10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2019

or

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

For the transition period from            to           

Commission File Number 001-36668

DERMIRA, INC.

(Exact name of registrant as specified in its charter)

Delaware	27-3267680
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

275 Middlefield Road, Suite 150

Menlo Park, CA 94025

(Address of principal executive offices) (Zip Code)

(650) 421-7200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Common Stock, $0.001 par value Trading symbol   DERM Name of each exchange on which registered   The Nasdaq Global Select Market

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

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

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

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

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

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

As of July 31, 2019, the registrant had 54,397,955 shares of common stock outstanding.

Dermira, Inc.

Quarterly Report on Form 10-Q

Index

		Page No.
PART I	FINANCIAL INFORMATION
ITEM 1:	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Loss	5
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit)	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
ITEM 3:	Quantitative and Qualitative Disclosures About Market Risk	32
ITEM 4:	Controls and Procedures	32
PART II	OTHER INFORMATION
ITEM 1:	Legal Proceedings	33
ITEM 1A:	Risk Factors	33
ITEM 2:	Unregistered Sales of Equity Securities and Use of Proceeds	70
ITEM 3:	Defaults Upon Senior Securities	70
ITEM 4:	Mine Safety Disclosures	70
ITEM 5:	Other Information	70
ITEM 6:	Exhibits	71
Signatures		72

2

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

DERMIRA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	June 30,			December 31,
	2019			2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	103,155		$	104,976
Short-term investments		222,014			208,064
Trade and other receivables, net		59,795			5,724
Inventory		17,644			8,370
Prepaid expenses and other current assets		25,862			8,275
Total current assets		428,470			335,409
Property and equipment, net		864			1,180
Long-term investments		1,997			2,962
Operating lease right-of-use asset		13,144			—
Intangible assets		903			952
Goodwill		771			771
Restricted cash		804			802
Other assets		313			2,245
Total assets	$	447,266		$	344,321
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	11,549		$	15,948
Accrued liabilities		20,029			22,608
Lease liability, current		4,220			—
Deferred revenue, current		15,075			—
Total current liabilities		50,873			38,556
Long-term liabilities:
Term loan		32,731			32,566
Convertible notes, net		282,145			281,223
Lease liability, non-current		9,621			—
Deferred revenue, non-current		6,340			—
Other long-term liabilities		—			1,015
Total liabilities		381,710			353,360
Stockholders’ equity (deficit):
Common stock		54			42
Additional paid-in capital		893,221			736,095
Accumulated other comprehensive income (loss)		113			(138	)
Accumulated deficit		(827,832	)		(745,038	)
Total stockholders’ equity (deficit)		65,556			(9,039	)
Total liabilities and stockholders’ equity (deficit)	$	447,266		$	344,321

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

3

DERMIRA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Revenue:
Product sales	$	8,060		$	—		$	10,512		$	—
Collaboration and license revenue		58,585			39,080			58,585			39,379
Total revenue		66,645			39,080			69,097			39,379
Costs and operating expenses:
Cost of sales		1,335			—			2,261			—
Research and development		18,285			19,545			33,854			45,136
Selling, general and administrative		63,327			40,770			112,006			71,280
Impairment of intangible assets		—			—			—			1,126
Total costs and operating expenses		82,947			60,315			148,121			117,542
Loss from operations		(16,302	)		(21,235	)		(79,024	)		(78,163	)
Interest and other income, net		1,970			2,037			3,521			3,771
Interest expense		(3,630	)		(4,734	)		(7,291	)		(8,988	)
Loss before taxes		(17,962	)		(23,932	)		(82,794	)		(83,380	)
Benefit for income taxes		—			—			—			194
Net loss	$	(17,962	)	$	(23,932	)	$	(82,794	)	$	(83,186	)
Net loss per share, basic and diluted	$	(0.33	)	$	(0.57	)	$	(1.70	)	$	(1.99	)
Weighted-average common shares used to compute net loss per share, basic and diluted		54,033			41,922			48,838			41,875

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

4

DERMIRA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Net loss	$	(17,962	)	$	(23,932	)	$	(82,794	)	$	(83,186	)
Other comprehensive income:
Unrealized gain on available-for-sale securities		82			173			251			45
Total comprehensive loss	$	(17,880	)	$	(23,759	)	$	(82,543	)	$	(83,141	)

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

5

DERMIRA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

(unaudited)

	Common Stock				Additional Paid-In			Accumulated Other Comprehensive			Accumulated			Total Stockholders’ Equity
	Shares		Amount		Capital			Gain (Loss)			Deficit			(Deficit)
Balance at December 31, 2018		42,328	$	42	$	736,095		$	(138	)	$	(745,038	)	$	(9,039	)
Issuance of common stock in connection with public offering, net of underwriting discounts, commissions and issuance costs of $9,318		11,283		12		140,171			—			—			140,183
Issuance of common stock upon restricted stock unit settlement, net of shares withheld for taxes		9		—		—			—			—			—
Exercise of stock options		13		—		23			—			—			23
Stock-based compensation		—		—		8,090			—			—			8,090
Unrealized gain on investments		—		—		—			169			—			169
Net loss		—		—		—			—			(64,832	)		(64,832	)
Balance at March 31, 2019		53,633	$	54	$	884,379		$	31		$	(809,870	)	$	74,594
Issuance of common stock upon restricted stock unit settlement, net of shares withheld for taxes		503		—		(490	)		—			—			(490	)
Exercise of stock options		96		—		382			—			—			382
Purchases under employee stock purchase plan		166		—		1,371			—			—			1,371
Stock-based compensation		—		—		7,579			—			—			7,579
Unrealized gain on investments		—		—		—			82			—			82
Net loss		—		—		—			—			(17,962	)		(17,962	)
Balance at June 30, 2019		54,398	$	54	$	893,221		$	113		$	(827,832	)	$	65,556
	Common Stock				Additional Paid-In			Accumulated Other Comprehensive			Accumulated			Total Stockholders’ Equity
	Shares		Amount		Capital			Gain (Loss)			Deficit			(Deficit)
Balance at December 31, 2017		41,798	$	42	$	703,215		$	(215	)	$	(553,393	)	$	149,649
Issuance of common stock upon restricted stock unit settlement, net of shares withheld for taxes		6		-		-			-			-			-
Exercise of stock options		44		-		197			-			-			197
Stock-based compensation		-		-		7,514			-			-			7,514
Unrealized loss on investments		-		-		-			(128	)		-			(128	)
Effect of adoption of the ASC 606		-		-		-			-			29,895			29,895
Net loss		-		-		-			-			(59,254	)		(59,254	)
Balance at March 31, 2018		41,848	$	42	$	710,926		$	(343	)	$	(582,752	)	$	127,873
Issuance of common stock upon restricted stock unit settlement, net of shares withheld for taxes		21		—		—			—			—			—
Exercise of stock options		37		—		73			—			—			73
Purchases under employee stock purchase plan		97		—		954			—			—			954
Stock-based compensation		—		—		7,306			—			—			7,306
Unrealized gain on investments		—		—		—			173			—			173
Effect of adoption of the ASC 606		—		—		—			—			—			—
Net loss		—		—		—			—			(23,932	)		(23,932	)
Balance at June 30, 2018		42,003	$	42	$	719,259		$	(170	)	$	(606,684	)	$	112,447

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

6

DERMIRA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended
	June 30,
	2019			2018
Cash flows from operating activities
Net loss	$	(82,794	)	$	(83,186	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		294			244
Stock-based compensation		15,491			14,820
Amortization of discount for payments related to acquired in-process research and development		—			3,760
Net (accretion) amortization of premiums on available-for-sale securities		(1,265	)		357
Amortization of debt discount and issuance costs		1,087			916
Amortization of operating lease right-of-use assets		1,645			—
Impairment of intangible assets		—			1,126
Loss on disposal of assets		101			—
Changes in assets and liabilities:
Trade and other receivables, net		(54,071	)		(4	)
Inventory		(9,095	)		(102	)
Prepaid expenses and other current assets		(17,691	)		(3,707	)
Other assets		1,932			(543	)
Accounts payable		(4,315	)		(2,697	)
Accrued liabilities		(1,821	)		(1,238	)
Refund liability		—			(7,180	)
Other long-term liabilities		—			128
Lease liabilities		(1,700	)		—
Deferred revenue		21,415			(379	)
Deferred taxes		—			(194	)
Net cash used in operating activities		(130,787	)		(77,879	)
Cash flows from investing activities
Purchases of available-for-sale securities		(163,822	)		(233,001	)
Maturities of available-for-sale securities		152,060			190,615
Purchase of property and equipment		(30	)		(574	)
Net cash used in investing activities		(11,792	)		(42,960	)
Cash flows from financing activities
Net proceeds from issuance of common stock in connection with equity financings		140,170			—
Payments for debt issuance cost		(708	)		—
Net proceeds from issuance of common stock in connection with equity awards		1,298			1,224
Net cash provided by financing activities		140,760			1,224
Net decrease in cash and cash equivalents and restricted cash		(1,819	)		(119,615	)
Cash and cash equivalents and restricted cash at beginning of year		105,778			296,723
Cash and cash equivalents and restricted cash at end of period	$	103,959		$	177,108

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

7

DERMIRA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization

We are a biopharmaceutical company dedicated to bringing biotech ingenuity to medical dermatology by delivering differentiated, new therapies to the millions of patients living with chronic skin conditions. We are committed to understanding the needs of both patients and physicians and using our insight to identify, develop and commercialize leading-edge medical dermatology products. Our approved treatment, QBREXZA™ (glycopyrronium) cloth (“QBREXZA”), is indicated for adult and pediatric patients (ages nine and older) with primary axillary hyperhidrosis (excessive underarm sweating). We are evaluating lebrikizumab for the treatment of moderate-to-severe atopic dermatitis (a severe form of eczema) and plan to initiate a Phase 3 clinical development program by the end of 2019. We also have early-stage research and development programs in other areas of dermatology. We are headquartered in Menlo Park, California.

2. Summary of Significant Accounting Policies

Basis of Presentation

Our condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of our financial information. The results of operations for the three- and six-month periods ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019 or any other future period. The condensed consolidated balance sheet as of December 31, 2018 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

The accompanying condensed consolidated financial statements include the accounts of our wholly owned subsidiary, Dermira Canada. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with our audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018 included in our Annual Report on Form 10-K, filed with the SEC on February 26, 2019.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and variable consideration, inventory, acquired in-process research and development, investments, accrued research and development expenses, goodwill, operating lease assets and liabilities, intangible assets, other long-lived assets, stock-based compensation and the valuation of deferred tax assets. We base our estimates on our historical experience and also on assumptions that we believe are reasonable; however, actual results could significantly differ from those estimates.

Restricted Cash

Restricted cash primarily consists of letters of credit collateralized by a money market account pursuant to certain lease and sublease agreements.

8

Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist primarily of cash and cash equivalents, investments and trade and other receivables. We invest in money market funds, U.S. Treasury securities, corporate debt, repurchase agreements, U.S. Government agency securities, commercial paper and certificates of deposits. Bank deposits are held primarily by a limited number of financial institutions and these deposits may exceed insured limits. We are exposed to credit risk in the event of a default by the financial institutions holding our cash and cash equivalents and issuers of investments to the extent recorded on the consolidated balance sheets. Our investment policy limits investments to money market funds, certain types of debt securities issued by the U.S. Government and its agencies, corporate debt, repurchase agreements, commercial paper, certificates of deposit and municipal bonds and places restrictions on the credit ratings, maturities and concentration by type and issuer.

As of and for the three and six months ended June 30, 2019, three customers (AmerisourceBergen Corporation, McKesson Corporation and Cardinal Health, Inc.) each accounted for more than 10% of our trade receivables and product sales. These three customers collectively accounted for 97.5% and 96.7% of product sales for the three and six months ended June 30, 2019, respectively, and 99.1% of our trade receivables as of June 30, 2019. As of June 30, 2019, we have a receivable of $50.0 million from Almirall, S.A. (“Almirall”), which was recorded in trade and other receivables, net.

Trade and Other Receivables

Our trade receivables consist of amounts due from the sale of QBREXZA. The trade receivables are recorded net of allowances for distribution fees and trade discounts, government rebates and chargebacks. Estimates for wholesaler chargebacks for government rebates and cash discounts are based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs. For the periods presented, we did not have any write-offs of trade receivables. We perform ongoing credit evaluations of our Customers and generally do not require collateral.

Other receivables, including collaboration and license receivables, are typically unsecured. Accordingly, we may be exposed to credit risk generally associated with our collaboration and license agreements. To date, we have not experienced any losses related to these receivables.

Inventory

Inventory consists of raw materials, work-in-process and finished goods related to the production of QBREXZA. Inventory costs are determined using the lower of standard cost, which approximates the actual costs determined using the first-in, first-out basis, or net realizable value. Standard costs are reviewed and updated annually or as needed. We expense costs associated with the manufacture of our products prior to regulatory approval and capitalize the cost of inventory when there is a high probability of future economic benefit. We began capitalizing the cost of inventory related to QBREXZA in the second quarter of 2018, the period in which we received regulatory approval to market the product. We expense costs associated with the manufacture of our lebrikizumab product candidate.

We review all inventory balances on a quarterly basis for impairment and recognize any reduction in value as a current period expense with a reserve provision on the condensed consolidated balance sheets. We write down inventory that is in excess of expected requirements or at risk of expiration. This assessment requires management to utilize judgment in formulating estimates and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates and assumptions. If the conditions that caused the impairment were to be resolved in a subsequent period, the reserve provision would not be reversed until the related inventory was sold or otherwise disposed. As of June 30, 2019, the carrying value of our inventory was $17.6 million, including finished goods inventory of $5.6 million which has fixed expiration dates. In addition, we have manufacturing purchase commitments during the next 12 months of $11.0 million related to QBREXZA. In order to realize the value of our recorded inventory, we will be dependent upon significant increases in the sales volumes of QBREXZA.

Leases

We adopted Accounting Standards Update (“ASU”) No. 2016‑02, Leases (Topic 842) (“Topic 842”) on January 1, 2019. For our long-term operating leases, we recognized a right-of-use asset and a lease liability on our condensed consolidated balance sheets. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that we would pay to borrow equivalent funds on a collateralized basis at the lease commencement date. As our leases do not provide an implicit rate, we estimated the rate of interest. In order to estimate the interest rate, we utilized the effective interest rate derived from recent debt transactions, adjusting it for factors that reflect the profile of secured borrowing over the expected term of the lease, including our credit rating. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent. We determined the lease term at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise.

9

We elected the practical expedients permitted under Topic 842, which allowed us to exclude from our condensed consolidated balance sheets recognition of leases having a term of 12 months or less (short-term leases) and we elected to not separate lease components and non-lease components for our long-term real-estate leases.

Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the condensed consolidated statements of operations. Variable lease payments include lease operating expenses.

Prior period amounts continue to be reported in accordance with our historic accounting under previous lease guidance, ASC 840, Leases (Topic 840) (“Topic 840”). See “―Recent Accounting Pronouncements” below, for more information about the impact of the adoption on Topic 842.

Revenue Recognition

We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers 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 the performance obligations. At contract inception, we assess the goods or services promised within each contract and assess whether each promised good or service is distinct and determine those that areperformance obligations. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Product Sales

Our product sales consist of sales of QBREXZA, which became available in pharmacies within the United States on October 1, 2018. We recognize revenue from product sales when our wholesalers and a preferred dispensing partner (together, “Customers”) obtain control of our product, which is generally upon delivery.

Product sales are recognized at the transaction price, net of estimates of variable consideration, including commercial rebates, discounts related to a savings card program, distribution fees, trade discounts, government rebates and chargebacks and product returns. Variable consideration amounts are estimated at contract inception using the expected-value method and updated at the end of each reporting period as additional information becomes available. The amounts of variable consideration are included in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates and assumptions are updated quarterly and if actual future results vary materially from estimates, we will record an adjustment, which could impact product sales and earnings in the period of adjustment.

The following items of variable consideration are recorded at the time of revenue recognition and require significant estimates and judgment.

Commercial rebates and savings card program. We contract with certain third-party payers for the payment of rebates with respect to the utilization of QBREXZA. Rebates to these payers are based on contractual percentages applied to the amount of QBREXZA prescribed to patients who are covered by the plan or the organization with which we have contracts. We estimate and record rebates as a reduction to the transaction price in the same period the related product sales are recognized. We estimate commercial rebates based on contractual terms, estimated payer mix, industry information and other third-party data. We also have a savings card program to provide assistance to eligible patients with out-of-pocket costs, such as deductibles, co-insurance and co-payments, for the patient’s usage of QBREXZA. Reductions to product sales for the savings card program are estimated based on actual and expected program utilization.

Distribution fees and trade discounts.  We pay our Customers certain fees for distribution services for QBREXZA. We have determined that such distribution services are not distinct from our sales of QBREXZA and the related fees are recorded as a reduction to the transaction price in the period the related product sales are recognized. Distribution fees are recorded based on contractual terms. We also incentivize prompt payment from our Customers by providing a discount for payments made within a certain number of days.

10

Government rebates and chargebacks.  We are subject to discount obligations under state Medicaid programs, Medicare and other government programs. Reserves for these rebates and chargebacks are recorded as a reduction to the transaction price in the period the related product sales are recognized. Chargeback amounts represent credit we expect to issue to our Customers and are recorded as a reduction to trade and other receivables, net. Reductions to product sales for government managed programs are estimated based on statutorily-defined discounts, estimated payer mix, expected sales to qualified healthcare providers and expected utilization.

Product returns.  Our product return policy provides our Customers the right to return QBREXZA, generally based on the product expiration date. The reserve for product returns is recorded as a reduction to the transaction price in the period the related product sales are recognized. We estimate product returns using third-party input and market data for products with characteristics similar to QBREXZA.

As of June 30, 2019, the balance of our revenue-related reserves, consisting of commercial rebates, discounts related to the savings card program, distribution fees, trade discounts, government rebates, chargebacks and product returns, was $3.5 million, of which $1.2 million was recorded as a direct deduction from trade and other receivables and $2.3 million was recorded in accrued liabilities on the condensed consolidated balance sheets. As of December 31, 2018, the balance of these revenue-related reserves was $2.5 million, of which $0.7 million was recorded as a direct deduction from trade and other receivables and $1.8 million was recorded in accrued liabilities on the condensed consolidated balance sheets. During the three and six months ended June 30, 2019, additions to the revenue-related reserves were $5.2 million and $12.9 million, respectively, which were offset by related credits or payments of $5.1 million and $11.9 million, respectively. We had no additions or credits to the revenue-related reserve during the three and six months ended June 30, 2018.

Collaborative Arrangements

We enter into collaborative arrangements that typically include one of more of the following: (i) license fees; (ii) milestone payments related to the achievement of developmental, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; and (iv) fees attributable to options to intellectual property. When a portion of non‑refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied. Fees attributable to options are deferred until the option expires or is exercised. When an option is exercised, the performance obligations associated with the option are identified, which will determine the accounting for the transaction price attributable to the option.

As part of the accounting for these arrangements, we must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation. The stand-alone selling price may include items such as forecasted revenues, development timelines, discount rates, and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

Under certain collaborative arrangements, we have been reimbursed for a portion of our research and development (“R&D”) expenses, including costs of drug supplies. When these R&D services are performed under a reimbursement or cost sharing model with our collaboration partner, we record these reimbursements as a reduction of R&D expense in our consolidated statements of operations.

License Fees

If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, 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. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

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Milestone Payments

At the inception of each arrangement that includes milestone payments (variable consideration), 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 our collaboration partner’s control, such as regulatory approvals, are generally 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, 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 achievement of such 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 license, collaboration or other 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 for which the license is deemed to be the predominant item to which the royalties relate, 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). To date, we have not recognized any royalty revenue resulting from any of our collaborative arrangements.

Advertising Expenses

We expense the costs of advertising as incurred. Advertising expenses were $26.7 million and $14.6 million for the three months ended June 30, 2019 and 2018, respectively, and $36.2 million and $21.5 million for the six months ended June 30, 2019 and 2018, respectively.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for dilutive potential shares of common stock. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive for all periods presented.

The following common stock equivalent shares were not included in the computations of diluted net loss per share for the periods presented because their effect was antidilutive (in thousands):

	Outstanding as of June 30,
	2019		2018
Stock options to purchase common stock		7,424		7,374
Shares subject to outstanding restricted stock units		1,953		1,544
Estimated shares issuable under the employee stock purchase plan		610		446
Shares issuable upon conversion of convertible notes		8,110		8,110
		18,097		17,474

Recent Accounting Pronouncements

In November 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”), which clarified the interaction between Topic 808, Collaborative Arrangements, and Topic 606, Revenue from Contracts with Customers (“Topic 606”). ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2018-18.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amended certain disclosure requirements over Level 1, Level 2 and Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2018-13, but do not anticipate it will have a material impact on our disclosures.

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In February 2016, the FASB issued Topic 842, which is aimed at making leasing activities more transparent and comparable, and requires lessees to recognize substantially all leases on their balance sheet as a right-of-use asset and a corresponding lease liability, including leases currently accounted for as operating leases. We adoptedTopic 842 on January 1, 2019 using the modified retrospective approach. There was no cumulative-effect adjustment as of January 1, 2019.We recognized a right-of-use asset and a lease liability on ourconsolidated balance sheet for the discounted value of future lease payments from the adoption of Topic 842. The impact on the condensed consolidated balance sheets as of January 1, 2019 was as follows (in thousands):

	Topic 840			Topic 842			Impact of
Balance Sheet	January 1, 2019			January 1, 2019			Adoption
Deferred rent classified as accrued liabilities	$	(134	)	$	—		$	134
Deferred rent classified as other long-term liabilities		(1,015	)		—			1,015
Operating lease right-of-use asset		—			14,788			14,788
Lease liability, current		—			(4,551	)		(4,551	)
Lease liability, non-current	$	—		$	(11,386	)	$	(11,386	)

3. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting guidance for fair value establishes a three-level hierarchy for disclosure of fair value measurements, 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) that are either directly or indirectly observable, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instrument’s anticipated life.

Level 3—Unobservable inputs that are supported by little or no market activity and reflect our 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.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Where quoted prices are available in an active market, securities are classified as Level 1. When quoted market prices are not available for the specific security, then we estimate fair value by using quoted prices for identical or similar instruments in markets that are not active and model‑based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market‑based observable inputs obtained from various third‑party data providers, including but not limited to benchmark yields, reported trades and broker/dealer quotes. There were no transfers between Level 1 and Level 2 during the periods presented.

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The following tables set forth the fair value of our financial assets, which consists of investments classified as available-for-sale securities, that were measured on a recurring basis (in thousands):

		As of June 30, 2019
	Fair Value Hierarchy Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Financial assets:
Money market funds	Level 1	$	23,200	$	—	$	—		$	23,200
U.S. Treasury securities	Level 1		63,336		57		—			63,393
Corporate debt	Level 2		71,701		56		(7	)		71,750
U.S. Government agency securities	Level 2		14,997		7		—			15,004
Commercial paper	Level 2		147,731		—		—			147,731
Total investments		$	320,965	$	120	$	(7	)	$	321,078

		As of December 31, 2018
	Fair Value Hierarchy Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Financial assets:
Money market funds	Level 1	$	21,201	$	—	$	—		$	21,201
U.S. Treasury securities	Level 1		84,098		5		(56	)		84,047
Corporate debt	Level 2		98,367		2		(88	)		98,281
U.S. Government agency securities	Level 2		1,984	—			(1	)		1,983
Commercial paper	Level 2		102,781	—		—				102,781
Total investments		$	308,431	$	7	$	(145	)	$	308,293

As of June 30, 2019, we did not hold any investments that have been in a continuous loss position for 12 months or more. We do not intend to sell the securities that are in an unrealized loss position and we believe it is more likely than not that the investments will be held until recovery of the amortized cost bases. We have determined that the gross unrealized losses on our securities as of June 30, 2019 were temporary in nature.

The estimated fair value of our term loan was $34.8 million as of June 30, 2019 and was based on interest rates currently available to us for debt with similar terms. The estimated fair value of our convertible notes was $249.4 million as of June 30, 2019 and was based upon observable, Level 2 inputs, including pricing information from recent trades of the convertible notes as of June 30, 2019.

4. Balance Sheet Components

Inventory

Inventory consists of the following (in thousands):

	June 30,		December 31,
	2019		2018
Raw materials	$	11,441	$	4,140
Work-in process		602		1,019
Finished goods		5,601		3,211
Total inventory	$	17,644	$	8,370

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Accrued liabilities consist of the following (in thousands):

	June 30,		December 31,
	2019		2018
Accrued compensation	$	9,056	$	12,510
Accrued outside research and development services		4,014		3,431
Accrued professional and consulting services		3,097		3,476
Accrued interest		1,123		1,102
Other		2,739		2,089
Total accrued liabilities	$	20,029	$	22,608

5. Leases

We lease our corporate headquarters in Menlo Park, California under a non-cancelable operating lease agreement entered into in July 2014, as amended (“Lease”). Pursuant to the Lease, we lease 45,192 square feet of space in a multi-suite building (the “Building”). As of June 30, 2019, rent payments under the Lease include base rent with an annual increase of three percent, and additional monthly fees to cover our share of certain facility expenses, including utilities, property taxes, insurance and maintenance.

The Lease will expire on December 31, 2021, subject to our option to renew the Lease for an additional five-year term.

Pursuant to the terms of the Lease, we provided the lessor with a $500,000 letter of credit in August 2014, which is collateralized by a money market account. The letter of credit may be used by or drawn upon by the lessor in the event of our default of certain terms of the Lease. If no such event of default has occurred or then exists, the letter of credit may be reduced to $350,000 after June 1, 2019. The collateralized money market account is restricted cash and recorded in our condensed consolidated balance sheets.

In connection with the Lease, we recognized an operating lease right-of-use asset of $7.5 million and an aggregate lease liability of $8.2 million as of January 1, 2019 in our condensed consolidated balance sheet. As of January 1, 2019, the remaining Lease term was 3.0 years, and we used an estimated discount rate of 9.0% in calculating the lease liability.

In September 2017, we entered into a sublease agreement (“Sublease”) pursuant to which we expanded our office space by subleasing an additional 23,798 square feet of space in the Building. Rent payments for the Sublease include base rent with an annual increase of three percent, and additional monthly fees to cover our share of certain facility expenses, including utilities, property taxes, insurance and maintenance. The Sublease term commenced on December 20, 2017, and will end on April 30, 2024, unless terminated early pursuant to the terms of the Sublease.

Pursuant to the terms of the Sublease, in October 2017, we provided the sublessor with a $300,000 irrevocable commercial letter of credit, which is collateralized by a money market account. The letter of credit may be used by or drawn upon by the sublessor in the event of our default of certain terms of the Sublease. The collateralized money market account is restricted cash and recorded in our condensed consolidated balance sheets.

In connection with the Sublease, we recognized an operating lease right-of-use asset of $7.2 million and an aggregate lease liability of $7.7 million as of January 1, 2019 in our condensed consolidated balance sheet. As of January 1, 2019, the remaining Sublease term was 5.3 years, and we used an estimated discount rate of 9.0% in calculating the lease liability.

Rent expense for the Lease and Sublease was $1.6 million and $1.5 million for the three months ended June 30, 2019 and 2018, respectively, and $3.2 million and $3.0 million for the six months ended June 30, 2019 and 2018, respectively, which includes additional rent charges for common area maintenance and real estate taxes of $0.4 million for each of the three months ended June 30, 2019 and 2018, and $0.8 million and $0.6 million for the six months ended June 30, 2019 and 2018, respectively. We recognize rent expense on a straight‑line basis over the lease period.

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As of June 30, 2019, the undiscounted future non-cancellable lease payments under the Lease and Sublease were as follows (in thousands):

Year Ending December 31,
2019 (remainder)	$	1,995
2020		4,918
2021		5,056
2022		1,879
2023		1,936
Thereafter		666
Total undiscounted lease payments		16,450
Less: Present value adjustment		(2,609	)
Total	$	13,841

6. Debt

Credit Facility

In December 2018, we entered into a Credit Agreement (“Credit Agreement”) with Athyrium Opportunities III Acquisition LP (“Athyrium”). The arrangement provides for a senior secured term loan facility of up to $125.0 million in aggregate principal amount available in three tranches, $35.0 million of which was funded upon the closing. The second tranche of $40.0 million may be borrowed in a single draw at our option on or before July 1, 2019 and the third tranche of $50.0 million may be borrowed in a single draw on or before March 2, 2020 subject to a performance-based milestone. Amounts outstanding under the Credit Agreement bear interest at a rate of 10.75% per year, payable in quarterly in arrears, and provide for interest-only payments followed by payment of principal at maturity in December 2023; provided, however, that if, as of February 13, 2022, the aggregate outstanding principal amount of our 3.00% Convertible Senior Notes due 2022 (“Notes”) is greater than $60.0 million, we must immediately repay all amounts outstanding under the Credit Agreement, together with all accrued and unpaid interest and the applicable prepayment premium, if any. After the occurrence and during the continuation of a default, amounts outstanding will bear interest at a rate of 13.75% per annum, payable in cash quarterly in arrears and on demand. Our obligations under the Credit Agreement are secured by a security interest in, subject to certain exceptions, substantially all of our assets.

We may make voluntary prepayments in whole or in part, subject to certain prepayment premiums and additional interest payments. The Credit Agreement also contains certain provisions, such as default and change in control provisions, which, if triggered, would require us to make mandatory prepayments on the term loan, which are subject to certain prepayment premiums and additional interest payments. We determined that these contingent prepayment provisions were an embedded component that qualified as a derivative which should be bifurcated from the term loan and accounted for separately from the host contract. As of June 30, 2019, the fair value of this embedded derivative was immaterial.

The Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type as well as customary events of default. As of June 30, 2019 and December 31, 2018, we were in compliance with all of the covenants under the Credit Agreement.

In connection with issuance of the term loan, we incurred certain costs and fees totaling $2.5 million which were recorded as a direct deduction discount from the term loan on the consolidated balance sheets and are being amortized ratably to interest expense over the term of the loan, using the effective interest method. As of June 30, 2019, there were unamortized issuance costs and debt discounts of $2.3 million related to the term loan. We recorded $1.0 million and $2.1 million in interest expense related to the term loan for the three and six months ended June 30, 2019, respectively.

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As of June 30, 2019, minimum aggregate future payments under the term loan are as follows (in thousands):

2019 (remainder)	$	1,891
2020		3,763
2021		3,763
2022		3,763
2023		38,521
Total minimum payments	$	51,701
Amount representing interest		(16,701	)
Principal amount of term loan	$	35,000

On August 5, 2019, we amended the Credit Agreement to extend the deadline for the drawing of the third tranche of $50.0 million from March 2, 2020 to June 3, 2020 and reduce the prepayment penalty. In connection with this amendment, we paid Athyrium an amendment fee of $350,000 and borrowed $40.0 million available under the second tranche.

Convertible notes

In May 2017, we sold $287.5 million aggregate principal amount of Notes in a private placement. We received net proceeds of $278.3 million, after deducting the initial purchasers’ discounts of $8.6 million and issuance costs of $0.6 million. The Notes were issued pursuant to an Indenture, dated as of May 16, 2017 (the “Indenture”), between us and U.S. Bank National Association, as trustee. The Notes are senior, unsecured obligations and bear interest at a rate of 3.00% per year, payable in cash semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2017. The Notes mature on May 15, 2022, unless earlier converted or repurchased in accordance with their terms.

The Notes are convertible into shares of our common stock, par value $0.001 per share, at an initial conversion rate of 28.2079 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $35.45 per share of common stock. The conversion rate and the corresponding conversion price are subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest. Holders of the Notes who convert their Notes in connection with a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the Notes may require us to repurchase all or a portion of their Notes at a price equal to 100% of the principal amount of Notes, plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. Holders of the Notes may convert all or a portion of their Notes at their option at any time prior to the close of business on the business day immediately prior to May 15, 2022, in multiples of $1,000 principal amount.

As of June 30, 2019, there were unamortized issuance costs and debt discounts of $5.4 million, which were recorded as a direct deduction from the Notes on the condensed consolidated balance sheets.

7. Collaboration and License Agreements

In-License Agreements

Roche Agreement

In August 2017, we entered into a licensing agreement (“Roche Agreement”) with F. Hoffmann-La Roche Ltd and Genentech, Inc. (together, “Roche”), pursuant to which we obtained exclusive, worldwide rights to develop and commercialize lebrikizumab, an injectable, humanized antibody targeting interleukin 13, for atopic dermatitis and all other therapeutic indications. The Roche Agreement became effective in September 2017 and was amended in February 2019.

Under the terms of the Roche Agreement, we made an initial payment of $80.0 million to Roche in October 2017 and a $25.0 million payment to Roche in July 2018 upon the achievement of 50% enrollment in our Phase 2 clinical study of lebrikizumab, which was achieved in June 2018, and a $30.0 million payment in November 2018 related to the achievement of 100% enrollment in our Phase 2 clinical study of lebrikizumab, which was achieved in October 2018.

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We amended the Roche Agreement in February 2019. Under the terms of the Roche Agreement, as amended, Roche is obligated to supply us with up to approximately $16.0 million in existing lebrikizumab drug substance, free of charge,approximately two-thirds of which was received as of June 30, 2019, and we will be obligated to make payments to Roche upon the achievement of certain milestones, comprising $20.0million upon the initiation of the first Phase 3 clinical study, up to $180.0 million upon the achievement of regulatory and first commercial sale milestones in certain territories and up to $1.0 billion based on the achievement of certain thresholds for net sales of lebrikizumab for all indications.

Under the terms of the Roche Agreement, as amended, we will also make royalty payments to Roche representing percentages of net sales. Royalty payments will be made from the first commercial sale date in such country and end on the later of the date that is (i) ten years after the date of the first commercial sale of lebrikizumab in such country, (ii) the expiration of the last to expire valid claim of the applicable licensed compound patent rights, our patent rights or joint patent rights in such country covering the use, manufacturing, import, offering for sale, or sale of lebrikizumab in such country, (iii) the expiration of the last to expire valid claim of the applicable licensed non-compound patent rights in such country covering the use, import, offering for sale, or sale of the product in such country, or (iv) the expiration of the last to expire regulatory exclusivity conferred by the applicable regulatory authority in such country for lebrikizumab.

Rose U Agreement

In April 2013, we entered into an exclusive license agreement with Rose U LLC (“Rose U”) pursuant to which we obtained a worldwide exclusive license within a field of use including hyperhidrosis to practice, enforce and otherwise exploit certain patent rights, know‑how and data related to our hyperhidrosis program. The license agreement includes a sublicense of certain data and an assignment of certain regulatory filings which Rose U had obtained from Stiefel Laboratories, Inc., a GSK company (“Stiefel”). In connection with the license agreement, we also entered into a letter agreement with Stiefel pursuant to which we assumed Rose U’s obligation to pay Stiefel $2.5 million in connection with the commercialization of products developed using the licensed data and to indemnify Stiefel for claims arising from the use, development or commercialization of products developed using the Stiefel data.

As of June 30, 2019, we have paid or accrued license and other fees of $4.3 million to Rose U and Stiefel, including a $2.5 million payment in connection with the first commercial sale of QBREXZA in 2018, and are required to pay Rose U additional amounts totaling up to $0.6 million upon the achievement of certain milestones. In addition, we are also obligated to pay Rose U low-to-mid single-digit royalties on net product sales and low double-digit royalties on sublicense fees and certain milestone, royalty and other contingent payments received from sublicensees, to the extent such amounts are in excess of the milestone and royalty payments we are obligated to pay Rose U directly upon the events or sales triggering such payments. Under the license agreement, we are entitled to credit the $2.5 million payment we paid in connection with the first commercial sale of QBREXZA against royalty payments owed to Rose U in accordance with the terms of the license agreement. As of June 30, 2019, the remaining creditable amount of this payment was $2.2 million.

Out-License and Other Agreements

Almirall Agreement

We entered into an option and license agreement with Almirall in February 2019 (“Almirall Agreement”), under which Almirall acquired an option to exclusively license rights to develop lebrikizumab for the treatment or prevention of dermatology indications, including but not limited to atopic dermatitis, and commercialize lebrikizumab for the treatment or prevention of all indications in Europe (“Lebrikizumab EU License”). In exchange, we received a non-refundable upfront option fee of $30.0 million in March 2019. In June 2019, Almirall exercised its option pursuant to the Almirall Agreement. In connection with this exercise, Almirall paid us an option exercise fee of $50.0 million, which we received in July 2019. Under the terms of the Almirall Agreement, we are entitled to receive additional payments upon the achievement of certain development, regulatory and sales milestones, including $30.0 million in connection with the initiation by us of certain Phase 3 clinical studies, as well as royalty payments representing percentages of net sales of lebrikizumab in Europe.

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Upon Almirall’s election to exercise its option pursuant to the Almirall Agreement, we identified the following distinct performance obligations: (i) the delivery of the Lebrikizumab EU License and (ii) the conduct of the lebrikizumab Phase 3 development program.We determined that the transaction price as of June 30, 2019 was $110.0 million, consisting of: (i) the $30.0 million upfront option fee; (ii) the $50.0 million option exercise fee; and (iii) the $30.0 million in milestones in connection with the initiation of certain Phase 3 clinical studies, which were determined to not be constrained. Other future potential regulatory milestones were considered to be fully constrained, as we determined that the achievement of such milestones is contingent upon success in future clinical trials and regulatory approvals, which are not within our control and are uncertain at this stage. We expect that the sales-based milestone and royalty payments will be recognized when the sales occur or the milestone is achieved. We will re-evaluate the transaction price each reporting period.

We allocated the transaction price based on the estimated stand-alone selling prices of each of the two performance obligations. We determined the stand-alone selling price for the Lebrikizumab EU License was based on a discounted cash flow approach and considered several factors including, but not limited to: estimated market demand, manufacturing and supply costs, development and commercialization costs, discount rate, development and approval timelines and probabilities of technical and regulatory success. The portion of the transaction price allocated to our Lebrikizumab EU License performance obligation was recorded immediately upon Almirall’s exercise of its option in the second quarter of 2019, as the Lebrikizumab EU License represents functional intellectual property that was transferred as of the date of Almirall’s option exercise in June 2019. We determined the stand-alone selling price for our lebrikizumab Phase 3 development program based on the nature of the services to be performed, estimates of the associated costs and third-party rates for similar services. The portion of the transaction price allocated to our lebrikizumab Phase 3 development program performance obligation will be recognized as revenue using the input method as the lebrikizumab Phase 3 development program is completed, subject to changes in estimated total lebrikizumab development program cost and actual costs incurred during each period. No revenue related to the lebrikizumab Phase 3 development program performance obligation had been recognized as of June 30, 2019.

For each of the three and six months ended June 30, 2019, we recognized $58.6 million as collaboration and license revenue related to the Almirall Agreement in our condensed consolidated statements of operations. As of June 30, 2019, $15.1 million and $6.3 million were recorded as deferred revenue, current, and deferred revenue, non-current, respectively, on the condensed consolidated balance sheets and are expected to be recognized as collaboration and license revenue over thePhase 3 development period.

Maruho Agreement

In September 2016, we entered into an Exclusive License Agreement with Maruho Co., Ltd. (“Maruho”), which grants Maruho an exclusive license to develop and commercialize glycopyrronium tosylate for the treatment of hyperhidrosis in Japan (“Maruho Agreement”). Pursuant to the terms of the Maruho Agreement, we received an upfront payment of $25.0 million from Maruho in October 2016 and are eligible to receive additional payments totaling up to $70.0 million, contingent upon the achievement of certain milestones associated with submission and approval of a marketing application in Japan and certain sales thresholds, as well as royalty payments based on a percentage of net product sales in Japan. The Maruho Agreement further provides that Maruho will be responsible for funding all development and commercial costs for the program in Japan and, until such time, if any, as Maruho elects to establish its own source of supply of drug product, Maruho will purchase product supply from us for development and, if applicable, commercial purposes at cost.

Under Topic 606, we evaluated the terms of the Maruho Agreement and the transfer of intellectual property rights (the “license”) was identified as the only performance obligation as of the inception of the agreement. We concluded that the license for the intellectual property was distinct from our ongoing manufacturing obligations. We further determined that the transaction price under the arrangement was comprised of the $25.0 million upfront payment. The future potential milestone amounts were not included in the transaction price, as they were all determined to be fully constrained. As part of our evaluation of the development and regulatory milestones constraint, we determined that the achievement of such milestones is contingent upon success in future clinical trials and regulatory approvals, each of which is uncertain at this time. We will re-evaluate the transaction price each quarter and as uncertain events are resolved or other changes in circumstances occur. Future potential milestone amounts would be recognized as revenue from collaboration arrangements, if unconstrained. Reimbursable program costs are recognized proportionately with the performance of the underlying services or delivery of drug substance and are accounted for as reductions to R&D expense and are excluded from the transaction price.

Unless earlier terminated, the Maruho Agreement will remain in effect until the later of: (i) expiration or abandonment of the last valid claim of the applicable patent rights in Japan; (ii) expiration of any market exclusivity in Japan granted by the applicable regulatory authority; and (iii) 15 years following the date of the first commercial sale of the drug product in Japan.

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UCB Agreements

In March 2014, we and UCB Pharma S.A. (“UCB”), entered into a Development and Commercialisation Agreement, dated March 21, 2014 (“UCB Agreement”), which provided that we would (a) develop Cimzia (certolizumab pegol) for the treatment of psoriasis in order for UCB to seek regulatory approval from the U.S. Food and Drug Administration (“FDA”), the European Medicines Agency and the Canadian federal department for health, and (b) upon the grant of regulatory approval in the United States and Canada, promote sales of Cimzia to dermatologists and conduct related medical affairs activities in the United States and Canada. The UCB Agreement also provided either party with the right to terminate the agreement under certain terms. We expressed our intent to terminate the UCB Agreement in accordance with its terms.

As a result, we and UCB entered into an agreement on November 6, 2017 to effect the termination of the UCB Agreement and an orderly transition of the development and commercialization activities under the UCB Agreement from us to UCB (“Transition Agreement”). The Transition Agreement, among other things, (a) terminated the UCB Agreement on February 15, 2018, (b) provided for the repurchase by UCB of all product rights, licenses and intellectual property relating to Cimzia, (c) specified the responsibilities and obligations of us and UCB in connection with the transition of certain activities under the UCB Agreement from us to UCB as a result of the termination of the UCB Agreement, (d) terminated UCB’s right to designate a director nominee to our board of directors and (e) provided for the resignation of UCB’s designee from our board of directors.

Pursuant to the UCB Agreement, there were no termination or penalty payments required by either party. In consideration for the repurchase of all product rights, licenses and intellectual property relating to Cimzia, UCB paid us $11.0 million in November 2017 and an additional $39.0 million in June 2018 upon FDA approval of Cimzia for the treatment of psoriasis. We were obligated to reimburse UCB for up to $10.0 million of development costs incurred by UCB in connection with the development of Cimzia between January 1, 2018 and June 30, 2018. For the three and six months ended June 30, 2018, we recognized $39.1 million and $39.4 million, respectively, in collaboration and license revenue in our condensed consolidated statement of operations related to UCB. As of December 31, 2018, we had fully reimbursed UCB the $10.0 million for development costs incurred by UCB.

8. Stock-Based Compensation

The following table reflects a summary of stock option activity under our 2010 Equity Incentive Plan (“2010 Plan”), 2014 Equity Incentive Plan (“2014 EIP”) and 2018 Equity Inducement Plan (“2018 Inducement Plan”) and related information for the period from December 31, 2018 through June 30, 2019:

	Shares Subject to Outstanding Stock Options			Weighted- Average Exercise Price Per Share
Stock options outstanding at December 31, 2018		6,950		$	19.06
Stock options granted		1,025		$	7.61
Stock options exercised		(109	)	$	3.70
Stock options forfeited		(442	)	$	23.38
Stock options outstanding at June 30, 2019		7,424		$	17.45

The following table reflects a summary of restricted stock unit (“RSU”) activity under our 2014 EIP and 2018 Inducement Plan and related information for the period from December 31, 2018 through June 30, 2019:

	Shares Subject to Outstanding RSUs			Weighted- Average Grant Date Fair Value Per Share
RSUs outstanding at December 31, 2018		1,572		$	13.50
RSUs granted		1,181		$	7.17
RSUs vested and settled		(557	)	$	9.51
RSUs forfeited		(243	)	$	10.20
RSUs outstanding at June 30, 2019		1,953		$	11.22

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Total stock-based compensation expense related to the 2010 Plan, the 2014 EIP, the 2018 Inducement Plan and the 2014 Employee Stock Purchase Plan was allocated as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Cost of sales	$	16	$	—	$	31	$	—
Research and development		2,371		2,408		4,831		5,261
Selling, general and administrative		5,123		4,898		10,629		9,559
Total stock-based compensation expense	$	7,510	$	7,306	$	15,491	$	14,820

Stock-based compensation of $0.1 million and $0.2 million was capitalized into inventory for the three and six months ended June 30, 2019, respectively. Stock-based compensation capitalized into inventory is recognized as cost of sales when the related product is sold.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The interim financial statements included in this Quarterly Report on Form 10-Q and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2018, included as part of our Annual Report on Form 10-K for the year ended December 31, 2018, and our unaudited Condensed Consolidated Financial Statements for the three- and six-month periods ended June 30, 2019 and other disclosures (including the disclosures under “Part II — Other Information, Item 1A. Risk Factors”) included in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “potential,” “predict,” “project,” “estimate,” or “continue,” and similar expressions or variations. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include those set forth elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II — Other Information, Item 1A. Risk Factors below, that could cause actual results to differ materially from historical results or anticipated results. Except as may be required by law, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a biopharmaceutical company dedicated to bringing biotech ingenuity to medical dermatology by delivering differentiated, new therapies to the millions of patients living with chronic skin conditions. We are committed to understanding the needs of both patients and physicians and using our insight to identify, develop and commercialize leading-edge medical dermatology products. Our approved treatment, QBREXZA™ (glycopyrronium) cloth (“QBREXZA”), is indicated for adult and pediatric patients (ages nine and older) with primary axillary hyperhidrosis (excessive underarm sweating). We are evaluating lebrikizumab for the treatment of moderate-to-severe atopic dermatitis (a severe form of eczema) and plan to initiate a Phase 3 clinical development program by the end of 2019. We also have early-stage research and development programs in other areas of dermatology. We are headquartered in Menlo Park, California.

Our portfolio consists of:

• QBREXZA, a topical, once-daily anticholinergic cloth that was approved by the U.S. Food and Drug Administration (“FDA”) in June 2018 for the treatment of primary axillary hyperhidrosis in adult and pediatric patients nine years of age and older. Primary axillary hyperhidrosis is a medical condition with no known cause that results in underarm sweating beyond what is needed for normal body temperature regulation. Anticholinergics are a class of pharmaceutical products that exert their effect by blocking the action of acetylcholine, a neurotransmitter that transmits signals within the nervous system that are responsible for the activation of sweat glands. QBREXZA is applied directly to the skin and is designed to block underarm sweat production by inhibiting sweat gland activation. We began shipping QBREXZA to wholesalers and a preferred dispensing partner (together, “Customers”) in September 2018, and QBREXZA became commercially available in pharmacies within the United States on October 1, 2018.

• Lebrikizumab, a novel, injectable, humanized monoclonal antibody targeting interleukin 13 (“IL‑13”) that we are developing for the treatment of moderate-to-severe atopic dermatitis. IL‑13 is a naturally occurring cytokine that is thought to play an important role in promoting allergic inflammation and mediating its effects on bodily tissues, including in patients with atopic dermatitis. Lebrikizumab is designed to bind to IL‑13 with high affinity, specifically preventing formation of the IL‑13 receptor/interleukin 4 (“IL-4”) receptor complex and subsequent signaling. In August 2017, we entered into a license agreement (the “Roche Agreement”) with F. Hoffmann-La Roche Ltd and Genentech, Inc. (collectively, “Roche”) pursuant to which we obtained exclusive, worldwide rights to develop and commercialize lebrikizumab for atopic dermatitis and all other therapeutic indications. Based on the results of two exploratory Phase 2 clinical trials conducted by Roche in atopic dermatitis patients, we initiated a Phase 2b clinical trial in January 2018 to evaluate the safety and efficacy of lebrikizumab as a monotherapy compared with placebo and to establish the dosing regimen for a potential Phase 3 program in patients with moderate-to-severe atopic dermatitis. We completed enrollment of 280 patients ages 18 years and older in the Phase 2b clinical trial in October 2018 and announced positive topline results from the clinical trial in March 2019. Each of the lebrikizumab doses evaluated in the study showed a dose-dependent and statistically significant improvement in the primary endpoint, the mean percent change in the Eczema Area and Severity Index (“EASI”) score compared to placebo from baseline to week 16. Consistent with prior studies evaluating this investigational therapy, lebrikizumab was generally well-tolerated with side effects that were primarily mild to moderate in severity. Based on these results and having completed an end-of-Phase 2 meeting with the FDA, we plan to initiate a lebrikizumab Phase 3 clinical development program by the end of 2019.

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• Early-stage research and development programs in other areas of dermatology.

Key Developments

Below is a summary of selected key developments affecting our business that have occurred since March 31, 2019:

QBREXZA

• Discontinued our QBREXZA $70 savings card program, subject to one additional refill in the second quarter of 2019 for eligible patients, and instituted a $200 maximum savings per refill for our $35 savings card program, effective April 1, 2019.

• Secured QBREXZA coverage for approximately 85% of the total U.S. commercial lives (calculated based on Dermira data on file) as of August 1, 2019.

Lebrikizumab

• Received notice that Almirall, S.A. (“Almirall”) exercised its option in June 2019 to exclusively license rights to develop lebrikizumab for the treatment or prevention of dermatology indications, including but not limited to atopic dermatitis, and commercialize lebrikizumab for the treatment or prevention of all indications in Europe pursuant to the option and license agreement (“Almirall Agreement”) entered into in February 2019.

• Completed an end-of-Phase 2 meeting with the FDA in June 2019.

Non-Program Developments

• Amended the $125.0 million credit facility bearing interest at 10.75% per annum with Athyrium Opportunities III Acquisition LP (“Athyrium”) and drew down the second tranche of $40.0 million, with net proceeds to us of approximately $39.6 million, in August 2019.

Financial Overview

For the three months ended June 30, 2019, net loss decreased 25% to $18.0 million from $23.9 million for the same period in 2018. Product sales were $8.1 million for the three months ended June 30, 2019, comprised exclusively of net product sales of QBREXZA. Collaboration and license revenue was $58.6 million for the three months ended June 30, 2019, an increase of $19.5 million compared to the same period in 2018. Research and development expenses decreased 6% to $18.3 million for the three months ended June 30, 2019 compared to the same period in 2018, driven primarily by a reduction in clinical trial activities. Selling, general and administrative expenses increased 55% to $63.3 million for the three months ended June 30, 2019 compared to the same period in 2018, driven primarily by an increase in advertising, promotion and commercialization expense for QBREXZA and an increase in expenses related to headcount growth.

For the six months ended June 30, 2019, net loss was $82.8 million and remained constant compared to the same period in 2018. Product sales were $10.5 million for the six months ended June 30, 2019, comprised exclusively of net product sales of QBREXZA. Collaboration and license revenue was $58.6 million for the six months ended June 30, 2019, an increase of $19.2 million compared to the same period in 2018. Research and development expenses decreased 25% to $33.9 million for the six months ended June 30, 2019 compared to the same period in 2018, driven primarily by a reduction in clinical trial activities. Selling, general and administrative expenses increased 57% to $112.0 million for the six months ended June 30, 2019 compared to the same period in 2018, driven primarily by an increase in advertising, promotion and commercialization expense for QBREXZA and an increase in expenses related to headcount growth. We also recorded an impairment charge of $1.1 million against intangible assets for the six months ended June 30, 2018 related to our olumacostat glasaretil development program.

As of June 30, 2019, we had cash and investments of $327.2 million.

Since our inception, we have devoted substantially all of our efforts to developing our product candidates, including conducting preclinical and clinical trials and manufacturing activities and, more recently, to executing the commercial launch of QBREXZA. We have financed our operations primarily through the sale of equity securities and convertible debt securities.

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We have never been profitable and may never be profitable. As of June 30, 2019, we had an accumulated deficit of $827.8 million. We expect to incursignificant costs to continue to commercialize QBREXZA andfor the clinical development and potential commercialization of our lebrikizumabproduct candidate and for any future product candidates we may choose to pursue. As a result, we will need substantial additional funding to support our operating activities. The timing and the amount of future funding we will require and the success of our business will be based in large part on the successful commercialization of QBREXZA and the timing, scope and outcome of our lebrikizumab Phase 3 development program.Adequate funding may not be available to us on acceptable terms, or at all. We currently anticipate that we will seek to fund our operations through public or private equity or debt financings, product sales of QBREXZA, or other sources, such as potential collaboration or license agreements. Our failure to obtain sufficient funds on acceptable terms as and when needed could have a material adverse effect on our business, results of operations and financial condition.

Critical Accounting Policies and Significant Estimates

Our management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other 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 may differ from these estimates under different assumptions and conditions.

While our significant accounting policies are described in the notes to our condensed consolidated financial statements, we believe that the following changes to our critical accounting policies are most important to understanding and evaluating our reported condensed consolidated financial results, as these policies relate to the more significant areas involving management’s judgments and estimates.

Trade and Other Receivables

Our trade receivables consist of amounts due from the sale of QBREXZA. The trade receivables are recorded net of allowances for distribution fees and trade discounts, government rebates and chargebacks. Estimates for wholesaler chargebacks for government rebates and cash discounts are based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs. For the periods presented, we did not have any write-offs of trade receivables. We perform ongoing credit evaluations of our Customers and generally do not require collateral.

Other receivables, including collaboration and license receivables, are typically unsecured. Accordingly, we may be exposed to credit risk generally associated with our collaboration and license agreements. To date, we have not experienced any losses related to these receivables.

Inventory

Inventory consists of raw materials, work-in-process and finished goods related to the production of QBREXZA. Inventory costs are determined using the lower of standard cost, which approximates the actual costs determined using the first-in, first-out basis, or net realizable value. Standard costs are reviewed and updated annually or as needed. We expense costs associated with the manufacture of our products prior to regulatory approval and capitalize the cost of inventory when there is a high probability of future economic benefit. We began capitalizing the cost of inventory related to QBREXZA in the second quarter of 2018, the period in which we received regulatory approval to market the product. We expense costs associated with the manufacture of our lebrikizumab product candidate.

We review all inventory balances on a quarterly basis for impairment and recognize any reduction in value as a current period expense with a reserve provision on the condensed consolidated balance sheets. We write down inventory that is in excess of expected requirements or at risk of expiration. This assessment requires management to utilize judgment in formulating estimates and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates and assumptions. If the conditions that caused the impairment were to be resolved in a subsequent period, the reserve provision would not be reversed until the related inventory was sold or otherwise disposed. As of June 30, 2019, the carrying value of our inventory was $17.6 million, including finished goods inventory of $5.6 million which has fixed expiration dates. In addition, we have manufacturing purchase commitments during the next 12 months of $11.0 million related to QBREXZA. In order to realize the value of our recorded inventory, we will be dependent upon significant increases in the sales volumes of QBREXZA.

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Leases

We adopted Accounting Standards Update No. 2016‑02, Leases (Topic 842) (“Topic 842”)on January 1, 2019. For our long-term operating leases, we recognized a right-of-use asset and a lease liability on our condensed consolidated balance sheets. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that we would pay to borrow equivalent funds on a collateralized basis at the lease commencement date. As our leases do not provide an implicit rate, we estimated the rate of interest. In order to estimate the interest rate, we utilized the effective interest rate derived from recent debt transactions, adjusting it for factors that reflect the profile of secured borrowing over the expected term of the lease, including our credit rating. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent. We determined the lease term at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise.

We elected the practical expedients permitted under Topic 842, which allowed us to exclude from our condensed consolidated balance sheets recognition of leases having a term of 12 months or less (short-term leases) and we elected to not separate lease components and non-lease components for our long-term real-estate leases.

Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the condensed statements of operations and comprehensive loss. Variable lease payments include lease operating expenses.

Revenue Recognition

We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers 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 the performance obligations. At contract inception, we assess the goods or services promised within each contract and assess whether each promised good or service is distinct and determine those that areperformance obligations. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Product Sales

Our product sales consist of sales of QBREXZA, which became available in pharmacies within the United States on October 1, 2018. We recognize revenue from product sales when our Customers obtain control of our product, which is generally upon delivery.

Product sales are recognized at the transaction price, net of estimates of variable consideration, including commercial rebates, discounts related to a savings card program, distribution fees, trade discounts, government rebates and chargebacks and product returns. Variable consideration amounts are estimated at contract inception using the expected-value method and updated at the end of each reporting period as additional information becomes available. The amounts of variable consideration are included in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates and assumptions are updated quarterly and if actual future results vary materially from estimates, we will record an adjustment, which could impact product sales and earnings in the period of adjustment.

The following items of variable consideration are recorded at the time of revenue recognition and require significant estimates and judgment.

Commercial rebates and savings card program. We contract with certain third-party payers for the payment of rebates with respect to the utilization of QBREXZA. Rebates to these payers are based on contractual percentages applied to the amount of QBREXZA prescribed to patients who are covered by the plan or the organization with which we have contracts. We estimate and record rebates as a reduction to the transaction price in the same period the related product sales are recognized. We estimate commercial rebates based on contractual terms, estimated payer mix, industry information and other third-party data. We also have a savings card program to provide assistance to eligible patients with out-of-pocket costs, such as deductibles, co-insurance and co-payments, for the patient’s usage of QBREXZA. Reductions to product sales for the savings card program are estimated based on actual and expected program utilization.

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Distribution fees and trade discounts.  We pay our Customers certain fees for distribution services for QBREXZA. We have determined that such distribution services are not distinct from our sales of QBREXZA and the related fees are recorded as a reduction to the transaction price in the period the related product sales are recognized. Distribution fees are recorded based on contractual terms. We also incentivize prompt payment from our Customers by providing a discount for payments made within a certain number of days.

Government rebates and chargebacks.  We are subject to discount obligations under state Medicaid programs, Medicare and other government programs. Reserves for these rebates and chargebacks are recorded as a reduction to the transaction price in the period the related product sales are recognized. Chargeback amounts represent credit we expect to issue to our Customers and are recorded as a reduction to trade and other receivables, net. Reductions to product sales for government managed programs are estimated based on statutorily-defined discounts, estimated payer mix, expected sales to qualified healthcare providers and expected utilization.

Product returns.  Our product return policy provides our Customers the right to return QBREXZA, generally based on the product expiration date. The reserve for product returns is recorded as a reduction to the transaction price in the period the related product sales are recognized. We estimate product returns using third-party input and market data for products with characteristics similar to QBREXZA.

Collaborative Arrangements

We enter into collaborative arrangements that typically include one of more of the following: (i) license fees; (ii) milestone payments related to the achievement of developmental, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; and (iv) fees attributable to options to intellectual property. When a portion of non‑refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied. Fees attributable to options are deferred until the option expires or is exercised. When an option is exercised, the performance obligations associated with the option are identified, which will determine the accounting for the transaction price attributable to the option.

As part of the accounting for these arrangements, we must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation. The stand-alone selling price may include items such as forecasted revenues, development timelines, discount rates, and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

Under certain collaborative arrangements, we have been reimbursed for a portion of our research and development (“R&D”) expenses, including costs of drug supplies. When these R&D services are performed under a reimbursement or cost sharing model with our collaboration partner, we record these reimbursements as a reduction of R&D expense in our consolidated statements of operations.

License Fees

If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, 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. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

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Milestone Payments

At the inception of each arrangement that includes milestone payments (variable consideration), 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 our collaboration partner’s control, such as regulatory approvals, are generally 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, 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 achievement of such 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 license, collaboration or other 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 for which the license is deemed to be the predominant item to which the royalties relate, 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). To date, we have not recognized any royalty revenue resulting from any of our collaborative arrangements.

Results of Operations

	Three Months Ended												Six Months Ended
	June 30,						Change						June 30,						Change
	2019			2018			$			%			2019			2018			$			%
	(in thousands, except percentages)
Revenue:
Product sales	$	8,060		$	—		$	8,060		*			$	10,512		$	—		$	10,512		*
Collaboration and license revenue		58,585			39,080			19,505			50	%		58,585			39,379			19,206			49	%
Total revenue		66,645			39,080			27,565			71			69,097			39,379			29,718			75
Costs and operating expenses:
Cost of sales		1,335			—			1,335		*				2,261			—			2,261		*
Research and development		18,285			19,545			(1,260	)		(6	)		33,854			45,136			(11,282	)		(25	)
Selling, general and administrative		63,327			40,770			22,557			55			112,006			71,280			40,726			57
Impairment of intangible assets		—			—			—		*				—			1,126			(1,126	)	*
Total costs and operating expenses		82,947			60,315			22,632			38			148,121			117,542			30,579			26
Loss from operations		(16,302	)		(21,235	)		4,933			(23	)		(79,024	)		(78,163	)		(861	)		1
Interest and other income, net		1,970			2,037			(67	)		(3	)		3,521			3,771			(250	)		(7	)
Interest expense		(3,630	)		(4,734	)		1,104			(23	)		(7,291	)		(8,988	)		1,697			(19	)
Loss before taxes		(17,962	)		(23,932	)		5,970			(25	)		(82,794	)		(83,380	)		586			(1	)
Benefit for income taxes		—			—			—		*				—			194			(194	)	*
Net loss	$	(17,962	)	$	(23,932	)	$	5,970			(25	)%	$	(82,794	)	$	(83,186	)	$	392			—	%

* Percentage not meaningful

Revenue.  Our revenue during the periods presented has been comprised of QBREXZA product sales and collaboration and license revenue.

We recognized $8.1 million and $10.5 million in net product sales for the three and six months ended June 30, 2019, respectively, related to sales of QBREXZA, which became available in pharmacies within the United States on October 1, 2018. For the three and six months ended June 30, 2019, the gross-to-net discount applicable to QBREXZA sales was 39% and 55%, respectively. The improvement in gross-to-net discount during the second quarter of 2019 was driven by the discontinuation of our QBREXZA $70 savings card program and the introduction of a $200 maximum savings per refill for our QBREXZA $35 savings card program on April 1, 2019.

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We recognized $58.6 million in collaboration and license revenue for each of the three and six months ended June 30, 2019 pursuant to the Almirall Agreement, under which Almirall acquired an exclusive license to develop lebrikizumab for the treatment or prevention of dermatology indications, including but not limited to atopic dermatitis, and commercialize lebrikizumab for the treatment or prevention of all indications in Europe. We recognized $39.1 million and $39.4 million in collaboration and license revenue for the three and six months ended June 30, 2018, respectively, pursuant to the transition agreement we entered into with UCB Pharma S.A. (“UCB”) to effect the termination of the development and commercialisation agreement between us and UCB.

Cost of sales.Cost of sales includes manufacturing and distribution costs, the cost of drug substance and other raw materials, royalties due to third parties on product sales, product liability insurance, freight, shipping, handling and storage costs and salaries and related costs of employees involved with production. Manufacturing costs related to QBREXZA are capitalized as inventory and subsequently expensed as cost of sales. We recognize cost of sales when product is sold to wholesalers from our distribution center. Cost of sales was $1.3 million and $2.3 million for the three and six months ended June 30, 2019, respectively. In periods prior to receiving FDA approval for QBREXZA, we expensed all inventory and related costs associated with the manufacture of QBREXZA to research and development expense. Cost of sales for the three and six months ended June 30, 2019 would have been $0.4 million and $0.8 million higher, respectively, if we had not sold inventory that was expensed prior to regulatory approval.

Research and Development.  Research and development expenses include external costs incurred for the development of our product candidates, including third-party expenses necessary for clinical studies and manufacturing, and internal expenses consisting primarily of salaries and related costs, including stock-based compensation expense, for personnel in our research and development functions. We track external research and development costs incurred for each of our product candidates. We do not track our internal research and development costs by product candidate, as these costs are typically spread across multiple product candidates. We expense research and development costs as they are incurred.

The following table summarizes our research and development expenses incurred during the respective periods:

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2019		2018			$ Change			2019			2018		$ Change
	(in thousands)
External costs:
QBREXZA1	$	1,593	$	(814	)	$	2,407		$	4,032		$	2,544	$	1,488
Lebrikizumab2		5,232		3,799			1,433			8,701			6,603		2,098
Olumacostat glasaretil3		157		3,733			(3,576	)		(134	)		10,510		(10,644	)
Other external research and development expenses		3,125		1,407			1,718			4,537			3,052		1,485
Internal costs		8,178		11,420			(3,242	)		16,718			22,427		(5,709	)
Total research and development expenses	$	18,285	$	19,545		$	(1,260	)	$	33,854		$	45,136	$	(11,282	)

¹ In June 2018, we received FDA approval of QBREXZA for the treatment of primary axillary hyperhidrosis in adult and pediatric patients nine years of age and older. QBREXZA became commercially available in pharmacies within the United States in October 2018. In February 2019, we initiated a proof-of-concept study to evaluate the efficacy and safety of QBREXZA in people living with primary palmar hyperhidrosis, or excessive sweating of the hands. During the three and six months ended June 30, 2018, we recorded a credit to research and development expense of $2.0 million related to a small business waiver fee refund from the FDA for the New Drug Application filing fee paid in 2017.

² In March 2019, we announced positive topline results from the Phase 2b study and plan to initiate a Phase 3 program by the end of 2019.

³ In March 2018, we announced that olumacostat glasaretil did not meet the co-primary endpoints in its two Phase 3 pivotal trials (CLAREOS-1 and CLAREOS-2) in patients ages nine years and older with moderate-to-severe acne vulgaris. Based on these results, we have discontinued the program. We have made and may continue to make additional adjustments to previously recognized expenses.

Research and development expenses decreased $1.3 million, or 6%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. This decrease was primarily due to a reduction in clinical trial activities totaling $3.6 million related to our olumacostat glasaretil development program and a decrease in internal costs of $3.2 million, which were partially offset by increases of $2.4 million related to QBREXZA and $1.7 million in other research and development costs.

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Research and development expenses decreased $11.3 million, or 25%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. This decrease was primarily due to reductions in clinical trial activities totaling $10.6 millionrelated to our olumacostatglasaretil development program.

We expect our near-term research and development expenses to increase as we continue clinical trials, prepare for regulatory submissions, expand our manufacturing activities, develop new product candidates resulting from our early-stage research programs or business development activities and expand our development organization and capabilities. The timing and amount of future research and development expenses incurred will depend upon the timing and outcomes of current or future clinical studies and associated manufacturing activities for our lebrikizumab product candidate and new product candidates resulting from our early-stage research programs or business development activities.

Selling, General and Administrative.  Selling, general and administrative expenses consist of salaries and related costs, including stock-based compensation, for personnel in our selling, general and administrative functions, including our sales and marketing and medical affairs functions, and costs for advertising and promotion, market research and commercial planning services and professional fees for audit, tax and legal services.

Selling, general and administrative expenses increased $22.6 million, or 55%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. This increase was primarily due to a $15.0 million increase in advertising, promotion and commercialization expense for QBREXZA, and an $8.2 million increase in compensation cost and associated expenses resulting from an increase of 125 full-time employees, including 112 therapeutic sales specialists.

Selling, general and administrative expenses increased $40.7 million, or 57%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. This increase was primarily due to a $21.0 million increase in advertising, promotion and commercialization expense for QBREXZA, and a $19.0 million increase in compensation cost and associated expenses resulting from an increase of 125 full-time employees, including 112 therapeutic sales specialists.

We expect our selling, general and administrative expenses to increase for full-year 2019 compared to 2018 due primarily to the annualization of costs incurred in 2018 as we expanded our operating activities, increased our headcount and built out our infrastructure to support commercialization of QBREXZA, as well as an increase in promotional activities. For the second half of 2019, we expect our quarterly selling, general and administrative expenses to decrease relative to the second quarter of 2019.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through the issuance and sale of equity securities and convertible debt securities.

On November 7, 2018, we filed a shelf registration on Form S-3 with the U.S. Securities and Exchange Commission (“SEC”) for the issuance and sale of up to an aggregate offering of $300.0 million of shares of our common stock, preferred stock, debt securities, warrants to purchase our common stock, preferred stock or debt securities, subscription rights to purchase our common stock, preferred stock or debt securities and/or units consisting of some or all of these securities. The shelf registration statement was declared effective on November 21, 2018. In March 2019, we sold 11,283,019 shares of our common stock in a public offering pursuant to the shelf registration statement (“2019 Public Offering”) and received gross proceeds of $149.5 million and net proceeds of $140.2 million, after deducting underwriting discounts and commissions of $9.0 million and offering expenses of approximately $0.3 million. The shelf registration statement also provides that we may issue and sell up to an aggregate offering of $75.0 million of our common stock through an at-the-market sales agreement with Cowen and Company, LLC. As of June 30, 2019, no sales had been made under this at-the-market sales agreement and $75.0 million of common stock remained available to be sold, subject to certain conditions as specified in the sales agreement.

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In December 2018, we entered into a credit agreement (“Credit Agreement”) with Athyrium, which provided for a senior secured term loan facility of up to $125 million in aggregate principal amount, $35.0 million of which was borrowed on the closing date,generating net proceeds to us of approximately $32.5million, $40.0 million of which could be borrowed in a single draw at our option on or before July 1, 2019 (the “First Delayed Draw Loan”), and $50.0 million of which could be borrowed in a single draw on or before March 2, 2020 provided that our consolidated net revenues from QBREXZA sales in the United States for the four fiscal quarter period then most recently ended, as calculated in accordance with the terms of the Credit Agreement, were at least $45.0 million (the “Second Delayed Draw Loan”). On August 5, 2019, we amended the Credit Agreementto extend the deadline for the Second Delayed Draw Loan to June 3, 2020 and reduce the prepayment penalty (the “Amendment”). In connection with the Amendment, we borrowed the $40.0 million available under the First Delayed Draw Loangenerating net proceeds to us of approximately $39.6 million. Additionally, to be eligible to draw down on the additional funds under the Credit Agreement, there cannot be an existing default or event of default under the terms of the Credit Agreement. Amounts outstanding under the Credit Agreement bear interest at a rate of 10.75% per year, payable in quarterly in arrears, and provide for interest-only payments followed by payment of principal at maturity in December 2023; provided, however, that if, as of February 13, 2022, the aggregate outstanding principal amount ofour 3.00% Convertible Senior Notes due 2022 (“Notes”)is greater than $60.0million, we must immediately repay all amounts outstanding under the Credit Agreement, together with all accrued and unpaid interest and the applicable prepayment premium, if any. Our obligations under the Credit Agreement are secured by a security interest in, subject to certain exceptions, substantially all of our assets. See Note 6 included in the notes to our consolidated financial statements for further details regarding the terms of the Credit Agreement.

In May 2017, we sold Notes for an aggregate principal amount of $287.5 million in a private placement to qualified institutional buyers and received net proceeds of $278.3 million, after deducting the initial purchasers’ discounts of $8.6 million and issuance costs of $0.6 million.As of June 30, 2019, we had $287.5 million in aggregate principal amount of Notes outstanding.

As of June 30, 2019, we had $327.2 million of cash and investments. Our cash and investments are held in a variety of interest-bearing instruments, including money market funds, U.S. Treasury securities, corporate debt, U.S. Government agency securities and commercial paper. Cash in excess of immediate requirements is invested with a view toward liquidity and capital preservation, and we seek to minimize the potential effects of concentration and degrees of risk.

Our primary use of cash is to fund our operating expenses, including costs to continue the commercialization of QBREXZA and for the clinical development and potential commercialization of our lebrikizumab product candidate and any future product candidates we may choose to pursue. As of June 30, 2019, we had an accumulated deficit of $827.8 million. We expect to incur additional losses and expend substantial cash resources for the foreseeable future to continue to fund the commercialization of QBREXZA, to fund our planned Phase 3 clinical program for our lebrikizumab product candidate and to fund our other research and development programs for any other indications and product candidates we may choose to pursue.

Cash Flows

The following table shows a summary of our cash flows for the six months ended June 30, 2019 and 2018:

	Six Months Ended
	June 30,
	2019			2018
	(in thousands)
Net cash (used in) provided by:
Operating activities	$	(130,787	)	$	(77,879	)
Investing activities		(11,792	)		(42,960	)
Financing activities		140,760			1,224
Net decrease in cash and cash equivalents and restricted cash	$	(1,819	)	$	(119,615	)

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Operating Activities.  Net cash used in operating activities was $130.8 million for the six months ended June 30, 2019and consisted of a net loss of $82.8 millionand a $65.3 million increase in net operating assets, offset by$17.4 million in non-cash charges. The increase in net operating assets consisted primarily of a$54.1 million increase in trade and other receivables, net, primarily due to the receivable related to the Almirall Agreement, a$17.7 million increase in prepaid expenses and other current assets, which resulted from advance payments made in connection with our direct-to-consumer advertising campaign,a $9.1 million increase in inventory and a $4.3 million decrease in accounts payable, partially offset by a $21.4 million increase in deferred revenue.Non-cash charges were comprised primarily of$15.5 million of stock-based compensation.Net cash used in operating activities was $77.9 million for the six months ended June 30, 2018 and consisted of a net loss of $83.2 million and a $15.9 million increase in net operating assets, offset by $21.2 million in non-cash charges. The increase in net operating assets consisted primarily of a $7.2 million decrease in refund liability, a $3.7 million increase in prepaid expenses and other current assets, a $2.7 million decrease in accounts payable and a $1.2 million decrease in accrued liabilities. Non-cash charges included $14.8 million of stock-based compensation expense, $3.8 million of amortization of discount for payments related to acquired in-process research and development and $1.1million of impairment of intangible assets related to olumacostat glasaretil.

Investing Activities.  Net cash used in investing activities for the six months ended June 30, 2019 was $11.8 million, which resulted primarily from purchases of investments of $163.8 million, partially offset by proceeds from maturities of investments of $152.1 million. Net cash used in investing activities for the six months ended June 30, 2018 was $43.0 million, which resulted primarily from purchases of investments of $233.0 million, partially offset by proceeds from maturities of investments of $190.6 million.

Financing Activities.  Net cash provided by financing activities for the six months ended June 30, 2019 was $140.8 million, which resulted primarily from net proceeds of $140.2 million from our 2019 Public Offering. Net cash provided by financing activities for the six months ended June 30, 2018 was $1.2 million, which resulted from net proceeds from the issuance of common stock in connection with equity awards.

Operating and Capital Expenditure Requirements

We have incurred losses since inception and anticipate that we will continue to generate losses for the foreseeable future. We expect to continue to expend substantial cash resources for the foreseeable future to continue to fund the commercialization of QBREXZA, to fund our planned Phase 3 clinical program for our lebrikizumab product candidate and to fund our other research and development programs for any other indications and product candidates we may choose to pursue. We believe that existing cash and investments on hand as of June 30, 2019, the $50.0 million we received from Almirall in July 2019 in connection with its option exercise pursuant to the Almirall Agreement and the $30.0 million we will receive upon our initiation of certain lebrikizumab Phase 3 clinical trials pursuant to the Almirall Agreement are sufficient to meet our anticipated cash requirements into the first half of 2021 and to enable us to fund our planned Phase 3 clinical program for lebrikizumab through receipt of topline results. However, we expect we will need to raise substantial additional financing in the future to fund our operations. In order to meet these additional cash requirements, we may seek to raise debt or sell additional equity or convertible debt securities that may result in dilution to our stockholders. If we raise additional funds through the issuance of debt or convertible debt securities, these instruments could have rights senior to those of our common stock and could contain covenants that restrict our operations. We cannot ensure that additional financing will be available to us in the amounts we need or that such financing will be available on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to significantly delay, scale back or discontinue one or more of our product development programs or other aspects of our business plan or relinquish, license or otherwise dispose of rights to products or product candidates that we would otherwise seek to commercialize or develop ourselves on terms that are less favorable than might otherwise be available, any of which could have a material adverse effect on our business, results of operations and financial condition. Please see “Part II — Other Information, Item 1A, Risk Factors” below for additional risks associated with our substantial capital requirements.

Contractual Obligations and Other Commitments

In August 2019, we borrowed $40.0 million under our Credit Agreement, as amended, with Athyrium. Otherwise, there were no material changes in our commitments under contractual obligations, as disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 26, 2019.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended, (“Exchange Act”), and do not have any holdings in variable interest entities.

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ITEM 3.Quantitative and Qualitative Disclosures about Market Risk

During the six months ended June 30, 2019, there have been no significant changes in market risks as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the U.S. Securities and Exchange Commission on February 26, 2019.

ITEM 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow for timely decisions regarding required or necessary disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and we are required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting identified in connection with the evaluation required by Rules 13a‑15(d) and 15d‑15(d) of the Exchange Act that occurred during the fiscal quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION.

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.

ITEM 1A. RISK FACTORS

Our operations and financial results are subject to numerous risks and uncertainties, including those described below, which may have a material and adverse effect on our business, results of operations, cash flows, financial conditions, and the trading price of our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. You should consider these risks and uncertainties carefully, together with all of the other information included or incorporated by reference in this Quarterly Report on Form 10-Q. If any of the following risks actually occur, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the market price of our stock could decline, and you could lose part or all of your investment.

Risks Related to Commercialization of QBREXZA™ (glycopyrronium) Cloth

QBREXZA™ (glycopyrronium) cloth is our only approved product and the success of our business is dependent on its successful commercialization.

Our product, QBREXZA™ (glycopyrronium) cloth (“QBREXZA”), was approved by the U.S. Food and Drug Administration (“FDA”) for the topical treatment of primary axillary hyperhidrosis in adult and pediatric patients nine years of age and older and became available in pharmacies within the United States on October 1, 2018. The success of our business will depend on the successful commercialization of QBREXZA. The commercial success of QBREXZA will depend on a number of factors, including the following:

• the effectiveness of our sales team and our ability to scale our distribution capabilities (see also “—We have built a team of sales representatives and our distribution capabilities. If we are unable to establish effective sales and distribution capabilities on our own or through third parties, we will be unable to successfully commercialize QBREXZA or generate product sales.”);

• the availability of formulary coverage and adequate reimbursement for QBREXZA (see also “—Our commercial success may be severely hindered if patients do not have access to our approved product from their insurers without undue restriction.”);

• the ability and willingness of patients to pay for QBREXZA (see also “—Our operating results and liquidity needs could be negatively affected by market fluctuations and economic downturn.”);

• acceptance by physicians, payers and patients of the benefits, safety and efficacy of QBREXZA, including relative to alternative and competing treatments (see also “—QBREXZAmay fail to achieve the broad degree of physician and patient adoption and use necessary for commercial success.”);

• a continued acceptable safety profile of QBREXZA (see also “—QBREXZA may cause undesirable side effects or have other unexpected properties that could limit its commercial profile, result in post-approval regulatory action or expose us to product liability claims, any of which may adversely impact our business, financial condition, operating results and prospects.”);

• our ability to successfully obtain the substances and materials used in QBREXZA from third parties and to have finished product manufactured by third parties in accordance with regulatory requirements and in sufficient quantities for sale (see also “—Risks Related to Our Dependence on Third Parties”);

• our ability to ensure compliance with federal and state healthcare laws and regulations (see also “—Our employees, independent contractors, principal investigators, consultants, vendors, CROs, distributors, prescribers and any partners with which we may collaborate may engage in misconduct or other improper activities, including noncompliance with

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regulatory standards and requirements, which could have an adverse effect on our business.” and “—We may also be subject to healthcare laws, regulation and enforcement and our failure to comply with those laws could adversely affect our business, operations and financial condition.”); and

• our ability to establish and enforce intellectual property rights in and to QBREXZA and avoid third-party patent interference or intellectual property infringement claims (see also “—Risks Related to Our Intellectual Property”).

If we do not achieve one or more of these factors, many of which are beyond our control, in a timely manner or at all, we could experience significant delays or an inability to commercialize our product, increase sales and generate revenue, which would harm our business, financial condition, operating results and prospects.

We have built a team of sales representatives and our distribution capabilities. If we are unable to maintain effective sales and distribution capabilities on our own or through third parties, we will be unable to successfully commercialize QBREXZA or generate product sales.

To achieve commercial success, we must effectively maintain our commercial infrastructure, including our sales and distribution capabilities, to enable us to execute on our commercialization goals. Factors that may inhibit our efforts to successfully commercialize QBREXZA through our own sales organization include:

• our inability to train and retain adequate numbers of effective sales personnel;

• the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe QBREXZA;

• the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

• unforeseen costs and expenses associated with maintaining an independent sales organization.

There are significant risks involved in managing a sales organization, including our ability to retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales personnel and effectively manage a geographically dispersed sales team. We may also choose to collaborate with third parties that have direct sales forces and established distribution systems to augment our own sales force and distribution systems. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to successfully commercialize QBREXZA. Even if we are able to enter into such arrangements, we will likely have little control over these third parties, and any such third party may fail to devote the necessary resources and attention to sell and market our product effectively. Any failure in our ability to maintain our commercial infrastructure and sales and distribution capabilities would adversely impact the commercialization of our product. The inability to successfully commercialize our product, either on our own or through collaborations with one or more third parties, would harm our business, financial condition, operating results and prospects.

We have contracted with a third-party logistics company to warehouse QBREXZA and distribute it to wholesalers, distributors, pharmacies, hospitals and other drug suppliers that will ultimately distribute our product directly to patients. Our third-party logistics company also provides billing, collection and returns services. This distribution network requires significant coordination with our market access, finance, quality and technical operations teams. Failure to maintain our contracts with our third-party logistics company, wholesalers, distributors, pharmacies, hospitals or other drug suppliers, or the inability or failure of any of them to adequately perform under the contracts, could negatively impact the distribution of our product. Failure to coordinate financial systems could also negatively impact our ability to accurately report and forecast product sales. If we are unable to effectively manage the distribution process, sales of QBREXZA could be severely compromised and our business, financial condition, operating results and prospects would be harmed.

Our commercial success may be severely hindered if patients do not have access to QBREXZA from their insurers without undue restriction.

The availability of formulary coverage and adequate reimbursement from private third-party payers such as pharmacy benefit managers and commercial insurers, and to a lesser degree, governmental healthcare programs, such as Medicare and Medicaid, is critical to market acceptance and commercial success of QBREXZA, which is available only by prescription. Timely coverage and acceptable patient cost-sharing tiers for our product may be adversely affected by a number of factors, including but not limited to, increasing and intense pressure from political, social, competitive and other sources to reduce drug unit costs or limit changes in list price; changes in federal, state or foreign government regulations or private third-party payers’ reimbursement policies; consolidation and increasing assertiveness of commercial payers seeking net price reduction via drug rebates and other forms of discounts linked to

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the placement of QBREXZAon their formularies; and the imposition of restrictions on access or coverage of particular drugs or pricing determined based on perceived pharmacoeconomic value.

A trend in the healthcare industry is cost containment. Third-party payers are developing increasingly sophisticated methods of controlling healthcare costs by, among other methods, limiting or preventing (via formulary exclusion) coverage for particular medications, requiring drug companies to provide them with varying levels of discounts from list prices and challenging the value of list prices charged for medical products. Coverage decisions may depend upon the size of a patient population, perceptions of clinical efficacy and economic standards that may disfavor new drug products when more established or lower cost therapeutic alternatives are already available or subsequently become available.

Although private third-party payers in the United States tend to follow Medicare reimbursement policies for products which are administered in a hospital or physician office setting, no uniform policy of pharmacy benefit coverage and reimbursement for drug products exists among third-party payers. Therefore, coverage and reimbursement for drug products adjudicated in a pharmacy benefit setting can differ significantly across payers. As a result, the coverage determination process is often a time-consuming and costly process that requires us to provide scientific and clinical support for the use of our product to each third-party payer separately, with no assurance that coverage will be obtained.

In addition, the market for QBREXZA will depend significantly on access to third-party payers’ drug formularies, or lists of medications for which third-party payers provide coverage and impose patient out-of-pocket cost sharing limits. The industry competition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies. Also, third-party payers may refuse to include a particular branded drug in their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other therapeutically similar alternative is available.

Third-party payers may also seek additional evidence, beyond the data required to obtain regulatory approval, demonstrating clinical benefits and value in specific patient populations before covering our product for those patients. This increased requirement is seen in particular with dermatology products that are perceived by payers to treat so-called lifestyle conditions. If third-party payers believe QBREXZA does not demonstrate sufficient value, they may not cover QBREXZA or may limit access to QBREXZA.

Patients who are prescribed medicine for the treatment of their conditions generally rely on third-party payers to reimburse all or part of the costs of their prescription drugs. Even if we obtain favorable coverage for our product, the patient may be required to pay co-payments or co-insurance they find unacceptably high. Patients may be unlikely to use QBREXZA unless a significant portion of the cost of our product is reimbursed through insurance coverage or reduced through the use of our savings card program. In connection with the commercial launch of QBREXZA, we implemented a savings card program to provide assistance to eligible patients with out-of-pocket costs, such as deductibles, co-insurance and co-payments, for the patient’s usage of QBREXZA. The savings card program provided commercially insured patients with a co-payment of no more than $35 (the “$35 savings card program”) and uninsured patients with a payment of $70 (the “$70 savings card program”). Effective April 1, 2019, we discontinued the $70 savings card program, subject to one additional refill in the second quarter of 2019 for eligible patients, and instituted a $200 maximum savings per refill for the $35 savings card program. Such discontinuation of the $70 savings card program, change to the $35 savings card program, and any future changes to or elimination of the $35 savings card program could adversely affect the frequency with which physicians prescribe QBREXZA, the availability of QBREXZA at pharmacies and the demand for and use of QBREXZA by patients.

Our inability to promptly obtain insurance coverage, profitable reimbursement rates or access to third-party payers’ drug formularies from private payers and, to a smaller degree, government-funded health insurance for our product, could have a material adverse effect on our business, financial condition, operating results and prospects.

QBREXZAmay fail to achieve the broad degree of physician and patient adoption and use necessary for commercial success.

The commercial success of QBREXZA will depend significantly on the broad adoption and use of the product by physicians and patients for the approved indication. The degree and rate of physician and patient adoption of our product will depend on a number of factors, including:

• patient demand for an approved product that treats primary axillary hyperhidrosis;

• our ability to successfully compete with existing therapies, some of which are widely known and accepted by physicians and patients, including demonstrating that the relative cost, safety and efficacy of QBREXZA provides an attractive alternative to the existing therapies;

• the availability of formulary coverage and adequate reimbursement from private third-party payers for QBREXZA;

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• the cost of treatment with QBREXZA in relation to alternative treatments and patients’ willingness to pay for the product;

• changes to or discontinuation of our savings card program for QBREXZA;

• acceptance by physicians, major operators of clinics and patients of QBREXZA as a safe and effective treatment;

• physician willingness to process prior authorizations when required by payers;

• physician and patient willingness to adopt and prescribe a new therapy over other available therapies to treat primary axillary hyperhidrosis;

• patients’ perception of primary axillary hyperhidrosis as a condition for which medical treatment may be appropriate and a prescription therapy may be available;

• overcoming any biases physicians or patients may have toward particular therapies for the treatment of primary axillary hyperhidrosis;

• proper training and administration of QBREXZA by physicians and medical staff;

• patients properly using QBREXZA as instructed;

• patient satisfaction with the results and administration of QBREXZA and overall treatment experience;

• the willingness of patients to pay for QBREXZA relative to other discretionary items, especially during economically challenging times;

• the revenue and profitability that QBREXZA may offer a physician as compared to alternative therapies;

• the prevalence and severity of side effects from the use or potential misuse of QBREXZA;

• limitations or warnings contained in the FDA-approved labeling of QBREXZA;

• the effectiveness of our sales, marketing and distribution efforts;

• patient confusion between QBREXZA and wipe products available over-the-counter;

• adverse publicity about QBREXZA or favorable publicity about competitive products;

• potential product liability claims;

• our ability to effectively manage our third-party supply and manufacturing operations while increasing production capabilities for QBREXZA to commercial levels; and

• our ability to manage our operations to effectively support our commercialization activities.

If QBREXZA fails to achieve the broad degree of physician, patient and payer adoption necessary for commercial success, our operating results and financial condition will be adversely affected, which may delay, prevent or limit our ability to generate revenue and continue our business.

QBREXZA may cause undesirable side effects or have other unexpected properties that could limit its commercial profile, result in post-approval regulatory action or expose us to product liability claims, any of which may adversely impact our business, financial condition, operating results and prospects.

If we or others identify undesirable side effects or other previously unknown problems caused by QBREXZA or other products with the same or related active ingredients, a number of potentially negative consequences could result, including:

• regulatory authorities may withdraw their approval of QBREXZA;

• we could be sued and held liable for harm caused to patients (see also “—We may face product liability exposure, and if successful claims are brought against us, we may incur substantial liability if our insurance coverage for those claims is inadequate.”);

• regulatory authorities may require a recall of QBREXZA or we or our potential partners may voluntarily recall the product (see also “—We or our current and prospective partners may be subject to product recalls in the future that could harm our brand and reputation and could negatively affect our business.”);

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• regulatory authorities may require the addition of warnings or contraindications in the product labeling, narrowing of the indication in the QBREXZA label or field alerts to physicians and pharmacies;

• we may be required to institute a risk evaluation and mitigation strategy;

• we may have limitations on how we promote QBREXZA;

• we may be required to change the way QBREXZA is administered or modify the product in some other way;

• the FDA or applicable foreign regulatory authority may require additional clinical trials or costly post-marketing testing and surveillance to monitor the safety or efficacy of QBREXZA;

• sales of QBREXZA may decrease significantly; and

• our brand and reputation may suffer.

Any of the above events resulting from undesirable side effects or other previously unknown problems could prevent us or our potential partners from achieving or maintaining market acceptance of QBREXZA and could substantially increase our costs, which may adversely affect our business, financial condition, operating results and prospects.

We may face product liability exposure, and if successful claims are brought against us, we may incur substantial liability if our insurance coverage for those claims is inadequate.

We face an inherent risk of product liability as a result of the clinical testing of our product candidates and the commercialization of QBREXZA. This risk exists even if a product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. QBREXZA and our past and current product candidates were designed to affect important bodily functions and processes. Any side effects, manufacturing defects, failure to follow instructions, misuse or abuse associated with our product or product candidates could result in injury to a patient or even death. We cannot offer any assurance that we will not face product liability suits in the future, nor can we provide assurances that our insurance coverage will be sufficient to cover our liability under any such cases.

In addition, a liability claim may be brought against us even if our product or product candidates merely appear to have caused an injury. Product liability claims may be brought against us by, among others, consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our product or product candidates. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:

• the inability to commercialize our product or product candidates;

• decreased demand for our product or product candidates;

• product recall or withdrawal from the market or labeling, marketing or promotional restrictions;

• withdrawal of clinical trial participants;

• decreased enrollment rates of clinical trial participants;

• termination of clinical trial sites or entire clinical trial programs;

• impairment of our business reputation;

• substantial costs of any related litigation or similar disputes;

• distraction of management’s attention and other resources from our primary business;

• substantial monetary awards to patients or other claimants against us that may not be covered by insurance; or

• loss of revenue.

Large judgments have been awarded in class action or individual lawsuits based on drugs that had anticipated or unanticipated side effects. Although we have obtained product liability insurance coverage, our insurance coverage may not be sufficient to cover all of our product liability related expenses or losses and may not cover us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect us against losses due to product liability. A successful product liability

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claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and could harm our business, financial condition, operating results and prospects.

If we are found to have improperly promoted QBREXZA for off-label uses or otherwise, or if physicians misuse our product or use our product off-label, we may become subject to prohibitions on the sale or marketing of our product, product liability claims and significant fines, penalties and sanctions, and our brand and reputation could be harmed.

The FDA and other regulatory agencies strictly regulate the marketing and promotional claims that are made about drug and biologic products. In particular, a product may not be promoted for uses or indications that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling and comparative safety or efficacy claims cannot be made without direct comparative clinical data. Additionally, there is greater regulatory scrutiny, especially in the United States, on advertising and promotion and, in particular, direct-to-consumer advertising.

In March 2019, we launched a new direct-to-consumer campaign designed to generate awareness of QBREXZA as a potential treatment option for people living with primary axillary hyperhidrosis. Although QBREXZA may appeal to individuals who have not been diagnosed with primary axillary hyperhidrosis or suffer from other forms of hyperhidrosis, we are able to promote it only for primary axillary hyperhidrosis. If we are found to have improperly promoted our product for off-label uses or otherwise, we may receive warning or untitled letters and become subject to significant criminal and civil liability, which would materially harm our business. Both federal and state governments have levied large civil and criminal fines against companies for alleged improper off-label promotion and have enjoined several companies from engaging in off-label promotion.

If we become the target of an investigation or prosecution based on our marketing and promotional practices, we could face sanctions, which would materially harm our business. In addition, management’s attention could be diverted from our business operations, significant legal expenses could be incurred and our brand and reputation could be damaged. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If we are deemed by the FDA to have engaged in the improper promotion of our product for off-label uses or otherwise, we could be subject to FDA regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute improper promotion of our product for off-label uses or otherwise, which could result in significant penalties, including criminal, civil or administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment or restructuring of our operations.

We cannot, however, prevent a physician from prescribing our product outside of its approved indication when in the physician’s independent professional medical judgment he or she deems appropriate. Physicians or patients may also misuse our product or use improper techniques, potentially leading to adverse results, side effects or injury, which may lead to product liability claims. If our product is misused or used with improper technique, we may become subject to costly litigation by physicians or their patients. See also “—We may face product liability exposure, and if successful claims are brought against us, we may incur substantial liability if our insurance coverage for those claims is inadequate.” Furthermore, the use of our product for indications other than those approved by the FDA may not effectively treat such conditions, which could adversely impact patient satisfaction with the results and administration of QBREXZA and harm our reputation among physicians and patients.

We rely completely on third parties to manufacture and distribute drug supplies for QBREXZA, including certain sole-source suppliers and manufacturers.

We do not currently have, nor do we plan to acquire, the infrastructure or capability to manufacture or distribute commercial quantities of QBREXZA. Our ability to commercially supply QBREXZA depends, in part, on our ability to successfully manufacture drug substance and other substances and materials used in QBREXZA from third parties and to have the finished product manufactured by third parties in accordance with regulatory requirements and in sufficient quantities for sale. If we fail to develop and maintain supply relationships with these third parties, we may be unable to successfully commercialize QBREXZA.

We rely and will continue to rely on certain third parties as the sole source of the materials they supply or the finished products they manufacture. For example, we are dependent on our current suppliers of the nonwoven material and pouchstock in QBREXZA. Any of our existing suppliers or manufacturers may:

• fail to supply us with product on a timely basis or in the requested amount due to unexpected damage to or destruction of facilities or equipment or otherwise;

• fail to increase manufacturing capacity and produce drug product and components in larger quantities and at higher yields in a timely or cost-effective manner, or at all, to sufficiently meet our commercial needs;

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• be unable to meet our production demands due to issues related to their reliance on sole-source suppliers and manufacturers;

• supply us with product that fails to meet regulatory requirements;

• become unavailable through business interruption or financial insolvency;

• lose regulatory status as an approved source;

• be unable or unwilling to renew current supply agreements when such agreements expire on a timely basis, on acceptable terms or at all; or

• discontinue production or manufacturing of necessary drug substances or products.

In the event of any of the foregoing, if we do not have an alternative supplier or manufacturer in place, we would be required to expend substantial management time and expense to identify, qualify and transfer processes to alternative suppliers or manufacturers. Transferring technology to other sites may require additional processes, technologies and validation studies, which are costly, may take considerable amounts of time, may not be successful and, in most cases, require review and approval by the FDA. Any need to find and qualify new suppliers or manufacturers could significantly delay production of QBREXZA, adversely impact our ability to market QBREXZA and adversely affect our business. There can be no assurance that replacements would be available to us on a timely basis, on acceptable terms or at all. Additionally, we and our manufacturers do not currently maintain significant inventory of drug substances and other materials. Any interruption in the supply of a drug substance or other material or in the manufacture of QBREXZA could have a material adverse effect on our business, financial condition, operating results and prospects.

Additionally, although we are ultimately responsible for ensuring compliance with regulatory requirements such as current good manufacturing practices (“cGMPs”), we are dependent on our contract suppliers and manufacturers for day-to-day compliance with cGMP for production of both drug substances and finished products. Facilities used by our contract suppliers and manufacturers to produce the drug substances and materials or finished products for commercial sale must pass inspection and be approved by the FDA and other relevant regulatory authorities. A number of our contract suppliers and manufacturers must comply with cGMP requirements enforced by the FDA through its facilities inspection program and review of submitted technical information. If the safety of QBREXZA is compromised due to a failure to adhere to applicable laws or for other reasons, we may not be able to successfully commercialize our product and we may be held liable for injuries sustained as a result. In addition, the manufacturing facilities of certain of our suppliers are located outside of the United States. This may give rise to difficulties in importing our product into the United States or other countries as a result of, among other things, regulatory agency approval requirements, taxes, tariffs, local import requirements such as import duties or inspections, incomplete or inaccurate import documentation or defective packaging. Any of these factors could adversely impact our ability to effectively commercialize QBREXZA.

QBREXZA will be subject to ongoing and continued regulatory review. Failure to comply with applicable regulatory requirements could have a material adverse impact on our business.

We are subject to ongoing FDA obligations and continued regulatory review with respect to, among other things, the manufacturing, processing, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for QBREXZA. These requirements include submissions of safety and other post-marketing information and reports and registration, as well as continued compliance with cGMP requirements and with the FDA’s good clinical practice (“GCP”).

In addition, manufacturers of drug and biologic products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where, or processes by which, the product is manufactured, a regulatory agency may impose restrictions on that product or us, including requesting that we initiate a product recall, or requiring notice to physicians, withdrawal of the product from the market or suspension of manufacturing.

If we, our product or product candidates or the manufacturing facilities for our product or product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

• impose restrictions on the marketing or manufacturing of the product, suspend or withdraw product approvals or revoke necessary licenses;

• mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

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• require us or our partners to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

• issue warning letters, show cause notices or untitled letters describing alleged violations, which may be publicly available;

• commence criminal investigations and prosecutions;

• impose injunctions, suspensions or revocations of necessary approvals or other licenses;

• impose other civil or criminal penalties;

• suspend any ongoing clinical trials;

• delay or refuse to approve pending applications or supplements to approved applications filed by us or our potential partners;

• refuse to permit drugs or precursor chemicals to be imported or exported to or from the United States;

• suspend or impose restrictions on operations, including costly new manufacturing requirements; or

• seize or detain products or require us or our partners to initiate a product recall.

The regulations, policies or guidance of the FDA and other applicable government agencies may change and new or additional statutes or government regulations may be enacted that could prevent or delay regulatory approval of our product candidates or further restrict or regulate post-approval activities. We cannot predict the likelihood, nature or extent of adverse government regulations that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to achieve and maintain regulatory compliance, we may not be permitted to market our product candidates, which would adversely affect our ability to generate revenue and achieve or maintain profitability.

We or our current and prospective partners may be subject to product recalls in the future that could harm our brand and reputation and could negatively affect our business.

We or our current and prospective partners may be subject to product recalls, withdrawals or seizures if QBREXZA fails to meet specifications or is believed to cause injury or illness or if we are alleged to have violated governmental regulations including those related to manufacturing, labeling, promotion, sale or distribution. Any recall, withdrawal or seizure in the future could materially and adversely affect consumer confidence in our brand and lead to decreased demand for our product. In addition, a recall, withdrawal or seizure of QBREXZA would require significant management attention, would likely result in substantial and unexpected expenditures and would harm our business, financial condition, operating results and prospects.

Risks Related to Development and Regulatory Approval of Our Product Candidates

Our business is dependent on the successful development and regulatory approval of our current and any future product candidates.

We plan to initiate a Phase 3 clinical development program for our product candidate, lebrikizumab, for the treatment of moderate-to-severe atopic dermatitis. We also have early-stage research and development programs in other areas of dermatology. The success of our business, including our ability to finance our company and generate additional revenue in the future, will depend on the successful development and regulatory approval of our lebrikizumab product candidate and any future product candidates we may develop, in-license or acquire. The clinical success of our current and any future product candidates will depend on a number of factors, including the following:

• the ability to raise additional capital on acceptable terms, or at all;

• timely completion of our clinical trials, which may be significantly slower or cost more than we currently anticipate and will depend substantially upon the performance of third-party contractors as well as our ability to timely recruit and enroll patients in our clinical trials, which may be delayed due to numerous factors, including the prevalence of other companies’ clinical trials for their product candidates for the same or similar indications;

• whether we are required by the FDA or similar foreign regulatory agencies to conduct additional clinical trials or other studies beyond those planned to support the approval and commercialization of our current or any future product candidates;

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• acceptance of our proposed indications and primary endpoint assessments relating to the proposed indications of our current or any future product candidates by the FDA and similar foreign regulatory authorities;

• our ability to demonstrate to the satisfaction of the FDA and similar foreign regulatory authorities the safety, efficacy and acceptable risk to benefit profile of our current or any future product candidates;

• the prevalence, duration and severity of potential side effects experienced with our current or any future product candidates;

• the timely receipt of necessary marketing approvals from the FDA and similar foreign regulatory authorities;

• achieving and maintaining, and, where applicable, ensuring that our third-party contractors achieve and maintain, compliance with our contractual obligations and with all regulatory requirements applicable to our current or any future product candidates;

• our ability to successfully obtain the substances and materials used in our current or any future product candidates from third parties and to have finished products manufactured by third parties in accordance with regulatory requirements and in sufficient quantities for preclinical and clinical testing;

• the ability of third parties with whom we contract to manufacture clinical trial supplies of our current or any future product candidates, remain in good standing with regulatory agencies and develop, validate and maintain commercially viable manufacturing processes that are compliant with cGMP; and

• a continued acceptable safety profile during clinical development of our current or any future product candidates.

If we do not achieve one or more of these factors, many of which are beyond our control, in a timely manner or at all, we could experience significant delays or an inability to successfully complete and obtain regulatory approvals of our current or any future product candidates.

Clinical drug development is very expensive, time-consuming and uncertain. Our clinical trials may fail to adequately demonstrate the safety and efficacy of our current or any futureproduct candidates, which could prevent or delay regulatory approval and commercialization.

Clinical drug development is very expensive, time-consuming and difficult to design and implement, and its outcome is inherently uncertain. Before obtaining regulatory approval for the commercial sale of a product candidate, we must demonstrate through clinical trials that a product candidate is both safe and effective for use in the target indication. Most product candidates that commence clinical trials are never approved by regulatory authorities for commercialization. The clinical trials for these product candidates may take significantly longer than expected to complete. In addition, we, any partner with which we currently or may in the future collaborate, the FDA, an institutional review board (“IRB”) or other regulatory authorities, including state and local agencies and counterpart agencies in foreign countries, may suspend, delay, require modifications to or terminate our clinical trials at any time, for various reasons, including:

• discovery of serious or unexpected toxicities or side effects experienced by study participants or other safety issues;

• lack of effectiveness of any product candidate during clinical trials or the failure of a product candidate to meet specified endpoints;

• slower than expected rates of subject recruitment and patient enrollment in clinical trials resulting from numerous factors, including the prevalence of other companies’ clinical trials for their product candidates for the same indication, such as atopic dermatitis;

• difficulty in retaining subjects who have initiated participation in a clinical trial but may withdraw at any time due to adverse side effects from the therapy, insufficient efficacy, fatigue with the clinical trial process or for any other reason;

• difficulty in obtaining IRB approval for studies to be conducted at each site;

• delays in manufacturing or obtaining, or inability to manufacture or obtain, sufficient quantities of materials for use in clinical trials;

• inadequacy of or changes in our manufacturing process or the product formulation or method of delivery;

• changes in applicable laws, regulations and regulatory policies;

• delays or failure in reaching agreement on acceptable terms in clinical trial contracts or protocols with prospective contract research organizations (“CROs”), clinical trial sites and other third-party contractors;

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• inability to add a sufficient number of clinical trial sites;

• uncertainty regarding proper dosing;

• failure of our CROs or other third-party contractors to comply with contractual and regulatory requirements or to perform their services in a timely or acceptable manner;

• failure by us, our employees, our CROs or their employees or any partner with which we may collaborate or their employees to comply with applicable FDA or other regulatory requirements relating to the conduct of clinical trials or the handling, storage, security and recordkeeping for drug and biologic products;

• scheduling conflicts with participating clinicians and clinical institutions;

• failure to design appropriate clinical trial protocols;

• inability or unwillingness of medical investigators to follow our clinical protocols;

• difficulty in maintaining contact with subjects during or after treatment, which may result in incomplete data; or

• insufficient data to support regulatory approval.

We or any partner with which we may collaborate may suffer significant setbacks in our clinical trials similar to the experience of a number of other companies in the pharmaceutical and biotechnology industries, even after receiving promising results in earlier trials. In the event that we or our potential partners abandon or are delayed in the clinical development efforts related to our current or any future product candidates, we may not be able to execute on our business plan effectively and our business, financial condition, operating results and prospects would be harmed. For example, in March 2018, we received results that the investigational treatment olumacostat glasaretil (formerly DRM01) for moderate-to-severe acne vulgaris did not meet the co-primary endpoints in its two Phase 3 pivotal trials (CLAREOS-1 and CLAREOS-2) in patients ages nine years and older notwithstanding earlier clinical trials. Based on these results, we discontinued the development program. Furthermore, if we experience delays in the completion of, or if we terminate, any of our current or future clinical trials, our business, financial condition, operating results and prospects would be adversely affected.

We have in the past relied and expect to continue to rely on third-party CROs and other third parties to conduct and oversee our clinical trials, other aspects of our product development and our regulatory submission process. If these third parties do not meet our requirements, conduct the trials as required or otherwise provide services as anticipated, we may not be able to satisfy our contractual obligations or obtain regulatory approval for, or successfully commercialize, our current or any future product candidates when expected or at all.

We have in the past relied and expect to continue to rely on third-party CROs and other third parties to conduct and oversee our clinical trials, other aspects of our product development and our regulatory submission process. We also rely upon various medical institutions, clinical investigators and contract laboratories to conduct our trials in accordance with our clinical protocols and all applicable regulatory requirements, including the FDA’s regulations and GCPs, which are an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators and monitors, and state regulations governing the handling, storage, security and recordkeeping for drug and biologic products. These CROs and other third parties play a significant role in the conduct of our clinical trials, the subsequent collection and analysis of data from the clinical trials, the preparation for and submission of our filings with the FDA and comparable foreign regulatory authorities and the successful commercialization of our product.

We rely heavily on third parties for the execution of our clinical trials and preclinical studies, and control only certain aspects of their activities. We and our CROs and other third-party contractors are required to comply with GCP and good laboratory practice (“GLP”) requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these GCP and GLP requirements through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these third parties fail to comply with applicable GCP and GLP requirements, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or other regulatory authorities may require us to perform additional clinical trials before approving our or our partners’ marketing applications. We cannot provide assurances that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials or preclinical studies complies with applicable GCP and GLP requirements. In addition, our clinical trials must generally be conducted with products produced under cGMP regulations. Our failure to comply with these regulations and policies may require us to repeat clinical trials, which would delay the regulatory approval process.

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If any of our CROs or clinical trial sites terminate their involvement in our clinical trials for any reason, we may not be able to enter into arrangements with alternative CROs or clinical trial sites in a timely manner, or do so on commercially reasonable terms or at all. In addition, if our relationship with clinical trial sites is terminated, we may experience the loss of follow-up information on patients enrolled in our ongoing clinical trial unless we are able to transfer the care of those patients to another qualified clinical trial site. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and could receive cash compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be questioned by the FDA and comparable foreign regulatory authorities.

Additionally, the regulatory submission process for a product candidate is complex. We expect to rely on a third-party service provider for the preparation and submission of filings with the FDA and comparable foreign regulatory authorities for approval of our current and any future product candidates. If our relationship with such service provider is terminated prior to completion of our regulatory submission process, we may not be able to enter into an arrangement with an alternative service provider in a timely manner, or do so on commercially reasonable terms, and our submission may be substantially delayed.

We are currently dependent on F. Hoffmann-La Roche Ltd and Genentech, Inc. (together, “Roche”) for the manufacture and supply of lebrikizumab drug substance. Roche has elected to transfer its manufacture and supply responsibilities to us and we have until November 2023 to engage a qualified contract manufacturer to manufacture and supply the drug substance.  Any interruption in our supply may cause serious delays in the timing of our clinical trials, increase our costs and adversely impact our financial results.

Pursuant to the terms of our license agreement with Roche for the exclusive, worldwide rights to develop and commercialize lebrikizumab for, among other indications, atopic dermatitis (the “Roche Agreement”), Roche is responsible for the manufacture and supply to us of lebrikizumab drug substance and we are completely reliant upon Roche to provide us with adequate supply for our use. We may experience an interruption in supply if, among other reasons, we incorrectly forecast our supply requirements, Roche allocates supply to its own development programs, Roche incorrectly plans its manufacturing production or Roche is unable to manufacture lebrikizumab drug substance in a timely manner to match our development or commercial needs.

Additionally, the Roche Agreement provides that, subject to certain requirements, Roche has the right to transfer its drug substance manufacture and supply responsibilities to us at any time. We do not currently have, nor do we plan to acquire, the infrastructure or capability to supply, manufacture or distribute clinical or commercial quantities of lebrikizumab drug substance. In November 2018, Roche provided us with notice of its election to transfer its drug substance manufacture and supply responsibilities to us.  Pursuant to the terms of the Roche Agreement, the transfer must be completed within five years after delivery of the election notice and we are responsible for the costs incurred in connection with the transfer and qualifying a contract manufacturer to manufacture and supply the lebrikizumab drug substance.

We are in the process of engaging an alternative manufacturer of lebrikizumab drug substance. Transferring technology to a new manufacturer will require additional processes, technologies and validation studies, which are costly, may take considerable amounts of time, may not be successful and require review and approval by the FDA and applicable foreign regulatory bodies. Such manufacturer must comply with cGMP requirements enforced by the FDA and applicable foreign regulatory bodies through facilities inspection programs and review of submitted technical information. In addition, if the contract manufacturer is located outside of the United States, we may face difficulties in importing our lebrikizumab drug substance into the United States or other countries as a result of, among other things, regulatory agency approval requirements, taxes, tariffs, local import requirements such as import duties or inspections, incomplete or inaccurate import documentation or defective packaging. There can be no assurance that a qualified contract manufacturer would be available to us on a timely basis, on acceptable terms or at all, or that a seamless transfer of technology would occur from Roche to the contract manufacturer. If we experience any interruption in the supply of lebrikizumab drug substance, our ability to timely supply our clinical sites would be adversely impacted, causing potentially serious delays in the timing of our clinical trials and substantially increased costs if trials need to be adjusted or re-performed.

We may be unable to obtain regulatory approval for our current or any of our future product candidates under applicable regulatory requirements. The FDA and foreign regulatory bodies have substantial discretion in the approval process, including the ability to delay, limit or deny approval of product candidates. The delay, limitation or denial of any regulatory approval would adversely impact our business and our operating results.

We may never obtain regulatory approval to commercialize our current or any future product candidates. The research, testing, manufacturing, safety surveillance, efficacy, quality control, recordkeeping, labeling, packaging, storage, approval, sale, marketing, distribution, import, export and reporting of safety and other post-market information related to our current and any future product candidates are subject to extensive regulation by the FDA and other regulatory authorities in the United States and in foreign countries,

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and such regulations differ from country to country. We are not permitted to market any of our current or any future product candidates in the United States until we receive approval of an NDA, biologics license application (“BLA”) or other applicable regulatory filing from the FDA. We are also not permitted to market our product or our current or any future product candidates in any foreign countries until we receive the requisite approval from the applicable regulatory authorities of such countries.

To gain approval to market a new drug, the FDA and foreign regulatory authorities must receive preclinical, clinical and chemistry, manufacturing and controls data that adequately demonstrate the safety, purity, potency, efficacy and compliant manufacturing of the product for the intended indication applied for in an NDA, BLA or other applicable regulatory filing. The development and approval of new drug products and biologic products involves a long, expensive and uncertain process. A delay or failure can occur at any stage in the process. A number of companies in the pharmaceutical and biopharmaceutical industry have suffered significant setbacks in clinical trials, including in Phase 3 clinical development, even after promising results in earlier preclinical studies or clinical trials. These setbacks have been caused by, among other things, findings made while clinical trials were underway and safety or efficacy observations made in clinical trials, including previously unreported adverse events. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the results of clinical trials by other parties may not be indicative of the results in trials we or our partners may conduct.

The FDA and foreign regulatory bodies have substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of product candidates for many reasons, including:

• the FDA or the applicable foreign regulatory body may disagree with the design, implementation, choice of dose, analysis plans or interpretation of the outcome of one or more clinical trials;

• the FDA or the applicable foreign regulatory body may not deem a product candidate safe and effective for its proposed indication, or may deem a product candidate’s safety or other perceived risks to outweigh its clinical or other benefits;

• the FDA or the applicable foreign regulatory body may not find the data from preclinical studies and clinical trials, including the number of subjects in the safety database, sufficient to support approval, or the results of clinical trials may not meet the level of statistical or clinical significance required by the FDA or the applicable foreign regulatory body for approval;

• the FDA or the applicable foreign regulatory body may disagree with our interpretation of data from preclinical studies or clinical trials performed by us or third parties, or with the interpretation of any partner with which we may collaborate;

• the data collected from clinical trials may not be sufficient to support the submission and approval of an NDA, BLA or other applicable regulatory filing;

• the FDA or the applicable foreign regulatory body may require additional preclinical studies or clinical trials;

• the FDA or the applicable foreign regulatory agency may identify deficiencies in the formulation, manufacturing, quality control, labeling or specifications of our current or any future product candidates;

• the FDA or the applicable foreign regulatory agency may require clinical trials in pediatric patients in order to establish pharmacokinetics or safety for this more drug-sensitive population;

• the FDA or the applicable foreign regulatory agency may grant approval contingent on the performance of costly additional post-approval clinical trials;

• the FDA or the applicable foreign regulatory agency may grant approval but impose substantial and costly post-approval requirements;

• the FDA or the applicable foreign regulatory agency may approve our current or any future product candidates for a more limited indication or a narrower patient population than we originally requested;

• the FDA or applicable foreign regulatory agency may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our current or any future product candidates;

• the FDA or the applicable foreign regulatory body may not approve of the manufacturing processes, controls or facilities of third-party manufacturers or testing labs with which we contract; or

• the FDA or the applicable foreign regulatory body may change its approval policies or adopt new regulations in a manner rendering our clinical data or regulatory filings insufficient for approval.

Of the large number of drugs, including biologics, in development, only a small percentage successfully complete the FDA or other regulatory approval processes and are commercialized. For example, our current and any future product candidates may not be

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approved by the FDA or applicable foreign regulatory agencies even though they meet specified endpoints in our clinical trials. The FDA or applicable foreign regulatory agencies may ask us to conduct additional costly and time-consuming clinical trials in order to obtain marketing approval or approval to enter into an advanced phase of development, or may change the requirements for approval even after such agency has reviewed and commented on the design for the clinical trials. Any delay in obtaining, or inability to obtain, applicable regulatory approval for any of our product candidates would delay or prevent commercialization of our current and any future product candidates and would harm our business, financial condition, operating results and prospects.

We have never obtained approval of a BLA submission or equivalent foreign filing, and we may be unable to successfully do so for any of ourcurrent or any futureproduct candidates. Failure to successfully prepare or obtain approval of a BLA or equivalent foreign filing in a timely manner for our current or any future product candidates could have a material adverse impact on our business and financial performance.

Obtaining approval of a BLA submission or equivalent foreign filing involves complicated processes. Although our employees have obtained approvals for BLAs in the past while employed at other companies, we as a company have not obtained approvals of BLAs or equivalent foreign filings. As a result, such activities may require more time and cost more than we anticipate. Failure to complete or obtain, or delays in completing or obtaining, approval of our BLA submission for our current or any future product candidates would prevent us from or delay us in commercializing the product candidate in the United States. The occurrence of any of the foregoing could have a material adverse impact on our business and financial performance.

We may conduct clinical trials for our current and any future product candidates outside the United States and the FDA and applicable foreign regulatory authorities may not accept data from such trials, which would likely result in additional costs to us and delay our business plan.

We have conducted, and may in the future choose to conduct, one or more of our clinical trials outside the United States. For example, our Phase 3 clinical program for glycopyrronium tosylate was conducted in multiple countries. Although the FDA or applicable foreign regulatory authority may accept data from clinical trials conducted outside the United States or the applicable jurisdiction, acceptance of such study data by the FDA or applicable foreign regulatory authority may be subject to certain conditions. Where data from foreign clinical trials are intended to serve as the basis for marketing approval in the United States, the FDA will not approve the application on the basis of foreign data alone unless those data are applicable to the U.S. population and U.S. medical practice; the studies were performed by clinical investigators of recognized competence; and the data are considered valid without the need for an on-site inspection by the FDA or, if the FDA considers such an inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means. Many foreign regulatory bodies have similar requirements. In addition, such foreign studies would be subject to the applicable local laws of the foreign jurisdictions where the studies are conducted. There can be no assurance the FDA or applicable foreign regulatory authority will accept data from trials conducted outside of the United States or the applicable jurisdiction. If the FDA or applicable foreign regulatory authority does not accept such data, it would likely result in the need for additional clinical trials, which would be costly and time-consuming and delay aspects of our business plan.

Other Risks Related to Our Business and Financial Operations

We have had significant and increasing operating expenses and we will require substantial additional financing to achieve our goals, which we may not be able to obtain when needed and on acceptable terms, or at all. We have a history of losses, we have not generated any significant revenue from product sales and we may not be able to achieve or maintain profitability, which could cause our business and operating results to suffer.

We are a biopharmaceutical company with a limited operating history upon which investors can evaluate our business and prospects. QBREXZA, which became available in pharmacies within the United States on October 1, 2018, is our only product approved for commercialization. We have not generated any significant revenue from product sales. We are not profitable and have incurred losses in each year since we commenced operations in August 2010. We have incurred net losses of $82.8 million and $83.2 million for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, we had an accumulated deficit of $827.8 million.

We have financed our operations primarily through the sale of equity securities and convertible debt securities. Since our inception, most of our resources have been dedicated to the development of our product candidates and, more recently, preparation for and execution of the commercial launch of QBREXZA. The size of our future net losses will depend, in part, on our future expenses and our ability to generate revenue through future sales of QBREXZA, any future products and our current and potential future collaborations. Revenue from our current and potential future collaborations is uncertain because milestones or other contingent payments under our agreements may not be achieved or received.

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As of June 30, 2019, we had capital resources consisting of cash and investments of $327.2 million. We will continue to expend substantial cash resources for the foreseeable future to fund the continued commercialization of QBREXZA, to fund our planned Phase 3 clinical program for our lebrikizumab product candidate and to fund our other research and development programs for any other indications and product candidates we may choose to pursue. These expenditures may include costs associated with any acquisition or in-license of products and product candidates, technologies or businesses, research and development, conducting preclinical studies, non-clinical studies and clinical trials, manufacturing and supply, regulatory submissions, preparing for potential commercial approvals and product launches, as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the conduct and results of any clinical trial are highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our current and any future product candidates.

We believe that existing cash and investments on hand as of June 30, 2019, the $50.0 million we received from Almirall in July 2019 in connection with its option exercise pursuant to the Almirall Agreement and the $30.0 million we will receive upon our initiation of certain lebrikizumab Phase 3 clinical trials pursuant to the Almirall Agreement are sufficient to meet our anticipated cash requirements into the first half of 2021 and to enable us to fund our planned Phase 3 clinical program for lebrikizumab through receipt of topline results. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available capital resources much faster than we currently expect or require more capital to fund our operations than we currently expect. See also “—Our future operating results are difficult to predict and may fluctuate significantly. Our gross-to-net estimates related to revenue recognition from product sales are difficult to estimate and if our estimates differ significantly from actual product sales, we will be required to record an adjustment in a subsequent period.” and “Risks Related to Our Indebtedness—If we are unable to satisfy certain conditions of our Credit Agreement, we will be unable to draw down the remainder of the facility.” We will need to raise additional capital to fund our operations and continue to support our planned research and development and commercialization activities.

The amount and timing of our future funding requirements will depend on many factors, including:

• costs to maintain our infrastructure to continue our commercialization of QBREXZA;

• the cost of commercialization activities, including manufacturing, marketing, sales and distribution costs;

• the degree and rate of market acceptance of QBREXZA;

• the amount of revenue generated from future sales of QBREXZA;

• the timing, rate of progress and cost of any preclinical and clinical trials and other product development activities for our current and any future product candidates that we develop, in-license or acquire;

• the results of the clinical trials for our current and any future product candidates in the United States and any foreign countries;

• the timing of, and the costs involved in, FDA approval and any foreign regulatory approval of our current and any future product candidates, if at all;

• the number and characteristics of any additional future product candidates we develop or acquire;

• our ability to establish and maintain strategic collaborations, licensing, co-promotion or other arrangements and the terms and timing of such arrangements;

• costs under our third-party manufacturing and supply arrangements for QBREXZA and our current and any future product candidates we commercialize;

• costs and timing of completion of any additional outsourced commercial manufacturing or supply arrangements that we may establish;

• costs associated with the transfer of manufacturing and supply responsibilities for lebrikizumab drug substance (see “—We are dependent on Roche for the manufacture and supply of lebrikizumab drug substance. Roche has elected to transfer its manufacture and supply responsibilities to us and we have until November 2023 to engage a qualified contract manufacturer to manufacture and supply the drug substance.  Any interruption in our supply may cause serious delays in the timing of our clinical studies, increase our costs and adversely impact our financial results.”);

• costs of preparing, filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights associated with QBREXZA and our current and any future product candidates, including post-grant challenges or opposition to third-party patent claims;

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• costs associated with prosecuting or defending any litigation that we may become involved in and any damages payable by us that result from such litigation;

• costs associated with defending any government investigations or enforcement actions including legal costs and fines;

• costs associated with any product recall that could occur;

• costs of operating as a public company;

• the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing products or treatments;

• costs associated with any acquisition or in-license of products and product candidates, technologies or businesses; and

• personnel, facilities and equipment requirements.

We cannot be certain that additional funding will be available on acceptable terms, or at all. Any future debt financing into which we enter may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe that we have sufficient funds for our current or future operating plans.

In order to fund the development and potential commercialization of our current and any future product candidates, we may also need to enter into collaboration agreements with pharmaceutical and biotechnology companies. For example, we have entered into the Almirall Agreement pursuant to which Almirall acquired an exclusive license to develop lebrikizumab for the treatment or prevention of dermatology indications, including but not limited to atopic dermatitis, and commercialize lebrikizumab for the treatment or prevention of all indications in Europe. Our ability to establish and maintain these collaborations is highly uncertain and subject to a number of variables. Under these arrangements, we may be responsible for substantial costs in connection with the clinical development, regulatory approval or the commercialization of a partnered product candidate. Furthermore, the payments we could receive from our potential collaboration partners may be subject to numerous conditions and may ultimately be insufficient to cover the cost of this development and commercialization. See Note 7 included in the notes to our consolidated financial statements for further details regarding the terms of the Almirall Agreement.

If we are unable to raise additional capital when required or on acceptable terms, we may be required to significantly delay, scale back or discontinue one or more of our product development programs or our commercialization efforts, or other aspects of our business plan. In addition, our ability to achieve profitability or to respond to competitive pressures would be significantly limited.

We need to effectively manage the increased size and complexity of our organization to execute our business strategy.

We recently experienced significant growth in the number of our employees and the scope of our operations in connection with our commercialization of QBREXZA. Our need to manage our operations, growth and various projects effectively requires that we:

• continue to improve our operational, financial, management and regulatory compliance controls and reporting systems and procedures;

• identify, recruit, maintain, motivate and integrate additional talented employees;

• further develop our marketing, sales and distribution capabilities;

• manage our commercialization activities for QBREXZA effectively and in a cost-effective manner;

• establish and maintain relationships with development and commercialization partners;

• manage our preclinical and clinical trials effectively;

• manage our third-party supply and manufacturing operations effectively and in a cost-effective manner, while increasing production capabilities for QBREXZA to commercial levels; and

• manage our development efforts effectively while carrying out our contractual obligations to partners and other third parties.

In addition, historically, we have utilized and continue to utilize the services of part-time outside consultants to perform a number of tasks for us, including tasks related to preclinical and clinical testing. Our growth strategy may also entail expanding our use of consultants to implement these and other tasks going forward. We rely on consultants for certain functions of our business and

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will need to effectively manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected deadlines. There can be no assurance that we will be able to manage our existing consultants or find other competent outside consultants, as needed, on economically reasonable terms, or at all.

To effectively manage the increased size and complexity of our organization, we may incur significant costs and our management and business development resources may be diverted. If we are unable to successfully implement the tasks necessary to effectively manage the increased size and complexity of our organization and execute our business strategy, our ability to achieve our research, development and commercialization goals may be materially adversely impacted.

If we fail to attract and retain management and other key personnel, we may be unable to continue to successfully develop our current and any future product candidates, commercialize QBREXZA or otherwise implement our business plan.

Our ability to compete in the highly competitive pharmaceuticals industry depends upon our ability to attract and retain highly qualified managerial, scientific, medical, sales and marketing and other personnel. We are highly dependent on our management and scientific personnel, including: our Chief Executive Officer and Chairman of our board of directors, Thomas G. Wiggans; our Chief Medical Officer and a member of our board of directors, Eugene A. Bauer, M.D.; our Chief Technical Operations Officer, Christopher Horan; our Chief Financial Officer, Andrew L. Guggenhime; our Chief Development Officer, Luis C. Peña; our Chief Commercial Officer, Lori Lyons-Williams; and our Chief Business and Strategy Officer, Christopher M. Griffith. The loss of the services of any of these individuals could impede, delay or prevent the successful development of our product pipeline, completion of our planned clinical trials, commercialization of our products or in-licensing or acquisition of new assets and could negatively impact our ability to successfully implement our business plan. If we lose the services of any of these individuals, we might not be able to find suitable replacements on a timely basis or at all, and our business could be harmed as a result. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. We employ all of our executive officers and key personnel on an at-will basis and their employment can be terminated by us or them at any time, for any reason and without notice. In order to retain valuable employees at our company, in addition to salary and cash incentives, we provide stock options and restricted stock units that vest over time. The value to employees of stock options and restricted stock units that vest over time will be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract offers from other companies. For example, following our announcement that the investigational treatment olumacostat glasaretil (formerly DRM01) for moderate-to-severe acne vulgaris did not meet the co-primary endpoints in its two Phase 3 pivotal trials (CLAREOS-1 and CLAREOS-2) in patients ages nine years and older, the value of our common stock decreased significantly, which may adversely impact our ability to attract and retain employees.

We might not be able to attract or retain qualified management and other key personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Francisco Bay Area where we are headquartered. We could have difficulty attracting experienced personnel to our company and may be required to expend significant financial resources in our employee recruitment and retention efforts. Many of the other pharmaceutical companies with whom we compete for qualified personnel have greater financial and other resources, different risk profiles and longer histories in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will harm our ability to implement our business strategy and achieve our business objectives.

In addition, we have scientific and clinical advisors who assist us in formulating our development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with ours.

Our failure to successfully in-license, acquire, develop and market additional product candidates or approved products would impair our ability to grow our business.

We intend to in-license, acquire, develop and market additional products and product candidates. Because our internal research and development capabilities are limited, we may be dependent upon pharmaceutical companies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon our ability to identify and select promising pharmaceutical product candidates and products, negotiate licensing or acquisition agreements with their current owners and finance these arrangements.

The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing, sales and other resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited resources to identify and

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execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. Additionally, we may not be able to acquire the rights to additional product candidates on terms that we find acceptable, or at all.

Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including preclinical or clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot provide assurance that any approved products that we acquire will be manufactured or sold profitably or achieve market acceptance.

If we are not able to establish and maintain collaborations, we may have to alter our development and commercialization plans.

The development of product candidates and commercialization of products require substantial additional cash to fund expenses. In order to fund further development of our current and any future product candidates, we may collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates. We face significant competition in seeking appropriate partners. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the partner’s resources and experience, the terms and conditions of the proposed collaboration and the proposed partner’s evaluation of a number of factors. Those factors may include the design or results of clinical trials; the likelihood of approval by the FDA or other regulatory authorities; the potential market for the subject product candidate; the costs and complexities of manufacturing and delivering such product candidate to patients; the potential of competing products; any uncertainty with respect to our ownership of our intellectual property; and industry and market conditions generally. The partner may also consider alternative product candidates or technologies for similar indications that may be available for collaboration and whether such a collaboration could be more attractive than the one with us for our product candidate. We may also be restricted under future license agreements from entering into agreements on certain terms with potential partners. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future partners.

Collaborations typically impose detailed obligations on each party, such as those required under the Roche Agreement. If we were to breach our obligations, we may face substantial consequences, including potential termination of the collaboration, and our rights to product candidates, in which we have invested substantial time and money, would be lost.

We may not be successful in our efforts to implement collaborations or other alternative arrangements for the development of our current or any future product candidates. When we partner with a third party for development and commercialization of a product candidate, we can expect to relinquish to the third party some of the control over the future success of that product candidate. Our collaboration partner may not devote sufficient resources to the commercialization of our product candidates or may otherwise fail in their commercialization. The terms of any collaboration or other arrangement that we establish may not be favorable to us. In addition, any collaboration that we enter into may be unsuccessful in the development and commercialization of our product candidates. In some cases, we may be responsible for continuing preclinical and initial clinical development of a partnered product candidate or research program, and the payment we receive from our collaboration partner may be insufficient to cover the cost of this development.

We may not be able to negotiate collaborations on a timely basis, on acceptable terms or at all. If we are unable to do so, we may have to curtail the development of a product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product sales.

We face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration.

The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on developing proprietary therapeutics. Numerous companies are engaged in the development, patenting, manufacturing and marketing of healthcare products competitive with those that we are developing and commercializing. We face competition from a number of sources, such as pharmaceutical companies, generic drug companies, biotechnology companies and academic and research institutions, many of which have greater financial resources, marketing capabilities, sales forces, manufacturing capabilities, research and

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development capabilities, clinical trial expertise, intellectual property portfolios, experience in obtaining patents and regulatory approvals for product candidates and other resources than we do. Some of the companies that offer competing products also have a broad range of other product offerings, large direct sales forces and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts. In addition, QBREXZA and any of our current or future product candidates, if approved, may compete with other dermatological products, including over-the-counter (“OTC”) treatments, for a share of some patients’ discretionary budgets and for physicians’ attention within their clinical practices.

Many pharmaceutical companies currently offer products or are developing alternative product candidates and technologies, for indications similar to those targeted by our product or product candidate, including: AbbVie Inc., Allergan plc, Amgen Inc., AnaptysBio, Inc., Arcutis, Inc., Asana BioSciences, LLC, Aslan Pharmaceuticals Pte Ltd., Atacama Therapeutics, Inc., Boehringer Ingelheim, Brickell Biotech, Inc., Candesant Biomedical, Inc., Cara Therapeutics, Inc., Chugai Pharmaceutical Co. (a division of Roche), Cynosure, Inc., Dermavant Sciences Ltd. (a subsidiary of Roivant Sciences), Dr. August Wolff GmbH & Co., DS Biopharma Limited, Eirion Therapeutics, Inc., Eli Lilly and Company, Evelo Biosciences, Inc., Hospira, Inc. (a subsidiary of Pfizer Inc.), Incyte Corporation, IVAX Corporation (a subsidiary of Teva Pharmaceutical Industries Ltd.), Galapagos NV, Galderma S.A., GlaxoSmithKline LLC, Glenmark Pharmaceuticals Limited,Kiniksa Pharmaceuticals, Ltd., Kymab Limited, Kyowa Hakko Kirin Co., Ltd., LEO Pharma A/S, Maruho Co., Ltd., MedImmune, LLC (a wholly-owned subsidiary of AstraZeneca plc), Medytox Inc., Menlo Therapeutics Inc., Miramar Labs, Inc. (a subsidiary of Sientra, Inc.), MorphoSys AG, Mylan Inc., Novartis AG, Pfizer Inc., Ltd., RAPT Therapeutics, Inc., Regeneron Pharmaceuticals, Inc., Roche, Sandoz International GmbH (a division of Novartis), Sanofi-Aventis Groupe S.A., Suzhou Connect Biopharmaceuticals, Ltd., Teva Pharmaceutical Industries Ltd., Ulthera, Inc. (a subsidiary of Merz Pharma GmbH & Co. KGaA),Valeant Pharmaceuticals International, Inc., Vanda Pharmaceuticals Inc. and XBiotech Inc.

The markets for dermatological therapies are competitive and are characterized by significant technological development and new product introduction. We anticipate that QBREXZA and any of our current or future product candidates, if approved, will face significant competition from other approved therapies as well as unregulated, unapproved and off-label treatments. QBREXZA and any of our current or future product candidates, if approved, would present novel therapeutic approaches for the approved indications and would have to compete with existing therapies, some of which are widely known and accepted by physicians and patients. To compete successfully in this market, we will have to demonstrate that the relative cost, safety and efficacy of our approved product provide an attractive alternative to existing and other new therapies. The competition we face could lead to reduced market share for QBREXZA and any of our current or future product candidates that are approved and contribute to downward pressure on the pricing of our products, which could harm our business, financial condition, operating results and prospects.

Due to less stringent regulatory requirements in certain foreign countries, there are many more dermatological products and procedures available for use in those international markets than are approved for use in the United States. In certain international markets, there are also fewer limitations on the claims that our competitors can make about the effectiveness of their products and the manner in which they can market their products. As a result, we expect to face more competition in these markets than in the United States.

We expect to face generic competition and may face competition from biosimilars, which could adversely affect our business, financial condition, operating results and prospects.

Upon the expiration or loss of any patent protection for QBREXZA and our current and any future product candidates that are approved, or upon the “at-risk” launch by a generic competitor of a generic version of QBREXZA or our current and any future product candidates that are approved, which may be sold at significantly lower prices than our approved product candidates, we could lose a significant portion of sales of that product in a short period of time, which would adversely affect our business, financial condition, operating results and prospects. In particular, QBREXZA faces competition from currently marketed generic oral and compounded topical anticholinergic agents. In addition, we may be subject to additional competition from third parties pursuing topical formulations of other anticholinergic agents for hyperhidrosis.

We may also face competition from biosimilars. In the United States, the Biologics Price Competition and Innovation Act of 2009 (“BPCIA”) created an abbreviated approval pathway for biological products that are demonstrated to be “highly similar,” or “biosimilar,” to or “interchangeable” with an FDA-approved biological product. This pathway allows competitors to reference the FDA’s prior determinations regarding innovative biological products and to obtain approval of a biosimilar application 12 years after the time of approval of the innovative biological product. The 12-year exclusivity period runs from the initial approval of the innovator product and not from approval of a new indication. In addition, the 12-year exclusivity period does not prevent another company from developing a product that is highly similar to the innovative product, generating all the data necessary for a full BLA and seeking approval. Exclusivity only assures that another company cannot rely on the FDA’s prior determinations in approving a BLA for an innovator’s biological product to support the biosimilar product’s approval. Further, under the FDA’s current interpretation, it is possible that a biosimilar applicant could obtain approval for one or more of the indications approved for the

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innovator product by extrapolating clinical data from one indication to support approval for the other indications. We cannot predict to what extent the entry of biosimilars or other competing products will impact our business, financial condition, operating results and prospects.

Manufacturing and supply of the drug substance and other substances and materials used in product and product candidate is a complex and technically challenging undertaking, and there is potential for failure at many points in the manufacturing, testing, quality assurance and distribution supply chain, as well as the potential for latent defects after products have been manufactured and distributed.

Manufacturing and supply of drug substance, other substances and materials and finished drug products is technically challenging. Changes beyond our direct control can impact the quality, volume, price and successful delivery of our product and current or future product candidates and can impede, delay, limit or prevent the successful commercialization of QBREXZA and development of our current or future product candidates. Mistakes and mishandling are not uncommon and can affect successful production and supply. Some of these risks include:

• failure of our manufacturers to follow cGMP requirements or mishandling of product while in production or in preparation for transit

• inability of our contract suppliers and manufacturers to efficiently and cost-effectively increase and maintain high yields and batch quality, consistency and stability;

• inability of our suppliers and manufacturers to meet our production demands due to issues related to their reliance on sole-source suppliers and manufacturers;

• difficulty in establishing optimal production, storage, packaging and shipment methods and processes;

• challenges in designing effective drug delivery devices and techniques;

• transportation and import/export risk, particularly given the global nature of our supply chain;

• delays in analytical results or failure of analytical techniques that we depend on for quality control and release of product;

• natural disasters, labor disputes, financial distress, lack of raw material supply, issues with facilities and equipment or other forms of disruption to the business operations of our contract manufacturers and suppliers; and

• latent defects that may become apparent after product has been released and which may result in recall and destruction of product.

Any of these factors could result in delays or higher costs in connection with our clinical trials, regulatory submissions, required approvals or commercialization of our product, which could harm our business, financial condition, operating results and prospects.

We may choose to discontinue the development of our current or any future product candidates or commercialization of any approved products, which would reduce or eliminate our potential return on investment for those product candidates or product.

At any time, we may decide to discontinue the development of our current or any future product candidates or commercialization of our approved products for a variety of reasons, such as the appearance of new technologies that make our product obsolete, competition from a competing product, changes in or failure to comply with applicable regulatory requirements, the discovery of unforeseen side effects after the approved product has been marketed or the occurrence of adverse events at a rate or severity level that is greater than experienced in our clinical trials. If we terminate a program in which we have invested significant resources, we will not receive any return on our investment and we will have missed the opportunity to have allocated those resources to potentially more productive uses.

Our business involves the use of hazardous materials and we and our third-party suppliers and manufacturers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

The manufacturing activities of our third-party suppliers and manufacturers involve the controlled storage, use and disposal of hazardous materials owned by us, including the components of our product, product candidates and other hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our suppliers’ or manufacturers’ facilities pending use and disposal. We and our suppliers and manufacturers cannot completely eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, injury to our service providers and others and environmental damage resulting in costly clean-up and

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liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party suppliers and manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources. We do not currently carry biological or hazardous waste insurance coverage.

Our employees, independent contractors, principal investigators, consultants, vendors, CROs, distributors, prescribers and any partners with which we may collaborate may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have an adverse effect on our business.

We are exposed to the risk that our employees, independent contractors, principal investigators, consultants, vendors, CROs, distributors, prescribers and any partners with which we may collaborate may engage in fraudulent or other illegal activity. Misconduct by these persons could include intentional, reckless or negligent conduct or unauthorized activity that violates: laws or regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA or foreign regulatory authorities; manufacturing standards; federal, state and foreign healthcare fraud and abuse laws and data privacy; or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and other business arrangements in the healthcare industry are subject to extensive laws intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws may restrict or prohibit a wide range of business activities, including research, manufacturing, distribution, pricing, discounting, marketing and promotion, sales commissions, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drug product, which could result in regulatory sanctions or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations, and serious harm to our reputation. In addition, federal procurement laws impose substantial penalties for misconduct in connection with government contracts and require certain contractors to maintain a code of business ethics and conduct. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our operating results.

We intend to in-license and acquire product candidates or engage in other strategic transactions, which could impact our liquidity, increase our expenses and present significant distractions to our management.

Our strategy is to in-license and acquire product candidates or engage in other strategic transactions. Additional potential transactions that we may consider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions entail numerous potential operational and financial risks, including:

• exposure to unknown liabilities;

• disruption of our business and diversion of our management’s time and attention in order to develop acquired products, product candidates or technologies;

• incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;

• substantial acquisition and integration costs;

• write-downs of assets or impairment charges;

• increased amortization expenses;

• difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;

• impairment of relationships with key suppliers, partners or customers of any acquired businesses due to changes in management and ownership; and

• inability to retain our key employees or those of any acquired businesses.

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Accordingly, there can be no assurance that we will undertake or successfully complete any transactions of the nature described above, and any transaction that we do complete could harm our business, financial condition, operating results and prospects. We have no current plan, commitment or obligation to enter into any transaction described above.

Our future operating results are difficult to predict and may fluctuate significantly. Our gross-to-net estimates related to revenue recognition from product sales are difficult to estimate and if our estimates differ significantly from actual product sales, we will be required to record an adjustment in a subsequent period.  If our operating results fall below expectations, our stock price may be adversely impacted.

Our operations to date have been primarily limited to researching and developing our product candidates, undertaking preclinical studies and clinical trials of our product candidates and, more recently, preparing for and executing the commercial launch of QBREXZA. QBREXZA, our only product approved for commercialization, became available in pharmacies within the United States on October 1, 2018. Our revenue and profitability will depend in large part on the successful commercialization of QBREXZA. Our future operating results are difficult to predict and may fluctuate significantly from period to period due to many factors, such as revenue from product sales, expenditures and payments relating to collaboration and license agreements and stock-based compensation expense.

Our gross-to-net estimates related to revenue recognition from product sales are difficult to estimate as they are based on multiple assumptions which may prove to be incorrect. For example, we contract with certain third-party payers for the payment of rebates with respect to the utilization of QBREXZA and rebates to these payers are based on contractual percentages applied to the amount of QBREXZA prescribed to patients who are covered by the plan or the organization with which the third-party payer contracts. We have also implemented a savings card program to provide assistance to eligible patients with out-of-pocket costs, such as deductibles, co-insurance and co-payments, for the patient’s usage of QBREXZA. Reductions to product sales for the savings card program are estimated based on actual and expected program utilization. We recognize product sales at the transaction price, net of estimates of variable consideration, including commercial rebates, discounts related to a patient savings card program, distribution fees, trade discounts, government rebates and chargebacks and product returns. Our estimates of variable consideration are based on assumptions relating to, among other things, the mix of patients who purchase QBREXZA who are fully insured, underinsured and uninsured and the utilization of our savings card program, rebates, discounts and other pricing concessions and fees. If our gross-to-net estimates differ significantly from actual product sales, we will be required to record an adjustment in a subsequent period to reported product sales and earnings.

From time to time, we may enter into collaboration agreements and license agreements with other companies that include development funding and significant upfront and milestone expenditures and payments. These upfront and milestone payments may vary significantly from period to period and any such variance could cause a significant fluctuation in our operating results from one period to the next.  

In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award as determined by our board of directors, and recognize the cost as an expense over the employee’s requisite service period. As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price and stock price volatility, the magnitude of the expense that we must recognize may vary significantly.

Furthermore, our operating results may fluctuate due to a variety of other factors, many of which are outside of our control and may be difficult to predict, including the following:

• delays in the commencement, patient enrollment and the timing of clinical testing for our current and any future product candidates;

• the timing and success or failure of clinical trials for our current and any future product candidates or competing product candidates, or any other change in the competitive landscape of our industry, including consolidation among our competitors or partners;

• any delays in regulatory review and approval of current and any future product candidates in clinical development;

• the timing and cost of, and level of investment in, research and development activities relating to our current and any future product candidates, which may change from time to time;

• the cost of manufacturing our current and any future product candidates, which may vary depending on FDA guidelines and requirements, and the quantity of production;

• our ability to obtain additional funding to develop our current and any future product candidates;

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• expenditures that we will or may incur to acquire or develop additional product candidates and technologies;

• the level of demand for our current and any future product candidates, should they receive approval, which may vary significantly;

• potential side effects of our current and any future product candidates that could delay or prevent commercialization or cause an approved drug to be taken off the market;

• the availability of formulary coverage and adequate reimbursement from private third-party payers for our current and any future product candidates that may be approved;

• gross-to-net deductions, including rebates, discount, other pricing concessions and fees that we may provide to integrated delivery networks, group purchasing organizations, other purchasers and pharmacy benefits managers and other third-party payers;

• the mix of fully insured, underinsured and uninsured patients who purchase QBREXZA and the utilization of our savings card program;

• our dependency on third-party manufacturers to supply or manufacture our current and any future product candidates;

• our ability to maintain an effective sales and marketing and distribution infrastructure that supports our commercial growth;

• market acceptance of our current and any future products, if approved, and our ability to forecast demand for those products;

• our ability to receive regulatory approval and commercialize our current and any future product candidates;

• our ability to establish and maintain collaborations, licensing or other arrangements;

• our ability and third parties’ abilities to protect intellectual property rights;

• costs related to and outcomes of potential litigation or other disputes;

• our ability to adequately support future growth;

• our ability to attract and retain key personnel to manage our business effectively;

• potential liabilities associated with hazardous materials;

• our ability to maintain adequate insurance policies; and

• future accounting pronouncements or changes in our accounting policies.

Our operating results and liquidity needs could be negatively affected by market fluctuations and economic downturn.

Our operating results and liquidity could be negatively affected by economic conditions generally, both in the United States and elsewhere around the world. The market for discretionary medical products and procedures may be particularly vulnerable to unfavorable economic conditions. Some patients may consider QBREXZA as discretionary, and if full reimbursement for the product is not available, demand for the product may be tied to the discretionary spending levels of our targeted patient populations. Domestic and international equity and debt markets have experienced and may continue to experience heightened volatility and turmoil based on domestic and international economic conditions and concerns. In the event these economic conditions and concerns continue or worsen and the markets continue to remain volatile, our operating results and liquidity could be adversely affected by those factors in many ways, including weakening demand for QBREXZA, making it more difficult for us to raise funds if necessary, and our stock price may decline.

Our ability to utilize our net operating loss (“NOL”) carryforwards and research and development income tax credit carryforwards may be limited.

As of December 31, 2018, we had NOL carryforwards available to reduce future taxable income, if any, for federal, California and Canadian income tax purposes. If not utilized, the federal and California NOL carryforwards will begin expiring during the year ending December 31, 2030 and the Canadian NOL carryforwards will begin expiring during the year ending December 31, 2028. Under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-

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change income may be limited. We have experienced at least one ownership change since inception and our utilization of NOL carryforwards will therefore be subject to annual limitation. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

We may be adversely affected by natural disasters and other catastrophic events, and by man-made problems such as terrorism, that could disrupt our business operations and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Our corporate headquarters are located in Menlo Park, California, near major earthquake and fire zones. If a disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as enterprise financial systems, manufacturing resource planning or enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. Our contract manufacturers’ and suppliers’ facilities are located in multiple locations, where other natural disasters or similar events, such as blizzards, tornadoes, fires, explosions or large-scale accidents or power outages, could severely disrupt our operations and have a material adverse effect on our business, financial condition, operating results and prospects. In addition, acts of terrorism and other geo-political unrest could cause disruptions in our business or the businesses of our partners, manufacturers or the economy as a whole. All of the aforementioned risks may be further increased if we do not implement a disaster recovery plan or our partners’ or manufacturers’ disaster recovery plans prove to be inadequate. To the extent that any of the above should result in delays in the regulatory approval, manufacture, distribution or commercialization of our product or product candidates, our business, financial condition, operating results and prospects would suffer.

Our business and operations would suffer in the event of failure, invasion, corruption, destruction or interruption of our or our partners’ critical information technology systems or infrastructure.

Despite the implementation of security measures, our information technology systems and infrastructure, and those of our current and any future partners, contractors and consultants, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. The ever-increasing use and evolution of technology, including cloud-based computing, creates opportunities for the unintentional dissemination or intentional destruction of confidential information stored in our systems or in non-encrypted portable media or storage devices. We could also experience a business interruption, intentional theft of confidential information, or reputational damage from espionage attacks, malware or other cyber-attacks, which may compromise our system infrastructure or lead to data leakage, either internally or at our third-party providers. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our manufacturing activities, development programs and our business operations. For example, the loss of manufacturing records or clinical trial data from completed, ongoing or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our current and any future product candidates and commercialization of our product could be delayed.

Risks Related to Our Industry

Healthcare reform measures could hinder or prevent the commercial success of our product and product candidates.

In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system that could affect our future revenue and profitability and the future revenue and profitability of any partner with which we may collaborate. Federal and state lawmakers regularly propose and, at times, enact legislation that results in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. For example, in March 2010, former President Obama signed one of the most significant healthcare reform measures in decades, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, “Affordable Care Act”). It contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which have impacted and are expected to continue to impact existing government healthcare programs and result in the development of new programs. The Affordable Care Act, among other things, (1) increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to certain individuals enrolled in Medicaid managed care organizations, (2) established annual fees on manufacturers

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of certain branded prescription drugs and (3) enacted a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D.

The current presidential administration and certain members of the majority of the U.S. Congress have sought to repeal all or part of the Affordable Care Act and implement a replacement program. For example, the so-called “individual mandate” was repealed as part of tax reform legislation adopted in December 2017, such that the shared responsibility payment for individuals who fail to maintain minimum essential coverage under section 5000A of the Code will be eliminated beginning in 2019. In addition, litigation may prevent some or all of the Affordable Care Act legislation from taking effect. For example, on December 14, 2018, the U.S. District Court for the Northern District of Texas held that the individual mandate is a critical and inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the tax reform legislation, the remaining provisions of the Affordable Care Act are invalid as well. The impact of this ruling is stayed as it is appealed to the Fifth Circuit Court of Appeals. While the ruling will have no immediate effect, it is unclear how this decision, and subsequent appeals, if any, will impact the law. In 2019 and beyond, we may face additional uncertainties as a result of likely federal and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the Affordable Care Act. There is no assurance that the Affordable Care Act, as amended in the future, will not adversely affect our business and financial results. Additionally, in October 2018, the U.S. President has proposed to lower Medicare Part B drug prices, in addition to contemplating other measures to lower prescription drug prices.  While this proposal has not yet been enacted, we expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our approved product or additional pricing pressures.

We may also be subject to healthcare laws, regulation and enforcement and our failure to comply with those laws could adversely affect our business, operations and financial condition.

Certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights, among other topics, are and will be applicable to our business. We are subject to regulation by both the federal government and the states in which we or our partners conduct our business. The healthcare laws and regulations that may affect our ability to operate include:

• the federal Anti-Kickback Statute, which prohibits, among other things, any person or entity from knowingly and willfully offering, soliciting, receiving or providing any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce either the referral of an individual or in return for the purchase, lease, or order of any good, facility item or service, for which payment may be made, in whole or in part, under federal healthcare programs such as the Medicare and Medicaid programs;

• federal civil and criminal false claims laws and civil monetary penalty laws, including, for example, the federal civil False Claims Act, which impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

• the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created additional federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payer (e.g., public or private), knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;

• HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and their implementing regulations, which impose obligations on covered entities, including certain healthcare providers, health plans, and healthcare clearinghouses, as well as their respective business associates that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

• the federal physician sunshine requirements under the Affordable Care Act, which require certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services information related to payments and other transfers of value provided to physicians and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members;

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• federal and state laws requiring pricing transparency or limiting price increases, which are in existence today or are anticipated to be in existence in the near future, may limit the ability to raise prices, require disclosure of price increases or require disclosure of the wholesale acquisition cost of pharmaceutical products to governmental agencies and consumers; and

• state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payer, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government, or otherwise restrict payments that may be provided to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent healthcare reform legislation has strengthened these laws. For example, the Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the Affordable Care Act codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.

Achieving and sustaining compliance with these laws may prove costly. In addition, any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of the laws described above or any other governmental laws or regulations that apply to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, the exclusion from participation in federal and state healthcare programs, individual imprisonment or the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.

Risks Related to Our Intellectual Property

We may not be able to obtain or enforce patent rights or other intellectual property rights that cover our product, product candidates and technologies that are of sufficient breadth to prevent third parties from competing against us.

Our success will depend in part on our ability to obtain and maintain patent protection in both the United States and other countries, to preserve our trade secrets and to prevent third parties from infringing upon our proprietary rights. Our ability to protect against unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and maintain valid and enforceable patents.

Our patent portfolio includes patents and patent applications in the United States and foreign jurisdictions where we believe there is a market opportunity for our product and product candidates. The covered technology and the scope of coverage vary from country to country. For those countries where we do not have granted patents, we may not have any ability to prevent the unauthorized use of our technologies. Any patents that we may obtain may be narrow in scope and thus easily circumvented by competitors. Further, in countries where we do not have granted patents, third parties may be able to make, use or sell products identical to or substantially similar to, our product or product candidates.

The patent application process, also known as patent prosecution, is expensive and time-consuming, and we and our current or future licensors and licensees may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we or our current licensors or licensees, or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Therefore, these and any of our patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. It is possible that defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, such as with respect to proper priority claims, inventorship, claim scope or patent term adjustments. If our current licensors or licensees, or any future licensors or licensees, are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised and we might not be able to prevent third parties from making, using and selling competing products. If there are material defects in the form or preparation of our patents or patent applications, such patents or applications may be invalid and

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unenforceable. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business, financial condition and operating results.

Due to legal standards relating to patentability, validity, enforceability and claim scope of patents covering pharmaceutical inventions, our ability to obtain, maintain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any existing patents or any patents we might obtain or license may not cover our product or product candidates, or may not provide us with sufficient protection for our product or product candidates to afford a commercial advantage against competitive products or processes, including those from branded and generic pharmaceutical companies. In addition, we cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us. Even if patents have issued or will issue, we cannot guarantee that the claims of these patents are or will be held valid or enforceable if challenged in post-grant proceedings or by the courts or will provide us with any significant protection against competitive products or otherwise be commercially valuable to us.

Competitors in the field of dermatologic therapeutics have created a substantial amount of prior art, including scientific publications, patents and patent applications. Our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our technology and the prior art allow our technology to be patentable over the prior art. Although we believe that our technology includes certain inventions that are unique and not duplicative of any prior art, we do not have outstanding issued patents covering all of the recent developments in our technology and we are unsure of the patent protection that we will be successful in obtaining, if any. Even if the patents do successfully issue, third parties may design around or challenge the validity, enforceability or scope of such issued patents or any other issued patents we own or license, which may result in such patents being narrowed, invalidated or held unenforceable. In particular, due to the extensive prior art relating to anticholinergic agents to control hyperhidrosis and because glycopyrronium tosylate is a form of a generic anticholinergic agent, the patent protection available for glycopyrronium tosylate may not prevent competitors from developing and commercializing similar products. If the breadth or strength of protection provided by the patents we hold or pursue with respect to our product or product candidates is challenged, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize, our product or product candidates.

The laws of some foreign jurisdictions do not provide intellectual property rights to the same extent as in the United States and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting or are otherwise precluded from effectively protecting our intellectual property in foreign jurisdictions, our business prospects could be substantially harmed.

The degree of future protection of our proprietary rights is uncertain. Patent protection may be unavailable or severely limited in some cases and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

• we might not have been the first to invent or the first to file the inventions covered by each of our pending patent applications and issued patents;

• others may independently develop similar or alternative technologies or duplicate any of our technologies;

• the patents of others may have an adverse effect on our business;

• any patents we obtain or our licensors’ issued patents may not encompass commercially viable products, may not provide us with any competitive advantages or may be challenged by third parties;

• any patents we obtain or our in-licensed issued patents may not be valid or enforceable; and

• we may not develop additional proprietary technologies that are patentable or provide us with a competitive advantage.

Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Without patent protection for our product and product candidates, we may be open to competition from generic versions of our product and product candidates. Further, the extensive period of time between patent filing and regulatory approval for a product or product candidate limits the time during which we can market a product under patent protection, which may particularly affect the profitability early-stage product candidates. The U.S. patents issued or subject to pending patent applications relating to glycopyrronium tosylate and lebrikizumab will expire between 2020 and 2037.

Proprietary trade secrets and unpatented know-how are also very important to our business. Although we have taken steps to protect our trade secrets and unpatented know-how by entering into confidentiality agreements with third parties, and intellectual property protection agreements with certain employees, consultants and advisors, third parties may still obtain this information or we

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may be unable to protect our rights. We also have limited control over the protection of trade secrets used by our suppliers, manufacturers and other third parties. There can be no assurance that binding agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and unpatented know-how will not otherwise become known or be independently discovered by our competitors. If trade secrets are independently discovered, we would not be able to prevent their use. Enforcing a claim that a third party illegally obtained and is using our trade secrets or unpatented know-how is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secret information.

Changes in patent laws or the interpretations of patent laws could diminish the value of patents in general, thereby impairing our ability to protect our product and product candidates.

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Changes in either the patent laws or in the interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. We cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. The United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Further, recent U.S. Supreme Court rulings have either narrowed the scope of patent protection available in certain circumstances or weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the scope and value of patents, once obtained.

For our U.S. patent applications containing a priority claim after March 16, 2013, there is a greater level of uncertainty in the patent law. In September 2011, the Leahy-Smith America Invents Act, also known as the America Invents Act (“AIA”) was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have an adverse effect on our business. An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the U.S. Patent and Trademark Office (“USPTO”) after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application.

Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and provide opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

Depending on decisions by the U.S. Congress, the U.S. federal courts, the USPTO or similar authorities in foreign jurisdictions, the laws and regulations governing patents could change in unpredictable ways that may weaken our and our licensors’ ability to obtain new patents or to enforce existing patents we and our licensors or partners may obtain in the future.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on our product and product candidates in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries, particularly developing countries. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, but enforcement on infringing activities is inadequate. These products may compete with our product and product candidates, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to pharmaceuticals, which could make it difficult for us to stop

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the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. In addition, certain countries in Europe and certain developing countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we may have limited remedies if our patents are infringed or if we are compelled to grant a license to our patents to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license. Finally, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and patent applications covering our product and product candidates, our competitors might be able to enter the market, which would have an adverse effect on our business.

If we fail to comply with our obligations under our intellectual property license agreements, we could lose license rights that are important to our business.

We are a party to certain license agreements that impose various diligence, milestone, royalty, insurance and other obligations on us. If we fail to comply with these obligations, the respective licensors may have the right to terminate the license, in which event we may not be able to develop or market the affected product or product candidate. The loss of such rights could materially adversely affect our business, financial condition, operating results and prospects. For example, any dispute with Roche relating to compliance with the terms of the Roche Agreement could lead to delays in, or termination of, the development and commercialization of lebrikizumab for the treatment of atopic dermatitis and time consuming and expensive arbitration.

If we are sued for infringing intellectual property rights of third parties, it will be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business.

Our commercial success depends upon our ability to develop, manufacture, market and sell our product and product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. We cannot provide assurances that marketing and selling such candidates and using such technologies will not infringe existing or future patents. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields relating to our product and product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that others may assert that our product, product candidates, technologies or methods of delivery or use infringe their patent rights. Moreover, it is not always clear to industry participants, including us, which patents cover various drugs, biologics, drug delivery systems or their methods of use, and which of these patents may be valid and enforceable. Thus, because of the large number of patents issued and patent applications filed in our fields, there may be a risk that third parties may allege they have patent rights encompassing our product, product candidates, technologies or methods.

In addition, there may be issued patents of third parties that are infringed or are alleged to be infringed by our product, product candidates or proprietary technologies. Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our own and in-licensed issued patents or our pending applications. Our competitors may have filed, and may in the future file, patent applications covering our product, product candidates or technology similar to ours. Any such patent application may have priority over our own and in-licensed patent applications or

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patents, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to those owned or in-licensed to us, we or, in the case of in-licensed technology, the licensor may have to participate, in the United States, in an interference proceeding to determine priority of invention.

We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our product, product candidates or proprietary technologies infringe such third parties’ intellectual property rights, including litigation resulting from filing under Paragraph IV of the Hatch-Waxman Act. These lawsuits could claim that there are existing patent rights for such drug and this type of litigation can be costly and could adversely affect our operating results and divert the attention of managerial and technical personnel, even if we do not infringe such patents or the patents asserted against us are ultimately established as invalid. There is a risk that a court would decide that we are infringing the third party’s patents and would order us to stop the activities covered by the patents. In addition, there is a risk that a court will order us to pay the other party damages for having violated the other party’s patents.

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally. To date, no litigation asserting infringement claims has ever been brought against us. If a third party claims that we infringe its intellectual property rights, we may face a number of issues, including:

• infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;

• substantial damages for infringement, which we may have to pay if a court decides that the product or technology at issue infringes or violates the third party’s rights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner’s attorneys’ fees;

• a court prohibiting us from selling or licensing the product or using the technology at issue unless the third party licenses its intellectual property rights to us, which it is not required to do;

• if a license is available from a third party, we may have to pay substantial royalties or upfront fees or grant cross-licenses to intellectual property rights for our product, product candidates or technologies; and

• redesigning our products or processes so they do not infringe, which may not be possible or may require substantial monetary expenditures and time.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could harm our ability to raise additional funds or otherwise adversely affect our business, financial condition, operating results and prospects.

Because we rely on certain third-party licensors, licensees and partners, and will continue to do so in the future, if one of our licensors, licensees or partners is sued for infringing a third party’s intellectual property rights, our business, financial condition, operating results and prospects could suffer in the same manner as if we were sued directly. In addition to facing litigation risks, we have agreed to indemnify certain third-party licensors, licensees and partners against claims of infringement caused by our proprietary technologies, and we have entered or may enter into cost-sharing agreements with some our licensors, licensees and partners that could require us to pay some of the costs of patent litigation brought against those third parties whether or not the alleged infringement is caused by our proprietary technologies. In certain instances, these cost-sharing agreements could also require us to assume greater responsibility for infringement damages than would be assumed just on the basis of our technology.

The occurrence of any of the foregoing could adversely affect our business, financial condition, operating results and prospects.

We may become involved in lawsuits or other adverse proceedings to protect or enforce our patents or other intellectual property or the patents of our licensors, which could be expensive and time-consuming.

Competitors may infringe our intellectual property, including our patents or the patents of our licensors. As a result, we may be required to file infringement claims to stop third-party infringement or unauthorized use. This can be expensive, particularly for a company of our size, and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patent claims do not cover its technology or that the factors necessary to grant an injunction against an infringer are not satisfied. An adverse determination of any litigation or other proceedings could put one or more of our patents at risk of being invalidated, interpreted narrowly or amended such that they do not cover our product or product candidates. Moreover, such adverse determinations could put

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our patent applications at risk of not issuing, or issuing with limited and potentially inadequate scope to cover our product or product candidates or to prevent others from marketing similar products.

Interference, derivation or other proceedings such as inter partes review, post-grant review and reexamination brought at the USPTO may be necessary to determine the priority or patentability of inventions with respect to our patent applications or those of our licensors or potential partners. Litigation or USPTO proceedings brought by us may fail or may be invoked against us by third parties. Even if we are successful, domestic or foreign litigation or USPTO or foreign patent office proceedings may result in substantial costs and distraction to our management. We may not be able, alone or with our licensors or potential partners, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or other proceedings. In addition, during the course of this kind of litigation or proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or developments or public access to related documents. If investors perceive these results to be negative, the market price for our common stock could be significantly harmed.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed to us alleged trade secrets of their former employers or their former or current customers.

As is common in the biotechnology and pharmaceutical industries, certain of our employees were formerly employed by other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Moreover, we engage the services of consultants to assist us in the development of our product candidates, many of whom were previously employed at or may have previously been or are currently providing consulting services to, other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees and consultants or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or their former or current customers. Although we have no knowledge of any such claims being alleged to date, if such claims were to arise, litigation may be necessary to defend against any such claims. Even if we are successful in defending against any such claims, any such litigation could be protracted, expensive, a distraction to our management team, not viewed favorably by investors and other third parties and may potentially result in an unfavorable outcome.

Risks Related to the Securities Markets and Ownership of Our Common Stock

The stock price of our common stock has been, and is likely to continue to be, volatile and may decline and stockholders may not be able to resell their shares at or above the price at which they purchased the shares.

Prior to our initial public offering (“IPO”) in October 2014, there had not been a public market for our common stock. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

• the level of, and fluctuations in, the commercial sales of QBREXZA;

• the development status of our product candidates, including whether any of our product candidates receive regulatory approval;

• regulatory or legal developments in the United States and foreign countries;

• the results of our clinical trials and preclinical studies;

• the clinical results of our competitors or potential competitors;

• safety or adverse events related to our product or product candidates;

• the success of, and fluctuations in, the commercial sales of additional products approved for commercialization, if any;

• the execution of our partnering and manufacturing arrangements;

• our execution of collaboration, co-promotion, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements;

• variations in the level of expenses related to our preclinical and clinical development programs, including relating to the timing of invoices from, and other billing practices of, our CROs and clinical trial sites;

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• variations in the level of expenses related to our commercialization activities, if any product candidates are approved;

• the performance of third parties on whom we rely for clinical trials, manufacturing, marketing, sales and distribution, including their ability to comply with regulatory requirements;

• overall performance of the equity markets;

• changes in operating performance and stock market valuations of other pharmaceutical companies;

• market conditions or trends in our industry or the economy as a whole;

• the public’s response to press releases or other public announcements by us or third parties, including our filings with the Securities and Exchange Commission (“SEC”) and announcements relating to acquisitions, strategic transactions, licenses, joint ventures, capital commitments, intellectual property, litigation or other disputes impacting us or our business;

• developments with respect to intellectual property rights;

• litigation relating to our product or product candidates;

• our commencement of, or involvement in, litigation;

• FDA or foreign regulatory actions affecting us or our industry;

• changes in the structure of healthcare payment systems;

• changes to laws affecting our industry, including full or partial repeal of the Affordable Care Act;

• the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

• changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;

• ratings downgrades by any securities analysts who follow our common stock;

• the development and sustainability of an active trading market for our common stock;

• the size of our market float;

• future sales of our common stock by our officers, directors and significant stockholders;

• future sales and purchases of any shares of our common stock issued upon conversion of the 3.00% Convertible Senior Notes due 2022 (the “Notes”);

• our level of indebtedness and our ability to satisfy certain conditions in our loan agreements;

• recruitment or departure of key personnel;

• changes in accounting principles;

• other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events; and

• any other factors discussed herein.

In addition, the stock markets, and in particular The Nasdaq Global Select Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many pharmaceutical companies. Stock prices of many pharmaceutical companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.

During the period between January 1, 2016 and July 31, 2019, the closing sale price of our common stock on The Nasdaq Global Select Market ranged from $6.19 to $38.03 per share. Because our stock price has been volatile, investing in our common stock is risky.

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Significant past or future decreases in the stock price of our common stock could subject us to securities litigation, which is expensive and could divert management’s attention, and could adversely impact our ability to raise additional capital to fund our operations.

The market price of our common stock has been volatile.  For example, following our announcement that the investigational treatment olumacostat glasaretil (formerly DRM01) for moderate-to-severe acne vulgaris did not meet the co-primary endpoints in its two Phase 3 pivotal trials (CLAREOS-1 and CLAREOS-2) in patients ages nine years and older, the value of our common stock decreased significantly. Many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.  Additionally, the volatility in the market price of our common stock could adversely impact our ability to raise additional capital to fund our operations and continue to support our planned research and development and commercialization activities. See also “—We have had significant and increasing operating expenses and we will require substantial additional financing to achieve our goals, which we may not be able to obtain when needed and on acceptable terms, or at all. We have a history of losses and may not be able to achieve or maintain profitability, which could cause our business and operating results to suffer.”

If a large number of shares of our common stock are sold in the public market, the sales could reduce the trading price of our common stock, impede our ability to raise future capital and holders may have difficulty selling their shares based on current trading volumes of our stock.

Our stock is currently traded on The Nasdaq Global Select Market, but we can provide no assurance that we will be able to maintain an active trading market on The Nasdaq Global Select Market or any other exchange in the future. The trading volume of our stock tends to be low and we have several stockholders who hold a significant number of shares. If there is no active trading market or if the volume of trading is limited, holders of our common stock may have difficulty selling their shares.

As of June 30, 2019, we had 54,397,955 shares of common stock outstanding, and stockholders holding 5% or more of our stock, individually or with affiliated persons or entities, collectively beneficially owned or controlled approximately 42% of such shares. If stockholders holding a significant number of our shares sell, indicate an intention to sell, or if it is perceived that they will sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline and our ability to raise future capital may be adversely affected. If a large number of shares of our common stock are sold in the public market after they become eligible for sale, the sales could reduce the trading price of our common stock and impede our ability to raise future capital.

Furthermore, in May 2017 we completed an offering of the Notes with an aggregate principal amount of $287.5 million in a private placement in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), to qualified institutional buyers pursuant to Rule 144A promulgated under the Securities Act. The Notes mature on May 15, 2022, unless earlier converted or repurchased in accordance with their terms. Holders of the Notes may convert all or a portion of their Notes at their option at any time prior to the close of business on the business day immediately prior to May 15, 2022, in multiples of $1,000 principal amount. The Notes are convertible into shares of our common stock at an initial conversion rate of 28.2079 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $35.45 per share of common stock. As of June 30, 2019, the Notes were convertible into 8,109,771 shares of our common stock. The conversion rate and the corresponding conversion price will be subject to adjustment upon the occurrence of certain events. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress our stock price.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) requires us, among other things, to assess and report on the effectiveness of our internal control over financial reporting annually and disclosure controls and procedures quarterly. In addition, our independent registered public accounting firm is required to audit the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act annually.

Effective internal control over financial reporting is necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. To maintain and improve the effectiveness of our

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disclosure controls and procedures and internal control over financial reporting, we have expended and will continue to expend significant resources, including accounting and professional services fees related costs and in providing diligent management oversight.

Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. Moreover, our independent registered public accounting firm could issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Ineffective internal control could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition, any future testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require retroactive changes to our consolidated financial statements, which could lead to financial statement restatements and require us to incur the expense of remediation.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. Prior to our IPO in October 2014, there had not been a public market for our common stock and we did not have research coverage by securities and industry analysts. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

If we sell or issue additional shares of our common stock or securities convertible into our common stock in the future, the percentage ownership of our stockholders will be diluted.

On November 7, 2018, we filed a shelf registration statement on Form S-3 for the potential offering, issuance and sale by us of up to $300.0 million of our common stock, preferred stock, debt securities, warrants to purchase our common stock, preferred stock and debt securities, subscription rights to purchase our common stock, preferred stock and debt securities, and units consisting of all or some of these securities. Our shelf registration statement was declared effective by the SEC on November 21, 2018. On March 22, 2019, we sold 11,283,019 shares of our common stock in a public offering pursuant to the shelf registration statement and received gross proceeds of $149.5 million and net proceeds of $140.2 million, after deducting underwriting discounts and commissions and offering expenses. If we sell additional common stock, preferred stock, convertible securities and other equity securities in future transactions pursuant to our shelf registration statement or otherwise, existing investors may be materially diluted by such subsequent sales and new investors could gain rights superior to our existing stockholders.

Furthermore, we completed a sale of the Notes in May 2017 in a private placement in reliance on Section 4(a)(2) of the Securities Act. The Notes mature on May 15, 2022, unless earlier converted or repurchased in accordance with their terms. Holders of the Notes may convert all or a portion of their Notes at their option at any time prior to the close of business on the business day immediately prior to May 15, 2022, in multiples of $1,000 principal amount. The Notes are convertible into shares of our common stock at an initial conversion rate of 28.2079 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $35.45 per share of common stock. As of June 30, 2019, the Notes were convertible into 8,109,771 shares of our common stock. The conversion rate and the corresponding conversion price will be subject to adjustment upon the occurrence of certain events. The conversion of some or all of the Notes into shares of our common stock will dilute the ownership interests of existing stockholders.

Furthermore, pursuant to a sales agreement between us and Cowen and Company, LLC (“Cowen”), common stock with an aggregate offering price of up to $75.0 million may be issued and sold pursuant to an “at-the-market” offering for sales of our common stock. Subject to certain limitations in the sales agreement and compliance with applicable law, we have the discretion to deliver a sales notice to Cowen at any time throughout the term of the sales agreement, which has a term equal to the term of the registration statement on Form S-3 unless otherwise terminated earlier by us or Cowen pursuant to the terms of the sales agreement. The number of shares that are sold by Cowen after delivering a sales notice will fluctuate based on the market price of our common stock during the sales period and limits we set with Cowen. Because the price per share of each share sold will fluctuate based on the market price of our common stock during the sales period, it is not possible at this stage to predict the number of shares that will be ultimately issued. As of the date hereof, no shares of our common stock have been sold pursuant to the sales agreement.

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Our directors and executive officers, together with their affiliates, will be able to exert significant influence over us and could impede a change of corporate control.

As of June 30, 2019, our directors and executive officers beneficially owned (determined in accordance with the rules of the SEC), in the aggregate, approximately 13% of our outstanding common stock. As a result, these stockholders, acting together, would have the ability to exert significant influence on matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, have the ability to significantly influence the management and affairs of our company. Accordingly, this concentration of ownership could harm the market price of our common stock by:

• delaying, deferring or preventing a change of control of us;

• impeding a merger, consolidation, takeover or other business combination involving us; or

• discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.

Delaware law and provisions in our restated certificate of incorporation and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.

The anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change of control by prohibiting us from engaging in a business combination with stockholders owning in excess of 15% of our outstanding voting stock for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the following:

• our board of directors is classified into three classes of directors with staggered three-year terms, with directors removable from office only for cause, so that not all members of our board of directors are elected at one time;

• only our board of directors has the right to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

• only the chairman of our board of directors, our chief executive officer, our president or a majority of our board of directors are authorized to call a special meeting of stockholders;

• certain litigation against us can only be brought in Delaware;

• our restated certificate of incorporation authorizes the issuance of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval, and which may include rights superior to the rights of the holders of common stock;

• all stockholder actions must be taken at meetings of our stockholders, and may not be taken by written consent;

• our board of directors is expressly authorized to make, alter or repeal our bylaws; and

• advance notice requirements apply for stockholders to nominate candidates for elections to our board of directors or to bring matters that can be acted upon by stockholders at stockholder meetings.

These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing so as to cause us to take certain corporate actions they desire.

Because management has broad discretion as to the use of the net proceeds from our previous and future sales of securities, stockholders may not agree with how we use them, and such proceeds may not be applied successfully.

Our management will have considerable discretion over the use of proceeds from our previous and future sales of securities and could spend the proceeds in ways that do not necessarily improve our operating results or enhance the value of our common stock, or with which our stockholders otherwise disagree. The failure of our management to apply these funds effectively could, among other things, result in unfavorable returns and uncertainty about our prospects, each of which could cause the price of our common stock to decline. Pending their use, we may invest the net proceeds from our previous and future sales of securities in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.

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We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

Risks Related to Our Indebtedness

We have a significant level of indebtedness in the form of convertible senior notes and pursuant to a credit agreement, which could adversely affect our financial health and our ability to respond to changes in our business.

In May 2017, we completed an offering of the Notes in an aggregate principal amount of $287.5 million. The Notes are senior, unsecured obligations and bear interest at a rate of 3.00% per year, payable in cash semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2017. The Notes mature on May 15, 2022, unless earlier converted or repurchased in accordance with their terms. The indenture for the Notes provides that we are required to repay amounts due under the indenture in the event there is an event of default for the Notes that results in the principal, premium, if any, and interest, if any, becoming due prior to the maturity date for the Notes. See Note 6 included in the notes to our consolidated financial statements for further details regarding the terms of the Notes.

In December 2018, we entered into a credit agreement (“Credit Agreement”) with Athyrium Opportunities III Acquisition LP. The arrangement provides for a senior secured term loan facility of up to $125.0 million in aggregate principal amount available in three tranches, of which the first tranche of $35.0 million was funded at the closing date. In August 2019, we amended the Credit Agreement and drew down the second tranche of $40.0 million. Amounts outstanding under the Credit Agreement bear interest at a rate of 10.75% per year, payable in quarterly in arrears, and provide for interest-only payments followed by payment of principal at maturity in December 2023; provided, however, if, as of February 13, 2022, the aggregate outstanding principal amount of the Notes is greater than $60.0 million, we must immediately repay all amounts outstanding under the Credit Agreement, together with all accrued and unpaid interest and the applicable prepayment premium, if any. The Credit Agreement also contains a number of other affirmative and restrictive covenants. These and other terms in the Credit Agreement have to be monitored closely for compliance and could restrict our ability to grow our business or enter into transactions that we believe would be beneficial to our business. Additionally, the Credit Agreement provides that we may be required to repay all outstanding loans, accrued interest and other amounts if an event of default occurs. See Note 6 included in the notes to our consolidated financial statements for further details regarding the terms of the Credit Agreement.

In addition, our Credit Agreement and the indenture governing the Notes contain cross default provisions whereby a default under one agreement would likely result in a cross default under the other. For example, the occurrence of a default with respect to any indebtedness or any failure to repay debt when due in an amount in excess of $15.0 million would cause a cross default under the indenture governing the Notes and the occurrence of a default with respect to any indebtedness or any failure to repay debt when due in an amount in excess of $2.0 million would cause a cross default under the Credit Agreement. The occurrence of a default either of these borrowing arrangements would permit the holders of the Notes or the lenders under our Credit Agreement to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable. If the Note holders or the trustee under the indenture governing the Notes or the lenders under our Credit Agreement accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings. Our current available cash would be insufficient to maintain our business operations if we are required to repay all of our outstanding debts in an event of default.

Our business may not generate cash flow from operations in the future sufficient to service our debt and support our growth strategies. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, including under our current debt obligations.

Our significant indebtedness may have other adverse consequences, such as:

• our vulnerability to adverse general economic conditions and competitive pressures is heightened;

• we are required to dedicate a larger portion of our cash flow from operations to interest payments, limiting the availability of cash for other purposes;

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• our flexibility in planning for, or reacting to, changes in our business and industry may be more limited; and

• our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired.

We cannot be sure that our leverage resulting from the level of increased debt due to the Notes and the Credit Agreement will not materially and adversely affect our ability to finance our operations or capital needs or to engage in other business activities. Our business may not generate cash flow from operations in the future sufficient to service our debt and support our growth strategies. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. In addition, we cannot be sure that additional financing will be available when required or, if available, will be on terms satisfactory to us. Further, even if we are able to obtain additional financing, we may be required to use such proceeds to repay a portion of our debt.

We may be unable to repurchase the Notes upon a fundamental change when required by the holders or repay prior to maturity any accelerated amounts due under the Notes upon an event of default, and our future debt agreements may contain limitations on our ability to pay cash upon conversion, repurchase or repayment of the Notes.

Holders of the Notes have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. In addition, the indenture for the Notes provides that we are required to repay amounts due under the indenture in the event that there is an event of default for the Notes that results in the principal, premium, if any, and interest, if any, becoming due prior to the maturity date for the Notes. However, we may not have enough available cash or be able to obtain financing at the time we are required to repurchase Notes surrendered upon a fundamental change or repay prior to maturity any accelerated amounts.

Our ability to purchase the Notes or repay prior to maturity any accelerated amounts under the Notes upon an event of default or redeem the Notes may be limited by law, by regulatory authority or by agreements governing our outstanding indebtedness, including the Credit Agreement. Under our Credit Agreement, we may purchase the Notes, repay accelerated amounts under the Notes prior to maturity and redeem the Notes only if we meet certain conditions that are defined under the Credit Agreement. Our failure to repurchase Notes at a time when the repurchase is required by the indenture (whether upon a fundamental change or otherwise under the indenture) would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing any of our current and future indebtedness, including our Credit Agreement. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness or repurchase the Notes.

Servicing debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the Notes and pursuant to the Credit Agreement, depends on our future financial condition and operating performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to satisfy our obligations under the Notes, the Credit Agreement and any future indebtedness we may incur and to make necessary capital expenditures. We cannot assure you that we will have in the future a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our debt, including the Notes and pursuant to the Credit Agreement.

If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. These alternative measures may not be successful and may not permit us to meet our schedule debt servicing obligations. Further, we may need to refinance all or a portion of our debt on or before maturity, and our ability to refinance our current or future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities on commercially reasonable terms or at all, which could result in a default on the Notes, the Credit Agreement or future indebtedness.

If we are unable to satisfy certain conditions of our Credit Agreement, we will be unable to draw down the remainder of the facility.

The Credit Agreement provides for a senior secured term loan facility of up to $125.0 million in aggregate principal amount, $35.0 million of which was funded at the closing date, $40.0 million of which was funded in August 2019 and $50.0 million of which may be borrowed in a single draw on or before June 3, 2020 provided that our consolidated net revenues from QBREXZA sales in the

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United States for the four fiscal quarter period then most recently ended, as calculated in accordance with the terms of the Credit Agreement, were at least $45.0 million. Additionally, to be eligible to draw down on the additional funds under the Credit Agreement, there cannot be an existing default or event of default under the terms of the Credit Agreement. If we are unable to satisfy these or other required conditions, we would not be able to draw down the remaining tranche of financing and may not be able to obtain alternative financing on commercially reasonable terms or at all, which could adversely impact our business. See Note 6 included in the notes to our consolidated financial statements for further details regarding the terms of the Credit Agreement.

Conversion of the Notes will dilute the ownership interest of existing stockholders, including holders who had previously converted their Notes, or may otherwise depress our stock price.

The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders. Holders of the Notes may convert all or a portion of their Notes at their option at any time prior to the close of business on the business day immediately prior to May 15, 2022, in multiples of $1,000 principal amount. The Notes are convertible into shares of our common stock at an initial conversion rate of 28.2079 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $35.45 per share of common stock. As of June 30, 2019, the Notes were convertible into 8,109,771 shares of our common stock. The conversion rate and the corresponding conversion price will be subject to adjustment upon the occurrence of certain events. The conversion of some or all of the Notes into shares of our common stock will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress our stock price.

The Notes are effectively junior to any secured debt we may incur, including debt pursuant to the Credit Agreement, and structurally subordinated to any liabilities of our subsidiary.

The Notes are our unsecured obligations exclusively and are not guaranteed by our subsidiary. Our subsidiary is a separate and distinct legal entity and has no obligation, contingent or otherwise, to make payments on the Notes or to make any funds available for that purpose. In addition, the indenture for the Notes does not restrict us or our subsidiary from incurring additional debt or other liabilities. Accordingly, the Notes rank junior to our indebtedness incurred under the Credit Agreement; rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; will rank equally in right of payment with any of our unsecured indebtedness that is not so subordinated; will be effectively junior in right of payment to any secured indebtedness we may incur to the extent of the value of the assets securing such indebtedness; and will be structurally junior to any indebtedness and other liabilities (including trade payables) of our subsidiaries. In the event of our bankruptcy, liquidation, reorganization or other winding up, our assets that secure any of our debt will be available to pay obligations on the Notes only after such secured debt we may incur has been repaid in full. There may not be sufficient assets remaining to pay amounts due on any or all of the Notes then outstanding.

Our right to receive assets from our subsidiary upon its liquidation or reorganization, and the right of holders of the Notes to participate in those assets, is structurally subordinated to claims of the subsidiary’s creditors, including trade creditors. Even if we were a creditor of our subsidiary, our rights as a creditor would be subordinate to any security interest in the assets of the subsidiary and any indebtedness of the subsidiary senior to that held by us. Furthermore, our subsidiary is not under any obligation to make payments to us, and any payments to us would depend on the earnings or financial condition of our subsidiary and various business considerations. Statutory, contractual or other restrictions may also limit our subsidiary’s ability to pay dividends or make distributions, loans or advances to us. For these reasons, we may not have access to any assets or cash flows of our subsidiary to make payments on the Notes.

The fundamental change repurchase feature of the Notes may delay or prevent an otherwise beneficial attempt to take over our company.

The terms of the Notes require us to repurchase the Notes in the event of a fundamental change. Under certain circumstances, a takeover of our company would trigger an option of the holders of the Notes to require us to repurchase the Notes. In addition, if a make-whole fundamental change occurs prior to the maturity date of the Notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change. Furthermore, the indenture for the Notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions of the indenture may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to investors in the Notes.

69

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

On December 3, 2018, (the “Closing Date”) we entered into a credit agreement (the “Credit Agreement”) with Athyrium Opportunities III Acquisition LP (“Athyrium”), which provided for a senior secured term loan facility of up to $125 million in aggregate principal amount, $35.0 million of which was borrowed on the Closing Date, $40.0 million of which could be borrowed in a single draw at our option on or before July 1, 2019 (the “First Delayed Draw Loan”), and $50.0 million of which could be borrowed in a single draw on or before March 2, 2020 provided that our consolidated net revenues from QBREXZA™ sales in the United States for the four fiscal quarter period then most recently ended, as calculated in accordance with the terms of the Credit Agreement, were at least $45.0 million (the “Second Delayed Draw Loan”). On August 5, 2019, we amended the Credit Agreement to extend the deadline for the Second Delayed Draw Loan to June 3, 2020 and reduce the prepayment penalty (the “Amendment”).  In connection with the Amendment, we paid to Athyrium an amendment fee of $350,000 and borrowed the $40.0 million available under the First Delayed Draw Loan. See Note 6 included in the notes to our consolidated financial statements for further details regarding the terms of the Credit Agreement.

The foregoing summary of the Amendment does not purport to be complete and is subject to, and qualified in its entirety by, the Amendment, a copy of which will be filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ending September 30, 2019.

70

ITEM 6. EXHIBITS

		Incorporated by Reference
Number	Exhibit Title	Form	File No.	Filing Date	Filed Herewith
31.1	Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
31.2	Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*				X
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*				X
101.INS	XBRL Instance Document.				X
101.SCH	XBRL Taxonomy Extension Schema Document.				X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.				X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.				X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.				X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.				X

* As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Dermira, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filings.

71

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Menlo Park, California, on August 7, 2019.

DERMIRA, INC.
By:	/s/ THOMAS G. WIGGANS
	Thomas G. Wiggans
	Chief Executive Officer and Chairman of the Board
	(Principal Executive Officer)
By:	/s/ ANDREW L. GUGGENHIME
	Andrew L. Guggenhime
	Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

72

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas G. Wiggans, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Dermira, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2019	By:	/s/ THOMAS G. WIGGANS
		Thomas G. Wiggans
		Chief Executive Officer and Chairman of the Board
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Andrew L. Guggenhime, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Dermira, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2019	By:	/s/ ANDREW L. GUGGENHIME
		Andrew L. Guggenhime
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting
		Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas G. Wiggans, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) the Quarterly Report of Dermira, Inc. on Form 10-Q for the fiscal quarter ended June 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Dermira, Inc. for the periods presented therein.

Date: August 7, 2019	By:	/s/ THOMAS G. WIGGANS
		Thomas G. Wiggans
		Chief Executive Officer and Chairman of the Board
		(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Andrew L. Guggenhime, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) the Quarterly Report of Dermira, Inc. on Form 10-Q for the fiscal quarter ended June 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Dermira, Inc. for the periods presented therein.

Date: August 7, 2019	By:	/s/ ANDREW L. GUGGENHIME
		Andrew L. Guggenhime
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting
		Officer)

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2019	Jul. 31, 2019
Document And Entity Information [Abstract]
Entity Registrant Name	Dermira, Inc.
Trading Symbol	DERM
Entity Central Index Key	0001557883
Document Type	10-Q
Document Period End Date	Jun. 30, 2019
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Current Reporting Status	Yes
Entity Shell Company	false
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding		54,397,955
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q2
Entity File Number	001-36668
Entity Tax Identification Number	273267680
Entity Address, Address Line One	275 Middlefield Road
Entity Address, Address Line Two	Suite 150
Entity Address, City or Town	Menlo Park
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	94025
City Area Code	650
Local Phone Number	421-7200

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Current assets:
Cash and cash equivalents	$ 103,155	$ 104,976
Short-term investments	222,014	208,064
Trade and other receivables, net	59,795	5,724
Inventory	17,644	8,370
Prepaid expenses and other current assets	25,862	8,275
Total current assets	428,470	335,409
Property and equipment, net	864	1,180
Long-term investments	1,997	2,962
Operating lease right-of-use asset	13,144
Intangible assets	903	952
Goodwill	771	771
Restricted cash	804	802
Other assets	313	2,245
Total assets	447,266	344,321
Current liabilities:
Accounts payable	11,549	15,948
Accrued liabilities	20,029	22,608
Lease liability, current	4,220
Deferred revenue, current	15,075
Total current liabilities	50,873	38,556
Long-term liabilities:
Term loan	32,731	32,566
Convertible notes, net	282,145	281,223
Lease liability, non-current	9,621
Deferred revenue, non-current	6,340
Other long-term liabilities		1,015
Total liabilities	381,710	353,360
Stockholders’ equity (deficit):
Common stock	54	42
Additional paid-in capital	893,221	736,095
Accumulated other comprehensive income (loss)	113	(138)
Accumulated deficit	(827,832)	(745,038)
Total stockholders’ equity (deficit)	65,556	(9,039)
Total liabilities and stockholders’ equity (deficit)	$ 447,266	$ 344,321

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Revenue:
Total revenue	$ 66,645	$ 39,080	$ 69,097	$ 39,379
Costs and operating expenses:
Cost of sales	1,335		2,261
Research and development	18,285	19,545	33,854	45,136
Selling, general and administrative	63,327	40,770	112,006	71,280
Impairment of intangible assets				1,126
Total costs and operating expenses	82,947	60,315	148,121	117,542
Loss from operations	(16,302)	(21,235)	(79,024)	(78,163)
Interest and other income, net	1,970	2,037	3,521	3,771
Interest expense	(3,630)	(4,734)	(7,291)	(8,988)
Loss before taxes	(17,962)	(23,932)	(82,794)	(83,380)
Benefit for income taxes				194
Net loss	$ (17,962)	$ (23,932)	$ (82,794)	$ (83,186)
Net loss per share, basic and diluted	$ (0.33)	$ (0.57)	$ (1.70)	$ (1.99)
Weighted-average common shares used to compute net loss per share, basic and diluted	54,033	41,922	48,838	41,875
Product Sales
Revenue:
Total revenue	$ 8,060		$ 10,512
Collaboration and License Revenue
Revenue:
Total revenue	$ 58,585	$ 39,080	$ 58,585	$ 39,379

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Statement Of Income And Comprehensive Income [Abstract]
Net loss	$ (17,962)	$ (23,932)	$ (82,794)	$ (83,186)
Other comprehensive income:
Unrealized gain on available-for-sale securities	82	173	251	45
Total comprehensive loss	$ (17,880)	$ (23,759)	$ (82,543)	$ (83,141)

XML

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (unaudited) - USD ($) shares in Thousands, $ in Thousands	Total	Restricted stock unit settlement	Shelf offering	Common Stock	Common Stock Restricted stock unit settlement	Common Stock Shelf offering	Additional Paid-In Capital	Additional Paid-In Capital Restricted stock unit settlement	Additional Paid-In Capital Shelf offering	Accumulated Other Comprehensive Gain (Loss)	Accumulated Deficit
Increase (Decrease) in Shareholders' Equity (Deficit)
Effect of adoption of ASC 606 | ASC 606	$ 29,895										$ 29,895
Balance at the beginning of the period at Dec. 31, 2017	149,649			$ 42			$ 703,215			$ (215)	(553,393)
Balance at the beginning of the period (in shares) at Dec. 31, 2017				41,798
Increase (Decrease) in Shareholders' Equity (Deficit)
Issuance of common stock (in shares)					6
Exercise of stock options	197						197
Exercise of stock options (in shares)				44
Stock-based compensation	7,514						7,514
Unrealized gain/(loss) on investments	(128)									(128)
Net loss	(59,254)										(59,254)
Balance at the end of the period at Mar. 31, 2018	127,873			$ 42			710,926			(343)	(582,752)
Balance at the end of the period (in shares) at Mar. 31, 2018				41,848
Balance at the beginning of the period at Dec. 31, 2017	149,649			$ 42			703,215			(215)	(553,393)
Balance at the beginning of the period (in shares) at Dec. 31, 2017				41,798
Increase (Decrease) in Shareholders' Equity (Deficit)
Unrealized gain/(loss) on investments	45
Net loss	(83,186)
Balance at the end of the period at Jun. 30, 2018	112,447			$ 42			719,259			(170)	(606,684)
Balance at the end of the period (in shares) at Jun. 30, 2018				42,003
Balance at the beginning of the period at Mar. 31, 2018	127,873			$ 42			710,926			(343)	(582,752)
Balance at the beginning of the period (in shares) at Mar. 31, 2018				41,848
Increase (Decrease) in Shareholders' Equity (Deficit)
Issuance of common stock (in shares)					21
Exercise of stock options	73						73
Exercise of stock options (in shares)				37
Purchases under employee stock purchase plan	954						954
Purchases under employee stock purchase plan (in shares)				97
Stock-based compensation	7,306						7,306
Unrealized gain/(loss) on investments	173									173
Net loss	(23,932)										(23,932)
Balance at the end of the period at Jun. 30, 2018	112,447			$ 42			719,259			(170)	(606,684)
Balance at the end of the period (in shares) at Jun. 30, 2018				42,003
Balance at the beginning of the period at Dec. 31, 2018	(9,039)			$ 42			736,095			(138)	(745,038)
Balance at the beginning of the period (in shares) at Dec. 31, 2018				42,328
Increase (Decrease) in Shareholders' Equity (Deficit)
Issuance of common stock			$ 140,183			$ 12			$ 140,171
Issuance of common stock (in shares)					9	11,283
Exercise of stock options	23						23
Exercise of stock options (in shares)				13
Stock-based compensation	8,090						8,090
Unrealized gain/(loss) on investments	169									169
Net loss	(64,832)										(64,832)
Balance at the end of the period at Mar. 31, 2019	74,594			$ 54			884,379			31	(809,870)
Balance at the end of the period (in shares) at Mar. 31, 2019				53,633
Balance at the beginning of the period at Dec. 31, 2018	(9,039)			$ 42			736,095			(138)	(745,038)
Balance at the beginning of the period (in shares) at Dec. 31, 2018				42,328
Increase (Decrease) in Shareholders' Equity (Deficit)
Unrealized gain/(loss) on investments	251
Net loss	(82,794)
Balance at the end of the period at Jun. 30, 2019	65,556			$ 54			893,221			113	(827,832)
Balance at the end of the period (in shares) at Jun. 30, 2019				54,398
Balance at the beginning of the period at Mar. 31, 2019	74,594			$ 54			884,379			31	(809,870)
Balance at the beginning of the period (in shares) at Mar. 31, 2019				53,633
Increase (Decrease) in Shareholders' Equity (Deficit)
Issuance of common stock		$ (490)						$ (490)
Issuance of common stock (in shares)					503
Exercise of stock options	382						382
Exercise of stock options (in shares)				96
Purchases under employee stock purchase plan	1,371						1,371
Purchases under employee stock purchase plan (in shares)				166
Stock-based compensation	7,579						7,579
Unrealized gain/(loss) on investments	82									82
Net loss	(17,962)										(17,962)
Balance at the end of the period at Jun. 30, 2019	$ 65,556			$ 54			$ 893,221			$ 113	$ (827,832)
Balance at the end of the period (in shares) at Jun. 30, 2019				54,398

XML

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Parenthetical) (unaudited) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)
Shelf offering
Issuance costs	$ 9,318

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Cash flows from operating activities
Net loss	$ (82,794)	$ (83,186)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	294	244
Stock-based compensation	15,491	14,820
Amortization of discount for payments related to acquired in-process research and development		3,760
Net (accretion) amortization of premiums on available-for-sale securities	(1,265)	357
Amortization of debt discount and issuance costs	1,087	916
Amortization of operating lease right-of-use assets	1,645
Impairment of intangible assets		1,126
Loss on disposal of assets	101
Changes in assets and liabilities:
Trade and other receivables, net	(54,071)	(4)
Inventory	(9,095)	(102)
Prepaid expenses and other current assets	(17,691)	(3,707)
Other assets	1,932	(543)
Accounts payable	(4,315)	(2,697)
Accrued liabilities	(1,821)	(1,238)
Refund liability		(7,180)
Other long-term liabilities		128
Lease liabilities	(1,700)
Deferred revenue	21,415	(379)
Deferred taxes		(194)
Net cash used in operating activities	(130,787)	(77,879)
Cash flows from investing activities
Purchases of available-for-sale securities	(163,822)	(233,001)
Maturities of available-for-sale securities	152,060	190,615
Purchase of property and equipment	(30)	(574)
Net cash used in investing activities	(11,792)	(42,960)
Cash flows from financing activities
Net proceeds from issuance of common stock in connection with equity financings	140,170
Payments for debt issuance cost	(708)
Net proceeds from issuance of common stock in connection with equity awards	1,298	1,224
Net cash provided by financing activities	140,760	1,224
Net decrease in cash and cash equivalents and restricted cash	(1,819)	(119,615)
Cash and cash equivalents and restricted cash at beginning of year	105,778	296,723
Cash and cash equivalents and restricted cash at end of period	$ 103,959	$ 177,108

XML

Organization

6 Months Ended

Jun. 30, 2019

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Organization

1. Organization

We are a biopharmaceutical company dedicated to bringing biotech ingenuity to medical dermatology by delivering differentiated, new therapies to the millions of patients living with chronic skin conditions. We are committed to understanding the needs of both patients and physicians and using our insight to identify, develop and commercialize leading-edge medical dermatology products. Our approved treatment, QBREXZA™ (glycopyrronium) cloth (“QBREXZA”), is indicated for adult and pediatric patients (ages nine and older) with primary axillary hyperhidrosis (excessive underarm sweating). We are evaluating lebrikizumab for the treatment of moderate-to-severe atopic dermatitis (a severe form of eczema) and plan to initiate a Phase 3 clinical development program by the end of 2019. We also have early-stage research and development programs in other areas of dermatology. We are headquartered in Menlo Park, California.

XML

Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2019

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation

Our condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of our financial information. The results of operations for the three- and six-month periods ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019 or any other future period. The condensed consolidated balance sheet as of December 31, 2018 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

The accompanying condensed consolidated financial statements include the accounts of our wholly owned subsidiary, Dermira Canada. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with our audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018 included in our Annual Report on Form 10-K, filed with the SEC on February 26, 2019.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and variable consideration, inventory, acquired in-process research and development, investments, accrued research and development expenses, goodwill, operating lease assets and liabilities, intangible assets, other long-lived assets, stock-based compensation and the valuation of deferred tax assets. We base our estimates on our historical experience and also on assumptions that we believe are reasonable; however, actual results could significantly differ from those estimates.

Restricted Cash

Restricted cash primarily consists of letters of credit collateralized by a money market account pursuant to certain lease and sublease agreements.

Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist primarily of cash and cash equivalents, investments and trade and other receivables. We invest in money market funds, U.S. Treasury securities, corporate debt, repurchase agreements, U.S. Government agency securities, commercial paper and certificates of deposits. Bank deposits are held primarily by a limited number of financial institutions and these deposits may exceed insured limits. We are exposed to credit risk in the event of a default by the financial institutions holding our cash and cash equivalents and issuers of investments to the extent recorded on the consolidated balance sheets. Our investment policy limits investments to money market funds, certain types of debt securities issued by the U.S. Government and its agencies, corporate debt, repurchase agreements, commercial paper, certificates of deposit and municipal bonds and places restrictions on the credit ratings, maturities and concentration by type and issuer.

As of and for the three and six months ended June 30, 2019, three customers (AmerisourceBergen Corporation, McKesson Corporation and Cardinal Health, Inc.) each accounted for more than 10% of our trade receivables and product sales. These three customers collectively accounted for 97.5% and 96.7% of product sales for the three and six months ended June 30, 2019, respectively, and 99.1% of our trade receivables as of June 30, 2019. As of June 30, 2019, we have a receivable of $50.0 million from Almirall, S.A. (“Almirall”), which was recorded in trade and other receivables, net.

Trade and Other Receivables

Our trade receivables consist of amounts due from the sale of QBREXZA. The trade receivables are recorded net of allowances for distribution fees and trade discounts, government rebates and chargebacks. Estimates for wholesaler chargebacks for government rebates and cash discounts are based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs. For the periods presented, we did not have any write-offs of trade receivables. We perform ongoing credit evaluations of our Customers and generally do not require collateral.

Other receivables, including collaboration and license receivables, are typically unsecured. Accordingly, we may be exposed to credit risk generally associated with our collaboration and license agreements. To date, we have not experienced any losses related to these receivables.

Inventory

Inventory consists of raw materials, work-in-process and finished goods related to the production of QBREXZA. Inventory costs are determined using the lower of standard cost, which approximates the actual costs determined using the first-in, first-out basis, or net realizable value. Standard costs are reviewed and updated annually or as needed. We expense costs associated with the manufacture of our products prior to regulatory approval and capitalize the cost of inventory when there is a high probability of future economic benefit. We began capitalizing the cost of inventory related to QBREXZA in the second quarter of 2018, the period in which we received regulatory approval to market the product. We expense costs associated with the manufacture of our lebrikizumab product candidate.

We review all inventory balances on a quarterly basis for impairment and recognize any reduction in value as a current period expense with a reserve provision on the condensed consolidated balance sheets. We write down inventory that is in excess of expected requirements or at risk of expiration. This assessment requires management to utilize judgment in formulating estimates and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates and assumptions. If the conditions that caused the impairment were to be resolved in a subsequent period, the reserve provision would not be reversed until the related inventory was sold or otherwise disposed. As of June 30, 2019, the carrying value of our inventory was $17.6 million, including finished goods inventory of $5.6 million which has fixed expiration dates. In addition, we have manufacturing purchase commitments during the next 12 months of $11.0 million related to QBREXZA. In order to realize the value of our recorded inventory, we will be dependent upon significant increases in the sales volumes of QBREXZA.

Leases

We adopted Accounting Standards Update (“ASU”) No. 2016‑02, Leases (Topic 842) (“Topic 842”) on January 1, 2019. For our long-term operating leases, we recognized a right-of-use asset and a lease liability on our condensed consolidated balance sheets. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that we would pay to borrow equivalent funds on a collateralized basis at the lease commencement date. As our leases do not provide an implicit rate, we estimated the rate of interest. In order to estimate the interest rate, we utilized the effective interest rate derived from recent debt transactions, adjusting it for factors that reflect the profile of secured borrowing over the expected term of the lease, including our credit rating. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent. We determined the lease term at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise.

We elected the practical expedients permitted under Topic 842, which allowed us to exclude from our condensed consolidated balance sheets recognition of leases having a term of 12 months or less (short-term leases) and we elected to not separate lease components and non-lease components for our long-term real-estate leases.

Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the condensed consolidated statements of operations. Variable lease payments include lease operating expenses.

Prior period amounts continue to be reported in accordance with our historic accounting under previous lease guidance, ASC 840, Leases (Topic 840) (“Topic 840”). See “―Recent Accounting Pronouncements” below, for more information about the impact of the adoption on Topic 842.

Revenue Recognition

We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers 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 the performance obligations. At contract inception, we assess the goods or services promised within each contract and assess whether each promised good or service is distinct and determine those that areperformance obligations. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Product Sales

Our product sales consist of sales of QBREXZA, which became available in pharmacies within the United States on October 1, 2018. We recognize revenue from product sales when our wholesalers and a preferred dispensing partner (together, “Customers”) obtain control of our product, which is generally upon delivery.

Product sales are recognized at the transaction price, net of estimates of variable consideration, including commercial rebates, discounts related to a savings card program, distribution fees, trade discounts, government rebates and chargebacks and product returns. Variable consideration amounts are estimated at contract inception using the expected-value method and updated at the end of each reporting period as additional information becomes available. The amounts of variable consideration are included in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates and assumptions are updated quarterly and if actual future results vary materially from estimates, we will record an adjustment, which could impact product sales and earnings in the period of adjustment.

The following items of variable consideration are recorded at the time of revenue recognition and require significant estimates and judgment.

Commercial rebates and savings card program. We contract with certain third-party payers for the payment of rebates with respect to the utilization of QBREXZA. Rebates to these payers are based on contractual percentages applied to the amount of QBREXZA prescribed to patients who are covered by the plan or the organization with which we have contracts. We estimate and record rebates as a reduction to the transaction price in the same period the related product sales are recognized. We estimate commercial rebates based on contractual terms, estimated payer mix, industry information and other third-party data. We also have a savings card program to provide assistance to eligible patients with out-of-pocket costs, such as deductibles, co-insurance and co-payments, for the patient’s usage of QBREXZA. Reductions to product sales for the savings card program are estimated based on actual and expected program utilization.

Distribution fees and trade discounts.  We pay our Customers certain fees for distribution services for QBREXZA. We have determined that such distribution services are not distinct from our sales of QBREXZA and the related fees are recorded as a reduction to the transaction price in the period the related product sales are recognized. Distribution fees are recorded based on contractual terms. We also incentivize prompt payment from our Customers by providing a discount for payments made within a certain number of days.

Government rebates and chargebacks.  We are subject to discount obligations under state Medicaid programs, Medicare and other government programs. Reserves for these rebates and chargebacks are recorded as a reduction to the transaction price in the period the related product sales are recognized. Chargeback amounts represent credit we expect to issue to our Customers and are recorded as a reduction to trade and other receivables, net. Reductions to product sales for government managed programs are estimated based on statutorily-defined discounts, estimated payer mix, expected sales to qualified healthcare providers and expected utilization.

Product returns.  Our product return policy provides our Customers the right to return QBREXZA, generally based on the product expiration date. The reserve for product returns is recorded as a reduction to the transaction price in the period the related product sales are recognized. We estimate product returns using third-party input and market data for products with characteristics similar to QBREXZA.

As of June 30, 2019, the balance of our revenue-related reserves, consisting of commercial rebates, discounts related to the savings card program, distribution fees, trade discounts, government rebates, chargebacks and product returns, was $3.5 million, of which $1.2 million was recorded as a direct deduction from trade and other receivables and $2.3 million was recorded in accrued liabilities on the condensed consolidated balance sheets. As of December 31, 2018, the balance of these revenue-related reserves was $2.5 million, of which $0.7 million was recorded as a direct deduction from trade and other receivables and $1.8 million was recorded in accrued liabilities on the condensed consolidated balance sheets. During the three and six months ended June 30, 2019, additions to the revenue-related reserves were $5.2 million and $12.9 million, respectively, which were offset by related credits or payments of $5.1 million and $11.9 million, respectively. We had no additions or credits to the revenue-related reserve during the three and six months ended June 30, 2018.

Collaborative Arrangements

We enter into collaborative arrangements that typically include one of more of the following: (i) license fees; (ii) milestone payments related to the achievement of developmental, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; and (iv) fees attributable to options to intellectual property. When a portion of non‑refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied. Fees attributable to options are deferred until the option expires or is exercised. When an option is exercised, the performance obligations associated with the option are identified, which will determine the accounting for the transaction price attributable to the option.

As part of the accounting for these arrangements, we must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation. The stand-alone selling price may include items such as forecasted revenues, development timelines, discount rates, and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

Under certain collaborative arrangements, we have been reimbursed for a portion of our research and development (“R&D”) expenses, including costs of drug supplies. When these R&D services are performed under a reimbursement or cost sharing model with our collaboration partner, we record these reimbursements as a reduction of R&D expense in our consolidated statements of operations.

License Fees

If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, 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. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone Payments

At the inception of each arrangement that includes milestone payments (variable consideration), 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 our collaboration partner’s control, such as regulatory approvals, are generally 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, 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 achievement of such 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 license, collaboration or other 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 for which the license is deemed to be the predominant item to which the royalties relate, 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). To date, we have not recognized any royalty revenue resulting from any of our collaborative arrangements.

Advertising Expenses

We expense the costs of advertising as incurred. Advertising expenses were $26.7 million and $14.6 million for the three months ended June 30, 2019 and 2018, respectively, and $36.2 million and $21.5 million for the six months ended June 30, 2019 and 2018, respectively.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for dilutive potential shares of common stock. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive for all periods presented.

The following common stock equivalent shares were not included in the computations of diluted net loss per share for the periods presented because their effect was antidilutive (in thousands):

	Outstanding as of June 30,
	2019		2018
Stock options to purchase common stock		7,424		7,374
Shares subject to outstanding restricted stock units		1,953		1,544
Estimated shares issuable under the employee stock purchase plan		610		446
Shares issuable upon conversion of convertible notes		8,110		8,110
		18,097		17,474

Recent Accounting Pronouncements

In November 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”), which clarified the interaction between Topic 808, Collaborative Arrangements, and Topic 606, Revenue from Contracts with Customers (“Topic 606”). ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2018-18.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amended certain disclosure requirements over Level 1, Level 2 and Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2018-13, but do not anticipate it will have a material impact on our disclosures.

In February 2016, the FASB issued Topic 842, which is aimed at making leasing activities more transparent and comparable, and requires lessees to recognize substantially all leases on their balance sheet as a right-of-use asset and a corresponding lease liability, including leases currently accounted for as operating leases. We adopted Topic 842 on January 1, 2019 using the modified retrospective approach. There was no cumulative-effect adjustment as of January 1, 2019. We recognized a right-of-use asset and a lease liability on our consolidated balance sheet for the discounted value of future lease payments from the adoption of Topic 842. The impact on the condensed consolidated balance sheets as of January 1, 2019 was as follows (in thousands):

	Topic 840			Topic 842			Impact of
Balance Sheet	January 1, 2019			January 1, 2019			Adoption
Deferred rent classified as accrued liabilities	$	(134	)	$	—		$	134
Deferred rent classified as other long-term liabilities		(1,015	)		—			1,015
Operating lease right-of-use asset		—			14,788			14,788
Lease liability, current		—			(4,551	)		(4,551	)
Lease liability, non-current	$	—		$	(11,386	)	$	(11,386	)

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Fair Value Measurements

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

3. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting guidance for fair value establishes a three-level hierarchy for disclosure of fair value measurements, 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) that are either directly or indirectly observable, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instrument’s anticipated life.

Level 3—Unobservable inputs that are supported by little or no market activity and reflect our 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.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Where quoted prices are available in an active market, securities are classified as Level 1. When quoted market prices are not available for the specific security, then we estimate fair value by using quoted prices for identical or similar instruments in markets that are not active and model‑based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market‑based observable inputs obtained from various third‑party data providers, including but not limited to benchmark yields, reported trades and broker/dealer quotes. There were no transfers between Level 1 and Level 2 during the periods presented.

The following tables set forth the fair value of our financial assets, which consists of investments classified as available-for-sale securities, that were measured on a recurring basis (in thousands):

		As of June 30, 2019
	Fair Value Hierarchy Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Financial assets:
Money market funds	Level 1	$	23,200	$	—	$	—		$	23,200
U.S. Treasury securities	Level 1		63,336		57		—			63,393
Corporate debt	Level 2		71,701		56		(7	)		71,750
U.S. Government agency securities	Level 2		14,997		7		—			15,004
Commercial paper	Level 2		147,731		—		—			147,731
Total investments		$	320,965	$	120	$	(7	)	$	321,078

		As of December 31, 2018
	Fair Value Hierarchy Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Financial assets:
Money market funds	Level 1	$	21,201	$	—	$	—		$	21,201
U.S. Treasury securities	Level 1		84,098		5		(56	)		84,047
Corporate debt	Level 2		98,367		2		(88	)		98,281
U.S. Government agency securities	Level 2		1,984	—			(1	)		1,983
Commercial paper	Level 2		102,781	—		—				102,781
Total investments		$	308,431	$	7	$	(145	)	$	308,293

As of June 30, 2019, we did not hold any investments that have been in a continuous loss position for 12 months or more. We do not intend to sell the securities that are in an unrealized loss position and we believe it is more likely than not that the investments will be held until recovery of the amortized cost bases. We have determined that the gross unrealized losses on our securities as of June 30, 2019 were temporary in nature.

The estimated fair value of our term loan was $34.8 million as of June 30, 2019 and was based on interest rates currently available to us for debt with similar terms. The estimated fair value of our convertible notes was $249.4 million as of June 30, 2019 and was based upon observable, Level 2 inputs, including pricing information from recent trades of the convertible notes as of June 30, 2019.

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Balance Sheet Components

6 Months Ended

Jun. 30, 2019

Balance Sheet Related Disclosures [Abstract]

Balance Sheet Components

4. Balance Sheet Components

Inventory

Inventory consists of the following (in thousands):

	June 30,		December 31,
	2019		2018
Raw materials	$	11,441	$	4,140
Work-in process		602		1,019
Finished goods		5,601		3,211
Total inventory	$	17,644	$	8,370

Accrued liabilities consist of the following (in thousands):

	June 30,		December 31,
	2019		2018
Accrued compensation	$	9,056	$	12,510
Accrued outside research and development services		4,014		3,431
Accrued professional and consulting services		3,097		3,476
Accrued interest		1,123		1,102
Other		2,739		2,089
Total accrued liabilities	$	20,029	$	22,608

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Leases

6 Months Ended

Jun. 30, 2019

Leases [Abstract]

Leases

5. Leases

We lease our corporate headquarters in Menlo Park, California under a non-cancelable operating lease agreement entered into in July 2014, as amended (“Lease”). Pursuant to the Lease, we lease 45,192 square feet of space in a multi-suite building (the “Building”). As of June 30, 2019, rent payments under the Lease include base rent with an annual increase of three percent, and additional monthly fees to cover our share of certain facility expenses, including utilities, property taxes, insurance and maintenance.

The Lease will expire on December 31, 2021, subject to our option to renew the Lease for an additional five-year term.

Pursuant to the terms of the Lease, we provided the lessor with a $500,000 letter of credit in August 2014, which is collateralized by a money market account. The letter of credit may be used by or drawn upon by the lessor in the event of our default of certain terms of the Lease. If no such event of default has occurred or then exists, the letter of credit may be reduced to $350,000 after June 1, 2019. The collateralized money market account is restricted cash and recorded in our condensed consolidated balance sheets.

In connection with the Lease, we recognized an operating lease right-of-use asset of $7.5 million and an aggregate lease liability of $8.2 million as of January 1, 2019 in our condensed consolidated balance sheet. As of January 1, 2019, the remaining Lease term was 3.0 years, and we used an estimated discount rate of 9.0% in calculating the lease liability.

In September 2017, we entered into a sublease agreement (“Sublease”) pursuant to which we expanded our office space by subleasing an additional 23,798 square feet of space in the Building. Rent payments for the Sublease include base rent with an annual increase of three percent, and additional monthly fees to cover our share of certain facility expenses, including utilities, property taxes, insurance and maintenance. The Sublease term commenced on December 20, 2017, and will end on April 30, 2024, unless terminated early pursuant to the terms of the Sublease.

Pursuant to the terms of the Sublease, in October 2017, we provided the sublessor with a $300,000 irrevocable commercial letter of credit, which is collateralized by a money market account. The letter of credit may be used by or drawn upon by the sublessor in the event of our default of certain terms of the Sublease. The collateralized money market account is restricted cash and recorded in our condensed consolidated balance sheets.

In connection with the Sublease, we recognized an operating lease right-of-use asset of $7.2 million and an aggregate lease liability of $7.7 million as of January 1, 2019 in our condensed consolidated balance sheet. As of January 1, 2019, the remaining Sublease term was 5.3 years, and we used an estimated discount rate of 9.0% in calculating the lease liability.

Rent expense for the Lease and Sublease was $1.6 million and $1.5 million for the three months ended June 30, 2019 and 2018, respectively, and $3.2 million and $3.0 million for the six months ended June 30, 2019 and 2018, respectively, which includes additional rent charges for common area maintenance and real estate taxes of $0.4 million for each of the three months ended June 30, 2019 and 2018, and $0.8 million and $0.6 million for the six months ended June 30, 2019 and 2018, respectively. We recognize rent expense on a straight‑line basis over the lease period.

As of June 30, 2019, the undiscounted future non-cancellable lease payments under the Lease and Sublease were as follows (in thousands):

Year Ending December 31,
2019 (remainder)	$	1,995
2020		4,918
2021		5,056
2022		1,879
2023		1,936
Thereafter		666
Total undiscounted lease payments		16,450
Less: Present value adjustment		(2,609	)
Total	$	13,841

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Debt

6 Months Ended

Jun. 30, 2019

Debt Disclosure [Abstract]

Debt

6. Debt

Credit Facility

In December 2018, we entered into a Credit Agreement (“Credit Agreement”) with Athyrium Opportunities III Acquisition LP (“Athyrium”). The arrangement provides for a senior secured term loan facility of up to $125.0 million in aggregate principal amount available in three tranches, $35.0 million of which was funded upon the closing. The second tranche of $40.0 million may be borrowed in a single draw at our option on or before July 1, 2019 and the third tranche of $50.0 million may be borrowed in a single draw on or before March 2, 2020 subject to a performance-based milestone. Amounts outstanding under the Credit Agreement bear interest at a rate of 10.75% per year, payable in quarterly in arrears, and provide for interest-only payments followed by payment of principal at maturity in December 2023; provided, however, that if, as of February 13, 2022, the aggregate outstanding principal amount of our 3.00% Convertible Senior Notes due 2022 (“Notes”) is greater than $60.0 million, we must immediately repay all amounts outstanding under the Credit Agreement, together with all accrued and unpaid interest and the applicable prepayment premium, if any. After the occurrence and during the continuation of a default, amounts outstanding will bear interest at a rate of 13.75% per annum, payable in cash quarterly in arrears and on demand. Our obligations under the Credit Agreement are secured by a security interest in, subject to certain exceptions, substantially all of our assets.

We may make voluntary prepayments in whole or in part, subject to certain prepayment premiums and additional interest payments. The Credit Agreement also contains certain provisions, such as default and change in control provisions, which, if triggered, would require us to make mandatory prepayments on the term loan, which are subject to certain prepayment premiums and additional interest payments. We determined that these contingent prepayment provisions were an embedded component that qualified as a derivative which should be bifurcated from the term loan and accounted for separately from the host contract. As of June 30, 2019, the fair value of this embedded derivative was immaterial.

The Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type as well as customary events of default. As of June 30, 2019 and December 31, 2018, we were in compliance with all of the covenants under the Credit Agreement.

In connection with issuance of the term loan, we incurred certain costs and fees totaling $2.5 million which were recorded as a direct deduction discount from the term loan on the consolidated balance sheets and are being amortized ratably to interest expense over the term of the loan, using the effective interest method. As of June 30, 2019, there were unamortized issuance costs and debt discounts of $2.3 million related to the term loan. We recorded $1.0 million and $2.1 million in interest expense related to the term loan for the three and six months ended June 30, 2019, respectively.

As of June 30, 2019, minimum aggregate future payments under the term loan are as follows (in thousands):

2019 (remainder)	$	1,891
2020		3,763
2021		3,763
2022		3,763
2023		38,521
Total minimum payments	$	51,701
Amount representing interest		(16,701	)
Principal amount of term loan	$	35,000

On August 5, 2019, we amended the Credit Agreement to extend the deadline for the drawing of the third tranche of $50.0 million from March 2, 2020 to June 3, 2020 and reduce the prepayment penalty. In connection with this amendment, we paid Athyrium an amendment fee of $350,000 and borrowed $40.0 million available under the second tranche.

Convertible notes

In May 2017, we sold $287.5 million aggregate principal amount of Notes in a private placement. We received net proceeds of $278.3 million, after deducting the initial purchasers’ discounts of $8.6 million and issuance costs of $0.6 million. The Notes were issued pursuant to an Indenture, dated as of May 16, 2017 (the “Indenture”), between us and U.S. Bank National Association, as trustee. The Notes are senior, unsecured obligations and bear interest at a rate of 3.00% per year, payable in cash semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2017. The Notes mature on May 15, 2022, unless earlier converted or repurchased in accordance with their terms.

The Notes are convertible into shares of our common stock, par value $0.001 per share, at an initial conversion rate of 28.2079 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $35.45 per share of common stock. The conversion rate and the corresponding conversion price are subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest. Holders of the Notes who convert their Notes in connection with a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the Notes may require us to repurchase all or a portion of their Notes at a price equal to 100% of the principal amount of Notes, plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. Holders of the Notes may convert all or a portion of their Notes at their option at any time prior to the close of business on the business day immediately prior to May 15, 2022, in multiples of $1,000 principal amount.

As of June 30, 2019, there were unamortized issuance costs and debt discounts of $5.4 million, which were recorded as a direct deduction from the Notes on the condensed consolidated balance sheets.

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Collaboration and License Agreements

6 Months Ended

Jun. 30, 2019

Collaboration And License Agreements [Abstract]

Collaboration and License Agreements

7. Collaboration and License Agreements

In-License Agreements

Roche Agreement

In August 2017, we entered into a licensing agreement (“Roche Agreement”) with F. Hoffmann-La Roche Ltd and Genentech, Inc. (together, “Roche”), pursuant to which we obtained exclusive, worldwide rights to develop and commercialize lebrikizumab, an injectable, humanized antibody targeting interleukin 13, for atopic dermatitis and all other therapeutic indications. The Roche Agreement became effective in September 2017 and was amended in February 2019.

Under the terms of the Roche Agreement, we made an initial payment of $80.0 million to Roche in October 2017 and a $25.0 million payment to Roche in July 2018 upon the achievement of 50% enrollment in our Phase 2 clinical study of lebrikizumab, which was achieved in June 2018, and a $30.0 million payment in November 2018 related to the achievement of 100% enrollment in our Phase 2 clinical study of lebrikizumab, which was achieved in October 2018.

We amended the Roche Agreement in February 2019. Under the terms of the Roche Agreement, as amended, Roche is obligated to supply us with up to approximately $16.0 million in existing lebrikizumab drug substance, free of charge, approximately two-thirds of which was received as of June 30, 2019, and we will be obligated to make payments to Roche upon the achievement of certain milestones, comprising $20.0 million upon the initiation of the first Phase 3 clinical study, up to $180.0 million upon the achievement of regulatory and first commercial sale milestones in certain territories and up to $1.0 billion based on the achievement of certain thresholds for net sales of lebrikizumab for all indications.

Under the terms of the Roche Agreement, as amended, we will also make royalty payments to Roche representing percentages of net sales. Royalty payments will be made from the first commercial sale date in such country and end on the later of the date that is (i) ten years after the date of the first commercial sale of lebrikizumab in such country, (ii) the expiration of the last to expire valid claim of the applicable licensed compound patent rights, our patent rights or joint patent rights in such country covering the use, manufacturing, import, offering for sale, or sale of lebrikizumab in such country, (iii) the expiration of the last to expire valid claim of the applicable licensed non-compound patent rights in such country covering the use, import, offering for sale, or sale of the product in such country, or (iv) the expiration of the last to expire regulatory exclusivity conferred by the applicable regulatory authority in such country for lebrikizumab.

Rose U Agreement

In April 2013, we entered into an exclusive license agreement with Rose U LLC (“Rose U”) pursuant to which we obtained a worldwide exclusive license within a field of use including hyperhidrosis to practice, enforce and otherwise exploit certain patent rights, know‑how and data related to our hyperhidrosis program. The license agreement includes a sublicense of certain data and an assignment of certain regulatory filings which Rose U had obtained from Stiefel Laboratories, Inc., a GSK company (“Stiefel”). In connection with the license agreement, we also entered into a letter agreement with Stiefel pursuant to which we assumed Rose U’s obligation to pay Stiefel $2.5 million in connection with the commercialization of products developed using the licensed data and to indemnify Stiefel for claims arising from the use, development or commercialization of products developed using the Stiefel data.

As of June 30, 2019, we have paid or accrued license and other fees of $4.3 million to Rose U and Stiefel, including a $2.5 million payment in connection with the first commercial sale of QBREXZA in 2018, and are required to pay Rose U additional amounts totaling up to $0.6 million upon the achievement of certain milestones. In addition, we are also obligated to pay Rose U low-to-mid single-digit royalties on net product sales and low double-digit royalties on sublicense fees and certain milestone, royalty and other contingent payments received from sublicensees, to the extent such amounts are in excess of the milestone and royalty payments we are obligated to pay Rose U directly upon the events or sales triggering such payments. Under the license agreement, we are entitled to credit the $2.5 million payment we paid in connection with the first commercial sale of QBREXZA against royalty payments owed to Rose U in accordance with the terms of the license agreement. As of June 30, 2019, the remaining creditable amount of this payment was $2.2 million.

Out-License and Other Agreements

Almirall Agreement

We entered into an option and license agreement with Almirall in February 2019 (“Almirall Agreement”), under which Almirall acquired an option to exclusively license rights to develop lebrikizumab for the treatment or prevention of dermatology indications, including but not limited to atopic dermatitis, and commercialize lebrikizumab for the treatment or prevention of all indications in Europe (“Lebrikizumab EU License”). In exchange, we received a non-refundable upfront option fee of $30.0 million in March 2019. In June 2019, Almirall exercised its option pursuant to the Almirall Agreement. In connection with this exercise, Almirall paid us an option exercise fee of $50.0 million, which we received in July 2019. Under the terms of the Almirall Agreement, we are entitled to receive additional payments upon the achievement of certain development, regulatory and sales milestones, including $30.0 million in connection with the initiation by us of certain Phase 3 clinical studies, as well as royalty payments representing percentages of net sales of lebrikizumab in Europe.

Upon Almirall’s election to exercise its option pursuant to the Almirall Agreement, we identified the following distinct performance obligations: (i) the delivery of the Lebrikizumab EU License and (ii) the conduct of the lebrikizumab Phase 3 development program. We determined that the transaction price as of June 30, 2019 was $110.0 million, consisting of: (i) the $30.0 million upfront option fee; (ii) the $50.0 million option exercise fee; and (iii) the $30.0 million in milestones in connection with the initiation of certain Phase 3 clinical studies, which were determined to not be constrained. Other future potential regulatory milestones were considered to be fully constrained, as we determined that the achievement of such milestones is contingent upon success in future clinical trials and regulatory approvals, which are not within our control and are uncertain at this stage. We expect that the sales-based milestone and royalty payments will be recognized when the sales occur or the milestone is achieved. We will re-evaluate the transaction price each reporting period.

We allocated the transaction price based on the estimated stand-alone selling prices of each of the two performance obligations. We determined the stand-alone selling price for the Lebrikizumab EU License was based on a discounted cash flow approach and considered several factors including, but not limited to: estimated market demand, manufacturing and supply costs, development and commercialization costs, discount rate, development and approval timelines and probabilities of technical and regulatory success. The portion of the transaction price allocated to our Lebrikizumab EU License performance obligation was recorded immediately upon Almirall’s exercise of its option in the second quarter of 2019, as the Lebrikizumab EU License represents functional intellectual property that was transferred as of the date of Almirall’s option exercise in June 2019. We determined the stand-alone selling price for our lebrikizumab Phase 3 development program based on the nature of the services to be performed, estimates of the associated costs and third-party rates for similar services. The portion of the transaction price allocated to our lebrikizumab Phase 3 development program performance obligation will be recognized as revenue using the input method as the lebrikizumab Phase 3 development program is completed, subject to changes in estimated total lebrikizumab development program cost and actual costs incurred during each period. No revenue related to the lebrikizumab Phase 3 development program performance obligation had been recognized as of June 30, 2019.

For each of the three and six months ended June 30, 2019, we recognized $58.6 million as collaboration and license revenue related to the Almirall Agreement in our condensed consolidated statements of operations. As of June 30, 2019, $15.1 million and $6.3 million were recorded as deferred revenue, current, and deferred revenue, non-current, respectively, on the condensed consolidated balance sheets and are expected to be recognized as collaboration and license revenue over thePhase 3 development period.

Maruho Agreement

In September 2016, we entered into an Exclusive License Agreement with Maruho Co., Ltd. (“Maruho”), which grants Maruho an exclusive license to develop and commercialize glycopyrronium tosylate for the treatment of hyperhidrosis in Japan (“Maruho Agreement”). Pursuant to the terms of the Maruho Agreement, we received an upfront payment of $25.0 million from Maruho in October 2016 and are eligible to receive additional payments totaling up to $70.0 million, contingent upon the achievement of certain milestones associated with submission and approval of a marketing application in Japan and certain sales thresholds, as well as royalty payments based on a percentage of net product sales in Japan. The Maruho Agreement further provides that Maruho will be responsible for funding all development and commercial costs for the program in Japan and, until such time, if any, as Maruho elects to establish its own source of supply of drug product, Maruho will purchase product supply from us for development and, if applicable, commercial purposes at cost.

Under Topic 606, we evaluated the terms of the Maruho Agreement and the transfer of intellectual property rights (the “license”) was identified as the only performance obligation as of the inception of the agreement. We concluded that the license for the intellectual property was distinct from our ongoing manufacturing obligations. We further determined that the transaction price under the arrangement was comprised of the $25.0 million upfront payment. The future potential milestone amounts were not included in the transaction price, as they were all determined to be fully constrained. As part of our evaluation of the development and regulatory milestones constraint, we determined that the achievement of such milestones is contingent upon success in future clinical trials and regulatory approvals, each of which is uncertain at this time. We will re-evaluate the transaction price each quarter and as uncertain events are resolved or other changes in circumstances occur. Future potential milestone amounts would be recognized as revenue from collaboration arrangements, if unconstrained. Reimbursable program costs are recognized proportionately with the performance of the underlying services or delivery of drug substance and are accounted for as reductions to R&D expense and are excluded from the transaction price.

Unless earlier terminated, the Maruho Agreement will remain in effect until the later of: (i) expiration or abandonment of the last valid claim of the applicable patent rights in Japan; (ii) expiration of any market exclusivity in Japan granted by the applicable regulatory authority; and (iii) 15 years following the date of the first commercial sale of the drug product in Japan.

UCB Agreements

In March 2014, we and UCB Pharma S.A. (“UCB”), entered into a Development and Commercialisation Agreement, dated March 21, 2014 (“UCB Agreement”), which provided that we would (a) develop Cimzia (certolizumab pegol) for the treatment of psoriasis in order for UCB to seek regulatory approval from the U.S. Food and Drug Administration (“FDA”), the European Medicines Agency and the Canadian federal department for health, and (b) upon the grant of regulatory approval in the United States and Canada, promote sales of Cimzia to dermatologists and conduct related medical affairs activities in the United States and Canada. The UCB Agreement also provided either party with the right to terminate the agreement under certain terms. We expressed our intent to terminate the UCB Agreement in accordance with its terms.

As a result, we and UCB entered into an agreement on November 6, 2017 to effect the termination of the UCB Agreement and an orderly transition of the development and commercialization activities under the UCB Agreement from us to UCB (“Transition Agreement”). The Transition Agreement, among other things, (a) terminated the UCB Agreement on February 15, 2018, (b) provided for the repurchase by UCB of all product rights, licenses and intellectual property relating to Cimzia, (c) specified the responsibilities and obligations of us and UCB in connection with the transition of certain activities under the UCB Agreement from us to UCB as a result of the termination of the UCB Agreement, (d) terminated UCB’s right to designate a director nominee to our board of directors and (e) provided for the resignation of UCB’s designee from our board of directors.

Pursuant to the UCB Agreement, there were no termination or penalty payments required by either party. In consideration for the repurchase of all product rights, licenses and intellectual property relating to Cimzia, UCB paid us $11.0 million in November 2017 and an additional $39.0 million in June 2018 upon FDA approval of Cimzia for the treatment of psoriasis. We were obligated to reimburse UCB for up to $10.0 million of development costs incurred by UCB in connection with the development of Cimzia between January 1, 2018 and June 30, 2018. For the three and six months ended June 30, 2018, we recognized $39.1 million and $39.4 million, respectively, in collaboration and license revenue in our condensed consolidated statement of operations related to UCB. As of December 31, 2018, we had fully reimbursed UCB the $10.0 million for development costs incurred by UCB.

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Stock-Based Compensation

6 Months Ended

Jun. 30, 2019

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock-Based Compensation

8. Stock-Based Compensation

The following table reflects a summary of stock option activity under our 2010 Equity Incentive Plan (“2010 Plan”), 2014 Equity Incentive Plan (“2014 EIP”) and 2018 Equity Inducement Plan (“2018 Inducement Plan”) and related information for the period from December 31, 2018 through June 30, 2019:

	Shares Subject to Outstanding Stock Options			Weighted- Average Exercise Price Per Share
Stock options outstanding at December 31, 2018		6,950		$	19.06
Stock options granted		1,025		$	7.61
Stock options exercised		(109	)	$	3.70
Stock options forfeited		(442	)	$	23.38
Stock options outstanding at June 30, 2019		7,424		$	17.45

The following table reflects a summary of restricted stock unit (“RSU”) activity under our 2014 EIP and 2018 Inducement Plan and related information for the period from December 31, 2018 through June 30, 2019:

	Shares Subject to Outstanding RSUs			Weighted- Average Grant Date Fair Value Per Share
RSUs outstanding at December 31, 2018		1,572		$	13.50
RSUs granted		1,181		$	7.17
RSUs vested and settled		(557	)	$	9.51
RSUs forfeited		(243	)	$	10.20
RSUs outstanding at June 30, 2019		1,953		$	11.22

Total stock-based compensation expense related to the 2010 Plan, the 2014 EIP, the 2018 Inducement Plan and the 2014 Employee Stock Purchase Plan was allocated as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Cost of sales	$	16	$	—	$	31	$	—
Research and development		2,371		2,408		4,831		5,261
Selling, general and administrative		5,123		4,898		10,629		9,559
Total stock-based compensation expense	$	7,510	$	7,306	$	15,491	$	14,820

Stock-based compensation of $0.1 million and $0.2 million was capitalized into inventory for the three and six months ended June 30, 2019, respectively. Stock-based compensation capitalized into inventory is recognized as cost of sales when the related product is sold.

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2019

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

Our condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of our financial information. The results of operations for the three- and six-month periods ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019 or any other future period. The condensed consolidated balance sheet as of December 31, 2018 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

The accompanying condensed consolidated financial statements include the accounts of our wholly owned subsidiary, Dermira Canada. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with our audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018 included in our Annual Report on Form 10-K, filed with the SEC on February 26, 2019.

Use of Estimates

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and variable consideration, inventory, acquired in-process research and development, investments, accrued research and development expenses, goodwill, operating lease assets and liabilities, intangible assets, other long-lived assets, stock-based compensation and the valuation of deferred tax assets. We base our estimates on our historical experience and also on assumptions that we believe are reasonable; however, actual results could significantly differ from those estimates.

Restricted Cash

Restricted Cash

Restricted cash primarily consists of letters of credit collateralized by a money market account pursuant to certain lease and sublease agreements.

Concentration of Credit Risk

Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist primarily of cash and cash equivalents, investments and trade and other receivables. We invest in money market funds, U.S. Treasury securities, corporate debt, repurchase agreements, U.S. Government agency securities, commercial paper and certificates of deposits. Bank deposits are held primarily by a limited number of financial institutions and these deposits may exceed insured limits. We are exposed to credit risk in the event of a default by the financial institutions holding our cash and cash equivalents and issuers of investments to the extent recorded on the consolidated balance sheets. Our investment policy limits investments to money market funds, certain types of debt securities issued by the U.S. Government and its agencies, corporate debt, repurchase agreements, commercial paper, certificates of deposit and municipal bonds and places restrictions on the credit ratings, maturities and concentration by type and issuer.

As of and for the three and six months ended June 30, 2019, three customers (AmerisourceBergen Corporation, McKesson Corporation and Cardinal Health, Inc.) each accounted for more than 10% of our trade receivables and product sales. These three customers collectively accounted for 97.5% and 96.7% of product sales for the three and six months ended June 30, 2019, respectively, and 99.1% of our trade receivables as of June 30, 2019. As of June 30, 2019, we have a receivable of $50.0 million from Almirall, S.A. (“Almirall”), which was recorded in trade and other receivables, net.

Trade and Other Receivables

Trade and Other Receivables

Our trade receivables consist of amounts due from the sale of QBREXZA. The trade receivables are recorded net of allowances for distribution fees and trade discounts, government rebates and chargebacks. Estimates for wholesaler chargebacks for government rebates and cash discounts are based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs. For the periods presented, we did not have any write-offs of trade receivables. We perform ongoing credit evaluations of our Customers and generally do not require collateral.

Other receivables, including collaboration and license receivables, are typically unsecured. Accordingly, we may be exposed to credit risk generally associated with our collaboration and license agreements. To date, we have not experienced any losses related to these receivables.

Inventory

Inventory

Inventory consists of raw materials, work-in-process and finished goods related to the production of QBREXZA. Inventory costs are determined using the lower of standard cost, which approximates the actual costs determined using the first-in, first-out basis, or net realizable value. Standard costs are reviewed and updated annually or as needed. We expense costs associated with the manufacture of our products prior to regulatory approval and capitalize the cost of inventory when there is a high probability of future economic benefit. We began capitalizing the cost of inventory related to QBREXZA in the second quarter of 2018, the period in which we received regulatory approval to market the product. We expense costs associated with the manufacture of our lebrikizumab product candidate.

We review all inventory balances on a quarterly basis for impairment and recognize any reduction in value as a current period expense with a reserve provision on the condensed consolidated balance sheets. We write down inventory that is in excess of expected requirements or at risk of expiration. This assessment requires management to utilize judgment in formulating estimates and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates and assumptions. If the conditions that caused the impairment were to be resolved in a subsequent period, the reserve provision would not be reversed until the related inventory was sold or otherwise disposed. As of June 30, 2019, the carrying value of our inventory was $17.6 million, including finished goods inventory of $5.6 million which has fixed expiration dates. In addition, we have manufacturing purchase commitments during the next 12 months of $11.0 million related to QBREXZA. In order to realize the value of our recorded inventory, we will be dependent upon significant increases in the sales volumes of QBREXZA.

Leases

Leases

We adopted Accounting Standards Update (“ASU”) No. 2016‑02, Leases (Topic 842) (“Topic 842”) on January 1, 2019. For our long-term operating leases, we recognized a right-of-use asset and a lease liability on our condensed consolidated balance sheets. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that we would pay to borrow equivalent funds on a collateralized basis at the lease commencement date. As our leases do not provide an implicit rate, we estimated the rate of interest. In order to estimate the interest rate, we utilized the effective interest rate derived from recent debt transactions, adjusting it for factors that reflect the profile of secured borrowing over the expected term of the lease, including our credit rating. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent. We determined the lease term at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise.

We elected the practical expedients permitted under Topic 842, which allowed us to exclude from our condensed consolidated balance sheets recognition of leases having a term of 12 months or less (short-term leases) and we elected to not separate lease components and non-lease components for our long-term real-estate leases.

Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the condensed consolidated statements of operations. Variable lease payments include lease operating expenses.

Prior period amounts continue to be reported in accordance with our historic accounting under previous lease guidance, ASC 840, Leases (Topic 840) (“Topic 840”). See “―Recent Accounting Pronouncements” below, for more information about the impact of the adoption on Topic 842.

Revenue Recognition

Revenue Recognition

We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers 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 the performance obligations. At contract inception, we assess the goods or services promised within each contract and assess whether each promised good or service is distinct and determine those that areperformance obligations. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Product Sales

Our product sales consist of sales of QBREXZA, which became available in pharmacies within the United States on October 1, 2018. We recognize revenue from product sales when our wholesalers and a preferred dispensing partner (together, “Customers”) obtain control of our product, which is generally upon delivery.

Product sales are recognized at the transaction price, net of estimates of variable consideration, including commercial rebates, discounts related to a savings card program, distribution fees, trade discounts, government rebates and chargebacks and product returns. Variable consideration amounts are estimated at contract inception using the expected-value method and updated at the end of each reporting period as additional information becomes available. The amounts of variable consideration are included in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates and assumptions are updated quarterly and if actual future results vary materially from estimates, we will record an adjustment, which could impact product sales and earnings in the period of adjustment.

The following items of variable consideration are recorded at the time of revenue recognition and require significant estimates and judgment.

Commercial rebates and savings card program. We contract with certain third-party payers for the payment of rebates with respect to the utilization of QBREXZA. Rebates to these payers are based on contractual percentages applied to the amount of QBREXZA prescribed to patients who are covered by the plan or the organization with which we have contracts. We estimate and record rebates as a reduction to the transaction price in the same period the related product sales are recognized. We estimate commercial rebates based on contractual terms, estimated payer mix, industry information and other third-party data. We also have a savings card program to provide assistance to eligible patients with out-of-pocket costs, such as deductibles, co-insurance and co-payments, for the patient’s usage of QBREXZA. Reductions to product sales for the savings card program are estimated based on actual and expected program utilization.

Distribution fees and trade discounts.  We pay our Customers certain fees for distribution services for QBREXZA. We have determined that such distribution services are not distinct from our sales of QBREXZA and the related fees are recorded as a reduction to the transaction price in the period the related product sales are recognized. Distribution fees are recorded based on contractual terms. We also incentivize prompt payment from our Customers by providing a discount for payments made within a certain number of days.

Government rebates and chargebacks.  We are subject to discount obligations under state Medicaid programs, Medicare and other government programs. Reserves for these rebates and chargebacks are recorded as a reduction to the transaction price in the period the related product sales are recognized. Chargeback amounts represent credit we expect to issue to our Customers and are recorded as a reduction to trade and other receivables, net. Reductions to product sales for government managed programs are estimated based on statutorily-defined discounts, estimated payer mix, expected sales to qualified healthcare providers and expected utilization.

Product returns.  Our product return policy provides our Customers the right to return QBREXZA, generally based on the product expiration date. The reserve for product returns is recorded as a reduction to the transaction price in the period the related product sales are recognized. We estimate product returns using third-party input and market data for products with characteristics similar to QBREXZA.

As of June 30, 2019, the balance of our revenue-related reserves, consisting of commercial rebates, discounts related to the savings card program, distribution fees, trade discounts, government rebates, chargebacks and product returns, was $3.5 million, of which $1.2 million was recorded as a direct deduction from trade and other receivables and $2.3 million was recorded in accrued liabilities on the condensed consolidated balance sheets. As of December 31, 2018, the balance of these revenue-related reserves was $2.5 million, of which $0.7 million was recorded as a direct deduction from trade and other receivables and $1.8 million was recorded in accrued liabilities on the condensed consolidated balance sheets. During the three and six months ended June 30, 2019, additions to the revenue-related reserves were $5.2 million and $12.9 million, respectively, which were offset by related credits or payments of $5.1 million and $11.9 million, respectively. We had no additions or credits to the revenue-related reserve during the three and six months ended June 30, 2018.

Collaborative Arrangements

We enter into collaborative arrangements that typically include one of more of the following: (i) license fees; (ii) milestone payments related to the achievement of developmental, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; and (iv) fees attributable to options to intellectual property. When a portion of non‑refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied. Fees attributable to options are deferred until the option expires or is exercised. When an option is exercised, the performance obligations associated with the option are identified, which will determine the accounting for the transaction price attributable to the option.

As part of the accounting for these arrangements, we must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation. The stand-alone selling price may include items such as forecasted revenues, development timelines, discount rates, and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

Under certain collaborative arrangements, we have been reimbursed for a portion of our research and development (“R&D”) expenses, including costs of drug supplies. When these R&D services are performed under a reimbursement or cost sharing model with our collaboration partner, we record these reimbursements as a reduction of R&D expense in our consolidated statements of operations.

License Fees

If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, 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. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone Payments

At the inception of each arrangement that includes milestone payments (variable consideration), 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 our collaboration partner’s control, such as regulatory approvals, are generally 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, 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 achievement of such 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 license, collaboration or other 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 for which the license is deemed to be the predominant item to which the royalties relate, 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). To date, we have not recognized any royalty revenue resulting from any of our collaborative arrangements.

Advertising Expenses

Advertising Expenses

We expense the costs of advertising as incurred. Advertising expenses were $26.7 million and $14.6 million for the three months ended June 30, 2019 and 2018, respectively, and $36.2 million and $21.5 million for the six months ended June 30, 2019 and 2018, respectively.

Net Loss Per Share

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for dilutive potential shares of common stock. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive for all periods presented.

The following common stock equivalent shares were not included in the computations of diluted net loss per share for the periods presented because their effect was antidilutive (in thousands):

	Outstanding as of June 30,
	2019		2018
Stock options to purchase common stock		7,424		7,374
Shares subject to outstanding restricted stock units		1,953		1,544
Estimated shares issuable under the employee stock purchase plan		610		446
Shares issuable upon conversion of convertible notes		8,110		8,110
		18,097		17,474

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In November 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”), which clarified the interaction between Topic 808, Collaborative Arrangements, and Topic 606, Revenue from Contracts with Customers (“Topic 606”). ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2018-18.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amended certain disclosure requirements over Level 1, Level 2 and Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2018-13, but do not anticipate it will have a material impact on our disclosures.

In February 2016, the FASB issued Topic 842, which is aimed at making leasing activities more transparent and comparable, and requires lessees to recognize substantially all leases on their balance sheet as a right-of-use asset and a corresponding lease liability, including leases currently accounted for as operating leases. We adopted Topic 842 on January 1, 2019 using the modified retrospective approach. There was no cumulative-effect adjustment as of January 1, 2019. We recognized a right-of-use asset and a lease liability on our consolidated balance sheet for the discounted value of future lease payments from the adoption of Topic 842. The impact on the condensed consolidated balance sheets as of January 1, 2019 was as follows (in thousands):

	Topic 840			Topic 842			Impact of
Balance Sheet	January 1, 2019			January 1, 2019			Adoption
Deferred rent classified as accrued liabilities	$	(134	)	$	—		$	134
Deferred rent classified as other long-term liabilities		(1,015	)		—			1,015
Operating lease right-of-use asset		—			14,788			14,788
Lease liability, current		—			(4,551	)		(4,551	)
Lease liability, non-current	$	—		$	(11,386	)	$	(11,386	)

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Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2019

Schedule of Common Stock Equivalent Shares Not Included in Computations of Diluted Net Loss per Share

The following common stock equivalent shares were not included in the computations of diluted net loss per share for the periods presented because their effect was antidilutive (in thousands):

	Outstanding as of June 30,
	2019		2018
Stock options to purchase common stock		7,424		7,374
Shares subject to outstanding restricted stock units		1,953		1,544
Estimated shares issuable under the employee stock purchase plan		610		446
Shares issuable upon conversion of convertible notes		8,110		8,110
		18,097		17,474

ASU 2016-02

Schedule of Impact on Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Cash Flows Related to Lease

	Topic 840			Topic 842			Impact of
Balance Sheet	January 1, 2019			January 1, 2019			Adoption
Deferred rent classified as accrued liabilities	$	(134	)	$	—		$	134
Deferred rent classified as other long-term liabilities		(1,015	)		—			1,015
Operating lease right-of-use asset		—			14,788			14,788
Lease liability, current		—			(4,551	)		(4,551	)
Lease liability, non-current	$	—		$	(11,386	)	$	(11,386	)

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

Schedule of Fair Value of Financial Assets Measured on a Recurring Basis

The following tables set forth the fair value of our financial assets, which consists of investments classified as available-for-sale securities, that were measured on a recurring basis (in thousands):

		As of June 30, 2019
	Fair Value Hierarchy Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Financial assets:
Money market funds	Level 1	$	23,200	$	—	$	—		$	23,200
U.S. Treasury securities	Level 1		63,336		57		—			63,393
Corporate debt	Level 2		71,701		56		(7	)		71,750
U.S. Government agency securities	Level 2		14,997		7		—			15,004
Commercial paper	Level 2		147,731		—		—			147,731
Total investments		$	320,965	$	120	$	(7	)	$	321,078

		As of December 31, 2018
	Fair Value Hierarchy Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Financial assets:
Money market funds	Level 1	$	21,201	$	—	$	—		$	21,201
U.S. Treasury securities	Level 1		84,098		5		(56	)		84,047
Corporate debt	Level 2		98,367		2		(88	)		98,281
U.S. Government agency securities	Level 2		1,984	—			(1	)		1,983
Commercial paper	Level 2		102,781	—		—				102,781
Total investments		$	308,431	$	7	$	(145	)	$	308,293

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Balance Sheet Components (Tables)

6 Months Ended

Jun. 30, 2019

Balance Sheet Related Disclosures [Abstract]

Schedule of Inventory

Inventory

Inventory consists of the following (in thousands):

	June 30,		December 31,
	2019		2018
Raw materials	$	11,441	$	4,140
Work-in process		602		1,019
Finished goods		5,601		3,211
Total inventory	$	17,644	$	8,370

Schedule of Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	June 30,		December 31,
	2019		2018
Accrued compensation	$	9,056	$	12,510
Accrued outside research and development services		4,014		3,431
Accrued professional and consulting services		3,097		3,476
Accrued interest		1,123		1,102
Other		2,739		2,089
Total accrued liabilities	$	20,029	$	22,608

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Leases (Tables)

6 Months Ended

Jun. 30, 2019

Leases [Abstract]

Schedule of Undiscounted Future Non-Cancellable Lease Payments under Lease and Sublease

As of June 30, 2019, the undiscounted future non-cancellable lease payments under the Lease and Sublease were as follows (in thousands):

Year Ending December 31,
2019 (remainder)	$	1,995
2020		4,918
2021		5,056
2022		1,879
2023		1,936
Thereafter		666
Total undiscounted lease payments		16,450
Less: Present value adjustment		(2,609	)
Total	$	13,841

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Debt (Tables)

6 Months Ended

Jun. 30, 2019

Debt Disclosure [Abstract]

Summary of Minimum Aggregate Future Payment Term Loan

As of June 30, 2019, minimum aggregate future payments under the term loan are as follows (in thousands):

2019 (remainder)	$	1,891
2020		3,763
2021		3,763
2022		3,763
2023		38,521
Total minimum payments	$	51,701
Amount representing interest		(16,701	)
Principal amount of term loan	$	35,000

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Stock-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2019

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Summary of Stock Option Activity under our 2010 Equity Incentive Plan ("2010 Plan"), 2014 Equity Incentive Plan ("2014 EIP") and 2018 Equity Inducement Plan ("2018 Inducement Plan") and Related Information

The following table reflects a summary of stock option activity under our 2010 Equity Incentive Plan (“2010 Plan”), 2014 Equity Incentive Plan (“2014 EIP”) and 2018 Equity Inducement Plan (“2018 Inducement Plan”) and related information for the period from December 31, 2018 through June 30, 2019:

	Shares Subject to Outstanding Stock Options			Weighted- Average Exercise Price Per Share
Stock options outstanding at December 31, 2018		6,950		$	19.06
Stock options granted		1,025		$	7.61
Stock options exercised		(109	)	$	3.70
Stock options forfeited		(442	)	$	23.38
Stock options outstanding at June 30, 2019		7,424		$	17.45

Summary of Restricted Stock Unit ("RSU") Activity under our 2014 EIP and 2018 Inducement Plan and Related Information

The following table reflects a summary of restricted stock unit (“RSU”) activity under our 2014 EIP and 2018 Inducement Plan and related information for the period from December 31, 2018 through June 30, 2019:

	Shares Subject to Outstanding RSUs			Weighted- Average Grant Date Fair Value Per Share
RSUs outstanding at December 31, 2018		1,572		$	13.50
RSUs granted		1,181		$	7.17
RSUs vested and settled		(557	)	$	9.51
RSUs forfeited		(243	)	$	10.20
RSUs outstanding at June 30, 2019		1,953		$	11.22

Schedule of Total Stock-Based Compensation Expense

Total stock-based compensation expense related to the 2010 Plan, the 2014 EIP, the 2018 Inducement Plan and the 2014 Employee Stock Purchase Plan was allocated as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Cost of sales	$	16	$	—	$	31	$	—
Research and development		2,371		2,408		4,831		5,261
Selling, general and administrative		5,123		4,898		10,629		9,559
Total stock-based compensation expense	$	7,510	$	7,306	$	15,491	$	14,820

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Summary of Significant Accounting Policies - Additional Information (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2019 USD ($) customer	Jun. 30, 2018 USD ($)	Jun. 30, 2019 USD ($) customer	Jun. 30, 2018 USD ($)	Dec. 31, 2018 USD ($)
Significant Accounting Policies [Line Items]
Trade and other receivables, net	$ 59,795,000		$ 59,795,000		$ 5,724,000
Inventory	17,644,000		17,644,000		8,370,000
Inventory finished goods	5,600,000		5,600,000
Manufacturing purchase commitments, amount	11,000,000		$ 11,000,000
Purchase commitments, period			12 months
Revenue related reserve	3,500,000		$ 3,500,000		2,500,000
Additional revenue related reserve	5,200,000	$ 0	12,900,000	$ 0
Additional revenue related reserve offset by credit or payment	5,100,000		11,900,000
Advertising expenses	26,700,000	$ 14,600,000	36,200,000	$ 21,500,000
Accrued Liabilities
Significant Accounting Policies [Line Items]
Revenue related reserve	2,300,000		2,300,000		1,800,000
Trade and Other Receivables
Significant Accounting Policies [Line Items]
Revenue related reserve	$ 1,200,000		$ 1,200,000		$ 700,000
Trade Receivable | Customer Concentration Risk
Significant Accounting Policies [Line Items]
Customer's accounted for more than 10% of trade receivables and product sales	99.10%		99.10%
Number of customers | customer	3		3
Product Sales | Customer Concentration Risk
Significant Accounting Policies [Line Items]
Customer's accounted for more than 10% of trade receivables and product sales	97.50%		96.70%
Number of customers | customer	3		3
Almirall, S.A. | Customer Concentration Risk
Significant Accounting Policies [Line Items]
Trade and other receivables, net	$ 50,000		$ 50,000

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Summary of Significant Accounting Policies - Schedule of Common Stock Equivalent Shares Not Included in Computations of Diluted Net Loss per Share (Details) - shares shares in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Anti dilutive securities not included in calculation of EPS
Shares not included in computations of diluted net loss per share	18,097	17,474
Employee stock options
Anti dilutive securities not included in calculation of EPS
Shares not included in computations of diluted net loss per share	7,424	7,374
Restricted stock units
Anti dilutive securities not included in calculation of EPS
Shares not included in computations of diluted net loss per share	1,953	1,544
Convertible Notes
Anti dilutive securities not included in calculation of EPS
Shares not included in computations of diluted net loss per share	8,110	8,110
Employee stock
Anti dilutive securities not included in calculation of EPS
Shares not included in computations of diluted net loss per share	610	446

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Summary of Significant Accounting Policies - Schedule of Impact on Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Cash Flows Related to Lease (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Leases [Line Items]
Prepaid expenses and other current assets	$ 25,862		$ 8,275
Deferred rent classified as accrued liabilities	20,029		22,608
Deferred rent classified as other long-term liabilities			$ 1,015
Operating lease right-of-use asset	13,144
Lease liability, current	4,220
Lease liability, non-current	$ 9,621
ASC 840
Leases [Line Items]
Deferred rent classified as accrued liabilities		$ (134)
Deferred rent classified as other long-term liabilities		(1,015)
ASU 2016-02
Leases [Line Items]
Operating lease right-of-use asset		14,788
Lease liability, current		(4,551)
Lease liability, non-current		(11,386)
ASU 2016-02 | Impact of Adoption
Leases [Line Items]
Deferred rent classified as accrued liabilities		134
Deferred rent classified as other long-term liabilities		1,015
Operating lease right-of-use asset		14,788
Lease liability, current		(4,551)
Lease liability, non-current		$ (11,386)

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Fair Value Measurements - Additional Information (Details) - USD ($)	Jun. 30, 2019	Dec. 31, 2018
Fair value transfers between level 1 and level 2
Transfer from level 1 to level 2	$ 0	$ 0
Transfer from level 2 to level 1	0	$ 0
Estimate of Fair Value Measurement | Term Loan
Fair value transfers between level 1 and level 2
Estimated fair value of our term loan	34,800,000
Estimate of Fair Value Measurement | Level 2
Fair value transfers between level 1 and level 2
Estimated fair value of our notes	$ 249,400,000

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Fair Value Measurements - Schedule of Fair Value of Financial Assets Measured on a Recurring Basis (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Financial assets:
Amortized Cost	$ 320,965	$ 308,431
Gross Unrealized Gains	120	7
Gross Unrealized Losses	(7)	(145)
Fair Value	321,078	308,293
Money market funds | Level 1
Financial assets:
Amortized Cost	23,200	21,201
Fair Value	23,200	21,201
U.S. Treasury securities | Level 1
Financial assets:
Amortized Cost	63,336	84,098
Gross Unrealized Gains	57	5
Gross Unrealized Losses		(56)
Fair Value	63,393	84,047
Corporate debt | Level 2
Financial assets:
Amortized Cost	71,701	98,367
Gross Unrealized Gains	56	2
Gross Unrealized Losses	(7)	(88)
Fair Value	71,750	98,281
U.S. Government agency securities | Level 2
Financial assets:
Amortized Cost	14,997	1,984
Gross Unrealized Gains	7
Gross Unrealized Losses		(1)
Fair Value	15,004	1,983
Commercial paper | Level 2
Financial assets:
Amortized Cost	147,731	102,781
Fair Value	$ 147,731	$ 102,781

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Balance Sheet Components - Schedule of Inventory (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Inventory Disclosure [Abstract]
Raw materials	$ 11,441	$ 4,140
Work-in process	602	1,019
Finished goods	5,601	3,211
Total inventory	$ 17,644	$ 8,370

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Balance Sheet Components - Schedule of Accrued Liabilities (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Payables And Accruals [Abstract]
Accrued compensation	$ 9,056	$ 12,510
Accrued outside research and development services	4,014	3,431
Accrued professional and consulting services	3,097	3,476
Accrued interest	1,123	1,102
Other	2,739	2,089
Total accrued liabilities	$ 20,029	$ 22,608

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Leases - Additional Information (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2019 USD ($)	Jun. 30, 2018 USD ($)	Jun. 30, 2019 USD ($)	Jun. 30, 2018 USD ($)	Jan. 01, 2019 USD ($)	Oct. 31, 2017 USD ($)	Sep. 30, 2017 ft²	Aug. 31, 2014 USD ($)	Jul. 31, 2014 ft²
Operating Leased Assets [Line Items]
Operating lease right-of-use asset	$ 13,144,000		$ 13,144,000
Aggregate lease liability	13,841,000		13,841,000
Rent expense for Lease and Sublease	1,600,000	$ 1,500,000	3,200,000	$ 3,000,000
Additional rent charges for common area maintenance and real estate taxes	$ 400,000	$ 400,000	$ 800,000	$ 600,000
Sublease Agreement
Operating Leased Assets [Line Items]
Area of office (in square feet) | ft²							23,798
Annual increase in base rent (as a percent)							3.00%
Lease expiration date, subject to renew of lease			Apr. 30, 2024
Operating lease right-of-use asset					$ 7,200,000
Aggregate lease liability					$ 7,700,000
Operating lease, remaining lease term					5 years 3 months 18 days
Operating lease, discount rate					9.00%
Lease commencement date			Dec. 20, 2017
Sublease Agreement | Irrevocable Commercial Letter of Credit
Operating Leased Assets [Line Items]
Irrevocable commercial letter of credit						$ 300,000
Menlo Park, California
Operating Leased Assets [Line Items]
Area of office (in square feet) | ft²									45,192
Annual increase in base rent (as a percent)	3.00%		3.00%
Lease expiration date, subject to renew of lease			Dec. 31, 2021
Renewal lease term (in years)	5 years		5 years
Operating lease right-of-use asset					$ 7,500,000
Aggregate lease liability					$ 8,200,000
Operating lease, remaining lease term					3 years
Operating lease, discount rate					9.00%
Menlo Park, California | Letter of Credit
Operating Leased Assets [Line Items]
Letter of credit								$ 500,000
Letter of credit, June 1, 2019, upon no event of default	$ 350,000		$ 350,000

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Leases - Schedule of Undiscounted Future Non-Cancellable Lease Payments under Lease and Sublease (Details) $ in Thousands	Jun. 30, 2019 USD ($)
Operating Lease Liabilities Payments Due [Abstract]
2019 (remainder)	$ 1,995
2020	4,918
2021	5,056
2022	1,879
2023	1,936
Thereafter	666
Total undiscounted lease payments	16,450
Less: Present value adjustment	(2,609)
Total	$ 13,841

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Debt - Additional Information (Details) - USD ($)		1 Months Ended	3 Months Ended	6 Months Ended
	Aug. 05, 2019	May 31, 2017	Jun. 30, 2019	Jun. 30, 2019
Debt Instrument [Line Items]
Costs and fees relating to issuance of term loan				$ 2,500,000
Interest Expense			$ 1,000,000	$ 2,100,000
Subsequent Event
Debt Instrument [Line Items]
Credit Agreement Amendment Fees	$ 350,000
3.00% Convertible Senior Notes due 2022
Debt Instrument [Line Items]
Debt instrument, interest rate			3.00%	3.00%
Unamortized issuance costs and debt discounts			$ 5,400,000	$ 5,400,000
Common stock, par value		$ 0.001
Initial conversion rate of notes		28.2079
Principal amount of notes		$ 1,000
Initial conversion price of stock		$ 35.45
Percentage of debt instrument redemption price fundamental change		100.00%
Debt instrument, description				Holders of the Notes may convert all or a portion of their Notes at their option at any time prior to the close of business on the business day immediately prior to May 15, 2022, in multiples of $1,000 principal amount.
3.00% Convertible Senior Notes due 2022 | Private placement
Debt Instrument [Line Items]
Aggregate principal amount of notes		$ 287,500,000
Net proceeds from issuance of convertible notes		278,300,000
Debt instrument, issuance costs		600,000
Debt instrument, initial purchaser's discounts		$ 8,600,000
Debt instrument, maturity date		May 15, 2022
3.00% Convertible Senior Notes due 2022 | Minimum
Debt Instrument [Line Items]
Aggregate outstanding principal threshold limit			60,000,000	$ 60,000,000
Term Loan
Debt Instrument [Line Items]
Unamortized issuance costs and debt discounts			2,300,000	2,300,000
Third Tranche | Subsequent Event
Debt Instrument [Line Items]
Description of Extended Maturity Date	March 2, 2020 to June 3, 2020
Senior Secured Term Loan Facility
Debt Instrument [Line Items]
Aggregate principal amount			125,000,000	$ 125,000,000
Credit facility interest rate				10.75%
Line of credit facility, frequency of payment and payment terms				Amounts outstanding under the Credit Agreement bear interest at a rate of 10.75% per year, payable in quarterly in arrears, and provide for interest-only payments followed by payment of principal at maturity in December 2023; provided, however, that if, as of February 13, 2022, the aggregate outstanding principal amount of our 3.00% Convertible Senior Notes due 2022 (“Notes”) is greater than $60.0 million, we must immediately repay all amounts outstanding under the Credit Agreement, together with all accrued and unpaid interest and the applicable prepayment premium, if any. After the occurrence and during the continuation of a default, amounts outstanding will bear interest at a rate of 13.75% per annum, payable in cash quarterly in arrears and on demand.
Line of credit facility, frequency of payments				quarterly
Credit facility maturity year				2023-12
Credit facility interest rate during default period				13.75%
Senior Secured Term Loan Facility | First Tranche
Debt Instrument [Line Items]
Aggregate principal amount			35,000,000	$ 35,000,000
Senior Secured Term Loan Facility | Second Tranche
Debt Instrument [Line Items]
Aggregate principal amount			40,000,000	40,000,000
Senior Secured Term Loan Facility | Third Tranche
Debt Instrument [Line Items]
Aggregate principal amount			$ 50,000,000	$ 50,000,000

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Debt - Summary of Minimum Aggregate Future Payment Term Loan (Details) $ in Thousands	Jun. 30, 2019 USD ($)
Debt Disclosure [Abstract]
2019 (remainder)	$ 1,891
2020	3,763
2021	3,763
2022	3,763
2023	38,521
Total minimum payments	51,701
Amount representing interest	(16,701)
Principal amount of term loan	$ 35,000

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Collaboration and License Agreements - Roche Agreement (Details) - USD ($) $ in Millions	1 Months Ended			6 Months Ended
	Feb. 28, 2019	Jul. 31, 2018	Oct. 31, 2017	Jun. 30, 2019	Nov. 30, 2018
Roche Agreement
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Collaborative arrangement and license agreement expiration term, description				Under the terms of the Roche Agreement, as amended, we will also make royalty payments to Roche representing percentages of net sales. Royalty payments will be made from the first commercial sale date in such country and end on the later of the date that is (i) ten years after the date of the first commercial sale of lebrikizumab in such country, (ii) the expiration of the last to expire valid claim of the applicable licensed compound patent rights, our patent rights or joint patent rights in such country covering the use, manufacturing, import, offering for sale, or sale of lebrikizumab in such country, (iii) the expiration of the last to expire valid claim of the applicable licensed non-compound patent rights in such country covering the use, import, offering for sale, or sale of the product in such country, or (iv) the expiration of the last to expire regulatory exclusivity conferred by the applicable regulatory authority in such country for lebrikizumab.
Amended Roche Agreement | Maximum
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Amount of drug substance to be received free of charge	$ 16.0
Amended Roche Agreement | Achievement of Certain Thresholds for Net Sales of Lebrikizumab | Maximum
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Payments to be made upon achievement of certain milestones	1,000.0
Development and Commercialization Agreement | Roche Agreement
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Initial payment made for licensing agreement			$ 80.0
Payment for execution of agreements		$ 25.0
Additional payments to be made in licensing agreement					$ 30.0
Initiation Of First Phase Three Clinical Study | Amended Roche Agreement
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Payments to be made upon achievement of certain milestones	20.0
Achievement of Certain Thresholds for Net Sales of Lebrikizumab | Roche Agreement
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Royalty payment period				10 years
Achievement of Certain Thresholds for Net Sales of Lebrikizumab | Amended Roche Agreement | Maximum
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Payments to be made upon achievement of certain milestones	$ 180.0

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Collaboration and License Agreements - Rose U Agreement (Details) - Exclusive License Agreement $ in Millions	6 Months Ended
	Jun. 30, 2019 USD ($)
Rose U and Stiefel
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Payment for execution of agreements	$ 4.3
Remaining creditable amount	2.2
Rose U
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Additional payment upon the achievement of specified regulatory, commercialization and other milestones	0.6
Payments made under collaborative arrangements	2.5
Accrual royalty payments due	$ 2.5

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Collaboration and License Agreements - Almirall Agreement (Details) - USD ($) $ in Thousands	3 Months Ended			6 Months Ended
	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Jul. 31, 2019
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Total revenue	$ 66,645		$ 39,080	$ 69,097	$ 39,379
Deferred revenue, current	15,075			15,075
Deferred revenue, non-current	6,340			6,340
Collaboration and License Revenue
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Total revenue	58,585		$ 39,080	58,585	$ 39,379
Option and License Agreement | Almirall, S.A.
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Non-refundable upfront option fee received		$ 30,000
Additional milestone payment to be received in connection of initiation of phase 3 clinical studies not constrained	30,000			30,000
Transaction price of option	110,000			110,000
Deferred revenue, current	15,100			15,100
Deferred revenue, non-current	6,300			6,300
Option and License Agreement | Almirall, S.A. | Collaboration and License Revenue
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Total revenue	$ 58,600			$ 58,600
Option and License Agreement | Almirall, S.A. | Subsequent Event
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Option exercise fee receivable						$ 50,000

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Collaboration and License Agreements - Maruho Agreement (Details) - Maruho G.T. Agreement - Maruho Co. Ltd. - USD ($)	1 Months Ended		6 Months Ended
	Oct. 31, 2016	Sep. 30, 2016	Jun. 30, 2019
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Upfront payment received	$ 25,000,000
Collaborative arrangement and license agreement expiration term, description			Unless earlier terminated, the Maruho Agreement will remain in effect until the later of: (i) expiration or abandonment of the last valid claim of the applicable patent rights in Japan; (ii) expiration of any market exclusivity in Japan granted by the applicable regulatory authority; and (iii) 15 years following the date of the first commercial sale of the drug product in Japan.
Collaborative arrangement and license agreement expiration term of first commercial sale		15 years
Maximum
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Addition payment to be received upon achievement of certain milestones			$ 70,000,000

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Collaboration and License Agreements - UCB Agreement (Details) - USD ($)		1 Months Ended	3 Months Ended		6 Months Ended		12 Months Ended
	Nov. 06, 2017	Mar. 31, 2014	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Total revenue			$ 66,645,000	$ 39,080,000	$ 69,097,000	$ 39,379,000
Collaboration and License Revenue
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Total revenue			$ 58,585,000	39,080,000	$ 58,585,000	39,379,000
Development and Commercialization Agreement | UCB
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Agreement date		Mar. 21, 2014
Agreement termination date	Feb. 15, 2018
Development and Commercialization Agreement and Transition Agreement | UCB
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Termination or penalty payments	$ 0
Payment to be received in consideration for repurchase of rights	11,000,000
Additional payment to be received in consideration for repurchase of rights				39,000,000		39,000,000
Reimbursement of development costs incurred	$ 10,000,000
Reimbursement of development costs description					We were obligated to reimburse UCB for up to $10.0 million of development costs incurred by UCB in connection with the development of Cimzia between January 1, 2018 and June 30, 2018.
Collaborative arrangement,fully reimbursement							$ 10,000,000
Development and Commercialization Agreement and Transition Agreement | UCB | Collaboration and License Revenue
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Total revenue				$ 39,100,000		$ 39,400,000

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Stock-Based Compensation - Summary of Stock Option Activity under our 2010 Equity Incentive Plan ("2010 Plan"), 2014 Equity Incentive Plan ("2014 EIP") and 2018 Equity Inducement Plan ("2018 Inducement Plan") and Related Information (Details) - Stock Options - 2010 Equity Incentive Plan ("2010 Plan"), 2014 Equity Incentive Plan ("2014 EIP") and 2018 Equity Inducement Plan ("2018 Inducement Plan") shares in Thousands	6 Months Ended
	Jun. 30, 2019 $ / shares shares
Shares Subject to Outstanding Stock Options
Stock options outstanding (in shares) | shares	6,950
Stock options granted (in shares) | shares	1,025
Stock options exercised (in shares) | shares	(109)
Stock options forfeited (in shares) | shares	(442)
Stock options outstanding (in shares) | shares	7,424
Weighted-Average Exercise Price Per Share
Stock options outstanding (in dollars per share) | $ / shares	$ 19.06
Stock options granted (in dollars per share) | $ / shares	7.61
Stock options exercised (in dollars per share) | $ / shares	3.70
Stock options forfeited (in dollars per share) | $ / shares	23.38
Stock options outstanding (in dollars per share | $ / shares	$ 17.45

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Stock-Based Compensation - Summary of Restricted Stock Unit ("RSU") Activity under our 2014 EIP and 2018 Inducement Plan and Related Information (Details) - Restricted stock units - 2014 EIP and 2018 Inducement Plan shares in Thousands	6 Months Ended
	Jun. 30, 2019 $ / shares shares
Shares Subject to Outstanding RSUs
RSUs outstanding at the beginning of the period (in shares) | shares	1,572
RSUs granted (in shares) | shares	1,181
RSUs vested and settled | shares	(557)
RSUs forfeited (in shares) | shares	(243)
RSUs outstanding at the end of the period (in shares) | shares	1,953
Weighted-Average Grant Date Fair Value
RSUs outstanding at the beginning of the period (in dollars per share) | $ / shares	$ 13.50
RSUs granted (in dollars per share) | $ / shares	7.17
RSUs vested and settled | $ / shares	9.51
RSUs forfeited (in dollars per share) | $ / shares	10.20
RSUs outstanding at the end of the period (in dollars per share) | $ / shares	$ 11.22

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Stock-Based Compensation - Schedule of Total Stock-Based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 7,510	$ 7,306	$ 15,491	$ 14,820
Cost of sales
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Total stock-based compensation expense	16		31
Research and development
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Total stock-based compensation expense	2,371	2,408	4,831	5,261
Selling, general and administrative
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 5,123	$ 4,898	$ 10,629	$ 9,559

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Stock-Based Compensation - Total Stock-Based Compensation - General Disclosures (Details) - USD ($) $ in Millions	3 Months Ended	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2019
Inventory
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Stock-based compensation capitalized	$ 0.1	$ 0.2