Revenue recognition

Net product sales

The Company views its operations and manages its business in one operating segment. During the three months ended March 31, 2018, net product sales in the United States was $19.2 million, consisting solely of Emflaza, and net product sales not in the United States was $36.8 million, consisting solely of Translarna.

The following table presents changes in the Company’s contract liabilities for the three months ended March 31, 2018:



	Balance as of December 31, 2017		Additions		Deductions		ASC 606 Adjustment			Balance as of March 31, 2018
Deferred Revenue	$	11,891	$	1,346	$	—	$	(3,937	)	$	9,300.265

The Company did not have any contract assets for the three months ended March 31, 2018.

During the three months ended March 31, 2018, the Company recognized revenue in the period from:



	March 31, 2018
Amounts included in contract liabilities at the beginning of the period	$	—
Performance obligations satisfied in previous period	—
Performance obligations satisfied in current period	55,981
Total product revenue	$	55,981

The Company has not made significant changes to the judgments made in applying ASC Topic 606 for the three months ended March 31, 2018.

Remaining performance obligations

Remaining performance obligations represent the transaction price for goods the Company has yet to provide. As of March 31, 2018, the aggregate amount of transaction price allocated to remaining performance obligations relating to Translarna net product revenue was $9.3 million. The Company expects to recognize revenue over the next two to four years as the specific timing for satisfying the performance obligations is contingent upon a number of factors, including customers’ needs and schedules.

The impact of adoption using the modified retrospective method on the Company’s consolidated financial statements is as follows:

i.Consolidated balance sheets



	Impact of changes in accounting policies
	As reported March 31, 2018			Adjustments			As reported Balances without adoption of Topic 606
Assets
Current assets:
Cash and cash equivalents	$	97,675		$	—		$	97,675
Marketable securities	80,595			—			80,595
Trade receivables, net	45,611			—			45,611
Inventory	12,355			80			12,435
Prepaid expenses and other current assets	5,760			—			5,760
Total current assets	241,996			80			242,076
Fixed assets, net	8,302			—			8,302
Intangible assets, net	127,565			—			127,565
Deposits and other assets	1,548			—			1,548
Total assets	$	379,411		$	80		$	379,491
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	71,437		$	(839	)	$	70,598
Deferred revenue	—			4,935			4,935
Other current liabilities	1,279			—			1,279
Total current liabilities	72,716			4,096			76,812
Deferred revenue - long-term	9,300			—			9,300
Long-term debt	146,878			—			146,878
Other long-term liabilities	209			—			209
Total liabilities	229,103			4,096			233,199

Stockholders’ equity:
Common stock	42			—			42
Additional paid-in capital	975,418			—			975,418
Accumulated other comprehensive income	4,953			—			4,953
Accumulated deficit	(830,105		)	(4,016		)	(834,121		)
Total stockholders’ equity	150,308			(4,016		)	146,292
Total liabilities and stockholders’ equity	$	379,411		$	80		$	379,491

ii.Consolidated statements of operations



	Impact of changes in accounting policies
	As reported for the period ended March 31, 2018			Adjustments			As reported Balances without adoption of Topic 606
Revenues:
Net product revenue	$	55,981		$	(829	)	$	55,152
Collaboration and grant revenue	81			—			81
Total revenues	56,062			(829		)	55,233
Operating expenses:
Cost of product sales, excluding amortization of acquired intangible asset	3,045			(80		)	2,965
Amortization of acquired intangible asset	5,428			—			5,428
Research and development	31,363			—			31,363
Selling, general and administrative	32,969			—			32,969
Total operating expenses	72,805			(80		)	72,725
Loss from operations	(16,743		)	(749		)	(17,492		)
Interest expense, net	(3,303		)	—			(3,303		)
Other income, net	1,004			—			1,004
Loss before income tax expense	(19,042		)	(749		)	(19,791		)
Income tax expense	(221		)	—			(221		)
Net loss attributable to common stockholders	$	(19,263	)	$	(749	)	$	(20,012	)

iii.Consolidated statements of comprehensive loss



	Impact of changes in accounting policies
	As reported for the period ended March 31, 2018			Adjustments			As reported Balances without adoption of Topic 606
Net loss	$	(19,263	)	$	(749	)	$	(20,012	)
Other comprehensive loss:
Unrealized loss on marketable securities, net of tax	(123		)	—			(123		)
Foreign currency translation gain	1,107			—			1,107
Comprehensive loss	$	(18,279	)	$	(749	)	$	(19,028	)

iv.Consolidated statements of cash flows



	Impact of changes in accounting policies
	As reported for the period ended March 31, 2018			Adjustments			Balances without adoption of Topic 606
Cash flows from operating activities
Net loss	$	(19,263	)	$	(749	)	$	(20,012	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	6,022			—			6,022
Non-cash interest expense	1,780			—			1,780
Amortization of premiums on investments	(96		)	—			(96		)
Amortization of debt issuance costs	126			—			126
Share-based compensation expense	7,748			—			7,748
Unrealized foreign currency transaction losses, net	(1,300		)	—			(1,300		)
Changes in operating assets and liabilities:							0
Inventory, net	(1,446		)	(80		)	(1,526		)
Prepaid expenses and other current assets	958			—			958
Trade receivables, net	(4,223		)	—			(4,223		)
Deposits and other assets	(308		)	—			(308		)
Accounts payable and accrued expenses	(6,810		)	(839		)	(7,649		)
Other liabilities	(475		)	—			(475		)
Deferred revenue	1,409			1,668			3,077
Net cash used in operating activities	(15,878		)	—			(15,878		)
Cash flows from investing activities
Purchases of fixed assets	(479		)	—			(479		)
Purchases of marketable securities	(22,683		)	—			(22,683		)
Sale and redemption of marketable securities	21,514			—			21,514
Net cash used in investing activities	(1,648		)	—			(1,648		)
Cash flows from financing activities
Proceeds from exercise of options	1,136			—			1,136
Net cash provided by financing activities	1,136			—			1,136
Effect of exchange rate changes on cash	2,273			—			2,273
Net decrease in cash and cash equivalents	(14,117		)	—			(14,117		)
Cash and cash equivalents, beginning of period	111,792			—			111,792
Cash and cash equivalents, end of period	$	97,675		$	—		$	97,675

Collaboration revenue

The Company has ongoing collaborations with the Spinal Muscular Atrophy Foundation (SMA Foundation) and F. Hoffman-La Roche Ltd and Hoffman- La Roche Inc. (collectively, Roche) and early stage discovery arrangements with other institutions. The following are the key terms to the Company’s (i) ongoing collaborations and (ii) early stage discovery and development arrangements.

Roche and SMA Foundation

In November 2011, the Company and the SMA Foundation entered into a licensing and collaboration agreement with Roche for a spinal muscular atrophy program. Under the terms of the agreement, Roche acquired an exclusive worldwide license to the Company’s spinal muscular atrophy program, which includes three compounds currently in preclinical development, as well as potential back-up compounds. The Company received a nonrefundable upfront cash payment of $30.0 million during the research term, which was terminated effective December 31, 2014, after which Roche provided the Company with funding, based on an agreed- upon full-time equivalent rate, for an agreed-upon number of full- time equivalent employees that the Company contributed to the research program.

The Company identified two material promises in the collaboration agreement, the license and the research activities. The Company evaluated whether these material promises are distinct and determined that the license does not have standalone functionality and there is a significant integration of the license and research activities. As such, both promises were bundled into one distinct performance obligation. As a result, the Company deferred the $30.0 million upfront payment which was recognized over the estimated performance period of two years, which was the contracted research period. As of adoption of ASC Topic 606 on January 1, 2018, all performance obligations had been satisfied and the balance of the remaining deferred upfront payment was fully recognized.

Under the agreement, the Company is eligible to receive additional payments from Roche if specified events are achieved with respect to each licensed product, including up to $135.0 million in research and development event milestones, up to $325.0 million in sales milestones upon achievement of sales events, and up to double digit royalties on worldwide annual net sales of a commercial product.

In January 2014, the Company announced the initiation of a Phase 1 clinical program in its spinal muscular atrophy collaboration with Roche and the SMA Foundation which triggered a $7.5 million milestone payment from Roche. Under ASC Topic 605, the Company considered this milestone event substantive because the applicable criteria of its revenue recognition policy would be satisfied and recorded it as collaboration revenue for the year ended December 31, 2014.

In November 2014, the Company announced the initiation of a Phase 2 study in adult and pediatric patients in its spinal muscular atrophy collaboration with Roche and the SMA Foundation which triggered a $10 million payment from Roche. Under ASC Topic 605, the Company considered this milestone event substantive because the applicable criteria of its revenue recognition policy would be satisfied and recorded it as collaboration revenue for the year ended December 31, 2014.

In October 2017, the Company announced that the Sunfish, a two-part clinical trial in pediatric and adult type 2 and type 3 spinal muscular atrophy initiated in the fourth quarter of 2016 with Roche and SMA Foundation, had transitioned into the pivotal second part of its study. The achievement of this milestone triggered a $20.0 million payment to the Company from Roche. Under ASC Topic 605, the Company considered this milestone event substantive because the applicable criteria of its revenue recognition policy would be satisfied and recorded it as collaboration revenue for the year ended December 31, 2017.

For the three months ended March 31, 2018 and 2017, the Company recognized revenue related to the licensing and collaboration agreement with Roche of $0.1 million and $0.1 million, respectively.

Early stage collaboration and discovery agreements

From time to time, the Company has arrangements with several organizations pursuant to which the Company uses its discovery technologies to help identify potential drug candidates. The Company does not take ownership of the potential compounds, but rather provides research services to the collaborator using its specialized technology platform.

Generally, these arrangements are structured such that the collaborator and the Company work together to jointly select targets from which to apply its discovery technologies. The research period for the Company to apply its technology is generally three to four years. The Company will typically receive a nonrefundable, upfront cash payment and the collaborator agrees to provide funding for research activities performed on its behalf.

Generally, the two material promises in these arrangements are the license and the research activities. The Company evaluated whether these material promises are distinct and determined that the license does not have standalone functionality and there is a significant integration of the license and research activities. As such, both promises are bundled into one distinct performance obligation. As of adoption of ASC Topic 606 on January 1, 2018, all deferred revenue related to these arrangements had been recognized. For the three months ended March 31, 2018 and 2017, the Company did not recognize any revenue related to discovery agreements.

The Company is eligible to receive additional payments from its early stage discovery research arrangements if the discovery compounds are ultimately developed and commercialized. The aggregate potential payments the Company is eligible for if all products are developed is $143.0 million and up to $252.0 million in sales milestones upon achievement of specified sales events and up to double digit royalties on worldwide annual net sales of the licensed product. The Company will recognize revenue when it is probable the milestones will be achieved (see Note 2). For the three months ended March 31, 2018 and 2017, the Company did not recognize any revenue related to early stage collaborations.