Note

Summary of Significant Accounting Policies

Business

Progenics Pharmaceuticals, Inc. (and its subsidiaries collectively the “Company,” “Progenics”, “we”, or “us”) is an oncology company focused on the development and commercialization of innovative targeted medicines and artificial intelligence to find, fight and follow cancer. Highlights of our recent progress include the

first

commercial revenue for AZEDRA

, completion of enrollment of the PyL

pivotal Phase

trial, and dosing of the

first

patient in the

1095

open label Phase

trial. Our pipeline includes therapeutic agents designed to precisely target cancer (AZEDRA,

1095

and PSMA TTC), as well as prostate-specific membrane antigen (“PSMA”) targeted imaging agents for prostate cancer (PyL and

1404

Recent

and Continued

Progress

	●	AZEDRA Launch – A team of Nuclear Medicine Technologists, Sales Representatives, Medical Science Liaisons and Access Specialists are in the field assisting centers of excellence and payers with utilizing and reimbursing AZEDRA. This quarter we completed the first administrations of commercial AZEDRA and recorded our first commercial sales.
	●	Centers for Medicare & Medicaid Services ("CMS") approved a new technology add-on payment ("NTAP") for AZEDRA when administered in the hospital inpatient setting for Medicare beneficiaries in FY 2020. The NTAP will cover the lesser of 65 percent of the average cost of AZEDRA, or 65 percent of the costs in excess of the Medicare Severity Diagnosis Related Groups ("MS–DRG") payment for the case. As a result, the maximum NTAP for a case involving a therapeutic dose of AZEDRA is $98,150.

●

Patient enrollment for the Phase

CONDOR trial evaluating the diagnostic performance and clinical impact of PyL (

F-DCFPyL) was completed

five

months ahead of schedule. The Phase

CONDOR trial is a multi-center, open label trial that dosed

208

patients with biochemical recurrence of prostate cancer at

sites in the U.S. and Canada. Top-line data is expected by year end.

●

The

first

patient was dosed in the ongoing Phase

trial of

1095

in combination with enzalutamide in chemotherapy-naïve patients with metastatic castration-resistant prostate cancer (mCRPC).

Progenics’1095

is a small molecule radiotherapeutic designed to selectively bind to the extracellular domain of prostate specific membrane antigen (“PSMA”), a protein that is highly expressed on prostate cancer cells.

●

We reached alignment with the U.S. Food and Drug Administration (“FDA”) on a clinical development plan to support an expanded label for AZEDRA for the treatment of patients with unresectable or metastatic neuroendocrine tumors (“NETs”) who are MIBG-avid. Progenics plans to conduct a basket study that will evaluate AZEDRA in patients with NETs that are MIBG-avid, including gastroenteropancreatic neuroendocrine tumors as well as other NETs and utilize a dosing regimen that enables outpatient administration. The basket study is expected to begin by the end of the year and enroll approximately

150

patients at sites in the U.S. and Canada.

●

The U.S. District Court of New Jersey upheld the validity and determined the infringement by Actavis Laboratories FL, Inc. (“Actavis”) of a patent protecting RELISTOR Tablets, which expires in

March 2031.

Defendant, Actavis, a subsidiary of Teva Pharmaceutical Industries Ltd., had challenged the validity of and had alleged non-infringement of Claims

and

of U.S. Patent

No.

8,524,276,

which protects the formulation of RELISTOR Tablets.

●

We entered into an exclusive license agreement with ROTOP Pharmaka GmbH (“ROTOP”), a Germany-based developer of radiopharmaceuticals for nuclear medicine diagnostics, to develop and commercialize

1404

in Europe.

1404

is a technetium-

99m

labeled small molecule which binds to PSMA and is used as an imaging agent to diagnose and detect localized prostate cancer as well as soft tissue and bone metastases. Under the terms of the collaboration, ROTOP will be responsible for the development, regulatory approvals and commercialization of

1404

in Europe while Progenics is entitled to double-digit, tiered royalties on net sales in the territory.

	●	The automated Bone Scan Index (“aBSI”) automatically segments the anatomical regions of the skeleton and detects and classifies lesions in the bone scans of prostate cancer patients. The aBSI has been shown to be an objective measure of the quantitative change in disease burden and is a prognostic biomarker in patients with metastatic prostate cancer. In August 2019, the Company received 510 (k) clearance from the FDA to market its cloud-based version of aBSI product in the U.S. This clearance of our cloud-based software as a medical device is an essential step towards the further development of PSMA AI.
	●	We entered into a transfer agreement with FUJIFILM Toyama Chemical Co, Ltd. (“FUJIFILM”) for the rights to the Company’s aBSI product in Japan for use under the name BONENAVI ® . Under the terms of the agreement, FUJIFILM acquired, by a combination of purchase and license, the Japanese software, source code, supporting data and all Japanese patents associated with the aBSI product from Progenics for use in Japan. In exchange, Progenics received $4.0 million in an upfront payment and will receive service fees for aBSI and other AI products over three years in Japan. BONENAVI has been licensed to FUJIFILM for use in Japan since 2011.

●

We initiated a collaboration that provides the VA Greater Los Angeles Healthcare System (“VAGLAHS”) with access to the Company’s AI platform for investigational use. In the project, the VAGLAHS network will gain access to Progenics’ machine learning platforms, which includes the aBSI and the PSMA AI platforms. The collaboration will explore novel predictive machine learning algorithms from the digital medical images and its associated clinical outcomes. These novel algorithms will be prospectively validated at VAGLAHS for effective healthcare management of veterans with prostate cancer. This project is the nation’s

first

collaborative effort to validate cutting-edge machine learning tools for improving treatment management of veterans with prostate cancer and provides additional validation to Progenics’ AI platform.

Corporate:

●

Progenics appointed Huw Jones to the newly created role of Vice President, Commercial. Mr. Jones joins Progenics following several years on the commercial strategy and operations team at Novartis Pharmaceuticals, as well as its subsidiaries, Advanced Accelerator Applications SA and Novartis Oncology. In his

two

decades at Novartis and its subsidiaries, Mr. Jones held various global leadership roles, including Executive Director and Global Brand Leader, Head of Global Commercial Excellence, as well as positions of increasing responsibility in general management, sales, marketing, training and commercial operations.

Strategic partnerships

●

RELISTOR

(methylnaltrexone bromide) is licensed to Salix Pharmaceuticals, Inc., a wholly-owned subsidiary of Bausch Health Companies Inc. (“Bausch”, which is the predecessor of Valeant Pharmaceuticals International, Inc.). RELISTOR subcutaneous injection and RELISTOR Tablets are approved by the FDA for the treatment of opioid-induced constipation in adults with chronic non-cancer pain.

●

Bayer AG (“Bayer”) has exclusive worldwide rights to develop and commercialize products using our PSMA antibody technology, in combination with Bayer’s alpha-emitting radionuclides. Bayer is developing PSMA TTC, a thorium-

227

labeled PSMA-targeted antibody therapeutic. Bayer initiated a Phase

trial of PSMA TTC in patients with metastatic castration-resistant prostate cancer. In

May 2019,

Bayer dosed the

first

patient in the Phase

trial which triggered a

$2.0

million milestone payment, recorded as part of the license and other revenue.

●

CytoDyn Inc. (“CytoDyn”) acquired leronlimab (PRO

140

), which acquisition included a milestone and royalty payment obligations to us. Leronlimab is a fully humanized monoclonal antibody which is a cellular targeting

CCR5

entry antagonist and is currently in development for the treatment of HIV. CytoDyn announced in

March 2019

that it filed its

first

three

sections of its Biologics License Application (“BLA”) to the FDA for leronlimab for the treatment of HIV under the Rolling Review process.

●

Curium has exclusive rights to develop, manufacture and commercialize PyL (

F-DCFPyL) in Europe. Under the terms of the collaboration, Curium is responsible for the development, regulatory approvals and commercialization of PyL in Europe, and Progenics is entitled to royalties on net sales of PyL.

●

ROTOP has exclusive rights to develop, manufacture and commercialize

1404

in Europe. Under the terms of the collaboration, ROTOP is responsible for the development, regulatory approvals and commercialization of

1404

in Europe. We understand from ROTOP that it plans to hold an expert panel meeting with Key Opinion Leaders (“KOLs”) in the PSMA imaging field, as well as regulatory experts, to review existing data on

1404

and obtain guidance on the clinical development. Upon agreement on a path forward, ROTOP will request a meeting with European regulators and start a clinical trial in early

2020.

Under this agreement, Progenics is entitled to double-digit, tiered royalties on future net sales of

1404

in Europe.

●

FUJIFILM has rights to the Company’s aBSI product in Japan for use under the name BONENAVI. Under the terms of the agreement, FUJIFILM acquired, by a combination of purchase and license, the Japanese software, source code, supporting data and all Japanese patents associated with the aBSI product from us for use in Japan. In exchange, Progenics received a

$4.0

million upfront payment and is entitled to service fees for the next

three

years.

Our current principal sources of revenue from operations are royalty and development and commercial milestones from Bausch and Bayer. Royalty and further milestone payments from Bausch or Bayer depend on success in development and commercialization of RELISTOR and our PSMA antibody technology, respectively, which is dependent on many factors, such as Bausch or Bayer’s respective efforts, decisions by the FDA and other regulatory bodies, competition from drugs for the same or similar indications, and the outcome of clinical and other testing of the licensed products.

We commenced principal operations in

1988,

became publicly traded in

1997,

and throughout have been engaged primarily in research and development efforts, establishing corporate collaborations, launching AZEDRA and other related business activities. Certain of our intellectual property rights are held by wholly-owned subsidiaries. Our U.S. operations are presently conducted at our headquarters in New York and our manufacturing facility in Somerset, New Jersey. The operations of our wholly-owned foreign subsidiary, EXINI Diagnostics A.B. (“EXINI”), are conducted at our facility in Lund, Sweden. We operate under a single operating segment, which includes development, manufacturing and commercialization of pharmaceutical products and other technologies to target, diagnose and treat cancer. Our operating segment is regularly evaluated for financial performance by our chief operating decision maker, who is our Chief Executive Officer.

Liquidity

June 30, 2019,

we had

$84.8

million of cash and cash equivalents, a decrease of

$52.9

million from

$137.7

million at

December 31, 2018.

We expect that this amount will be sufficient to fund operations as currently anticipated beyond

one

year from the filing date of this Quarterly Report on Form

-Q. We have historically funded our operations to a significant extent from capital-raising and we expect to require additional funding in the future, the availability of which is never guaranteed and

may

be uncertain. We expect that we

may

continue to incur operating losses.

Basis of Presentation

Our unaudited condensed consolidated financial statements have been prepared in accordance with applicable presentation requirements, and accordingly, do

not

include all information and disclosures necessary for a presentation of our financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the U.S. (“GAAP”). In the opinion of management, these financial statements reflect all adjustments, consisting primarily of normal recurring accruals necessary for a fair statement of results for the periods presented. The results of operations for interim periods are

not

necessarily indicative of the results for the full year.

Our unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in our Annual Report on Form

-K for the year ended

December 31, 2018.

The year-end consolidated balance sheet data in these financial statements were derived from audited financial statements but do

not

include all disclosures required by GAAP.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Progenics as well as its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results

may

differ from those estimates.

Revenue Recognition

We recognize revenue when our customers obtain control of the promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To account for our revenue arrangements, 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, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy our performance obligations.

For contracts determined to be within the scope of ASU

2014

09,

Revenue from Contracts with Customers (Topic

606

)

(“ASU

2014

09”

or the “Topic

606”

), we assess the goods or services promised within each contract for the purpose of identifying them as performance obligations. We must apply judgement in assessing whether each promised good or service is distinct. If a promised good or service is

not

distinct, we will combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct.

The transaction price is then determined and allocated to the identified performance obligations in proportion to their estimated fair value, which requires significant judgment. Variable consideration, which is estimated using the expected value method or the most likely amount method, is included in the transaction price only if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will

not

occur.

For arrangements that include development, regulatory or sales milestone payments, we evaluate whether the milestones are 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 control or the licensee’s control, such as regulatory approvals, are generally

not

considered probable of being achieved until those approvals are received.

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.

The following table summarizes our revenue streams from contracts with customers for the

three

and

six

months ended

June 30, 2019

and

2018

(in thousands):

	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Product sales	$	270	$	-	$	270	$	-
Royalty income		3,593		3,530		7,754		6,588
License and other revenue		6,103		348		6,223		479
Total revenue	$	9,966	$	3,878	$	14,247	$	7,067

Product sales

– represent revenue from sales of AZEDRA directly to hospitals. Our performance obligations are to provide AZEDRA based on sales orders from hospitals, which have been verified by our commercial team as properly credentialed to receive, handle, administer and dispose of radioactive materials. We recognize revenue after the customer takes title and has obtained control of the product. Our contracts with hospitals stipulate that product is shipped free on board destination. We invoice hospitals after the products have been delivered and invoice payments are generally due within

days of invoice date. We record sales to hospitals based on AZEDRA’s list price per mCi and the amount prescribed based upon a dosimetric assessment of each patient. We record product sales net of any variable consideration due to rebates and discounts provided under governmental and other programs, and other sales-related deductions, such as product returns and copay assistance programs. Shipping and handling costs associated with finished goods delivered to customers are recorded as a selling expense.

Royalty income

– represents revenue from the sales-based royalties under our intellectual property licensing arrangements and is recognized upon net sales of the licensed products.

License and o

ther revenue

– represents revenue from upfront payments (fixed consideration) and development and sales milestones, sublicense payments, support and service payments and sales-based bonus payments (variable consideration) under our licensing or software arrangements. The fixed consideration will be recognized as revenue at the time when the transfer of know-how is completed. The variable consideration will be estimated using the most likely amount method and recognized only when we have “a high degree of confidence” that revenue will

not

be reversed in a subsequent reporting period. The other revenue also includes revenue from product sales of research reagents, that is recognized upon shipment to the end customer (i.e. control of the product is deemed to be transferred).

We had receivable contract balances of

$10.6

million and

$3.8

million as of

June 30, 2019

and

December 31, 2018,

respectively, primarily related to the royalty revenue and upfront and milestone payments under our partnerships, which are included in license and other revenue (see

Note

Accounts Receivable

Restricted Cash

Restricted cash included in long-term assets of

$3.3

million and

$1.5

million at

June 30, 2019

and

December 31, 2018,

respectively, represents collateral for a letter of credit securing a lease obligation (for both periods), collateral for a letter of credit related to equipment purchases and a security deposit with the German District Court related to the PSMA-

617

litigation (for the

2019

period). We believe the carrying value of this asset approximates fair value.

Foreign Currency Translation

Our international subsidiaries generally consider their respective local currency to be their functional currency. Assets and liabilities of these international subsidiaries are translated into U.S. dollars at quarter-end exchange rates and revenues and expenses are translated at average exchange rates during the quarter and year-to-date period. Foreign currency translation adjustments for the reported periods are included in accumulated other comprehensive loss in our condensed consolidated statements of comprehensive loss, and the cumulative effect is included in the stockholders’ equity section of our condensed consolidated balance sheets. Realized gains and losses denominated in foreign currencies are recorded in operating expenses in our condensed consolidated statements of operations and were

not

material to our consolidated results of operations for the

three

and

six

months ended

June 30, 2019

2018.

Leases

We determine whether an arrangement is or contains a lease at its inception. We recognize lease liabilities based on the present value of the minimum lease payments

not

yet paid by using the lease term and discount rate determined at lease commencement. As most of our leases do

not

provide an implicit rate, we use our incremental borrowing rate to determine the present value of our lease payments. Our leases

may

include options to extend or terminate a lease when it is reasonably certain that we will exercise that option. We recognize the operating right-of-use (“ROU”) lease assets at amounts equal to the lease liability adjusted for prepaid or accrued rent, remaining balance of any lease incentives and unamortized initial direct costs.

The operating lease liabilities are reported in other current liabilities and other noncurrent liabilities and the related ROU lease assets are reported in other noncurrent assets on our condensed consolidated balance sheets. Lease expense for our operating leases is calculated on a straight-line basis over the lease term and is reported in research and development and selling, general and administrative expenses on our condensed consolidated statements of operations. We do

not

recognize a lease liability or ROU lease assets for leases whose lease terms, at commencement, are

twelve

months or less, or for leases which are below the established capitalization threshold.

Property and Equipment

Property and equipment is recorded at historical cost, net of accumulated depreciation and amortization of

$3.1

million and

$2.7

million as of

June 30, 2019

and

December 31, 2018,

respectively. The following table summarizes our property and equipment (in thousands):

	June 30,			December 31,
	2019			2018
Machinery and equipment	$	3,949		$	2,992
Leasehold improvements		3,052			1,734
Computer equipment		632			721
Furniture and fixtures		909			878
Construction in progress		1,612			317
Property and equipment, gross		10,154			6,642
Less - accumulated depreciation		(3,146	)		(2,698	)
Property and equipment, net	$	7,008		$	3,944