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Organization and Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2019
Organization and Significant Accounting Policies [Abstract] |
Organization and Significant Accounting Policies | 1. Organization and Significant Accounting Policies Basis of Presentation In our consolidated financial statements we included the accounts of Ionis Pharmaceuticals, Inc. (“we”, “us” or “our”) and the consolidated results of our majority-owned affiliate, Akcea Therapeutics, Inc., which we formed in December 2014. In July 2017, Akcea completed an initial public offering, or IPO. Since Akcea’s IPO, our ownership has ranged from 68 percent to 77 percent. At December 31, 2019, our ownership was approximately 76 percent. We reflect changes in our ownership of Akcea in our financial statements in the period the change occurs. For example, we reflected an increase in our ownership when we received 6.9 million shares of Akcea common stock as payment for the sublicense fee Akcea owed us for Pfizer’s license of AKCEA-ANGPTL3-LRx in the fourth quarter of 2019. Refer to the section titled “Noncontrolling Interest in Akcea” in Note 2, Significant Accounting Policies, for further information related to our accounting for our investment in Akcea. Organization and Business Activity We incorporated in California on January 10, 1989. In conjunction with our IPO, we reorganized as a Delaware corporation in April 1991. We were organized principally to develop human therapeutic medicines using antisense technology. In December 2015, we changed our name from Isis Pharmaceuticals, Inc. to Ionis Pharmaceuticals, Inc. Basic and Diluted Net Income per Share Basic net income per share We compute basic net income per share by dividing the total net income attributable to our common stockholders by our weighted-average number of common shares outstanding during the period. The calculation of total net income attributable to our common stockholders for each year considered our net income for Ionis on a stand-alone basis plus our share of Akcea’s net income (loss) for the period. To calculate the portion of Akcea’s net income (loss) attributable to our ownership for each year, we multiplied Akcea’s income (loss) per share by the weighted average shares we owned in Akcea during the period. As a result of this calculation, our total net income available to Ionis common stockholders for the calculation of net income per share is different than net income attributable to Ionis Pharmaceuticals, Inc. common stockholders in our consolidated statements of operations for each year. Our basic net income per share, was calculated as follows (in thousands, except per share amounts):
Year Ended December 31, 2019 |  | Weighted Average Shares Owned in Akcea |  |  | Akcea’s Net Income Per Share |  |  | Ionis’ Portion of Akcea’s Net Income |
Common shares |  |  | 70,100 |  |  | $ | 0.49 |  |  | $ | 34,073 |
Akcea’s net income attributable to our ownership |  |  |  |  |  |  |  |  |  | $ | 34,073 |
Ionis’ stand-alone net income |  |  |  |  |  |  |  |  |  |  | 262,490 |
Net income available to Ionis common stockholders |  |  |  |  |  |  |  |  |  | $ | 296,563 |
Weighted average shares outstanding |  |  |  |  |  |  |  |  |  |  | 139,998 |
Basic net income per share |  |  |  |  |  |  |  |  |  | $ | 2.12 |
Year Ended December 31, 2018 |  | Weighted Average Shares Owned in Akcea |  |  | Akcea’s Net Loss Per Share |  |  | Ionis’ Portion of Akcea’s Net Loss |
Common shares |  |  | 59,812 |  |  | $ | (2.74 | ) |  | $ | (163,938 | )
Akcea’s net loss attributable to our ownership |  |  |  |  |  |  |  |  |  | $ | (163,938 | )
Ionis’ stand-alone net income |  |  |  |  |  |  |  |  |  |  | 440,806 |
Net income available to Ionis common stockholders |  |  |  |  |  |  |  |  |  | $ | 276,868 |
Weighted average shares outstanding |  |  |  |  |  |  |  |  |  |  | 132,320 |
Basic net income per share |  |  |  |  |  |  |  |  |  | $ | 2.09 |
We calculated our basic net income per share for 2017 as follows (in thousands, except per share amounts):
Year Ended December 31, 2017 |  | Weighted Average Shares Owned in Akcea |  |  | Akcea’s Net Loss Per Share |  |  | Ionis’ Portion of Akcea’s Net Loss |
Common shares |  |  | 20,669 |  |  | $ | (3.08 | ) |  | $ | (63,638 | )
Preferred shares |  |  | 15,748 |  |  |  | (1.80 | ) |  |  | (28,346 | )
Akcea’s net loss attributable to our ownership |  |  |  |  |  |  |  |  |  | $ | (91,984 | )
Ionis’ stand-alone net income |  |  |  |  |  |  |  |  |  |  | 110,776 |
Net income available to Ionis common stockholders |  |  |  |  |  |  |  |  |  | $ | 18,792 |
Weighted average shares outstanding |  |  |  |  |  |  |  |  |  |  | 124,016 |
Basic net income per share |  |  |  |  |  |  |  |  |  | $ | 0.15 |
Prior to Akcea’s IPO in July 2017, we owned Akcea series A convertible preferred stock, which included a six percent cumulative dividend. Upon completion of Akcea’s IPO in July 2017, our preferred stock was converted into common stock on a 1:1 basis. The preferred stock dividend was not paid at the IPO because the IPO was not a liquidation event or a change in control. During 2017, Akcea used a two-class method to compute its net loss per share because it had both common and preferred shares outstanding during the periods. The two-class method required Akcea to calculate its net loss per share for each class of stock by dividing total distributable losses applicable to preferred and common stock, including the six percent cumulative dividend contractually due to series A convertible preferred shareholders, by the weighted-average of preferred and common shares outstanding during the requisite period. Since Akcea used the two-class method, accounting rules required us to include our portion of Akcea’s net loss per share for both Akcea’s common and preferred shares that we owned in our calculation of basic and diluted net income per share for the year ended December 31, 2017. Diluted net income per share We calculated our diluted net income per share as follows (in thousands except per share amounts):
Year Ended December 31, 2019 |  | Income (Numerator) |  |  | Shares (Denominator) |  |  | Per-Share Amount |
Net income available to Ionis common stockholders |  | $ | 296,563 |  |  |  | 139,998 |  |  | $ | 2.12 |
Effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |
Shares issuable upon exercise of stock options |  |  | — |  |  |  | 2,090 |  |  |  |  |
Shares issuable upon restricted stock award issuance |  |  | — |  |  |  | 766 |  |  |  |  |
Shares issuable related to our Employee Stock Purchase Plan |  |  | — |  |  |  | 18 |  |  |  |  |
Income available to Ionis common stockholders, plus assumed conversions |  | $ | 296,563 |  |  |  | 142,872 |  |  | $ | 2.08 |
Year Ended December 31, 2018 |  | Income (Numerator) |  |  | Shares (Denominator) |  |  | Per-Share Amount |
Net income available to Ionis common stockholders |  | $ | 276,868 |  |  |  | 132,320 |  |  | $ | 2.09 |
Effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |
Shares issuable upon exercise of stock options |  |  | — |  |  |  | 1,216 |  |  |  |  |
Shares issuable upon restricted stock award issuance |  |  | — |  |  |  | 514 |  |  |  |  |
Shares issuable related to our Employee Stock Purchase Plan |  |  | — |  |  |  | 6 |  |  |  |  |
Income available to Ionis common stockholders, plus assumed conversions |  | $ | 276,868 |  |  |  | 134,056 |  |  | $ | 2.07 |
Year Ended December 31, 2017 |  | Income (Numerator) |  |  | Shares (Denominator) |  |  | Per-Share Amount |
Net income available to Ionis common stockholders |  | $ | 18,792 |  |  |  | 124,016 |  |  | $ | 0.15 |
Effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |
Shares issuable upon exercise of stock options |  |  | — |  |  |  | 1,619 |  |  |  |  |
Shares issuable upon restricted stock award issuance |  |  | — |  |  |  | 459 |  |  |  |  |
Shares issuable related to our Employee Stock Purchase Plan |  |  | — |  |  |  | 4 |  |  |  |  |
Income available to Ionis common stockholders, plus assumed conversions |  | $ | 18,792 |  |  |  | 126,098 |  |  | $ | 0.15 |
For each year presented, the calculation excluded our convertible senior notes because the effect on diluted earnings per share was anti-dilutive. Revenue Recognition Our Revenue Sources We generally recognize revenue when we have satisfied all contractual obligations and are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue. In the instances in which we have received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on our consolidated balance sheet. Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue We earn commercial revenue primarily in the form of royalty payments on net sales of SPINRAZA. We will also recognize as commercial revenue future sales milestone payments and royalties we earn under our partnerships. Commercial Revenue: Product sales, net We added product sales from TEGSEDI to our commercial revenue in the fourth quarter of 2018 and we added product sales from WAYLIVRA to our commercial revenue in the third quarter of 2019. In the U.S., we distribute TEGSEDI through an exclusive distribution agreement with a third-party logistics company, or 3PL, that takes title to TEGSEDI. The 3PL is our sole customer in the U.S. The 3PL then distributes TEGSEDI to a specialty pharmacy and a specialty distributor, which we collectively refer to as wholesalers, who then distribute TEGSEDI to health care providers and patients. In Europe, prior to the third quarter of 2019 we distributed TEGSEDI through a non-exclusive distribution model with a 3PL that took title to TEGSEDI. The 3PL was our sole customer in Europe. The 3PL in Europe then distributed TEGSEDI to hospitals and pharmacies. In the third quarter of 2019, we entered into a distribution arrangement with a 3PL and began to sell both TEGSEDI and WAYLIVRA directly to hospitals and pharmacies in Europe. Research and development revenue under collaborative agreements We often enter into collaboration agreements to license and sell our technology on an exclusive or non-exclusive basis. Our collaboration agreements typically contain multiple elements, or performance obligations, including technology licenses or options to obtain technology licenses, research and development, or R&D, services, and manufacturing services. Our collaboration agreements are detailed in Note 6, Collaborative Arrangements and Licensing Agreements. Under each collaboration note we discuss our specific revenue recognition conclusions, including our significant performance obligations under each collaboration. Steps to Recognize Revenue We use a five-step process to determine the amount of revenue we should recognize and when we should recognize it. The five step process is as follows:
| 1. | Identify the contract
Accounting rules require us to first determine if we have a contract with our partner, including confirming that we have met each of the following criteria:
| ● | We and our partner approved the contract and we are both committed to perform our obligations;
| ● | We have identified our rights, our partner’s rights and the payment terms;
| ● | We have concluded that the contract has commercial substance, meaning that the risk, timing, or amount of our future cash flows is expected to change as a result of the contract; and
| ● | We believe collectability is probable.
| 2. | Identify the performance obligations
We next identify the distinct goods and services we are required to provide under the contract. Accounting rules refer to these as our performance obligations. We typically have only one performance obligation at the inception of a contract, which is to perform R&D services. Often times we enter into a collaboration agreement in which we provide our partner with an option to license a medicine in the future. We may also provide our partner with an option to request that we provide additional goods or services in the future, such as active pharmaceutical ingredient, or API. We evaluate whether these options are material rights at the inception of the agreement. If we determine an option is a material right, we will consider the option a separate performance obligation. Historically, we have concluded that the options we grant to license a medicine in the future or to provide additional goods and services as requested by our partner are not material rights. These items are contingent upon future events that may not occur. When a partner exercises its option to license a medicine or requests additional goods or services, then we identify a new performance obligation for that item. In some cases, we deliver a license at the start of an agreement. If we determine that our partner has full use of the license and we do not have any additional material performance obligations related to the license after delivery, then we consider the license to be a separate performance obligation.
| 3. | Determine the transaction price
We then determine the transaction price by reviewing the amount of consideration we are eligible to earn under the collaboration agreement, including any variable consideration. Under our collaboration agreements, consideration typically includes fixed consideration in the form of an upfront payment and variable consideration in the form of potential milestone payments, license fees and royalties. At the start of an agreement, our transaction price usually consists of only the upfront payment. We do not typically include any payments we may receive in the future in our initial transaction price because the payments are not probable and are contingent on certain future events. We reassess the total transaction price at each reporting period to determine if we should include additional payments in the transaction price. Milestone payments are our most common type of variable consideration. We recognize milestone payments using the most likely amount method because we will either receive the milestone payment or we will not, which makes the potential milestone payment a binary event. The most likely amount method requires us to determine the likelihood of earning the milestone payment. We include a milestone payment in the transaction price once it is probable we will achieve the milestone event. Most often, we do not consider our milestone payments probable until we or our partner achieve the milestone event because the majority of our milestone payments are contingent upon events that are not within our control and are usually based on scientific progress. For example, in the fourth quarter of 2019, we earned a $10 million milestone payment from AstraZeneca when AstraZeneca initiated a Phase 1 trial for ION839. We did not consider the milestone payments probable until AstraZeneca achieved the milestone event because the initiation of the Phase 1 trial was a contingent event that was not within our control. We recognized the milestone payments in full in the period the milestone event was achieved because we did not have any remaining performance obligations related to the milestone payment.
| 4. | Allocate the transaction price
Next, we allocate the transaction price to each of our performance obligations. When we have to allocate the transaction price to more than one performance obligation, we make estimates of the relative stand-alone selling price of each performance obligation because we do not typically sell our goods or services on a stand-alone basis. We then allocate the transaction price to each performance obligation based on the relative stand-alone selling price. We may engage a third party, independent valuation specialist to assist us with determining a stand-alone selling price for collaborations in which we deliver a license at the start of an agreement. We estimate the stand-alone selling price of these licenses using valuation methodologies, such as the relief from royalty method. Under this method, we estimate the amount of income, net of taxes, for the license. We then discount the projected income to present value. The significant inputs we use to determine the projected income of a license could include:
| ● | Estimated future product sales;
| ● | Estimated royalties on future product sales;
| ● | Contractual milestone payments;
| ● | Expenses we expect to incur;
| ● | Income taxes; and
| ● | A discount rate.
We typically estimate the selling price of R&D services by using our internal estimates of the cost to perform the specific services. The significant inputs we use to determine the selling price of our R&D services include:
| ● | The number of internal hours we estimate we will spend performing these services;
| ● | The estimated cost of work we will perform;
| ● | The estimated cost of work that we will contract with third parties to perform; and
| ● | The estimated cost of API we will use.
For purposes of determining the stand-alone selling price of the R&D services we perform and the API we will deliver, accounting guidance requires us to include a markup for a reasonable profit margin. We do not reallocate the transaction price after the start of an agreement to reflect subsequent changes in stand-alone selling prices.
| 5. | Recognize revenue
We recognize revenue in one of two ways, over time or at a point in time. We recognize revenue over time when we are executing on our performance obligation over time and our partner receives benefit over time. For example, we recognize revenue over time when we provide R&D services. We recognize revenue at a point in time when our partner receives full use of an item at a specific point in time. For example, we recognize revenue at a point in time when we deliver a license or API to a partner. For R&D services that we recognize over time, we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods. For example, in the third quarter of 2019, we updated our estimate of the total effort we expected to expend to satisfy our performance obligation under our 2013 Strategic Neurology collaboration with Biogen. As of September 30, 2019, we had completed a significant portion of the research and development services. We expect to complete the remainder of our services in 2020. As a result of our change in estimate, in the third quarter of 2019, we recorded a cumulative catch up adjustment of $16.5 million to decrease revenue. Refer to Note 7, Collaborative Arrangements and Licensing Agreements, for further discussion of the cumulative catch up adjustment we made. The following are examples of when we typically recognize revenue based on the types of payments we receive. Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue We recognize royalty revenue, including royalties from SPINRAZA sales, in the period in which the counterparty sells the related product and recognizes the related revenue, which in certain cases may require us to estimate our royalty revenue. Commercial Revenue: Product sales, net We recognize product sales in the period when our customer obtains control of our products, which occurs at a point in time upon transfer of title to the customer. We classify payments to customers or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative expenses in our consolidated statements of operations. Otherwise, payments to customers or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below. We exclude from revenues taxes collected from customers relating to product sales and remitted to governmental authorities. Reserves for Product sales We record product sales at our net sales price, or transaction price. We include in our transaction price estimated reserves for discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that we offer within contracts between us and our customers, wholesalers, health care providers and other indirect customers. We estimate our reserves using the amounts we have earned or what we can claim on the associated sales. We classify our reserves as a reduction of accounts receivable when we are not required to make a payment or as a current liability when we are required to make a payment. In certain cases, our estimates include a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, our reserves reflect our best estimates under the terms of our respective contracts. When calculating our reserves and related product sales, we only recognize amounts to the extent that we consider it probable that we would not have to reverse in a future period a significant amount of the cumulative sales we previously recognized. The actual amounts we receive may ultimately differ from our reserve estimates. If actual amounts in the future vary from our estimates, we will adjust these estimates, which would affect our net product sales in the respective period. The following are the components of variable consideration related to product sales: Chargebacks: In the U.S., we estimate obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers at prices lower than the list prices charged to our U.S. customer. Our U.S. customer charges us for the difference between what it pays for the product and the selling price to the qualified healthcare providers. We also estimate the amount of chargebacks related to our estimated product remaining in the distribution channel at the end of the reporting period that we expect our customer to sell to healthcare providers in future periods. We record these reserves as an accrued liability on our consolidated balance sheet for the chargebacks related to product sales to our U.S. customer during the reporting period. Government rebates: We are subject to discount obligations under government programs, including Medicaid and Medicare programs in the U.S. and we record reserves for government rebates based on statutory discount rates and estimated utilization. We estimate Medicaid and Medicare rebates based on a range of possible outcomes that are probability-weighted for the estimated payer mix. We record these reserves as an accrued liability on our consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. On a quarterly basis, we update our estimates and record any adjustments in the period that we identify the adjustments. Managed care rebates: We are subject to rebates in connection with a value-based agreement with one of our commercial payer’s. We record these rebates as an accrual on our consolidated balance sheet in the same period we recognize the related revenue. We estimate our managed care rebates based on our estimated payer mix and the applicable contractual rebate rate. Trade discounts: We provide customary invoice discounts on product sales to our U.S. customer for prompt payment. We record this discount as a reduction of product sales in the period in which we recognize the related product revenue. Distribution services: We receive and pay for various distribution services from our U.S. and EU customers and wholesalers in the U.S.. We classify the costs for services we receive that are either not distinct from the sale of the product or for which we cannot reasonably estimate the fair value as a reduction of product sales. To the extent that the services we receive are distinct from the sale of the product, we classify the costs for such services as selling, general and administration, or SG&A, expenses. Product returns: Our U.S. customer has return rights and the wholesalers have limited return rights primarily related to the product’s expiration date. We estimate the amount of product sales that our customer may return. We record our return estimate as an accrued refund liability on our consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. Based on our distribution model for product sales, contractual inventory limits with our customer and wholesalers and the price of the product, we have had minimal returns to date and we believe we will continue to have minimal returns. Our EU customers only take title to the product after they receive an order from a hospital or pharmacy and therefore they do not maintain excess inventory levels of our products. Accordingly, we have limited return risk in the EU and we do not estimate returns in the EU. Other incentives: In the U.S., we estimate reserves for other incentives including co-payment assistance we provide to patients with commercial insurance who have coverage and reside in states that allow co-payment assistance. We record a reserve for the amount we estimate we will pay for co-payment assistance. We base our reserve on the number of estimated claims and our estimate of the cost per claim related to product sales that we have recognized as revenue. We record our other incentive reserve estimates as an accrued liability on our consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. Research and development revenue under collaboration agreements: Upfront payments When we enter into a collaboration agreement with an upfront payment, we typically record the entire upfront payment as deferred revenue if our only performance obligation is for R&D services we will provide in the future. We amortize the upfront payment into revenue as we perform the R&D services. For example, under our collaboration agreement with Roche to develop IONIS-FB-LRx for the treatment of complement-mediated diseases, we received a $75 million upfront payment in the fourth quarter of 2018. We allocated the upfront payment to our single performance obligation, R&D services. We are amortizing the $75 million upfront payment using an input method over the estimated period of time we are providing R&D services. Milestone payments We are required to include additional consideration in the transaction price when it is probable. We typically include milestone payments for R&D services in the transaction price when they are achieved. We include these milestone payments when they are achieved because there is considerable uncertainty in the research and development processes that trigger these payments. Similarly, we include approval milestone payments in the transaction price once the medicine is approved by the applicable regulatory agency. We will recognize sales-based milestone payments in the period in which we achieve the milestone under the sales-based royalty exception allowed under accounting rules. We recognize milestone payments that relate to an ongoing performance obligation over our period of performance. For example, in the fourth quarter of 2019, we achieved two $7.5 million milestone payments from Biogen when we advanced two new targets for undisclosed neurological diseases under our 2018 strategic neurology collaboration. We added these payments to the transaction price and allocated it to our R&D services performance obligation. We are recognizing revenue related to these milestone payments over our estimated period of performance. Conversely, we recognize in full those milestone payments that we earn based on our partners’ activities when our partner achieves the milestone event and we do not have a performance obligation. For example, in the fourth quarter of 2019, we recognized a $10 million milestone payment when Biogen advanced the development candidate for an undisclosed target under our 2012 neurology collaboration agreement. We concluded that the milestone payment was not related to our R&D services performance obligation. Therefore, we recognized the milestone payment in full in the fourth quarter of 2019. License fees We generally recognize as revenue the total amount we determine to be the relative stand-alone selling price of a license when we deliver the license to our partner. This is because our partner has full use of the license and we do not have any additional performance obligations related to the license after delivery. For example, in the fourth quarter of 2019, we earned a $45 million license fee when Biogen licensed IONIS-MAPTRx from us. We also recognized $246 million of license fee revenue related to Akcea’s license of AKCEA-ANGPTL3-LRx to Pfizer in the fourth quarter of 2019. Sublicense fees We recognize sublicense fee revenue in the period in which a party, who has already licensed our technology, further licenses the technology to another party because we do not have any performance obligations related to the sublicense. For example, in the second quarter of 2019, we earned a $20 million sublicense fee when Alnylam Pharmaceuticals sublicensed our technology to Regeneron Pharmaceuticals. Amendments to Agreements From time to time we amend our collaboration agreements. When this occurs, we are required to assess the following items to determine the accounting for the amendment:
| 1) | If the additional goods and/or services are distinct from the other performance obligations in the original agreement; and
| 2) | If the goods and/or services are at a stand-alone selling price.
If we conclude the goods and/or services in the amendment are distinct from the performance obligations in the original agreement and at a stand-alone selling price, we account for the amendment as a separate agreement. If we conclude the goods and/or services are not distinct and at their stand-alone selling price, we then assess whether the remaining goods or services are distinct from those already provided. If the goods and/or services are distinct from what we have already provided, then we allocate the remaining transaction price from the original agreement and the additional transaction price from the amendment to the remaining goods and/or services. If the goods and/or services are not distinct from what we have already provided, we update the transaction price for our single performance obligation and recognize any change in our estimated revenue as a cumulative adjustment. For example, in May 2015, we entered into an exclusive license agreement with Bayer to develop and commercialize IONIS-FXIRx for the prevention of thrombosis. As part of the agreement, Bayer paid us a $100 million upfront payment. At the onset of the agreement, we were responsible for completing a Phase 2 study of IONIS-FXIRx in people with end-stage renal disease on hemodialysis and for providing an initial supply of API. In February 2017, we amended our agreement with Bayer to advance IONIS-FXIRx and to initiate development of IONIS-FXI-LRx, which Bayer licensed. As part of the 2017 amendment, Bayer paid us $75 million. We are also eligible to receive milestone payments and tiered royalties on gross margins of IONIS-FXIRx and IONIS-FXI-LRx. Under the 2017 amendment, we concluded we had a new agreement with three performance obligations. These performance obligations were to deliver the license of IONIS-FXI-LRx, to provide R&D services and to deliver API. We allocated the $75 million transaction price to these performance obligations. Refer to Note 7, Collaborative Arrangements and Licensing Agreements, for further discussion of our accounting treatment for our Bayer collaboration. Multiple agreements From time to time, we may enter into separate agreements at or near the same time with the same partner. We evaluate such agreements to determine whether we should account for them individually as distinct arrangements or whether the separate agreements should be combined and accounted for together. We evaluate the following to determine the accounting for the agreements:
| ● | Whether the agreements were negotiated together with a single objective;
| ● | Whether the amount of consideration in one contract depends on the price or performance of the other agreement; or
| ● | Whether the goods and/or services promised under the agreements are a single performance obligation.
Our evaluation involves significant judgment to determine whether a group of agreements might be so closely related that accounting guidance requires us to account for them as a combined arrangement. For example, in the second quarter of 2018, we entered into two separate agreements with Biogen at the same time: a new strategic neurology collaboration agreement and a stock purchase agreement, or SPA. We evaluated the Biogen agreements to determine whether we should treat the agreements separately or combine them. We considered that the agreements were negotiated concurrently and in contemplation of one another. Based on these facts and circumstances, we concluded that we should evaluate the provisions of the agreements on a combined basis. Contracts Receivable Our contracts receivable balance represents the amounts we have billed our partners or customers and that are due to us unconditionally for goods we have delivered or services we have performed. When we bill our partners or customers with payment terms based on the passage of time, we consider the contract receivable to be unconditional. We typically receive payment within one quarter of billing our partner or customer. Unbilled SPINRAZA Royalties Our unbilled SPINRAZA royalties represent our right to receive consideration from Biogen in advance of when we are eligible to bill Biogen for SPINRAZA royalties. We include these unbilled amounts in other current assets on our consolidated balance sheet. Deferred Revenue We are often entitled to bill our customers and receive payment from our customers in advance of our obligation to provide services or transfer goods to our partners. In these instances, we include the amounts in deferred revenue on our consolidated balance sheet. During the years ended December 31, 2019 and 2018, we recognized $159.5 million and $105.3 million of revenue from amounts that were in our beginning deferred revenue balance for each respective period. For further discussion, refer to our revenue recognition policy above. Cost of Products Sold Our cost of products sold includes manufacturing costs, transportation and freight costs and indirect overhead costs associated with the manufacturing and distribution of our products. We also may include certain period costs related to manufacturing services and inventory adjustments in cost of products sold. Prior to obtaining regulatory approval of TEGSEDI in July 2018 and WAYLIVRA in May 2019, we expensed as research and development expenses a significant portion of the costs we incurred to produce the initial commercial launch supply for each medicine. We previously expensed $0.7 million and $0.1 million of costs to produce our products related to the product sales revenue we recognized in 2019 and 2018, respectively. Research, Development and Patent Expenses Our research and development expenses include wages, benefits, facilities, supplies, external services, clinical trial and manufacturing costs and other expenses that are directly related to our research and development operations. We expense research and development costs as we incur them. When we make payments for research and development services prior to the services being rendered, we record those amounts as prepaid assets on our consolidated balance sheet and we expense them as the services are provided. For the years ended December 31, 2019, 2018 and 2017, research and development expenses were $461.5 million, $411.9 million and $372.5 million, respectively. A portion of the costs included in research and development expenses are costs associated with our partner agreements. For the years ended December 31, 2019, 2018 and 2017, research and development costs of approximately $83.2 million, $58.7 million and $59.5 million, respectively, were related to our partner agreements. We capitalize costs consisting principally of outside legal costs and filing fees related to obtaining patents. We amortize patent costs over the useful life of the patent, beginning with the date the U.S. Patent and Trademark Office, or foreign equivalent, issues the patent. The weighted average remaining amortizable life of our issued patents was 10.3 years at December 31, 2019. The cost of our patents capitalized on our consolidated balance sheet at December 31, 2019 and 2018 was $34.0 million and $32.7 million, respectively. Accumulated amortization related to patents was $8.3 million and $8.7 million at December 31, 2019 and 2018, respectively. Based on our existing patents, we estimate amortization expense related to patents in each of the next five years to be the following:
Year Ending December 31, |  | Amortization (in millions) |
2020 |  | $ | 1.8 |
2021 |  | $ | 1.8 |
2022 |  | $ | 1.7 |
2023 |  | $ | 1.6 |
2024 |  | $ | 1.4 |
We review our capitalized patent costs regularly to ensure that they include costs for patents and patent applications that have future value. When we identify patents and patent applications that we are not actively pursuing, we write off any associated costs. In 2019, 2018 and 2017, patent expenses were $4.2 million, $2.6 million and $2.1 million, respectively, and included non-cash charges related to the write-down of our patent costs to their estimated net realizable values of $2.2 million, $0.8 million and $0.4 million, respectively. Accrued Liabilities Our accrued liabilities consisted of the following (in thousands):
|  | December 31, |
|  | 2019 |  |  | 2018 |
Clinical expenses |  | $ | 24,461 |  |  | $ | 22,125 |
In-licensing expenses |  |  | 10,289 |  |  |  | 12,298 |
Other miscellaneous expenses |  |  | 32,019 |  |  |  | 13,080 |
Total accrued liabilities |  | $ | 66,769 |  |  | $ | 47,503 |
Noncontrolling Interest in Akcea Therapeutics, Inc. Prior to Akcea’s IPO in July 2017, we owned 100 percent of Akcea. Since Akcea’s IPO, our ownership has ranged from 68 percent to 77 percent. At December 31, 2019, our ownership was approximately 76 percent. We reflect changes in our ownership percentage in our financial statements as an adjustment to noncontrolling interest in the period the change occurs. During 2019, we received the following additional shares of Akcea common stock:
| ● | 2.8 million shares in the first quarter of 2019 as payment for the sublicense fee Akcea owed us for Novartis’s license of AKCEA-APO(a)-LRx, and;
| ● | 6.9 million shares in the fourth quarter of 2019 as payment for the sublicense fee Akcea owed us for Pfizer’s license of AKCEA-ANGPTL3-LRx.
The shares third parties own represent an interest in Akcea’s equity that we do control. However, as we continue to maintain overall control of Akcea through our voting interest, we reflect the assets, liabilities and results of operations of Akcea in our consolidated financial statements. We reflect the noncontrolling interest attributable to other owners of Akcea’s common stock in a separate line on the statement of operations and a separate line within stockholders’ equity in our consolidated balance sheet. In addition, we record a noncontrolling interest adjustment to account for the stock options Akcea grants, which if exercised, will dilute our ownership in Akcea. This adjustment is a reclassification within stockholders’ equity from additional paid-in capital to noncontrolling interest in Akcea equal to the amount of stock-based compensation expense Akcea had recognized. Concentration of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, short-term investments and receivables. We place our cash equivalents and short-term investments with reputable financial institutions. We primarily invest our excess cash in commercial paper and debt instruments of the U.S. Treasury, financial institutions, corporations, and U.S. government agencies with strong credit ratings and an investment grade rating at or above A-1, P-1 or F-1 by Moody’s, Standard & Poor’s, or S&P, or Fitch, respectively. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. We periodically review and modify these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity. Cash, Cash Equivalents and Investments We consider all liquid investments with maturities of three months or less when we purchase them to be cash equivalents. Our short-term investments have initial maturities of greater than three months from date of purchase. We classify our short-term debt investments as “available-for-sale” and carry them at fair market value based upon prices on the last day of the fiscal period for identical or similar items. We record unrealized gains and losses on debt securities as a separate component of comprehensive income (loss) and include net realized gains and losses in gain (loss) on investments. We use the specific identification method to determine the cost of securities sold. We also have equity investments of less than 20 percent ownership in publicly and privately held biotechnology companies that we received as part of a technology license or partner agreement. At December 31, 2019, we held equity investments in two publicly held companies, ProQR Therapeutics N.V., or ProQR, and Antisense Therapeutics Limited, or ATL. We also held equity investments in five privately-held companies, Atlantic Pharmaceuticals Limited, Dynacure SAS, Empirico, Inc., Seventh Sense Biosystems and Suzhou Ribo Life Science Co, Ltd. In January 2018, we adopted the amended accounting guidance related to the recognition, measurement, presentation, and disclosure of certain financial instruments. The amended guidance requires us to measure and record our equity investments at fair value. Additionally, the amended accounting guidance requires us to recognize the changes in fair value in our consolidated statement of operations, instead of through accumulated other comprehensive income. Prior to 2018, we accounted for our equity investments in privately held companies under the cost method of accounting. Under the amended guidance we account for our equity investments in privately held companies at their cost minus impairments, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Our adoption of this guidance did not have an impact on our results. Inventory Valuation We reflect our inventory on our consolidated balance sheet at the lower of cost or market value under the first-in, first-out method, or FIFO. We capitalize the costs of raw materials that we purchase for use in producing our medicines because until we use these raw materials, they have alternative future uses, which we refer to as clinical raw materials. We include in inventory raw material costs for medicines that we manufacture for our partners under contractual terms and that we use primarily in our clinical development activities and drug products. We can use each of our raw materials in multiple products and, as a result, each raw material has future economic value independent of the development status of any single medicine. For example, if one of our medicines failed, we could use the raw materials for that medicine to manufacture our other medicines. We expense these costs as R&D expenses when we begin to manufacture API for a particular medicine if the medicine has not been approved for marketing by a regulatory agency. We obtained the first regulatory approval for TEGSEDI in July 2018 and for WAYLIVRA in May 2019. At December 31, 2019, our physical inventory for TEGSEDI and WAYLIVRA included API that we produced prior to when we obtained regulatory approval. As such, this API has no cost basis as we had previously expensed the costs as R&D expenses. We review our inventory periodically and reduce the carrying value of items we consider to be slow moving or obsolete to their estimated net realizable value based on forecasted demand compared to quantities on hand. We consider several factors in estimating the net realizable value, including shelf life of our inventory, alternative uses for our medicines in development and historical write-offs. We recorded an insignificant amount of inventory write-offs during the year ended December 31, 2019. We did not record any inventory write-offs for the years ended December 31, 2018 or 2017. Our inventory consisted of the following (in thousands):
|  | December 31, |
|  | 2019 |  |  | 2018 |
Raw materials: |  |  |  |  |  |
Raw materials- clinical |  | $ | 9,363 |  |  | $ | 8,497 |
Raw materials- commercial |  |  | 6,520 |  |  |  | — |
Total raw materials |  |  | 15,883 |  |  |  | 8,497 |
Work in process |  |  | 2,039 |  |  |  | — |
Finished goods |  |  | 258 |  |  |  | 85 |
Total inventory |  | $ | 18,180 |  |  | $ | 8,582 |
Property, Plant and Equipment We carry our property, plant and equipment at cost and depreciate it on the straight-line method over its estimated useful life, which consists of the following (in thousands):
|  | Estimated Useful Lives |  |  | December 31, |
|  | (in years) |  |  | 2019 |  |  | 2018 |
Computer software, laboratory, manufacturing and other equipment |  | 3 to 10 |  |  | $ | 60,965 |  |  | $ | 53,496 |
Building, building improvements and building systems |  | 15 to 40 |  |  |  | 119,830 |  |  |  | 97,528 |
Land improvements |  |  | 20 |  |  |  | 2,853 |  |  |  | 2,853 |
Leasehold improvements |  | 5 to 15 |  |  |  | 13,600 |  |  |  | 18,981 |
Furniture and fixtures |  | 5 to 10 |  |  |  | 7,354 |  |  |  | 6,283 |
|  |  |  |  |  |  | 204,602 |  |  |  | 179,141 |
Less accumulated depreciation |  |  |  |  |  |  | (74,013 | ) |  |  | (61,474 | )
|  |  |  |  |  |  | 130,589 |  |  |  | 117,667 |
Land |  |  |  |  |  |  | 23,062 |  |  |  | 14,493 |
Total |  |  |  |  |  | $ | 153,651 |  |  | $ | 132,160 |
We depreciate our leasehold improvements using the shorter of the estimated useful life or remaining lease term. Fair Value of Financial Instruments We have estimated the fair value of our financial instruments. The amounts reported for cash, accounts receivable, accounts payable and accrued expenses approximate the fair value because of their short maturities. We report our investment securities at their estimated fair value based on quoted market prices for identical or similar instruments. Leases Topic 842 Adoption In February 2016, the Financial Accounting Standards Board, or FASB, issued amended accounting guidance related to lease accounting. This guidance supersedes the lease requirements we previously followed in Accounting Standards Codification, or ASC, Topic 840, Leases, or Topic 840, and created a new lease accounting standard, Topic 842, Leases, or Topic 842. Under Topic 842, an entity will record on its balance sheet all leases with a term longer than one year. Further, an entity will record a liability with a value equal to the present value of payments it will make over the life of the lease (lease liability) and an asset representing the underlying leased asset (right-of-use asset). The new accounting guidance requires entities to determine if its leases are operating or financing leases. Entities will recognize expense for operating leases on a straight-line basis as an operating expense. If an entity determines a lease is a financing lease, it will record both interest and amortization expense and generally the expense will be higher in the earlier periods of the lease. We adopted Topic 842 on January 1, 2019 and adjusted our opening balance sheet on that date for our right-of-use operating lease assets and operating lease liabilities. At adoption, we recorded $13.5 million in right-of-use operating lease assets and $18.5 million in operating lease liabilities, of which we classified $2 million as a current liability. We adopted Topic 842 using the available practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification of those leases we had in place as of January 1, 2019. The adoption did not have an impact on our consolidated statement of operations. Leases We determine if an arrangement contains a lease at inception. We currently only have operating leases. We recognize a right-of-use operating lease asset and associated short- and long-term operating lease liability on our consolidated balance sheet for operating leases greater than one year. Our right-of-use assets represent our right to use an underlying asset for the lease term and our lease liabilities represent our obligation to make lease payments arising from the lease arrangement. We recognize our right-of-use operating lease assets and lease liabilities based on the present value of the future minimum lease payments we will pay over the lease term. We determined the lease term at the inception of the lease, and in certain cases our lease term could include renewal options if we concluded we were reasonably certain that we will exercise the renewal option. As our current leases do not provide an interest rate implicit in the lease, we used our or Akcea’s incremental borrowing rate, based on the information available on the date we adopted Topic 842 or as of the lease inception date in determining the present value of future payments. Our right-of-use operating lease asset also includes any lease payments we made and excludes any tenant improvement allowances we received. We recognize rent expense for our minimum lease payments on a straight-line basis over the expected term of our lease. We recognize period expenses, such as common area maintenance expenses, in the period we incur the expense. Long-Lived Assets We evaluate long-lived assets, which include property, plant and equipment and patent costs, for impairment on at least a quarterly basis and whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of such assets. We recorded charges of $2.2 million, $0.8 million and $0.8 million for the years ended December 31, 2019, 2018 and 2017, respectively, related primarily to the write-down of intangible assets. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Stock-Based Compensation Expense We measure stock-based compensation expense for equity-classified awards, principally related to stock options, restricted stock units, or RSUs, and stock purchase rights under our ESPP based on the estimated fair value of the award on the date of grant. We recognize the value of the portion of the award that we ultimately expect to vest as stock-based compensation expense over the requisite service period in our consolidated statements of operations. We reduce stock-based compensation expense for estimated forfeitures at the time of grant and revise in subsequent periods if actual forfeitures differ from those estimates. We use the Black-Scholes model to estimate the fair value of stock options granted and stock purchase rights under our ESPP. On the grant date, we use our stock price and assumptions regarding a number of variables to determine the estimated fair value of stock-based payment awards. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. We recognize compensation expense for option awards and RSUs using the accelerated multiple-option approach. Under the accelerated multiple-option approach (also known as the graded-vesting method), we recognize compensation expense over the requisite service period for each separately vesting tranche of the award as though the award were in substance multiple awards, which results in the expense being front-loaded over the vesting period. The fair value of RSUs is based on the market price of our common stock on the date of grant. The RSUs we have granted vest annually over a four-year period. See Note 4, Stockholders’ Equity, for additional information regarding our stock-based compensation plans. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss is primarily comprised of unrealized gains and losses on investments, net of taxes and adjustments we made to reclassify realized gains and losses on investments from other accumulated comprehensive loss to our Consolidated Statement of Operations. The following table summarizes changes in accumulated other comprehensive loss for the years ended December 31, 2019, 2018 and 2017 (in thousands):
|  | Year Ended December 31, |
|  | 2019 |  |  | 2018 |  |  | 2017 |
Beginning balance accumulated other comprehensive loss |  | $ | (32,016 | ) |  | $ | (31,759 | ) |  | $ | (30,358 | )
Unrealized gains (losses) on securities, net of tax (1) |  |  | 6,633 |  |  |  | (280 | ) |  |  | (960 | )
Amounts reclassified from accumulated other comprehensive loss |  |  | — |  |  |  | — |  |  |  | (374 | )
Currency translation adjustment |  |  | 93 |  |  |  | 23 |  |  |  | (67 | )
Net other comprehensive loss for the period |  |  | 6,726 |  |  |  | (257 | ) |  |  | (1,401 | )
Ending balance accumulated other comprehensive loss |  | $ | (25,290 | ) |  | $ | (32,016 | ) |  | $ | (31,759 | )
(1) | A tax benefit of $1.4 million and $0.3 million was included in other comprehensive loss for the years ended December 31, 2019 and 2018, respectively. There was no tax benefit or expense for other comprehensive loss for the year ended December 31, 2017.
Convertible Debt At issuance, we accounted for our convertible debt instruments, including our 0.125 percent senior convertible notes, or 0.125% Notes and 1 percent senior convertible notes, or 1% Notes, that may be settled in cash upon conversion (including partial cash settlement) by separating the liability and equity components of the instruments in a manner that reflects our nonconvertible debt borrowing rate on the date the notes were issued. In reviewing debt issuances, we were not able to identify any comparable companies that recently issued non-convertible debt instruments. Therefore, we estimated the fair value of the liability component of our notes by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities. We assigned a value to the debt component of our convertible notes equal to the estimated fair value of similar debt instruments without the conversion feature, which resulted in us recording our debt at a discount. We are amortizing our debt issuance costs and debt discount over the life of the convertible notes as additional non-cash interest expense utilizing the effective interest method. For additional information, see Note 3, Long-Term Obligations and Commitments. Segment Information We have two operating segments, our Ionis Core segment and Akcea Therapeutics, our majority-owned affiliate. Akcea is a biopharmaceutical company focused on developing and commercializing medicines to treat patients with serious and rare diseases. We provide segment financial information and results for our Ionis Core segment and our Akcea Therapeutics segment based on the segregation of revenues and expenses that our chief decision maker reviews to assess operating performance and to make operating decisions. We allocate a portion of Ionis’ development, R&D support and general and administrative expenses to Akcea for work Ionis performs on behalf of Akcea and we bill Akcea for these expenses. Fair Value Measurements We use a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets, which includes our money market funds and treasury securities classified as available-for-sale securities and our investment in equity securities in publicly-held biotechnology companies; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, which includes our fixed income securities and commercial paper classified as available-for-sale securities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions. We classify the majority of our securities as Level 2. We obtain the fair value of our Level 2 investments from our custodian bank or from a professional pricing service. We validate the fair value of our Level 2 investments by understanding the pricing model used by the custodian banks or professional pricing service provider and comparing that fair value to the fair value based on observable market prices. The following tables present the major security types we held at December 31, 2019 and 2018 that we regularly measure and carry at fair value. At December 31, 2019, a portion of our ProQR investment was subject to trading restrictions through the fourth quarter of 2020, as a result we included a lack of marketability discount in valuing this investment, which is a Level 3 input. At December 31, 2018, our ProQR investment was subject to trading restrictions through the fourth quarter of 2019, as a result we included a lack of marketability discount in valuing this investment, which is a Level 3 input. The tables segregate each security type by the level within the fair value hierarchy of the valuation techniques we utilized to determine the respective securities’ fair value (in thousands):
|  | At December 31, 2019 |  |  | Quoted Prices in Active Markets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Cash equivalents (1) |  | $ | 418,406 |  |  | $ | 418,406 |  |  | $ | — |  |  | $ | — |
Corporate debt securities (2) |  |  | 1,102,568 |  |  |  | — |  |  |  | 1,102,568 |  |  |  | — |
Debt securities issued by U.S. government agencies (3) |  |  | 329,404 |  |  |  | — |  |  |  | 329,404 |  |  |  | — |
Debt securities issued by the U.S. Treasury (4) |  |  | 363,694 |  |  |  | 363,694 |  |  |  | — |  |  |  | — |
Debt securities issued by states of the U.S. and political subdivisions of the states (4) |  |  | 40,407 |  |  |  | — |  |  |  | 40,407 |  |  |  | — |
Investment in ProQR Therapeutics N.V. (5) |  |  | 4,506 |  |  |  | — |  |  |  | — |  |  |  | 4,506 |
Total |  | $ | 2,258,985 |  |  | $ | 782,100 |  |  | $ | 1,472,379 |  |  | $ | 4,506 |
|  | At December 31, 2018 |  |  | Quoted Prices in Active Markets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Cash equivalents (1) |  | $ | 146,281 |  |  | $ | 146,281 |  |  | $ | — |  |  | $ | — |
Corporate debt securities (6) |  |  | 1,252,960 |  |  |  | — |  |  |  | 1,252,960 |  |  |  | — |
Debt securities issued by U.S. government agencies (4) |  |  | 276,612 |  |  |  | — |  |  |  | 276,612 |  |  |  | — |
Debt securities issued by the U.S. Treasury (7) |  |  | 260,154 |  |  |  | 260,154 |  |  |  | — |  |  |  | — |
Debt securities issued by states of the U.S. and political subdivisions of the states (4) |  |  | 79,942 |  |  |  | — |  |  |  | 79,942 |  |  |  | — |
Investment in ProQR Therapeutics N.V. (5) |  |  | 1,349 |  |  |  | — |  |  |  | — |  |  |  | 1,349 |
Total |  | $ | 2,017,298 |  |  | $ | 406,435 |  |  | $ | 1,609,514 |  |  | $ | 1,349 |
________________
(1) | Included in cash and cash equivalents on our consolidated balance sheet.
(2) | $19.0 million included in cash and cash equivalents on our consolidated balance sheet, with the difference included in short-term investments on our consolidated balance sheet.
(3) | $0.8 million included in cash and cash equivalents on our consolidated balance sheet, with the difference included in short-term investments on our consolidated balance sheet.
(4) | Included in short-term investments.
(5) | Included in other current assets on our consolidated balance sheet.
(6) | $50.2 million included in cash and cash equivalents on our consolidated balance sheet, with the difference included in short-term investments on our consolidated balance sheet.
(7) | $14.2 million included in cash and cash equivalents on our consolidated balance sheet, with the difference included in short-term investments on our consolidated balance sheet.
Income Taxes We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. We record a valuation allowance when necessary to reduce our net deferred tax assets to the amount expected to be realized. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, or the Tax Act. The Tax Act created a new requirement on global intangible low-taxed income, or GILTI, earned by foreign subsidiaries for tax years beginning on or after January 1, 2018. The GILTI provisions require foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s assets to be included in our U.S. income tax return. Under U.S. GAAP, we are permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into our measurement of deferred taxes. We have made the election to account for GILTI as a component of current taxes incurred rather than as a component of deferred taxes. We apply the authoritative accounting guidance prescribing a threshold and measurement attribute for the financial recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50 percent likely to be realized upon ultimate settlement. We are required to use significant judgment in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves for changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences may impact the provision for income taxes in the period in which such determination is made. We are also required to use significant judgment in determining any valuation allowance recorded against our deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including scheduled reversal of deferred tax liabilities, past operating results, the feasibility of tax planning strategies and estimates of future taxable income. We base our estimates of future taxable income on assumptions that are consistent with our plans. The assumptions we use represent our best estimates and involve inherent uncertainties and the application of our judgment. Should actual amounts differ from our estimates, the amount of our tax expense and liabilities we recognize could be materially impacted. We record a valuation allowance to reduce the balance of our net deferred tax assets to the amount we believe is more-likely-than-not to be realized. We do not provide for a U.S. income tax liability and foreign withholding taxes on undistributed foreign earnings of our foreign subsidiaries. Impact of Recently Issued Accounting Standards In June 2016, the FASB issued guidance that changes the measurement of credit losses for most financial assets and certain other instruments. If we have credit losses, this updated guidance requires us to record allowances for these instruments under a new expected credit loss model. This model requires us to estimate the expected credit loss of an instrument over its lifetime, which represents the portion of the amortized cost basis we do not expect to collect. The new guidance requires us to remeasure our allowance in each reporting period we have credit losses. We adopted this the new guidance on January 1, 2020. We do not expect this guidance will have an impact on our consolidated financial statements. In August 2018, the FASB issued clarifying guidance on how to account for implementation costs related to cloud-servicing arrangements. The guidance states that if these fees qualify to be capitalized and amortized over the service period, they need to be expensed in the same line item as the service expense and recognized in the same balance sheet category. The update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We adopted this guidance on January 1, 2020 on a prospective basis. We do not expect this guidance will have an impact on our consolidated financial statements. In August 2018, the FASB updated its disclosure requirements related to Level 1, 2 and 3 fair value measurements. The update included deletion and modification of certain disclosure requirements and additional disclosure related to Level 3 measurements. The guidance is effective for fiscal years beginning after December 31, 2019 and early adoption is permitted. We adopted this updated guidance on January 1, 2019 and it did not have a significant impact on our disclosures. In November 2018, the FASB issued clarifying guidance of the interaction between the collaboration accounting guidance and the new revenue recognition guidance we adopted on January 1, 2018 (Topic 606). Below is the clarifying guidance and how we will implement it (in italics):
| 1) | When a participant is considered a customer in a collaborative arrangement, all of the associated accounting under Topic 606 should be applied
| ● | We will apply all of the associated accounting under Topic 606 when we determine a participant in a collaborative arrangement is a customer
| 2) | Adds “unit of account” concept to collaboration accounting guidance to align with Topic 606. The “unit of account” concept is used to determine if revenue is recognized or if a contra expense is recognized from consideration received under a collaboration
| ● | We will use the “unit of account” concept when we receive consideration under a collaborative arrangement to determine when we recognize revenue or a contra expense
| 3) | The clarifying guidance precludes us from recognizing revenue under Topic 606 when we determine a transaction with a collaborative partner is not a customer and is not directly related to the sales to third parties
| ● | When we conclude a collaboration partner is not a customer and is not directly related to the sales to third parties, we will not recognize revenue for the transaction
We adopted this new guidance on January 1, 2020. We do not expect this guidance will have a significant impact on our consolidated financial statements. In December 2019, the FASB issued guidance to simplify the accounting for income taxes. The update includes removing several exceptions under the existing guidance and includes several simplification updates, none of which apply to our current accounting for income taxes. The guidance is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. We adopted this updated guidance in the fourth quarter of 2019 and it did not have an impact on our consolidated financial statements or disclosures.

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