Basis of Presentation and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2015

Basis of Presentation and Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. Our results of operations for the nine months ended September 30, 2015, include the results of Lumara Health, which we acquired on November 12, 2014 (the “Lumara Acquisition Date”) and CBR Holdings, since August 17, 2015 (the “CBR Acquisition Date”).

Use of Estimates and Assumptions

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates and assumptions are used to determine amounts and values of, but are not limited to: revenue recognition related to product and services sales and collaboration agreements; product sales allowances and accruals; potential other‑than‑temporary impairment of investments; acquisition date fair value and subsequent fair value estimates used to assess impairment of long‑lived assets, including goodwill, in‑process research and development (“IPR&D”) and other intangible assets; contingent consideration; debt obligations; accrued expenses; income taxes and equity‑based compensation expense. Actual results could differ materially from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist principally of cash held in commercial bank accounts, money market funds and U.S. Treasury securities having an original maturity of less than three months. We consider all highly liquid investments with a maturity of three months or less as of the acquisition date to be cash equivalents. At September 30, 2015 and December 31, 2014, substantially all of our cash and cash equivalents were held in either commercial bank accounts or money market funds.

Restricted Cash

As of September 30, 2015, we classified $30.8 million as short-term restricted cash for certain payments owed to former CBR shareholders in connection with a sale transaction involving CBR, which was completed in September 2012 and which payment obligations were assumed by us in our August 2015 acquisition of CBR. The related liability was recorded in “Payable to former CBR shareholders” on our condensed consolidated balance sheet at September 30, 2015 and was paid in full in October 2015. As of September 30, 2015 and December 31, 2014, we classified $2.4 million as long-term restricted cash, which included $2.0 million held in a restricted fund previously established by Lumara Health in connection with its Chapter 11 plan of reorganization to pay potential claims against its former directors and officers and a $0.4 million security deposit delivered to the landlord of our Waltham, Massachusetts headquarters in the form of a revocable letter of credit.

Concentrations and Significant Customer Information

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, investments, and accounts receivable. As of September 30, 2015, our cash, cash equivalents and investments amounted to approximately $442.9 million. We currently invest our excess cash primarily in corporate debt securities, commercial paper, certificates of deposit and municipal securities. As of September 30, 2015, approximately $35.3 million of our total $167.5 million cash and cash equivalents balance was invested in institutional money market funds, of which $34.3 million was invested in a single fund.

Our operations are located primarily within the U.S. We focus on developing, manufacturing, and commercializing Makena and Feraheme and commercializing MuGard. In addition, we are focused on marketing and selling the CBR Services. We perform ongoing credit evaluations of our customers and generally do not require collateral. The following table sets forth customers or partners who represented 10% or more of our total revenues for the three and nine months ended September 30, 2015 and 2014:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
AmerisourceBergen Drug Corporation	28	%	40	%	25	%	39	%
McKesson Corporation	13	%	24	%	11	%	24	%
Cardinal Health, Inc.	7	%	18	%	5	%	18	%
Takeda Pharmaceuticals Company Limited	—	%	10	%	17	%	10	%

In addition, approximately 25% and 27% of our Feraheme end-user demand during the nine months ended September 30, 2015 and 2014, respectively, was generated by members of a single group purchasing organization with which we have contracted. Revenues from outside of the U.S. amounted to approximately 17% and 11% of our total revenues for the nine months ended September 30, 2015 and 2014, respectively, and were principally related to deferred Feraheme revenue recognized in connection with the termination of our license, development and commercialization agreement with Takeda Pharmaceutical Company Limited (“Takeda”), which is headquartered in Japan.

Our net accounts receivable primarily represented amounts due for products sold directly to wholesalers, distributors, and specialty pharmacies and amounts due for CBR Services sold directly to consumers. Accounts receivable for our products are recorded net of reserves for estimated chargeback obligations, prompt payment discounts and any allowance for doubtful accounts. Customers which represented greater than 10% of our accounts receivable balances as of September 30, 2015 and December 31, 2014 were as follows:

We are currently solely dependent on a single supplier for Feraheme drug substance (produced in two separate facilities) and finished drug product and a single supply chain for Makena finished drug product. In addition, we rely on single sources for certain materials required to provide the CBR Services. We would be exposed to a significant loss of revenue from the sale of our products and services if our suppliers and/or manufacturers cannot fulfill demand for any reason.

Revenue Recognition

We recognize revenue from the sale of our products and services as well as license fee, collaboration and other revenues, including milestone payments, other product revenues, and royalties we receive from our licensees. Revenue is recognized when the following criteria are met: persuasive evidence of an arrangement exists; delivery of product has occurred or services have been rendered; the sales price charged is fixed or determinable; and collection is reasonably assured.

Product Sales Revenue

Our U.S. product sales, which primarily represented revenues from both Makena and Feraheme in the first nine months of 2015 and Feraheme in the first nine months of 2014, were offset by provisions for allowances and accruals as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Gross U.S. product sales	$	145,131	$	41,396	$	407,238	$	113,550
Provision for U.S. product sales allowances and accruals:
Contractual adjustments		41,851		18,179		116,236		49,953
Governmental rebates		14,363		208		40,018		580
Total provision for U.S. product sales allowances and accruals		56,214		18,387		156,254		50,533
U.S. product sales, net	$	88,917	$	23,009	$	250,984	$	63,017

We recognize U.S. product sales net of certain allowances and accruals in our condensed consolidated statement of operations at the time of sale. Our contractual adjustments include provisions for returns, pricing and prompt payment discounts, as well as wholesaler distribution fees, and volume-based and other commercial rebates. Governmental rebates relate to our reimbursement arrangements with state Medicaid programs.

The increases in contractual adjustments and governmental rebates primarily reflect the addition of Makena to our product portfolio in connection with the November 2014 acquisition of Lumara Health. During the nine months ended September 30, 2015, we reduced our Makena related Medicaid and other reserves by $5.3 million and we reduced our chargeback reserves by $1.9 million, all of which were initially recorded at the time of the Lumara acquisition. These adjustments were recorded to goodwill during the nine months ended September 30, 2015, as they occurred within the acquisition measurement period. We did not materially adjust our product sales allowances and accruals during the three or nine months ended September 30, 2014. If we determine in future periods that our actual experience is not indicative of our expectations, if our actual experience changes, or if other factors affect our estimates, we may be required to adjust our allowances and accruals estimates, which would affect our net product sales in the period of the adjustment and could be significant.

Service Revenue

For multiple element arrangements, we allocate revenue to all deliverables based on their relative selling prices. We determine the selling price to be used for allocating revenue to deliverables as follows (i) vendor specific objective evidence; (ii) third-party evidence of selling price and (iii) the best estimate of the selling price. Vendor specific objective evidence generally exists only when we sell the deliverable separately and it is the price actually charged by us for that deliverable. Any discounts given to the customer are allocated by applying the relative selling price method.

We have identified two deliverables contained in the revenue arrangements for the CBR Services, which involve the storage of umbilical cord blood and/or cord tissue products, namely: (i) enrollment, including the provision of a collection kit and unit processing, with revenue for this deliverable recognized after the collection and successful processing of a cord blood/cord tissue unit; and (ii) the storage of a specimen for either an annual fee or a prepayment of 18 years or the lifetime of the newborn donor (“lifetime option”). For the lifetime option, storage fees are not charged during the lifetime of the newborn donor. However, if the newborn donor dies and his/her legal guardian chooses to continue to store the newborn stem cells and/or cord tissue, the number of remaining years of storage covered by the lifetime option without additional charge is calculated by taking the average of male and female life expectancies based on lifetime actuarial tables published by the Social Security Administration and in effect at the time of the newborn’s birth and subtracting the age at death. We have allocated revenue between these two deliverables using the relative selling price method. The selling price for the enrollment, collection kit and processing deliverable and the lifetime option are estimated based on the published selling prices because we do not have vendor specific objective evidence or third-party evidence of selling price for these elements. The selling price for the annual storage option is determined based on vendor specific objective evidence as we have standalone renewals to support the selling price.

Deferred revenue includes (i) amounts collected in advance of unit processing and (ii) amounts associated with unearned storage fees collected at the beginning of the storage contract term, net of allocated discounts. Amounts not expected to be recognized within the next year are classified as long-term deferred revenues.

IPR&D

IPR&D acquired in a business combination is capitalized on our condensed consolidated balance sheet at the acquisition‑date fair value, net of any accumulated impairment losses. IPR&D is tested for impairment on an annual basis or more frequently if indicators of impairment are present, until completion or abandonment of the projects. If we determine that IPR&D becomes impaired or is abandoned, the carrying value of the IPR&D is written down to its fair value with the related impairment charge recognized in our condensed consolidated statement of operations in the period in which the impairment occurs. Upon successful completion of each project and launch of the product, we will make a separate determination of the estimated useful life of the IPR&D intangible asset and the related amortization will be recorded as an expense prospectively over its estimated useful life.

- Definition

Disclosure of accounting policy for cash and cash equivalents, including the policy for determining which items are treated as cash equivalents. Other information that may be disclosed includes (1) the nature of any restrictions on the entity's use of its cash and cash equivalents, (2) whether the entity's cash and cash equivalents are insured or expose the entity to credit risk, (3) the classification of any negative balance accounts (overdrafts), and (4) the carrying basis of cash equivalents (for example, at cost) and whether the carrying amount of cash equivalents approximates fair value.

+ References + Details

September 30, 2015

December 31, 2014

AmerisourceBergen Drug Corporation

McKesson Corporation