Revenue recognition

Net product sales

The Company views its operations and manages its business in one operating segment. During the three and six months ended June 30, 2018, net product sales in the United States were $20.3 million and $39.5 million, respectively, consisting solely of Emflaza, and net product sales not in the United States were $47.8 million and $84.6 million, respectively, consisting solely of Translarna.

The following table presents changes in the Company’s contract liabilities from December 31, 2017 to June 30, 2018:



	Balance as of December 31, 2017		Additions		Deductions		ASC 606 Adjustment			Balance as of June 30, 2018
Deferred Revenue	$	11,891	$	2,586	$	—	$	(3,937	)	$	10,540

The Company did not have any contract assets for the three and six months ended June 30, 2018.

During the three and six months ended June 30, 2018, the Company recognized revenue in the period from:



	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
Amounts included in contract liabilities at the beginning of the period	$	—	$	—
Performance obligations satisfied in previous period	—		—
Performance obligations satisfied in current period	68,170		124,151
Total product revenue	$	68,170	$	124,151

The Company has not made significant changes to the judgments made in applying ASC Topic 606 for the three and six months ended June 30, 2018.

Remaining performance obligations

Remaining performance obligations represent the transaction price for goods the Company has yet to provide. As of June 30, 2018, the aggregate amount of transaction price allocated to remaining performance obligations relating to Translarna net product revenue was $10.5 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 June 30, 2018			Adjustments			As reported Balances without adoption of Topic 606
Assets
Current assets:
Cash and cash equivalents	$	223,788		$	—		$	223,788
Marketable securities	72,318			—			72,318
Trade receivables, net	59,383			—			59,383
Inventory	13,852			(67		)	13,785
Prepaid expenses and other current assets	6,305			—			6,305
Total current assets	375,646			(67		)	375,579
Fixed assets, net	8,217			—			8,217
Intangible assets, net	126,290			—			126,290
Deposits and other assets	1,620			—			1,620
Total assets	$	511,773		$	(67	)	$	511,706
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	82,534		$	(649	)	$	81,885
Current portion of long-term debt	1,666			—			1,666
Deferred revenue	—			4,141			4,141
Other current liabilities	2,274			—			2,274
Total current liabilities	86,474			3,492			89,966
Deferred revenue - long-term	10,540			—			10,540
Long-term debt	147,204			—			147,204
Other long-term liabilities	153			—			153
Total liabilities	244,371			3,492			247,863

Stockholders’ equity:
Common stock	47			—			47
Additional paid-in capital	1,105,124			—			1,105,124
Accumulated other comprehensive income	1,855			—			1,855
Accumulated deficit	(839,624		)	(3,559		)	(843,183		)
Total stockholders’ equity	267,402			(3,559		)	263,843
Total liabilities and stockholders’ equity	$	511,773		$	(67	)	$	511,706

ii.Consolidated statements of operations



	Impact of changes in accounting policies Three Months Ended
	As reported for the period ended June 30, 2018			Adjustments		As reported Balances without adoption of Topic 606
Revenues:
Net product revenue	$	68,170		$	604	$	68,774
Collaboration and grant revenue	573			—		573
Total revenues	68,743			604		69,347
Operating expenses:
Cost of product sales, excluding amortization of acquired intangible asset	2,572			13		2,585
Amortization of acquired intangible asset	5,593			—		5,593
Research and development	32,607			—		32,607
Selling, general and administrative	33,545			—		33,545
Total operating expenses	74,317			13		74,330
Loss from operations	(5,574		)	591		(4,983		)
Interest expense, net	(2,884		)	—		(2,884		)
Other expense, net	(673		)	—		(673		)
Loss before income tax expense	(9,131		)	591		(8,540		)
Income tax expense	(389		)	—		(389		)
Net loss attributable to common stockholders	$	(9,520	)	$	591	$	(8,929	)



	Impact of changes in accounting policies Year to Date
	As reported for the period ended June 30, 2018			Adjustments			As reported Balances without adoption of Topic 606
Revenues:
Net product revenue	$	124,151		$	(225	)	$	123,926
Collaboration and grant revenue	654			—			654
Total revenues	124,805			(225		)	124,580
Operating expenses:
Cost of product sales, excluding amortization of acquired intangible asset	5,616			(67		)	5,549
Amortization of acquired intangible asset	11,022			—			11,022
Research and development	63,970			—			63,970
Selling, general and administrative	66,514			—			66,514
Total operating expenses	147,122			(67		)	147,055
Loss from operations	(22,317		)	(158		)	(22,475		)
Interest expense, net	(6,187		)	—			(6,187		)
Other income, net	332			—			332
Loss before income tax expense	(28,172		)	(158		)	(28,330		)
Income tax expense	(610		)	—			(610		)
Net loss attributable to common stockholders	$	(28,782	)	$	(158	)	$	(28,940	)

iii.Consolidated statements of comprehensive loss



	Impact of changes in accounting policies Three Months Ended
	As reported for the period ended June 30, 2018			Adjustments		As reported Balances without adoption of Topic 606
Net loss	$	(9,520	)	$	591	$	(8,929	)
Other comprehensive loss:
Unrealized gain on marketable securities, net of tax	40			—		40
Foreign currency translation loss	(3,138		)	—		(3,138		)
Comprehensive loss	$	(12,618	)	$	591	$	(12,027	)



	Impact of changes in accounting policies Year to Date
	As reported for the period ended June 30, 2018			Adjustments			As reported Balances without adoption of Topic 606
Net loss	$	(28,782	)	$	(158	)	$	(28,940	)
Other comprehensive loss:
Unrealized loss on marketable securities, net of tax	(83		)	—			(83		)
Foreign currency translation loss	(2,031		)	—			(2,031		)
Comprehensive loss	$	(30,896	)	$	(158	)	$	(31,054	)

iv.Consolidated statements of cash flows



	Impact of changes in accounting policies
	As reported for the period ended June 30, 2018			Adjustments			Balances without adoption of Topic 606
Cash flows from operating activities
Net loss	$	(28,782	)	$	(158	)	$	(28,940	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	12,243			—			12,243
Change in valuation of warrant liability	—			—			—
Non-cash interest expense	3,644			—			3,644
Loss on disposal of asset	—			—			—
Amortization of premiums and accretion of discounts on investments, net	(230		)	—			(230		)
Amortization of debt issuance costs	256			—			256
Share-based compensation expense	15,831			—			15,831
Benefit for deferred income taxes	—			—			—
Unrealized foreign currency transaction losses, net	(764		)	—			(764		)
Changes in operating assets and liabilities:							0
Inventory, net	(3,393		)	(67		)	(3,460		)
Prepaid expenses and other current assets	254			—			254
Trade receivables, net	(20,429		)	—			(20,429		)
Deposits and other assets	(419		)	—			(419		)
Accounts payable and accrued expenses	2,225			(649		)	1,576
Other liabilities	485			—			485
Deferred revenue	3,204			874			4,078
Net cash used in operating activities	(15,875		)	—			(15,875		)
Cash flows from investing activities
Purchases of fixed assets	(1,187		)	—			(1,187		)
Purchases of marketable securities	(28,656		)	—			(28,656		)
Sale and redemption of marketable securities	35,939			—			35,939
Acquisition, including transaction costs	—			—			—
Net cash provided by investing activities	6,096			—			6,096
Cash flows from financing activities
Proceeds from exercise of options	3,592			—			3,592
Net proceeds from public offerings	117,874			—			117,874
Proceeds from shares issued under employee stock purchase plan	1,299			—			1,299
Debt issuance costs related to secured term loan	—			—			—
Proceeds from issuance of secured term loan	—			—			—
Debt issuance costs related to convertible notes	—			—			—
Proceeds from issuance of convertible notes	—			—			—
Net cash provided by financing activities	122,765			—			122,765
Effect of exchange rate changes on cash	(990		)	—			(990		)
Net increase in cash and cash equivalents	111,996			—			111,996
Cash and cash equivalents, beginning of period	111,792			—			111,792
Cash and cash equivalents, end of period	$	223,788		$	—		$	223,788

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 six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 2018 and 2017, the Company did not recognize any revenue related to early stage collaborations.