Revenue recognition

Net product sales

The Company views its operations and manages its business in one operating segment. During the three and nine months ended September 30, 2018, net product sales in the United States were $22.6 million and $62.2 million, respectively, consisting solely of Emflaza, and net product sales not in the United States were $30.4 million and $115.0 million, respectively, consisting solely of Translarna.

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



	Balance as of December 31, 2017		Additions		Deductions		ASC 606 Adjustment			Balance as of September 30, 2018
Deferred Revenue	$	11,891	$	4,706	$	—	$	(3,937	)	$	12,660

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

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



	Three Months Ended September 30, 2018		Nine Months Ended September 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	53,021		177,172
Total product revenue	$	53,021	$	177,172

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

Remaining performance obligations

Remaining performance obligations represent the transaction price for goods the Company has yet to provide. As of September 30, 2018, the aggregate amount of transaction price allocated to remaining performance obligations relating to Translarna net product revenue was $12.7 million. The Company expects to recognize revenue over the next one to three 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 September 30, 2018			Adjustments			As reported Balances without adoption of Topic 606
Assets
Current assets:
Cash and cash equivalents	$	206,913		$	—		$	206,913
Marketable securities	42,491			—			42,491
Trade receivables, net	42,197			—			42,197
Inventory	13,660			(84		)	13,576
Prepaid expenses and other current assets	8,020			—			8,020
Total current assets	313,281			(84		)	313,197
Fixed assets, net	8,805			—			8,805
Intangible assets, net	604,612			—			604,612
Goodwill	100,309			—			100,309
Deposits and other assets	1,620			—			1,620
Total assets	$	1,028,627		$	(84	)	$	1,028,543
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	102,788		$	(794	)	$	101,994
Current portion of long-term debt	6,667			—			6,667
Deferred revenue	2,004			5,120			7,124
Other current liabilities	3,463			—			3,463
Total current liabilities	114,922			4,326			119,248
Deferred revenue - long-term	11,156			—			11,156
Long-term debt	144,258			—			144,258
Contingent consideration payable	218,700			—			218,700
Deferred consideration payable	38,200			—			38,200
Deferred tax liability	115,200			—			115,200
Other long-term liabilities	101			—			101
Total liabilities	642,537			4,326			646,863

Stockholders’ equity:
Common stock	51			—			51
Additional paid-in capital	1,275,004			—			1,275,004
Accumulated other comprehensive income	1,628			—			1,628
Accumulated deficit	(890,593		)	(4,410		)	(895,003		)
Total stockholders’ equity	386,090			(4,410		)	381,680
Total liabilities and stockholders’ equity	$	1,028,627		$	(84	)	$	1,028,543

ii.Consolidated statements of operations



	Impact of changes in accounting policies Three Months Ended
	As reported for the period ended September 30, 2018			Adjustments			As reported Balances without adoption of Topic 606
Revenues:
Net product revenue	$	53,021		$	(834	)	$	52,187
Collaboration and grant revenue	570			—			570
Total revenues	53,591			(834		)	52,757
Operating expenses:
Cost of product sales, excluding amortization of acquired intangible asset	3,292			(17		)	3,275
Amortization of acquired intangible asset	5,793			—			5,793
Research and development	54,368			—			54,368
Selling, general and administrative	38,368			—			38,368
Total operating expenses	101,821			(17		)	101,804
Loss from operations	(48,230		)	(817		)	(49,047		)
Interest expense, net	(3,118		)	—			(3,118		)
Other expense, net	734			—			734
Loss before income tax expense	(50,614		)	(817		)	(51,431		)
Income tax expense	(355		)	—			(355		)
Net loss attributable to common stockholders	$	(50,969	)	$	(817	)	$	(51,786	)



	Impact of changes in accounting policies Year to Date
	As reported for the period ended September 30, 2018			Adjustments			As reported Balances without adoption of Topic 606
Revenues:
Net product revenue	$	177,172		$	(1,059	)	$	176,113
Collaboration and grant revenue	1,224			—			1,224
Total revenues	178,396			(1,059		)	177,337
Operating expenses:
Cost of product sales, excluding amortization of acquired intangible asset	8,909			(84		)	8,825
Amortization of acquired intangible asset	16,815			—			16,815
Research and development	118,337			—			118,337
Selling, general and administrative	104,882			—			104,882
Total operating expenses	248,943			(84		)	248,859
Loss from operations	(70,547		)	(975		)	(71,522		)
Interest expense, net	(9,306		)	—			(9,306		)
Other income, net	1,066			—			1,066
Loss before income tax expense	(78,787		)	(975		)	(79,762		)
Income tax expense	(964		)	—			(964		)
Net loss attributable to common stockholders	$	(79,751	)	$	(975	)	$	(80,726	)

iii.Consolidated statements of comprehensive loss



	Impact of changes in accounting policies Three Months Ended
	As reported for the period ended September 30, 2018			Adjustments			As reported Balances without adoption of Topic 606
Net loss	$	(50,969	)	$	(817	)	$	(51,786	)
Other comprehensive loss:
Unrealized gain on marketable securities, net of tax	33			—			33
Foreign currency translation loss	(260		)	—			(260		)
Comprehensive loss	$	(51,196	)	$	(817	)	$	(52,013	)



	Impact of changes in accounting policies Year to Date
	As reported for the period ended September 30, 2018			Adjustments			As reported Balances without adoption of Topic 606
Net loss	$	(79,751	)	$	(975	)	$	(80,726	)
Other comprehensive loss:
Unrealized loss on marketable securities, net of tax	(50		)	—			(50		)
Foreign currency translation loss	(2,291		)	—			(2,291		)
Comprehensive loss	$	(82,092	)	$	(975	)	$	(83,067	)

iv.Consolidated statements of cash flows



	Impact of changes in accounting policies
	As reported for the period ended September 30, 2018			Adjustments			Balances without adoption of Topic 606
Cash flows from operating activities
Net loss	$	(79,751	)	$	(975	)	$	(80,726	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	19,316			—			19,316
Change in valuation of warrant liability	3			—			3
Non-cash interest expense	5,563			—			5,563
Loss on disposal of asset	2			—			2
Amortization of premiums and accretion of discounts on investments, net	(354		)	—			(354		)
Amortization of debt issuance costs	390			—			390
Share-based compensation expense	24,773			—			24,773
Unrealized foreign currency transaction gain	(977		)	—			(977		)
Changes in operating assets and liabilities:							0
Inventory, net	(3,252		)	(84		)	(3,336		)
Prepaid expenses and other current assets	(1,301		)	—			(1,301		)
Trade receivables, net	(2,681		)	—			(2,681		)
Deposits and other assets	(385		)	—			(385		)
Accounts payable and accrued expenses	18,606			(794		)	17,812
Other liabilities	1,617			—			1,617
Deferred revenue	5,933			1,853			7,786
Net cash used in operating activities	(12,498		)	—			(12,498		)
Cash flows from investing activities
Purchases of fixed assets	(2,489		)	—			(2,489		)
Purchases of marketable securities	(28,656		)	—			(28,656		)
Sale and redemption of marketable securities	65,923			—			65,923
Acquisition of product rights	(3,903		)	—			(3,903		)
Business acquisition, net of cash acquired	(48,892		)	—			(48,892		)
Net cash (used in) / provided by investing activities	(18,017		)	—			(18,017		)
Cash flows from financing activities
Proceeds from exercise of options	8,631			—			8,631
Net proceeds from public offerings	117,915			—			117,915
Proceeds from shares issued under employee stock purchase plan	1,299			—			1,299
Net cash provided by financing activities	127,845			—			127,845
Effect of exchange rate changes on cash	(2,209		)	—			(2,209		)
Net increase in cash and cash equivalents	95,121			—			95,121
Cash and cash equivalents, beginning of period	111,792			—			111,792
Cash and cash equivalents, end of period	$	206,913		$	—		$	206,913

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 August 2013, a lead development compound, RG7800, was selected to move into IND-enabling studies, which triggered a milestone payment to the Company from Roche of $10 million. 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, 2013.

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.

The remaining potential research and development event milestones that can be received as of September 30, 2018 is $87.5 million.

For the nine months ended September 30, 2018 and 2017, the Company recognized revenue related to the licensing and collaboration agreement with Roche of $0.2 million and $0.2 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 nine months ended September 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 nine months ended September 30, 2018 and 2017, the Company did not recognize any revenue related to early stage collaborations.