Revenue recognition

Net product sales

During the twelve months ended December 31, 2018, net product sales in the United States were $92.0 million consisting solely of Emflaza, and net product sales not in the United States were $171.0 million and consisting solely of Translarna.

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



	Balance as of December 31, 2017		Additions		Deductions			ASC 606 Adjustment			Balance as of December 31, 2018
Deferred Revenue	$	11,891	$	6,417	$	(1,433	)	$	(3,937	)	$	12,938

The Company did not have any contract assets for the During the twelve months ended December 31, 2018.

During the twelve months ended December 31, 2018, the Company recognized revenue in the period from:



	December 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	263,005
Total product revenue	$	263,005

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

Remaining performance obligations

Remaining performance obligations represent the transaction price for goods the Company has yet to provide. As of December 31, 2018, the aggregate amount of transaction price allocated to remaining performance obligations relating to Translarna net product revenue was $12.9 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 December 31, 2018			Adjustments			As reported Balances without adoption of Topic 606
Assets
Current assets:
Cash and cash equivalents	$	169,498		$	—		$	169,498
Marketable securities	58,088			—			58,088
Trade receivables, net	67,907			—			67,907
Inventory	16,117			(84		)	16,033
Prepaid expenses and other current assets	9,247			—			9,247
Total current assets	320,857			(84		)	320,773
Fixed assets, net	12,694			—			12,694
Intangible assets, net	701,031			—			701,031
Goodwill	82,341			—			82,341
Deposits and other assets	2,299			—			2,299
Total assets	$	1,119,222		$	(84	)	$	1,119,138
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	128,199		$	(2,120	)	$	126,079
Current portion of long-term debt	11,667			—			11,667
Deferred revenue	3,716			10,563			14,279
Other current liabilities	3,814			—			3,814
Deferred consideration payable- current	19,400			—			19,400
Total current liabilities	166,796			8,443			175,239
Deferred revenue - long-term	9,722			—			9,722
Long-term debt	141,347			—			141,347
Contingent consideration payable	310,240			—			310,240
Deferred consideration payable - long-term	18,300			—			18,300
Deferred tax liability	122,032			—			122,032
Other long-term liabilities	58			—			58
Total liabilities	768,495			8,443			776,938

Stockholders’ equity:
Common stock	51			—			51
Additional paid-in capital	1,288,137			—			1,288,137
Accumulated other comprehensive income	1,462			—			1,462
Accumulated deficit	(938,923		)	(8,527		)	(947,450		)
Total stockholders’ equity	350,727			(8,527		)	342,200
Total liabilities and stockholders’ equity	$	1,119,222		$	(84	)	$	1,119,138

Consolidated statements of operations



	Impact of changes in accounting policies Twelve Months Ended
	As reported for the period ended December 31, 2018			Adjustments			As reported Balances without adoption of Topic 606
Revenues:
Net product revenue	$	263,005		$	(5,177	)	$	257,828
Collaboration and grant revenue	1,729			—			1,729
Total revenues	264,734			(5,177		)	259,557
Operating expenses:
Cost of product sales, excluding amortization of acquired intangible asset	12,670			(84		)	12,586
Amortization of acquired intangible asset	22,877			—			22,877
Research and development	171,984			—			171,984
Selling, general and administrative	153,548			—			153,548
Change in the fair value of deferred and contingent consideration	19,340			—			19,340
Total operating expenses	380,419			(84		)	380,335
Loss from operations	(115,685		)	(5,093		)	(120,778		)
Interest expense, net	(12,554		)	—			(12,554		)
Other income, net	129			—			129
Loss before income tax expense	(128,110		)	(5,093		)	(133,203		)
Income tax benefit	29			—			29
Net loss attributable to common stockholders	$	(128,081	)	$	(5,093	)	$	(133,174	)

iii.Consolidated statements of comprehensive loss



	Impact of changes in accounting policies Twelve Months Ended
	As reported for the period ended December 31, 2018			Adjustments			As reported Balances without adoption of Topic 606
Net loss	$	(128,081	)	$	(5,093	)	$	(133,174	)
Other comprehensive loss:
Unrealized gain on marketable securities, net of tax	9			—			9
Foreign currency translation loss	(2,516		)	—			(2,516		)
Comprehensive loss	$	(130,588	)	$	(5,093	)	$	(135,681	)

iv.Consolidated statements of cash flows



	Impact of changes in accounting policies
	As reported for the period ended December 31, 2018			Adjustments			Balances without adoption of Topic 606
Cash flows from operating activities
Net loss	$	(128,081	)	$	(5,093	)	$	(133,174	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	26,087			—			26,087
Change in valuation of deferred and contingent consideration	19,340			—			19,340
Amortization of premiums on investments	(433		)	—			(433		)
Amortization of debt issuance costs	524			—			524
Share-based compensation expense	33,252			—			33,252
Non-cash interest expense	7,518			—			7,518
Disposal of asset	2			—			2
Unrealized foreign currency transaction (gains) losses, net	(59		)	—			(59		)
Changes in operating assets and liabilities:							0
Inventory, net	(5,823		)	(84		)	(5,907		)
Prepaid expenses and other current assets	(1,609		)	—			(1,609		)
Trade receivables, net	(29,589		)	—			(29,589		)
Deposits and other assets	(1,093		)	—			(1,093		)
Accounts payable and accrued expenses	43,877			(2,120		)	41,757
Other long-term liabilities	1,932			—			1,932
Deferred revenue	6,514			7,297			13,811
Net cash used in operating activities	(27,641		)	—			(27,641		)
Cash flows from investing activities
Purchases of fixed assets	(7,097		)	—			(7,097		)
Purchases of marketable securities	(68,614		)	—			(68,614		)
Sale & redemption of marketable securities	90,423			—			90,423
Acquisition of product rights	(8,433		)	—			(8,433		)
Business acquisition, net of cash acquired	(48,892		)	—			(48,892		)
Net cash used in investing activities	(42,613		)	—			(42,613		)
Cash flows from financing activities
Proceeds from exercise of options	10,868			—			10,868
Proceeds from shares issued under employee stock purchase plan	2,787			—			2,787
Net proceeds from public offerings	117,916			—			117,916
Net cash provided by financing activities	131,571			—			131,571
Effect of exchange rate changes on cash	(3,611		)	—			(3,611		)
Net increase in cash and cash equivalents	57,706			—			57,706
Cash and cash equivalents, beginning of period	111,792			—			111,792
Cash and cash equivalents, end of period	$	169,498		$	—		$	169,498

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 3 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 2 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 2 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 certain 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 $10.0 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 December 31, 2018 is $87.5 million. The remaining potential sales milestones as of December 31, 2018 is $325.0 million upon achievement of certain sales events. In addition, the Company is eligible to receive up to double digit royalties on worldwide annual net sales of a commercial product.

For the twelve months ended December 31, 2018, 2017, and 2016, the Company recognized revenue related to the licensing and collaboration agreement with Roche of $0.2 million, $20.3 million, and $0.4 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 3 to 4 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 2 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 twelve months ended December 31, 2018, 2017, and 2016, 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 twelve months ended December 31, 2018, 2017, and 2016, the Company did not recognize any revenue related to early stage collaborations.

Grant revenue

The Company receives grant funding from various institutions and governmental bodies. The grants are typically for early discovery research, and typically the grant program lasts from two to five years. The Company records revenue as the research activities are performed. If the granting agency provides for an upfront payment, the amount is deferred and recognized as revenue as the expenditures are incurred. For the year ended December 31, 2018 and 2017, the Company did not recognize any grant revenue. For the year ending December 31, 2016, the Company recognized $0.9 million in grant revenue.