventory, net
(1,714
)
 
(2,087
)
Prepaid expenses and other current assets
(1,577
)
 
1,049

Other long-term assets
3

 
519

Accounts payable
(1,535
)
 
472

Accrued compensation and benefits
465

 
(4,779
)
Accrued clinical trial liabilities
(3,048
)
 
549

Accrued collaboration liabilities
(1,261
)
 
5,873

Deferred revenue
5,910

 
28,159

Other current and long-term liabilities
10,164

 
7,457

Net cash provided by operating activities
146,577

 
74,393

Cash flows from investing activities:
 
 
 
Purchases of Property and equipment and other, net
(15,182
)
 
(2,298
)
Purchases of investments
(227,012
)
 
(154,809
)
Proceeds from maturities of investments
139,948

 
200,893

Proceeds from sale of investments
10,237

 
37,294

Proceeds from other equity investments
209

 
639

Net cash (used in) provided by investing activities
(91,800
)
 
81,719

Cash flows from financing activities:
 
 
 
Principal repayments of debt
—

 
(185,788
)
Proceeds from exercise of stock options
6,550

 
12,980

Proceeds from employee stock purchase plan
3,650

 
3,053

Taxes paid related to net share settlement of equity awards
(2,976
)
 
(2,331
)
Principal payments on financing lease obligation
(304
)
 
—

Net cash provided by (used in) financing activities
6,920

 
(172,086
)
Net increase (decrease) in cash, cash equivalents and restricted cash
61,697

 
(15,974
)
Cash, cash equivalents and restricted cash at beginning of period
188,314

 
155,836

Cash, cash equivalents and restricted cash at end of period
$
250,011

 
$
139,862

Supplemental cash flow disclosure - non-cash investing and financing activity:
 
 
 
Property and equipment deemed to have been acquired under build-to-suit lease
$
6,864

 
$
14,530

Unpaid liabilities incurred to acquire Property and equipment
$
13,972

 
$
531

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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EXELIXIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Exelixis, Inc. (“Exelixis,” “we,” “our” or “us”) is a biotechnology company committed to the discovery, development and commercialization of new medicines to improve care and outcomes for people with cancer. Since our founding in 1994, three products discovered at Exelixis have progressed through clinical development, received regulatory approval, and entered the marketplace. Two are derived from cabozantinib, an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors, and RET: CABOMETYX® (cabozantinib) tablets approved for advanced renal cell carcinoma (“RCC”); and COMETRIQ® (cabozantinib) capsules approved for progressive, metastatic medullary thyroid cancer. The third product, COTELLIC® (cobimetinib) tablets, is an inhibitor of MEK, marketed under a collaboration agreement with Genentech, Inc. (a member of the Roche Group) (“Genentech”), and is approved as part of a combination regimen to treat advanced melanoma.
Basis of Consolidation
The accompanying Condensed Consolidated Financial Statements include the accounts of Exelixis and those of our wholly-owned subsidiaries. These entities’ functional currency is the U.S. dollar. All intercompany balances and transactions have been eliminated.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of operations and cash flows for the periods presented have been included.
We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31st. Fiscal year 2018 will end on December 28, 2018 and fiscal year 2017 ended on December 29, 2017. For convenience, references in this report as of and for the fiscal periods ended June 29, 2018, March 30, 2018 and June 30, 2017, and as of and for the fiscal years ended December 28, 2018 and December 29, 2017, are indicated as being as of and for the periods ended June 30, 2018, March 31, 2018 and June 30, 2017, and the years ended December 31, 2018 and December 31, 2017, respectively. Similarly, references in this report to the first day of the fiscal year ended December 28, 2018 and the first day of the fiscal quarter ended June 29, 2018 are indicated as being as of January 1, 2018 and April 1, 2018, respectively.
Operating results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or for any future period. The accompanying Condensed Consolidated Financial Statements and Notes thereto should be read in conjunction with our Consolidated Financial Statements and Notes thereto for the year ended December 31, 2017, included in our Annual Report on Form 10-K filed with the SEC on February 26, 2018.
Segment Information
We operate in one business segment that focuses on discovery, development and commercialization of new medicines to improve care and outcomes for people with cancer. Our Chief Executive Officer, as the chief operating decision-maker, manages and allocates resources to our operations on a total consolidated basis. Consistent with this decision-making process, our Chief Executive Officer uses consolidated, single-segment financial information for purposes of evaluating performance, forecasting future period financial results, allocating resources and setting incentive targets.
All of our long-lived assets are located in the U.S. See “Note 2. Revenues” for enterprise-wide disclosures about product sales, revenues from major customers and revenues by geographic region.

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Use of Estimates
The preparation of the accompanying Condensed Consolidated Financial Statements conforms to accounting principles generally accepted in the U.S., which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. On an ongoing basis, management evaluates its estimates including, but not limited to: those related to revenue recognition, including determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, and variable consideration such as rebates, chargebacks, sales returns and sales allowances as well as milestones included in collaboration arrangements; the amounts of revenues and expenses under our profit and loss sharing agreement; recoverability of inventory; the accrual for certain liabilities including accrued clinical trial liability; and valuations of awards used to determine stock-based compensation. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Reclassifications
Certain prior period amounts on the accompanying Condensed Consolidated Financial Statements have been reclassified to conform to current period presentation.
In addition, as a result of new information received during the six months ended June 30, 2018, as described further in “Note 3. Collaboration Revenues - Genentech Collaboration”, we have reclassified the $1.4 million in profit on the U.S. commercialization of COTELLIC for the three months ended March 31, 2018 from Selling, general and administrative expenses to Collaboration revenue in preparing our Condensed Consolidated Statements of Operations for the six months ended June 30, 2018. As a result of this reclassification, for the three months ended March 31, 2018, Collaboration revenues increased from $78.1 million to $79.4 million, Net revenues increased from $212.3 million to $213.7 million, Selling, general and administrative expenses increased from $52.6 million to $54.0 million and Operating expenses increased from $96.0 million to $97.4 million. There was no impact on Net income or Net income per share as a result of this reclassification.
Recently Adopted Accounting Pronouncements
Restricted Cash
In January 2018, we adopted Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was adopted using the retrospective transition method in the accompanying Condensed Consolidated Financial Statements.
As a result of the adoption of ASU 2016-18, we no longer include purchases of restricted cash and proceeds from maturities of restricted cash in our cash flows from investing activities. Accordingly, the adoption of ASU 2016-18 resulted in a $0.5 million increase in Net cash provided by investing activities for the six months ended June 30, 2017.
See “Note 4. Cash and Investments - Cash, Cash Equivalents and Restricted Cash” for a reconciliation of cash and cash equivalents presented in our previously published Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2017 and Cash, cash equivalents and restricted cash reported in the accompanying Condensed Consolidated Statement of Cash Flows for the same period.
Revenue
On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”) using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for the six months ended June 30, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under previous revenue recognition guidance, Accounting Standards Codification Topic 605: Revenue Recognition (“Topic 605”).

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We recorded a net reduction of $258.5 million to opening accumulated deficit as of January 1, 2018, due to the cumulative impact of adopting Topic 606, with the impact primarily relating to a change in the recognition of upfront and non-substantive milestone payments received related to our collaboration arrangements with Ipsen Pharma SAS (“Ipsen”) and Takeda Pharmaceutical Company Ltd. (“Takeda”). The adoption of Topic 606 did not have an impact on our recognition of revenue from product sales.
The impact of the adoption of Topic 606 on the accompanying Condensed Consolidated Balance Sheet as of January 1, 2018 was as follows (in thousands):
 
December 31, 2017
 
Adjustments Due to the Adoption of Topic 606
 
January 1, 2018
Contract assets: unbilled collaboration revenue, gross:
 
 
 
 
 
Current portion
$
—

 
$
9,588

 
$
9,588

Long-term portion
$
—

 
$
12,247

 
$
12,247

Contract liabilities: deferred revenue, gross:
 
 
 
 
 
Current portion
$
31,984

 
$
(23,591
)
 
$
8,393

Long-term portion
$
238,520

 
$
(213,079
)
 
$
25,441

Accumulated deficit
$
(1,829,172
)
 
$
258,505

 
$
(1,570,667
)
The adjustments due to the adoption of Topic 606 primarily related to a reduction in deferred revenue driven by the allocation of the transaction price to our license performance obligations in the Ipsen and Takeda collaborations, which were determined to be functional intellectual property that was transferred at a point in time and as a result, revenue was recorded at a point in time. Previously under Topic 605, revenue related to the upfront payments and one non-substantive milestone payment earned in 2016 had been deferred over the estimated period of performance pursuant to the terms of the contract. Contract assets as of January 1, 2018 primarily related to estimated revenue for reimbursements for our continuing research and development services and the $10.0 million milestone from Ipsen’s filing with the European Medicines Agency (“EMA”) for cabozantinib, as a treatment for patients with previously treated advanced hepatocellular carcinoma (“HCC”), that was deemed probable under Topic 606 prior to January 1, 2018. Deferred revenue as of January 1, 2018 is related to the up-front, nonrefundable, fees and milestones achieved that were allocated to our research and development services performance obligation that had not been satisfied as of that date. Contract assets and liabilities are netted by collaboration agreement in our Condensed Consolidated Balance Sheets; however, for illustration purposes the above amounts are shown prior to netting.
The impact of the adoption of Topic 606 on the accompanying Condensed Consolidated Statements of Operations as of and for three and six months ended June 30, 2018 were as follows (in thousands):
 
Three Months Ended June 30, 2018
 
As Reported
 
Balances Without the Adoption of Topic 606
 
Effect of Adoption
Higher / (Lower)
Collaboration revenues
$
40,272

 
$
94,420

 
$
(54,148
)
Total revenues
$
186,108

 
$
240,256

 
$
(54,148
)
Income before income taxes
$
88,395

 
$
142,543

 
$
(54,148
)
Provision for income taxes
$
901

 
$
1,906

 
$
(1,005
)
Net income
$
87,494

 
$
140,637

 
$
(53,143
)
Net income per share, basic
$
0.29

 
$
0.47

 
$
(0.18
)
Net income per share, diluted
$
0.28

 
$
0.45

 
$
(0.17
)

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Six Months Ended June 30, 2018
 
As Reported
 
Balances Without the Adoption of Topic 606
 
Effect of Adoption
Higher / (Lower)
Collaboration revenues
$
119,719

 
$
142,469

 
$
(22,750
)
Total revenues
$
399,827

 
$
422,577

 
$
(22,750
)
Income before income taxes
$
206,766

 
$
229,516

 
$
(22,750
)
Provision for income taxes
$
3,415

 
$
3,529

 
$
(114
)
Net income
$
203,351

 
$
225,987

 
$
(22,636
)
Net income per share, basic
$
0.68

 
$
0.76

 
$
(0.08
)
Net income per share, diluted
$
0.65

 
$
0.72

 
$
(0.07
)
Collaboration revenues for the three and six months ended June 30, 2018 recognized in accordance with Topic 606 included $0.2 million and $46.0 million in revenue, respectively, for a $50.0 million milestone from Ipsen for the approval of cabozantinib for the first-line treatment of advanced RCC. We recognized $45.8 million in revenue for this milestone in the first quarter of 2018 when we deemed achievement of the milestone was probable in accordance with Topic 606. If we had not adopted Topic 606, we would have recognized the entire $50.0 million milestone as revenue in the second quarter of 2018 upon achievement of the milestone. If we had not adopted Topic 606, we would also have recognized a $10.0 million milestone in the first quarter of 2018 upon the validation of Ipsen’s filing with the EMA for cabozantinib as a treatment for patients with previously treated advanced HCC that was recognized under Topic 606 as part of our adoption transition adjustment on January 1, 2018. The adoption of Topic 606 also resulted in a reduction of previously deferred revenue that was recorded as part of our adoption transition adjustment as of January 1, 2018.
Revenue
Topic 606 supersedes all previous revenue recognition requirements in accordance with generally accepted accounting principles. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration to which the entity is entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.
Net Product Revenues
We sell our products principally to specialty distributors and specialty pharmacy providers, or collectively, our Customers. These Customers subsequently resell our products to health care providers and patients. In addition to distribution agreements with Customers, we enter into arrangements with health care providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of our products. Revenues from product sales are recognized when the Customer obtains control of our product, which occurs at a point in time, typically upon delivery to the Customer.
Product Sales Discounts and Allowances
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and that result from discounts, chargebacks, rebates, co-pay assistance, returns and other allowances that are offered within contracts between us and our Customers, health care providers, payors and other indirect customers relating to the sales of our products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than a Customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted Customer buying and payment patterns. Overall, these reserves reflect our best

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estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenues and earnings in the period such variances become known.
Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty distributor. Contracted customers, which currently consist primarily of Public Health Service institutions, non-profit clinics, Federal government entities purchasing via the Federal Supply Schedule and Group Purchasing Organizations, and health maintenance organizations, generally purchase the product at a discounted price. The specialty distributor, in turn, charges back to us the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by the customer. The allowance for chargebacks is based on an estimate of sales to contracted customers.
Discounts for Prompt Payment: Our Customers in the U.S. receive a discount of 2% for prompt payment. We expect our Customers will earn 100% of their prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized.
Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and other government programs. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid. The allowance for rebates is based on statutory discount rates and expected utilization. Our estimates for the expected utilization of rebates are based on customer and payer data received from the specialty pharmacies and distributors and historical utilization rates. Rebates are generally invoiced by the payer and paid in arrears, such that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s shipments to our customers, plus an accrual balance for known prior quarters’ unpaid rebates. If actual future rebates vary from estimates, we may need to adjust our accruals, which would affect net product revenues in the period of adjustment.
Allowances for rebates also include amounts related to the Medicare Part D Coverage Gap Discount Program. In the U.S., the Medicare Part D prescription drug benefit mandates participating manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for expected Medicare Part D coverage gap amounts are based on customer and payer data received from specialty pharmacies and distributors and historical utilization rates. Funding of the coverage gap is invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s shipments to patients, plus an accrual balance for known prior quarters’ unpaid claims. If actual future funding varies from estimates, we may need to adjust our accruals, which would affect net product revenues in the period of adjustment.
Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption using customer data provided by the specialty distributor that administers the copay program.
Other Customer Credits: We pay fees to our Customers for account management, data management and other administrative services. To the extent the services received are distinct from the sale of products to the Customer, these payments are classified in Selling, general and administrative expenses in our Condensed Consolidated Statements of Operations.
Collaboration Revenues
We enter into collaboration arrangements, under which we license certain rights to our intellectual property to third parties. The terms of these arrangements typically include payment to us for one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for product supply; development cost reimbursements; profit sharing arrangements; and royalties on net sales of licensed products. Except for profit sharing arrangements and payments for product supply, each of these payment types are within the scope of Topic 606. As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. These key assumptions may include forecasted revenues, clinical development timelines and costs, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

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Up-front License Fees: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from nonrefundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
Regulatory and Development Milestone Payments: At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until uncertainty associated with the approvals has been resolved. The transaction price is then allocated to each performance obligation, on a relative standalone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achieving such development and regulatory milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect Collaboration revenues and earnings in the period of adjustment.
Product Supply Services: Arrangements that include a promise for future supply of drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations.
Development Cost Reimbursements: Our Ipsen and Takeda arrangements include promises of future clinical development and drug safety services, as well as participation on certain joint committees. We have determined that these services collectively are distinct from the licenses provided to Ipsen and Takeda and as such, these promises are accounted for as a separate performance obligation recorded over time. We record revenue for these services as the performance obligations are satisfied, which we estimate using internal development costs incurred and projections through the term of the arrangements.
Profit Sharing Arrangements: Under the terms of our collaboration agreement with Genentech for cobimetinib, we are entitled to a share of U.S. profits and losses received in connection with commercialization of cobimetinib. We are also entitled to low double-digit royalties on ex-U.S. net sales. We account for such arrangements in accordance with Accounting Standards Codification Topic 808, Collaborative Arrangements (“Topic 808”). We have determined that we are an agent under the agreement and therefore revenues are recorded net of costs incurred. We record U.S. profits and losses under the collaboration agreement in the period earned based on our estimate of those amounts. We expect to recognize an annual profit under the agreement for the year ended December 31, 2018 and accordingly, those profits are recognized as Collaboration revenues on the accompanying Condensed Consolidated Statements of Operations. Historically, we had not recognized a profit for any annual period from the commercialization of cobimetinib in the U.S. and accordingly, losses for periods prior to 2018 were recognized as Selling, general and administrative expenses on the accompanying Condensed Consolidated Statements of Operations.
Sales-based Milestone Payments and Royalties: For arrangements that include sales-based royalties, including milestone payments based on the volume of sales, the license is deemed to be the predominant item to which the royalties or sales-based milestones relate and we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842), (“ASU 2016-02”). Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. ASU 2016-02 will require a right-of-use asset to be recognized on the balance sheet for both types of leases. ASU 2016-02 also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the

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amounts recorded in the financial statements. ASU 2016-02 must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU No. 2018-11”). In issuing ASU No. 2018-11, the FASB is permitting another transition method for ASU 2016-02, which allows the transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
We are currently considering the potential of an early adoption of this standard in the second half of 2018 using the transition method permitted by ASU 2018-11. Based on our initial evaluation of the impact of ASU 2016-02 on our build-to-suit lease of office and research facilities located in Alameda, California, we expect that the amount we have capitalized as Property and equipment related to the building shells and related financing liabilities, will be derecognized upon the adoption of ASU 2016-02. Upon adoption of ASU 2016-02 we will also be required to recognize a right-of-use asset and lease liability related to this lease. The adoption of ASU 2016-02 could also change the nature of future expenses related to the build-to-suit lease, reducing future depreciation and interest expense, which would be offset by an increase in lease expense. We are continuing to assess the impact of ASU No. 2016-02 on our consolidated financial statements.
NOTE 2. REVENUES
Revenues by disaggregated category were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Product revenues:
 
 
 
 
 
 
 
Gross product revenues
$
172,646

 
$
100,258

 
$
332,082

 
$
178,217

Discounts and allowances
(26,810
)
 
(12,254
)
 
(51,974
)
 
(21,336
)
Net product revenues
145,836

 
88,004

 
280,108

 
156,881

Collaboration revenues:
 
 
 
 
 
 
 
License revenues (1)
31,908

 
9,156

 
100,938

 
20,370

Research and development services revenues (2)
6,805

 
2,175

 
16,904

 
3,307

Other collaboration revenues (3)
1,559

 
(327
)
 
1,877

 
(663
)
Total collaboration revenues
40,272

 
11,004

 
119,719

 
23,014

Total revenues
$
186,108

 
$
99,008

 
$
399,827

 
$
179,895

____________________
(1)
License revenues for the three and six months ended June 30, 2018 included revenues related to the portion of three milestones that were allocated to the transfer of intellectual property licenses and were recognized in the current period and royalty revenue from Ipsen and Genentech. License revenues for the three and six months ended June 30, 2017 included the recognition of deferred revenues from upfront payments and a non-substantive milestone that were being amortized over various periods, as well as royalty revenues from Ipsen and Genentech. License revenues for the six months ended June 30, 2017 also included a milestone payment from Bristol-Myers Squibb Company (“BMS”). Upon the adoption of Topic 606, the allocation of proceeds from our collaboration partners between licenses and research and development services as well as the timing of recognition has changed. Therefore, among other changes, as of January 1, 2018, the portion of proceeds allocated to intellectual property licenses for our Ipsen and Takeda collaboration agreements are recognized immediately and License revenues no longer includes revenues related to the amortization of deferred revenue.
(2)
Research and development services revenues for the three and six months ended June 30, 2018 included the recognition of deferred revenue for the portion of the upfront and milestone payments that have been allocated to the research and development services performance obligation which are being amortized through early 2030, as well as development cost reimbursements earned on our collaboration agreements. As described above, we did not allocate any of our upfront payments or milestones to research and development services prior to the adoption of Topic 606 and therefore Research and development services revenues for the three and six months ended June 30, 2017 included only development cost reimbursements earned on our collaboration agreements.
(3)
Other collaboration revenues for three and six months ended June 30, 2018 included net product supply revenues from Ipsen and Takeda and the profit on the U.S. commercialization of COTELLIC from Genentech. Losses on the U.S. commercialization of COTELLIC for the three and six months ended June 30, 2017 were included in Selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations and therefore Other collaboration revenues for the three and six months ended June 30, 2017 included only net product supply revenues.

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During the three and six months ended June 30, 2018, Net product revenues and License revenues related to goods transferred at a point in time and Research and development services revenues related to services performed over time. License revenues and Research and development services revenues were recorded in accordance with Topic 606 during 2018 and Topic 605 in prior periods. Other collaboration revenues, which included the profit on the U.S. commercialization of COTELLIC and net product supply revenues, were recorded in accordance with Topic 808 for all periods presented.
Net product revenues disaggregated by product were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
CABOMETYX
$
141,121

 
$
80,861

 
$
270,055

 
$
143,220

COMETRIQ
4,715

 
7,143

 
10,053

 
13,661

Net product revenues
$
145,836

 
$
88,004

 
$
280,108

 
$
156,881

Total revenues disaggregated by significant customer were as follows (dollars in thousands):
 
Three Months Ended June 30,
 
2018
 
2017
 
Dollars
 
Percent of total
 
Dollars
 
Percent of total
Ipsen
$
34,043

 
18
%
 
$
5,494

 
6
%
Caremark L.L.C.
$
26,421

 
14
%
 
$
18,435

 
19
%
Affiliates of McKesson Corporation
$
23,321

 
13
%
 
$
12,846

 
13
%
Diplomat Specialty Pharmacy
$
18,475

 
10
%
 
$
22,599

 
23
%
Accredo Health, Incorporated
$
19,714

 
11
%
 
$
13,619

 
14
%
Others, individually less than 10% of Total revenues for all periods presented
$
64,134

 
34
%
 
$
26,015

 
25
%
Total revenues
$
186,108

 
100
%
 
$
99,008

 
100
%

 
Six Months Ended June 30,
 
2018
 
2017
 
Dollars
 
Percent of total
 
Dollars
 
Percent of total
Ipsen
$
87,852

 
22
%
 
$
10,024

 
6
%
Caremark L.L.C.
$
52,809

 
13
%
 
$
32,254

 
18
%
Affiliates of McKesson Corporation
$
44,652

 
11
%
 
$
24,124

 
13
%
Diplomat Specialty Pharmacy
$
38,622

 
10
%
 
$
42,449

 
24
%
Accredo Health, Incorporated
$
38,000

 
10
%
 
$
23,059

 
13
%
Others, individually less than 10% of Total revenues for all periods presented
$
137,892

 
34
%
 
$
47,985

 
26
%
Total revenues
$
399,827

 
100
%
 
$
179,895

 
100
%
Total revenues disaggregated by geographic region were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
U.S.
$
150,079

 
$
89,371

 
$
287,072

 
$
163,046

Europe
34,043

 
5,494

 
87,852

 
10,024

Rest of the world
1,986

 
4,143

 
24,903

 
6,825

Total revenues
$
186,108

 
$
99,008

 
$
399,827

 
$
179,895

Net product revenues are attributed to regions based on the ship-to location. Collaboration revenues are attributed to regions based on the location of our collaboration partners’ headquarters.

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Product Sales Discounts and Allowances
The activities and ending reserve balances for each significant category of discounts and allowances (which constitute variable consideration) were as follows (in thousands):
 
Chargebacks and Discounts for Prompt Payment
 
Other Customer Credits/Fees and Co-pay Assistance
 
Rebates
 
Total
Balance at December 31, 2017
$
1,928

 
$
1,795

 
$
5,770

 
$
9,493

Provision related to sales made in:
 
 
 
 
 
 
 
Current period
32,088

 
6,336

 
14,318

 
52,742

Prior periods
(737
)
 
—

 
(32
)
 
(769
)
Payments and customer credits issued
(30,675
)
 
(6,850
)
 
(10,194
)
 
(47,719
)
Balance at June 30, 2018
$
2,604

 
$
1,281

 
$
9,862

 
$
13,747

Chargebacks and discounts for prompt payment are recorded as a reduction of trade receivables and the remaining reserve balances are classified as Other current liabilities in the accompanying Condensed Consolidated Balance Sheets.
Contract Assets and Liabilities
We receive payments from our licensees based on billing schedules established in each contract. Amounts are recorded as accounts receivable when our right to consideration is unconditional. Upfront and milestone payments may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements and are recorded as deferred revenue upon receipt or when due. We may also recognize revenue in advance of the contractual billing schedule and such amounts are recorded as unbilled collaboration revenue when recognized. Changes in our contract assets and liabilities under Topic 606 were as follows (in thousands):
 
Contract Assets: Unbilled Collaboration Revenue
 
Contract Liabilities: Deferred Revenue
 
Current Portion
 
Long-term Portion
 
Current Portion
 
Long-term Portion
Balance at December 31, 2017
$
—

 
$
—

 
$
31,984

 
$
238,520

Adoption of Topic 606
9,588

 
12,247

 
(23,591
)
 
(213,079
)
Balance at January 1, 2018
9,588

 
12,247

 
8,393

 
25,441

Increases as a result of a change in transaction price and recognition of revenues as services are performed
471

 
2,534

 
—

 
—

Transfer to receivables from contract assets recognized at the beginning of the period
(9,109
)
 
—

 
—

 
—

Increases as a result of the deferral of milestones achieved in period, excluding amounts recognized as revenue
—

 
—

 
948

 
3,835

Revenue recognized that was included in the contract liability balance at the beginning of the period
—

 
—

 
(4,977
)
 
—

Other adjustments (1)
(950
)
 
(14,781
)
 
1,575

 
(17,306
)
Balance at June 30, 2018
$
—

 
$
—

 
$
5,939

 
$
11,970

____________________
(1)
Includes reclassification of deferred revenue from long-term to current and adjustments made due to netting of contract assets and liabilities by collaboration agreement.
During the three and six months ended June 30, 2018, we recognized $32.2 million and $103.8 million, respectively, in revenues under Topic 606 for performance obligations satisfied in previous periods. Such revenues primarily related to milestone and royalty payments allocated to our license performance obligations of our collaborations with Ipsen and Daiichi Sankyo Company, Limited (“Daiichi Sankyo”).

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NOTE 3. COLLABORATION AGREEMENTS
From time to time, we enter into collaborative arrangements for the development, manufacture and/or commercialization of products and/or product candidates. These collaborations generally provide for non-refundable up-front license fees, development and commercial performance milestone payments, payments for product supply, development cost reimbursements, royalty payments and/or profit sharing. See “Note 2. Revenues” for information on collaboration revenues recognized during the three and six months ended June 30, 2018 and 2017.
Ipsen Collaboration
In February 2016, we entered into a collaboration and license agreement with Ipsen for the commercialization and further development of cabozantinib. Pursuant to the terms of the collaboration agreement, Ipsen received exclusive commercialization rights for current and potential future cabozantinib indications outside of the U.S., Canada and Japan. The collaboration agreement was subsequently amended in December 2016 to include commercialization rights in Canada. We have also agreed to collaborate with Ipsen on the development of cabozantinib for current and potential future indications. The parties’ efforts are governed through a joint steering committee and appropriate subcommittees established to guide and oversee the collaboration’s operation and strategic direction; provided, however, that we retain final decision-making authority with respect to cabozantinib’s ongoing development.
In consideration for the exclusive license and other rights contained in the collaboration agreement, including commercialization rights in Canada, Ipsen paid us aggregate upfront payments of $210.0 million. As of December 31, 2017 we had achieved various milestones totaling $125.0 million. During the six months ended June 30, 2018 we achieved an additional $50.0 million milestone upon the EMA’s approval of cabozantinib as a first-line treatment of advanced RCC, a $10.0 million milestone upon Ipsen’s filing with the EMA for cabozantinib as a treatment for patients with previously treated advanced HCC and a $25.0 million commercial milestone upon Ipsen’s achievement of $100.0 million of net sales cumulatively over four consecutive quarters. The timing and amount of revenue recognized during the three and six months ended June 30, 2018 for those milestones is described below.
We are also eligible to receive future development and regulatory milestone payments, totaling up to an additional $199.0 million, including a $40.0 million milestone upon the EMA’s approval of cabozantinib as a treatment for patients with previously treated advanced HCC, and additional milestone payments for other future indications and/or jurisdictions. The collaboration agreement also provides that we will be eligible to receive contingent payments of up to $519.9 million associated with sales volume milestones. We will also receive royalties on net sales of cabozantinib by Ipsen outside of the U.S. and Japan. We were entitled to receive a tiered royalty of 2% to 12% on the initial $150.0 million of net sales, which was reached in the second quarter of 2018. As of June 30, 2018, we are entitled to receive a tiered royalty of 22% to 26% of annual net sales, with separate tiers for Canada and the remainder of Ipsen’s sales territory. These tiers will reset each calendar year.
We are primarily responsible for funding cabozantinib-related development costs for those trials in existence at the time we entered into the collaboration agreement with Ipsen; global development costs for additional trials are shared between the parties, with Ipsen reimbursing us for 35% of such costs, provided Ipsen chooses to opt into such trials. In accordance with the collaboration agreement, Ipsen has opted into and is co-funding: CheckMate 9ER, the phase 3 pivotal trial evaluating the combination of cabozantinib with nivolumab versus sunitinib in patients with previously untreated, advanced or metastatic RCC being conducted in collaboration with BMS; CheckMate 040, the phase 1/2 study evaluating the combination of cabozantinib with nivolumab in patients with both previously treated and previously untreated advanced HCC being conducted in collaboration with BMS (though Ipsen will not be co-funding the triplet arm of the study evaluating cabozantinib with nivolumab and ipilimumab); and the phase 1b trial evaluating cabozantinib in combination with atezolizumab in locally advanced or metastatic solid tumors being conducted in collaboration with the Roche Group.
We remain responsible for the manufacture and supply of cabozantinib for all development and commercialization activities under the collaboration agreement. In connection with the collaboration agreement, we entered into a supply agreement with Ipsen to supply finished, labeled drug product to Ipsen for distribution in the territories outside of the U.S. and Japan for the term of the collaboration agreement. The product will be supplied at our cost, as defined in the agreement, which excludes the 3% royalty we are required to pay GSK on Ipsen’s net sales of any product incorporating cabozantinib.
Unless terminated earlier, the collaboration agreement has a term that continues, on a product-by-product and country-by-country basis, until the latter of (i) the expiration of patent claims related to cabozantinib, (ii) the expiration of regulatory exclusivity covering cabozantinib or (iii) ten years after the first commercial sale of cabozantinib, other than

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COMETRIQ. The supply agreement will continue in effect until expiration or termination of the collaboration agreement. The collaboration agreement may be terminated for cause by either party based on uncured material breach of either the collaboration agreement or the supply agreement by the other party, bankruptcy of the other party or for safety reasons. We may terminate the collaboration agreement if Ipsen challenges or opposes any patent covered by the collaboration agreement. Ipsen may terminate the collaboration agreement if the U.S. Food and Drug Administration or EMA orders or requires substantially all cabozantinib clinical trials to be terminated. Ipsen also has the right to terminate the collaboration agreement on a region-by-region basis after the first commercial sale of cabozantinib in advanced RCC in the given region. Upon termination by either party, all licenses granted by us to Ipsen will automatically terminate, and, except in the event of a termination by Ipsen for our material breach, the licenses granted by Ipsen to us shall survive such termination and shall automatically become worldwide, or, if Ipsen were to terminate only for a particular region, then for the terminated region. Following termination by us for Ipsen’s material breach, or termination by Ipsen without cause or because we undergo a change of control by a party engaged in a competing program, Ipsen is prohibited from competing with us for a period of time.
We identified the following performance obligations under the collaboration agreement with Ipsen: (1) the transfer of an exclusive license for the commercialization and further development of cabozantinib, as described above; and (2) research and development services, which includes certain committed studies for the development of cabozantinib, pharmacovigilance services and participation on the joint steering and development committees (as defined in the collaboration agreement).
We evaluated the collaboration agreement with Ipsen under Topic 606 as of January 1, 2018. Based on the evaluation as of that date, the up-front, nonrefundable fees, the milestones earned and royalties earned as of December 31, 2017, the $10.0 million milestone we expected to achieve in the first quarter of 2018 upon Ipsen’s filing with the EMA for cabozantinib as a treatment for patients with previously treated advanced HCC, and the estimated reimbursements for our research and development services performance obligation constituted the amount of the consideration to be included in the transaction price as of December 31, 2017. The transaction price was allocated to the performance obligations identified based on our best estimate of the relative standalone selling price: for our license, the estimate was determined using a discounted cash flow valuation utilizing forecasted revenues and costs, and a discount rate and for research and development services the estimate was determined using an adjusted market assessment approach that relies on internal and external costs and market factors. Other than the $10.0 million HCC filing milestone discussed above, variable consideration related to regulatory and development milestones not previously recognized was constrained due to the fact that it was not probable that a significant reversal of cumulative revenue would not occur, given the inherent uncertainty of success with these milestones. Any variable consideration related to sales-based milestones and royalties will be recognized when the related sales occur as these amounts have been determined to relate to the license transferred to Ipsen and therefore is recognized at the later of when the performance obligation is satisfied or the related sales occur. We re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
Revenues related to our license performance obligation are recorded immediately as our license represents functional intellectual property that was transferred at a point in time, upon execution of the collaboration agreement in February 2016. Revenues for our research and development services performance obligation are being recognized using the inputs method based on our internal development projected cost estimates through the current estimated patent expiration of cabozantinib in the European Union, which is early 2030. As of June 30, 2018, $51.6 million of the transaction price allocated to our research and development services performance obligation had not been satisfied.
Collaboration revenues for the three and six months ended June 30, 2018 included $25.0 million in revenue for a commercial milestone from Ipsen that we earned in the second quarter of 2018 upon Ipsen’s achievement of $100.0 million in net sales cumulatively over four consecutive quarters. We have determined that sales-based milestones relate entirely to the previously satisfied performance obligations for the transfer of an intellectual property license and therefore recognized the entire milestone in the quarter the milestone was achieved.
Collaboration revenues for the six months ended June 30, 2018 included $46.0 million in revenue of a $50.0 million milestone from Ipsen for the approval of cabozantinib for the first-line treatment of advanced RCC by the European Commission (“EC”), of which $45.8 million was recognized in the first quarter of 2018. We determined recognition of the milestone during the first quarter of 2018 was appropriate following the Committee for Medicinal Products for Human Use’s (“CHMP”) positive opinion of cabozantinib for the first-line treatment of advanced RCC. The positive CHMP opinion was reviewed by the EC as part of their approval process. Our determination that we expected to achieve the $50.0 million milestone resulted in a change in the overall transaction price of the collaboration agreement, as it was probable that a significant reversal of cumulative revenue would not occur. We recognized $45.8 million in revenue in the first quarter of

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2018 which represents the portion of the milestone that was allocated to the previously satisfied performance obligations for the transfer of an intellectual property license and research and development services. The remainder of the milestone was allocated to research and development services to be recognized in future periods as those services are delivered through early 2030, which included an additional $0.2 million recognized in the second quarter of 2018.
As of June 30, 2018, the net contract liability for the collaboration agreement with Ipsen was $15.2 million, of which $5.9 million was included in Current portion of deferred revenue and $9.3 million was included in Long-term deferred revenue on the accompanying Condensed Consolidated Balance Sheets.
Collaboration revenues under the collaboration agreement with Ipsen were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Ipsen collaboration revenues
$
34,043

 
$
5,494

 
$
87,852

 
$
10,024

Takeda Collaboration
In January 2017, we entered into a collaboration and license agreement with Takeda for the commercialization and further clinical development of cabozantinib in Japan. Pursuant to the terms of the collaboration agreement, Takeda has exclusive commercialization rights for current and potential future cabozantinib indications in Japan. The parties have also agreed to collaborate on the future clinical development of cabozantinib in Japan. The operation and strategic direction of the parties’ collaboration is governed through a joint executive committee and appropriate subcommittees.
In consideration for the exclusive license and other rights contained in the collaboration agreement, we received a $50.0 million upfront nonrefundable payment from Takeda.
In May 2018, we amended the collaboration agreement to modify the milestones we are eligible to receive under the agreement. As of June 30, 2018, we were eligible to receive development, regulatory and first-sale milestone payments of up to $100.0 million related to second-line RCC, first-line RCC and second-line HCC, as well as additional development, regulatory and first-sale milestone payments for potential future indications. The collaboration agreement also provides that we are eligible to receive pre-specified payments of up to $83.0 million associated with sales volume milestones. We consider the contingent payments due to us upon the achievement of specified sales volumes to be similar to royalty payments. We will also receive royalties on net sales of cabozantinib in Japan. We are entitled to receive a tiered royalty of 15% to 24% on the initial $300.0 million of net sales, and after the initial $300.0 million of net sales, we are then entitled to receive a tiered royalty of 20% to 30% on annual net sales. These tiers will reset each calendar year.
Takeda is responsible for 20% of the costs associated with the global cabozantinib development plan’s current and future trials, provided Takeda opts into such trials, and 100% of costs associated with the cabozantinib development activities that are exclusively for the benefit of Japan. In accordance with the collaboration agreement, Takeda has opted into and is co-funding CheckMate 9ER, the phase 3 pivotal trial evaluating the combination of cabozantinib with nivolumab versus sunitinib in patients with previously untreated, advanced or metastatic RCC being conducted in collaboration with BMS.
Pursuant to the terms of the collaboration agreement, we are responsible for the manufacture and supply of cabozantinib for all development and commercialization activities under the collaboration, and consequently, we entered into a clinical supply agreement covering the supply of cabozantinib to Takeda, as well as a quality agreement setting forth, in detail, the respective responsibilities pertaining to the quality requirements of the aforementioned supply to Takeda. We will record reimbursements for development costs as revenue as the development services represent a part of our ongoing major or central operations.
Unless earlier terminated, the collaboration agreement has a term that continues, on a product-by-product basis, until the earlier of (i) two years after first generic entry with respect to such product in Japan or (ii) the later of (A) the expiration of patent claims related to cabozantinib and (B) the expiration of regulatory exclusivity covering cabozantinib in Japan. The collaboration agreement may be terminated for cause by either party based on uncured material breach by the other party, bankruptcy of the other party or for safety reasons. For clarity, Takeda’s failure to achieve specified levels of commercial performance, based upon sales volume and/or promotional effort, during the first six years of the collaboration shall constitute a material breach of the collaboration agreement. We may terminate the agreement if Takeda challenges or opposes any patent covered by the collaboration agreement. At any time prior to August 1, 2023, the parties may mutually agree to terminate the collaboration agreement if Japan’s Pharmaceuticals and Medical Devices Agency is unlikely to grant

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any approval of the marketing authorization application in any cancer indication in Japan. After the commercial launch of cabozantinib in Japan, Takeda may terminate the collaboration agreement upon twelve months’ prior written notice following the third anniversary of the first commercial sale of cabozantinib in Japan. Upon termination by either party, all licenses granted by us to Takeda will automatically terminate, and the licenses granted by Takeda to us shall survive such termination and shall automatically become worldwide.
We identified the following performance obligations under the collaboration agreement with Takeda: (1) the transfer of an exclusive license for the commercialization and further development of cabozantinib, as described above; and (2) research and development services, which includes certain committed studies for the development of cabozantinib, pharmacovigilance services and participation on the joint executive and development committees (as defined in the collaboration agreement).
We evaluated the collaboration agreement with Takeda under Topic 606 as of January 1, 2018. Based on the evaluation as of that date, the up-front, nonrefundable fee and the estimated reimbursements for our research and development services performance obligation constituted the amount of the consideration to be included in the transaction price as of December 31, 2017. The transaction price was allocated to the performance obligations identified based on our best estimate of the relative standalone selling price: for our license, the estimate was determined using a discounted cash flow valuation utilizing forecasted revenues and costs, and a discount rate and for research and development services the estimate was determined using an adjusted market assessment approach that relies on internal and external costs and market factors. Variable consideration related to regulatory and development milestones not previously recognized was constrained due to the fact that it was not probable that a significant reversal of cumulative revenue would not occur, given the inherent uncertainty of success with these milestones. Any variable consideration related to sales-based milestones and royalties will be recognized when the related sales occur as these amounts have been determined to relate predominantly to the license transferred to Takeda and therefore is recognized at the later of when the performance obligation is satisfied or the related sales occur. We re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
Revenues related to our license performance obligation are recorded immediately as our license represents functional intellectual property that was transferred at a point in time, upon execution of the collaboration agreement in January 2017. Revenues for our research and development services performance obligation are being recognized using the inputs method based on our internal development projected cost estimates through the current estimated patent expiration of cabozantinib in Japan, which is early 2030. As of June 30, 2018, $28.9 million of the transaction price allocated to our research and development services performance obligation had not been satisfied.
As of June 30, 2018, the net contract liability for the collaboration agreement with Takeda was $2.7 million, which was included in Long-term deferred revenue on the accompanying Condensed Consolidated Balance Sheets.
Collaboration revenues under the collaboration agreement with Takeda were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Takeda collaboration revenues
$
1,986

 
$
4,143

 
$
4,903

 
$
6,825

Genentech Collaboration
Royalty revenues on ex-U.S. sales and our share of the profits and losses recognized in connection with COTELLIC’s commercialization in the U.S. were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Royalty revenues on ex-U.S. sales
$
1,546

 
$
1,367

 
$
2,895

 
$
3,665

Profits and losses on U.S. commercialization
$
2,696

 
$
(781
)
 
$
4,069

 
$
(1,407
)
The royalty revenues on ex-U.S. sales were included in Collaboration revenues. Prior to the adoption of topic 606, royalty revenues from the collaboration agreement with Genentech were based on amounts reported to us by our collaboration partner and were recorded when such information becomes available to us; beginning in the first quarter of 2017 such information became available in the current quarter and for 2016 such information was not available until the following quarter, meaning that through December 31, 2016 we recorded royalty revenues on a one quarter lag. As a result

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of this change, royalty revenues for the six months ended June 30, 2017 included $1.1 million in royalty revenues for sales in the fourth quarter of 2016 in addition to the royalty revenues for sales in the first half of 2017.
Losses on the U.S. commercialization of COTELLIC for the three and six months ended June 30, 2017 were included in Selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations; Selling, general and administrative expenses also included the profit for the first quarter of 2018 in Selling, general and administrative expenses in our Condensed Consolidated Statements of Operations included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 filed with the SEC on May 2, 2018 as we were not expecting an overall profit for the year ended December 31, 2018. During the second quarter of 2018, we determined that we now expect an overall profit on the U.S. commercialization of COTELLIC for the year ended December 31, 2018 and therefore we have included the profit for the three and six months ended June 30, 2018 in Collaboration revenues for those periods; accordingly, we have also reclassified the profit for the first quarter of 2018 from Selling, general and administrative expenses to Collaboration revenue for that period.
GSK Collaboration
Royalties accruing to GSK in connection with the sales of COMETRIQ and CABOMETYX are included in Cost of goods sold for net sales by us and as a reduction of Collaboration revenues for net sales by Ipsen on the accompanying Condensed Consolidated Statements of Operations. Such royalties were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Royalties accruing to GSK
$
5,628

 
$
2,962

 
$
10,753

 
$
5,363

StemSynergy Collaboration
In January 2018, we entered into an exclusive collaboration and license agreement with StemSynergy Therapeutics, Inc. (“StemSynergy”) for the discovery and development of novel oncology compounds targeting Casein Kinase 1 alpha (“CK1α”) a component of the Wnt signaling pathway implicated in key oncogenic processes. Under the terms of the agreement, we will partner with StemSynergy to conduct preclinical and clinical studies with compounds targeting CK1α. We paid StemSynergy an upfront payment of $3.0 million for initial research and development funding and StemSynergy is eligible to receive up to an additional $3.5 million of such funding. The $3.0 million payment we made during the six months ended June 30, 2018 is included in Research and development expenses in the accompanying Condensed Consolidated Statements of Operations. StemSynergy will also be eligible for up to $56.5 million in milestones for the first product to emerge from the collaboration, including preclinical and clinical development and regulatory milestone payments, commercial milestones, as well as single-digit royalties on worldwide sales. We will be solely responsible for the commercialization of products that arise from the collaboration.
Invenra Collaboration
In May 2018, we entered into a collaboration and license agreement with Invenra, Inc. (“Invenra”), which is focused on developing next-generation biologics, to discover and develop multispecific antibodies for the treatment of cancer. Invenra is responsible for antibody lead discovery and generation while we will lead Investigational New Drug enabling studies, manufacturing, clinical development in single-agent and combination therapy regimens, and future regulatory and commercialization activities. The collaboration agreement also provides that we will receive an exclusive, worldwide license to one preclinical asset (the “lead preclinical asset”), and that we and Invenra intend to pursue up to six additional discovery projects during the term of the collaboration, which in total are directed to three discovery programs.
In consideration for the exclusive worldwide license and other rights contained in the collaboration agreement, we paid Invenra an upfront payment of $2.0 million and second project initiation fee of $2.0 million. The $4.0 million of total payments we made during the six months ended June 30, 2018 are included in Research and development expenses in the accompanying Condensed Consolidated Statements of Operations. Invenra is eligible to receive payments of up to $131.5 million based on the achievement of specific development and regulatory milestones for a product containing the lead preclinical asset in the first indication. Upon successful commercialization of a product, Invenra is eligible to receive global milestone payments up to $325.0 million if certain sales thresholds are achieved as well as single digit tiered royalties on net sales of the approved product. We also have the right to initiate five additional discovery projects for development subject to an upfront payment of $2.0 million for each project as well as additional global milestone payments and royalties for any products that arise from these discovery efforts.

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Unless earlier terminated, the collaboration agreement has a term that continues, on a product-by-product and country-by-country basis, until the later of (i) ten years after the first commercial sale of such product in such country or (ii) expiration of patent claims covering the product in such country. We may terminate the collaboration agreement in its entirety or on a project-by-project basis at any time prior to commercialization, for any or no reason, upon thirty days’ written notice to Invenra. The collaboration agreement also may be terminated by either party for a material breach by the other, subject to notice and cure provisions.
Other Collaborations
For a description of our other existing collaboration agreements, see “Note 2. Collaboration Agreements” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 26, 2018.
We have determined that each of our other existing collaboration agreements have one performance obligation, the delivery of an intellectual property license to each collaboration partner, which was satisfied for all such agreements prior to the adoption of Topic 606. As a result, any consideration earned and received from these collaborations will be recognized immediately as the licenses we provided represent functional intellectual property that was transferred at a point in time prior to the adoption of Topic 606, when the agreements were executed. Potential variable consideration for these collaborations related to regulatory and development milestones was constrained due to the fact that it was not probable that a significant reversal of cumulative revenue would not occur, given the inherent uncertainty of success with these milestones. Any variable consideration related to sales-based milestones, including royalties, will be recognized when the related sales occur as these amounts have been determined to relate predominantly to the licenses transferred and therefore are recognized at the later of when the performance obligation is satisfied or the related sales occur.
In February 2018, upon Daiichi Sankyo’s submission of a regulatory application to the Japanese Pharmaceutical and Medical Devices Agency for esaxerenone as a treatment for patients with essential hypertension, we earned a $20.0 million milestone, which is included in Collaboration revenues during the six months ended June 30, 2018.
NOTE 4. CASH AND INVESTMENTS
Cash, Cash Equivalents and Restricted Cash
A reconciliation of Cash, cash equivalents, and restricted cash reported within our Condensed Consolidated Balance Sheets to the amount reported within the accompanying Condensed Consolidated Statements of Cash Flows was as follows (in thousands):
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
 
December 31, 2016
Cash and cash equivalents
$
248,407

 
$
183,164

 
$
135,212

 
$
151,686

Restricted cash included in short-term restricted cash and investments
504

 
504

 
—

 
—

Restricted cash included in long-term restricted cash and investments
1,100

 
4,646

 
4,650

 
4,150

Cash, cash equivalents, and restricted cash as reported within the accompanying Condensed Consolidated Statements of Cash Flows
$
250,011

 
$
188,314

 
$
139,862

 
$
155,836

Restricted cash includes certificates of deposit used to collateralize letters of credit and, in prior periods, a purchasing card program.

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Investments Available-for-sale
Investments by security type were as follows; the amounts presented exclude cash, but include investments classified as cash equivalents (in thousands):
 
June 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Money market funds
$
54,546

 
$
—

 
$
—

 
$
54,546

Certificates of deposit
21,095

 
—

 
—

 
21,095

Commercial paper
280,654

 
—

 
—

 
280,654

Corporate bonds
218,780

 
54

 
(730
)
 
218,104

U.S. Treasury and government sponsored enterprises
20,532

 
—

 
(55
)
 
20,477

Total
$
595,607

 
$
54

 
$
(785
)
 
$
594,876

 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Money market funds
$
45,478

 
$
—

 
$
—

 
$
45,478

Commercial paper
199,647

 
—

 
—

 
199,647

Corporate bonds
179,336

 
18

 
(332
)
 
179,022

U.S. Treasury and government sponsored enterprises
16,295

 
—

 
(32
)
 
16,263

Total
$
440,756

 
$
18

 
$
(364
)
 
$
440,410

Gains and losses on the sales of investments available-for-sale were nominal during the three and six months ended June 30, 2018 and 2017.
The fair value of gross unrealized losses on investments available-for-sale in an unrealized loss position were as follows (in thousands):
 
June 30, 2018
 
In an Unrealized Loss Position Less than 12 Months
 
In an Unrealized Loss Position 12 Months or Greater
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds
$
177,129

 
$
(725
)
 
$
2,495

 
$
(5
)
 
$
179,624

 
$
(730
)
U.S. Treasury and government sponsored enterprises (1)
18,818

 
(55
)
 
1,660

 
—

 
20,478

 
(55
)
Total
$
195,947

 
$
(780
)
 
$
4,155

 
$
(5
)
 
$
200,102

 
$
(785
)
____________________
(1)
Gross unrealized losses on commercial paper in an unrealized loss position 12 months or greater were less than $1 thousand.

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December 31, 2017
 
In an Unrealized Loss Position Less than 12 Months
 
In an Unrealized Loss Position 12 Months or Greater
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds
$
140,746

 
$
(296
)
 
$
20,047

 
$
(36
)
 
$
160,793

 
$
(332
)
U.S. Treasury and government sponsored enterprises
13,611

 
(23
)
 
2,651

 
(9
)
 
16,262

 
(32
)
Total
$
154,357

 
$
(319
)
 
$
22,698

 
$
(45
)
 
$
177,055

 
$
(364
)
There were 149 and 134 investments in an unrealized loss position as of June 30, 2018 and December 31, 2017, respectively. During the three and six months ended June 30, 2018 and 2017 we did not record any other-than-temporary impairment charges on our available-for-sale securities. Based upon our quarterly impairment review, we determined that the unrealized losses were not attributed to credit risk, but were primarily associated with changes in interest rates. Based on the scheduled maturities of our investments and our determination that it was more likely than not that we will hold these investments for a period of time sufficient for a recovery of our cost basis, we concluded that the unrealized losses in our investment securities were not other-than-temporary.
The fair value of cash equivalents and investments by contractual maturity were as follows (in thousands): 
 
June 30,
2018
 
December 31,
2017
Maturing in one year or less
$
500,480

 
$
377,155

Maturing after one year through five years
94,396

 
63,255

Total
$
594,876

 
$
440,410

NOTE 5. INVENTORY
Inventory consisted of the following (in thousands):
 
June 30,
2018
 
December 31, 2017
Raw materials
$
2,134

 
$
498

Work in process
3,737

 
3,997

Finished goods
3,265

 
2,854

Total
$
9,136

 
$
7,349

 
 
 
 
Balance Sheet classification:
 
 
 
Inventory
$
8,371

 
$
6,657

Other long-term assets
765

 
692

Total
$
9,136

 
$
7,349

Write-downs related to excess and expiring inventory are charged to either Cost of goods sold or the cost of supplied product included in Collaboration revenues. Such write-downs were $0.5 million for both the six months ended June 30, 2018 and June 30, 2017.
Inventory expected to be used in production or sold in periods more than 12 months from the date presented is classified as Other long-term assets on the accompanying Condensed Consolidated Balance Sheets. As of both June 30, 2018 and December 31, 2017, the non-current portion of inventory consisted of a portion of our finished goods.

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NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands): 
 
June 30,
2018
 
December 31,
2017
Leasehold improvements
$
41,003

 
$
4,715

Computer equipment and software
15,507

 
14,146

Buildings
14,530

 
—

Furniture and fixtures
4,028

 
1,609

Laboratory equipment
1,991

 
5,959

Construction in progress
1,839

 
22,114

 
78,898

 
48,543

Less: accumulated depreciation and amortization
(14,154
)
 
(22,800
)
Property and equipment, net
$
64,744

 
$
25,743

Depreciation expense was $1.2 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively.
Leased Premises Placed in Service
In May 2017, we entered into a Lease Agreement (the “Lease”) with Ascentris 105, LLC (“Ascentris”) for office and research facilities located at 1851, 1801, and 1751 Harbor Bay Parkway, Alameda, California (the “Premises”). The Lease was amended in October 2017 and June 2018 to increase the space leased to an aggregate of 134,765 square feet. For a description of the Lease, see “Note 12. Commitments” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 26, 2018. In June 2018, we relocated our offices and research facilities to the Premises. Accordingly, we placed into service $59.5 million in related Leasehold improvements, Buildings, Furniture and fixtures and Computer equipment and software, portions of which were included in Construction in progress at prior period ends. We are continuing to review the allocation of these additions between Leasehold improvements and Furniture and fixtures.
We evaluated our involvement during the construction period and determined the scope of the tenant improvements on portions of the Premises, including the building shells, did not qualify as “normal tenant improvements” under Accounting Standards Codification Topic 840, Leases (“Topic 840”). Accordingly, for accounting purposes, we were deemed to be the owner of such portions of the Premises during the construction period. As such, we capitalized the construction costs as a build-to-suit property within Property and equipment, net, including the estimated fair value of the building shells that we are deemed to own at the lease inception date, as determined using a third-party appraisal. Accordingly, we capitalized $14.5 million of costs related to the Lease in construction in progress as of May 2, 2017, with a corresponding build-to-suit financing obligation in Other long-term liabilities. In June 2018, upon placing of the assets in service and in accordance with Topic 840, due to our continuing involvement in the Premises the Lease did not qualify for sale-leaseback accounting. Accordingly, the assets placed into service include the $14.5 million estimated fair value of the building shells that we are deemed to own. We have also recorded a related financing obligation of $0.7 million in Other current liabilities and $20.6 million in Financing obligation for build-to-suit lease in the accompanying Condensed Consolidated Balance Sheets for the buildings and related landlord allowance earned in the second quarter of 2018. Buildings are depreciated over their estimated 40 year useful life.

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NOTE 7. STOCK-BASED COMPENSATION
We recorded and allocated employee stock-based compensation expense for our equity incentive plans and our 2000 Employee Stock Purchase Plan (“ESPP”) as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Research and development
$
2,900

 
$
1,600

 
$
5,933

 
$
3,078

Selling, general and administrative
6,383

 
3,427

 
12,655

 
6,662

Total stock-based compensation
$
9,283

 
$
5,027

 
$
18,588

 
$
9,740

We have several equity incentive plans under which we have granted stock options and restricted stock units (“RSUs”) to employees, directors and consultants. At June 30, 2018, 19,509,911 shares were available for grant under our equity incentive plans.
We use the Black-Scholes Merton option pricing model to value our stock options and ESPP purchases. The weighted average grant-date fair value per share of our stock options and ESPP purchases was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Stock options
$
9.82

 
$
10.07

 
$
10.37

 
$
10.01

ESPP
$
6.84

 
$
5.65

 
$
7.17

 
$
4.61

The grant-date fair value of employee stock option grants and ESPP purchases was estimated using the following assumptions:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Stock options:
 
 
 
 
 
 
 
Risk-free interest rate
2.66
%
 
1.72
%
 
2.60
%
 
1.68
%
Dividend yield
—
%
 
—
%
 
—
%
 
—
%
Volatility
54
%
 
60
%
 
54
%
 
61
%
Expected life
4.5 years

 
4.3 years

 
4.4 years

 
4.2 years

ESPP:
 
 
 
 
 
 
 
Risk-free interest rate
1.80
%
 
0.94
%
 
1.63
%
 
0.77
%
Dividend yield
—
%
 
—
%
 
—
%
 
—
%
Volatility
52
%
 
60
%
 
52
%
 
64
%
Expected life
6 months

 
6 months

 
6 months

 
6 months

We considered our implied volatility and our historical volatility in developing our estimates of expected volatility. The assumptions for the expected life of stock options were based on historical exercise patterns and post-vesting termination behavior.
The fair value of RSUs was based on the closing price of the underlying common stock on the date of grant.

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Stock option activity for the six months ended June 30, 2018 was as follows (dollars in thousands, except per share amounts):
 
Shares
 
Weighted
Average
Exercise Price Per Share
 
Weighted
Average
Remaining Contractual
Term
 
Aggregate
Intrinsic
Value
Options outstanding at December 31, 2017
22,208,446

 
$
6.83

 
 
 
 
Granted
818,842

 
$
22.63

 
 
 
 
Exercised
(1,141,640
)
 
$
5.74

 
 
 
 
Forfeited
(102,177
)
 
$
15.20

 
 
 
 
Options outstanding at June 30, 2018
21,783,471

 
$
7.44

 
3.8 years
 
$
312,900

Exercisable at June 30, 2018
16,249,965

 
$
4.80

 
3.2 years
 
$
271,709

As of June 30, 2018, $39.1 million of unrecognized compensation expense related to unvested stock options will be recognized over a weighted-average period of 2.3 years.
RSU activity for the six months ended June 30, 2018 was as follows (dollars in thousands, except per share amounts):
 
Shares
 
Weighted
Average
Grant Date
Fair Value Per Share
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
RSUs outstanding at December 31, 2017
3,762,990

 
$
17.76

 
 
 
 
Awarded
300,670

 
$
23.35

 
 
 
 
Vested and released
(341,572
)
 
$
7.75

 
 
 
 
Forfeited
(120,886
)
 
$
19.81

 
 
 
 
RSUs outstanding at June 30, 2018
3,601,202

 
$
19.11

 
1.7 years
 
$
77,498

As of June 30, 2018, $56.8 million of unrecognized compensation expense related to unvested RSUs will be recognized over a weighted-average period of 2.8 years.
NOTE 8. INCOME TAXES
Provision for income taxes was as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Provision for income taxes
$
901

 
$
581

 
$
3,415

 
$
715

Provision for income taxes for the three and six months ended June 30, 2018 and 2017 primarily relates to state taxes for which we do not have net operating loss carry-forwards due to a limited operating history. Our historical losses are sufficient to fully offset our federal taxable income.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. The Tax Cuts and Jobs Act contained significant changes to corporate taxation, included among other items, a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%. Further guidance may be forthcoming from the FASB and the SEC, as well as regulations, interpretations and rulings from federal and state tax agencies, which could result in additional impacts. The Provision for income taxes for the three and six months ended June 30, 2018 did not reflect any adjustment to the impact of the Tax Cuts and Jobs Act enactment that we recorded during the year ended December 31, 2017.

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NOTE 9. NET INCOME PER SHARE
The computation of basic and diluted net income per share was as follows (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income
$
87,494

 
$
17,656

 
$
203,351

 
$
34,356

Net income allocated to participating securities
—

 
(60
)
 
—

 
(117
)
Net income allocable to common stock for basic net income per share
87,494

 
17,596

 
203,351

 
34,239

Adjustment to net income allocated to participating securities
—

 
4

 
—

 
7

Net income allocable to common stock for diluted net income per share
$
87,494

 
$
17,600

 
$
203,351

 
$
34,246

Denominator:
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding used in computing basic net income per share
297,336

 
293,188

 
296,874

 
292,029

Dilutive securities:
 
 
 
 
 
 
 
Outstanding stock options, unvested RSUs and ESPP contributions
14,905

 
18,031

 
16,150

 
18,730

Weighted-average shares of common stock outstanding and dilutive securities used in computing diluted net income per share
312,241

 
311,219

 
313,024

 
310,759

 
 
 
 
 
 
 
 
Net income per share, basic
$
0.29

 
$
0.06

 
$
0.68

 
$
0.12

Net income per share, diluted
$
0.28

 
$
0.06

 
$
0.65

 
$
0.11

The two-year warrants to purchase an aggregate of 1,000,000 shares of our common stock issued in January 2014 (“2014 Warrants”) were participating securities. The warrant holders did not have a contractual obligation to share in our losses. The 2014 Warrants were fully exercised in September 2017. For a description of the 2014 Warrants, see “Note 7. Common Stock and Warrants” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 26, 2018.
Potentially dilutive shares of common stock not included in the computation of diluted net income per share because to do so would be anti-dilutive were as follows (in thousands): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Outstanding stock options, unvested RSUs and ESPP contributions
5,163

 
1,747

 
2,606

 
1,633

Total potentially dilutive shares
5,163

 
1,747

 
2,606

 
1,633


26
Table of Contents    

NOTE 10. FAIR VALUE MEASUREMENTS
The classification of our financial assets within the fair value hierarchy that were measured and recorded at fair value on a recurring basis was as follows; the amounts presented exclude cash, but include investments classified as cash equivalents (in thousands):
 
June 30, 2018
 
Level 1
 
Level 2
 
Total
Money market funds
$
54,546

 
$
—

 
$
54,546

Certificates of deposit
—

 
21,095

 
21,095

Commercial paper
—

 
280,654

 
280,654

Corporate bonds
—

 
218,104

 
218,104

U.S. Treasury and government sponsored enterprises
—

 
20,477

 
20,477

Total financial assets
$
54,546

 
$
540,330

 
$
594,876

 
December 31, 2017
 
Level 1
 
Level 2
 
Total
Money market funds
$
45,478

 
$
—

 
$
45,478

Commercial paper
—

 
199,647

 
199,647

Corporate bonds
—

 
179,022

 
179,022

U.S. Treasury and government sponsored enterprises
—

 
16,263

 
16,263

Total financial assets
$
45,478

 
$
394,932

 
$
440,410

We did not have any financial liabilities measured and recorded at fair value on a recurring basis as of those dates. We did not have any financial assets or liabilities classified as Level 3 in the fair value hierarchy as of June 30, 2018 or December 31, 2017 and there were no transfers of financial assets or liabilities classified as Level 3 during the six months ended June 30, 2018 or 2017.
When available, we value investments based on quoted prices for those financial instruments, which is a Level 1 input. Our remaining investments are valued using third-party pricing sources, which use observable market prices, interest rates and yield curves observable at commonly quoted intervals for similar assets as observable inputs for pricing, which is a Level 2 input.
Our remaining financial assets and liabilities include Cash, Trade and other receivables, Unbilled collaboration revenue, Accounts payable, Accrued compensation and benefits, Accrued clinical trial liabilities, Accrued collaboration liabilities, Rebates and fees due to customers, and other current and long-term liabilities. Those financial assets and liabilities are carried at cost which approximates their fair values.

27
Table of Contents    

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements. These statements are based on Exelixis, Inc.’s (“Exelixis,” “we,” “our” or “us”) current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. Words such as “expect,” “potential,” “will,” “goal,” “would,” “intend,” “continues,” “objective,” “anticipate,” “initiate,” “believe,” “could,” “plan,” “trend,” or the negative of such terms or other similar expressions identify forward-looking statements. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in Part II, Item 1A of this Form 10-Q, as well as those discussed elsewhere in this report. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report.
This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this report and the financial statements and accompanying notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the Securities and Exchange Commission, or SEC, on February 26, 2018.
Overview
We are a biotechnology company committed to the discovery, development and commercialization of new medicines to improve care and outcomes for people with cancer. Since our founding in 1994, three products discovered at Exelixis have progressed through clinical development, received regulatory approval, and entered the marketplace. Two are derived from cabozantinib, an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors, and RET: CABOMETYX® (cabozantinib) tablets approved for advanced renal cell carcinoma, or RCC; and COMETRIQ® (cabozantinib) capsules approved for progressive, metastatic medullary thyroid cancer, or MTC. The third product, COTELLIC® (cobimetinib) tablets, is an inhibitor of MEK, marketed under a collaboration agreement with Genentech, Inc. (a member of the Roche Group), or Genentech, and is approved as part of a combination regimen to treat advanced melanoma. Both cabozantinib and cobimetinib have shown potential in a variety of forms of cancer and are the subject of broad clinical development programs for multiple potential oncology indications.
CABOMETYX was approved by the U.S. Food and Drug Administration, or FDA, for previously treated patients with advanced RCC in April 2016, and then on December 19, 2017, approximately two months ahead of the assigned Prescription Drug User Fee Act, or PDUFA, action date, the FDA expanded CABOMETYX’s approval in this indication to include previously untreated patients with advanced RCC. We continue to be highly focused on optimizing the execution of this commercial launch in the U.S. through our commercial and medical affairs organizations and established distribution network.
To develop and commercialize CABOMETYX and COMETRIQ outside the U.S., we have entered into license agreements with Ipsen Pharma SAS, or Ipsen, and Takeda Pharmaceutical Company Ltd., or Takeda. Ipsen has been granted rights to cabozantinib outside of the U.S. and Japan, and Takeda has been granted rights to cabozantinib in Japan. Ipsen and Takeda also contribute financially and operationally to the further global development and commercialization of cabozantinib in other potential indications, and we are working closely with them on these activities.
Beyond our currently approved indications for advanced RCC and for MTC, we are pursuing other indications that have the potential to expand the number of cancer patients who could benefit from cabozantinib. Furthest advanced is our evaluation of CABOMETYX as a treatment for patients with previously treated advanced hepatocellular carcinoma, or HCC. On March 15, 2018, we submitted a supplemental New Drug Application, or sNDA, for cabozantinib in this indication to the FDA, and on May 29, 2018, the FDA accepted this filing, assigning a PDUFA action date of January 14, 2019. The data in support of this filing are derived from CELESTIAL, our company-sponsored, global phase 3 trial comparing cabozantinib to placebo in patients with advanced HCC who had previously progressed on or were intolerant to sorafenib and up to one additional therapy. On October 16, 2017, we announced that at the time of the second planned interim analysis, the study’s independent data monitoring committee had recommended that CELESTIAL be stopped because it had met its primary endpoint, with cabozantinib providing a statistically significant and clinically meaningful improvement in overall survival, or OS, compared to placebo. Safety data from the study were consistent with the established profile of cabozantinib. The results of the CELESTIAL trial were published in the New England Journal of Medicine, or NEJM, in early July 2018. We believe that the available clinical data demonstrate that cabozantinib has the potential to be broadly active in cancer indications beyond those for which it is already approved. Accordingly, we are currently evaluating cabozantinib, both as a single agent and in combination with immune checkpoint inhibitors or other compounds, in a broad development program comprising over 70 ongoing or planned clinical trials across multiple indications. We, along with our clinical and commercial collaboration partners, sponsor some of the trials, and independent clinicians conduct the remaining trials through our Cooperative Research and Development Agreement, or CRADA, with the National Cancer Institute’s Cancer Therapy Evaluation Program, or NCI-CTEP, or our investigator sponsored trial program.
We are particularly interested in examining cabozantinib’s potential in combination with immune checkpoint inhibitors to determine if such combinations further improve outcomes for patients. Building on preclinical and clinical observations that cabozantinib may promote a more immune-permissive tumor environment potentially resulting in cooperative activity of cabozantinib in combination with these products, we are evaluating cabozantinib in combination with a variety of immune checkpoint inhibitors in multiple clinical trials. The most advanced of these combination studies include a phase 3 pivotal trial evaluating cabozantinib in combination with nivolumab in previously untreated, advanced or metastatic RCC, and a phase 1/2 trial evaluating cabozantinib in combination with nivolumab and in combination with both nivolumab and ipilimumab in patients with both previously treated and previously untreated advanced HCC. Both trials are in collaboration with Bristol-Myers Squibb Company, or BMS. As a further part of our clinical collaboration with BMS, we also plan to evaluate cabozantinib and nivolumab with or without ipilimumab in various other tumor types, including in bladder cancer. Diversifying our exploration of combinations with immune checkpoint inhibitors, we have also initiated COSMIC-021, a phase 1b dose escalation study evaluating the safety and tolerability of cabozantinib in combination with the Roche Group’s, or Roche’s, atezolizumab in patients with locally advanced or metastatic solid tumors. Following the completion of the dose escalation portion of the study in the first quarter of 2018, the study is currently enrolling patients into eight tumor expansion cohorts. The protocol for the study is also being amended to include an aggregate of eighteen tumor expansion cohorts, including multiple therapeutic settings of RCC, urothelial cancer, or UC, and non-small cell lung cancer, or NSCLC, and single therapeutic settings of HCC, castration-resistant prostate cancer, or CRPC, triple-negative breast cancer, or TNBC, epithelial ovarian cancer, or EOC, endometrial cancer, gastric or gastroesophageal junction cancer, or GEJ cancer, colorectal adenocarcinoma, differentiated thyroid carcinoma, or DTC, and head and neck cancer of squamous cell histology.
Genentech also continues to make progress with respect to the phase 3 clinical development program for our second approved cancer agent, cobimetinib. In December 2006, we licensed cobimetinib to Genentech and Genentech has been, and is, solely responsible for the product’s clinical development. Genentech is currently conducting two phase 3 pivotal trials exploring the combination of cobimetinib with atezolizumab in BRAF wild type melanoma population (IMspire170), and the combination of cobimetinib with atezolizumab and vemurafenib in BRAF V600 mutant melanoma (IMspire150). The first patient for IMspire170 was enrolled in December 2017, and enrollment for IMspire150 was completed in April 2018. Additionally, although IMblaze 370, a third phase 3 pivotal trial conducted by Genentech evaluating the combination of cobimetinib with atezolizumab in colorectal carcinoma, or CRC, did not meet its primary endpoint as announced in May 2018, Genentech continues to pursue the cobimetinib development program and is conducting a series of early-stage clinical trials investigating the combination of cobimetinib and atezolizumab in multiple tumor settings. Should these trials prove positive and Genentech obtain regulatory approvals based on such positive results, we believe that cobimetinib could provide us with a potentially meaningful source of revenue in the future. 
As we continue to work to maximize the clinical, therapeutic and commercial potential of cabozantinib and cobimetinib, we remain committed to building our product pipeline by discovering and developing new cancer therapies for patients. In this regard, we have resumed internal drug discovery efforts with the goal of identifying new product candidates to advance into clinical trials. Notably, these efforts are led by some of the same experienced scientists responsible for the discovery of cabozantinib and cobimetinib, which have been approved for commercialization by regulatory authorities, as well as other promising compounds we have discovered, many of which are in earlier stages of clinical and regulatory development pursuant to our collaborations with Daiichi Sankyo Company, Limited, or Daiichi Sankyo, Merck (known as MSD outside of the U.S. and Canada), BMS and Sanofi.
We are also focused on augmenting our product pipeline by in-licensing attractive, early-stage oncology assets and then further developing them utilizing our established clinical development infrastructure