Commitments and Contingencies

12 Months Ended

Dec. 31, 2021

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

Leases

Headquarters Lease

In May 2017, we entered into a Lease Agreement (the Lease) for our corporate headquarters located in Alameda, California (the Initial Premises). The Lease was subsequently amended in October 2017, June 2018, April 2019, August 2019, January 2020 and December 2020, resulting in, among other things, an increase to the amount of space leased and changes to the lease term. Our right-of-use asset, lease liability and the related lease costs reflect the 254,690 square feet of space we have taken possession of as of December 31, 2021 (the Current Premises) under the amended Lease, including 25,749 square feet of space we took possession of in 2021.

The term of the Lease continues through October 31, 2031 (the Lease Term). We have two five-year options to extend the Lease; these optional periods have not been considered in the determination of the right-of-use asset or the lease liability for the Lease as we did not consider it reasonably certain that we would exercise any such options.

We have made certain tenant improvements on the Initial Premises, for which we received $8.2 million in reimbursements in January 2019. During 2020, we also made certain tenant improvements for which we have received $1.7 million in reimbursements in 2021 related to the additional space we obtained under the April 2019 amendment. We were also provided an allowance of up to $1.4 million in 2021 for certain planned tenant improvements to the additional space obtained under the December 2020 amendment.

The balance sheet classification of our operating lease assets and liabilities were as follows (in thousands):


	December 31,
	2021		2020
Assets:
Right-of-use assets included in other long-term assets	$	45,122	$	43,010
Liabilities:
Current portion included in other current liabilities	$	5,137	$	3,025
Long-term portion of operating lease liabilities	51,272		49,086
Total operating lease liabilities	$	56,409	$	52,111

The components of operating lease costs, which are included in selling, general and administrative expenses in our Consolidated Statements of Income, were as follows (in thousands):


	Year Ended December 31,
		2021		2020		2019
Operating lease cost		$	5,332	$	4,825	$	2,844
Variable lease cost		2,685		2,830		1,024

Total operating lease costs		$	8,017	$	7,655	$	3,868

Cash paid for amounts included in the measurement of lease liabilities for the years ended December 31, 2021, 2020 and 2019 was $5.0 million, $4.6 million and $2.9 million, respectively, and was included in net cash provided by operating activities in our Consolidated Statements of Cash Flows.

As of December 31, 2021, the maturities of our operating lease liabilities were as follows (in thousands):


Year Ended December 31,	Amount
2022	$	5,638
2023	5,995
2024	6,283
2025	6,478
2026	6,675
Thereafter	35,170
Total lease payments	66,239
Less:
Imputed interest	(9,404)
Future tenant improvement reimbursements	(426)
Operating lease liabilities	$	56,409

As of December 31, 2021, the weighted average discount rate used to determine the operating lease liability was 3.1% and the weighted average remaining lease term was 9.8 years.

Build-to-Suit Lease

In October 2019, we entered into a build-to-suit Lease Agreement (the Build-to-Suit Lease) for approximately 220,000 square feet of office space located in Alameda, California (the New Premises), adjacent to the Current Premises.

The term of the Build-to-Suit Lease is for a period of 242 months (the Term), which will begin upon the substantial completion of the building and tenant improvements by the lessor. We currently anticipate that the Term will begin in the first quarter of 2022 (which date will be the Lease Commencement Date). The monthly base rent under the Build-to-Suit Lease will equal a percentage of the total development costs incurred in connection with the development of the New Premises (excluding the cost of the tenant improvements in excess of the allowance provided by the lessor and any development costs we pay) and is currently estimated to be about $0.7 million, subject to an annual increase of 3% during the Term. We will also be responsible for paying operating expenses related to the New Premises. The rent payments will begin sixty days following commencement of the Term. We have been provided a tenant improvement allowance for the New Premises of approximately $16.5 million. To the extent that the total development costs of the New Premises exceeds $525 per square foot, we will also pay 50% of such excess costs prior to the commencement of the Term, and we are required to secure such amount by providing a letter of credit or depositing such amounts in an account with the lessor’s lender.

The Build-to-Suit Lease includes two five-year options to extend the term of the Build-to-Suit Lease, exercisable under certain conditions and at a market rate determined in accordance with the Build-to-Suit Lease. We have a one-time option to terminate the Build-to-Suit Lease without cause after the 180th month of the Term, exercisable under certain conditions as described in the Build-to-Suit Lease and subject to a termination payment calculated in accordance with the Build-to-Suit Lease. In addition, we have a right of first offer to purchase the New Premises, subject to certain procedures and exclusions set forth in the Build-to-Suit Lease.

We have determined that, under the guidance provided in Topic 842, we do not have control of the New Premises during the construction period. Therefore, we will not record a right-of-use asset or lease liability for the Build-to-Suit Lease until the Lease Commencement Date. We will evaluate the classification of the Build-to-Suit Lease as an operating lease or financing lease at the Lease Commencement Date. We determined the cost of tenant improvements during the construction period are lessor assets and considered a prepayment of lease under Topic 842. The costs incurred as of December 31, 2021 of $36.8 million are recorded as other long-term assets in the Consolidated Balance Sheets.

Letters of Credit

We have obtained standby letters of credit related to our lease obligations and certain other obligations with combined credit limits of $16.7 million and $1.6 million as of December 31, 2021 and 2020, respectively.

In January 2021, we entered into a standby letter of credit as guarantee of our obligation to fund our portion of the tenant improvements related to our build-to-suit lease at our corporate campus. The letter of credit is secured by our short-term investments, which are recorded as restricted cash equivalents and presented in Other long-term assets in our Consolidated Balance Sheets and is reduced as we fund our portion of the tenant improvements. As of December 31, 2021, restricted cash equivalents included $15.2 million of short-term investments as collateral under our standby letter of credit for our portion of the tenant improvements.

Legal Proceedings

In September 2019, we received a notice letter regarding an Abbreviated New Drug Application (ANDA) submitted to the FDA by MSN Pharmaceuticals, Inc. (MSN), requesting approval to market a generic version of CABOMETYX tablets. MSN’s initial notice letter included a Paragraph IV certification with respect to our U.S. Patent Nos. 8,877,776 (salt and polymorphic forms), 9,724,342 (formulations), 10,034,873 (methods of treatment) and 10,039,757 (methods of treatment), which are listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, also referred to as the Orange Book, for CABOMETYX. MSN’s initial notice letter did not provide a Paragraph IV certification against U.S. Patent No. 7,579,473 (composition of matter) or U.S. Patent No. 8,497,284 (methods of treatment), each of which is listed in the Orange Book. On October 29, 2019, we filed a complaint in the United States District Court for the District of Delaware (the Delaware District Court) for patent infringement against MSN asserting infringement of U.S. Patent No. 8,877,776 arising from MSN’s ANDA filing with the FDA. On November 20, 2019, MSN filed its response to the complaint, alleging that the asserted claims of U.S. Patent No. 8,877,776 are invalid and not infringed. On May 5, 2020, we received notice from MSN that it had amended its ANDA to include additional Paragraph IV certifications. In particular, the ANDA requested approval to market a generic version of CABOMETYX tablets prior to expiration of two previously unasserted CABOMETYX patents: U.S. Patent Nos. 7,579,473 and 8,497,284. On May 11, 2020, we filed a complaint in the Delaware District Court for patent infringement against MSN asserting infringement of U.S. Patent Nos. 7,579,473 and 8,497,284 arising from MSN’s amended ANDA filing with the FDA. Neither of our complaints have alleged infringement of U.S. Patent Nos. 9,724,342, 10,034,873 and 10,039,757. On May 22, 2020, MSN filed its response to the complaint, alleging that the asserted claims of U.S. Patent Nos. 7,579,473 and 8,497,284 are invalid and not infringed. On March 23, 2021, MSN filed its First Amended Answer and Counterclaims (amending its prior filing from May 22, 2020), seeking, among other things, a declaratory judgment that U.S. Patent No. 9,809,549 is invalid and would not be infringed by MSN if its generic version of CABOMETYX tablets were approved by the FDA. U.S. Patent No. 9,809,549 is not listed in the Orange Book. On April 7, 2021, we filed our response to MSN’s First Amended Answer and Counterclaims, denying, among other things, that U.S. Patent No. 9,809,549 is invalid or would not be infringed.

On October 1, 2021, pursuant to a stipulation between us and MSN, the Delaware District Court entered an order that (i) MSN’s submission of its ANDA constitutes infringement of certain claims relating to U.S. Patent Nos. 7,579,473 and 8,497,284, if those claims are not found to be invalid, and (ii) upon approval, MSN’s commercial manufacture, use, sale or offer for sale within the U.S., and importation into the U.S., of MSN’s ANDA product prior to the expiration of U.S. Patent Nos. 7,579,473 and 8,497,284 would also infringe certain claims of each patent, if those claims are not found to be invalid. Then, on October 12, 2021, pursuant to a separate stipulation between us and MSN, the Delaware District Court entered an order dismissing MSN’s counterclaims with respect to U.S. Patent No. 9,809,549. In our complaints, we are seeking, among other relief, an order that the effective date of any FDA approval of MSN’s ANDA be a date no earlier than the expiration of all of U.S. Patent Nos. 7,579,473, 8,497,284 and 8,877,776, the latest of which expires on October 8, 2030, and equitable relief enjoining MSN from infringing these patents. A bench trial has been scheduled for May 2022.

On January 11, 2022, we received notice from MSN that it had further amended its ANDA to assert additional Paragraph IV certifications. The ANDA now requests approval to market a generic version of CABOMETYX tablets prior to expiration of four previously-unasserted CABOMETYX patents that are now listed in the Orange Book: U.S. Patent Nos. 11,091,439 (salt and polymorphic forms) 11,091,440 (formulations) and 11,098,015 (methods of treatment). We have 45 days from receipt of the January 11, 2022 notice to file a patent infringement claim against MSN relating to the newly challenged patents.

In May 2021, we received notice letters from Teva Pharmaceuticals Development, Inc. and Teva Pharmaceuticals USA, Inc. (individually and collectively referred to as Teva) regarding an ANDA Teva submitted to the FDA, requesting

approval to market a generic version of CABOMETYX tablets. Teva’s notice letters included a Paragraph IV certification with respect to our U.S. Patent Nos. 9,724,342 (formulations), 10,034,873 (methods of treatment) and 10,039,757 (methods of treatment), which are listed in the Orange Book and expire in 2033, 2031 and 2031, respectively. Teva’s notice letters did not provide a Paragraph IV certification against any additional CABOMETYX patents. On June 17, 2021, we filed a complaint in the Delaware District Court for patent infringement against Teva, along with Teva Pharmaceutical Industries Limited (Teva Parent), asserting infringement of U.S. Patent Nos. 9,724,342, 10,034,873 and 10,039,757 arising from Teva’s ANDA filing with the FDA. On August 27, 2021, Teva filed its answer and counterclaims to the complaint, alleging that the asserted claims of U.S. Patent Nos. 9,724,342, 10,034,873 and 10,039,757 are invalid and not infringed, and on August 23, 2021, we and Teva entered into a stipulation wherein Teva Parent was dismissed without prejudice from this lawsuit and agreed to be bound by any stipulation, judgment, order or decision rendered as to Teva, including any appeals and any order granting preliminary or permanent injunctive relief against Teva. On September 17, 2021, we filed an answer to Teva’s counterclaims. We are seeking, among other relief, an order that the effective date of any FDA approval of Teva’s ANDA be a date no earlier than the expiration of all of U.S. Patent Nos. 9,724,342, 10,034,873 and 10,039,757, the latest of which expires on July 9, 2033, and equitable relief enjoining Teva from infringing these patents. On February 8, 2022, the parties filed a stipulation to stay all proceedings, which was granted by the Delaware District Court on February 9, 2022. The stipulation and order were filed under seal.

The sale of any generic version of CABOMETYX earlier than its patent expiration could significantly decrease our revenues derived from the U.S. sales of CABOMETYX and thereby materially harm our business, financial condition and results of operations. It is not possible at this time to determine the likelihood of an unfavorable outcome or estimate of the amount or range of any potential loss.

We may also from time to time become a party or subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Some of these proceedings have involved, and may involve in the future, claims that are subject to substantial uncertainties and unascertainable damages.