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Deferred Royalty Obligation
 6 Months Ended
Jun. 30, 2022
Debt Disclosure [Abstract]  
Deferred Royalty Obligation

7.  Deferred Royalty Obligation

In May 2018, the Company closed a $125.0 million royalty financing agreement (the “Royalty Agreement”) with HealthCare Royalty Partners (“HCR”). Under the terms of the Royalty Agreement, the Company received $125.0 million in exchange for tiered royalty payments on worldwide net sales of GIAPREZA. HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA beginning April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. Through December 31, 2021, the maximum royalty rate was 10%. Starting January 1, 2022, the maximum royalty rate increased by 4%, and starting January 1, 2024, the maximum royalty rate may increase by an additional 4%, if an agreed-upon, cumulative net product sales threshold has not been met. The Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $225.0 million. The Royalty Agreement expires upon the first to occur of January 1, 2031 or when the maximum aggregate royalty payments have been made. The Royalty Agreement was entered into by the Company’s wholly owned subsidiary, La Jolla Pharma, LLC, and HCR has no recourse under the Royalty Agreement against La Jolla Pharmaceutical Company or any assets other than GIAPREZA.

On receipt of the $125.0 million payment from HCR, the Company recorded a deferred royalty obligation of $125.0 million, net of issuance costs of $0.7 million. For the three and six months ended June 30, 2022, the Company recognized interest expense, including amortization of the obligation discount, of $2.4 million and $4.8 million, respectively. For the three and six months ended June 30, 2021, the Company recognized interest expense, including amortization of the obligation discount, of $2.7 million and $5.3 million, respectively. The carrying value of the deferred royalty obligation as of June 30, 2022 and December 31, 2021, was $124.5 million, net of unamortized obligation discount of $0.5 million and was classified as a noncurrent liability. The related accrued interest expense as of June 30, 2022 and December 31, 2021 was $32.5 million and $29.8 million, respectively, of which $26.8 million and $24.6 million was classified as noncurrent liabilities, respectively. During the three and six months ended June 30, 2022, the Company made royalty payments to HCR of $1.1 million and $2.0 million, respectively. During the three and six months ended June 30, 2021, the Company made royalty payments to HCR of $0.7 million and $1.6 million, respectively. As of June 30, 2022 and December 31, 2021, the Company recorded royalty obligations payable of $1.0 million and $0.9 million, respectively, in accrued expenses. The deferred royalty obligation is classified as Level 3 in the FASB ASC Topic 820-10, three-tier fair value hierarchy, and its carrying value approximates fair value.

Under the terms of the Royalty Agreement, La Jolla Pharma, LLC has certain obligations, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA. If La Jolla Pharma, LLC is held to not have met these obligations, HCR would have the right to terminate the Royalty Agreement and demand payment from La Jolla Pharma, LLC of either $125.0 million or $225.0 million (depending on which obligation La Jolla Pharma, LLC is held to not have met), minus aggregate royalties already paid to HCR. To date, the Company has paid $10.6 million of aggregate royalties to HCR under the Royalty Agreement. In the event that

La Jolla Pharma, LLC fails to timely pay such amount if and when due, HCR would have the right to foreclose on the GIAPREZA-related assets. The Company concluded that certain of these contract provisions that could result in an acceleration of amounts due under the Royalty Agreement are embedded derivatives that require bifurcation from the deferred royalty obligation and fair value recognition. The Company determined the fair value of each derivative by assessing the probability of each event occurring, as well as the potential repayment amounts and timing of such repayments that would result under various scenarios. As a result of this assessment, the Company determined that the fair value of the embedded derivatives is immaterial as of June 30, 2022 and December 31, 2021. Each reporting period, the Company estimates the fair value of the embedded derivatives until the features lapse and/or the termination of the Royalty Agreement. Any material change in the fair value of the embedded derivatives will be recorded as either a gain or loss on the condensed consolidated statements of operations.

On August 5, 2022, the Company received a notice letter from HCR in which HCR alleges the occurrence, or imminent occurrence, of La Jolla Pharma, LLC not meeting certain obligations under the Royalty Agreement and related agreements, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA and the obligation to not undertake a Change of Control, that would result in HCR’s right to terminate the Royalty Agreement. As defined in the Royalty Agreement, a Change of Control means any event or series of events that results in either: (i) the Company no longer directly or indirectly owning 100% of La Jolla Pharma, LLC; or (ii) La Jolla Pharma, LLC no longer directly owning 100% of worldwide net sales of GIAPREZA, except for the granting of ex-U.S. product licenses, neither of which are impacted by the transactions contemplated by the Merger Agreement with Innoviva. If La Jolla Pharma, LLC is ultimately determined to not have met these obligations, HCR would have the right to terminate the Royalty Agreement and demand payment from La Jolla Pharma, LLC of either $125.0 million or $225.0 million (depending on which obligation La Jolla Pharma, LLC is held to not have met), minus aggregate royalties already paid to HCR. The Company believes that each of the claims made in the notice letter are wholly without merit and frivolous, disputes them and would vigorously defend against such claims if they were asserted in a legal proceeding. Neither the notice letter nor the meritless and frivolous claims made therein are expected to impede the anticipated closing of the transactions contemplated by the Merger Agreement and the Company expects to complete the transactions as planned.