Income Taxes

12 Months Ended

Dec. 31, 2018

Income Taxes For the years ended December 31, 2018, 2017 and 2016 there was no provision for income taxes due to taxable losses generated, fully offset by a valuation allowance.

The significant components of the Company's deferred income tax assets (liabilities) were as follows (in thousands):


	December 31,
	2018		2017
Deferred income tax assets:
Federal U.S. net operating loss carryforward	$	87,284	$	50,346
State net operating loss carryforward	22,809		7,551
Research and development credit, net	29,750		21,284
Orphan drug credit, net	22,580		21,708
Deferred rent	3,118		3,385
Deferred revenue	3,736		2,982
Depreciation	—		155
Other	6,854		5,847
Gross deferred income tax assets	176,131		113,258
Valuation allowance	(172,457)		(112,453)
Net deferred income tax assets	3,674		805

Deferred income tax liabilities:
Depreciation	(1,911)		—
Prepaid expenditures	(1,763)		(805)
Gross deferred income tax liabilities	(3,674)		(805)
Net deferred income tax asset/(liability)	$	—	$	—

The Company recognizes valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers (i) future reversals of existing taxable temporary differences; (ii) future taxable income exclusive of reversing temporary difference and carryforwards; (iii) taxable income in prior carryback years if carryback is permitted under applicable tax law; and (iv) tax planning strategies. The Company's net deferred income tax asset is not more likely than not to be utilized due to the lack of sufficient sources of future taxable income and cumulative book losses which have resulted over the years.

As of December 31, 2018, the Company has U.S. federal and state net operating loss (NOL) carryforwards of approximately $415.6 million. Of these NOLs, $237.8 million will expire in various years beginning in 2025 through 2037. $177.8 million of NOLs were generated post December 31, 2017 and carryforward indefinitely. In addition, the Company has U.S. federal tax credits of $52.3 million which will expire in various years beginning in 2022 through 2038.

The use of the Company's U.S. federal NOL and tax credit carryforwards in future years are restricted due to changes in the Company's ownership and tax attributes acquired through the Company's acquisitions. As of December 31, 2018, $13.5 million of the Company's U.S. Federal NOLs are limited for use over the years 2019 – 2028 in which a range of such amounts could be utilized on an annual basis of $0.2 million to $1.4 million. The remaining $402.1 million of NOLs is not limited and can be offset against future taxable income, subject to certain limitations for newly enacted tax legislation. The Company adopted ASU 2016-09 as of January 1, 2017. Accordingly, the Company recognized the previously unrecognized excess tax benefits of approximately $18.6 million ($6.5 million tax effected) recorded as deferred tax assets with a corresponding offsetting full valuation allowance at the beginning of 2017 without any tax impact.

The reconciliation of the reported estimated income tax benefit to the amount that would result by applying the U.S. federal statutory tax rate to the net income is as follows (in thousands):


	Year Ended December 31,
	2018		2017		2016

United States federal tax at statutory rate	$	(36,005)	$	(6,869)	$	(20,489)
State taxes (net of federal benefit)	(11,133)		(735)		(3,116)
Deferred income tax adjustments	(4,435)		607		173
Deferred state blended rate adjustments	—		(485)		(32)
Deferred federal rate change reduction in corporate rate	—		39,447		—
Research credit, net	(8,466)		(8,455)		(2,551)
Orphan drug credit, net	(872)		(1,853)		(571)
Other permanent items	148		276		145
Equity-based compensation	758		2,067		1,997
Change in valuation allowance	60,005		(24,000)		24,444
Income tax expense/(benefit)	$	—	$	—	$	—

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):


	Year Ended December 31,
	2018		2017		2016
Beginning balance	$	3,395	$	2,465	$	2,425
Increases for current year tax positions	642		569		308
Increases/(decreases) for prior year tax positions	281		361		(268)
Ending balance	$	4,318	$	3,395	$	2,465

As of December 31, 2018 and 2017, of the total gross unrecognized tax benefits, approximately $4.5 million and $3.4 million would favorably impact the Company's effective income tax rate, respectively. Although, due to the Company's determination that the deferred income tax asset would not more likely than not be realized, a valuation allowance would be recorded, therefore, zero net impact would result within the Company's effective income tax rate. The Company's uncertain income tax position liability has been recorded to deferred income taxes to offset the tax attribute carryforward amounts.

For the years ended December 31, 2018, 2017 and 2016, the Company has not recognized any interest or penalties related to the uncertain income tax positions due to the fact such position is related to tax attribute carryforwards which have not yet been utilized. The Company does not expect its unrecognized income tax position to significantly decrease within the next twelve months.

The Company's U.S. Federal and state income tax returns from 2001 forward remain open to examination due to the carryover of unused net operating losses and tax credits.

As more fully described in Note 2 to the consolidated financial statements, the Tax Act was signed into law making significant changes to the Internal Revenue Code on December 22, 2017. Under ASC 740, the effects of the new legislation are to be recognized in the period of enactment. As such, recognition of the tax impact of the Tax Act was required in the interim and annual periods that include December 22, 2017. As a result, the Company revalued the deferred tax asset as of December 31, 2017, fully offset by a valuation allowance without impact to the financial statements.