2.	Accounting Policies

Basis of Presentation

In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of June 30, 2014, the results of operations and comprehensive loss for the three-month and six-month periods ended June 30, 2014 and 2013 and the cash flows for the six-month periods ended June 30, 2014 and 2013, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”). The Company’s accounting policies are described in the “Notes to Consolidated Financial Statements” in the 2013 Form 10-K and updated, as necessary, in this Form 10-Q. The year-end consolidated balance sheet data presented for comparative purposes were derived from the audited financial statements included in the 2013 Form 10-K. The results of operations for the three-month and six-month periods ended June 30, 2014 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Accounting Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosure of assets and liabilities at the date of the consolidated financial statements and the reported amounts and disclosure of revenue and expenses during the reporting period. Significant estimates included in the Company’s financial statements include estimates associated with potential revenue adjustments, the allocation of proceeds from the recent convertible note issuance, research and development accruals, inventory, leased buildings under construction and stock-based compensation expense. Actual results could differ from those estimates.

Reclassification

In the condensed consolidated statement of cash flows for the six months ended June 30, 2014, vendor advances have been aggregated with other current assets. This reclassification was not material.

Restricted Cash

Restricted cash consists of cash balances held as collateral for outstanding letters of credit related to the lease of the Company’s laboratory and office facilities and other purposes. At June 30, 2014, the Company’s restricted cash balance was $11.4 million, which includes $9.2 million established as security for a letter of credit related to a lease agreement entered into in January 2013, and amended in September 2013, for lab and office space in a new facility under construction in Cambridge, Massachusetts.

Accounts Receivable

The Company extends credit to customers based on its evaluation of the customer’s financial condition. The Company records receivables for all billings when amounts are due under standard terms. Accounts receivable are stated at amounts due net of applicable prompt pay discounts and other contractual adjustments as well as an allowance for doubtful accounts. The Company assesses the need for an allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the customer’s ability to pay its obligation and the condition of the general economy and the industry as a whole. The Company will write off accounts receivable when the Company determines that they are uncollectible.

Inventory

The Company outsources the manufacturing of Iclusig and uses contract manufacturers that produce the raw and intermediate materials used in the production of Iclusig as well as the finished product. The Company currently has one supplier qualified for each step in the manufacturing process and is in the process of qualifying additional suppliers for certain steps of the production process of Iclusig. Accordingly, the Company has concentration risk associated with its manufacturing process and relies on its currently approved contract manufacturers for supply of its product.

Inventory is composed of raw materials, intermediate materials which are classified as work-in-process, and finished goods which are goods that are available for sale. The Company records inventory at the lower of cost or market. The Company determines the cost of its inventory on a specific identification basis. If the Company identifies excess, obsolete or unsalable items, it writes down its inventory to its net realizable value in the period it is identified. These adjustments are recorded based upon various factors, including the level of product manufactured by the Company, the level of product in the distribution channel, current and projected demand for the foreseeable future and the expected shelf-life of the inventory components. Inventory that is not expected to be used within one year is included in other assets, net, on the accompanying condensed consolidated balance sheets.

Prior to receiving approval from the FDA on December 14, 2012 to sell Iclusig, the Company expensed all costs incurred related to the manufacture of Iclusig as research and development expense because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for the Company of regulatory approval of drug candidates.

Shipping and handling costs for product shipments are recorded as incurred in cost of product revenue along with costs associated with manufacturing the product sold and any inventory reserves or write-downs.

Revenue Recognition

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collection is reasonably assured. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price of each deliverable and the appropriate revenue recognition principles are applied to each unit.

Product Revenue, Net

From the launch of Iclusig in January 2013 until its temporary suspension in October 2013, the Company sold Iclusig in the United States to a limited number of specialty pharmacies, which dispensed the product directly to patients, and specialty distributors, which in turn sold the product to hospital pharmacies and community practice pharmacies (collectively, healthcare providers) for the treatment of patients. Commencing with the re-launch of Iclusig in January 2014, the Company now sells Iclusig in the United States through an exclusive relationship with Biologics, Inc. (“Biologics”), a specialty pharmacy. Biologics dispenses the product directly to patients. In Europe, the Company sells Iclusig to retail pharmacies and hospital pharmacies, which dispense product directly to patients. Biologics and these retail pharmacies and hospital pharmacies are referred to as the Company’s customers.

The Company provides the right of return to Biologics in the United States for unopened product for a limited time before and after its expiration date. European customers are provided the right to return product only in limited circumstances, such as instances of damaged product. Given the Company’s limited sales history for Iclusig and the inherent uncertainties in estimating product returns, the Company determined that the shipments of Iclusig to Biologics, thus far, do not meet the criteria for revenue recognition at the time of shipment. Accordingly, the Company recognizes revenue when the product is sold through by Biologics, provided all other revenue recognition criteria are met. The Company invoices Biologics upon shipment of Iclusig and records accounts receivable, with a corresponding liability for deferred revenue equal to the gross invoice price. The Company then recognizes revenue when Iclusig is sold through, which occurs when Biologics dispenses Iclusig directly to the patient. For European customers, who are provided with a limited right of return, the criteria for revenue recognition is met at the time of shipment and revenue is recognized at that time, provided all other revenue recognition criteria are met.

In connection with the temporary suspension of marketing and commercial distribution of Iclusig in October 2013, the Company terminated its then existing contracts with specialty pharmacies and specialty distributors in the United States. In addition, the Company accepted product returns for Iclusig in connection with the temporary suspension. These returns primarily related to Iclusig held by specialty pharmacies and specialty distributors for which revenue had not yet been recognized.

The Company has written contracts or standard terms of sale with each of its customers and delivery occurs when Iclusig is shipped to the customer in the United States and when the customer receives Iclusig in Europe. The Company evaluates the creditworthiness of its customers to determine whether collection is reasonably assured. In order to conclude that the price is fixed or determinable, the Company must be able to (i) calculate its gross product revenues from the sales to its customers and (ii) reasonably estimate its net product revenues. The Company calculates gross product revenues based on the wholesale acquisition cost that the Company charges its customers for Iclusig. The Company estimates its net product revenues by deducting from its gross product revenues (i) trade allowances, such as invoice discounts for prompt payment and customer fees, (ii) estimated government rebates, chargebacks and discounts, such as Medicare and Medicaid reimbursements in the United States, and (iii) estimated costs of incentives offered to certain indirect customers including patients. These deductions from gross revenue to determine net revenue are also referred to as gross to net deductions.

Trade Allowances: The Company provides invoice discounts on Iclusig sales to certain of its customers for prompt payment and pays fees for certain distribution services, such as fees for certain data that its customers provide to the Company. The Company deducts the full amount of these discounts and fees from its gross product revenues at the time such discounts and fees are earned by such customers.

Rebates, Chargebacks and Discounts: In the United States, the Company contracts with Medicare, Medicaid and other government agencies (collectively, payers) to make Iclusig eligible for purchase by, or for partial or full reimbursement from, such payers. The Company estimates the rebates, chargebacks and discounts it will provide to payers and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized. The Company’s estimates of rebates, chargebacks and discounts are based on (1) the contractual terms of agreements in place with payers (2) the government -mandated discounts applicable to government funded programs, and (3) the estimated payer mix. Government rebates that are invoiced directly to the Company are recorded in other accrued expenses on the condensed consolidated balance sheet. In Europe, the Company is subject to mandatory rebates and discounts in markets where government-sponsored healthcare systems are the primary payers for healthcare. These rebates and discounts are recorded in other accrued expenses on the condensed consolidated balance sheet.

Other Incentives: Other incentives that the Company offers to indirect customers include co-pay assistance rebates provided by the Company to commercially insured patients who have coverage for Iclusig and who reside in states that permit co-pay assistance programs. The Company’s co-pay assistance program is intended to reduce each participating patient’s portion of the financial responsibility for Iclusig’s purchase price to a specified dollar amount. In each period, the Company records the amount of co-pay assistance provided to eligible patients based on the terms of the program. Other incentives in the six-month period ended June 30, 2014 include product returns from customers related to the temporary suspension of marketing and distribution of Iclusig in the United States.

The following table summarizes activity in each of the above product revenue allowances and reserve categories for the six-month period ended June 30, 2014:


*In thousands*	Trade Allowances			Rebates, Chargebacks and Discounts			Other Incentives			Total

Balance, January 1, 2014	$	18		$	515		$	77		$	610
Provision		126			685			389			1,200
Payments or credits		(101	)		(539	)		(188	)		(828	)

Balance, March 31, 2014		43			661			278			982
Provision		176			628			134			938
Payments or credits		(167	)		(476	)		(377	)		(1,020	)

Balance, June 30, 2014	$	52		$	813		$	35		$	900

The reserves above, included in the Company’s condensed consolidated balance sheets are summarized as follows:


*In thousands*	June 30, 2014		December 31, 2013
Reductions of accounts receivable	$	—	$	64
Component of other accrued expenses		900		546

Total	$	900	$	610

In 2012, prior to the Company obtaining marketing authorization for Iclusig in Europe, the French regulatory authority granted an Autorisation Temporaire d’Utilisation (ATU), or Temporary Authorization for Use, for Iclusig for the treatment of patients with CML and Ph+ ALL under a nominative program on a patient-by-patient basis. The Company began shipping Iclusig under this program during the year ended December 31, 2012. This program concluded on September 30, 2013. Upon completion of the ATU program, the Company became eligible to ship Iclusig directly to customers in France as of October 1, 2013. Shipments under these programs have not met the criteria for revenue recognition as the price for these shipments is not yet fixed or determinable. The aggregate gross selling price of the shipments under these programs amounted to $16.8 million through June 30, 2014, including, $1.8 million for the period from January 1, 2014 to March 31, 2014, and $2.3 million for the period from April 1, 2014 to June 30, 2014, of which $15.2 million was received as of June 30, 2014. The price of Iclusig in France will become fixed or determinable upon completion of pricing and reimbursement negotiations, which is expected in the first half of 2015. At that time, the Company will record revenue related to cumulative shipments as of that date in France, net of any amounts that will be refunded to the health authority based on the results of the pricing and reimbursement negotiations.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable from customers and cash held at financial institutions. The Company believes that such customers and financial institutions are of high credit quality. As of June 30, 2014, a portion of the Company’s cash and cash equivalent accounts were concentrated at a single financial institution, which potentially exposes the Company to credit risks. The Company does not believe that there is significant risk of non-performance by the financial institution and the Company’s cash on deposit at this financial institution is fully liquid.

For the three-month and six-month periods ended June 30, 2014, Biologics accounted for 67 percent and 63 percent of net product revenue, respectively. As of June 30, 2014, Biologics accounted for 66 percent of accounts receivable. No other customer accounted for more than 10 percent of net product revenue or accounts receivable.

For the three-month period ended June 30, 2013, three individual customers accounted for 26 percent, 15 percent and 15 percent of net product revenue, respectively. For the six-month period ended June 30, 2013, four individual customers accounted for 24 percent, 17 percent, 14 percent and 10 percent of net product revenue, respectively. As of June 30, 2013, five individual customers accounted for 29 percent, 17 percent, 14 percent, 14 percent and 12 percent of accounts receivable, respectively. No other customer accounted for more than 10 percent of net product revenue or accounts receivable.

Geographic Information

For the three-month period ended June 30, 2014, product revenue from customers outside the United States totaled 33%, with 22% of product revenue representing product revenue from customers in Germany. All other product, license and service revenues for the three-month and six-month periods ended June 30, 2014 were generated within the United States. For the six-month period ended June 30, 2014, product revenue from customers outside the United States totaled 37%, with 26% of product revenue representing product revenue from customers in Germany. All revenue for the three-month and six-month periods ended June 30, 2013 was generated within the United States.

Long lived assets outside the United States as of June 30, 2014 were $1.3 million and were not material as of December 31, 2013.

License and Service Revenue

The Company generates revenue from license agreements with third parties related to use of the Company’s technology and/or development and commercialization of product candidates. Such agreements may provide for payment to the Company of up-front payments, periodic license payments, milestone payments and royalties. The Company also generates service revenue from license agreements with third parties related to internal services provided under such agreements. Service revenue is recognized as the services are delivered.

In January 2005, the Company entered into a non-exclusive license agreement with Medinol Ltd. (“Medinol”), a leading innovator in stent technology, pursuant to which Medinol agreed to develop and commercialize stents and other medical devices to deliver ridaforolimus to prevent restenosis, or reblockage, of injured vessels following interventions in which stents are used in conjunction with balloon angioplasty. During the three-month period ended March 31, 2014, the commencement of patient enrollment in Medinol’s clinical trials, along with the submission of an investigational device exemption, or IDE, to the FDA, triggered milestone payments to the Company of $3.8 million. These milestones were recorded as license revenue upon achievement.

On February 20, 2014, the Company received notice from Merck & Co., Inc. (“Merck”) that it is terminating the license agreement between the two parties to develop, manufacture and commercialize ridaforolimus for oncology indications. Per the terms of the license agreement, this termination will become effective nine months from the date of the notice (November 20, 2014), at which time all rights to ridaforolimus in oncology licensed to Merck will be returned to the Company.