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Income taxes

12 Months Ended

Dec. 31, 2020

14. Income taxes

The loss from operations before tax (expense) benefit consisted of the following for the years ended December 31, 2020, 2019, and 2018:


	2020		2019		2018
Domestic	$	(452,475)	$	(231,915)	$	(68,461)
Foreign		49,543		(8,011)		(59,649)
Total	$	(402,932)	$	(239,926)	$	(128,110)

The Income Tax Provision consisted of the following for the years ended December 31, 2020, 2019 and 2018:


	2020		2019		2018
Current:
U.S. Federal	$	—	$	—	$	—
U.S. State and Local		(24,984)		(61)		(38)
Foreign		(4,372)		(2,041)		(669)
Deferred:
U.S. Federal		—		—		—
U.S. State and Local		(5,872)		(8,812)		—
Foreign		—		(736)		736
Total tax benefit (expense)	$	(35,228)	$	(11,650)	$	29

A reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate is as follows:


	December 31,
	2020		2019		2018
Federal income tax provision at statutory rate	21.00	%	21.00	%	21.00	%
State income tax provision, net of federal benefit	(3.31)		1.08		0.05
Permanent differences	(6.66)		(6.17)		(6.41)
Research and development	4.93		4.38		6.49
Change in valuation allowances	(26.40)		(35.49)		2.20
Change in deferred tax assets	2.93		15.89		(14.22)
Foreign tax rate differential	0.72		(1.88)		(9.10)
Tax rate change	(1.46)		(3.67)		—
(Accrual) Release of uncertain tax positions	(0.61)		—		—
Other	0.12		—		0.01
Effective income tax rate	(8.74)	%	(4.86)	%	0.02	%

Accounting for income taxes under U.S. GAAP requires that individual tax-paying entities of the company offset all deferred tax liabilities and assets within each particular tax jurisdiction and present them as a noncurrent deferred tax liability or asset. Amounts in different tax jurisdictions cannot be offset against each other. The noncurrent deferred income tax asset is recorded within deposits and other assets on the balance sheet. The amount of deferred income taxes are as follows:


	2020		2019
Assets:
Noncurrent deferred income taxes	$	—	$	—
Liabilities:
Noncurrent deferred income taxes		(136,735)		(130,862)
Deferred income taxes - net	$	(136,735)	$	(130,862)

The significant components of the Company’s deferred tax assets and liabilities at December 31, 2020 and 2019 are as follows:


	2020		2019
Deferred tax assets:
Accrued expense	$	5,528	$	2,588
Amortization		80,677		78,291
Depreciation		—		991
Federal tax credits		123,405		99,421
State tax credits		—		6,489
Federal net operating losses		16,999		91,010
State net operating losses		1,428		1,360
Foreign net operating losses		—		1,056
Capitalized research and development costs		661		1,274
Share based compensation and other		14,612		16,425
Liability for sale of future royalties		161,204		—
Other comprehensive loss		7,624		1,512
Total gross deferred tax assets		412,138		300,417
Less valuation allowance		(379,608)		(267,131)
Total deferred tax assets, net of valuation allowance	$	32,530	$	33,286
Deferred tax liabilities:
Depreciation	$	(2,904)	$	—
Convertible debt		(29,626)		(33,286)
Indefinite lived intangible		(136,735)		(130,862)
Total gross deferred tax liabilities		(169,265)		(164,148)
Net deferred tax assets (liabilities)	$	(136,735)	$	(130,862)

For the year ended December 31, 2020, the Company generated taxable income in the U.S. of $364.1 million which is primarily attributable to the taxable income from the sale of the Company’s right to receive sales-based royalty payments on Roche’s worldwide net sales of products, pursuant to the Royalty Purchase Agreement. The Company has not recorded any federal income tax provision after considering the federal NOL. The Company recorded a state income tax provision of $25.0 million after considering the state NOL and state tax credits.

At December 31, 2020 and 2019, the Company recorded valuation allowance against its net deferred tax assets of $379.6 million and $267.1 million, respectively. The change in the valuation allowance during the years ended December 31, 2020 and 2019 was $112.5 million and $86.7 million, respectively. A valuation allowance has been recorded since, in the judgment of management, these assets are not more likely than not to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences and carryforwards become deductible or are utilized. As of December 31, 2020, the Company had $80.9 million and $22.6 million of federal and state net operating loss carryforwards, respectively. As a result of the adoption of ASU 2016-09, the Company no longer excludes tax benefits that arose directly from equity compensation in excess of compensation recognized for financial reporting in its U.S. federal and U.S. state net operating loss carryforwards.

During 2018, the Company acquired IPR&D as part of the acquisition of Agilis. This asset is currently considered an indefinite-lived intangible with no related book amortization and tested for impairment, annually. As the IPR&D has no tax basis and is an indefinite-lived intangible, the deferred tax liability created at the time of acquisition is not considered positive evidence of future income and is presented as a deferred tax liability in the balance sheet.

As of December 31, 2020, research and development credit carryforward for federal purposes is $15.7 million. In addition, the Orphan Drug Credit Carryover available as of December 31, 2020 is $107.7 million. The Company’s federal credit carryforwards began to expire in 2019.

As a result of U.S. tax reform legislation, federal net operating losses generated in 2018 carryforward indefinitely. State net operating loss carryforwards begin to expire in 2037. Sections 382 and 383 of the Internal Revenue Code of 1986 subject the future utilization of net operating losses and certain other tax attributes, such as research and development tax credits, to an annual limitation in the event of certain ownership changes, as defined. The Company has undergone an ownership change and has determined that a “change in ownership” as defined by IRC Section 382 of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder, did occur in June of 2013. Accordingly, about $231.5 million of the Company’s NOL carryforwards are limited and the Company can only use $16.7 million for the first five years from the ownership change and $5.7 million per year going forward. Therefore, $169.2 million of the NOL’s will be freed up over the next 20 years and $62.3 million are expected to expire unused which are not included in the deferred tax assets listed above. At December 31, 2020, the Company utilized $364.1 million NOLs of which $97.7 million is the Section 382 NOL. There is $9.5 million available for immediate use and an additional $5.7 million will free up in 2021.

The income tax expense for the years ended December 31, 2020 and 2019 differed from the amounts computed by applying the U.S. federal income tax rate of 21% to loss before tax expense as a result of foreign taxes, the impact of permanent differences, including “global intangible low-taxed income” (“GILTI”), tax credits generated, true up of net operating loss carryforwards, and increase in the Company’s valuation allowance.

The Company applies the elements of FASB ASC 740-10 regarding accounting for uncertainty in income taxes. This clarifies the accounting for uncertainty in income taxes recognized in financial statements and required impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As of December 31, 2020, the Company recorded unrecognized tax benefits in the amount of $2.4 million and has not accrued any interest or penalties through 2020. The Company’s policy is to recognize interest and penalties related to tax matters within the income tax provision. Tax years beginning in 2014 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. The Company concluded the examination from the United States Internal Revenue Service for tax year 2014 noting adjustments to the U.S. federal net operating loss carryforwards and research and development credit carryforwards. No other examinations are in process.

For all years through December 31, 2016, the Company generated research credits but has not conducted a study to document the qualified activities. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforwards and the valuation allowance.

As a result of U.S. tax reform legislation, distributions of profits from non-U.S. subsidiaries are not expected to cause a significant incremental U.S. tax impact in the future. However, distributions may be subject to non-U.S. withholding taxes if profits are distributed from certain jurisdictions. As of December 31, 2020, for purposes of ASC 740-10-25-3, the Company had $16.1 million of undistributed earnings from non-U.S. subsidiaries that it intends to reinvest permanently in its non-U.S. operations. As these ASC 740-10-25-3 earnings are considered permanently reinvested, no tax provision has been accrued. It is not feasible to estimate the amount of tax that might be payable on the eventual remittance of such earnings.

The Company has completed its accounting for the income tax effects of U.S. tax reform legislation and included measurement period adjustments in 2018. As a result of the reduction in the U.S. corporate income tax rate, the Company revalued its ending net deferred tax assets as of December 31, 2018, which resulted in a provisional benefit of $46.1 million which was offset by an associated change in the valuation allowance.

Uncertain Income Tax Benefits

A reconciliation of the gross amount of unrecognized tax benefits, excluding accrued interest and penalties, is as follows:


	Unrecognized Tax Benefits
Balance at December 31, 2019		—
Increase in tax positions for prior years		2,446
Balance at December 31, 2020	$	2,446

Uncertain tax positions, for which management's assessment is that there is a more than 50% probability of sustaining the position upon challenge by a taxing authority based upon its technical merits, are subject to certain recognition and measurement criteria. The nature of the uncertain tax positions is often very complex and subject to change, and the amounts at issue can be substantial. The Company develops its cumulative probability assessment of the measurement of uncertain tax positions using internal experience, judgment and assistance from professional advisors. The Company re-evaluates these uncertain tax positions on a quarterly basis based on a number of factors including, but not limited to, changes in facts or circumstances, changes in tax law, and effectively settled issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.

For the year ended December 31, 2020, the Company recorded $2.4 million of uncertain tax benefits which were generated in tax years ended December 31, 2019. While it is reasonably possible that a further change in the unrecognized tax benefits may occur within the next twelve months, the Company is unable to estimate the amount of any such change.

The Company records penalties and tax-related interest expense on unrecognized tax benefits as a component of the provision for income taxes in the accompanying consolidated statement of operations. The Company has recorded no interest and penalties related to uncertain tax positions for the years ended December 31, 2020 in the accompanying consolidated balance sheet. Future changes in the Company’s unrecognized tax benefits will affect the Company’s annual effective tax rate.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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