Basis of Presentation and Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2018

The accompanying condensed consolidated financial statements are unaudited, include the Company’s accounts and those of its wholly-owned subsidiary and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany balances and transactions have been eliminated in consolidation. See “Adopted Accounting Pronouncements – Revenue Recognition” below for a discussion of certain revisions to prior period financial statements made in connection with the Company’s adoption of new revenue recognition guidance.

The Company currently operates in one business segment, which is the identification, development and commercialization of therapies for the treatment of serious and neglected rare cardiovascular diseases and has a single reporting and operating unit. These interim statements, in the opinion of management, reflect all normal recurring adjustments necessary for the fair presentation of the Company’s financial position and results of operations for the interim periods ended March 31, 2017 and 2018.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year or any interim period and should be read in conjunction with the audited financial statements for the year ended December 31, 2017 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2017. The significant accounting policies used in preparation of these condensed consolidated financial statements for the three months ended March 31, 2018 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2017 Annual Report on Form 10-K and are updated below as necessary.

Reclassifications

The cash and cash equivalents on the condensed consolidated statements of cash flows for the three-month period ended March 31, 2017 has been reclassified to include restricted cash to conform to the current period’s presentation. Such reclassifications did not impact the Company’s net loss or financial position.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, other comprehensive gain (loss) and the related disclosures. On an ongoing basis, management evaluates its estimates, including estimates related to license and collaboration revenues, accrued clinical trial and manufacturing development expenses and stock-based compensation expense. Significant estimates in these condensed consolidated financial statements include estimates made in connection with accrued research and development expenses, stock-based compensation expense and revenue. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

Significant accounting policies are described in Note 2 to the consolidated financial statements as of and for the year ended December 31, 2017 included in the Annual Report. There have been no changes to the Company’s significant accounting policies during the three months ended March 31, 2018, except as described below.

Adopted Accounting Pronouncements

Adopted Accounting Pronouncements - Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”) using the full retrospective transition method. 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 ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs 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) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Licenses of intellectual property: Upon the inception of a Collaboration Agreement, if the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgement 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 proportional performance for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of proportional performance each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone payments: At the inception of each arrangement that includes development, regulatory or commercial milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price. ASC 606 suggests two alternatives to use when estimating the amount of variable consideration: the expected value method and the most likely amount method. Under the expected value method, an entity considers the sum of probability-weighted amounts in a range of possible consideration amounts. Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. Whichever method is used, it should be consistently applied throughout the life of the contract; however, it is not necessary for the Company to use the same approach for all contracts. The Company expects to use the most likely amount method for development and regulatory milestone payments. 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 the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis. The Company recognizes revenue when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes 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). To date, the Company has not recognized any royalty revenue resulting from its collaboration arrangement.

Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts payable to the Company are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.

Impact of Adoption – ASC 606

The Company entered into a license and collaboration agreement that became effective in August 2014, which is within the scope of ASC 606, under which it has licensed certain rights to its HCM-1 (which includes mavacamten), HCM-2 and DCM-1 (which includes MYK-491) programs to Sanofi, and may enter into other such arrangements in the future. The terms of the arrangement include payment to the Company of one or more of the following: non-refundable, up-front license fees, development and regulatory and commercial milestone payments, and royalties on net sales of licensed products.

The Company has applied the five-step model of the new standard to the Company’s contract with Sanofi, as it is the only contract that will be impacted by the adoption of the new revenue standards. The Company has implemented the new revenue standards using the full retrospective transition method and has revised its comparative financial statements as if ASC 606 had been effective for those periods.

The following tables summarize the financial statement line items that were affected due to the Company’s implementation of ASC 606 (in thousands, except for share and per share amounts):

Condensed Consolidated Balance Sheet

	As of December 31, 2017
	As Originally Reported			Effect of Change			As Revised
Deferred revenue - current	$	22,500		$	11,058		$	33,558
Accumulated deficit	$	(123,797	)	$	(11,058	)	$	(134,855	)

Condensed Consolidated Statement of Operations and Comprehensive Loss

	Three Months Ended March 31, 2017
	As Originally Reported			Effect of Change			As Revised
Collaboration and license revenue	$	5,625		$	(3,215	)	$	2,410
Operating expenses:
Research and development		11,917			—			11,917
General and administrative		5,476			—			5,476
Total operating expenses		17,393			—			17,393
Loss from operations		(11,768	)		(3,215	)		(14,983	)
Interest and other income, net		221			—			221
Net loss		(11,547	)		(3,215	)		(14,762	)
Other comprehensive loss		(55	)		—			(55	)
Comprehensive loss		(11,602	)		(3,215	)		(14,817	)
Net loss attributable to common stockholders	$	(11,547	)	$	(3,215	)	$	(14,762	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.37	)	$	(0.10	)	$	(0.47	)
Weighted average number of shares used to compute net loss per share attributable to common stockholders, basic and diluted		31,089,310			31,089,310			31,089,310

Condensed Consolidated Statement of Cash Flows

	Three Months Ended March 31, 2017
	As Originally Reported			Effect of Change			As Revised
Net loss	$	(11,547	)	$	(3,215	)	$	(14,762	)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred revenue	$	(5,625	)	$	3,215		$	(2,410	)
Cash, cash equivalents and restricted cash, beginning of period	$	135,797		$	259		$	136,056
Cash, cash equivalents and restricted cash, end of period	$	135,594		$	259		$	135,853

The change to net loss and deferred revenue in the condensed consolidated statement of cash flows, as revised above, reflects (i) the Company’s determination that the Sanofi continuation payment of $45.0 million received in January 2017 relates to three performance obligations that were previously accounted for as one combined unit of accounting and (ii) the result of the Company utilizing a cost-based input method to measure proportional performance for each interim period during the year ending December 31, 2017, instead of straight-line.

Impact of Adoption – ASU 2016-18

As discussed in “Adopted Accounting Pronouncements – Other” below, the change to cash, cash equivalents and restricted cash in the table above reflects the Company’s implementation of ASU 2016-18 whereby amounts generally described as restricted cash and restricted cash equivalents should be 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. The Company implemented this change using a retrospective transition method.

The following table summarizes the cash balances that were affected due to the Company’s implementation of ASU 2016-18 (in thousands):

Condensed Consolidated Statement of Cash Flows

	March 31, 2018		December 31, 2017		March 31, 2017		December 31, 2016
	As Revised		As Revised		As Revised		As Revised
Cash and cash equivalents	$	183,865	$	224,571	$	135,594	$	135,797
Restricted cash – noncurrent		286		286		259		259
Total cash, cash equivalents and restricted cash	$	184,151	$	224,857	$	135,853	$	136,056

Adopted Accounting Pronouncements – Other

In May 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718 to address diversity in practice. An entity should account for the effects of a modification unless all the three specified conditions are met. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18 (Topic 230), Restricted Cash, Statement of Cash Flows. This 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 should be 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 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU should be applied using a retrospective transition method to each period presented. Other than the change in presentation in the accompanying consolidated statements of cash flows, the adoption of this guidance had no effect on the Company’s financial position, results of operations or liquidity.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), the Company meets the definition of an emerging growth company, and has irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases. This ASU modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company will adopt ASU 2016-02 in its first quarter of 2019 utilizing the modified retrospective transition method. While the Company is currently evaluating the timing and impact of adopting ASU 2016-02, currently the Company anticipates recording lease assets and liabilities for its three facilities in South San Francisco and is currently evaluating and estimating the financial statement impact. It is not expected to have a material impact to the Company’s Consolidated Statements of Operations and the Company has not quantified the impact to its Consolidated Balance Sheets. However, the ultimate impact of adopting ASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date.

In February 2018, the FASB issued ASU No. 2018-05 (Topic 740) Income Taxes, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The update provides guidance that gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income (OCI) that the FASB refers to as having been stranded in accumulated OCI as a result of tax reform. Entities can early adopt the guidance in any interim or annual period for which financial statements have not yet been issued and apply it either (1) in the period of adoption or (2) retrospectively to each period in which the income tax effects of the Tax Cuts and Jobs Act related to items in accumulated OCI are recognized. The adoption of this standard is not expected to have a material impact to the Company’s financial statements.

Revenue Recognition

The Company evaluated the Collaboration Agreement under ASC 606 and determined that it had the following performance obligations: (1) the licenses of intellectual property for each of the HCM-1, HCM-2 and DCM-1 programs, and (2) the performance of research and development services, including regulatory support, for each of the three programs. The Company considered whether the licenses have standalone functionality and are capable of being distinct; however, given the fact that the research and development services are of such a specialized nature that can only be performed by the Company and Sanofi cannot benefit from the intellectual property licenses without the Company’s performance, the Company determined that the intellectual property licenses are not distinct from the research and development services and thus the license and research and development services for each program are combined into three separate performance obligations.

Contract Term

For revenue recognition purposes, the Company determined that the Collaboration Agreement is a period to period contract for which the Company had enforceable rights and obligations from inception through December 31, 2016. Sanofi had the right to terminate the Collaboration Agreement prior to December 31, 2016 or to extend the contract term through December 31, 2018. If Sanofi had elected to terminate the agreement, the termination would have had taken effect on December 31, 2016 and all licensed rights would have reverted to the Company. The Company did not have any obligation to reimburse Sanofi any portion of the payments received if Sanofi had terminated the agreement.

In December 2016, Sanofi elected to continue the Collaboration Agreement through an extended term ending December 31, 2018 and made the $45.0 million continuation payment to the Company. The Company determined that the extended term was to be treated as a separate contract because such an extension was not probable at the inception of the contract, the extension represents additional goods and services, and such activities are priced commensurate to the effort required and do not involve any significant discount. It was also concluded that the extended term provides the Company with enforceable rights and obligations for the two-year period ending December 31, 2018.

Because Sanofi retains the option in the Collaboration Agreement to extend the arrangement, neither party is committed to perform and the contract does not have enforceable rights and obligations beyond December 31, 2018.

Transaction Price

The Company’s assessment of the transaction price included an analysis of amounts it expected to be entitled for providing goods or services to the customer which at contract inception consisted of the upfront cash payment, valued at $34.3 million, net of the fair value of $0.7 million allocated to the option provided to Sanofi to acquire equity, and variable consideration of $25.0 million, subject to an IND application. Sanofi paid the Company the $25.0 million milestone upon the Company’s application for the IND. In 2016, after the IND application was made and when the Company determined it was deemed probable that significant reversal in the amount of cumulative revenue recognized will not occur, the Company included this amount in the transaction price. As of December 31, 2016, all performance obligations associated with the initial term were satisfied.

The extended term (from January 1, 2017 to December 31, 2018) has a fixed fee of $45.0 million, paid by Sanofi contemporaneously with the notice of continuation of the contract. The Company therefore determined that the transaction price for this extended term is $45.0 million.

As previously noted above, the Collaboration Agreement also includes up to $45.0 million in funding from Sanofi of approved in-kind research and clinical activities. Sanofi is the decision maker on how to provide these services and such services are used in the development of joint program technology which is co-owned by both parties. As such the Company concluded that these in-kind contributions do not constitute consideration paid by Sanofi to the Company.

Any consideration related to sales-based royalties will be recognized when the related sales occur and therefore have also been excluded from the transaction price.

Methodology for Recognition

Since the Company has determined that the three performance obligations are satisfied over time, the Company has selected a single revenue recognition method that it believes most faithfully depicts the Company’s performance in transferring control of the services. ASC 606 allows entities to choose between two methods to measure progress toward complete satisfaction of a performance obligation:

1. Output methods - recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract (e.g. surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units produced or units delivered); or

2. Input methods - recognize revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (e.g., resources consumed, labor hours expended, costs incurred, or time elapsed) relative to the total expected inputs to the satisfaction of that performance obligation.

The Company concluded that it will utilize a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. The Company believes this is the best measure of progress because other measures do not reflect how the Company executes its performance obligations under the contract with Sanofi. In applying the cost-based input methods of revenue recognition, the Company uses actual costs incurred relative to budgeted costs to fulfill the combined performance obligations. Revenue will be recognized based on actual costs incurred as a percentage of total actual and budgeted costs as the Company completes its performance obligations, which will be fulfilled by December 31, 2018. A cost-based input method of revenue recognition requires management to make estimates of costs to complete the Company’s performance obligations. In making such estimates, significant judgment is required to evaluate assumptions related to cost estimates. The cumulative effect of revisions to estimated costs to complete the Company’s performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.

For the three months ended March 31, 2017 and 2018, the Company recognized $2.4 million and $5.3 million of license and collaboration revenue, respectively.

The following table presents changes in the Company’s contract assets and liabilities, which excludes research and development reimbursements under the mavacamten registration program plan, for the three months ended March 31, 2017 and 2018 (in thousands):

	Three Months Ended March 31, 2018
	Balance at Beginning of Period		Additions		Deductions			Balance at End of Period
Contract liabilities:
Deferred revenue	$	33,558	$	—	$	(5,331	)	$	28,227

	Three Months Ended March 31, 2017
	Balance at Beginning of Period		Additions		Deductions			Balance at End of Period
Contract assets:
Receivable from collaboration partner	$	45,000	$	—	$	(45,000	)	$	—
Contract liabilities:
Deferred revenue	$	45,000	$	—	$	(2,410	)	$	42,590

Deferred revenue of $28.2 million as of March 31, 2018 consists of the $45.0 million continuation payment received in January 2017, less $16.8 million recognized during the five quarters ending March 31, 2018. The $28.2 million in deferred revenue will be recognized through December 31, 2018 as the performance obligations are satisfied.

Registration Program Plan Cost Sharing

In addition to amounts due to the Company under the Collaboration Agreement, Sanofi is conditionally responsible for sharing one half of the registration program plan (“RPP”) costs after the clinical proof of concept is established for each of the HCM-1, HCM-2 and DCM-1 programs. Effective October 2017, Sanofi is sharing RPP costs for the mavacamten program during the remainder of the contract term. Registration program costs are subject to review and approval by the Company and Sanofi and include amounts incurred relating to clinical trials, development and manufacturing of, and obtaining regulatory approvals for mavacamten and include direct employee costs and direct out-of-pocket costs incurred, by or on behalf of a party, that are specifically identifiable or reasonably and directly allocable to those activities.

Estimated reimbursements are invoiced to Sanofi before each interim period based on budgeted amounts. These estimates consist of one half of the Company’s mavacamten development budget in excess of Sanofi’s mavacamten development budget each interim period. After each period end, a review of the actual expenses occurs and adjustments to future invoices are applied as a result of an analysis of the budgeted versus incurred expenses. Actual amounts received from Sanofi for the applicable period are recorded by the Company to reduce its research and development expenses each interim period.

The Company recorded a $1.0 million and $0 receivable for reimbursable RPP expenses, as of December 31, 2017 and March 31, 2018, respectively, which is recorded as receivable from collaboration partner and included in current assets in the condensed consolidated balance sheets. The Company received $4.4 million and $6.1 million as prepayments from collaboration partner as of December 31, 2017 and March 31, 2018, respectively, which is included in current liabilities in the condensed consolidated balance sheets. The Company recorded $0 and $2.8 million as reductions to research and development expenses for the three months ending March 31, 2017 and 2018, respectively.

The following table presents the RPP related receivables and prepayments (in thousands):

Balance at

December 31, 2017

Payments

Received from

Sanofi under RPP

Actual Expenses

Incurred During

the Quarter

Balance at

March 31, 2018

Receivable from collaboration partner

1,013

—

Prepayment from collaboration partner

4,432

6,090

(2,821

)

7,701

Fair Value Measurements

4. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs other than quoted market prices included in Level 1 are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Contingencies

From time to time, the Company may have contingent liabilities that arise in the ordinary course of business activities. The Company accrues for such a liability when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

Guarantees and Indemnifications

Pursuant to certain of these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third-party with respect to the Company’s technology.

The Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with its certificate of incorporation and bylaws, and agreements providing for indemnification entered into with its officers and directors.

Income Taxes

Also on December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. For the three months ended March 31, 2018, the Company noted no additional guidance or information that affects the provisional amounts initially recorded at zero for the transition tax and the remeasurement of the deferred tax assets for the year ended December 31, 2017.