Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Summary of Significant Accounting Policies

The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and U.S. Securities and Exchange Commission (“SEC”) regulations for quarterly reporting. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying consolidated financial information as of September 30, 2019 and for the three months and nine months ended September 30, 2018 and 2019 are unaudited. The December 31, 2018 balance sheet was derived from audited consolidated financial statements but does not include all disclosures required by US GAAP. The interim unaudited consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2019 and for the three and nine months ended September 30, 2018 and 2019. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2018 and 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, any other interim periods or any future year or period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2018 contained in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 12, 2019.

The Company’s significant accounting policies are described in Note 2 of the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Since the date of those financial statements, the Company has added the following significant accounting policy with respect to revenue recognition due to the commercial launch of XENLETA in September 2019.

Revenue Recognition

Revenue Recognition—The Company recognizes revenue from sales of its commercial products in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606").

Product Revenue

Beginning in September 2019, the Company began selling its XENLETA product principally to a limited number of specialty distributors in the United States. The distributors place orders with the Company for sufficient quantities of its products to maintain an appropriate level of inventory based on its customers’ anticipated purchase volumes and demand. The Company recognizes revenue once it has transferred physical possession of the goods and the distributor obtains legal title to the product. Payment terms between Nabriva and its customers are generally approximately 60 days from the invoice date. In addition to distribution agreements with customers, the Company enters into arrangements with health care providers and payers that provide for government mandated and/or privately negotiated rebates, chargebacks and discounts with respect to the purchase of its product.

The transaction price that the Company recognizes as revenue reflects the amount it expects to be entitled to in connection with the sale and transfer of control of product to its customers. At the time that the Company’s customers take control of the product, which is when the Company’s performance obligation under the sales contracts is complete, the Company records product revenues net of applicable reserves for various types of variable consideration. The types of variable consideration are as follows:

Fees-for-service

Product returns

Chargebacks and rebates

Government rebates

Commercial payer and other rebates

Group Purchasing Organizations ("GPO") administration fees

Voluntary patient assistance programs

In determining the amounts of certain allowances and accruals, the Company must make significant judgments and estimates. For example, in determining these amounts, the Company estimates prescription demand from the specialty pharmacies, hospital demand, buying patterns by hospitals, hospital systems and/or group purchasing organizations and the levels of inventory held by specialty distributors and customers. The Company also analyzes third party end usage product consumption patterns to gauge demand for its products. Making these determinations involves analyzing third party industry data to determine whether trends in historical channel distribution patterns will predict future product sales. The Company receives data periodically from its specialty distributors and customers on inventory levels and historical channel sales mix, and the Company considers this data when determining the amount of the allowances and accruals for variable consideration, however given the recent launch of its XENLETA product this data is limited.

In assessing the amount of net revenue to record, the Company considers both the likelihood and the magnitude of the revenue reversal. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known. The specific considerations the Company uses in estimating these amounts related to variable consideration associated with the Company’s products are as follows:

Fees-for-service – The Company offers discounts and pays certain distributor service fees for sales order management, data, and distribution services which are explicitly stated at contractually determined rates in the customer’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In assessing if the consideration paid to the customer should be recorded as a reduction of the transaction price, the Company determines whether the payment is for a distinct good or service or a combination of both. Since the Company’s distributor fees are not specifically identifiable, it does not consider the fees separate from the distributors’ purchase of the product. Additionally, distributor services generally cannot be provided by a third party. Because of these factors, the consideration paid is considered a reduction of revenue. The Company records its fee-for-service accruals based on distributors’ purchases and the applicable discount rate.

Product returns – Generally, the Company’s customers have the right to return product during the 18-month period beginning six months prior to the labeled expiration date and ending twelve months after the labeled expiration date. Since the Company currently does not have history of XENLETA returns, the Company estimated returns based on industry data for comparable products in the market. As the Company distributes its product and establishes historical sales over a longer period of time (i.e., two to three years), the Company will be able to place more reliance on historical purchasing, demand and return patterns of its customers when evaluating its reserves for product returns. The Company’s XENLETA product has a thirty-six-month shelf life.

At the end of each reporting period for any of our products, the Company may decide to constrain revenue for product returns based on information from various sources, including channel inventory levels and dating and sell-through data, the expiration dates of product currently being shipped, price changes of competitive products and introductions of generic products.

Chargebacks and rebates – Although the Company primarily sells products to specialty distributors in the United States, the Company also enters into agreements with hospitals and retail pharmacies, either directly or through group purchasing organizations acting on behalf of their members, in connection with the purchase of product. Based on these agreements, certain of the Company’s customers have the right to receive a discounted price on product purchases. The Company typically provides a credit to its specialty distributors customers (i.e., chargeback), representing the difference between the customer’s acquisition list price and the discounted price. The calculation of the accrual for chargebacks and rebates is based on estimates of claims and their associated cost that the Company expects to receive associated with product sales that have been recognized as revenue but remain in the distribution channel as inventory at the end of each reporting period.

Government rebates –The Company is subject to discount obligations primarily under state Medicaid and Medicare programs. The Company estimates its Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payer mix. These reserves are recorded in the same period the related product revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued expenses on the consolidated balance sheet. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The calculation of the accrual for government rebates is based on estimates of claims and their associated cost that the Company expects to receive associated with product sales that have been recognized as revenue but remain in the distribution channel as inventory at the end of each reporting period.

Commercial payer and other rebates – The Company contracts with certain private payer organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of XENLETA and contracted formulary status. The Company estimates these rebates and records reserves for such estimates in the same period the related revenue is recognized. Currently, the reserve for customer payer rebates considers future utilization based on third party studies of payer prescription data; the utilization is applied to product that remains in the distribution and retail pharmacy channel inventories at the end of each reporting period. As the Company distributes its product and establishes historical sales over a longer period of time (i.e., two years), the Company will be able to place more reliance on historical data related to commercial payer rebates (i.e., actual utilization units) while continuing to rely on third party data related to payer prescriptions and utilization. The calculation of the accrual for commercial payer and other rebates is based on estimates of claims and their associated cost that the Company expects to receive associated with product sales that have been recognized as revenue but remain in the distribution channel as inventory at the end of each reporting period.

GPO administration fees – The Company contracts with GPOs and pays administration fees related to contacting and membership management services provided. In assessing if the consideration paid to the GPO should be recorded as a reduction in the transaction price, the Company determines whether the payment is for a distinct good or service or a combination of both. Since GPO fees are not specifically identifiable, the Company does not consider the fees separate from the purchase of the product. Additionally, the GPO services generally cannot be provided by a third party. Because of these factors, the consideration paid is considered a reduction of revenue.

Patient assistance – The Company offers certain voluntary patient assistance programs for prescriptions, such as co-pay assistance programs, which are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payers. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product sales that have been recognized as revenue but remains in the distribution channel as inventory at the end of each reporting period.

At the end of each reporting period, the Company will adjust its variable consideration estimates for product returns, chargebacks, and rebates when the Company believes actual experience may differ from current estimates.

The following table summarizes balances and activity of product revenue allowances and reserves:


	Total
Balance at December 31, 2018	$	—
Provision related to current period sales		575
Adjustment related to prior period sales		—
Credit or payments made during the period		—
Balance at September 30, 2019	$	575

The variable consideration for fee for service and estimates for chargebacks are recorded as contra-assets in accounts receivable, net, and other receivables whereas the other variable consideration estimates are recorded in accrued expenses as these payments are not made directly to the Company’s customers.

Cost of product sales

Cost of product sales consists primarily of the direct and indirect manufacturing costs for XENLETA. All manufacturing costs incurred prior to XENLETA’s approval in the United States on August 19, 2019 were expensed in research and development expense. Costs incurred after the approval date were capitalized as inventory.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date.

Adopted as of the current period:

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. On January 1, 2019, the Company adopted the new lease standard using the optional transition method under which comparative financial information has not been restated and will continue to apply the provisions of the previous lease standard in its annual disclosures for the comparative periods. In addition, the new lease standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients. As such, the Company did not have to reassess whether expired or existing contracts are or contain a lease; and did not have to reassess the lease classifications or reassess the initial direct costs associated with expired or existing leases.

The new lease standard also provides practical expedients for an entity's ongoing accounting. The Company elected the short-term lease recognition exemption under which the Company will not recognize right of use (“ROU”) assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases. The Company elected the practical expedient to not separate lease and non-lease components for certain classes of assets (office buildings).

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, other current liabilities, and operating lease liabilities on the Company’s consolidated balance sheet as of September 30, 2019. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the remaining lease term as of January 1, 2019. Since none of the Company’s lease agreements provide an implicit rate, the Company estimated an incremental borrowing rate over the lease term based on the information available at January 1, 2019 in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. Variable lease costs such as operating costs and property taxes are expensed as incurred.

On January 1, 2019, the Company recognized ROU assets and lease liabilities of approximately $2.0 million on its consolidated balance sheet using an estimated incremental borrowing rate of 9.8%. This ROU asset is recorded in property, plant and equipment, net and the ROU liability is recorded in other non-current liabilities.