2 0 1 8 A N N U A L R E P O R T
With the FDA approval of two novel medicines in the past two years, both of which were discovered in the
Company’s research labs, and a diversified, multistage pipeline, Neurocrine Biosciences has the potential for
three approved treatments in the United States across four therapeutic indications by 2020.
Neurocrine Biosciences (Nasdaq: NBIX) is a neuroscience-focused, biopharmaceutical company with more than
25 years of experience discovering and developing life-changing treatments for people with serious, challenging
and under-addressed neurological, endocrine and psychiatric disorders. The company’s diverse portfolio includes
FDA-approved treatments for tardive dyskinesia and endometriosis* and clinical development programs in
multiple therapeutic areas including Parkinson’s disease, congenital adrenal hyperplasia and uterine fibroids*.
Headquartered in San Diego, Neurocrine Biosciences specializes in targeting and interrupting disease-causing
mechanisms involving the interconnected pathways of the nervous and endocrine systems. For more information,
visit neurocrine.com. (*in collaboration with AbbVie)
Dear Fellow Shareholders,
2018 was another pivotal year for Neurocrine Biosciences as we continued to build a world-class
neuroscience-focused biopharmaceutical company and advance our mission to bring life-changing
treatments to improve the lives of people with serious, challenging and under-addressed neurological,
psychiatric and endocrine disorders. We made significant progress raising physician and patient awareness
of INGREZZA® (valbenazine), the first U.S. Food and Drug Administration (FDA)-approved treatment for
tardive dyskinesia (TD), a devastating involuntary movement disorder, and celebrated the FDA approval of
a second medication discovered at Neurocrine Biosciences, ORILISSA® (elagolix), for endometriosis-
associated pain. We also advanced our diversified, multistage pipeline, which includes treatments for
Parkinson’s disease and congenital adrenal hyperplasia, two new compounds discovered through our
robust internal R&D efforts, and four new gene therapy programs acquired in early 2019 through a strategic
collaboration with Voyager Therapeutics. I am confident that we have laid the foundation to make
meaningful strides throughout 2019 and work toward our goal of having three FDA-approved treatments in
four indications by 2020.
We are pleased to have exceeded our launch expectations for INGREZZA since the FDA approval in 2017
and continue to work diligently on several fronts to bring this important medicine to people coping with the
physical and emotional suffering associated with TD. We expanded our field sales team and launched
efforts to educate healthcare professionals to better recognize TD symptoms to help diagnose patients. As
a result, approximately 71,500 INGREZZA prescriptions were filled in 2018, yielding net product sales of
more than $400 million. We believe this growth was driven by the efficacy and tolerability of INGREZZA as
well as a favorable coverage climate (about 90% of lives are covered by insurance), a high fulfillment rate
(more than 70% of prescriptions are dispensed), and affordability (about 80% of patients pay less than $10
out-of-pocket).
With the vast majority of the half a million people with TD still undiagnosed, we recognize that we have
more work to do. We remain focused on building excitement and awareness around INGREZZA among
physicians and the TD patient community by continuing to invest in our field sales and support team,
reaching physicians, and expanding the reach of our multimedia patient and caregiver educational
campaign, Talk About TD. We believe INGREZZA is well positioned to deliver on hope and help alleviate
the suffering of those living with TD.
Beyond INGREZZA, we are proud of the U.S. regulatory clearance of ORILISSA, the second treatment
discovered at Neurocrine Biosciences and cleared by the FDA in the last two years, and like INGREZZA, a
testament to our research and development capabilities. ORILISSA is not only the first oral treatment for
the management of moderate to severe pain associated with endometriosis in over a decade, but also the
first and only oral gonadotropin-releasing hormone antagonist approved by the FDA for this indication.
Marketed by AbbVie, ORILISSA became available to patients in the U.S. in August 2018 and in Canada in
October 2018. Approximately 3 million women suffer from endometriosis in the U.S., with 300,000 newly
diagnosed women each year. AbbVie also plans to submit a New Drug Application (NDA) to the FDA for
elagolix for the treatment of uterine fibroids, with an anticipated commercial launch in 2020.
Our late-stage pipeline is led by opicapone, a catechol-O-methyltransferase (COMT) inhibitor for the
adjunctive treatment of Parkinson’s disease, a chronic, progressive and debilitating neurodegenerative
disease that affects approximately 1 million people in the U.S. We in-licensed opicapone from BIAL for
exclusive development and commercialization rights in the United States and Canada and we’re working
toward an NDA submission in the second quarter of 2019.
(cid:3)
Following opicapone is NBI-74788, a corticotropin-releasing factor type 1 (CRF-1) receptor antagonist, for
the treatment of classic congenital adrenal hyperplasia (CAH), a rare genetic disorder affecting the adrenal
glands. Patients with classic CAH have highly variable clinical features, limited treatment options and often
require supraphysiological doses of glucocorticoids, which can lead to serious long-term health
consequences. We recently announced positive interim results from a Phase II proof-of-concept trial in
adults and plan to meet with the FDA to discuss the registration program for NBI-74788 in adult and pediatric
patients with CAH later in 2019.
In January 2019, we acquired four gene therapy programs through our strategic development and
commercialization collaboration with Voyager Therapeutics. The partnership combines our expertise in
neuroscience, drug development and commercialization with Voyager’s expertise in gene therapy targeting
severe neurological diseases. In the coming year, we expect to advance a Phase II gene therapy program
in Parkinson’s disease and select a lead gene therapy candidate for Friedreich’s ataxia, a rare neurological
disease.
We also expanded our early-stage clinical pipeline with Investigational New Drug (IND) filings for two newly
discovered compounds -- a VMAT2 inhibitor and a novel compound addressing the central nervous system
-- targeting neurological and/or psychiatric disorders. In addition, as part of our continued commitment to
bring important new medicines for patients with central nervous system disorders, we also entered a
research partnership with Jnana Therapeutics to combine our in-house R&D expertise with their drug
discovery platform to identify small molecules targeted to the solute carrier family of transporters.
The progress and results we have achieved in 2018 and early 2019 would not be possible without the talent,
dedication, hard work and commitment of our team members, who are the lifeblood of our company. I could
not be prouder of our team’s accomplishments or more optimistic about our opportunities for further growth
as we build on our 25-year legacy. As we pursue our vision of becoming the leader in neuroscience-based
therapeutics for diseases that lack effective treatments, we will continue building our commercial
infrastructure to support future launches, while remaining lean and efficient, taking calculated risks, and
making strategic investments that drive shareholder value. I’m inspired by our potential, thankful for the
opportunity to lead Neurocrine Biosciences into its next phase of growth, and grateful for the continued
support of our Board and you, our shareholders.
Sincerely,
Kevin Gorman, Ph.D.
Chief Executive Officer
(cid:3)
NEUROCRINE BIOSCIENCES, INC.
12780 El Camino Real
San Diego, CA 92130
Notice of Annual Meeting of Stockholders
To Be Held on May 22, 2019
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the 2019 Annual Meeting of Stockholders of Neurocrine Biosciences,
Inc., a Delaware corporation (the “Company”), will be held on May 22, 2019, at 10:30 a.m., local time, at the
Company’s corporate headquarters located at 12780 El Camino Real, San Diego, California 92130, for the
following purposes as more fully described in the Proxy Statement accompanying this Notice:
1.
The election of the two nominees for Class II Director named herein to the Board of Directors to serve
for a term of three years;
2. An advisory vote on the compensation paid to the Company’s named executive officers;
3.
4.
5.
To approve an amendment to the Company’s 2011 Equity Incentive Plan to increase the number of
shares of common stock reserved for issuance thereunder from 19,000,000 to 21,000,000;
The ratification of the appointment of Ernst & Young LLP as the Company’s independent registered
public accounting firm for the fiscal year ending December 31, 2019; and
To transact such other business as may properly come before the Annual Meeting of Stockholders or
any continuation, adjournment or postponement thereof.
Only stockholders of record at the close of business on March 29, 2019 are entitled to receive notice of and
to vote at the Annual Meeting of Stockholders.
All stockholders are cordially invited to attend the Annual Meeting of Stockholders in person. Your vote is
important. Whether or not you plan to attend the Annual Meeting, we hope you will vote as soon as possible.
You may vote over the Internet, as well as by telephone or by mailing a proxy or voting instruction form. Please
review the instructions on each of your voting options described in these proxy materials. Stockholders attending
the Annual Meeting may vote in person even if they have returned a proxy.
By Order of the Board of Directors,
Darin Lippoldt
Chief Legal Officer and Corporate Secretary
San Diego, California
April 17, 2019
Important Notice Regarding the Availability of Proxy Materials for the Stockholders’
Meeting to be Held on May 22, 2019 at 10:30 a.m. Local Time at
12780 El Camino Real, San Diego, California 92130.
The proxy statement and annual report to stockholders are available at
www.proxyvote.com. Please have the control number on your proxy card available.
[THIS PAGE INTENTIONALLY LEFT BLANK]
NEUROCRINE BIOSCIENCES, INC.
12780 El Camino Real
San Diego, California 92130
PROXY STATEMENT
This Proxy is solicited on behalf of Neurocrine Biosciences, Inc., a Delaware corporation (the “Company”
or “Neurocrine”), for use at its 2019 Annual Meeting of Stockholders (the “Annual Meeting”) to be held on
May 22, 2019 beginning at 10:30 a.m., local time, or at any continuations, postponements or adjournments
thereof for the purposes set forth in this proxy statement and the accompanying Notice of Annual Meeting of
Stockholders. The Annual Meeting will be held at the Company’s corporate headquarters, located at 12780 El
Camino Real, San Diego, California 92130. The Company’s phone number is (858) 617-7600.
ABOUT THE ANNUAL MEETING
Why did I receive these proxy materials?
The Company has sent you these proxy materials because the Board of Directors of the Company is
soliciting your proxy to vote at the Annual Meeting, including at any adjournments or postponements of the
Annual Meeting. You are invited to attend the Annual Meeting to vote on the proposals described in this proxy
statement. However, you do not need to attend the Annual Meeting to vote your shares. Instead, you may simply
complete, sign and return the enclosed proxy card, or follow the instructions on the enclosed proxy card to
submit your proxy over the telephone or Internet.
We intend to mail these proxy materials on or about April 22, 2019 to all shareholders of record entitled to
vote at the Annual Meeting.
What is the purpose of the Annual Meeting?
At the Annual Meeting, stockholders will act upon the matters outlined in these proxy materials, including
the election of the two nominees for Class II Director named herein, an advisory vote on the compensation paid
to the Company’s named executive officers, approval of an amendment increasing the number of shares of
common stock reserved for issuance under the Company’s 2011 Equity Incentive Plan from 19,000,000 to
21,000,000, and ratification of the appointment of Ernst & Young LLP as the Company’s independent registered
public accounting firm for the fiscal year ending December 31, 2019. In addition, following the Annual Meeting,
management will report on the performance of the Company and respond to questions from stockholders.
Who can attend the Annual Meeting?
All stockholders of record at the close of business on March 29, 2019 (the “Record Date”), or their duly
appointed proxies, may attend the Annual Meeting. If you attend, please note that you may be asked to present
valid picture identification, such as a driver’s license or passport. Cameras, recording devices and other
electronic devices will not be permitted at the Annual Meeting.
Please also note that if you hold your shares in “street name” (that is, through a broker or other nominee),
you will need to bring a copy of a brokerage statement reflecting your stock ownership as of the record date and
check in at the registration desk at the Annual Meeting.
1
Who is entitled to vote at the Annual Meeting?
Stockholders of record at the close of business on the Record Date are entitled to receive notice of and to
participate in the Annual Meeting. At the close of business on the Record Date, 91,284,279 shares of the
Company’s common stock, $0.001 par value per share, were issued and outstanding. If you were a stockholder of
record on that date, you will be entitled to vote all of the shares that you held on that date at the Annual Meeting,
or any continuations, postponements or adjournments of the Annual Meeting.
Each outstanding share of the Company’s common stock will be entitled to one vote on each proposal
considered at the Annual Meeting.
What constitutes a quorum? What are broker non-votes? What are advisory votes?
The presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the aggregate
voting power of the common stock outstanding on the Record Date will constitute a quorum, permitting the
Company to conduct its business at the Annual Meeting. As of the Record Date, 91,284,279 shares of common
stock, representing the same number of votes, were outstanding. Thus, the presence of the holders of common
stock representing at least 45,642,140 shares will be required to establish a quorum. The presence of a quorum
will be determined by the Inspector of Elections (the “Inspector”).
Proxies received but marked as abstentions, as well as “broker non-votes,” will be included in the
calculation of the number of shares considered to be present at the Annual Meeting. Broker non-votes occur
when a holder of shares in “street name” does not give instructions to the broker or nominee holding the shares as
to how to vote on “non-routine” matters. Under the rules and interpretations of the New York Stock Exchange
(the “NYSE”), “non-routine” matters are matters that may substantively affect the rights or privileges of
stockholders, such as mergers, stockholder proposals and elections of directors, even if not contested. In addition,
as required by Section 957 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,
advisory votes on executive compensation are non-routine matters for which brokers do not have discretionary
authority to vote shares held by account holders. Only ratification of our independent registered public
accounting firm under Proposal Four is considered a routine matter.
The vote on Proposal Two is advisory. The approval or the disapproval of Proposal Two will not be binding
on the Company or the Board of Directors and will not create or imply any change to the fiduciary duties of the
Board of Directors. However, the Company and the Board of Directors will consider the results of the advisory
vote on Proposal Two in making future decisions about compensation of the Company’s named executive
officers.
How do I vote my shares in person at the Annual Meeting?
You may vote your shares held in your name as the stockholder of record in person at the Annual Meeting.
You may vote your shares held beneficially in street name in person at the Annual Meeting only if you obtain a
legal proxy from the broker, bank, trustee, or nominee that holds your shares giving you the right to vote the
shares. Even if you plan to attend the Annual Meeting, we recommend that you also submit your proxy or voting
instructions as described below so that your vote will be counted if you later decide not to attend the Annual
Meeting.
How can I vote my shares without attending the Annual Meeting?
Whether you hold shares directly as the stockholder of record or beneficially in street name, you may direct
how your shares are voted without attending the Annual Meeting. If you are a stockholder of record, you may
vote by proxy. You can vote by proxy over the Internet, by mail or by telephone pursuant to instructions provided
on the enclosed proxy card. If you hold shares beneficially in street name, you may also vote by proxy over the
2
Internet or you can also vote by telephone or mail by following the voting instruction form provided to you by
your broker, bank, trustee, or nominee. The deadline for voting by telephone or electronically is 11:59 p.m.,
Eastern Time, on May 21, 2019.
Who will bear the cost of soliciting votes for the Annual Meeting?
To the extent such costs are incurred, the cost of solicitation of proxies will be borne by the Company. The
Company will reimburse expenses incurred by brokerage firms and other persons representing beneficial owners
of shares in forwarding solicitation material to beneficial owners. To assist in soliciting proxies (votes), the
Company may retain a professional proxy solicitation firm, at an approximate cost of $10,000. Proxies also may
be solicited by certain of the Company’s directors, officers and regular employees, without additional
compensation, personally, by telephone or by other appropriate means.
Can I change my vote after I return my proxy?
Yes. Even after you have submitted your proxy, you may change your vote at any time before the proxy is
exercised by filing with the Corporate Secretary of the Company either a notice of revocation or a duly executed
proxy bearing a later date. Your proxy will also be revoked if you attend the Annual Meeting and vote in person.
Attendance at the Annual Meeting will not by itself revoke a previously granted proxy.
What does it mean if I receive more than one set of proxy materials?
If you receive more than one set of proxy materials, your common stock is registered in more than one name
or are registered in different accounts. Please complete a proxy for each separate set of proxy materials that you
receive to ensure that all of your shares are voted.
What are the Board of Directors’ recommendations?
Unless you give other instructions on your proxy, the persons named as proxy holders on the proxy will vote
in accordance with the recommendations of the Board of Directors. The Board of Directors’ recommendation is
set forth together with the description of each item in this proxy statement. In summary, the Board of Directors
recommends a vote:
•
•
•
•
for election of the two nominees for Class II Director named herein (see Proposal One);
for an advisory vote on the compensation paid to the Company’s named executive officers (see
Proposal Two);
for approval of the amendment to the Company’s 2011 Equity Incentive Plan to increase the number of
shares of common stock reserved for issuance thereunder from 19,000,000 to 21,000,000 (see Proposal
Three); and
for ratification of the appointment of Ernst & Young LLP as the Company’s independent registered
public accounting firm for the fiscal year ending December 31, 2019 (see Proposal Four).
With respect to any other matter that properly comes before the meeting, the proxy holders will vote as
recommended by the Board of Directors or, if no recommendation is given, in their own discretion.
What vote is required to approve each item?
Election of Directors. The affirmative vote of a plurality of the votes cast at the Annual Meeting is required
for the election of directors. A properly executed proxy marked “WITHHOLD AUTHORITY” with respect to
the election of one or more directors will not be voted with respect to the director or directors indicated, although
it will be counted for purposes of determining whether there is a quorum.
3
Other Items. For each other item, the affirmative vote of the holders of a majority of the shares represented
in person or by proxy and entitled to vote on the item will be required for approval. A properly executed proxy
marked “ABSTAIN” with respect to any such matter will not be voted, although it will be counted for purposes
of determining the number of shares represented in person or by proxy at the Annual Meeting. Accordingly, an
abstention will have the effect of a negative vote for each item. If you hold your shares in “street name” through
a broker or other nominee, your broker or nominee will not be permitted to exercise voting discretion with
respect to each of the matters to be acted upon, other than Proposal Four. Thus, if you do not give your broker or
nominee specific instructions, your shares will not be voted on and will not be counted for any other matter to be
acted upon, other than Proposal Four. Shares represented by such “broker non-votes” will, however, be counted
in determining whether there is a quorum.
Who counts the votes?
Votes cast by proxy or in person at the Annual Meeting will be tabulated by the Inspector.
How can I find out the results of the voting at the Annual Meeting?
Preliminary voting results will be announced at the Annual Meeting. In addition, final voting results will be
published in a current report on Form 8-K that we expect to file with the SEC within four business days after the
Annual Meeting. If final voting results are not available to us in time to file a Form 8-K within four business days
after the meeting, we intend to file a Form 8-K to publish preliminary results and, within four business days after
the final results are known to us, file an amended Form 8-K to publish the final results.
What proxy materials are available on the internet?
The proxy statement and annual report to stockholders are available at www.proxyvote.com. Please have the
control number on your proxy card available.
4
STOCK OWNERSHIP
Who are the principal stockholders, and how much stock does management own?
The following table sets forth the beneficial ownership of the Company’s common stock as of March 15,
2019 by (i) each of the executive officers named in the table under the heading “Summary Compensation Table,”
(ii) each current director, (iii) all current directors and executive officers as a group and (iv) all persons known to
the Company to be the beneficial owners of more than 5% of the Company’s common stock. The table is based
upon information supplied by our executive officers, directors and principal stockholders and a review of
Schedules 13D and 13G, if any, filed with the SEC. A total of 91,266,478 shares of the Company’s common
stock were issued and outstanding as of March 15, 2019.
Name and Address of Beneficial Owner (1)
Number of
Shares of
Common
Stock
Acquirable
Within
60 Days (3)
Total Number
of Shares of
Common
Stock
Beneficially
Owned (4)
Number of
Shares of
Common Stock
Owned (2)
Percent
Ownership
FMR LLC (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,097,329
— 13,097,329
14.4%
245 Summer Street, Boston, MA 02210
Janus Henderson Group plc (6) . . . . . . . . . . . . . . . . . . . . .
9,120,212
201 Bishopsgate EC2M 3AE, United Kingdom
The Vanguard Group (7) . . . . . . . . . . . . . . . . . . . . . . . . . .
8,079,818
100 Vanguard Blvd., Malvern, PA 19355
BlackRock, Inc. (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,978,917
55 East 52nd Street, New York, NY 10055
Perceptive Advisors LLC (9) . . . . . . . . . . . . . . . . . . . . . . .
4,608,554
—
—
—
—
9,120,212
10.0%
8,079,818
8.9%
4,978,917
5.5%
4,608,554
5.0%
51 Astor Place, 10th Floor, New York, NY 10003
Kevin C. Gorman, Ph.D.
. . . . . . . . . . . . . . . . . . . . . . . . . .
Matthew C. Abernethy . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eric Benevich.
Kyle W. Gano, Ph.D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eiry W. Roberts, M.D. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William H. Rastetter, Ph.D. . . . . . . . . . . . . . . . . . . . . . . . .
Gary A. Lyons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
George J. Morrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richard F. Pops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alfred W. Sandrock, Jr., M.D., Ph.D.
. . . . . . . . . . . . . . . .
Stephen A. Sherwin, M.D. . . . . . . . . . . . . . . . . . . . . . . . . .
All current executive officers and directors as a group
417,597
2,276
20,911
86,145
3,417
24,750
245,697
—
29,512
—
47,548
951,443
26,465
151,491
245,256
27,500
139,750
111,458
81,458
111,458
81,458
111,458
1,369,040
28,741
172,402
331,401
30,917
164,500
357,155
81,458
140,970
81,458
159,006
1.5%
*
*
*
*
*
*
*
*
*
*
(15 persons) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,179,283
2,734,010
3,913,293
4.3%
*
Represents beneficial ownership of less than one percent (1%) of the outstanding shares of the Company’s
common stock as of March 15, 2019.
(1) The address of each beneficial owner named is c/o Neurocrine Biosciences, Inc., 12780 El Camino Real,
San Diego, CA 92130, unless otherwise indicated.
(2) Represents shares of common stock owned, excluding shares of common stock subject to stock options that
are listed under the heading “Number of Shares of Common Stock Acquirable Within 60 Days,” by the
named parties as of March 15, 2019.
(3) Shares of common stock subject to stock options currently exercisable or exercisable within 60 days of
March 15, 2019, regardless of exercise price, are deemed to be outstanding for computing the percentage
ownership of the person holding such options and the percentage ownership of any group of which the
holder is a member, but are not deemed outstanding for computing the percentage of any other person.
5
(4) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or
investment power with respect to securities. Except as indicated by footnote, and subject to community
property laws where applicable, the Company believes that the persons named in the table have sole voting
and investment power with respect to all shares of common stock shown as beneficially owned by them.
(5) Based on Amendment No. 9 to Schedule 13G filed by FMR LLC (“FMR”) on February 13, 2019, reporting
ownership as of December 31, 2018. According to such filing, FMR beneficially owns 13,097,329 shares of
common stock and has sole voting power as to 1,805,400 shares of common stock. Various persons have the
right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the
common stock held by FMR.
(6) Based on Amendment No. 1 to Schedule 13G filed by Janus Henderson Group plc (“Janus”) on February 8,
2019, reporting ownership as of December 31, 2018. According to such filing, Janus beneficially owns
9,120,212 shares of common stock and sole voting power as to 0 shares of common stock. These securities
are owned by various institutional investors for which Janus has a controlling ownership interest. As a result
of its role as an investment adviser or sub-adviser to such institutional investors, for the purposes of the
reporting requirements of the Exchange Act, Janus is deemed to be a beneficial owner of such securities;
however, Janus expressly disclaims that it is, in fact, the beneficial owner of such securities.
(7) Based on Amendment No. 3 to Schedule 13G filed by The Vanguard Group, Inc. (“Vanguard Group”) on
February 11, 2019, reporting ownership as of December 31, 2018. According to such filing, Vanguard
Group beneficially owns 8,079,818 shares of common stock and sole voting power as to 49,601 shares of
common stock.
(8) Based on Amendment No. 6 to Schedule 13G filed by BlackRock, Inc. (“BlackRock”) on February 11,
2019, reporting ownership as of December 31, 2018. According to such filing, BlackRock beneficially owns
4,978,917 shares of common stock and sole voting power as to 4,617,444 shares of common stock. Various
persons have the right to receive or the power to direct the receipt of dividends from, or the proceeds from
the sale of shares of the common stock held by BlackRock. No one person’s interest in the common stock
held by BlackRock is more than five percent of the Company’s total outstanding common stock.
(9) Based on Amendment No. 2 to Schedule 13G filed by Perceptive Advisors LLC (“Perceptive”) on
February 14, 2019, reporting ownership as of December 31, 2018. According to such filing, Perceptive
beneficially owns 4,608,554 shares of common stock and sole voting power as to 0 shares of common stock.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s officers and directors, and persons who
beneficially own 10% or greater of a registered class of the Company’s equity securities, to file reports of
ownership on Form 3 and reports of changes in ownership on Form 4 or Form 5 with the SEC. Such officers,
directors and 10% or greater stockholders are also required by SEC rules to furnish the Company with copies of
all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, and
written representations from certain reporting persons, the Company believes that its officers, directors and 10%
or greater stockholders complied with all Section 16(a) filing requirements applicable to them during the fiscal
year ended December 31, 2017, except that: (i) one report covering one transaction was inadvertently filed late
by the Company on behalf of each of Mr. Lyons, Mr. Mollica, Mr. Morrow, Ms. Nevinny, Mr. Pops,
Dr. Rastetter, Dr. Sandrock and Dr. Sherwin; (ii) one report covering three transactions was inadvertently filed
late by the Company on behalf of each of Dr. Gano and Dimitri Grigoriadis, Ph.D., our Chief Research Officer;
(iii) one report covering seven transactions was inadvertently filed late by the Company on behalf of Christopher
O’Brien, M.D., our former Chief Medical Officer; (iv) one report covering six transactions was inadvertently
filed late by the Company on behalf of Malcolm Lloyd-Smith, our Chief Regulatory Officer; and (v) two reports
covering six transactions were inadvertently filed late by the Company on behalf of Darin Lippoldt, our Chief
Legal Officer. Based solely on its review of the copies of such forms received by it, and written representations
from certain reporting persons, the Company believes that its officers, directors and 10% or greater stockholders
complied with all Section 16(a) filing requirements applicable to them during the fiscal year ended December 31,
2018.
6
BOARD OF DIRECTORS AND COMMITTEES
General
The Company’s bylaws, as amended, provide that the Board of Directors is comprised of seven directors.
The Company’s Certificate of Incorporation provides that the Board of Directors is divided into three classes.
There are currently two directors in Class I (William H. Rastetter, Ph.D. and George J. Morrow), two directors in
Class II (Richard F. Pops and Stephen A. Sherwin, M.D.), and three directors in Class III (Kevin C.
Gorman, Ph.D., Gary A. Lyons and Alfred W. Sandrock, Jr., M.D., Ph.D.). With the exception of Kevin C.
Gorman, Ph.D., who is the Chief Executive Officer of the Company, all current members of the Board of
Directors meet the definition of “independent director” under the Nasdaq Stock Market qualification standards.
The directors in Class I hold office until the 2021 Annual Meeting of Stockholders, the directors in Class II
hold office until the 2019 Annual Meeting of Stockholders, and the directors in Class III hold office until the
2020 Annual Meeting of Stockholders (or, in each case, until their earlier resignation, removal from office, or
death). After each such election, the directors in each such case will then serve in succeeding terms of three years
and until a successor is duly elected and qualified. Officers of the Company serve at the discretion of the Board
of Directors. There are no family relationships among the Company’s directors and executive officers.
The term of office for directors Richard F. Pops and Stephen A. Sherwin, M.D. will expire at the 2019
Annual Meeting of Stockholders. At the 2019 Annual Meeting of Stockholders, the stockholders will elect two
Class II directors for a term of three years.
Director Biographies of Class I and Class III Directors not Nominated for Reelection at the 2019 Annual
Meeting of Stockholders
Kevin C. Gorman, Ph.D. has been employed with the Company since 1993. He was appointed President
and Chief Executive Officer in January 2008 after having served as Executive Vice President and Chief
Operating Officer since September 2006 and prior to that, as Executive Vice President and Chief Business
Officer and Senior Vice President of Business Development. He currently serves as Chief Executive Officer and
has served on the Board of Directors since January 2008. From 1990 until 1993, Dr. Gorman was a principal of
Avalon Medical Partners, L.P. where he was responsible for the early stage founding of the Company and several
other biotechnology companies such as Onyx Pharmaceuticals, Inc., Metra Biosystems, Inc., Idun
Pharmaceuticals, Inc. and ARIAD Pharmaceuticals, Inc. Dr. Gorman received his Ph.D. in immunology and
M.B.A. in Finance from the University of California, Los Angeles and did further post-doctoral training at The
Rockefeller University.
The continued service of Dr. Gorman on the Company’s Board of Directors is based on the fact that as
Chief Executive Officer of the Company, Dr. Gorman has extensive knowledge of our product candidates, our
employees and the industry in which we operate. Dr. Gorman has also demonstrated exceptional leadership
skills, sound business judgment and a strong commitment to the Company.
William H. Rastetter, Ph.D. has served on the Board of Directors since February 2010 and as Chairman of
the Board of Directors since May 2011. Currently, he serves as the Chairman of the Board of Directors for Fate
Therapeutics, a publicly traded company focused on cellular therapies. Dr. Rastetter also serves on the Board of
Directors for each of Regulus Therapeutics, a publicly traded company focused on RNA based therapeutics, and
Daré Bioscience, Inc. (previously known as Cerulean Pharma Inc.), a publicly traded company focused on
women’s health care and Grail, Inc., a private company developing deep sequencing approaches for disease
diagnosis, with an initial focus on the early diagnosis of cancer. Dr. Rastetter was a partner in the venture capital
firm, Venrock, from 2006 through early 2013 and was Executive Chairman of Biogen Idec, Inc. from 2003 to
2005. Earlier, he served as Chairman and Chief Executive Officer of IDEC Pharmaceuticals Corporation until its
merger with Biogen in 2003; he joined IDEC Corporation as its Chief Executive Officer at the company’s
7
founding in 1986. From 1984 to 1986, Dr. Rastetter was Director of Corporate Ventures at Genentech, where
from 1982 to 1984 he held scientific positions. He held a series of faculty positions including Associate Professor
at the Massachusetts Institute of Technology (“MIT”) from 1975 to 1982. Dr. Rastetter has a Bachelor of Science
degree in chemistry from MIT, and received Master of Art and doctorate degrees in chemistry from Harvard
University.
The continued service of Dr. Rastetter on the Company’s Board of Directors is based on Dr. Rastetter’s
scientific and technical expertise combined with his business experience in leading rapidly growing companies in
the life science industry. The Company’s continued growth is dependent on scientific and technical advances,
and the Board of Directors believes that Dr. Rastetter offers both strategic and technical insight into the risks and
opportunities associated with our business. In addition, Dr. Rastetter’s board and executive leadership experience
at other life science companies provides valuable strategic and governance insight to the Board of Directors as a
whole.
Gary A. Lyons has served on the Board of Directors since joining Neurocrine in February 1993. Mr. Lyons
served as the President and Chief Executive Officer of the Company from February 1993 through January 2008.
Prior to joining the Company, Mr. Lyons held a number of senior management positions at Genentech, Inc.,
including Vice President of Business Development and Vice President of Sales. Mr. Lyons is currently the
Chairman of the Board of Directors for each of Rigel Pharmaceuticals, Inc., a biotechnology company focused on
developing drugs for the treatment of inflammatory/autoimmune and metabolic diseases, and Retrophin, an ultra-
orphan disease commercial stage company. Mr. Lyons is a member of the Board of Directors of Vical
Incorporated, a biotechnology company focused on the prevention and treatment of serious or life-threatening
diseases, and Novus Therapeutics, Inc., a biotechnology company focused on ear, nose and throat therapies.
Mr. Lyons was previously a director of Neurogesx, Cytori Therapeutics, and Facet Biotech Corporation.
Mr. Lyons holds a B.S. in marine biology from the University of New Hampshire and an M.B.A. from
Northwestern University’s J.L. Kellogg Graduate School of Management.
The continued service of Mr. Lyons on the Company’s Board of Directors is based on Mr. Lyons’ extensive
business development and corporate governance experience and, as the Company’s former Chief Executive
Officer, his in-depth understanding of the Company’s product candidates, management and culture. With this
history with the Company and management, Mr. Lyons brings a unique perspective and point of view to the
Company’s Board of Directors.
George J. Morrow has served on the Board of Directors since October 2015. Mr. Morrow served as
Executive Vice President, Global Commercial Operations at Amgen Inc., a global biotechnology company, from
2003 until his retirement in 2011. He joined Amgen in 2001 as Executive Vice President, Worldwide Sales and
Marketing. His responsibilities included oversight of all commercial functions for Amgen’s broad spectrum of
products in more than 50 countries worldwide, and the introduction of multiple new products into global markets.
From 1992 to 2001, Mr. Morrow held executive management and commercial positions within several
subsidiaries of Glaxo Wellcome, including Group Vice President for Commercial Operations (U.S.), Managing
Director (U.K.), and most recently as President and Chief Executive Officer of Glaxo Wellcome, Inc. (U.S.).
Mr. Morrow currently serves on the board of directors of Vical, Inc., a biotechnology company and Align
Technology, Inc., a global medical device company. He has previously served on the boards of Glaxo Wellcome,
Inc., Human Genome Sciences, Inc., Safeway, Inc., National Commerce Bank, the John Hopkins School of
Public Health, and the Duke University Fuqua School of Business. Mr. Morrow holds a B.S. in chemistry from
Southampton College, Long Island University, an M.S. in biochemistry from Bryn Mawr College and an M.B.A.
from Duke University.
The continued service of Mr. Morrow on the Company’s Board of Directors is based on his extensive
commercialization experience at Amgen, his broad executive experience at GlaxoSmithKline Inc., and his years
of experience in corporate governance as a board member of several publicly traded companies. Mr. Morrow’s
board, leadership experience and commercialization expertise prove valuable strategic insights to the Board of
Directors.
8
Alfred W. Sandrock, Jr., M.D., Ph.D. has served on our Board of Directors since September 2015.
Dr. Sandrock is the Executive Vice President and Chief Medical Officer at Biogen, Inc., and has served in this
role since November 2015. Since joining Biogen in 1998, Dr. Sandrock has held several senior executive
positions including Group Senior Vice President of Development Sciences, Senior vice President of Neurology
research and Development, and Vice President of clinical Development, Neurology. Prior to joining Biogen,
Dr. Sandrock was Assistant Professor of Neurology at Harvard Medical School and Assistant in Neurology at
Massachusetts General Hospital. Dr. Sandrock currently serves on the Boards of Directors of Praxis Precision
Medicines, Inc. and Disarm Therapeutics Inc., and is a member of the Partners Healthcare Innovation Advisory
Board. Dr. Sandrock also serves as Chairman of the Board of the PhRMA Foundation. Dr. Sandrock received his
B.A. in human biology from Stanford University, an M.D. from Harvard Medical School and a Ph.D. in
neurobiology from Harvard University. Dr. Sandrock completed an internship in medicine, a residency and chief
residency in neurology, and a clinical fellowship in neuromuscular disease and clinical neurophysiology
(electromyography) at Massachusetts General Hospital.
The continued service of Dr. Sandrock on the Company’s Board of Directors is based on his extensive
experience and credentials in the biotechnology industry as an Executive Vice President of Biogen and his
extensive experience in successfully leading development teams. In addition, Dr. Sandrock’s medical expertise in
neurology and his scientific background provide a unique contribution to the Board of Directors.
Director Biographies of Class II Directors Nominated for Reelection at the 2019 Annual Meeting of
Stockholders
Richard F. Pops has served on the Board of Directors since April 1998. Mr. Pops is the Chairman and Chief
Executive Officer of Alkermes, Inc. He joined Alkermes as Chief Executive Officer in February 1991. Under his
leadership, Alkermes has grown from a privately held research-based company with 25 employees to an
international, publicly traded pharmaceutical company with more than 1,200 employees. In addition to Alkermes,
he currently serves on the Board of Directors of: Acceleron Pharma, Inc., a biotechnology company focused on
musculoskeletal and metabolic therapeutics; Epizyme Corporation, a biotechnology company focused on
epigenetics; the Biotechnology Industry Organization; and the Pharmaceutical Research and Manufacturers of
America (PhRMA). He holds a B.A. in economics from Stanford University.
The nomination of Mr. Pops for election to the Company’s Board of Directors is based on his leadership
experience and track record for growing companies, his strength in business strategy and his financial acumen
and capital markets experience. In addition, Mr. Pops is recognized for his service to the biopharmaceutical
industry as a member of the Boards of the Biotechnology Industry Organization and the Pharmaceutical Research
and Manufacturers of America. His breadth and range of industry experience from operations and strategy is a
significant contribution to the Board of Directors. The Nominating and Governance Committee also considers
whether each nominee has the time available, in light of other business and personal commitments. Among the
criteria considered is whether any incumbent director nominee demonstrates preparedness and engagement
required for effective service to the Board and its Committees. In connection with the nomination of Mr. Pops,
the Nominating and Governance Committee considered Mr. Pops’ consistently demonstrated preparedness,
attendance, engagement, and vigorous leadership of the Compensation Committee and his contributions to both
the Audit Committee and the Board.
Stephen A. Sherwin, M.D. has served on the Board of Directors since April 1999. Dr. Sherwin currently
divides his time between advisory work in the life science industry and patient care and teaching in his specialty
of medical oncology. He is a Clinical Professor of Medicine at the University of California, San Francisco, and a
volunteer Attending Physician in Hematology-Oncology at the Zuckerberg San Francisco General Hospital.
Dr. Sherwin currently serves on the Board of Directors of Aduro Biotech, Biogen and Neon Therapetics. He is a
Venture Partner with Third Rock Ventures and a member of the Scientific Steering Committee of the Parker
Institute for Cancer Immunotherapy. Previously Dr. Sherwin was chairman and chief executive officer of Cell
Genesys, a cancer immunotherapy company, from 1990 until the company’s merger in 2009 with BioSante
9
Pharmaceuticals (now ANI Pharmaceuticals). He was also a co-founder and chairman of Abgenix, an antibody
company which was acquired by Amgen in 2006, and co-founder and chairman of Ceregene, a gene therapy
company which was acquired by Sangamo Biosciences in 2013. From 1983 to 1990, Dr. Sherwin held various
positions in clinical research at Genentech, most recently that of Vice President. Prior to 1983, he was on the
staff of the National Cancer Institute. In addition, Dr. Sherwin previously served on the board of directors of the
Biotechnology Industry Organization from 2001 to 2014 and as its chairman from 2009 to 2011, and was a
member of the President’s Council of Advisors in Science and Technology (PCAST) Working Group on Drug
Development from 2011 to 2013. Dr. Sherwin holds a B.A. in biology summa cum laude from Yale University
and an M.D. from Harvard Medical School, is board-certified in internal medicine and medical oncology, and is a
fellow of the American College of Physicians.
The nomination of Dr. Sherwin for election to the Company’s Board of Directors is based on his experience
and credentials in the biotechnology industry as the former Chief Executive Officer of Cell Genesys, Inc., the
former chairman and co-founder of Abgenix, Inc., the chairman and co-founder of Ceregene, Inc., and his
positions at Genentech, Inc. and the National Cancer Institute. Dr. Sherwin is also currently Chairman Emeritus
of the Biotechnology Industry Organization. In addition to his biotechnology credentials, Dr. Sherwin’s medical
expertise in internal medicine and medical oncology provides a unique contribution to the Board of Directors.
10
CORPORATE GOVERNANCE
General
We have long believed that good corporate governance is important to ensure that Neurocrine is managed
for the long-term benefit of its stockholders. We periodically review our corporate governance policies and
practices. The Board of Directors has adopted Corporate Governance Guidelines which describe our corporate
governance practices and address corporate governance issues such as Board composition, responsibilities and
director qualifications. These guidelines are available at www.neurocrine.com.
What is the Board’s leadership structure?
It is the Company’s policy to separate the roles of Chief Executive Officer and Chairman of the Board. This
separation recognizes the independent roles of the Board of Directors, Chairman of the Board and Chief
Executive Officer. The Board of Directors sets Company strategy and provides oversight and accountability for
the Chief Executive Officer and Company management. The Chairman of the Board presides over the Board of
Directors and provides guidance to the Chief Executive Officer. The Chief Executive Officer and the balance of
the Board of Directors set Company goals with the Chief Executive Officer providing leadership and day to day
oversight in furtherance of those goals. The Company believes that separation of the Board of Directors and
Company leadership reinforces the independence of the Board of Directors in its oversight of the business and
affairs of the Company, and creates an environment that is more conducive to objective evaluation and oversight
of management’s performance, increasing management accountability and improving the ability of the Board of
Directors to monitor whether management’s actions are in the best interests of the Company and its stockholders.
Are the members of the Board independent?
The Board of Directors annually reviews the independence of each of the directors. With the exception of
Kevin C. Gorman, Ph.D., who is the Chief Executive Officer of Neurocrine, all current members of the Board of
Directors meet the definition of “independent director” under the Nasdaq Stock Market qualification standards.
How often did the Board meet during fiscal 2018?
The Board of Directors held a total of five meetings during 2018. For 2018, the Board of Directors had an
Audit Committee, a Compensation Committee, a Nominating/Corporate Governance Committee, and a Science
and Medical Technology Committee. Charters for each of these committees have been established and approved
by the Board of Directors and current copies of the charters for each of the committees have been posted on the
Company’s website at www.neurocrine.com. During 2018, no director attended fewer than 75% of the aggregate
of the total meetings of the Board of Directors and no director attended fewer than 75% of the total number of
meetings held by all committees of the Board of Directors on which such director served.
What are the various committees of the Board and which directors are on those committees?
The Company’s Audit Committee is comprised entirely of directors who meet the independence
requirements set forth in Nasdaq Stock Market Rule 5605(c)(2)(A). Information regarding the functions
performed by the committee, its membership, and the number of meetings held during the fiscal year is set forth
in the “Report of the Audit Committee,” included in this proxy statement. The members of the Audit Committee
are Richard F. Pops, George J. Morrow and Stephen A. Sherwin, M.D. The Board of Directors has determined
that Richard F. Pops, George J. Morrow and Stephen A. Sherwin, M.D. are “audit committee financial experts”
within the meaning of item 407(d)(5) of SEC Regulation S-K. This committee met five times during 2018.
The Company’s Compensation Committee consists of directors Richard F. Pops, George J. Morrow and
Alfred W. Sandrock, Jr., M.D., Ph.D. The Compensation Committee reviews and recommends to the Board of
11
Directors the compensation of executive officers and other employees of the Company. Under its charter, the
Compensation Committee may form, and delegate authority to, subcommittees as appropriate. Each of the
current members of the Compensation Committee is an “independent director” as defined by Nasdaq Stock
Market Rule 5605(a)(2). This committee met seven times during 2018.
The Company’s Nominating/Corporate Governance Committee consists of directors Stephen A. Sherwin,
M.D., George J. Morrow and Alfred W. Sandrock, Jr. M.D., Ph.D., all of whom are “independent directors” as
defined by Nasdaq Stock Market Rule 5605(a)(2). The Nominating/Corporate Governance Committee is
responsible for developing and implementing policies and practices relating to corporate governance, including
administration of the Company’s Code of Business Conduct and Ethics, which applies to all of the Company’s
officers, directors and employees, and is available on the Company’s website at www.neurocrine.com. The
functions of this committee also include consideration of the composition of the Board of Directors and
recommendation of individuals for election as directors of the Company. The Nominating/Corporate Governance
Committee will consider nominees recommended by stockholders, provided such nominations are made pursuant
to the Company’s bylaws and applicable law. This committee met four times during 2018.
The Company’s Science and Medical Technology Committee consists of directors Gary A. Lyons,
William H. Rastetter, Ph.D. and Alfred W. Sandrock, Jr. M.D., Ph.D. The purpose of the Science and Medical
Technology Committee is to assist the Board of Directors in its oversight of management’s exercise of its
responsibility to make significant scientific judgments relating to the Company’s research and development
activities and portfolio. This committee met two times during 2018.
Compensation Committee interlocks and insider participation
During 2018, the Compensation Committee consisted of George J. Morrow, Richard F. Pops, Corinne H.
Nevinny and Alfred W. Sandrock, Jr., M.D., Ph.D. Ms. Nevinny served on the Compensation Committee until
she resigned from the Board of Directors on September 18, 2018. Dr. Sandrock joined the Compensation
Committee in September 2018 after Ms. Nevinny’s resignation. No interlocking relationship existed between any
member of the Compensation Committee and any member of any other company’s Board of Directors or
compensation committee.
What is our director nomination process?
In selecting non-incumbent candidates and reviewing the qualifications of incumbent candidates for the
Board of Directors, the Nominating/Corporate Governance Committee considers the Company’s corporate
governance principles, which include the following:
• Directors should possess the highest ethics, integrity and values, and be committed to representing the
long-term interest of the stockholders. They also must have experience they can draw upon to help
direct the business strategies of the Company together with sound judgment. They must be actively
engaged in the pursuit of information relevant to the Company’s business and must constructively
engage their fellow Board members and management in dialogue and the decision-making process.
• Directors must be willing to devote sufficient time to carrying out their duties and responsibilities
effectively, and should be committed to serve on the Board of Directors for an extended period of time.
• Directors should notify the Chairman of the Board and Chairman of the Nominating/Corporate
Governance Committee in the event of any significant change in their employment responsibilities or
affiliations. Director nominees should meet the Director Qualification requirements set forth in the
Company’s Corporate Governance Guidelines.
•
In evaluating director nominees, the Nominating/Corporate Governance Committee considers the
following factors: personal and professional integrity, ethics and values including any potential
conflicts of interest; experience in corporate management and the biopharmaceutical industry, such as
serving as an officer or former officer of a publicly held company; experience as a board member of
another publicly held company; and additionally, for nominees seeking re-election, meeting attendance
and participation and compliance with Company policies.
12
It is the Company’s policy to have a diversity of skills, professional experience, education, associations,
achievements, training, points of view and individual qualities and attributes represented on the Board of
Directors. The Nominating/Corporate Governance Committee considers the diversity of the Board of Directors
when evaluating candidates for election or re-election to the Board of Directors.
The Nominating/Corporate Governance Committee’s goal is to assemble a Board of Directors that brings to
the Company a variety of perspectives and skills derived from high quality business and professional experience.
In doing so, the Nominating/Corporate Governance Committee also considers candidates with appropriate
non-business backgrounds.
In addition to the foregoing, the Nominating/Corporate Governance Committee Charter and Corporate
Governance Guidelines set forth minimum criteria for director nominees. The Nominating/Corporate Governance
Committee may also consider such other facts as it may deem are in the best interests of the Company and its
stockholders. The Nominating/Corporate Governance Committee does, however, believe that at least one, and
preferably several members of the Board of Directors, meet the criteria for an “audit committee financial expert”
as defined by SEC rules. We believe that all of our directors should have a reputation for honesty, integrity and
highest ethical standards, and should demonstrate business acumen, an ability to exercise sound judgment and a
commitment to serve the Company.
Board Self-Assessment
The Nominating/Corporate Governance Committee ensures that each member of the Board, the
Committees, and the Chair of the Board are annually assessed annually aimed at enhancing effectiveness.
Directors complete a number of different evaluations in order to provide performance feedback and suggestions
for improved effectiveness or contributions. The assessments are done by way of a questionnaire conducted by
our external legal counsel, Cooley, LLP. The assessments are treated on a confidential basis, with the results
tallied on an anonymous basis for review. The results of the evaluation are analyzed by our Chief Legal Officer,
the Nomination/Corporate Governance Committee and the Board, who decide whether any changes are needed to
the Board’s processes, procedures, composition or Committee structure. The evaluation carried out in 2018
indicated that all individuals and groups were effectively fulfilling their responsibilities.
Board Education
The Board recognizes the importance of ongoing director education. In order to facilitate member of the
Board of Directors’ educational development, the members of the Board of Directors regularly meet with
management and are given periodic presentations on our business and recent business developments. Members of
the Board of Directors also attend dinners on the evening before regularly scheduled Board meetings. Generally,
at these dinners the Board meets with senior decision-makers within the Company or outside experts in order to
enhance the Board’s understanding of our business and affairs. In addition, on an annual basis an external expert
meets with the Board to discuss new developments relating to corporate governance and the operation of public
company boards. The Company also provides funding for members of the Board of Directors to attend outside
director continuing education programs sponsored by educational and other institutions.
Identification and Evaluation of Nominees for Director
The Nominating/Corporate Governance Committee identifies nominees for director by first evaluating the
current members of the Board of Directors willing to continue in service. Current members with qualifications
and skills that are consistent with the Nominating/Corporate Governance Committee’s criteria for service and
who are willing to continue are considered for re-nomination, balancing the value of continuity of service by
existing members of the Board of Directors with that of obtaining members who would offer a new perspective.
If any member of the Board of Directors does not wish to continue in service, or if the Board of Directors decides
not to re-nominate a member for re-election, the Nominating/Corporate Governance Committee identifies the
13
desired skills and experience of a new nominee in light of the criteria above. The Nominating/Corporate
Governance Committee generally polls the Board of Directors and members of management for their
recommendations and may also seek input from third-party search firms. The Nominating/Corporate Governance
Committee may also seek input from industry experts or analysts. The Nominating/Corporate Governance
Committee reviews the qualifications, experience and background of the candidates. Final candidates are then
interviewed by the Company’s independent directors and executive management. In making its determinations,
the Nominating/Corporate Governance Committee evaluates each individual in the context of the Company’s
Board of Directors as a whole, with the objective of assembling a group that can best perpetuate the success of
the Company and represent stockholder interests through the exercise of sound judgment. After review and
deliberation of all feedback and data, the Nominating/Corporate Governance Committee makes its
recommendation to the Board of Directors.
We have not received director candidate recommendations from the Company’s stockholders and do not
have a formal policy regarding consideration of such recommendations. However, any recommendations
received from stockholders will be evaluated in the same manner that potential nominees suggested by members
of our Board of Directors, management or other parties are evaluated. Accordingly, our Board of Directors
believes a formal policy regarding consideration of such recommendations is unnecessary.
What is our process for stockholder communications with the Board of Directors?
Stockholders of the Company wishing to communicate with the Company’s Board of Directors or an
individual director may send a written communication to the Board of Directors or such director c/o Neurocrine
Biosciences, Inc., 12780 El Camino Real, San Diego, CA 92130, Attn: Corporate Secretary. Each
communication must set forth:
•
•
the name and address of the Company stockholder on whose behalf the communication is sent; and
the number of Company shares that are beneficially owned by such stockholder as of the date of the
communication.
Each stockholder communication will be reviewed by the Company’s Corporate Secretary to determine
whether it is appropriate for presentation to the Board or such director. Examples of inappropriate
communications include advertisements, solicitations or hostile communications.
Communications determined by the Corporate Secretary to be appropriate for presentation to the Board or
such director will be submitted to the Board or such director on a periodic basis.
What is the Board’s role in risk oversight?
While the Board of Directors has ultimate oversight responsibility for the risk management process, it has
delegated portions of this responsibility to various committees. The Board of Directors and its committees
oversee risk throughout the business with focus on financial risk, legal/compliance risk, scientific/clinical
development risk, and strategic risk. The Audit Committee focuses on financial risk and internal controls. The
Nominating/Corporate Governance Committee and Audit Committee each focus on legal/compliance risk with
the Nominating/Corporate Governance Committee taking the lead on the governance and management process
and the Audit Committee taking the lead on SEC reporting and compliance. The Compensation Committee
addresses compensation policies and practices as they relate to risk management practices and risk-taking
incentives. The Science and Medical Technology Committee reviews the scientific risk associated with the
Company’s research and development activities and any related legal/compliance risk. The participation of the
full Board of Directors in setting the Company’s business strategy incorporates assessment of strategic risk for
the Company overall.
14
How do the Company’s compensation policies and practices relate to risk management practices and risk-
taking incentives?
During 2018, the Compensation Committee, in conjunction with the Board of Directors, conducted an
assessment of how the Company’s compensation policies and practices relate to risk management practices and
risk-taking incentives. As part of the process, the Compensation Committee engaged the services of an external,
independent compensation consulting firm to conduct an independent risk assessment. Based on this assessment,
the Compensation Committee concluded that the Company’s compensation policies and practices do not create
risks that are reasonably likely to have a material adverse effect on the Company.
What is our policy regarding Board member attendance at the Company’s Annual Meeting?
The Company does not have a formal policy regarding attendance by members of the Board of Directors at
the Annual Meeting. Directors Dr. Rastetter and Dr. Gorman attended the 2018 Annual Meeting of Stockholders.
15
REPORT OF THE AUDIT COMMITTEE
The following Report of the Audit Committee does not constitute soliciting material and should not be
deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, except to the extent the Company specifically
incorporates this Report by reference therein.
The Audit Committee is currently comprised of directors George J. Morrow, Richard F. Pops and Stephen
A. Sherwin, M.D. All current committee members satisfy the definition of “independent director” as established
in the Nasdaq Stock Market qualification requirements. The Audit Committee met five times during the year
ended December 31, 2018.
The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of
Directors. Management has the primary responsibility for the Company’s financial statements and the reporting
process, including the Company’s systems of internal controls. In fulfilling its oversight responsibilities, the
Audit Committee has reviewed and discussed with management the Company’s audited financial statements as
of and for the year ended December 31, 2018, including a discussion of the quality, not just the acceptability, of
the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the
financial statements.
The Audit Committee also has reviewed and discussed the Company’s audited financial statements as of and
for the year ended December 31, 2018 with the Company’s independent registered public accounting firm, who
are responsible for expressing an opinion on the conformity of those audited financial statements with accounting
principles generally accepted in the United States, as well as their judgments as to the quality, not just the
acceptability, of the Company’s accounting principles and such other matters as are required to be discussed with
the Audit Committee under Auditing Standard No. 16, Communications with Audit Committees, as adopted by
the Public Company Accounting Oversight Board (United States) (the “PCAOB”). The independent registered
public accounting firm also is responsible for performing an independent audit of the Company’s internal control
over financial reporting in accordance with the auditing standards of the PCAOB. In addition, the Audit
Committee has discussed the independent registered public accounting firm’s independence from management
and the Company, including the matters in the written disclosures and the letter from the independent registered
public accounting firm required by applicable requirements of the PCAOB and considered the compatibility of
non-audit services with the auditors’ independence.
The Audit Committee discussed with the Company’s independent registered public accounting firm the
overall scope and plans for their audits. The Audit Committee meets with the independent registered public
accounting firm, with and without management present, to discuss the results of their examinations, their
evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the
Board of Directors that the audited financial statements be included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2018, for filing with the Securities and Exchange Commission. The
Audit Committee and the Board of Directors are also seeking stockholder ratification of the selection of the
Company’s independent registered public accounting firm for the year ending December 31, 2019.
Respectfully submitted by:
AUDIT COMMITTEE
George J. Morrow
Richard F. Pops
Stephen A. Sherwin, M.D.
16
Audit and non-audit fees
The aggregate fees billed to the Company by Ernst & Young LLP, the Company’s independent registered
public accounting firm, for the indicated services for each of the last two fiscal years were as follows:
2018
2017
Audit fees (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit related fees (2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax fees (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other fees (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 998,939
—
140,300
—
$1,123,601
—
89,970
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,139,239
$1,213,571
(1) Audit fees consist of fees for professional services performed by Ernst & Young LLP for the integrated
audit of the Company’s annual financial statements and internal control over financial reporting and review
of financial statements included in the Company’s 10-Q filings, review of registration statements on Form
S-8, and services that are normally provided in connection with statutory and regulatory filings or
engagements.
(2) Audit related fees consist of fees for assurance and related services performed by Ernst & Young LLP that
are reasonably related to the performance of the audit or review of the Company’s financial statements.
(3) Tax fees consist of fees for professional services performed by Ernst & Young LLP with respect to tax
compliance, tax advice and tax planning. For 2018, these fees included $78,950 for tax preparation services,
$15,450 for services related to Section 382 studies for net operating loss utilization and $45,900 for state tax
planning. For 2017, these fees included $74,970 for tax preparation services and $15,000 for services related
to Section 382 studies for net operating loss utilization.
(4) All other fees consist of fees for other permissible work performed by Ernst & Young LLP that does not
meet with the above category descriptions
The Audit Committee has considered whether the provision of non-audit services is compatible with
maintaining the independence of Ernst & Young LLP, and has concluded that the provision of such services is
compatible with maintaining the independence of that firm. All of the services rendered by Ernst & Young LLP
were pre-approved by the Audit Committee in accordance with the Audit Committee pre-approval policy
described below.
Audit Committee policy regarding pre-approval of audit and permissible non-audit services of our independent
registered public accounting firm
The Company’s Audit Committee has established a policy that all audit and permissible non-audit services
provided by the Company’s independent registered public accounting firm will be pre-approved by the Audit
Committee. These services may include audit services, audit related services, tax services and other services. The
Audit Committee considers whether the provision of each non-audit service is compatible with maintaining the
independence of the Company’s registered public accounting firm. Pre-approval is detailed as to the particular
service or category of services and is generally subject to a specific budget. The Company’s independent
registered public accounting firm and management are required to periodically (at least quarterly) report to the
Audit Committee regarding the extent of services provided by the independent registered public accounting firm
in accordance with this pre-approval, and the fees for the services performed to date.
17
COMPENSATION COMMITTEE REPORT
The following Report of the Committee does not constitute soliciting material and should not be deemed
filed or incorporated by reference into any other Company filing under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended, except to the extent the Company specifically incorporates
this Report by reference therein.
The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and
discussions, the Compensation Committee recommended to the Board of Directors that the Compensation
Discussion and Analysis be included in this proxy statement.
Respectfully submitted by:
COMPENSATION COMMITTEE
George J. Morrow
Richard F. Pops
Alfred W. Sandrock, Jr., M.D., Ph.D.
18
PROPOSAL ONE: ELECTION OF DIRECTORS
The Company’s bylaws, as amended, provide that the Board of Directors is comprised of seven directors.
The Company’s Certificate of Incorporation provides that the Board of Directors is divided into three classes.
There are currently two directors in Class I (William H. Rastetter, Ph.D. and George J. Morrow), two directors in
Class II (Richard F. Pops and Stephen A. Sherwin, M.D.), and three directors in Class III (Kevin C.
Gorman, Ph.D., Gary A. Lyons and Alfred W. Sandrock, M.D., Ph.D.). With the exception of Kevin C.
Gorman, Ph.D., who is the Chief Executive Officer of Neurocrine, all current members of the Board of Directors
meet the definition of “independent director” under the Nasdaq Stock Market qualification standards.
The directors in Class I hold office until the 2021 Annual Meeting of Stockholders, the directors in Class II
hold office until the 2019 Annual Meeting of Stockholders and the directors in Class III hold office until the
2020 Annual Meeting of Stockholders (or, in each case, until their earlier resignation, removal from office, or
death). After each such election, the elected directors will then serve in succeeding terms of three years and until
a successor is duly elected and qualified. Officers of the Company serve at the discretion of the Board of
Directors. There are no family relationships among the Company’s directors and executive officers.
The term of office for directors Richard F. Pops and Stephen A. Sherwin, M.D., will expire at the 2019
Annual Meeting of Stockholders. At the 2019 Annual Meeting of Stockholders, the stockholders will elect two
Class II directors for a term of three years.
Nominees for Election at the Annual Meeting
All of the nominees (Richard F. Pops and Stephen A. Sherwin, M.D.) are currently Class II directors of the
Company. All of the nominees were previously elected to the Board of Directors by the Company’s stockholders.
Information about the nominees is set forth below:
Name of Director
Richard F. Pops (1) (2) . . . . . . . . . . . . . . . . . . . . . . .
Stephen A. Sherwin, M.D. (1) (3) . . . . . . . . . . . . . . .
Age
56
70
Position in the Company
Director
Director
Director
Since
1998
1999
Who are the remaining Directors that are not up for election this year?
The Class I and III directors will remain in office after the 2019 Annual Meeting of Stockholders. The
names and certain other current information about the directors whose terms of office continue after the Annual
Meeting are set forth below:
Name of Director
Kevin C. Gorman, Ph.D. . . . . . . . . . . . . . . . . . . . . . .
Gary A. Lyons (4) . . . . . . . . . . . . . . . . . . . . . . . . . . .
George J. Morrow (1) (2) (3) . . . . . . . . . . . . . . . . . .
William H. Rastetter, Ph.D. (4)
. . . . . . . . . . . . . . . .
Alfred W. Sandrock, Jr. M.D., Ph.D. (2) (3) (4) . . . .
Age
61
67
67
70
61
Position in the Company
Chief Executive Officer and Director
Director
Director
Chairman of the Board
Director
Director
Since
2008
1993
2015
2010
2015
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating/Corporate Governance Committee.
(4) Member of the Science and Medical Technology Committee.
Vote Required
The nominees receiving the highest number of affirmative votes of the shares present in person or
represented by proxy at the 2019 Annual Meeting of Stockholders and entitled to vote on the election of directors
will be elected to the Board of Directors.
19
Votes withheld from any director are counted for purposes of determining the presence or absence of a
quorum, but have no other legal effect under Delaware law.
Unless otherwise instructed, the proxy holders will vote the proxies received by them for the Company’s
Class II nominees named above. If any of the Company’s nominees is unable or declines to serve as a director at
the time of the Annual Meeting, the proxies will be voted for any nominee who is designated by the present
Board of Directors to fill the vacancy. It is not expected that any of the Company’s nominees will be unable or
will decline to serve as a director. The Board of Directors unanimously recommends that stockholders vote
“FOR” the Class II nominees named above.
20
PROPOSAL TWO: ADVISORY VOTE ON
COMPENSATION PAID TO THE COMPANY’S NAMED EXECUTIVE OFFICERS
General
At the 2017 Annual Meeting of Stockholders, the Board of Directors, as a matter of good corporate
governance, recommended that the stockholders approve an advisory vote on Named Executive Officer
compensation (“say-on-pay”) on an annual basis. Approximately 94% of the stockholder votes cast at the 2017
Annual Meeting of Stockholders were for the Company’s recommendation, and in response the Company holds
an annual say-on-pay vote. This annual vote is not intended to address any specific compensation item, but rather
the overall compensation of the Company’s Named Executive Officers and the philosophy, policies and practices
described in this proxy statement.
Summary of the Company’s Executive Compensation Philosophy
The Compensation Committee of the Board of Directors (the “Committee”) bases its executive
compensation decisions on a number of objectives which include aligning management incentives with interests
of stockholders, providing competitive compensation, appropriately balancing compensation risk in the context
of the Company’s business strategy and meeting evolving compensation governance standards. The philosophy
of the Committee in establishing the Company’s compensation policy for executive officers as well as all other
employees is to:
•
•
•
•
align compensation plans with both short-term and long-term goals and objectives of the Company and
stockholder interests;
attract and retain highly skilled individuals by offering compensation that compares favorably to other
employers who are competing for available employees;
incentivize employees through a mix of base salary, bonus amounts based on achievement of defined
corporate and personal goals and long-term equity awards to generate returns for stockholders; and
pay for performance by ensuring that an ever-increasing percentage of an individual’s compensation is
performance-based as they progress to higher levels within the Company.
As discussed below in the Compensation Discussion and Analysis, we believe we have adopted a
compensation philosophy that provides strong alignment between executive pay and performance based on
strategic goals designed to provide both near-term and long-term growth in stockholder value. The historical
approval rates, on an advisory basis, for the Company’s executive compensation program have been over 98%
for each of the 2016, 2017 and 2018 Annual Meetings of Stockholders. The Committee and our Board of
Directors believe that this level of approval of our executive compensation program is indicative of our
stockholders’ strong support of our compensation philosophy and goals as well as the overall administration of
executive compensation by the Committee and the Board of Directors.
You are being asked to approve on an advisory basis, the compensation paid to the Company’s Named
Executive Officers as set forth in the Compensation Discussion and Analysis, Summary Compensation Table and
related notes and narrative set forth herein. This vote is not intended to address any specific compensation item,
but rather the overall compensation of the Company’s Named Executive Officers and the philosophy, policies
and practices described in this proxy statement.
21
Vote Required
The ‘say-on-pay’ vote is advisory and therefore not binding on the Company, the Committee or the Board of
Directors. However, we value the opinions of our stockholders and will review and will continue to consider the
outcome of this advisory vote when making future compensation decisions for our Named Executive Officers
and will evaluate whether any actions are necessary to address the stockholders’ concerns. Approval of this
advisory vote requires the affirmative vote of the majority of shares represented in person or by proxy and
entitled to vote on the item. The Board of Directors unanimously recommends voting “FOR” approval of
the Company’s Named Executive Officers compensation.
22
PROPOSAL THREE: APPROVAL OF AN AMENDMENT TO THE 2011 EQUITY INCENTIVE PLAN
General
The Neurocrine Biosciences, Inc. 2011 Equity Incentive Plan was originally approved by the Board of
Directors and the stockholders of the Company in 2011, and was subsequently amended by the Board of
Directors and our stockholders most recently in 2018 (the “2011 Plan”). Subject to stockholder approval, our
Board of Directors approved an amendment of the 2011 Plan on February 8, 2019 (the 2011 Plan, as amended,
the “Amended 2011 Plan”). The Board of Directors is requesting stockholder approval of the Amended 2011
Plan, which includes the following material changes to the 2011 Plan, as described in more detail under
“Summary of the Amended 2011 Plan” below:
•
to increase in the maximum number of shares of common stock that may be issued under the 2011 Plan
from 19,000,000 to 21,000,000 shares.
The Board of Directors believes that the proposed increase in the number of shares of common stock
reserved for issuance under the Amended 2011 Plan will allow the Company to attract and retain valuable
employees and continue to provide its employees, consultants and directors with a proprietary interest in the
Company. In particular, the Company anticipates a material increase in its number of employees in 2019 in
connection with: (i) the continued commercialization of the Company’s first approved product, INGREZZA®
(valbenazine) capsules, which began in May 2017; and (ii) development activities related to the Company’s other
development programs. Within the Company, equity awards foster an ownership culture and are a critical tool for
driving stockholder value and for recruiting, retaining and motivating employees. The Company grants annual
equity awards to employees as an incentive to retain its work force and remain competitive. The terms of the
Company’s annual equity awards and the Company’s employee policies are designed to align employee and
stockholder interests. The Company grants equity awards to a broad group of employees and such awards
constitute a significant component of the Company’s employees’ total compensation. The Company’s equity
awards contain long-term vesting, performance-based vesting, and provisions designed to encourage employees
to focus on the Company’s long-term goals and success. If our stockholders do not approve the Amended 2011
Plan, the Company strongly believes that it will be unable to successfully continue to use equity as part of its
compensation program, as most of its competitors in the industry do, putting the Company at a significant
disadvantage and compromising its ability to enhance stockholder value.
The Amended 2011 Plan authorizes the grant to our employees of options that qualify as incentive stock
options under Section 422 of the Code. The 2011 Plan also authorizes the grant of nonstatutory stock options,
stock appreciation rights, restricted stock awards, restricted stock units, performance stock awards and other
stock awards (collectively “stock awards”) to our employees, directors and consultants. The 2011 Plan also
provides that certain nonstatutory stock options will be automatically granted to non-employee directors and the
Chairman of the Board of Directors of the Company, as described below.
As of March 15, 2019, under the 2011 Plan there were 6,675,604 options outstanding to purchase shares of
common stock, and 4,998,075 shares were available for future stock awards; 1,690,001 shares were subject to
outstanding restricted stock units; and 3,400,386 shares previously issued upon exercise of options granted and
2,242,069 shares previously issued upon vesting of restricted stock units under the 2011 Plan are now
outstanding shares of common stock. As of March 29, 2019, there were approximately 630 employees and
directors eligible to receive grants under the 2011 Plan.
As of the Record Date, whether granted under the 2011 Plan or otherwise, an aggregate of 6,873,590 shares
are issuable upon exercise of outstanding options with a weighted average exercise price of $48.69 and a
weighted average remaining contractual term of 7.1 years; and 1,714,376 shares are subject to unvested restricted
stock units. The closing price of the Company’s common stock on March 29, 2019 was $88.10 with 91,284,279
shares outstanding.
23
Vote Required
At the Annual Meeting, the stockholders are being asked to approve the Amended 2011 Plan. The
affirmative vote of the holders of a majority of the shares represented in person or by proxy at the Annual
Meeting and entitled to vote on the item will be required to approve the Amended 2011 Plan. The Board of
Directors recommends voting “FOR” the approval of the Amended 2011 Plan.
Summary of the Amended 2011 Plan
The essential features of the Amended 2011 Plan are summarized below. This summary does not purport to
be complete and is subject to, and qualified by reference to, all provisions of the Amended 2011 Plan. The
Amended 2011 Plan, which reflects all of the changes proposed to be made to the 2011 Plan, is attached as
Appendix A to this proxy statement and is incorporated herein by reference.
Purpose. The purpose of the Amended 2011 Plan is to enable the Company to attract and retain the best
available personnel, to provide additional incentives to the employees, directors and consultants of the Company
and to promote the success of the Company’s business.
Administration. Our Board of Directors has the authority to administer the Amended 2011 Plan. Our Board
of Directors also has the authority to delegate some or all of the administration of the Amended 2011 Plan
(except the Non-Discretionary Grant Program summarized below) to a committee or committees composed of
one or more members of the Board of Directors or Company officers (the Board of Directors or any such
committee, the “Administrator”). The Amended 2011 Plan may be administered by different committees with
respect to different groups of employees and consultants. The Administrator may make any determinations
deemed necessary or advisable for the Amended 2011 Plan. The Administrator, in its discretion, selects the
employees, directors and consultants to whom stock awards may be granted, the time or times at which such
awards shall be granted, the number of shares subject to each such grant, and other terms of the stock awards. All
decisions, determinations and interpretations of the Administrator shall be final and binding on all holders.
Eligibility. Incentive stock options may be granted only to our employees. Nonstatutory stock options, stock
appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards and other
stock awards may be granted under the Amended 2011 Plan to our employees, directors and consultants.
Participation in the non-discretionary grant program is limited to our non-employee directors (see
“Non-Discretionary Grant Program” below).
Stock Subject to the Amended 2011 Plan
Subject to stockholder approval of this Proposal Three and adjustments for changes in our capitalization, an
aggregate of 21,000,000 shares of common stock will be reserved for issuance under the Amended 2011 Plan.
Shares may be issued in connection with a merger or acquisition as permitted by the rules of the applicable
national securities exchange, and such issuance shall not reduce the number of shares available for issuance
under the Amended 2011 Plan. If a stock award granted under the Amended 2011 Plan expires or otherwise
terminates without all of the shares having been issued, or if any shares of common stock issued pursuant to a
stock award are forfeited to us because of the failure to meet a contingency or condition required for the vesting
of such shares, then the shares of common stock not issued under such stock award, or forfeited to us, shall revert
to and again become available for issuance under the Amended 2011 Plan.
If any shares subject to a stock award are not delivered to a participant because such shares are withheld for
the payment of taxes or the stock award is exercised through a reduction of shares subject to the stock award (i.e.
“net exercised”), or an appreciation distribution in respect of a stock appreciation right is paid in shares of
common stock, the number of shares that are not delivered will not again become available for issuance under the
Amended 2011 Plan. If the exercise price of any stock award is satisfied by tendering shares of common stock
held by the participant, then the number of shares so tendered will not become available for issuance under the
Amended 2011 Plan.
24
The aggregate maximum number of shares of common stock that may be issued under the Amended 2011
Plan pursuant to the exercise of incentive stock options, subject to stockholder approval of this Proposal Three, is
21,000,000 shares.
Per-Person Award Limitations. The Amended 2011 Plan provides that no employee may be granted, in any
fiscal year of the Company, stock options, stock appreciation rights (and any other stock awards whose value is
determined by reference to an increase over an exercise or strike price of at least the fair market value on the date
of grant) (all such options, stock appreciation rights and other stock awards “appreciation awards”) covering
more than 500,000 shares of common stock. Notwithstanding this limit, however, in connection with an
employee’s initial employment, he or she may be granted appreciation awards covering up to an additional
500,000 shares of common stock. Additional per-person limitations apply to performance stock awards, as
described below in the section entitled “Terms of Performance Awards”.
Full Value Stock Award Limitations. In addition, subject to adjustments upon changes in our capitalization
or in connection with a merger or other similar event, the maximum number of shares of common stock that may
be issued pursuant to the grant of “full value stock awards” (i.e., restricted stock, restricted stock units,
performance stock and other stock awards, but not including stock options or stock appreciation rights) is 50% of
the total number of shares of common stock issuable under the Amended 2011 Plan.
Minimum Vesting. Generally, no full value stock award that vests on the basis of the participant’s
continuous service with the Company shall vest at a rate that is any more rapid than ratably over a three-year
period, and no full value stock award that vests based on the satisfaction of performance goals shall have a
performance period of less than twelve months.
Limited Exception to Minimum Vesting Restrictions. Up to five percent (5%) of the total number of shares
of common stock available for issuance under the Amended 2011 Plan may in the aggregate be issued as full
value stock awards that are not subject to the minimum vesting requirements set forth in the Amended 2011 Plan.
Limit on Non-Employee Director Compensation. The aggregate value of all compensation granted or paid,
as applicable, to any individual for service as a non-employee director with respect to any period commencing on
the date of the Company’s annual meeting of stockholders for a particular year and ending on the date of the
Company’s annual meeting of stockholders for the next subsequent year, including stock awards granted under
the Amended 2011 Plan and cash fees paid to such non-employee director, will not exceed $1,250,000 in total
value. In addition, the aggregate value of the initial option grant or other similar stock award(s) granted under the
Plan or otherwise to any individual for service as a non-employee director upon or in connection with his or her
initial election or appointment to the Board of Directors will not exceed $2,000,000 in total value. For purposes
of these limitations, the value of stock awards is calculated based on the grant date fair value of such stock
awards for financial reporting purposes. The Board of Directors has the authority to make exceptions to these
limits in extraordinary circumstances, in its discretion, provided that any non-employee director who is granted
or paid such additional compensation may not participate in the decision to grant or pay such additional
compensation.
Section 162(m) Transition Relief for Performance-Based Compensation. Under Section 162(m) of the
Code, compensation paid to any publicly held corporation’s “covered employees” (as defined under
Section 162(m) of the Code) that exceeds $1 million per taxable year for any covered employee is generally
non-deductible. Certain provisions in the Amended 2011 Plan refer to the “performance-based compensation”
exception to the $1 million deduction limit under Section 162(m) of the Code. Pursuant to the Tax Cuts and Jobs
Act, this exception was repealed with respect to taxable years beginning after December 31, 2017. However, an
award may still be eligible for this exception if, among other requirements, it is intended to qualify, and is
eligible to qualify, as “performance-based compensation” under Section 162(m) of the Code pursuant to the
transition relief provided by the Tax Cuts and Jobs Act for remuneration provided pursuant to a written binding
contract which was in effect on November 2, 2017 and which was not modified in any material respect on or
25
after such date. For purposes of this Proposal Three, the term “Section 162(m) Transition Relief” refers to such
transition relief. Accordingly, the provisions in the Amended 2011 Plan which refer to the “performance-based
compensation” exception under Section 162(m) of the Code will only apply to any award that is intended to
qualify, and is eligible to qualify, as “performance-based compensation” under Section 162(m) of the Code
pursuant to the Section 162(m) Transition Relief and, therefore, such provisions are not applicable to any other
awards granted under the Amended 2011 Plan. Because of certain ambiguities and uncertainties as to the
application and interpretation of Section 162(m) of the Code, as well as other factors beyond the control of the
Compensation Committee, no assurance can be given that any award granted under the Amended 2011 Plan will
be eligible for such transition relief and be deductible by the Company in the future.
Terms and Conditions of Options and Stock Appreciation Rights
Options and stock appreciation rights may be granted under the Amended 2011 Plan pursuant to stock
option agreements and stock appreciation right agreements. The following is a description of the permissible
terms of options and stock appreciation rights under the Amended 2011 Plan. Individual grants may be more
restrictive as to any or all of the permissible terms described below.
Exercise Price. The Administrator determines the exercise price of options and strike price of stock
appreciation rights at the time the options or stock appreciation rights are granted as set forth in the applicable
stock award agreement. The exercise price of a stock option and strike price of a stock appreciation right may not
be less than 100% of the fair market value of the common stock on the date such award is granted. In the case of
an incentive stock option granted to an optionee who owns more than 10% of all classes of stock of the Company
or any parent or subsidiary of the Company, the exercise price may not be less than 110% of the fair market
value of the common stock on the date such option is granted. The fair market value of the common stock is
generally determined with reference to the closing sale price for the common stock on the date the option or
stock appreciation right is granted.
Stock Appreciation Rights. Each stock appreciation right is denominated in shares of common stock
equivalents. Upon exercise of a stock appreciation right, we will pay the participant an amount equal to the
excess of (i) the aggregate fair market value of our common stock on the date of exercise over (ii) the strike price
determined by the Administrator on the date of grant. The appreciation distribution upon exercise of a stock
appreciation right will be paid in shares of our common stock, in cash, any combination of the two or any other
form of consideration determined by the Administrator.
Repricing; Cancellation and Re-Grant of Stock Awards. Under the Amended 2011 Plan, the Administrator
does not have the authority to reprice any outstanding stock awards by reducing the exercise price of the stock
award or to cancel any outstanding stock awards in exchange for cash or other stock awards without obtaining
the approval of our stockholders within 12 months prior to the repricing or cancellation and re-grant event.
Exercise; Form of Consideration. The Administrator determines when options and stock appreciation
rights become exercisable as set forth in the applicable stock award agreement. The means of payment for shares
issued upon exercise of an option is specified in each option agreement. The Amended 2011 Plan permits
payment to be made to the extent permitted under applicable laws by cash, check, other shares of common stock
of the Company (with some restrictions), net exercise, cashless exercise, any other form of consideration
permitted by applicable law, or any combination thereof.
Term. The Administrator determines the term of options and stock appreciation rights granted under the
Amended 2011 Plan as set forth in the applicable stock award agreement. The term of options and stock
appreciation rights granted under the Amended 2011 Plan may be no more than 10 years from the date of grant.
In the case of an incentive stock option granted to an optionee who owns more than 10% of all classes of stock of
the Company or any parent or subsidiary of the Company, the term of the option may be no more than five years
from the date of grant. No option or stock appreciation right may be exercised after the expiration of its term.
26
Termination of Continuous Service. Options and stock appreciation rights granted under the Amended
2011 Plan generally terminate three months after termination of the participant’s service unless (i) such
termination is due to the participant’s disability, in which case the stock award may, but need not, provide that it
may be exercised (to the extent the stock award was exercisable at the time of the termination of service) at any
time within 12 months of such termination; (ii) the participant dies before the participant’s service has
terminated, or within the period specified in the stock award agreement after termination of such service, in
which case the stock award may, but need not, provide that it may be exercised (to the extent the stock award was
exercisable at the time of the participant’s death) within 18 months of the participant’s death by the person or
persons to whom the rights to exercise such stock award pass by will or by the laws of descent and distribution;
(iii) the stock award by its terms specifically provides otherwise, or (iv) the termination is for cause. Except as
provided otherwise in a participant’s stock award agreement, or otherwise set forth in an employment agreement,
upon termination of a participant’s service for cause, the stock award shall immediately terminate and may not
thereafter be exercised. A participant may designate a beneficiary who may exercise the stock award following
the participant’s death. Individual grants by their terms may provide for exercise within a longer or shorter period
of time following termination of service. In no event, however, may an option or stock appreciation right be
exercised beyond the expiration of its maximum term. The option or stock appreciation right term generally is
extended in the event that exercise of the stock award within the foregoing periods is prohibited. A participant’s
stock award agreement may provide that if the exercise of the stock award following the termination of the
participant’s service would be prohibited because the issuance of stock would violate the registration
requirements under the Securities Act of 1933, as amended, then the stock award will terminate on the earlier of
(i) the expiration of the term of the stock award or (ii) three months after the termination of the participant’s
service during which the exercise of the stock award would not be in violation of such registration requirements.
Other Provisions. The stock option agreement may contain other terms, provisions and conditions not
inconsistent with the Amended 2011 Plan as may be determined by the Administrator.
Terms of Restricted Stock Awards and Restricted Stock Unit Awards
Restricted stock awards and restricted stock unit awards may be granted under the Amended 2011 Plan
pursuant to restricted stock award and restricted stock unit award agreements. The following is a description of
the permissible terms of restricted stock awards and restricted stock unit awards under the Amended 2011 Plan.
Individual grants may be more restrictive as to any or all of the permissible terms described below.
Consideration. The Administrator may grant restricted stock awards and restricted stock unit awards in
consideration for past services rendered to the Company or in exchange for any other form of legal consideration
acceptable to the Administrator.
Vesting. Shares of stock issued under a restricted stock award agreement may, but need not, be subject to
forfeiture to the Company in accordance with a vesting schedule as determined by the Administrator. Restricted
stock unit awards vest and are issued at the rate specified in the restricted stock unit award agreement as
determined by the Administrator. However, at the time of grant, the Administrator may impose additional
restrictions or conditions that delay the delivery of stock to be issued in respect of the restricted stock unit award
after vesting.
Termination of Service. Unless the Administrator determines otherwise, the restricted stock purchase
agreement shall give the Company a repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser’s employment or consulting relationship with the Company for any reason (including death and
disability). The purchase price for any issued shares repurchased by the Company shall be the original price paid
by the purchaser, if any. The repurchase option lapses at a rate determined by the Administrator. Except as
otherwise provided in the applicable award agreement, restricted stock unit awards that have not vested will be
automatically forfeited upon the participant’s termination of service.
27
Dividend Equivalents. Dividend equivalent rights may be credited with respect to shares covered by a
restricted stock unit award. However, we do not anticipate paying cash dividends on our common stock for the
foreseeable future.
Terms of Performance Awards
The Amended 2011 Plan allows the Administrator to issue performance stock awards. Performance stock
awards may be granted, vest or be exercised based upon the attainment during a certain period of time of certain
performance goals and will be issued in shares of our common stock, or if determined by the Administrator, cash.
All of our employees, consultants and directors are eligible to receive performance stock awards under the
Amended 2011 Plan. The length of any performance period, the performance goals to be achieved during the
performance period and the measure of whether and to what degree such performance goals have been attained
shall be determined by the Administrator. The maximum amount to be granted to any individual in any calendar
year attributable to such performance stock awards may not exceed 500,000 shares of our common stock.
Notwithstanding this limit, however, in connection with an employee’s initial employment, he or she may be
granted performance stock awards covering up to an additional 500,000 shares of common stock.
In granting a performance stock award, the Administrator will set a period of time, or a performance period,
over which the attainment of one or more goals, or performance goals, will be measured for the purpose of
determining whether the stock award recipient has a vested right in or to such performance stock award. With
respect to stock awards that are intended to qualify as performance based compensation for purposes of
Section 162(m) of the Code, within the time period prescribed by Section 162(m) of the Code, the Administrator
will establish the performance goals, based upon one or more pre-established criteria, or performance criteria,
enumerated in the Amended 2011 Plan and described below. However, in order to qualify as “performance-based
compensation” under Section 162(m) of the Code, among other requirements, such awards must be eligible to
qualify for the Section 162(m) Transition Relief (as described in “Section 162(m) Transition Relief for
Performance-Based Compensation” above). As soon as administratively practicable following the end of the
performance period, the Administrator will certify (in writing) whether the performance goals have been
satisfied.
Performance goals under the Amended 2011 Plan shall be established by the Administrator, based on one or
more of the following performance criteria: (i) earnings (including earnings per share and net earnings, in either
case before or after any or all of: interest, taxes, depreciation and amortization, legal settlements or other income
(expense), or stock-based compensation, other non-cash expenses and changes in deferred revenue); (ii) total
stockholder return; (iii) return on equity or average stockholder’s equity; (iv) return on assets, investment, or
capital employed; (v) stock price; (vi) margin (including gross margin); (vii) income (before or after taxes);
(viii) operating income; (ix) operating income after taxes; (x) pre-tax profit; (xi) operating cash flow; (xii) sales
or revenue targets; (xiii) increases in revenue or product revenue; (xiv) expenses and cost reduction goals;
(xv) improvement in or attainment of working capital levels; (xvi) economic value added (or an equivalent
metric); (xvii) market share; (xviii) cash flow; (xix) cash flow per share; (xx) cash burn; (xxi) share price
performance; (xxii) debt reduction; (xxiii) implementation or completion of projects or processes (including,
without limitation, discovery of a pre-clinical drug candidate, recommendation of a drug candidate to enter a
clinical trial, clinical trial initiation, clinical trial enrollment and dates, clinical trial results, regulatory filing
submissions, regulatory filing acceptances, regulatory or advisory committee interactions, regulatory approvals,
presentation of studies and launch of commercial plans, compliance programs or education campaigns);
(xxiv) customer satisfaction; (xxv) stockholders’ equity; (xxvi) capital expenditures; (xxvii) debt levels;
(xxviii) financings; (xxix) operating profit or net operating profit; (xxx) workforce diversity; (xxxi) growth of net
income or operating income; (xxxii) billings; (xxxiii) employee hiring; (xxxiv) funds from operations;
(xxxv) budget management; (xxxvi) strategic partnerships or transactions (including acquisitions, joint ventures
or licensing transactions); (xxxvii) engagement of thought leaders and patient advocacy groups;
(xxxviii) enhancement of intellectual property portfolio, filing of patent applications and granting of patents;
(xxxix) litigation preparation and management; and (xl) to the extent that an award is not intended to comply
with Section 162(m) of the Code, other measures of performance selected by the Administrator.
28
Unless otherwise determined by the Administrator, the attainment of performance goals for a performance
period will be calculated: (i) to exclude restructuring and/or other nonrecurring charges; (ii) to exclude exchange
rate effects, as applicable, for non-U.S. dollar denominated net sales and operating earnings; (iii) to exclude the
effects of changes to generally accepted accounting standards required by the Financial Accounting Standards
Board; (iv) to exclude the effects of any statutory adjustments to corporate tax rates; (v) to exclude the effects of
items that are “unusual” in nature or occur “infrequently” as determined under generally accepted accounting
principles; (vi) to exclude the dilutive effects of acquisitions or joint ventures; (vii) to assume that any business
divested by the Company achieved performance objectives at targeted levels during the balance of a performance
period following such divestiture; (viii) to exclude the effect of any change in the outstanding shares of common
stock of the Company by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization,
merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any
distributions to common stockholders other than regular cash dividends; (ix) to exclude the effects of stock based
compensation and the award of bonuses under the Company’s bonus plans; (x) to exclude costs incurred in
connection with potential acquisitions or divestitures that are required to be expensed under generally accepted
accounting principles; (xi) to exclude the goodwill and intangible asset impairment charges that are required to
be recorded under generally accepted accounting principles; and (xii) to exclude the effects of the timing of
acceptance for review and/or approval of submissions to the FDA or any other regulatory body. In addition, the
Administrator retains the discretion to reduce or eliminate the compensation or economic benefit due upon
attainment of performance goals.
Non-Discretionary Grant Program
The non-discretionary grant program under the Amended 2011 Plan provides for the grant of stock options
to non-employee directors over their period of service on the Board of Directors. These stock options will be
granted as follows:
Initial Option Grant. Each new non-employee director will, at the time of his or her initial election or
appointment to the Board of Directors, receive an option to purchase a number of shares of the Company’s
common stock determined by the Board of Directors (the “initial option grant”). The initial option grant shall
vest monthly with respect to 1/36th of the shares over the three-year period following the date of grant, subject to
the director’s continuous service through the applicable vesting dates, so that the initial option grant will be fully
vested on the third anniversary of the date of grant.
Annual Option Grant. On each annual meeting, each continuing non-employee director will automatically
be granted a stock option to purchase a number of shares of our common stock determined by the Board of
Directors (the “annual option grant”). The annual option grant shall vest monthly with respect to 1/12th of the
shares over the one year period following the date of grant, subject to the director’s continuous service through
the applicable vesting dates, so that the annual option grant will be fully vested on the first anniversary of the
date of grant.
General Terms. The exercise price of each option granted under the non-discretionary grant program is
100% of the fair market value of the common stock subject to the option on the date of grant. The maximum term
of options granted under the non-discretionary grant program is ten years. All other terms of each option granted
under the non-discretionary grant program shall be consistent with the terms of the Amended 2011 Plan.
Corporate Transaction. Each option granted under the non-discretionary grant program shall automatically
fully accelerate vesting upon a corporate transaction, subject to the non-employee director’s continuous service
through the date of the corporate transaction.
Terms of Other Stock Awards
The Administrator may grant other stock awards that are valued in whole or in part by reference to our
common stock. Subject to the provisions of the Amended 2011 Plan, the Administrator has the authority to
29
determine the persons to whom, and the dates on which, such other stock awards will be granted, the number of
shares of common stock (or cash equivalents) to be subject to each award, and other terms and conditions of such
awards.
General Provisions
Tax Withholding. To the extent provided by the terms of any stock award agreement, a participant may
satisfy any federal, state or local tax withholding obligation relating to such stock award by a cash payment, by
authorizing the Company to withhold a portion of the stock otherwise issuable to the participant, by withholding
from any amounts otherwise payable to the participant, by a combination of these means, or by such other
method as set forth in the stock award agreement.
Transferability. Stock awards may not be sold, pledged, transferred, or disposed of in any manner other
than by will or by the laws of descent and distribution, pursuant to a domestic relations order, or with respect to
stock awards other than options or stock appreciation rights, with the Administrator’s consent, and may be
exercised, during the lifetime of the holder, only by the holder or such transferees as have been transferred a
stock award with the Administrator’s consent. If the Administrator makes a stock award transferable, such stock
award shall contain such additional terms and conditions as the Administrator deems appropriate and such award
will not otherwise be transferred for consideration.
Adjustments Upon Changes in Capitalization. In the event any change is made to the outstanding shares of
the Company’s common stock without the receipt of consideration (whether through a stock split or other
specified change in our capital structure), the Administrator shall appropriately adjust the number and kind of
shares of stock (or other securities or property) subject to the Amended 2011 Plan, the maximum number of
shares that may be issued pursuant to the exercise of incentive stock options, the maximum numbers and/or class
of securities for which any one person may be granted appreciation awards, full value stock awards and
performance stock awards per calendar year, the number and kind of shares of stock (or other securities or
property) subject to any stock award outstanding under the Amended 2011 Plan, and the exercise or purchase
price of any such outstanding stock award.
Effect of Certain Corporate Events. In the event of a dissolution or liquidation of the Company, all
outstanding stock awards under the Amended 2011 Plan shall terminate immediately prior to such dissolution or
liquidation. The Amended 2011 Plan further provides that, in the event of a sale, or other disposition of all or
substantially all of the Company’s assets or specified types of mergers or consolidations (each, a “corporate
transaction”), any surviving or acquiring corporation shall either assume stock awards outstanding under the
Amended 2011 Plan or substitute similar stock awards for those outstanding under the Amended 2011 Plan. If
any surviving corporation declines to assume stock awards outstanding under the Amended 2011 Plan or to
substitute similar stock awards, then, with respect to participants whose service with the Company has not
terminated prior to the time of such corporate transaction, the vesting and the time during which such stock
awards may be exercised will be accelerated in full, and all outstanding stock awards will terminate if the
participant does not exercise such stock awards at or prior to the corporate transaction. With respect to any stock
awards that are held by other participants that terminated service with the Company prior to the corporate
transaction, the vesting and exercisability provisions of such stock awards will not be accelerated and such stock
awards will terminate if not exercised prior to the corporate transaction.
Amendment and Termination of the Amended 2011 Plan. The Board of Directors may amend, alter,
suspend or terminate the Amended 2011 Plan, or any part thereof, at any time and for any reason. Unless sooner
terminated, the Amended 2011 Plan will terminate on February 20, 2021. However, the Amended 2011 Plan
requires stockholder approval for any amendment to the Amended 2011 Plan to the extent necessary to comply
with applicable laws, rules and regulations. No action by the Board of Directors or stockholders may impair any
award previously granted under the Amended 2011 Plan without the consent of the holder.
30
Federal Income Tax Consequences
Incentive Stock Options. An optionee who is granted an incentive stock option does not recognize taxable
income at the time the option is granted or upon its exercise, although the exercise is an adjustment item for
alternative minimum tax purposes and may subject the optionee to the alternative minimum tax. Upon a
disposition of the shares more than two years after grant of the option and one year after exercise of the option,
any gain or loss is treated as long-term capital gain or loss. If these holding periods are not satisfied, the optionee
recognizes ordinary income at the time of disposition equal to the difference between the exercise price and the
lesser of (i) the excess of the stock’s fair market value on the date of exercise over the exercise price, or (ii) the
participant’s actual gain, if any, on the purchase and sale. Any gain or loss recognized on such a premature
disposition of the shares in excess of the amount treated as ordinary income is treated as long-term or short-term
capital gain or loss, depending on the holding period. A different rule for measuring ordinary income upon such a
premature disposition may apply if the optionee is also an officer, director or 10% stockholder of the Company.
Unless limited by Section 162(m) of the Code, the Company is entitled to a deduction in the same amount as the
ordinary income recognized by the optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable income at the time he or she is
granted a nonstatutory stock option. Upon exercise, the optionee recognizes taxable income generally measured
by the excess of the then fair market value of the shares over the exercise price. Any taxable income recognized
in connection with an option exercise by an employee of the Company is subject to tax withholding by the
Company. Unless limited by Section 162(m) of the Code, the Company is entitled to a deduction in the same
amount as the ordinary income recognized by the optionee. Upon a disposition of such shares by the optionee,
any difference between the sale price and the optionee’s exercise price, to the extent not recognized as taxable
income as provided above, is treated as long-term or short-term capital gain or loss, depending on the holding
period.
Stock Appreciation Rights. No taxable income is realized upon the receipt of a stock appreciation right.
Upon exercise of the stock appreciation right, the fair market value of the shares (or cash in lieu of shares)
received is recognized as ordinary income to the participant in the year of such exercise. Generally, with respect
to employees, we are required to withhold from the payment made on exercise of the stock appreciation right or
from regular wages or supplemental wage payments an amount based on the ordinary income recognized.
Subject to the requirement of reasonableness, Section 162(m) of the Code and the satisfaction of a reporting
obligation, we will be entitled to an income tax deduction equal to the amount of ordinary income recognized by
the participant.
Restricted Stock Awards. For federal income tax purposes, if an individual is granted a restricted stock
award, the recipient generally will recognize taxable ordinary income equal to the excess of the common stock’s
fair market value over the purchase price, if any. However, to the extent the common stock is subject to certain
types of restrictions, such as a repurchase right in favor of the Company, the taxable event will be delayed until
the vesting restrictions lapse unless the recipient makes a valid election under Section 83(b) of the Code. If the
recipient makes a valid election under Section 83(b) of the Code with respect to restricted stock, the recipient
generally will recognize ordinary income at the date of acquisition of the restricted stock in an amount equal to
the difference, if any, between the fair market value of the shares at that date over the purchase price for the
restricted stock. If, however, a valid Section 83(b) election is not made by the recipient, the recipient will
generally recognize ordinary income when the restrictions on the shares of restricted stock lapse, in an amount
equal to the difference between the fair market value of the shares at the date such restrictions lapse over the
purchase price for the restricted stock. With respect to employees, the Company is generally required to withhold
from regular wages or supplemental wage payments an amount based on the ordinary income recognized.
Generally, the Company will be entitled (subject to the requirement of reasonableness, the provisions of
Section 162(m) of the Code and the satisfaction of a tax reporting obligation) to a business expense deduction
equal to the taxable ordinary income realized by the recipient. Upon disposition of the common stock, the
recipient will recognize a capital gain or loss equal to the difference between the selling price and the sum of the
31
amount paid for such common stock, if any, plus any amount recognized as ordinary income upon acquisition (or
the lapse of restrictions) of the common stock. Such gain or loss will be long-term or short-term depending on
how long the common stock was held. Slightly different rules may apply to recipients who are subject to
Section 16(b) of the Exchange Act.
Restricted Stock Unit Awards. No taxable income is recognized upon receipt of a restricted stock unit
award. The participant will recognize ordinary income in the year in which the shares subject to that unit are
actually issued to the participant in an amount equal to the fair market value of the shares on the date of issuance.
The participant and the Company will be required to satisfy certain tax withholding requirements applicable to
such income. Subject to the requirement of reasonableness, Section 162(m) of the Code and the satisfaction of a
tax reporting obligation, we will be entitled to an income tax deduction equal to the amount of ordinary income
recognized by the participant at the time the shares are issued. In general, the deduction will be allowed for the
taxable year in which such ordinary income is recognized by the participant.
Potential Limitation on Company Deductions. Under Section 162(m) of the Code, compensation paid to
any publicly held corporation’s “covered employees” (as defined under Section 162(m) of the Code) that exceeds
$1 million per taxable year for any covered employee is generally non-deductible. Prior to the enactment of the
Tax Cuts and Jobs Act, Section 162(m) of the Code provided a performance-based compensation exception,
pursuant to which the deduction limit under Section 162(m) of the Code did not apply to any compensation that
qualified as “performance-based compensation” under Section 162(m) of the Code. Pursuant to the Tax Cuts and
Jobs Act, the performance-based compensation exception under Section 162(m) of the Code was repealed with
respect to taxable years beginning after December 31, 2017, except that certain transition relief is provided for
compensation paid pursuant to a written binding contract which was in effect on November 2, 2017 and which is
not modified in any material respect on or after such date. Compensation paid to each of the Company’s “covered
employees” in excess of $1 million per taxable year generally will not be deductible unless it qualifies for the
performance-based compensation exception under Section 162(m) of the Code pursuant to the transition relief
described above. Because of certain ambiguities and uncertainties as to the application and interpretation of
Section 162(m) of the Code, as well as other factors beyond the control of the Compensation Committee, no
assurance can be given that any compensation paid by the Company (including any award granted under the
Amended 2011 Plan) will be eligible for such transition relief and be deductible by the Company in the future.
The foregoing is only a summary of the effect of federal income taxation upon holders of stock awards
and the Company with respect to the grant and exercise of stock awards under the Amended 2011 Plan. It
does not purport to be complete, and does not discuss the tax consequences of the holder’s death or the
provisions of the income tax laws of any municipality, state or foreign country in which the holder may
reside.
32
New Plan Benefits
Name
Kevin C. Gorman, Ph.D.
Amended 2011 Plan
Dollar value Number of shares
Chief Executive Officer and Director
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matthew C. Abernethy
Chief Financial Officer
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eric Benevich
Chief Commercial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kyle W. Gano, Ph.D.
Chief Business Development Officer
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eiry W. Roberts, M.D.
Chief Medical Officer
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All current executive officers as a group (nine persons) . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
All current non-employee directors as a group (six persons)
All employees, including all current officers who are not executive officers, as a
group (approximately 690 persons) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
(1)
(1)
(1)
(1)
(1)
(2)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(2)
(1)
(1) Awards granted under the Amended 2011 Plan to our executive officers and other employees are
discretionary and are not subject to set benefits or amounts under the terms of the Amended 2011 Plan, and
our Board of Directors and our Compensation Committee have not granted any awards under the Amended
2011 Plan subject to stockholder approval of this Proposal Three. Accordingly, the benefits or amounts that
will be received by or allocated to our executive officers and other employees under the Amended 2011 Plan
are not determinable.
(2) Pursuant to the terms of the Amended 2011 Plan, non-employee directors are entitled to receive options as
described in “Non-Discretionary Grant Program” above. Under our compensation arrangements for
non-employee directors and the Amended 2011 Plan, in 2018 each of our six current non-employee
directors was granted a nonstatutory stock option to purchase 12,500 (15,000 in the case of our Chairman)
shares at the 2018 Annual Meeting and such options were granted under the Amended 2011 Plan. For
additional information regarding our current compensation arrangements for non-employee directors, please
see “Director Compensation” below. The actual value realized upon exercise of an option will depend on the
excess, if any, of the stock price over the exercise prices on the date of exercise. Only non-employee
directors of the Company are eligible to receive non-discretionary grants under the Amended 2011 Plan. All
other grants under the Amended 2011 Plan are within the discretion of the Administrator.
33
Plan Benefits
The following table sets forth, for each of the individuals and groups indicated, the total number of shares of
our common stock subject to options and stock awards that have been granted (even if not currently outstanding)
under the 2011 Plan through the Record Date.
Name and position
Kevin C. Gorman, Ph.D.
2011 Plan
Number of shares Granted
Chief Executive Officer and Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,882,272
Matthew C. Abernethy
Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123,264
Eric Benevich
Chief Commercial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
309,714
Kyle W. Gano, Ph.D.
Chief Business Development Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
728,212
Eiry W. Roberts, M.D.
Chief Medical Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All current executive officers as a group (nine persons) . . . . . . . . . . . . . . . . . . . . . . . . . .
All current directors who are not executive officers as a group (six persons) . . . . . . . . . .
Each nominee for election as a director: (two persons)
Richard F. Pops.
Stephen A. Sherwin, M.D.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All employees, including all current officers who are not executive officers, as a group
109,662
5,396,601
643,500
112,500
112,500
(approximately 690 persons)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,448,958
34
EQUITY COMPENSATION PLANS
The following table sets forth information regarding all of the Company’s equity compensation plans as of
March 1, 2019:
Plan Category
Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights
(a)
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(b)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding
Securities Reflected
in Column a)
(c)
Equity compensation plans approved by security
holders (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,406,021
Equity compensation plans not approved by security
holders (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
240,162
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,646,183
$48.17
$59.37
$48.45
5,002,799
55,182
5,057,981
(1) The number of securities remaining available for future issuance under equity compensation plans as of
March 1, 2019 are from the 2011 Plan. The shares available for issuance under the 2011 Plan may be issued
in the form of option awards, restricted stock awards, restricted stock unit awards or stock bonus awards
subject to limitations set forth in the 2011 Plan.
(2) Consists of shares of common stock issuable pursuant to employment commencement nonstatutory stock
option awards and restricted stock unit awards.
OUR BOARD OF DIRECTORS RECOMMENDS
A VOTE “FOR” PROPOSAL THREE
35
PROPOSAL FOUR: RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
General
The Audit Committee has selected Ernst & Young LLP to audit the financial statements of the Company for
the current fiscal year ending December 31, 2019. Ernst & Young LLP has audited the Company’s financial
statements since 1992. Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting,
will have the opportunity to make a statement if they so desire, and are expected to be available to respond to
appropriate questions.
Stockholders are not required to ratify the selection of Ernst & Young LLP as the Company’s independent
registered public accounting firm. However, the Audit Committee is submitting the selection of Ernst & Young
LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the
selection, the Audit Committee will reconsider whether or not to retain that firm. Even if the selection is ratified,
the Audit Committee in their discretion may direct the selection of a different independent registered public
accounting firm at any time during the year if they determine that such a change would be in the best interests of
the Company and its stockholders.
Vote Required
The affirmative vote of the holders of a majority of the shares represented in person or by proxy at the
Annual Meeting and entitled to vote on the item will be required to approve and ratify the Audit Committee’s
selection of Ernst & Young LLP. The Board of Directors unanimously recommends voting “FOR” approval
and ratification of such selection. In the event of a negative vote on such ratification, the Audit Committee will
reconsider its selection.
36
EXECUTIVE OFFICERS
As of the Record Date, our executive officers were as follows:
Name
Age
Position
Kevin C. Gorman, Ph.D. . . . . . . . . . .
Matthew C. Abernethy . . . . . . . . . . .
Eric Benevich . . . . . . . . . . . . . . . . . .
. . . . . . . . . .
Haig P. Bozigian, Ph.D.
. . . . . . . . . . . .
Kyle W. Gano, Ph.D.
Dimitri E. Grigoriadis, Ph.D.
. . . . . .
Darin M. Lippoldt . . . . . . . . . . . . . . .
Malcolm C. Lloyd-Smith . . . . . . . . .
. . . . . . . . . . .
Eiry W. Roberts, M.D.
61 Chief Executive Officer and Director
39 Chief Financial Officer
53 Chief Commercial Officer
61 Chief Development Officer
46 Chief Business Development Officer
61 Chief Research Officer
53 Chief Legal Officer and Corporate Secretary
63 Chief Regulatory Officer
55 Chief Medical Officer
See above for biographical information concerning Kevin C. Gorman, Ph.D.
Matthew C. Abernethy was appointed Chief Financial Officer in November 2017 and is responsible for
leading corporate finance activities and commercial supply chain operations, as well as information technology
and investor relations functions at Neurocrine. Mr. Abernethy has nearly 15 years of experience in the financial
sector and investor relations with expertise in the healthcare industry. He joined Neurocrine from Zimmer
Biomet, where he held various positions from February 2009 to November 2017, including most recently, Vice
President, Investor Relations and Treasurer and Vice President of Finance for the Americas and Global Product
Engines. He began his career with KPMG LLP and is a certified public accountant. Mr. Abernethy earned his
B.S. in Accounting and Business Administration from Grace College and an MBA from the University of
Chicago.
Eric Benevich was appointed Chief Commercial Officer in May 2015 and is responsible for all aspects of
commercial development, marketing and sales of the Neurocrine product portfolio. Previously, Mr. Benevich was
at Avanir Pharmaceuticals, Inc., from 2005 to 2015, serving most recently as Vice President of Marketing where
he was responsible for NUEDEXTA® and commercialization of their CNS pipeline. Mr. Benevich has over
20 years of experience in the pharmaceutical industry and previously served in various positions of increasing
responsibility at Peninsula Pharmaceuticals Inc., Amgen and AstraZeneca in the sales and marketing of drugs
such as Enbrel®, Epogen® and Prilosec®. Mr. Benevich has a BBA in International Business from Washington
State University.
Haig P. Bozigian, Ph.D. was appointed Chief Development Officer in 2013 after having served as Senior
Vice President of Pharmaceutical and Preclinical Development. Dr. Bozigian is responsible for all preclinical
development, chemistry manufacturing and controls (CMC) and clinical pharmacology, and has led such
functions since 2006. Dr. Bozigian joined Neurocrine in 1997. With extensive expertise in CNS related new
product development, Dr. Bozigian has participated in research and development for approximately 30 years.
Prior to joining Neurocrine, Dr. Bozigian served as Director of Pharmaceutical Development at Procyte
Corporation, Associate Director of Pharmacokinetics and Drug Metabolism at Sphinx Pharmaceuticals
Corporation and as a Clinical Pharmacokineticist at GlaxoSmithKline. Dr. Bozigian earned his B.S. in
Microbiology from the University of Massachusetts, his M.S. in Pharmacodynamics and Toxicology from the
University of Nebraska Medical Center, and earned his Ph.D. in Pharmaceutical Sciences from the University of
Arizona.
Kyle W. Gano, Ph.D. was appointed Chief Business Development Officer in 2011 and is responsible for all
business and corporate development activities, including the management of ongoing collaborations with
AbbVie, Mitsubishi Tanabe Pharma, BIAL, Jnana Therapeutics and Voyager Therapeutics. From 2001 to 2011,
Dr. Gano held several positions of increasing responsibility at Neurocrine spanning marketing analytics to
37
business development. Dr. Gano received his B.S. in Chemistry from the University of Oregon, B.S. in
Biochemistry from the University of Washington, and his Ph.D. in Organic Chemistry and M.B.A in Finance
from the University of California, Los Angeles.
Dimitri E. Grigoriadis, Ph.D. was appointed Chief Research Officer in 2013. Dr. Grigoriadis oversees all
research functions, including drug discovery, biology and chemistry, and has led such functions since 2006.
Dr. Grigoriadis joined Neurocrine in 1993, established the pharmacology and drug screening groups and was
most recently a Neurocrine Fellow and Vice President of Discovery Biology. Prior to joining Neurocrine, he was
a Senior Scientist in the Neuroscience group at the DuPont Pharmaceutical Company from 1990 to 1993.
Dr. Grigoriadis received his B.Sc. from the University of Guelph in Ontario, Canada, and his M.Sc. and Ph.D. in
Pharmacology from the University of Toronto, Ontario, Canada. He conducted his postdoctoral research at the
National Institute on Drug Abuse from 1987 to 1990.
Darin M. Lippoldt was appointed Chief Legal Officer and Corporate Secretary in October 2014 and has
oversight of all corporate legal matters, intellectual property, compliance, and government relations. Prior to
joining Neurocrine, Mr. Lippoldt served as Executive Vice President, General Counsel, Chief Compliance
Officer and Corporate Secretary of Volcano Corporation, a company he joined in 2010. Prior to Volcano,
Mr. Lippoldt served as Associate General Counsel at Amylin Pharmaceuticals, Inc. since 2003. He previously
practiced corporate and securities law with the law firms of Fulbright & Jaworski LLP and Matthews and
Branscomb, P.C. Mr. Lippoldt received a B.B.A. in Finance, an M.A. in International Relations and a J.D. from
St. Mary’s University.
Malcolm C. Lloyd-Smith was appointed Chief Regulatory Officer in September 2014 and is responsible for
regulatory affairs and quality assurance. Prior to joining Neurocrine, Mr. Lloyd-Smith served at Cadence
Pharmaceuticals, Inc. as Senior Vice President, Regulatory Affairs, Quality and Clinical from August 2012 to
September 2014, and previously as Senior Vice President, Regulatory Affairs and Quality Assurance from
August 2008. Mr. Lloyd-Smith served as Vice President and Head of Global Regulatory Affairs for Elan
Pharmaceuticals, Inc. from September 2003 to August 2008, after having served in the United Kingdom as its
Vice President, International Regulatory Affairs from March 2002 to August 2003. Previously, Mr. Lloyd-Smith
served in various positions of increasing responsibility with DuPont Pharmaceuticals in Germany, Switzerland,
USA and UK. Mr. Lloyd-Smith holds a B.Sc. in Pharmacology from the University of Leeds and a M.Sc. in
Pharmacological Biochemistry from Hatfield Polytechnic.
Eiry W. Roberts, M.D., was appointed Chief Medical Officer in January 2018 and is responsible for all
clinical development and medical affairs activities at Neurocrine. Dr. Roberts has over 25 years of research and
development experience in the pharmaceutical industry across all phases of drug development from research
through commercialization in multiple therapeutic areas, including neuroscience, inflammation, oncology and
metabolic diseases. She joined Neurocrine from Eli Lilly and Company where she had worked since May 1991.
During her tenure at Eli Lily and Company Dr. Roberts held various positions of increasing responsibility,
including Vice President, Clinical Pharmacology/Managing Director of Chorus a position she held from October
2014 until December 2017 and Vice President of R&D, BioMedicines Business Unit. At Eli Lilly Dr. Roberts
was the Chair of the Medical Review Committee, where she was responsible for review and approval of all the
integrated clinical plans for molecules in the Lilly portfolio. Dr. Roberts was accountable for early clinical
development programs across all therapeutic areas within Lilly, as well as registration for new chemical entities
and biproducts in Phase III development. During her time at Lilly, Dr. Roberts established a new therapeutic
area, which resulted in the development of five potential novel medicines from Phase I through to approval, with
two of them successfully receiving regulatory approval. Dr. Roberts also has extensive leadership and business
development experience, including the management of strategic alliances, business partnerships and venture
capital collaborations. Dr. Roberts is a physician who trained in pharmacology and medicine in the UK,
qualifying from the University of London in 1987. Her post-graduate clinical training was in clinical
pharmacology and cardiology at St. Bartholomew’s Hospital and the Royal London Hospital.
38
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis describes Neurocrine’s executive officer compensation
program for 2018 and certain elements of our 2019 program. It provides qualitative information on the factors
relevant to these decisions and the manner in which compensation is awarded to the following individuals who
are our Named Executive Officers (“NEOs”) for 2018:
• Chief Executive Officer, Kevin C. Gorman, Ph.D.;
• Chief Financial Officer, Matthew C. Abernethy;
• Chief Commercial Officer, Eric Benevich;
• Chief Business Development Officer, Kyle W. Gano, Ph.D.; and
• Chief Medical Officer, Eiry W. Roberts, M.D.(1)
(1) Dr. Roberts joined the Company as our Chief Medical Officer on January 8, 2018.
Executive Summary
Business Overview
We are a company focused on discovering, developing, and commercializing innovative and life-changing
pharmaceuticals, in diseases with high unmet medical needs, through our novel research and development (R&D)
platform, focused on neurological and endocrine related diseases and disorders. Utilizing a portfolio approach to
drug discovery, we have multiple small molecule drug candidates at various stages of pharmaceutical
development. We develop proprietary pharmaceuticals for our pipeline, as well as collaborate with other
pharmaceutical companies on our products and product candidates.
On April 11, 2017, the United States Food and Drug Administration (FDA) approved INGREZZA®
(valbenazine) capsules for the treatment of adults with tardive dyskinesia (TD). We market INGREZZA for TD
in the United States (U.S.) through our specialty sales force focused primarily on physicians who treat TD
patients, including psychiatrists and neurologists. The commercial launch of INGREZZA occurred on May 1,
2017.
On July 24, 2018, we were notified by AbbVie Inc. (AbbVie) that FDA approval was granted for
ORILISSA® (elagolix) for the management of moderate to severe endometriosis pain in women. Discovered and
developed through Phase II clinical trials by us, ORILISSA, the first FDA-approved oral medication for the
management of endometriosis with associated moderate to severe pain in over a decade, began to be marketed by
AbbVie in August 2018 as part of a collaboration to develop and commercialize elagolix for women’s health.
Our clinical development programs include opicapone as an adjunctive therapy to levodopa/DOPA
decarboxylase inhibitors in adult Parkinson’s disease patients, elagolix for uterine fibroids partnered with
AbbVie, NBI-74788 for the treatment of congenital adrenal hyperplasia, a vesicular monoamine transporter 2
inhibitor and a first-in-class central nervous system compound each with potential use in the treatment of
neurologic and psychiatric disorders, and two gene therapy programs in which we are partnered with Voyager
Therapeutics, Inc. (Voyager) for the treatment of Parkinson’s disease and Friedreich’s ataxia.
We currently have several collaborations with other companies. In June 2010, we announced an exclusive
worldwide collaboration with AbbVie to develop and commercialize elagolix and all next-generation
gonadotropin-releasing hormone antagonists. In March 2015, we entered into a collaboration and license
agreement with Mitsubishi Tanabe Pharma Corporation for the development and commercialization of
INGREZZA for movement disorders in Japan and other select Asian markets. In February 2017, we in-licensed
technology from BIAL—Portela & Ca, S.A. for the development and commercialization of opicapone for the
39
treatment of human diseases and conditions, including Parkinson’s disease, in the U.S. and Canada. In October
2018, we entered into a research collaboration with Jnana Therapeutics, Inc. aimed at discovering novel small
molecule therapeutics for multiple targets for CNS disorders. In January 2019, we entered into a collaboration
and license agreement with a Voyager, clinical-stage gene therapy company. The collaboration is focused on the
development and commercialization of four programs using Voyager’s proprietary gene therapy platforms. The
four programs consist of Voyager’s VY-AADC program for Parkinson’s disease and VY-FXN01 program for
Friedreich’s ataxia, as well as rights to two programs to be determined by the parties in the future.
2018 Corporate Performance Highlights
2018 was a year of significant achievement for the Company as we:
•
•
•
•
•
continued the successful launch of INGREZZA for the treatment of TD with product revenues of over
$400 million in its first full year of commercialization;
prepared for the submission to the FDA of a New Drug Application for opicapone;
entered into a collaboration with Jnana Therapeutics;
expanded early stage pipeline by filing two new Investigational New Drug Applications (INDs) with
the FDA; and
recorded earnings of $18.1 million.
Pay for Performance/At Risk Pay
Our executive officer compensation program is designed to reward achievement of the specific strategic
goals that we believe will advance our business strategy and create long-term value for our stockholders.
Consistent with our goal of attracting, motivating and retaining a high-caliber executive team, our executive
officer compensation program is designed to pay for performance. We utilize compensation elements that
meaningfully align our NEOs’ interests with those of our stockholders to create long-term value. As such, a
significant portion of our CEO’s and other executive officers’ compensation is “at-risk,” performance-based
compensation, in the form of long-term equity awards, and annual cash incentives that are only earned if we
achieve multiple corporate metrics. The graphics below illustrate the elements of our CEO’s compensation mix
for 2018 and the aggregate compensation mix for 2018 for the other named executive officers as a group.
CEO 2018 Compensation Mix
75% At-Risk
All Other NEO 2018 Compensation Mix
70% At-Risk
Time-Based
Restricted Stock Units
18%
Base Salary
8%
5%
Performance-Based
Cash Incentive
Time-Based
Restricted Stock Units
20%
Base Salary
10%
4%
Performance-Based
Cash Incentive
Performance-
Based Restricted
Stock Units
CEO 2018
Compensation Mix
17%
Stock
Options
52%
All Other
NEO 2018
Compensation Mix
Performance-
Based Restricted
Stock Units
35%
Stock
Options
31%
= Performance-Based Compensation
40
Our Compensation Practices
Below are key elements of our compensation program, as well as problematic pay practices that we avoid:
What We Don’t Do
× Allow for the repricing of stock options without
stockholder approval
×
×
Pay dividends or dividend equivalents on
unearned shares
Permit hedging or other forms of speculative
transactions by employees or directors, or
permit borrowing against our stock by
employees or directors
×
Provide single-trigger change in control benefits
What We Do
✓ Heavily weight our NEO compensation toward “at
risk,” performance-based compensation
✓ Use multi-year vesting for all executive officer
equity awards
✓ Have an incentive compensation recoupment or
clawback policy
✓ Structure our executive officer compensation
program to minimize inappropriate risk-taking
✓ Cap annual cash incentives at a maximum payout
amount
✓ Select peer companies that we compete with for
executive officer talent, have a similar business and
are of similar size as us, and review their pay
practices
✓ Solicit advice from the Committee’s independent
compensation consultant
✓ Have meaningful stock ownership guidelines for
NEOs
✓ Have three independent non-employee directors
serve on the Committee
Role of the Compensation Committee
As discussed in greater detail below, the Compensation Committee of our Board of Directors (the
“Committee”) takes into consideration a peer group, survey data and advice from an independent compensation
consultant when setting the compensation philosophy and compensation structure for the Company. The
Committee’s complete roles and responsibilities are set forth in a written charter which was adopted by the Board
of Directors and is available at www.neurocrine.com. Some of the significant roles and responsibilities of the
Committee include:
•
•
•
•
•
•
•
reviewing and, if necessary, revising the compensation philosophy of the Company;
reviewing and approving corporate goals and objectives relating to the compensation of the Company’s
employees, including executive officers, and evaluating the performance of the Company, and its
executive officers, in light of these corporate goals and objectives;
reviewing and approving compensation for all executive officers, including perquisite benefits, if any;
reviewing and approving all employment agreements for executive officers;
reviewing and approving all promotions to executive officer positions and the hiring of all new
executive officers;
reviewing director compensation by taking into consideration peer group data and advice from an
independent compensation consultant, and making recommendations to the Board of Directors;
reviewing and approving guidelines for salaries, merit salary increases, cash incentive payments, stock-
based grants and performance-based stock grants for all non-executive officer employees of the
Company;
41
•
reviewing and approving equity grants to non-employees of the Company, if any;
• making recommendations to the Board of Directors with regard to amendments or modifications to
equity incentive plans;
administering the Company’s equity incentive plans;
reviewing and taking into consideration stockholder feedback regarding compensation matters,
including our annual “say-on-pay” vote;
retaining independent compensation consultant and advisors when appropriate to advise the Committee
on compensation policies and plans;
complying with requirements established by the SEC, assessing the risks arising from the Company’s
compensation policies and taking any actions required as a result thereof;
reviewing executive officer and director compliance with our Stock Ownership Guidelines; and
preparing and approving the Compensation Discussion and Analysis to be included as part of the
Company’s annual proxy statement.
•
•
•
•
•
•
Committee Actions in Connection with Say-on-Pay Vote
Our Committee is committed to ensuring that our executive officer compensation program is effective and
aligned with our stockholders’ interests and concerns. Accordingly, a critical component of our Committee’s
process has been to continue to:
•
•
review emerging compensation “best practices” in the U.S., with a focus toward companies of similar
size; and
solicit advice from our Committee’s independent compensation consultant.
In 2018, we sought an advisory vote from our stockholders regarding our executive officer compensation
program and received a 98.2% favorable vote supporting the program. Each year, the Committee considers the
results of the advisory vote as it completes its annual review of each pay element and the compensation provided
to our NEOs and other executive officers. Given the significant level of stockholder support, the Committee
concluded that our executive officer compensation program continues to align executive officer pay with
stockholder interests and provides competitive pay that encourages retention and effectively incentivizes
performance of talented NEOs and executive officers. Accordingly, the Committee determined not to make any
significant changes to our programs as a result of the vote. The Committee will continue to consider the outcome
of our say-on-pay votes and our stockholders’ views when making future compensation decisions for the NEOs
and executive officers.
Compensation Philosophy and Overall Compensation Determination Process
We believe that in order to create value for our stockholders, it is critical to attract, motivate and retain key
executive officer talent by providing competitive compensation packages. Accordingly, we design our executive
officer compensation programs to attract, motivate and retain executive officers with the skills and expertise to
execute our business plans, and reward those executive officers fairly over time for actions consistent with
creating long-term stockholder value. The market for talented individuals in the life sciences industry is highly
competitive and becoming more challenging for employers.
Our compensation philosophy for executive officers provides that cash compensation should be structured
such that at least one-third of each executive officer’s total cash compensation, consisting of base salary and
target cash incentives, is at risk and dependent upon the Company’s achievement of specific corporate metrics
that drive shareholder value. Non-cash long-term equity compensation for executive officers is generally a
42
combination of performance-based and time-based vesting, and is designed to motivate executive officers to
increase long-term stockholder value as well as reward and retain key employees. The Committee believes that
this approach provides an appropriate blend of short-term and long-term incentives to maximize stockholder
value.
The implementation of the compensation philosophy is carried out under the supervision of the Committee.
The Committee uses the services of an independent compensation consultant who is retained by, and reports
directly to, the Committee. Management, under guidelines and procedures approved by the Committee,
determines the compensation of our non-executive officer employees.
In the early part of each year, the Committee, without the presence of our Chief Executive Officer,
deliberates and makes decisions regarding the base salary, target cash incentives and long-term equity award
components of compensation to be awarded to our Chief Executive Officer for the new fiscal year, as well as
performance-based compensation payouts for the prior fiscal year. In setting compensation for our other NEOs,
the Committee solicits the input of our Chief Executive Officer, who recommends to the Committee the base
salary, target cash incentives and long-term equity award components of compensation to be awarded to our
NEOs for the new fiscal year, as well as performance-based compensation payouts for the prior fiscal year. The
Committee remains solely responsible for making the final decisions on compensation for all of our NEOs. Our
NEOs are not present during discussions of their compensation packages nor do they participate in approving any
portion of their own or other NEO compensation packages.
The Chief Executive Officer annually reviews the performance of each NEO (other than himself) and
discusses these performance reviews with the Committee. These recommendations reflect his consideration of
the overall performance of the Company, market data prepared by the Committee’s independent compensation
consultant, the performance of each NEO, internal pay equity among individuals (including qualifications and
contributions to meeting our corporate objectives), criticality and scope of job function and our Chief Executive
Officer’s extensive industry experience. The Committee considers a variety of factors, as described below, which
may vary from year to year, to set the compensation of our NEOs at levels that the Committee considers to be
competitive and appropriate for each NEO, using the Committee’s professional experience and judgment:
✓ Market data from the independent compensation consultant
✓ Chief Executive Officer’s recommendations (other than for himself)
✓ Independent compensation consultant recommendations
✓ Internal pay equity among individuals and positions
✓ Criticality and scope of job function
✓ Retention risk
✓ Company performance
✓ Individual performance
✓ Total targeted and historical compensation
✓ Any other factors the Committee determines appropriate
In the first quarter of the year, the performance of each executive officer for the prior year and market data
are reviewed by the Committee, and base salary adjustments, cash incentive payouts, following year targets and
annual equity grants are discussed and approved. Also, during the first quarter of the year, Company-wide
performance goals for the then current year are finalized by the Committee and the Board of Directors. At
mid-year meetings, the Committee reviews the Company’s compensation philosophy, policies and procedures.
Committee meetings in the fourth quarter of the year generally focus on Company goal achievement, selection of
the peer group for the following year and the structure of executive officer performance reviews.
43
Compensation Consultants
The Committee uses the services of an independent compensation consultant who is retained by, and reports
directly to, the Committee to provide the Committee with an additional external perspective with respect to its
evaluation of relevant market and industry practices. The Committee continued to select Radford, an AON
Hewitt Company, as a third-party compensation consultant to assist the Committee in establishing 2018 and 2019
overall compensation levels. Radford conducted analyses and provided advice on, among other things, the
appropriate peer group, executive officer compensation for our executive officers and compensation trends in the
life sciences industry.
In weighing its recommendations for executive officer compensation for the fiscal year 2018, the
Committee directed Radford to advise the Committee on both best practices and peer practices when designing
and modifying our compensation program for executive officers in order to achieve our objectives. As part of its
duties, Radford provided the Committee with the following services with respect to 2018 compensation
decisions:
•
•
•
•
•
•
•
•
carried out a comprehensive review of our peer group for use in making 2018 executive officer
compensation decisions;
provided compensation data for the peer group and relevant executive officer pay survey data and an
analysis of the compensation of the Company’s executive officers as compared to this market data;
provided a competitive assessment of, and comparison to, incentive design and executive officer pay
program structure based on peer group data;
conducted a comprehensive pay for performance assessment;
provided recommendations regarding the annual cash incentive and long-term equity incentive program
design for 2018;
assisted the Committee with the design of 2018 pay programs consistent with the Company’s business
strategy and pay philosophy;
provided background information and data for 2018 adjustments to the Company’s executive officer
compensation program consistent with good governance practices and the Company’s objectives; and
prepared an analysis of the Board’s 2018 compensation program.
The Committee annually assesses whether the work of Radford as a compensation consultant has raised any
conflict of interest, taking into consideration the following factors: (i) the provision of other services, if any, to
the Company by Radford; (ii) the amount of fees the Company paid to Radford as a percentage of the firm’s total
revenue; (iii) Radford’s policies and procedures that are designed to prevent conflicts of interest; (iv) any
business or personal relationship of Radford or the individual compensation advisors employed by the firm with
an executive officer of the Company; (v) any business or personal relationship of the individual compensation
advisors with any member of the Committee and (vi) any stock of the Company owned by Radford or the
individual compensation advisors employed by the firm. The Committee has determined, based on its analysis of
the above factors, that the work of Radford and the individual compensation advisors employed by Radford as
compensation consultants to the Company have not created any conflict of interest.
Competitive Assessment of Compensation—Peer Group and Market Data
2018 Peer Group. When developing a proposed list of our peer group companies to be used in connection
with making compensation decisions for 2018, Radford reexamined our compensation philosophy and peer group
and recommended changes to our 2017 peer group company list to reflect our growth, market capitalization and
the stage of our commercial development. Radford suggested biopharmaceutical companies that were primarily
recently commercial companies with revenue generally less than $300 million, had market values of
44
approximately one half (0.5x) to two-and-a-half (2.5x) our market capitalization at the time (resulting in a range
of between $2 billion to $12 billion in market capitalization) and had headcounts approximately one half (0.5x)
to two-and-a-half (2.5x) our headcount at the time (resulting in a range generally between 200 to 1,000
employees approximately). As a result of the growth in revenue, market capitalization and headcount that we
experienced from when our 2017 peer group was determined, there was a change to the criteria used to determine
our 2018 peer group, as compared to the criteria used to determine our 2017 peer group.
Based on these criteria, for 2018 Radford recommended, and our Committee approved the following peer
group:
ACADIA Pharmaceuticals, Inc.
bluebird bio, Inc.
Halozyme Therapeutics, Inc.
Juno Therapeutics, Inc.
Puma Biotechnology, Inc.
TESARO, Inc.
Agios Pharmaceuticals, Inc.
Clovis Oncology, Inc.
Ionis Pharmaceuticals, Inc.
Nektar Therapeutics
Sarepta Therapeutics, Inc.
The Medicines Company
Alnylam Pharmaceuticals, Inc.
Exelixis, Inc.
Ironwood Pharmaceuticals, Inc.
Portola Pharmaceuticals, Inc.
Seattle Genetics, Inc.
Ultragenyx Pharmaceutical Inc.
The 2018 peer group reflects the following changes from our 2017 peer group, all of which were recommended
by Radford and approved by our Committee: (i) the removal of the following company Intercept
Pharmaceuticals, Inc., which no longer met the criteria above, (ii) the removal of the following companies due to
such companies being acquired since the 2017 peer group had been approved: ARIAD Pharmaceuticals, Inc. and
Kite Pharma, Inc., and (iii) the addition of the following companies, which met the criteria above: Clovis
Oncology, Inc., Halozyme Therapeutics, Inc. and Portola Pharmaceuticals, Inc.
In determining executive officer compensation for 2018, the Committee reviewed data from this group of
peer companies. At the time of approval of our 2018 peer group, our Company was approximately in the 66th
percentile of the peer group for market capitalization, in the 8th percentile of the peer group for revenue.
In early 2018, Radford completed an assessment of executive officer compensation based on the 2018 peer
group to inform the Committee’s determinations of executive officer compensation for 2018. The data for this
assessment was compiled from multiple sources, including: (i) the 2018 peer group companies’ publicly
disclosed information, or public peer data and (ii) data from public biotechnology and pharmaceutical companies
in the Radford Global Life Sciences Survey that had market values between $2 billion and $12 billion or the
general survey data. The components of this data were based on the availability of sufficient comparative data for
an executive officer’s position. The general survey data and the public peer data, collectively referred to in this
proxy statement together as market data, were reviewed by the Committee, with the assistance of Radford, and
used as one reference point, in addition to other factors, in setting our executive officers’ compensation.
The Committee generally reviews target total direct compensation, comprising both target cash
compensation and equity compensation, against the market data described above primarily to ensure that our
executive officer compensation program as a whole is positioned competitively to attract and retain the highest
caliber executive officers and that the total direct compensation opportunity for the executive officer group is
aligned with our corporate objectives and strategic needs. The Committee does not have a specific target
compensation level for the NEOs; rather, the Committee reviews a range of market data reference points
(generally at the 25th, 50th and 75th percentiles of the market data) with respect to target total direct compensation,
target total cash compensation (including both base salary and the target annual cash incentive) and equity
compensation (valued based on an approximation of grant date fair value). In making compensation
determinations, the Committee considers the market data, along with the other factors described above under
“Compensation Philosophy and Overall Compensation Determination Process”.
2019 Peer Group. In November 2018, when developing a proposed list of our peer group companies to be
used in connection with making compensation decisions for 2019, Radford selected primarily recently
45
commercial or commercial biopharmaceutical companies with revenue generally between $200 million and
$1.5 billion, market capitalization between $4 billion to $25 billion and employee headcounts up to 2,000,
reflecting our growth in revenue, market capitalization and headcount.
Based on these criteria, for 2019 Radford recommended, and our Committee approved the following peer
group:
Agios Pharmaceuticals, Inc.
Alnylam Pharmaceuticals, Inc.
bluebird bio, Inc.
Ionis Pharmaceuticals, Inc.
Nektar Therapeutics
Seattle Genetics, Inc.
Alexion Pharmaceuticals, Inc
BeiGene
Exelixis, Inc.
Intercept Pharmaceuticals, Inc.
Sage Therapeutics, Inc.
Ultragenyx Pharmaceutical Inc.
Alkermes
BioMarin Pharmaceuticals, Inc.
Incyte Corporation
Jazz Pharmaceuticals, Inc.
Sarepta Therapeutics, Inc.
United Therapeutics Corporation
The 2019 peer group reflects the following changes from our 2018 peer group, all of which were recommended
by Radford and approved by our Committee: (i) the removal of the following companies ACADIA
Pharmaceuticals, Inc., Clovis Oncology, Inc., Halozyme Therapeutics, Inc., Ironwood Pharmaceuticals, Inc.,
Juno Therapeutics, Inc., Portola Pharmaceuticals, Inc., Puma Biotechnology, Inc., TESARO, Inc. and The
Medicines Company, which no longer meet the criteria above or were acquired since the 2018 peer group had
been approved and (ii) the addition of the following companies, which met the criteria above: Alexion
Pharmaceuticals, Inc., Alkermes, BeiGene, BioMarin Pharmaceuticals, Inc., Incyte Corporation, Intercept
Pharmaceuticals, Inc., Jazz Pharmaceuticals, Inc., Sage Therapeutics, Inc., and United Therapeutics Corporation.
Components of Executive Compensation
The Committee considers each executive officer’s performance, contribution to Company goals,
responsibilities, experience, qualifications, and where in the competitive range the executive officer’s
compensation compares to the Company’s identified peer group when determining the appropriate compensation
for each executive officer. The Committee considers each component of compensation independently and each
component in the context of each executive officer’s total compensation. Compensation for our NEOs currently
consists of three key elements that are designed to reward performance in a simple and straightforward manner:
base salaries, annual performance-based cash incentives and long-term equity awards, which generally include
restricted stock unit awards (“RSUs”) and stock options, which both vest based on continued service over time,
and in some years include performance restricted stock units (“PRSUs”), which vest upon achievement of key
corporate metrics that we believe will create shareholder value. The purpose and key characteristics of each of
these elements are summarized below.
Element
Base Salary
Purpose
Key Characteristics
Designed to compensate
competitively at levels necessary to
attract and retain qualified executive
officers in the life sciences industry;
generally based on the scope of each
executive officer’s responsibilities,
as well as his/her qualifications,
breadth of experience, performance
record and depth of applicable
functional expertise; established and
adjusted to be appropriate as
compared to the applicable market
data, enabling the Company to
attract, motivate, reward and retain
Fixed compensation where
year-to-year adjustments to each
executive officer’s base salary are
based upon sustained superior
performance, changes in the general
level of base salaries of persons in
comparable positions within our
industry, and any average merit
salary increase for such year for all
employees of the Company
established by the Committee, as
well as other factors the Committee
judges to be pertinent during an
assessment period.
46
Element
Purpose
Key Characteristics
highly skilled executive officers;
gives executive officers a degree of
certainty in light of having a majority
of their compensation at risk.
In making base salary decisions, the
Committee exercises its judgment to
determine the appropriate weight to
be given to each of these factors.
Adjustments may also be made
during the fiscal year for promotions,
highly urgent retention reasons,
superior performance in response to
changed or challenging
circumstances, and similar special
circumstances.
Annual Cash Incentives
Motivates executive officers to
achieve our short-term strategic plan
and milestones that are designed to
drive long-term growth and
performance while providing
flexibility to respond to opportunities
and changing market conditions.
Annual cash award opportunity
based on corporate performance
compared to pre-established
corporate goals with pre-established
target and maximum payout
opportunities for each executive
officer.
The cash incentive program,
including corporate goals and target
payouts, are reviewed and approved
by the Committee annually and may
include individual performance
targets for each executive officer.
The corporate goals are prepared in
an interactive process between
management and the Board of
Directors based on the Company’s
business plan and budget for the
year. Cash incentive payments are
linked to the attainment of overall
corporate goals and may include
individual performance targets for
each executive officer, or other
factors the Committee determines
appropriate.
RSUs generally vest on an annual
basis, ratably over four years subject
to executive officer’s continued
service; the ultimate value realized
varies with our common stock price.
Long-Term Equity
Incentives (RSUs)
Motivates executive officers to
achieve our business objectives by
tying compensation to the
performance of our common stock
over the long term; creates an
ownership culture; motivates our
executive officers to remain with the
Company by mitigating swings in
incentive values during periods when
market volatility impacts our stock
price; directly motivates an executive
officer to maximize long-term
stockholder value and serve as an
47
Element
Purpose
Key Characteristics
Long-Term Equity
Incentives (Stock Options)
Long-Term Equity
Incentives (PRSUs)
Other Compensation
effective tool for incentivizing and
retaining those executive officers
who are most responsible for
influencing stockholder value.
Motivates executive officers to
achieve our business objectives by
tying incentives to the appreciation
of our common stock over the long-
term and creates an ownership
culture.
Creates a strong link to the
Company’s long-term performance,
creates an ownership culture and
closely aligns the interests of our
executive officers with those of our
stockholders because the value that
the grants deliver are directly
dependent on our performance goal
attainment.
Provides benefits that promote
employee health and welfare, which
assists in attracting and retaining our
executive officers; certain additional
benefits reflect market standards and
are reasonable and necessary to
attract and/or retain each of our
executive officers and allow the
executive officers to realize the full
benefit of the other elements of
compensation we provide.
Stock options with an exercise price
equal to the fair market value on the
date of grant generally vesting
monthly over four years subject to
executive officer’s continued service;
the ultimate realizable value, if any,
depends on the appreciation of our
common stock price from the date of
grant.
PRSUs only vest upon achievement
of objectively measurable
performance goals tied to our
business strategy that focus executive
officers on achieving these long-term
Company performance goals and
increasing stockholder value.
Executive officers are eligible to
participate in the Company’s
employee benefit plans on the same
terms as all other full-time
employees. These plans include
medical, dental and life insurance
and eligibility to participate in the
Company’s employee stock purchase
plan. Additional benefits include
disability insurance premiums, an
annual physical examination and
financial planning services.
The terms of the Company’s 401(k)
Savings Plan (the “401(k) Plan”)
provide for executive officer and
broad-based employee participation
on the same general terms. Under the
401(k) Plan, all Company employees
are eligible to receive basic matching
contributions from the Company that
vest annually over three years from
date of hire.
Severance and Change in
Control Benefits
Serves our retention objectives by
helping our NEOs maintain
continued focus and dedication to
their responsibilities to maximize
Provides protection in the event of a
termination of employment under
specified circumstances, including
following a change in control of the
48
Element
Purpose
Key Characteristics
stockholder value, including in the
event of a transaction that could
result in a change in control of the
Company.
Company as described below under
“Potential Payments Upon
Termination or Change-in-Control”.
Compensation components for
executive officers in the event of a
termination by the Company without
cause or termination by the executive
officer due to constructive
termination within six months after
the consummation of a change in
control include payments for accrued
annual base salary, a cash
compensation payment, cash
compensation for the value of all
outstanding stock awards, limited
Company-paid health insurance
benefits, and any accrued vacation
and any accrued benefits under any
plans of the Company in which the
executive officer is a participant.
Eligibility for these benefits requires
a signed release agreement by the
executive officer.
Certain individuals whose offer
letters were entered into in or before
2007, including Dr. Gorman, are
entitled to tax gross-ups in the event
of certain levels of payments they
may receive upon a change in
control. We have not entered into
any new change in control gross-ups
for executive officers since 2007, nor
does the Company intend to enter
into any new agreements containing
such gross-ups. Accordingly,
Mr. Benevich’s, Mr. Abernethy’s,
Dr. Gano’s and Dr. Roberts’
employment agreements do not
provide for such tax gross-ups.
2018 Executive Officer Compensation Decisions
Base Salary
In February 2018, our Committee reviewed and determined the 2018 base salaries for each of the NEOs as
set forth in the table below, except for Mr. Abernethy’s and Dr. Roberts’ base salary, which the Committee
determined in connection with the commencement with Mr. Abernethy’s employment in the fourth quarter of
2017 and the commencement of Dr. Roberts’ employment in the first quarter of 2018, respectively. In making
these 2018 decisions, the Committee considered the market data for each individual NEO’s position, as well as
the individual’s historical salary levels (if applicable), our then-current budget for employee salary adjustments,
49
anticipated role and responsibilities for the coming year, along with the other factors described under
“Compensation Philosophy and Overall Compensation Determination Process” set forth above. The changes also
take into account the adjustments made to our peer group for 2018 as a result of our growth in revenue, market
capitalization and headcount since late 2016 when our 2017 peer group was determined. Although the Committee
does not have a specific target compensation level for each NEO, the NEOs’ salaries are generally within the 25th
to 50th percentiles of the market data.
Named Executive Officer
Kevin C. Gorman, Ph.D . . . . . . . . . . . . . . . . . . . . . .
Matthew C. Abernethy . . . . . . . . . . . . . . . . . . . . . . .
Eric Benevich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kyle W. Gano, Ph.D.
. . . . . . . . . . . . . . . . . . . . . . . .
Eiry W. Roberts, M.D. . . . . . . . . . . . . . . . . . . . . . . .
2018
Base Salary
$675,000
$420,000
$432,600
$403,100
$520,000
%
Change
from 2017 Base
Salary
5.5%
N/A
5.5%
7.5%
N/A
Annual Cash Incentives
In February 2018, the Committee approved the Company’s executive officer cash incentive target
percentages and performance goals for 2018, with the exception of Dr. Roberts’ percentage, which the
Committee determined in connection with her commencement of employment with us in January 2018. The table
below sets forth the targets for our Chief Executive Officer and other NEOs for 2018. No changes were made to
the target percentages of our NEOs who were employed with us in 2017. The target percentage is paid as a
percentage of such executive officer’s base salary. For example, if 100% of the Company’s performance goals
are achieved for 2018, this would yield our Chief Executive Officer a cash incentive award of 70% of his 2018
base salary.
Executive Officer
Target
Percentage of
Base Salary
Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Other Executive Officers . . . . . . . . . . . . . . . . . . . . . . .
70%
50%
In early 2018, the Committee established the corporate goals described below. Our objective corporate goals
are directly aligned with our specific strategic goals, including advancing our development programs, our
research function, our clinical activities, commercialization activities and certain corporate and financial goals,
which we believe will create long-term value for stockholders. The Board of Directors and the Committee did not
assign specific relative weightings to the goals for 2018. The maximum corporate achievement for 2018 was
120% of our 2018 corporate goals. In February 2019, the Committee evaluated the accomplishments and
performance of the Company against such corporate goals. After its consideration of the Company’s
performance, as more specifically described below, the Committee rated our 2018 corporate achievement at 90%
of our 2018 corporate goals.
Corporate Goal
Maximize the medical and economic impact of INGREZZA® . . . . . . . . . . . . . .
Enter into collaboration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expand internal clinical pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepare for 2019 NDA for opicapone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Achievement
Partial Achievement
Achieved
Achieved
Achieved
In February 2019, after making these determinations regarding level of corporate performance achieved
against the pre-established performance goals, the Committee reviewed and approved corporate cash incentives
as set forth in the table below. The Committee may, in its sole discretion, eliminate any individual cash incentive
or reduce or increase the amount of compensation payable with respect to any individual cash incentive. The
50
Committee exercised its discretion to increase the amount of individual cash incentives with respect to
Mr. Abernethy, Mr. Benevich and Dr. Gano for 2018 by paying their cash incentives at the rates noted below,
rather than 90%, due to their significant individual performances related to the achievement of the corporate
goals and their individual goals.
2018 Target Annual Cash
Incentive
2018 Actual Annual Cash Incentive Paid
Named Executive Officer
% of Base Salary
$
Kevin C. Gorman, Ph.D.
. . . . . .
Matthew C. Abernethy . . . . . . . .
Eric Benevich . . . . . . . . . . . . . . .
. . . . . . . . .
Kyle W. Gano, Ph.D.
Eiry W. Roberts, M.D. (1) . . . . .
70%
50%
50%
50%
50%
$472,500
$210,000
$216,300
$201,550
$245,333
% of Target Annual Cash
Incentive
90%
95%
95%
95%
90%
$
$425,250
$199,500
$205,485
$191,473
$220,800
(1) Dr. Roberts’ award was pro-rated due to her commencement of employment with us in January 2018.
Long-Term Equity Awards
Size of Equity Awards. In determining the size of the total equity compensation opportunity in 2018, the
Committee:
•
•
•
•
aimed to have the aggregate target award value result in target total direct compensation at a level that
is competitive in the marketplaces in which we compete;
focused a larger portion of total direct compensation in the form of long-term and performance-based
equity awards intended to drive long-term differentiated value relative to our peers and maximize long-
term stockholder value;
aimed to structure a substantial portion of equity opportunity in the form of awards that vest based on
achievement of performance goals to better align our executive officers’ long-term compensation
opportunity with our stockholders’ interests; and
considered the recommendations of Dr. Gorman for the other NEOs.
Equity Award Mix. The Committee determined that the equity awards granted to the NEOs on February 5,
2018 should consist of stock options, time-vesting RSU grants and performance-vesting RSU grants, or PRSUs,
as set forth in the table below. The Committee determined these three types of equity awards provided the
appropriate balance of long-term incentives for our executive officers. Specifically, PRSUs that vest based on
objectively measurable performance goals focus executive officers on achieving longer-term Company
performance goals that are key to our business strategy and increasing stockholder value and RSUs that vest over
time provide tangible value to executive officers and serve as an incentive and retention tool during a difficult
operating or volatile business environment, while still being tied to our stockholder value. It is the Committee’s
view that stock options are inherently performance oriented because the executive officer realizes no value from
stock options unless and until the Company’s stock price increases over the strike price. The Committee believes
it is important to evaluate the equity award mix each year to determine what types of equity awards should be
granted.
In setting the mix of the three types of equity awards for 2018, the Committee determined that a substantial
portion of the equity grants should consist of awards that vest based on our performance (in the form of specific
and measurable performance goals), in addition to continued service over time. The mix between the three types
of awards was determined based on market data of the equity award practices of peer group companies provided
by the Committee’s consultant. Accordingly, the Committee structured the mix of equity such that the baseline
award of options and RSUs would generally deliver value, as determined by the Black-Scholes value of stock
options and the value of RSUs as if they were fully vested, to NEOs between approximately the 75th and 90th
51
percentiles of the market data with PRSUs providing the opportunity for above-market compensation if earned.
The opportunity for higher performance-based compensation opportunity reflects our commitment to pay for
performance, with compensation above the median of our peers for exceptional performance and compensation
below this level if our performance goals are not reached.
Named Executive Officer
Stock Options
RSU—Time Vesting
PRSU—Performance-
based Vesting
Kevin C. Gorman, Ph.D.
. . . . . . .
Matthew C. Abernethy (1) (2) . . .
Eric Benevich . . . . . . . . . . . . . . . .
Kyle W. Gano, Ph.D. (3) . . . . . . .
Eiry W. Roberts, M.D. (2) (4) . . .
104,200
N/A
34,750
30,400
70,000
18,400
N/A
6,150
20,350
20,000
18,400
24,500
12,250
12,250
30,650
(1) Mr. Abernethy received grants in connection with his employment with us in fourth quarter 2017, and thus
was only awarded PRSUs in early 2018.
(2) Mr. Abernethy and Dr. Roberts received a grant of 12,250 and 18,400 PRSUs, respectively, in February 5,
2018 to align them with the PRSU grant that was made to the other executive officers in February 2016. The
performance criteria for such PRSU grants remains the same as the February 2016 PRSU grant in that such
PRSUs vest upon: (i) obtaining positive pivotal clinical trial data for the treatment of Tourette syndrome
with valbenazine as determined by the Committee and (ii) the FDA’s acceptance of our NDA submission of
valbenazine for the treatment of Tourette syndrome. Additionally, these PRSUs have a limited term until
February 5, 2020 for us to achieve the objectives required for vesting. The individual PRSUs either fully
vest upon completion of the corporate objectives by February 5, 2020 or never vest.
(3) Dr. Gano received a one-time RSU award of 15,000 shares in recognition of his contributions over time to
us, including being the primary inventor of the valbenazine molecule.
(4) Dr. Roberts received stock option and RSU grants in connection with her commencement of employment
with us, as further described under “New Hire Awards” below.
2018 Award Vesting Criteria. The Committee, in consultation with the independent members of the Board
of Directors, determined with respect to the February 5, 2018 equity grants that the use of both stock options
which vest monthly, on a pro-rata basis, over a four-year period and RSUs which vest annually, on a pro-rata
basis, over a four-year period were the appropriate time-vesting equity compensation vehicles to use in
combination with the PRSU awards. The Committee and Board of Directors believe that these long-term equity
based compensation awards closely align stockholder and management interests.
The Committee also carefully set the PRSU award goals to be rigorous and ultimately serve to align
management and our stockholders’ interests. A portion of the 2018 PRSUs will vest upon FDA approval of
opicapone within a specified time period, and a portion of the 2018 PRSUs will vest upon achievement of
specified revenue milestones within a specified time period. If the vesting criteria are achieved, we believe
significant stockholder value will be created. Additionally, these PRSUs have a limited term until March 15,
2021 for us to achieve the objectives required for vesting. The individual PRSUs either fully vest upon
completion of the corporate objectives by March 15, 2021 or never vest.
New Hire Awards. In connection with her commencement of employment, on January 8, 2018, Dr. Roberts
was granted: (i) an initial stock option to purchase up to 70,000 shares of the Company’s common stock, 25% of
which will vest on the first anniversary of the grant date, and the remainder of which will vest in equal monthly
installments thereafter over three years and (ii) an RSU award covering 20,000 shares of the Company’s common
stock which vests in equal annual installments over four years, which has generally been the vesting schedule for
all new hire grants. The Committee and Board of Directors structures the vesting schedules for new hire awards
in order to serve as an effective tool for incentivizing and retaining our NEOs.
52
Retirement Benefits
The Company’s matching contribution to the 401(k) Plan for 2018 was 50% of eligible participant
contributions, subject to applicable federal limits. Our NEOs are eligible for these benefits on the same basis as
our other employees. The Company made no additional discretionary contributions to the 401(k) Plan in 2018.
Equity Ownership Guidelines
Since 2014, we have maintained equity ownership guidelines for our executive officers. The Committee
amended these guidelines in November 2018 to increase the guideline for our Chief Executive Officer from three
to six times his base salary. The equity ownership guidelines are designed to further align the interests of the
executive officers with those of our stockholders by ensuring that our executive officers have a meaningful
financial stake in the Company’s long-term success. The equity ownership guidelines establish a minimum
equity ownership level by position, with such values determined based on the value of our common stock owned
by such persons as of certain measurement dates. All shares directly or beneficially owned by the executive
officer, including the net exercisable value of outstanding vested stock options (where the market price of our
common stock exceeds the strike price of such option) are included in determining the value of equity owned
under our equity ownership guidelines. The equity ownership requirements are as follows:
Chief Executive Officer . . . . . . . . . . . . . . . . . . . . .
All other executive officers . . . . . . . . . . . . . . . . . . .
6 times base salary
1 times base salary
New executive officers are granted a five-year period to reach the equity ownership requirements set forth in
the guidelines and are expected to make annual progress toward the equity ownership requirements during this
five-year period. When an executive officer does not meet the equity ownership requirements set forth in the
guidelines, he/she is restricted from selling any held shares until such requirements are met. Additionally, should
an executive officer who does not meet the equity ownership requirements choose to exercise a stock option or
vest in any RSUs, he or she is required to retain all shares acquired through those transactions, aside from any
shares necessary to fulfill such transaction related tax obligations, until full compliance with the equity
ownership guidelines is attained.
Annual compliance with the equity ownership guidelines is assessed during the first quarter of each year. As
of March 1, 2019, each of our executive officers is in compliance with the equity ownership guidelines.
Equity Trading Policies and Procedures
The Company has policies and procedures to prohibit direct or indirect participation by employees of the
Company in transactions involving trading activities in Company common stock which by their aggressive or
speculative nature may give rise to an appearance of impropriety. Such prohibited activities would include the
purchase of put or call options, or the writing of such options as well as short sales, hedging transactions such as
“cashless” collars, forward sales, equity swaps and other related arrangement which may indirectly involve short-
sale and any other transactions designed for profit from short-term movement in the Company’s stock price. In
addition, no officer, director or employee of the Company may margin, or make any offer to margin, any
Company common stock, including without limitation, borrowing against such stock, at any time.
To the Company’s knowledge, there were no transactions involving hedging, pledging or margining
Company common stock during 2018, nor were there any such transactions as of the Record Date.
The Company also requires directors and executive officers to complete all equity related open-market
purchase and sale transactions via a 10b5-1 plan. The 10b5-1 plans typically cover, among other transactions,
direct sales and purchases of Company stock, as well as same-day-sales related to option exercises and sales of
stock for tax payments upon the vesting of restricted stock units. All 10b5-1 plans are required to have a waiting
period from the election date to the date of the first transaction. Additionally, Company policy restricts the
executive officers from making certain changes to 10b5-1 trading plan subsequent to adoption of the plan.
53
Compensation Recoupment Policy
In February 2017, we adopted a clawback policy, even though the SEC has not yet issued final rules
implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act requirement. Our policy
currently provides that, in the event that (i) we are required to prepare an accounting restatement for any fiscal
quarter or year due to our material noncompliance with any financial reporting requirement and (ii) it is
determined that misconduct contributed to the noncompliance that resulted in the obligation to restate our
financial statements, we may take action to recover from any officer whose misconduct contributed to the
noncompliance which resulted in the obligation to restate our financial statements, the incentive compensation
that was paid or vested to such officer during the twelve-month period preceding the restatement obligation. We
will also comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and
will modify our policy to the extent required by law once the SEC adopts final regulations on the subject.
2019 Named Executive Officer Compensation Decisions
Base Salary
In February 2019, our Committee reviewed and determined the 2019 base salaries and target cash bonus for
each of the NEOs as set forth in the table below. In making these 2019 decisions, the Committee considered the
market data for each individual NEO’s position, as well as the individual’s historical salary levels, our then-
current budget for employee salary adjustments, anticipated role and responsibilities for the coming year, along
with the other factors described under “Compensation Philosophy and Overall Compensation Determination
Process” set forth above. Although the Committee does not have a specific target compensation level for each
NEO, the NEOs’ salaries are generally within the 25th to 50th percentiles of the market data.
Named Executive Officer
Kevin C. Gorman, Ph.D . . . . . . . . . . . . . . . . . . . . . . . .
Matthew C. Abernethy . . . . . . . . . . . . . . . . . . . . . . . . .
Eric Benevich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kyle W. Gano, Ph.D. . . . . . . . . . . . . . . . . . . . . . . . . . .
Eiry W. Roberts, M.D. . . . . . . . . . . . . . . . . . . . . . . . . .
2019
Base Salary
$725,000
$495,600
$467,200
$443,400
$538,200
2019 Target
Percentage of
Base Salary
80%
50%
50%
50%
50%
Long-Term Equity Awards
In February 2019, our Committee approved a grant of options and RSUs to each of the NEOs as set forth in
the table below. The stock options vest monthly, on a pro-rata basis, over a four-year period and the RSUs vest
annually, on a pro-rata basis, over a four-year period. The Committee determined that these two types of equity
awards provided the appropriate balance of long-term incentives for our executive officers. The mix between the
two types of awards was determined based on market data of the equity award practices of peer group companies
provided by the Committee’s consultant. Accordingly, the Committee structured the mix of equity such that the
baseline award of options and RSUs would generally deliver value, as determined by the Black-Scholes value of
stock options and the value of RSUs as if they were fully vested, to NEOs between approximately the 75th and
90th percentiles of our peer group. The opportunity for higher performance-based compensation opportunity
reflects our commitment to pay for performance, with compensation above the median of our peers for
exceptional performance and compensation below this level if our performance goals are not reached.
Named Executive Officer
Stock Options
RSU—Time Vesting
Kevin C. Gorman, Ph.D.
. . . . . . . . . . . . . . . . .
Matthew C. Abernethy . . . . . . . . . . . . . . . . . . .
Eric Benevich . . . . . . . . . . . . . . . . . . . . . . . . . .
Kyle W. Gano, Ph.D. . . . . . . . . . . . . . . . . . . . .
Eiry W. Roberts, M.D. . . . . . . . . . . . . . . . . . . .
133,345
83,341
83,341
66,673
66,673
24,677
15,423
15,423
12,339
12,339
54
Tax Considerations
Internal Revenue Code Section 162(m)
Under Section 162(m) of the Internal Revenue Code (“Section 162(m)”), compensation paid to any publicly
held corporation’s “covered employees” that exceeds $1 million per taxable year for any covered employee is
generally non-deductible. Prior to the enactment of the Tax Cuts and Jobs Act, Section 162(m) provided a
performance-based compensation exception, pursuant to which the deduction limit under Section 162(m) did not
apply to any compensation that qualified as “performance-based compensation” under Section 162(m). Pursuant
to the Tax Cuts and Jobs Act, the performance-based compensation exception under Section 162(m) was
repealed with respect to taxable years beginning after December 31, 2017, except that certain transition relief is
provided for compensation paid pursuant to a written binding contract which was in effect on November 2, 2017
and which is not modified in any material respect on or after such date.
Compensation paid to each of the Company’s “covered employees” in excess of $1 million per taxable year
generally will not be deductible unless it qualifies for the performance-based compensation exception under
Section 162(m) pursuant to the transition relief described above. Because of certain ambiguities and uncertainties
as to the application and interpretation of Section 162(m), as well as other factors beyond the control of the
Committee, no assurance can be given that any compensation paid by the Company will be eligible for such
transition relief and be deductible by the Company in the future. Although the Committee will continue to
consider tax implications as one factor in determining executive officer compensation, the Committee also looks
at other factors in making its decisions and retains the flexibility to provide compensation for the Company’s
NEOs in a manner consistent with the goals of the Company’s executive officer compensation program and the
best interests of the Company and its stockholders, which may include providing for compensation that is not
deductible by the Company due to the deduction limit under Section 162(m). The Committee also retains the
flexibility to modify compensation that was initially intended to be exempt from the deduction limit under
Section 162(m) if it determines that such modifications are consistent with the Company’s business needs.
Internal Revenue Code Section 409A
Section 409A governs deferred compensation arrangements. The Committee structures our deferred
compensation programs with the assistance of our external counsel to be exempt from, or compliant with,
Section 409A.
Accounting Considerations
The Company accounts for equity compensation paid to our employees under the FASB ASC Topic 718,
which requires us to estimate and record an expense over the service period of the equity award. Our cash
compensation is recorded as an expense at the time the obligation is incurred. The accounting impact of our
compensation programs are one of many factors that the Committee considers in determining the structure and
size of our executive officer compensation programs.
Risk Analysis of Our Compensation Program
Our Committee has reviewed our compensation policies as generally applicable to our employees and
believes that our policies do not encourage excessive or inappropriate risk taking and that the level of risk that
they do encourage is not reasonably likely to have a material adverse effect on the Company. As part of its
assessment, the Committee considered, among other factors, the allocation of compensation among base salary
and short- and long-term compensation, our approach to establishing Company-wide and individual financial,
operational and other performance targets, our bonus structure of payouts at multiple levels of performance
(including maximum payout caps and payments for performance below target levels) and the nature of our key
performance metrics. We believe these practices encourage our employees to focus on sustained, long-term
Company growth, which we believe will ultimately contribute to the creation of stockholder value.
55
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table The following table sets forth the compensation paid by the Company for
the fiscal years ended December 31, 2016, 2017 and 2018 to the NEOs named below.
Summary Compensation Table
Name and Principal Position (1)
Year
Salary
($) (2)
Bonus
($) (2)
Option
Awards
($) (3)
Stock
Awards
($) (4)
All
Other
Compensation
($) (5)
Total ($)
Kevin C. Gorman, Ph.D. . . . . . . . . 2016 $592,000 $337,440 $2,202,729 $2,114,413
2017 $640,000 $515,200 $4,929,898 $1,426,920
2018 $675,000 $425,250 $4,486,852 $2,998,832
Chief Executive Officer
$ 43,076
$ 44,356
$ 47,045
$5,289,658
$7,556,374
$8,632,979
Matthew C. Abernethy . . . . . . . . . 2017 $ 38,231 $ 20,071 $2,416,800 $ 920,000
— $1,996,506
2018 $420,000 $199,500 $
Chief Financial Officer
Eric Benevich . . . . . . . . . . . . . . . . 2016 $376,000 $169,200 $ 831,828 $1,050,908
2017 $410,000 $246,000 $1,825,536 $ 458,344
2018 $432,600 $205,485 $1,496,335 $1,499,417
Chief Commercial Officer
Kyle W. Gano, Ph.D.
Chief Business Development
. . . . . . . . . . 2016 $345,000 $155,250 $ 734,916 $1,014,918
2017 $375,000 $215,625 $1,426,200 $ 328,624
2018 $403,100 $191,473 $1,309,024 $2,656,575
Officer
$394,190
$ 69,741
$3,789,292
$2,685,747
$ 62,663
$ 37,722
$ 38,768
$
$
$
4,363
5,123
8,069
$2,490,599
$2,977,602
$3,672,605
$2,254,447
$2,350,572
$4,568,241
Eiry W. Roberts, M.D.
. . . . . . . . . 2018 $490,700 $220,800 $2,863,700 $4,053,869
$671,554
$8,300,623
Chief Medical Officer
(1) The titles and capacities set forth in the table above are as of March 1, 2019.
(2) Salary and bonus figures represent amounts earned during each respective fiscal year, regardless of whether
part or all of such amounts were paid in subsequent fiscal year(s). Bonuses are awarded pursuant to a bonus
program.
(3) The amounts shown are the full grant date fair value in accordance with Accounting Standards Codification
718-10, Compensation—Stock Compensation (ASC 718). The assumptions used to calculate the grant date
fair value of stock awards are set forth under Note 8 of the Notes to the Consolidated Financial Statements
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with
the SEC on February 8, 2019. The grant date fair values of option awards for 2016, 2017 and 2018 (other
than Mr. Abernethy’s 2017 option award and Dr. Roberts’ new hire award) are based on per share Black-
Scholes values of $20.19, $23.77 and $43.06, respectively. Mr. Abernethy’s 2017 option awards are based
on per share Black-Scholes value of $40.28 and Dr. Roberts’ new hire option awards are based on per share
Black-Scholes value of $40.91.
(4) The amounts shown are the full grant date fair value in accordance with Accounting Standards Codification
718-10, Compensation—Stock Compensation (ASC 718). The assumptions used to calculate the grant date
fair value of stock awards are set forth under Note 8 of the Notes to the Consolidated Financial Statements
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with
the SEC on February 8, 2019. The fair values of restricted stock units granted in 2016, 2017 and 2018 are
based on the Company’s closing market price per share on the grant date, which was $35.99 for all 2016
grants, which was $43.24 for all 2017 grants (other than Mr. Abernethy’s grant, for which it was $73.60)
and which was $81.49 for all 2018 grants (other than Dr. Roberts’ new hire grant, for which it was $77.81).
56
(5)
Includes all other compensation as described in the table below.
All Other Compensation Table
Name
Kevin C. Gorman, Ph.D. . . . . . . . . . . . . . . .
Matthew C. Abernethy . . . . . . . . . . . . . . . .
Eric Benevich. . . . . . . . . . . . . . . . . . . . . . . .
Kyle. W. Gano, Ph.D.
. . . . . . . . . . . . . . . . .
401(k)
Employer
Match
$7,950
$7,950
$8,250
$ —
$8,250
$7,393
$7,950
$8,250
$1,725
$1,875
$5,375
Year
2016
2017
2018
2017
2018
2016
2017
2018
2016
2017
2018
Insurance
Premiums (1)
Inducement
Payments
Relocation
Expense
Total
Other
$35,126
$36,406
$38,795
$ 2,190
$27,817
$28,454
$29,772
$30,518
$ 2,638
$ 3,248
$ 2,694
$ — $ — $ 43,076
$ — $ — $ 44,356
$ — $ — $ 47,045
$180,000
$212,000
$ — $ 33,674
$394,190
$ 69,741
$ — $ 26,816
$ 62,663
$ — $ — $ 37,722
$ — $ — $ 38,768
$ — $ — $
$ — $ — $
$ — $ — $
4,363
5,123
8,069
Eiry W. Roberts, M.D.
. . . . . . . . . . . . . . . .
2018
$8,250
$35,522
$225,000
$402,782
$671,554
(1) The amounts in this column represent the costs for medical insurance for Company-wide plans, as well as
disability insurance premiums and related tax gross-up amounts.
Grants of Plan-Based Awards During the Fiscal Year Ended December 31, 2018
The following table sets forth certain information regarding plan based-awards granted by the Company during
the year ended December 31, 2018 to the NEOs below:
Name
Grant Date
Kevin C. Gorman, Ph.D. . . . . 2/5/2018
Estimated Future
Payouts Under
Equity Incentive
Plan Awards
Target(#)
All Other
Stock Awards:
Number of
Shares of
Stock or Units
(#) (2)
18,400
All Other Option
Awards: Number
of Securities
Underlying
Options (#) (2)
2/5/2018 (1)
2/5/2018
18,400
Matthew C. Abernethy. . . . . . 2/5/2018 (1)
2/5/2018 (4)
12,250
12,250
Eric Benevich. . . . . . . . . . . . . 2/5/2018
2/5/2018 (1)
2/5/2018
12,250
Kyle W. Gano, Ph.D.
. . . . . . 2/5/2018
2/5/2018 (1)
2/5/2018
12,250
Eiry W. Roberts, M.D.. . . . . . 1/8/2018
2/5/2018 (1)
2/5/2018 (4)
1/8/2018
18,400
12,250
6,150
20,350
20,000
104,200
34,750
30,400
70,000
Exercise or Base
Price of Awards
($/Sh) (2)
Grant Date
Fair Value (3)
$ —
$ —
$81.49
$ —
$ —
$ —
$ —
$81.49
$ —
$ —
$81.49
$ —
$ —
$ —
$77.81
$1,499,416
$1,499,416
$4,486,852
$ 998,253
$ 998,253
$ 501,164
$ 998,253
$1,496,335
$1,658,322
$ 998,253
$1,309,024
$1,556,200
$1,499,416
$ 998,253
$2,863,700
(1) Represents the target number of shares that may be earned under the PRSUs granted to NEOs in 2018 under the
Company’s 2011 Plan. The PRSUs did not include threshold or maximum award amounts. The PRSUs vest upon the
following: (i) a portion of each grant shall vest automatically on the date the FDA approves the NDA for opicapone
within a specified period of time; and (ii) a portion of each grant shall vest upon the achievement of specified revenue
57
milestones within a specified time period. These PRSUs either fully vest upon the completion of the above criteria by
March 15, 2021 or never vest.
(2) All options and restricted stock units were granted and approved on the same date with option awards having an exercise
price equal to the closing market price of the Company’s common stock on the date of grant. All option awards are time-
based awards, which vest monthly, on a pro-rata basis, over four years and have an option term of ten years. These
restricted stock units vest annually, on a pro-rata basis, over a four-year period.
(3) Reflects the grant date per share Black-Scholes value of $43.06 for option awards and the grant date per share value of
$81.49 for restricted stock units, each granted on February 5, 2018 (other than with respect to Dr. Roberts’ new hire
equity awards) which was calculated in accordance with ASC 718. The grant date per share Black-Scholes value for
Dr. Roberts’ new hire option awards and restricted stock units was $40.91 and $77.81, respectively.
(4) Represents additional PRSU grant made to Mr. Abernethy and Dr. Roberts, which grant was made on February 5, 2018
and was made to align with the PRSU grant that was made to the other executive officers in February 2016. The
performance criteria for such grant remains the same as the February 2016 PRSU grant in that such PRSUs vest upon:
(i) obtaining positive pivotal clinical trial data for the treatment of Tourette syndrome with valbenazine as determined by
the Committee and (ii) the FDA’s acceptance of our NDA submission of valbenazine for the treatment of Tourette
syndrome.
Agreements with Named Executive Officers
Kevin C. Gorman, Ph.D. has an employment contract that provides that: (i) Dr. Gorman will serve as the
Company’s Executive Vice President and Chief Operating Officer commencing on August 1, 2007 at an initial
annual salary of $400,000, subject to annual adjustment by the Board of Directors (subsequent to entering into
the employment contract, Dr. Gorman became Chief Executive Officer and his annual base salary for 2018 is
$675,000); (ii) the agreement terminates upon death, disability, termination by the Company with or without
cause, constructive termination or voluntary resignation; (iii) Dr. Gorman is eligible for a discretionary annual
bonus as determined by the Board of Directors, based upon achieving certain performance criteria; and (iv) each
year starting in 2007 and continuing for the term of the agreement, Dr. Gorman will be eligible to receive equity
awards with the number of shares, vesting terms, and exercise price as shall be determined by the Board of
Directors.
Matthew C. Abernethy has an employment contract that provides that: (i) Mr. Abernethy will be entitled to
receive an initial base salary of $420,000 per year, which was his base salary for 2018, subject to future
adjustments; (ii) the agreement terminates upon death, disability, termination by the Company with or without
cause, constructive termination or voluntary resignation; (iii) Mr. Abernethy is eligible for a discretionary annual
bonus as determined by the Board of Directors, based upon achieving certain performance criteria;
(iv) Mr. Abernethy is eligible to receive equity awards with the number of shares, vesting terms, and exercise
price as shall be determined by the Board of Directors; (v) Mr. Abernethy received a one-time cash inducement
advance in the amount of $180,000, which will be deemed earned when Mr. Abernethy completes two full years
of employment with the Company; and (vi) Mr. Abernethy received relocation benefits, including a one-time
cash relocation advance in the amount of $140,000.
Eric Benevich has an employment contract that provides that: (i) Mr. Benevich will serve as the Company’s
Chief Commercial Officer commencing on May 26, 2015 at an initial annual salary of $365,000, subject to
annual adjustment by the Board of Directors (Mr. Benevich’s annual base salary for 2018 is $432,600); (ii) the
agreement terminates upon death, disability, termination by the Company with or without cause, constructive
termination or voluntary resignation; (iii) Mr. Benevich is eligible for a discretionary annual bonus as determined
by the Board of Directors, based upon achieving certain performance criteria; and (iv) Mr. Benevich is eligible to
receive stock option awards with the equity awards with the number of shares, vesting terms, and exercise price
as shall be determined by the Board of Directors.
Kyle W. Gano, Ph.D. has an employment contract that provides that: (i) Dr. Gano will serve as the
Company’s Chief Business Development Officer commencing on November 12, 2014 at an initial annual salary
of $310,000, subject to annual adjustment by the Board of Directors (Dr. Gano’s annual base salary for 2018 is
$403,100); (ii) the agreement terminates upon death, disability, termination by the Company with or without
cause, constructive termination or voluntary resignation; (iii) Dr. Gano is eligible for a discretionary annual
58
bonus as determined by the Board of Directors, based upon achieving certain performance criteria; and (iv) Dr. Gano is
eligible to receive stock option awards with the equity awards with the number of shares, vesting terms, and exercise
price as shall be determined by the Board of Directors.
Eiry W. Roberts, M.D. has an employment contract that provides that: (i) Dr. Roberts will serve as the Company’s
Chief Medical Officer commencing on January 8, 2018 at an initial annual salary of $520,000, subject to annual
adjustment by the Board of Directors; (ii) the agreement terminates upon death, disability, termination by the Company
with or without cause, constructive termination or voluntary resignation; (iii) Dr. Roberts is eligible for a discretionary
annual bonus as determined by the Board of Directors, based upon achieving certain performance criteria;
(iv) Dr. Roberts is eligible to receive stock option awards with the equity awards with the number of shares, vesting
terms, and exercise price as shall be determined by the Board of Directors, (v) Dr. Roberts received a one-time cash
inducement advance in the amount of $225,000, which will be deemed earned when Dr. Roberts completes two full
years of employment with the Company; and (vi) Dr. Roberts received relocation benefits, including a one-time cash
relocation advance in the amount of $220,000.
Outstanding Equity Awards at Fiscal Year-End. The following table sets forth the outstanding equity awards held by
the NEOs at December 31, 2018.
Option Awards
Stock Awards
Name
Kevin C. Gorman, Ph.D. . . . .
Matthew C. Abernethy . . . . .
Eric Benevich. . . . . . . . . . . . .
Kyle W. Gano, Ph.D.
. . . . . .
Eiry W. Roberts, M.D . . . . . .
Award
Grant and
Commencement
of Vesting Date
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
1/12/2012
1/10/2013
1/16/2014
2/3/2015
2/5/2016
2/6/2017
2/5/2018
12/1/2017
2/5/2018
6/1/2015
2/5/2016
2/6/2017
2/5/2018
1/12/2012
1/16/2014
2/3/2015
2/5/2016
2/6/2017
2/5/2018
1/8/2018
2/5/2018
223,449
164,801
167,858
142,883
77,277
95,056
21,708
15,007
—
52,501
29,182
35,199
7,240
28,266
75,000
62,290
25,782
27,499
6,333
—
—
—
—
—
6,253
31,823
112,344
82,492
44,993
—
7,499
12,018
41,601
27,510
—
—
2,710
10,618
32,501
24,067
70,000
—
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
Option
Exercise
Price
($)
Option
Expiration
Date
Number
of
Shares
or Units
of
Stock
That
Have
Not
Vested
(#)
Market
Value of
Shares
or Units
of Stock
That
Have Not
Vested
($)
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$41.78
$35.99
$43.24
$81.49
—
—
—
—
—
$ 8.66 1/12/2022 (2)
—
—
$ 8.65 1/10/2023 (2)
—
—
$19.59 1/16/2024 (2)
446,313
—
2/3/2025 (2)
$32.99
6,250 (4)
821,215 2,552,908
2/5/2026 (2) 47,250 (3)
$35.99
—
2/6/2027 (2) 24,750 (4) 1,767,398
$43.24
2/5/2028 (2) 36,800 (5) 1,313,944 1,313,944
$81.49
$73.60 12/1/2027 (1)
9,375 (4)
24,500 (5)
669,469
—
— 1,749,545
6/1/2025 (1)
2/5/2026 (2) 24,850 (3)
2/6/2027 (2)
7,950 (4)
2/5/2028 (2) 18,400 (5)
310,634 1,463,905
—
567,710
874,773
439,172
—
—
—
—
$ 8.66 1/12/2022 (2)
—
—
$19.59 1/16/2024 (2)
196,378
—
2/3/2025 (2)
$32.99
2,750 (4)
274,929 1,463,905
2/5/2026 (2) 24,350 (3)
$35.99
—
2/6/2027 (2)
$43.24
407,037
5,700 (4)
874,773
2/5/2028 (2) 32,600 (5) 1,453,194
$81.49
$77.81
—
1/8/2028 (1) 20,000 (4) 1,428,200
30,650 (5)
—
— 2,188,717
(1) Vests monthly over four years, subject to an initial one-year “cliff.”
(2) Vests monthly over four years.
(3) Consists of 35,750 Performance Restricted Stock Units (PRSUs) for Dr. Gorman, 20,500 PRSUs for Mr. Benevich and Dr. Gano. These PRSUs
vest upon the Company obtaining positive pivotal data in Tourette syndrome and filing of a NDA for valbenazine in Tourette syndrome. The
59
PRSUs have a limited term of four years to file the NDA. Additionally, Dr. Gorman has 11,500 restricted stock unit (RSU) awards,
Mr. Benevich has 4,350 RSUs and Dr. Gano has 3,850 RSUs. These RSUs are time-based and vest annually, on a pro-rata basis over
four years.
(4) Vests annually over four years.
(5) Consists of 18,400 Performance Restricted Stock Units (PRSUs) for Dr. Gorman, 12,250 PRSUs foreach of Mr. Abernethy,
Mr. Benevich, Dr. Gano and Dr. Roberts. A portion of portion of this grant will vest upon FDA approval of opicapone within a specified
time period, and portions of this grant will vest upon achievement of specified revenue milestones within a specified time period. These
PRSUs have a limited term of 23 months to achieve the objectives. Mr. Abernethy and Dr. Roberts also have 12,250 PRSUs and 18,400
PRSUs, respectively, that were granted to align them with the PRSU grant that was made to the other executive officers in February
2016. These PRSUs vest upon the Company obtaining positive pivotal data in Tourette syndrome and filing of a NDA for valbenazine in
Tourette syndrome. Additionally, Dr. Gorman has 18,400 restricted stock unit (RSU) awards, Mr. Benevich has 6,150 RSUs and
Dr. Gano has 20,350 RSUs. These RSUs are time-based and vest annually, on a pro-rata basis over four years.
Option Exercises and Stock Vested During the Year. The following table sets forth the options exercised and
stock awards that vested during fiscal 2018 along with their respective values at December 31, 2018 for the
NEOs:
Option Exercises and Stock Vested Table
Name
Kevin C. Gorman, Ph.D.
. . . . . . . . . . . . . . . . . . . . . . . .
Matthew C. Abernethy . . . . . . . . . . . . . . . . . . . . . . . . . .
Eric Benevich.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kyle W. Gano, Ph.D. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eiry W. Roberts, M.D. . . . . . . . . . . . . . . . . . . . . . . . . . .
Option Awards (1)
Stock Awards (2)
Number of
Shares
Acquired on
Exercise (#)
284,756
—
—
51,916
—
Value
Realized on
Exercise ($) (3)
$22,039,758
—
$
$
—
$ 4,929,734
—
$
Number of
Shares
Acquired on
Vesting (#)
27,750
3,125
29,825
9,825
—
Value
Realized on
Vesting ($) (4)
$2,271,265
$ 281,313
$2,861,650
$ 801,857
$
—
Information relates to stock option exercises during 2018.
Information relates to restricted stock units that vested during 2018.
(1)
(2)
(3) Calculated by multiplying the number of shares acquired upon exercise of stock options by the difference
between the exercise price and the market price of the Company’s common stock at the time of exercise.
(4) Calculated by multiplying the number of shares acquired upon vesting of restricted stock units by the
average price of shares sold for purposes of satisfying federal and state income tax liabilities.
Potential Payments Upon Termination or Change-in-Control. The following tables set forth the potential
severance benefits payable to the NEOs in the event of a termination prior to or following a change in control,
assuming such event occurred on December 31, 2018:
Potential Payment upon Termination Table*
Name
Salary (1)
Bonus (2)
Accrued
Compensation (3)
Stock
Awards (4) Medical (5)
Total
Kevin C. Gorman, Ph.D. . . . . . .
Matthew C. Abernethy . . . . . . .
Eric Benevich. . . . . . . . . . . . . . .
. . . . . . . .
Kyle W. Gano, Ph.D.
. . . . . . .
Eiry W. Roberts, M.D.
$843,750
$420,000
$432,600
$403,100
$520,000
$590,625
$210,000
$216,300
$201,550
$260,000
$57,856
$25,324
$38,309
$48,448
$19,019
$6,295,930
$ 223,157
$1,582,196
$1,681,774
$ 357,050
$45,495
$28,152
$36,396
$ 2,700
$33,144
$7,833,656
$ 906,633
$2,305,801
$2,337,572
$1,189,213
*
Reflects a termination without cause or due to a constructive termination, or deemed termination, prior to a
change in control.
(1) Based on salary as of December 31, 2018.
(2) Based on bonus targets established by the Board of Directors for 2018.
60
(3) Accrued compensation is comprised of vacation pay earned and unpaid as of December 31, 2018.
(4) The amounts in this column represent the intrinsic value of ‘in-the money’ unvested options and restricted
stock units as of December 31, 2018 that would vest in accordance with the executive officers’ employment
agreements. Values were derived using the closing price of the Company’s common stock on December 31,
2018 of $71.41.
(5) Medical is comprised primarily of health insurance premiums for the period specified in each executive
officer’s employment contract.
Potential Payment upon Change-in-Control Table*
Name
Severance (1) Bonus (2)
Accrued
Compensation (3)
Stock
Awards (4) Medical (5)
Total
Kevin C. Gorman, Ph.D. . . . . . . . $1,350,000 $945,000
Matthew C. Abernethy . . . . . . . . $ 630,000 $315,000
Eric Benevich. . . . . . . . . . . . . . . . $ 648,900 $324,450
. . . . . . . . . $ 604,650 $302,325
Kyle W. Gano, Ph.D.
. . . . . . . . $ 780,000 $390,000
Eiry W. Roberts, M.D.
$57,856
$25,324
$38,309
$48,448
$19,019
$12,747,862 $72,792 $15,173,510
$ 2,419,014 $42,228 $ 3,431,566
$ 5,475,966 $54,594 $ 6,542,219
$ 6,065,975 $ 4,050 $ 7,025,448
$ 3,616,917 $49,716 $ 4,855,652
*
Reflects benefits to be provided upon a termination without cause, or due to a constructive termination,
within a specified time following a change-in-control.
(1) Based on salary as of December 31, 2018.
(2) Based on bonus targets established by the Board of Directors for 2018.
(3) Accrued compensation is comprised of vacation pay earned and unpaid as of December 31, 2018.
(4) The amounts in this column represent the intrinsic value of ‘in-the money’ unvested options and restricted
stock units as of December 31, 2018 that would vest in accordance with the executive officers’ employment
agreements. Values were derived using the closing price of the Company’s common stock on December 31,
2018 of $71.41.
(5) Medical is comprised primarily of health insurance premiums for the period specified in each executive
officer’s employment contract.
Potential Payment upon Termination by Disability Table*
Name
Salary (1)
Bonus (2)
Accrued
Compensation (3)
Stock
Awards (4) Medical (5)
Total
Kevin C. Gorman, Ph.D. . . . . . .
Matthew C. Abernethy . . . . . . .
Eric Benevich. . . . . . . . . . . . . . .
. . . . . . . .
Kyle W. Gano, Ph.D.
. . . . . . .
Eiry W. Roberts, M.D.
$843,750
$420,000
$432,600
$403,100
$520,000
$590,625
$210,000
$216,300
$201,550
$260,000
$57,856
$25,324
$38,309
$48,448
$19,019
$6,295,930
$ 223,157
$1,582,196
$1,681,774
$ 357,050
$45,495
$28,152
$36,396
$ 2,700
$33,144
$7,833,656
$ 906,633
$2,305,801
$2,337,572
$1,189,213
*
Reflects a termination due to disability.
(1) Based on salary as of December 31, 2018.
(2) Based on bonus targets established by the Board of Directors for 2018.
(3) Accrued compensation is comprised of vacation pay earned and unpaid as of December 31, 2018.
(4) The amounts in this column represent the intrinsic value of ‘in-the money’ unvested options and restricted
stock units as of December 31, 2018 that would vest in accordance with the executive officers’ employment
agreements. Values were derived using the closing price of the Company’s common stock on December 31,
2018 of $71.41.
(5) Medical is comprised primarily of health insurance premiums for the period specified in each executive
officer’s employment contract.
61
Potential Payment upon Termination by Death Table*
Name
Kevin C. Gorman, Ph.D. . . . . . . . . . . . . .
Matthew C. Abernethy . . . . . . . . . . . . . .
Eric Benevich. . . . . . . . . . . . . . . . . . . . . .
Kyle W. Gano, Ph.D. . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
Eiry W. Roberts, M.D.
Bonus (1)
$472,500
$210,000
$216,300
$201,550
$260,000
Accrued
Compensation (2)
Stock
Awards (3)
$57,856
$25,324
$38,309
$48,448
$19,019
$6,295,930
$ 223,157
$1,582,196
$1,681,774
$ 357,050
Total
$6,826,286
$ 458,481
$1,836,805
$1,931,772
$ 636,069
Reflects a termination due to death.
*
(1) Based on bonus targets established by the Board of Directors for 2018.
(2) Accrued compensation is comprised of vacation pay earned and unpaid as of December 31, 2018.
(3) The amounts in this column represent the intrinsic value of ‘in-the money’ unvested options and restricted
stock units as of December 31, 2018 that would vest in accordance with the executive officers’ employment
agreements. Values were derived using the closing price of the Company’s common stock on December 31,
2018 of $71.41.
The following is a description of the arrangements under which the NEOs may be entitled to potential
payments upon a termination without cause or resignation due to a constructive termination (including following
a change-in-control) or upon disability or death. Resignation due to constructive termination may include an
executive’s resignation following one or more of the following material adverse changes in the nature of such
executive’s employment, as specified in the agreement, which is not cured following notification:
•
•
a significant reduction in the executive or the executive supervisor’s duties or responsibilities,
a material reduction in base salary,
• material relocation, or
• material breach of the executive’s employment agreement.
Dr. Gorman is entitled to 1.25 times the amount of his annual base salary and target annual bonus to be paid
equally over 15 months, an acceleration of unvested shares that would have vested over the 15 continuous
months after the date of termination, and payment of COBRA benefits to continue then-current coverage for a
period of 15 months following termination in the event that the Company terminates his employment without
cause, or he resigns due to a constructive termination. In the event of such termination within six months after the
consummation of a change of control, Dr. Gorman is entitled to 2 times the amount of his annual base salary and
annual target bonus to be paid in one lump sum, a cash amount equal to the value of all unvested stock awards
and all vested and outstanding stock awards, and payment of COBRA benefits to continue then-current coverage
for a period of 24 months following termination. In addition, the Company has agreed to reimburse Dr. Gorman
for the increase in federal and state income taxes payable by him by reason of the benefits provided in connection
with such a termination in connection with a change in control if the total payment exceeds 2.99 times his base
amount by more than 15%. In the event of termination due to disability, Dr. Gorman is entitled to 15 months of
base salary paid semi-monthly over 15 months, a lump sum amount equal to his target annual bonus multiplied
by a fraction the numerator of which is the number of full months of employment by Dr. Gorman in the fiscal
year and the denominator of which is 12, an acceleration of unvested shares that would have vested over the
15 continuous months after the date of termination, and payment of COBRA benefits to continue then-current
coverage for a period of 15 months following termination. In the event of a termination due to Dr. Gorman’s
death, his beneficiaries or estate, would be entitled to an acceleration of unvested shares that would have vested
over the 15 continuous months after the date of termination, a lump sum amount equal to his target annual bonus
multiplied by a fraction the numerator of which is the number of full months of employment by Dr. Gorman in
the fiscal year and the denominator of which is 12 and any accrued and unpaid compensation on the date of
termination.
62
Mr. Abernethy is entitled to 1.0 times the amount of his annual base salary and target annual bonus to be
paid equally over 12 months, an acceleration of unvested shares that would have vested over the 12 continuous
months after the date of termination, and payment of COBRA benefits to continue then-current coverage for a
period of 12 months following termination in the event that the Company terminates his employment without
cause, or he resigns due to a constructive termination. In the event of such termination within six months after the
consummation of a change of control, Mr. Abernethy is entitled to 1.5 times the amount of his annual base salary
and annual target bonus to be paid in one lump sum, a cash amount equal to the value of all unvested stock
awards and all vested and outstanding stock awards, and payment of COBRA benefits to continue then-current
coverage for a period of 18 months following termination; provided, however, in the event such payment to
Mr. Abernethy after a change of control is subject to a “best-after-tax” provision. The best-after-tax provision
provides that if the change of control payment due to Mr. Abernethy would be subject to the excise tax
provisions of Section 280G of the Internal Revenue Code, the Company may reduce the change of control
payments to Mr. Abernethy if, after all applicable taxes, the final payments would be larger than if the change of
control payments were not reduced and therefor subject to an excise tax. In the event of termination due to
disability, Mr. Abernethy is entitled to 12 months of base salary paid semi-monthly over 12 months, a lump sum
amount equal to his target annual bonus multiplied by a fraction the numerator of which is the number of full
months of employment by Mr. Abernethy in the fiscal year and the denominator of which is 12, an acceleration
of unvested shares that would have vested over the 12 continuous months after the date of termination, and
payment of COBRA benefits to continue then-current coverage for a period of 12 months following termination.
In the event of a termination due to Mr. Abernethy’s death, his beneficiaries or estate, would be entitled to an
acceleration of unvested shares that would have vested over the 12 continuous months after the date of
termination, a lump sum amount equal to his target annual bonus multiplied by a fraction the numerator of which
is the number of full months of employment by Mr. Abernethy in the fiscal year and the denominator of which is
12 and any accrued and unpaid compensation on the date of termination.
Mr. Benevich is entitled to 1.0 times the amount of his annual base salary and target annual bonus to be paid
equally over 12 months, an acceleration of unvested shares that would have vested over the 12 continuous
months after the date of termination, and payment of COBRA benefits to continue then-current coverage for a
period of 12 months following termination in the event that the Company terminates his employment without
cause, or he resigns due to a constructive termination. In the event of such termination within six months after the
consummation of a change of control, Mr. Benevich is entitled to 1.5 times the amount of his annual base salary
and annual target bonus to be paid in one lump sum, a cash amount equal to the value of all unvested stock
awards and all vested and outstanding stock awards, and payment of COBRA benefits to continue then-current
coverage for a period of 18 months following termination; provided, however, in the event such payment to
Mr. Benevich after a change of control is subject to a “best-after-tax” provision. The best-after-tax provision
provides that if the change of control payment due to Mr. Benevich would be subject to the excise tax provisions
of Section 280G of the Internal Revenue Code, the Company may reduce the change of control payments to
Mr. Benevich if, after all applicable taxes, the final payments would be larger than if the change of control
payments were not reduced and therefor subject to an excise tax. In the event of termination due to disability,
Mr. Benevich is entitled to 12 months of base salary paid semi-monthly over 12 months, a lump sum amount
equal to his target annual bonus multiplied by a fraction the numerator of which is the number of full months of
employment by Mr. Benevich in the fiscal year and the denominator of which is 12, an acceleration of
unvested shares that would have vested over the 12 continuous months after the date of termination, and payment
of COBRA benefits to continue then-current coverage for a period of 12 months following termination. In the
event of a termination due to Mr. Benevich’s death, his beneficiaries or estate, would be entitled to an
acceleration of unvested shares that would have vested over the 12 continuous months after the date of
termination, a lump sum amount equal to his target annual bonus multiplied by a fraction the numerator of which
is the number of full months of employment by Mr. Benevich in the fiscal year and the denominator of which is
12 and any accrued and unpaid compensation on the date of termination.
Dr. Gano is entitled to 1.0 times the amount of his annual base salary and target annual bonus to be paid
equally over 12 months, an acceleration of unvested shares that would have vested over the 12 continuous
63
months after the date of termination, and payment of COBRA benefits to continue then-current coverage for a
period of 12 months following termination in the event that the Company terminates his employment without
cause, or he resigns due to a constructive termination. In the event of such termination within six months after the
consummation of a change of control, Dr. Gano is entitled to 1.5 times the amount of his annual base salary and
annual target bonus to be paid in one lump sum, a cash amount equal to the value of all unvested stock awards
and all vested and outstanding stock awards, and payment of COBRA benefits to continue then-current coverage
for a period of 18 months following termination; provided, however, in the event such payment to Dr. Gano after
a change of control is subject to a “best-after-tax” provision. The best-after-tax provision provides that if the
change of control payment due to Dr. Gano would be subject to the excise tax provisions of Section 280G of the
Internal Revenue Code, the Company may reduce the change of control payments to Dr. Gano if, after all
applicable taxes, the final payments would be larger than if the change of control payments were not reduced and
therefor subject to an excise tax. In the event of termination due to disability, Dr. Gano is entitled to 12 months of
base salary paid semi-monthly over 12 months, a lump sum amount equal to his target annual bonus multiplied
by a fraction the numerator of which is the number of full months of employment by Dr. Gano in the fiscal year
and the denominator of which is 12, an acceleration of unvested shares that would have vested over the 12
continuous months after the date of termination, and payment of COBRA benefits to continue then-current
coverage for a period of 12 months following termination. In the event of a termination due to Dr. Gano’s death,
his beneficiaries or estate, would be entitled to an acceleration of unvested shares that would have vested over the
12 continuous months after the date of termination, a lump sum amount equal to his target annual bonus
multiplied by a fraction the numerator of which is the number of full months of employment by Dr. Gano in the
fiscal year and the denominator of which is 12 and any accrued and unpaid compensation on the date of
termination.
Dr. Roberts is entitled to 1.0 times the amount of her annual base salary and target annual bonus to be paid
equally over 12 months, an acceleration of unvested shares that would have vested over the 12 continuous
months after the date of termination, and payment of COBRA benefits to continue then-current coverage for a
period of 12 months following termination in the event that the Company terminates her employment without
cause, or she resigns due to a constructive termination. In the event of such termination within six months after
the consummation of a change of control, Dr. Roberts is entitled to 1.5 times the amount of her annual base
salary and annual target bonus to be paid in one lump sum, a cash amount equal to the value of all unvested stock
awards and all vested and outstanding stock awards, and payment of COBRA benefits to continue then-current
coverage for a period of 18 months following termination; provided, however, in the event such payment to
Dr. Roberts after a change of control is subject to a “best-after-tax” provision. The best-after-tax provision
provides that if the change of control payment due to Dr. Roberts would be subject to the excise tax provisions of
Section 280G of the Internal Revenue Code, the Company may reduce the change of control payments to
Dr. Roberts if, after all applicable taxes, the final payments would be larger than if the change of control
payments were not reduced and therefor subject to an excise tax. In the event of termination due to disability,
Dr. Roberts is entitled to 12 months of base salary paid semi-monthly over 12 months, a lump sum amount equal
to her target annual bonus multiplied by a fraction the numerator of which is the number of full months of
employment by Dr. Roberts in the fiscal year and the denominator of which is 12, an acceleration of
unvested shares that would have vested over the 12 continuous months after the date of termination, and payment
of COBRA benefits to continue then-current coverage for a period of 12 months following termination. In the
event of a termination due to Dr. Roberts’s death, her beneficiaries or estate, would be entitled to an acceleration
of unvested shares that would have vested over the 12 continuous months after the date of termination, a lump
sum amount equal to her target annual bonus multiplied by a fraction the numerator of which is the number of
full months of employment by Dr. Roberts in the fiscal year and the denominator of which is 12 and any accrued
and unpaid compensation on the date of termination.
64
CEO PAY RATIO
In order to reflect our employee compensation practices, we have calculated the annual base salary of our
median employee while taking only annual base salary into account, as well as the ratio of the base salary of our
CEO as compared to the annual base salary of such median employee. In calculating the annual base salary of
our median employee we used the applicable methodology listed above. For fiscal 2018, the median of the annual
base salary of our employees (other than our CEO) was $133,120, and the annual base salary of our CEO, Kevin
C. Gorman, Ph.D., as reported in the Summary Compensation Table included in this Proxy Statement, was
$675,000. Based on this information, the ratio of the annual base salary of our CEO to the median of the annual
base salary of all employees (other than the CEO) was approximately 5 to 1.
In addition to the information above, under SEC rules, we are required to calculate and disclose the annual
total compensation of our median employee, as well as the ratio of the annual total compensation of our median
employee as compared to the annual total compensation of our CEO (“CEO Pay Ratio”). To identify our median
employee, we used the following methodology:
• To determine our total population of employees, we included all full-time and part-time as of
December 31, 2018.
• To identify our median employee from our employee population, we calculated the aggregate amount
of each employee’s fiscal 2018 base salary (using a reasonable estimate of the hours worked and
overtime actually paid during fiscal 2018 for hourly employees and actual salary paid for our
remaining employees) and bonuses attributable to fiscal 2018 performance and the grant date fair value
of equity awards granted in fiscal 2018 using the same methodology we use for estimating the value of
the equity awards granted to our named executive officers and reported in our Summary Compensation
Table.
•
In making this determination, we annualized the base salary and target bonus compensation of
employees who were employed by us for less than the entire fiscal year.
For fiscal 2018, the median of the annual total compensation of our employees (other than our CEO) was
$259,000 and the annual total compensation of our CEO, Kevin C. Gorman, Ph.D., as reported in the Summary
Compensation Table included in this Proxy Statement, was $8,632,979. Based on this information, the ratio of
the annual total compensation of our CEO to the median of the annual total compensation of all employees was
approximately 33 to 1.
The CEO Pay Ratio above represents our reasonable estimate calculated in a manner consistent with SEC
rules and applicable guidance. SEC rules and guidance provide significant flexibility in how companies identify
the median employee, and each company may use a different methodology and make different assumptions
particular to that company. As a result, and as explained by the SEC when it adopted these rules, in considering
the pay ratio disclosure, stockholders should keep in mind that the rule was not designed to facilitate comparisons
of pay ratios among different companies, even companies within the same industry, but rather to allow
stockholders to better understand and assess each particular company’s compensation practices and pay ratio
disclosures.
Neither the Compensation Committee nor our management used our CEO Pay Ratio measure in making
compensation decisions.
65
DIRECTORS COMPENSATION SUMMARY
Non-Employee Director Compensation Philosophy
Our non-employee director compensation philosophy is based on the following guiding principles:
• Aligning the long-term interests of stockholders and directors; and
• Compensating directors appropriately and adequately for their time, effort and experience.
The elements of director compensation consist of annual cash retainers and equity awards, as well as
customary and usual expense reimbursement in attending Board or Committee meetings. In an effort to align the
long-term interests of our stockholders and non-employee directors, the mix of cash and equity compensation has
historically been, and is currently, weighted more heavily to equity. The equity compensation has historically
taken the form of stock options, which we believe motivates the non-employee directors to help us achieve our
business objectives by tying incentives to the appreciation of our common stock over the long term.
The Board and the Company’s stockholders approved certain annual limits on compensation to be paid to
the Company’s non-employee directors, beginning with our 2016 annual meeting of stockholders. The aggregate
value of all compensation granted or paid, as applicable, to any individual for service as a non-employee director
will not exceed $1,250,000 in total value during any year, measured from our annual meeting of stockholders for
a particular year and ending on the date of our annual meeting of stockholders for the subsequent year. In
addition, the aggregate value of the initial option grant or other similar stock awards granted under the 2011 Plan
or otherwise to any individual for service as a non-employee director upon or in connection with his or her initial
election or appointment to the Board will not exceed $2,000,000 in total value. These limits are further described
in our 2011 Plan. The Board has the authority to make exceptions to these limits in extraordinary circumstances,
in its discretion, provided that any non-employee director who is granted or paid such additional compensation
may not participate in the decision to grant or pay such additional compensation. No exceptions were made in
2018.
Our Compensation Committee regularly assesses our non-employee director compensation program in
consultation with its independent compensation consultant, who provides analysis and input on prevailing market
practices, and recommends any changes to the program to our Board, who ultimately approves non-employee
director compensation. On at least an annual basis, qualified experts in the field of non-employee director
compensation also deliver a presentation to the Compensation Committee about recent developments and best
practices related to non-employee director compensation.
The 2018 compensation for the Company’s non-employee directors was recommended by the
Compensation Committee to the Board following the review of a report from Radford, its independent
compensation consultant during 2018, which contained an analysis of prevailing market practices regarding
levels and types of non-employee director compensation, including the non-employee director compensation
practices of our peer group, which is described in the “Compensation Discussion and Analysis” section of this
proxy statement, and a comparative assessment of our non-employee director compensation to such peers and
market practices. In 2018, the Compensation Committee also received a presentation from Radford about recent
developments and best practices related to non-employee directors to inform its analysis of, and
recommendations regarding, non-employee director compensation. In 2018 the Board approved certain
adjustments to cash compensation of certain committee Chairs and members based primarily on an increase in
the number of meetings that certain committees had as compared to prior years. In addition, the Board approved
a decrease in the number of shares subject to the annual option granted to each non-employee director at the 2018
Annual Meeting of Stockholders and the initial option granted each non-employee director upon his or her initial
election or appointment to the Board.
In formulating its recommendations to the Board for 2018, the Compensation Committee did not engage in
benchmarking or targeting compensation to a specific level of the peer group data provided by Radford, but
66
rather used the peer data as a reference point in making non-employee director compensation recommendations.
The Compensation Committee determined that the equity awards granted to non-employee directors should
consist of stock options rather than time-vesting RSU grants. It is the Compensation Committee’s view that stock
options are inherently performance oriented and align the interest of the non-employee directors with those of our
stockholders, as the non-employee director realizes no value from stock options unless and until the Company’s
stock price increases. Ultimately, the Board set 2018 non-employee director compensation in the forms and
amounts it determined to be appropriate using its professional experience and judgment, after careful review of
the Radford analysis and the Compensation Committee’s recommendations. Our director compensation for fiscal
2018 is described below.
Non-Employee Director Compensation for Fiscal 2018
Non-employee directors are reimbursed for expenses incurred in connection with performing their duties as
directors of the Company. For 2018, directors who are not employees of the Company received a $50,000 annual
retainer. The Company provided the Chair of the Board, William H. Rastetter, an additional $30,000, making his
total annual cash retainer $80,000. In addition to the cash compensation set forth above, the Chairs of the Audit
Committee and Compensation Committee each received an additional $20,000 annual cash retainer. The Chair of
the Nominating/Corporate Governance Committee received an additional $10,000 annual cash retainer, and the
Chair of the Science and Medical Technology Committee received an additional $15,000 annual cash retainer.
Each other director who was a member of the Audit Committee, the Compensation Committee, the Nominating/
Corporate Governance Committee or the Science and Medical Technology Committee received an additional
annual cash retainer of $12,000, $12,000, $5,000 and $7,500, respectively, for each Committee on which she or
he served.
Additionally, for 2018, each non-employee director received a grant of a nonstatutory stock option to
purchase 12,500 shares of the Company’s common stock (except that the Chair of the Board received an option
to purchase 15,000 shares) on the date of the 2018 Annual Meeting of Stockholders. The options granted to
non-employee directors have exercise prices equal to the closing price of the Company’s common stock on the
date of the grant, are subject to a ten-year term and vest monthly over the one-year period following the date of
grant.
Although we did not have any new non-employee directors during 2018, any non-employee director who is
first elected or appointed to the Board would receive a grant of a nonstatutory stock option to purchase shares of
the Company’s common stock. The initial option would be granted upon such director’s initial election or
appointment to the Board, have an exercise price equal to the closing price of the Company’s common stock on
the date of grant, a ten-year maximum term and vest monthly over the three-year period following the date of
grant.
67
The following table sets forth the compensation paid by the Company for the fiscal year ended
December 31, 2018 to the directors of the Company named below:
Director Compensation Table
Name
Kevin C. Gorman, Ph.D. (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William H. Rastetter, Ph.D. (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gary A. Lyons (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
George J. Morrow (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corinne H. Nevinny (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richard F. Pops (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alfred W. Sandrock, Jr., M.D. Ph.D. (9)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stephen A. Sherwin, M.D. (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees Earned
or Paid in
Cash (1)
$ —
$87,500
$57,500
$75,000
$82,000
$82,000
$78,000
$77,333
Option
Awards (2)
Total
$ — $ —
$873,800
$786,300
$712,750
$655,250
$730,250
$655,250
$737,250
$655,250
$737,250
$655,250
$733,250
$655,250
$732,583
$655,250
(1) Amounts in this column reflect compensation earned in 2018, all of which was paid during 2018.
(2)
The amounts shown represent the full grant date fair value of option awards granted in 2018 as determined
pursuant to ASC 718. The assumptions used to calculate the value of such awards are set forth under Note
8 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2018. The grant date fair values of all option awards are based
on a per share Black-Scholes value of $52.42.
(3) During 2018, Dr. Gorman was an employee of the Company, and as such, did not receive any
compensation for service on the Board of Directors. As of December 31, 2018, Dr. Gorman had
outstanding options to purchase 1,125,944 shares of common stock, and 115,050 outstanding restricted
stock units.
(4) As of December 31, 2018, Dr. Rastetter had outstanding options to purchase 141,000 shares of common
stock.
(5) As of December 31, 2018, Mr. Lyons had outstanding options to purchase 112,500 shares of common
stock.
(6) As of December 31, 2018, Mr. Morrow had outstanding options to purchase 82,500 shares of common
stock.
(7) Ms. Nevinny resigned from the Board of Directors in September 2018. As of December 31, 2018,
Ms. Nevinny had outstanding options to purchase 88,125 shares of common stock.
(8) As of December 31, 2018, Mr. Pops had outstanding options to purchase 112,500 shares of common stock.
(9) As of December 31, 2018, Dr. Sandrock had outstanding options to acquire 82,500 shares of common
stock.
(10) As of December 31, 2018, Dr. Sherwin had outstanding options to purchase 112,500 shares of common
stock.
Equity Ownership Guidelines
In August 2018, the Board of Directors implemented equity ownership guidelines for our non-employee
directors. The equity ownership guidelines are designed to further align the interests of the non-employee
directors with those of our stockholders by ensuring that our non-employee directors have a significant financial
stake in the Company’s long-term success. The equity ownership guidelines establish a minimum equity
ownership equal to one times the cash retainer paid to the non-employee director, with such values determined
based on the value of our common stock owned by such persons as of certain measurement dates. All shares
directly or beneficially owned by the non-employee director, including the net exercisable value of outstanding
vested stock options (where the market price of our common stock exceeds the strike price of such option) are
included in determining the value of equity owned under our equity ownership guidelines. New non-employee
directors are granted a five-year period to reach the equity ownership requirements set forth in the guidelines and
68
are expected to make annual progress toward the equity ownership requirements during this five-year period.
When a non-employee director does not meet the equity ownership requirements set forth in the guidelines, he/
she is restricted from selling any held shares until such requirements are met. Additionally, should non-employee
director who does not meet the equity ownership requirements choose to exercise a stock option or vest in any
RSUs, he or she is required to retain all shares acquired through those transactions, aside from any shares
necessary to fulfill such transaction related tax obligations, until full compliance with the equity ownership
guidelines is attained.
Annual compliance with the equity ownership guidelines is assessed during the first quarter of each year. As
of March 1, 2019, each of our non-employee directors is in compliance with the equity ownership guidelines.
Additional Information
Executive officers of the Company serve at the discretion of the Board of Directors. There are no family
relationships among any of the directors, executive officers or key employees of the Company. None of our
directors or executive officers has been involved in any of the legal proceedings specified in Item 401(f) of
Regulation S-K in the past 10 years.
69
RELATED PERSON TRANSACTIONS
Review, Approval or Ratification of Related Person Transactions
In accordance with the Company’s Audit Committee Charter, the Company’s Audit Committee is
responsible for reviewing and approving the terms and conditions of all related person transactions. In connection
with its review, approval or ratification of related person transactions, the Company’s Audit Committee takes
into account all relevant available facts and circumstances in determining whether such transaction is in the best
interests of the Company and its stockholders. Any transaction that would disqualify a director from meeting the
“independent director” standard as defined under the Nasdaq Stock Market rules requires review by the
Company’s Audit Committee prior to entering into such transaction. For all other related person transactions, the
Company reviews all agreements and payments for related person transactions and based on this review, a report
is made to the Company’s Audit Committee quarterly disclosing all related person transactions during that
quarter, if any. All related person transactions shall be disclosed in the Company’s applicable filings with the
SEC as required under SEC rules.
Related Person Transactions During Fiscal 2018
There were no related person transactions during fiscal 2018.
OTHER MATTERS
As of the date of this proxy statement, the Company knows of no other matters to be submitted to the
stockholders at the Annual Meeting. If any other matters properly come before the Annual Meeting, it is the
intention of the persons named in the proxy to vote the shares they represent as the Board of Directors may
recommend.
ADDITIONAL INFORMATION
“Householding” of Proxy Materials. The SEC has adopted rules that permit companies and intermediaries
such as brokers to satisfy delivery requirements for proxy statements with respect to two or more stockholders
sharing the same address by delivering a single set of proxy materials addressed to those stockholders. This
process, which is commonly referred to as “householding,” potentially provides extra convenience for
stockholders and cost savings for companies. The Company, as well as certain brokers, household proxy
materials, unless contrary instructions have been received from the affected stockholders. Once you have
received notice from your broker or us that they or we will be householding materials to your address,
householding will continue until you are notified otherwise or until you revoke your consent. If, at any time, you
no longer wish to participate in householding and would prefer to receive a separate set of proxy materials,
please notify your broker if your shares are held in a brokerage account or us if you hold registered shares. If you
hold registered shares, you may direct your written request to the Company’s Corporate Secretary at 12780 El
Camino Real, San Diego, California 92130 or contact the Company’s Corporate Secretary at 858-617-7600.
Advance Notice Procedures. To be considered for inclusion in next year’s proxy materials, a stockholder
must submit his, her or its proposal in writing by December 24, 2019, which is the date that is 120 days prior to
the first anniversary of the mailing date of this proxy statement, to the Company’s Corporate Secretary at 12780
El Camino Real, San Diego, California 92130. Any proposal must comply with the requirements as to form and
substance established by the SEC for such proposal to be included in our proxy statement. Stockholders are also
advised to review our bylaws, which contain additional requirements about advance notice of stockholder
proposals and director nominations.
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Appendix A
NEUROCRINE BIOSCIENCES, INC.
2011 EQUITY INCENTIVE PLAN
ADOPTED BY THE BOARD OF DIRECTORS: FEBRUARY 21, 2011
APPROVED BY THE STOCKHOLDERS: MAY 25, 2011
AMENDED BY THE STOCKHOLDERS: MAY 23, 2013
AMENDED BY THE STOCKHOLDERS: MAY 22, 2014
AMENDED BY THE STOCKHOLDERS: MAY 28, 2015
AMENDED BY THE STOCKHOLDERS: MAY 20, 2016
AMENDED BY THE STOCKHOLDERS: MAY 22, 2017
AMENDED BY THE STOCKHOLDERS: MAY 24, 2018
, 2019
AMENDED BY THE STOCKHOLDERS:
TERMINATION DATE: FEBRUARY 20, 2021
1. GENERAL.
(a) Successor to and Continuation of Prior Plans. The Plan is intended as the successor to and
continuation of the Neurocrine Biosciences, Inc. 2003 Incentive Stock Plan, 2001 Stock Option Plan, 1997
Incentive Stock Plan, 1996 Director Stock Option Plan and 1992 Incentive Stock Plan (together the “Prior
Plans”). On the Effective Date, awards will automatically be granted to the Company’s Directors pursuant to the
terms of Section 10 of the Neurocrine Biosciences, Inc. 2003 Incentive Stock Plan (the “2011 Automatic
Director Awards”). From and following the Effective Date, no additional stock awards shall be granted under the
Prior Plans except for the 2011 Automatic Director Awards. From and after the Effective Date, all outstanding
stock awards granted under the Prior Plans shall remain subject to the terms of the Prior Plans; provided,
however, any shares subject to outstanding stock awards granted under the Prior Plans that expire or terminate
for any reason prior to exercise or settlement or are otherwise forfeited prior to issuance of the shares because of
the failure to meet a contingency or condition required to vest such shares shall not again become available for
issuance under either the Prior Plans or this Plan. Except with respect to the 2011 Automatic Director Awards, all
Awards granted on or after the Effective Date of this Plan shall be subject to the terms of this Plan.
(b) Eligible Award Recipients. The persons eligible to receive discretionary Awards are Employees,
Directors and Consultants. The persons eligible to receive Stock Awards under the Director Grant Program are
Eligible Directors.
(c) Available Awards. The Plan provides for the grant of the following Awards: (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, (iii) Stock Appreciation Rights (iv) Restricted Stock Awards,
(v) Restricted Stock Unit Awards, (vi) Performance Stock Awards, and (vii) Other Stock Awards.
(d) Purpose. The Company, by means of the Plan, seeks to secure and retain the services of the group of
persons eligible to receive Awards as set forth in Section 1(b), to provide incentives for such persons to exert
maximum efforts for the success of the Company and any Affiliate and to provide a means by which such
eligible recipients may be given an opportunity to benefit from increases in value of the Common Stock through
the granting of Awards.
(e) Section 162(m) Transition Relief. Notwithstanding anything in the Plan to the contrary:
(i) any provision in the Plan that refers to “performance-based compensation” under Section 162(m) of
the Code will only apply to any Award that is intended to qualify, and is eligible to qualify, as “performance-
based compensation” under Section 162(m) of the Code pursuant to the transition relief provided by the Tax Cuts
and Jobs Act (the “TCJA”) for remuneration provided pursuant to a written binding contract which was in effect
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on November 2, 2017 and which was not modified in any material respect on or after such date (the “Transition
Relief”), as determined by the Board, in its sole discretion, in accordance with the TCJA and any applicable
guidance, rulings or regulations issued by the U.S. Department of the Treasury, the Internal Revenue Service or
any other governmental authority (collectively, the “TCJA Guidance”) (each such Award, a “162(m) Award”);
(ii) any Award (including any 162(m) Award) that was granted prior to May 22, 2019 will be subject to
and governed by the terms of the Plan, as in effect on the date of grant of such Award (or as in effect on the date
of any subsequent amendment of the Plan, to the extent applicable, but no later than November 2, 2017 with
respect to any 162(m) Award and no later than May 23, 2018 with respect to any Award that is not a 162(m)
Award); provided, however, that any such terms which refer to a subsection of Section 162(m) of the Code (or
any regulations thereunder) will mean such subsection (or any regulations thereunder) as in effect on
December 31, 2017 (or with respect to any Award that is not a 162(m) Award, as amended by the TCJA or any
TCJA Guidance and as in effect on January 1, 2018 (or as subsequently amended thereafter), to the extent
applicable); and
(iii) any Award (including any 162(m) Award) that is granted on or after May 22, 2019 will be subject
to and governed by the terms of the Plan, as in effect on May 22, 2019 (or as in effect on the date of any
subsequent amendment of the Plan, to the extent applicable, provided that with respect to any 162(m) Award, no
such subsequent amendment will be effective if it would result in such 162(m) Award not being able to qualify
for the Transition Relief); provided, however, that (a) with respect to any 162(m) Award, any such terms which
refer to a subsection of Section 162(m) of the Code (or any regulations thereunder) will mean such subsection (or
any regulations thereunder) as in effect on December 31, 2017, and (b) with respect to any Award that is not a
162(m) Award, any such terms which refer to a subsection of Section 162(m) of the Code (or any regulations
thereunder) will mean such subsection (or any regulations thereunder), as amended by the TCJA or any TCJA
Guidance and as in effect on January 1, 2018 (or as subsequently amended thereafter), to the extent applicable.
2. ADMINISTRATION.
(a) Administration by Board. The Board shall administer the Plan unless and until the Board delegates
administration of the Plan to a Committee or Committees, as provided in Section 2(d). However, the Board may
not delegate administration of the Director Grant Program.
(b) Powers of Board. Except with respect to the Director Grant Program, the Board shall have the power,
subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine from time to time (A) which of the persons eligible under the Plan shall be granted
Awards; (B) when and how each Award shall be granted; (C) what type or combination of types of Award
shall be granted; (D) the provisions of each Award granted (which need not be identical), including the time
or times when a person shall be permitted to receive cash or Common Stock pursuant to an Award; (E) the
number of shares of Common Stock with respect to which a Stock Award shall be granted to each such
person; and (F) the Fair Market Value applicable to a Stock Award.
(ii) To construe and interpret the Plan and Awards granted under it, and to establish, amend and revoke
rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect,
omission or inconsistency in the Plan or in any Stock Award Agreement in a manner and to the extent it
shall deem necessary or expedient to make the Plan or Award fully effective.
(iii) To settle all controversies regarding the Plan and Awards granted under it.
(iv) To accelerate the time at which an Award may first be exercised or the time during which an
Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the
Award stating the time at which it may first be exercised or the time during which it will vest.
(v) To suspend or terminate the Plan at any time. Suspension or termination of the Plan shall not impair
rights and obligations under any Award granted while the Plan is in effect except with the written consent of
the affected Participant.
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(vi) To amend the Plan in any respect the Board deems necessary or advisable. However, except as
provided in Section 10(a) relating to Capitalization Adjustments, to the extent required by applicable law or
listing requirements, stockholder approval shall be required for any amendment of the Plan that either
(A) materially increases the number of shares of Common Stock available for issuance under the Plan,
(B) materially expands the class of individuals eligible to receive Awards under the Plan, (C) materially
increases the benefits accruing to Participants under the Plan or materially reduces the price at which shares
of Common Stock may be issued or purchased under the Plan, (D) materially extends the term of the Plan,
or (E) expands the types of Awards available for issuance under the Plan. Except as provided above, rights
under any Award granted before amendment of the Plan shall not be impaired by any amendment of the
Plan unless (1) the Company requests the consent of the affected Participant, and (2) such Participant
consents in writing.
(vii) To submit any amendment to the Plan for stockholder approval, including, but not limited to,
amendments to the Plan intended to satisfy the requirements of (A) Section 162(m) of the Code regarding
the exclusion of performance-based compensation from the limit on corporate deductibility of compensation
paid to Covered Employees, (B) Section 422 of the Code regarding incentive stock options or
(C) Rule 16b-3.
(viii) To approve forms of Award Agreements for use under the Plan and to amend the terms of any
one or more Awards, including, but not limited to, amendments to provide terms more favorable to the
Participant than previously provided in the Award Agreement, subject to any specified limits in the Plan that
are not subject to Board discretion; provided however, that except with respect to amendments that
disqualify or impair the status of an Incentive Stock Option, a Participant’s rights under any Award shall not
be impaired by any such amendment unless (A) the Company requests the consent of the affected
Participant, and (B) such Participant consents in writing. Notwithstanding the foregoing, subject to the
limitations of applicable law, if any, the Board may amend the terms of any one or more Awards without the
affected Participant’s consent if necessary to maintain the qualified status of the Award as an Incentive
Stock Option or to bring the Award into compliance with Section 409A of the Code.
(ix) Generally, to exercise such powers and to perform such acts as the Board deems necessary or
expedient to promote the best interests of the Company and that are not in conflict with the provisions of the
Plan or Awards.
(x) To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in
the Plan by Employees, Directors or Consultants who are foreign nationals or employed outside the United
States.
(c) Administration of Director Grant Program. The Board shall have the power, subject to and within the
limitations of, the express provisions of the Director Grant Program:
(i) To determine the provisions of each Stock Award to the extent not specified in the Director Grant
Program.
(ii) To construe and interpret the Director Grant Program and the Stock Awards granted under it, and to
establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this
power, may correct any defect, omission or inconsistency in the Director Grant Program or in any Stock
Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Director
Grant Program fully effective.
(iii) To amend the terms of the Director Grant Program or a Stock Award granted thereunder, except
that rights under any such Stock Award granted before amendment of the Director Grant Program shall not
be impaired by any amendment of the Director Grant Program unless (1) the Company requests the consent
of the affected Participant, and (2) such Participant consents in writing.
(iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or
expedient to promote the best interests of the Company and that are not in conflict with the provisions of the
Director Grant Program.
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(d) Delegation to Committee.
(i) General. The Board may delegate some or all of the administration of the Plan (except the Director
Grant Program) to a Committee or Committees. If administration of the Plan is delegated to a Committee, the
Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the
Board that have been delegated to the Committee, including the power to delegate to a subcommittee of the
Committee any of the administrative powers the Committee is authorized to exercise (and references in this Plan
to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Committee
may, at any time, abolish the subcommittee and/or revest in the Committee any powers delegated to the
subcommittee. The Board may retain the authority to concurrently administer the Plan with the Committee and
may, at any time, revest in the Board some or all of the powers previously delegated.
(ii) Section 162(m) and Rule 16b-3 Compliance. The Committee may consist solely of two or more
Outside Directors, in accordance with Section 162(m) of the Code, or solely of two or more Non-Employee
Directors, in accordance with Rule 16b-3.
(e) Delegation to an Officer. The Board may delegate to one (1) or more Officers the authority to do one or
both of the following (i) designate Employees who are providing Continuous Service to the Company or any of
its Subsidiaries who are not Officers to be recipients of Options and SARs (and, to the extent permitted by
applicable law, other Stock Awards) and the terms thereof, and (ii) determine the number of shares of Common
Stock to be subject to such Stock Awards granted to such Employees; provided, however, that the Board
resolutions regarding such delegation shall specify the total number of shares of Common Stock that may be
subject to the Stock Awards granted by such Officer and that such Officer may not grant a Stock Award to
himself or herself. Notwithstanding the foregoing, the Board may not delegate authority to an Officer to
determine the Fair Market Value pursuant to Section 14(z)(iii) below.
(f) Effect of Board’s Decision. All determinations, interpretations and constructions made by the Board in
good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons.
(g) Cancellation and Re-Grant of Stock Awards. Except in connection with a Corporate Transaction, as
provided in Section 10(a) relating to Capitalization Adjustments, or unless the stockholders of the Company have
approved such an action within twelve (12) months prior to such an event, neither the Board nor any Committee
shall have the authority to: (i) reduce the exercise price of any outstanding Options or SARs under the Plan, or
(ii) cancel any outstanding Options or SARs that have an exercise price or strike price greater than the current
Fair Market Value of the Common Stock in exchange for cash, Full Value Awards, or Options or SARs with an
exercise price less than the original exercise price of the Options or SARs that are cancelled.
3. SHARES SUBJECT TO THE PLAN.
(a) Share Reserve. Subject to Section 10(a) relating to Capitalization Adjustments, the aggregate number of
shares of Common Stock that may be issued pursuant to Stock Awards from and after the Effective Date shall not
exceed twenty-one million (21,000,000) shares. For clarity, the Share Reserve in this Section 3(a) is a limitation
on the number of shares of the Common Stock that may be issued pursuant to the Plan and does not limit the
granting of Stock Awards except as provided in Section 8(a). Shares may be issued in connection with a merger
or acquisition as permitted by, as applicable, NASDAQ Listing Rule 5635(c) or, if applicable, NYSE Listed
Company Manual Section 303A.08, AMEX Company Guide Section 711 or other applicable rule, and such
issuance shall not reduce the number of shares available for issuance under the Plan. Furthermore, if a Stock
Award or any portion thereof expires or otherwise terminates without all of the shares covered by such Stock
Award having been issued, such expiration or termination shall not reduce (or otherwise offset) the number of
shares of Common Stock that may be available for issuance under the Plan.
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(b) Reversion of Shares to the Share Reserve. If any shares of common stock issued pursuant to a Stock
Award are forfeited back to the Company because of the failure to meet a contingency or condition required to
vest such shares in the Participant, then the shares that are forfeited shall revert to and again become available for
issuance under the Plan.
(c) Limitation on Full Value Awards. The aggregate number of shares of Common Stock that may be
issued pursuant to grants of Full Value Awards shall not exceed fifty percent (50%) of the aggregate number of
shares of Common Stock available for issuance under this Plan as set forth in Section 3(a), subject to adjustment
as provided in Sections 3(b) and 10(a).
(d) Shares Not Available For Subsequent Issuance. If any shares subject to a Stock Award are not
delivered to a Participant because the Stock Award is exercised through a reduction of shares subject to the Stock
Award (i.e., “net exercised”), the number of shares that are not delivered to the Participant shall no longer be
available for issuance under the Plan. Also, any shares used to pay the exercise price of a Stock Award or that are
withheld in satisfaction of applicable tax withholding obligations shall no longer be available for issuance under
the Plan. Any shares repurchased on the open market with the proceeds of the exercise price of a Stock Award
shall not again be available for issuance under the Plan.
(e) Incentive Stock Option Limit. Notwithstanding anything to the contrary in this Section 3 and, subject
to the provisions of Section 10(a) relating to Capitalization Adjustments, the aggregate maximum number of
shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options shall be
twenty-one] million (21,000,000) shares of Common Stock.
(f) Section 162(m) Limitation on Annual Grants. Subject to the provisions of Section 10(a) relating to
Capitalization Adjustments, at such time as the Company may be subject to the applicable provisions of
Section 162(m) of the Code, a maximum of five hundred thousand (500,000) shares of Common Stock subject to
Options, SARs and Other Stock Awards whose value is determined by reference to an increase over an exercise
or strike price of at least one hundred percent (100%) of the Fair Market Value on the date any such Stock Award
is granted may be granted to any Participant during any calendar year; provided, however that in connection with
his or her initial employment, an Employee may be granted such forms of Stock Awards for up to an additional
five hundred thousand (500,000) shares of Common Stock which shall not count against such annual limit.
Notwithstanding the foregoing, if any additional Options, SARs or Other Stock Awards whose value is
determined by reference to an increase over an exercise or strike price of at least one hundred percent (100%) of
the Fair Market Value on the date the Stock Award are granted to any Participant during any calendar year,
compensation attributable to the exercise of such additional Stock Awards shall not satisfy the requirements to be
considered “qualified performance-based compensation” under Section 162(m) of the Code unless such
additional Stock Awards are approved by the Company’s stockholders.
(g) Non-Employee Director Compensation Limit. The aggregate value of all compensation granted or
paid, as applicable, to any individual for service as a Non-Employee Director with respect to any period
commencing on the date of the Company’s regular Annual Meeting for a particular year and ending on the date
of the Company’s regular Annual Meeting for the next subsequent year (the “Annual Period”), including
Awards granted and cash fees paid by the Company to such Non-Employee Director, will not exceed one million
two hundred fifty thousand dollars ($1,250,000) in total value. In addition, the aggregate value of the Initial
Award(s) (or other similar stock award(s) granted under the Plan or otherwise to any individual for service as a
Non-Employee Director upon or in connection with his or her initial election or appointment to the Board) will
not exceed two million dollars ($2,000,000) in total value; for the avoidance of doubt, the aggregate
compensation granted or paid, as applicable, to any individual for service as a Non-Employee Director with
respect to an Annual Period in which such individual is first appointed or elected to the Board shall not exceed
the sum of the two preceding limitations in this Section 3(g). The value of any stock awards, for purposes of the
limitations described in this Section 3(g), shall be calculated based on the grant date fair value of such stock
awards for financial reporting purposes. The limitations in this Section 3(g) shall apply beginning with the
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Annual period in which the Company’s 2016 Annual Meeting occurs. The Board may make an exception to the
applicable limit in this Section 3(g) for any Non-Employee Director in extraordinary circumstances, as the Board
may determine in its discretion, provided that any Non-Employee Director who is granted or paid such additional
compensation may not participate in the decision to grant or pay such additional compensation.
(h) Source of Shares. The stock issuable under the Plan shall be shares of authorized but unissued or
reacquired Common Stock, including shares repurchased by the Company on the open market or otherwise;
provided, however that the Company may not repurchase shares to be used under this Plan to the extent such
repurchased shares would exceed the limitation in Section 3(a).
4. ELIGIBILITY.
(a) Eligibility for Specific Stock Awards. Incentive Stock Options may be granted only to employees of
the Company or a “parent corporation” or “subsidiary corporation” thereof (as such terms are defined in Sections
424(e) and (f) of the Code). Stock Awards other than Incentive Stock Options may be granted to Employees,
Directors and Consultants; provided, however, Nonstatutory Stock Options and SARs may not be granted to
Employees, Directors and Consultants who are providing Continuous Service only to any “parent” of the
Company, as such term is defined in Rule 405 promulgated under the Securities Act, unless the stock underlying
such Stock Awards is treated as “service recipient stock” under Section 409A of the Code because the Stock
Awards are granted pursuant to a corporate transaction (such as a spin off transaction) or unless such Stock
Awards comply with the distribution requirements of Section 409A of the Code. Stock Awards granted under the
Director Grant Program in Section 7 may be granted only to Eligible Directors.
(b) Ten Percent Stockholders. A Ten Percent Stockholder shall not be granted an Incentive Stock Option
unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value on
the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.
5. PROVISIONS RELATING TO OPTIONS AND STOCK APPRECIATION RIGHTS.
Each Option or SAR shall be in such form and shall contain such terms and conditions as the Board shall
deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and, if certificates are issued, a separate certificate or certificates shall be issued for
shares of Common Stock purchased on exercise of each type of Option. If an Option is not specifically
designated as an Incentive Stock Option, then the Option shall be a Nonstatutory Stock Option. The provisions of
separate Options or SARs need not be identical; provided, however, that each Option Agreement or SAR
Agreement shall conform to (through incorporation of provisions hereof by reference in the applicable Award
Agreement or otherwise) the substance of each of the following provisions:
(a) Term. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, no Option or SAR
shall be exercisable after the expiration of ten (10) years from the date of its grant or such shorter period
specified in the Award Agreement.
(b) Exercise Price. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, the
exercise price (or strike price) of each Option or SAR shall be not less than one hundred percent (100%) of the
Fair Market Value of the Common Stock subject to the Option or SAR on the date the Option or SAR is granted.
Notwithstanding the foregoing, an Option or SAR may be granted with an exercise price (or strike price) lower
than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option or SAR if
such Option or SAR is granted pursuant to an assumption of or substitution for another option or stock
appreciation right pursuant to a Corporate Transaction and in a manner consistent with the provisions of Sections
409A and, if applicable, 424(a) of the Code. Each SAR will be denominated in shares of Common Stock
equivalents.
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(c) Purchase Price for Options. The purchase price of Common Stock acquired pursuant to the exercise of
an Option shall be paid, to the extent permitted by applicable law and as determined by the Board in its sole
discretion, by any combination of the methods of payment set forth below. The Board shall have the authority to
grant Options that do not permit all of the following methods of payment (or otherwise restrict the ability to use
certain methods) and to grant Options that require the consent of the Company to utilize a particular method of
payment. The permitted methods of payment are as follows:
(i) by cash, check, bank draft or money order payable to the Company;
(ii) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board
that, prior to the issuance of the stock subject to the Option, results in either the receipt of cash (or check) by
the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company
from the sales proceeds;
(iii) by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock;
(iv) if the option is a Nonstatutory Stock Option, by a “net exercise” arrangement pursuant to which
the Company will reduce the number of shares of Common Stock issuable upon exercise by the largest
whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price;
provided, however, that the Company shall accept a cash or other payment from the Participant to the extent
of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of
whole shares to be issued; provided, further, that shares of Common Stock will no longer be subject to an
Option and will not be exercisable thereafter to the extent that (A) shares issuable upon exercise are reduced
to pay the exercise price pursuant to the “net exercise,” (B) shares are delivered to the Participant as a result
of such exercise, and (C) shares are withheld to satisfy tax withholding obligations; or
(v) in any other form of legal consideration that may be acceptable to the Board.
(d) Exercise and Payment of a SAR. To exercise any outstanding SAR, the Participant must provide
written notice of exercise to the Company in compliance with the provisions of the SAR Agreement evidencing
such SAR. The appreciation distribution payable on the exercise of a SAR will be not greater than an amount
equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the SAR) of a number
of shares of Common Stock equal to the number of Common Stock equivalents in which the Participant is vested
under such SAR, and with respect to which the Participant is exercising the SAR on such date, over (B) the strike
price that will be determined by the Board at the time of grant of the SAR. The appreciation distribution in
respect to a SAR may be paid in Common Stock, in cash, in any combination of the two or in any other form of
consideration, as determined by the Board and contained in the SAR Agreement evidencing such SAR.
(e) Transferability of Options and SARs. The Board may, in its sole discretion, impose such limitations
on the transferability of Options and SARs as the Board shall determine. In the absence of such a determination
by the Board to the contrary, the following restrictions on the transferability of Options and SARs shall apply:
(i) Restrictions on Transfer. An Option or SAR shall not be transferable except by will or by the laws
of descent and distribution and shall be exercisable during the lifetime of the Participant only by the
Participant. Except as explicitly provided herein, neither an Option nor a SAR may be transferred.
(ii) Domestic Relations Orders. Notwithstanding the foregoing, an Option or SAR may be transferred
pursuant to a domestic relations order; provided, however, that if an Option is an Incentive Stock Option,
such Option may be deemed to be a Nonstatutory Stock Option as a result of such transfer.
(iii) Beneficiary Designation. Notwithstanding the foregoing, the Participant may, by delivering
written notice to the Company, in a form provided by or otherwise satisfactory to the Company and any
broker designated by the Company to effect Option exercises, designate a third party who, in the event of
the death of the Participant, shall thereafter be entitled to exercise the Option or SAR and receive the
Common Stock or other consideration resulting from such exercise. In the absence of such a designation, the
executor or administrator of the Participant’s estate shall be entitled to exercise the Option or SAR and
receive the Common Stock or other consideration resulting from such exercise.
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(f) Vesting Generally. The total number of shares of Common Stock subject to an Option or SAR may vest
and therefore become exercisable in periodic installments that may or may not be equal. The Option or SAR may
be subject to such other terms and conditions on the time or times when it may or may not be exercised (which
may be based on the satisfaction of Performance Goals or other criteria) as the Board may deem appropriate. The
vesting provisions of individual Options or SARs may vary. The provisions of this Section 5(f) are subject to any
Option or SAR provisions governing the minimum number of shares of Common Stock as to which an Option or
SAR may be exercised.
(g) Termination of Continuous Service. Except as otherwise provided in the applicable Award Agreement
or other agreement between the Participant and the Company, if a Participant’s Continuous Service terminates
(other than for Cause or upon the Participant’s death or Disability), the Participant may exercise his or her Option
or SAR (to the extent that the Participant was entitled to exercise such Award as of the date of termination of
Continuous Service) but only within such period of time ending on the earlier of (i) the date three (3) months
following the termination of the Participant’s Continuous Service (or such longer or shorter period specified in
the applicable Award Agreement), or (ii) the expiration of the term of the Option or SAR as set forth in the
Award Agreement. If, after termination of Continuous Service, the Participant does not exercise his or her Option
or SAR within the time specified herein or in the Award Agreement (as applicable), the Option or SAR shall
terminate.
(h) Extension of Termination Date. If the exercise of an Option or SAR following the termination of the
Participant’s Continuous Service (other than for Cause or upon the Participant’s death or Disability) would be
prohibited at any time solely because the issuance of shares of Common Stock would violate the registration
requirements under the Securities Act, then the Option or SAR shall terminate on the earlier of (i) the expiration
of a total period of three (3) months (that need not be consecutive) after the termination of the Participant’s
Continuous Service during which the exercise of the Option or SAR would not be in violation of such
registration requirements, or (ii) the expiration of the term of the Option or SAR as set forth in the applicable
Award Agreement. In addition, unless otherwise provided in a Participant’s Award Agreement, if the immediate
sale of any Common Stock received upon exercise of an Option or SAR following the termination of the
Participant’s Continuous Service (other than for Cause) would violate the Company’s insider trading policy, then
the Option or SAR shall terminate on the earlier of (i) the expiration of a period equal to the applicable post-
termination exercise period after the termination of the Participant’s Continuous Service during which the sale of
the Common Stock received upon exercise of the Option or SAR would not be in violation of the Company’s
insider trading policy, or (ii) the expiration of the term of the Option or SAR as set forth in the applicable Award
Agreement.
(i) Disability of Participant. Except as otherwise provided in the applicable Award Agreement or other
agreement between the Participant and the Company, if a Participant’s Continuous Service terminates as a result
of the Participant’s Disability, the Participant may exercise his or her Option or SAR (to the extent that the
Participant was entitled to exercise such Option or SAR as of the date of termination of Continuous Service), but
only within such period of time ending on the earlier of (i) the date twelve (12) months following such
termination of Continuous Service (or such longer or shorter period specified in the Award Agreement), or
(ii) the expiration of the term of the Option or SAR as set forth in the Award Agreement. If, after termination of
Continuous Service, the Participant does not exercise his or her Option or SAR within the time specified herein
or in the Award Agreement (as applicable), the Option or SAR (as applicable) shall terminate.
(j) Death of Participant. Except as otherwise provided in the applicable Award Agreement or other
agreement between the Participant and the Company, if (i) a Participant’s Continuous Service terminates as a
result of the Participant’s death, or (ii) the Participant dies within the period (if any) specified in the Award
Agreement for exercisability after the termination of the Participant’s Continuous Service (for a reason other than
death), then the Option or SAR may be exercised (to the extent the Participant was entitled to exercise such
Option or SAR as of the date of death) by the Participant’s estate, by a person who acquired the right to exercise
the Option or SAR by bequest or inheritance or by a person designated to exercise the Option or SAR upon the
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Participant’s death, but only within the period ending on the earlier of (i) the date eighteen (18) months following
the date of death (or such longer or shorter period specified in the Award Agreement), or (ii) the expiration of the
term of such Option or SAR as set forth in the Award Agreement. If, after the Participant’s death, the Option or
SAR is not exercised within the time specified herein or in the Award Agreement (as applicable), the Option or
SAR shall terminate.
(k) Termination for Cause. Except as explicitly provided otherwise in a Participant’s Award Agreement or
other individual written agreement between the Company or any Affiliate and the Participant, if a Participant’s
Continuous Service is terminated for Cause, the Option or SAR shall terminate immediately upon such
Participant’s termination of Continuous Service, and the Participant shall be prohibited from exercising his or her
Option or SAR from and after the time of such termination of Continuous Service.
(l) Non-Exempt Employees. No Option or SAR, whether or not vested, granted to an Employee who is a
non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first
exercisable for any shares of Common Stock until at least six months following the date of grant of the Option or
SAR. Notwithstanding the foregoing, consistent with the provisions of the Worker Economic Opportunity Act,
(i) in the event of the Participant’s death or Disability, (ii) upon a Corporate Transaction in which such Option or
SAR is not assumed, continued, or substituted, (iii) upon a Change in Control, or (iv) upon the Participant’s
retirement (as such term may be defined in the Participant’s Award Agreement or in another applicable
agreement or in accordance with the Company’s then current employment policies and guidelines), any such
vested Options and SARs may be exercised earlier than six months following the date of grant. The foregoing
provision is intended to operate so that any income derived by a non-exempt employee in connection with the
exercise or vesting of an Option or SAR will be exempt from his or her regular rate of pay.
6. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS AND SARS.
(a) Restricted Stock Awards. Each Restricted Stock Award Agreement shall be in such form and shall
contain such terms and conditions as the Board shall deem appropriate. To the extent consistent with the
Company’s Bylaws, at the Board’s election, shares of Common Stock may be (i) held in book entry form subject
to the Company’s instructions until any restrictions relating to the Restricted Stock Award lapse; or
(ii) evidenced by a certificate, which certificate shall be held in such form and manner as determined by the
Board. The terms and conditions of Restricted Stock Award Agreements may change from time to time, and the
terms and conditions of separate Restricted Stock Award Agreements need not be identical; provided, however,
that each Restricted Stock Award Agreement shall conform to (through incorporation of the provisions hereof by
reference in the agreement or otherwise) the substance of each of the following provisions:
(i) Consideration. A Restricted Stock Award may be awarded in consideration for (A) cash, check,
bank draft or money order payable to the Company, (B) past services to the Company or an Affiliate, or
(C) any other form of legal consideration (including future services) that may be acceptable to the Board, in
its sole discretion, and permissible under applicable law.
(ii) Vesting. Shares of Common Stock awarded under the Restricted Stock Award Agreement may be
subject to forfeiture to the Company in accordance with a vesting schedule to be determined by the Board.
(iii) Termination of Participant’s Continuous Service. If a Participant’s Continuous Service
terminates, the Company may receive through a forfeiture condition or a repurchase right any or all of the
shares of Common Stock held by the Participant that have not vested as of the date of termination of
Continuous Service under the terms of the Restricted Stock Award Agreement.
(iv) Transferability. Rights to acquire shares of Common Stock under the Restricted Stock Award
Agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in
the Restricted Stock Award Agreement, as the Board shall determine in its sole discretion, so long as
Common Stock awarded under the Restricted Stock Award Agreement remains subject to the terms of the
Restricted Stock Award Agreement.
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(v) Dividends. A Restricted Stock Award Agreement may provide that any dividends paid on
Restricted Stock will be subject to the same vesting and forfeiture restrictions as apply to the shares subject
to the Restricted Stock Award to which they relate.
(b) Restricted Stock Unit Awards. Each Restricted Stock Unit Award Agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of
Restricted Stock Unit Award Agreements may change from time to time, and the terms and conditions of
separate Restricted Stock Unit Award Agreements need not be identical; provided, however, that each Restricted
Stock Unit Award Agreement shall conform to (through incorporation of the provisions hereof by reference in
the Agreement or otherwise) the substance of each of the following provisions:
(i) Consideration. At the time of grant of a Restricted Stock Unit Award, the Board will determine the
consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to
the Restricted Stock Unit Award. The consideration to be paid (if any) by the Participant for each share of
Common Stock subject to a Restricted Stock Unit Award may be paid in any form of legal consideration
that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(ii) Vesting. At the time of the grant of a Restricted Stock Unit Award, the Board may impose such
restrictions on or conditions to the vesting of the Restricted Stock Unit Award as it, in its sole discretion,
deems appropriate.
(iii) Payment. A Restricted Stock Unit Award will be settled by the delivery of shares of Common
Stock as determined by the Board and contained in the Restricted Stock Unit Award Agreement.
(iv) Additional Restrictions. At the time of the grant of a Restricted Stock Unit Award, the Board, as
it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of
Common Stock (or their cash equivalent) subject to a Restricted Stock Unit Award to a time after the
vesting of such Restricted Stock Unit Award.
(v) Dividend Equivalents. Dividend equivalents may be credited in respect of shares of Common
Stock covered by a Restricted Stock Unit Award, as determined by the Board and contained in the
Restricted Stock Unit Award Agreement. At the sole discretion of the Board, such dividend equivalents may
be converted into additional shares of Common Stock covered by the Restricted Stock Unit Award in such
manner as determined by the Board. Any additional shares covered by the Restricted Stock Unit Award
credited by reason of such dividend equivalents will be subject to all of the same terms and conditions of the
underlying Restricted Stock Unit Award Agreement to which they relate, including any vesting restrictions.
(vi) Termination of Participant’s Continuous Service. Except as otherwise provided in the
applicable Restricted Stock Unit Award Agreement, such portion of the Restricted Stock Unit Award that
has not vested will be forfeited upon the Participant’s termination of Continuous Service.
(c) Performance Awards.
(i) Performance Stock Awards. A Performance Stock Award is a Stock Award that may vest or may
be exercised contingent upon the attainment during a Performance Period of certain Performance Goals. A
Performance Stock Award may, but need not, require the completion of a specified period of Continuous
Service. The length of any Performance Period, the Performance Goals to be achieved during the
Performance Period, and the measure of whether and to what degree such Performance Goals have been
attained shall be conclusively determined by the Committee, in its sole discretion. The maximum number of
shares covered by an Award that may be granted to any Participant in a calendar year attributable to Stock
Awards described in this Section 6(c)(i) (whether the grant, vesting or exercise is contingent upon the
attainment during a Performance Period of the Performance Goals) shall not exceed five hundred thousand
(500,000) shares of Common Stock; provided, however that in connection with his or her initial
employment, an Employee may be granted Performance Stock Awards for up to an additional five hundred
thousand (500,000) shares of Common Stock which shall not count against such annual limit. The Board
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may provide for or, subject to such terms and conditions as the Board may specify, may permit a Participant
to elect for, the payment of any Performance Stock Award to be deferred to a specified date or event. In
addition, to the extent permitted by applicable law and the applicable Award Agreement, the Board may
determine that cash may be used in payment of Performance Stock Awards.
Dividend equivalents may be credited in respect of shares of Common Stock covered by a Performance
Stock Award, as determined by the Board and contained in the Performance Stock Award Agreement. At
the sole discretion of the Board, such dividend equivalents may be converted into additional shares of
Common Stock covered by the Performance Stock Award in such manner as determined by the Board. Any
additional shares covered by the Performance Award credited by reason of such dividend equivalents will be
subject to all of the same terms and conditions of the underlying Performance Stock Award Agreement to
which they relate, including any vesting contingent upon the attainment during a Performance Period of
certain Performance Goals.
(ii) Board Discretion. The Board retains the discretion to reduce or eliminate the compensation or
economic benefit due upon attainment of Performance Goals and to define the manner of calculating the
Performance Criteria it selects to use for a Performance Period.
(iii) Section 162(m) Compliance. Unless otherwise permitted in compliance with the requirements of
Section 162(m) of the Code with respect to an Award intended to qualify as “performance-based
compensation” thereunder, the Committee shall establish the Performance Goals applicable to, and the
formula for calculating the amount payable under, the Award no later than the earlier of (a) the date ninety
(90) days after the commencement of the applicable Performance Period, or (b) the date on which twenty-
five percent (25%) of the Performance Period has elapsed, and in either event at a time when the
achievement of the applicable Performance Goals remains substantially uncertain. Prior to the payment of
any compensation under an Award intended to qualify as “performance-based compensation” under
Section 162(m) of the Code, the Committee shall certify the extent to which any Performance Goals and any
other material terms under such Award have been satisfied (other than in cases where such relate solely to
the increase in the value of the Common Stock). Notwithstanding satisfaction of any completion of any
Performance Goals, to the extent specified at the time of grant of an Award to “covered employees” within
the meaning of Section 162(m) of the Code, the number of shares of Common Stock, Options, or other
benefits granted, issued, retainable and/or vested under an Award on account of satisfaction of such
Performance Goals may be reduced by the Committee on the basis of such further considerations as the
Committee, in its sole discretion, shall determine.
(d) Other Stock Awards. Other forms of Stock Awards valued in whole or in part by reference to, or
otherwise based on, Common Stock, including the appreciation in value thereof may be granted either alone or in
addition to Stock Awards provided for under Section 5 and the preceding provisions of this Section 6. Subject to
the provisions of the Plan, the Board shall have sole and complete authority to determine the persons to whom
and the time or times at which such Other Stock Awards will be granted, the number of shares of Common Stock
(or the cash equivalent thereof) to be granted pursuant to such Other Stock Awards and all other terms and
conditions of such Other Stock Awards.
7. INITIAL AND ANNUAL GRANTS TO ELIGIBLE DIRECTORS.
(a) General. The Director Grant Program in this Section 7 provides that Eligible Directors shall receive
certain Stock Awards at designated intervals over their period of Continuous Service on the Board. For the
avoidance of doubt, all Stock Awards granted the Plan, including any Stock Awards granted under this Section 7,
are subject to all the terms and conditions of the Plan, including but not limited to the share reserve limitations of
Section 3 and the cancellation and regrant restrictions set forth in Section 2(g).
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(b) Eligibility. Stock Awards shall be granted under this Section 7 to all Eligible Directors who meet the
criteria specified below.
(c) Director Grants.
(i) Initial Award. At the time a person is first elected or appointed to serve on the Board, provided
such person is an Eligible Director, he or she automatically shall, upon the date of his or her initial election
or appointment as an Eligible Director, be granted an Option to purchase a number of shares of Common
Stock as determined by the Board in its sole discretion, on the terms and conditions set forth in Section 7(d)
(each such Option is an “Initial Award”).
(ii) Annual Awards. On the date of each Annual Meeting, commencing with the Annual Meeting in
2012, each person who is then a Eligible Director and who has served as an Eligible Director on the Board
for a period of at least six (6) months shall be granted an Option to purchase a number of shares of Common
Stock as determined by the Board, in its sole discretion on the terms and conditions set forth in Section 7(d)
(each such Option is an “Annual Award”).
(d) Director Option Grant Provisions.
(i) Option Type. Each Option automatically granted under this Section 7 shall be a Nonstatutory Stock
Option.
(ii) Term. No Option shall be exercisable after the expiration of ten (10) years from the date it was
granted.
(iii) Exercise Price. The exercise price of each Option shall be one hundred percent (100%) of the Fair
Market Value of the Common Stock subject to the Option on the date the Option is granted.
(iv) Vesting.
(1) Initial Awards granted pursuant to this Section 7 shall vest monthly with respect to 1/36th of
the shares over the three (3) year period following the date of grant, subject to the Eligible Director’s
Continuous Service through the applicable vesting dates, so that the Option will be fully vested on the
third anniversary of the date of grant.
(2) Annual Awards granted pursuant to this Section 7 shall vest monthly with respect to 1/12th of
the shares over the one (1) year period following the date of grant, subject to the Eligible Director’s
Continuous Service through the applicable vesting dates, so that the Option will be fully vested on the
first anniversary of the date of grant.
(3) Each Option granted pursuant to this Section shall automatically fully accelerate vesting upon
a Corporate Transaction, subject to the Eligible Director’s Continuous Service through the date of the
Corporate Transaction.
(v) Remaining Terms. The remaining terms and conditions of each Option shall be as set forth in an
Option Agreement in the form adopted from time to time by the Board; provided, however, that the terms of
such Option Agreement shall be consistent with the terms of the Plan.
8. COVENANTS OF THE COMPANY.
(a) Availability of Shares. During the terms of the Stock Awards, the Company shall keep available at all
times the number of shares of Common Stock reasonably required to satisfy such Stock Awards.
(b) Securities Law Compliance. The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue
and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking
shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common
Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to
obtain from any such regulatory commission or agency the authority that counsel for the Company deems
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necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from
any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until
such authority is obtained. A Participant shall not be eligible for the grant of a Stock Award or the subsequent
issuance of Common Stock pursuant to the Stock Award if such grant or issuance would be in violation of any
applicable securities law.
(c) No Obligation to Notify or Minimize Taxes. The Company shall have no duty or obligation to any
Participant to advise such holder as to the time or manner of exercising such Stock Award. Furthermore, the
Company shall have no duty or obligation to warn or otherwise advise such holder of a pending termination or
expiration of a Stock Award or a possible period in which the Stock Award may not be exercised. The Company
has no duty or obligation to minimize the tax consequences of a Stock Award to the holder of such Stock Award.
9. MISCELLANEOUS.
(a) Use of Proceeds from Sales of Common Stock. Proceeds from the sale of shares of Common Stock
pursuant to Stock Awards shall constitute general funds of the Company.
(b) Corporate Action Constituting Grant of Stock Awards. Corporate action constituting a grant by the
Company of a Stock Award to any Participant shall be deemed completed as of the date of such corporate action,
unless otherwise determined by the Board, regardless of when the instrument, certificate, or letter evidencing the
Stock Award is communicated to, or actually received or accepted by, the Participant.
(c) Stockholder Rights. No Participant shall be deemed to be the holder of, or to have any of the rights of a
holder with respect to, any shares of Common Stock subject to such Stock Award unless and until (i) such
Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms, if applicable, and
(ii) the issuance of the Common Stock subject to such Stock Award has been entered into the books and records
of the Company.
(d) No Employment or Other Service Rights. Nothing in the Plan, any Stock Award Agreement or any
other instrument executed thereunder or in connection with any Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the
Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment
of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the
terms of such Consultant’s agreement with the Company or an Affiliate, or (iii) the service of a Director pursuant
to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in
which the Company or the Affiliate is incorporated, as the case may be.
(e) Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value
(determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and
any Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof that exceed
such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options,
notwithstanding any contrary provision of the applicable Option Agreement(s).
(f) Investment Assurances. The Company may require a Participant, as a condition of exercising or
acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as
to the Participant’s knowledge and experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and
business matters and that he or she is capable of evaluating, alone or together with the purchaser representative,
the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the
Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant’s
own account and not with any present intention of selling or otherwise distributing the Common Stock. The
foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (A) the
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issuance of the shares upon the exercise or acquisition of Common Stock under the Stock Award has been
registered under a then currently effective registration statement under the Securities Act, or (B) as to any
particular requirement, a determination is made by counsel for the Company that such requirement need not be
met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to
the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting
the transfer of the Common Stock.
(g) Withholding Obligations. Unless prohibited by the terms of a Stock Award Agreement, the Company
may, in its sole discretion, satisfy any federal, state or local tax withholding obligation relating to an Award by
any of the following means or by a combination of such means: (i) causing the Participant to tender a cash
payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise
issuable to the Participant in connection with the Award; provided, however, that no shares of Common Stock are
withheld with a value exceeding the minimum amount of tax required to be withheld by law (or such lesser
amount as may be necessary to avoid classification of the Stock Award as a liability for financial accounting
purposes); (iii) withholding cash from an Award settled in cash; (iv) withholding payment from any amounts
otherwise payable to the Participant; or (v) by such other method as may be set forth in the Award Agreement.
(h) Electronic Delivery. Any reference herein to a “written” agreement or document shall include any
agreement or document delivered electronically or posted on the Company’s intranet (or other shared electronic
medium controlled by the Company to which the Participant has access).
(i) Deferrals. To the extent permitted by applicable law, the Board, in its sole discretion, may determine
that the delivery of Common Stock or the payment of cash, upon the exercise, vesting or settlement of all or a
portion of any Award may be deferred and may establish programs and procedures for deferral elections to be
made by Participants. Deferrals by Participants will be made in accordance with Section 409A of the Code.
Consistent with Section 409A of the Code, the Board may provide for distributions while a Participant is still an
employee or otherwise providing services to the Company. The Board is authorized to make deferrals of Awards
and determine when, and in what annual percentages, Participants may receive payments, including lump sum
payments, following the Participant’s termination of Continuous Service, and implement such other terms and
conditions consistent with the provisions of the Plan and in accordance with applicable law.
(j) Compliance with Section 409A. To the extent that the Board determines that any Award granted
hereunder is subject to Section 409A of the Code, the Award Agreement evidencing such Award shall
incorporate the terms and conditions necessary to avoid the consequences specified in Section 409A(a)(1) of the
Code. To the extent applicable, the Plan and Award Agreements shall be interpreted in accordance with
Section 409A of the Code. Notwithstanding anything to the contrary in this Plan (and unless the Award
Agreement specifically provides otherwise), if the shares of Common Stock are publicly traded and a Participant
holding an Award that constitutes “deferred compensation” under Section 409A of the Code is a “specified
employee” for purposes of Section 409A of the Code, no distribution or payment of any amount shall be made
upon a “separation from service” before a date that is six (6) months following the date of such Participant’s
“separation from service” (as defined in Section 409A of the Code without regard to alternative definitions
thereunder) or, if earlier, the date of the Participant’s death.
(k) Minimum Vesting. After the Effective Date of the Plan, generally (i) no Full Value Award that vests on
the basis of the Participant’s Continuous Service with the Company shall vest at a rate that is any more rapid than
ratably over a three (3)-year period and (ii) no Full Value Award that vests based on the satisfaction of
Performance Goals shall provide for a Performance Period of less than twelve (12) months. Notwithstanding the
foregoing, Full Value Awards may be granted by the Committee after the Effective Date that do not meet the
foregoing minimum vesting guidelines, provided that such Awards shall be limited to no more than 5% of the
total number of shares reserved for issuance under the Plan.
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10. ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.
(a) Capitalization Adjustments. In the event of a Capitalization Adjustment, the Board shall appropriately
and proportionately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to
Section 3(a), (ii) the class(es) and maximum number of securities that may be issued pursuant to the exercise of
Incentive Stock Options pursuant to Section 3(e), (iii) the class(es) and maximum number of securities that may
be awarded to any person pursuant to Sections 3(f) and 6(c)(i) , and (iv) the class(es) and number of securities
and price per share of stock subject to outstanding Stock Awards. The Board shall make such adjustments, and its
determination shall be final, binding and conclusive.
(b) Dissolution or Liquidation. Except as otherwise provided in the Stock Award Agreement, in the event
of a dissolution or liquidation of the Company, all outstanding Stock Awards (other than Stock Awards
consisting of vested and outstanding shares of Common Stock not subject to a forfeiture condition or the
Company’s right of repurchase) shall terminate immediately prior to the completion of such dissolution or
liquidation, and the shares of Common Stock subject to the Company’s repurchase rights or subject to a
forfeiture condition may be repurchased or reacquired by the Company notwithstanding the fact that the holder of
such Stock Award is providing Continuous Service, provided, however, that the Board may, in its sole discretion,
cause some or all Stock Awards to become fully vested, exercisable and/or no longer subject to repurchase or
forfeiture (to the extent such Stock Awards have not previously expired or terminated) before the dissolution or
liquidation is completed but contingent on its completion.
(c) Corporate Transaction. The following provisions shall apply to Stock Awards in the event of a
Corporate Transaction unless otherwise provided in the instrument evidencing the Stock Award or any other
written agreement between the Company or any Affiliate and the Participant or unless otherwise expressly
provided by the Board at the time of grant of a Stock Award.
(i) Stock Awards May Be Assumed. In the event of a Corporate Transaction, any surviving corporation
or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume or
continue any or all Stock Awards outstanding under the Plan or may substitute similar stock awards for
Stock Awards outstanding under the Plan (including but not limited to, awards to acquire the same
consideration paid to the stockholders of the Company pursuant to the Corporate Transaction), and any
reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to
Stock Awards may be assigned by the Company to the successor of the Company (or the successor’s parent
company, if any), in connection with such Corporate Transaction. A surviving corporation or acquiring
corporation (or its parent) may choose to assume or continue only a portion of a Stock Award or substitute a
similar stock award for only a portion of a Stock Award, or may choose to assume or continue the Stock
Awards held by some, but not all Participants. The terms of any assumption, continuation or substitution
shall be set by the Board.
(ii) Stock Awards Held by Current Employee and Director Participants. In the event of a Corporate
Transaction in which the surviving corporation or acquiring corporation (or its parent company) does not
assume or continue such outstanding Stock Awards or substitute similar stock awards for such outstanding
Stock Awards, then with respect to Stock Awards that have not been assumed, continued or substituted and
that are held by Participants that are Employees or Directors and whose Continuous Service has not
terminated prior to the effective time of the Corporate Transaction (referred to as the “Current Employee
and Director Participants”), the vesting of such Stock Awards (and, with respect to Options and SARs, the
time when such Stock Awards may be exercised) shall be accelerated in full to a date prior to the effective
time of such Corporate Transaction (contingent upon the effectiveness of the Corporate Transaction) as the
Board shall determine (or, if the Board shall not determine such a date, to the date that is fifteen (15) days
prior to the effective time of the Corporate Transaction), and such Stock Awards shall terminate if not
exercised (if applicable) at or prior to the effective time of the Corporate Transaction, and any reacquisition
or repurchase rights held by the Company with respect to such Stock Awards shall lapse (contingent upon
the effectiveness of the Corporate Transaction).
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(d) Stock Awards Held by Persons other than Current Employee and Director Participants. In the
event of a Corporate Transaction in which the surviving corporation or acquiring corporation (or its parent
company) does not assume or continue such outstanding Stock Awards or substitute similar stock awards for
such outstanding Stock Awards, then with respect to Stock Awards that have not been assumed, continued or
substituted and that are held by persons other than Current Employee and Director Participants, such Stock
Awards shall terminate if not exercised (if applicable) prior to the effective time of the Corporate Transaction;
provided, however, that any reacquisition or repurchase rights held by the Company with respect to such Stock
Awards shall not terminate and may continue to be exercised notwithstanding the Corporate Transaction.
(e) Payment for Stock Awards in Lieu of Exercise. Notwithstanding the foregoing, in the event a Stock
Award will terminate if not exercised prior to the effective time of a Corporate Transaction, the Board may
provide, in its sole discretion, that the holder of such Stock Award may not exercise such Stock Award but will
receive a payment, in such form as may be determined by the Board, equal in value, at the effective time, to the
excess, if any, of (A) the value of the property the Participant would have received upon the exercise of the Stock
Award (including, at the discretion of the Board, any unvested portion of such Stock Award), over (B) any
exercise price payable by such holder in connection with such exercise.
(f) Change in Control. A Stock Award may be subject to acceleration of vesting and exercisability upon or
after a Change in Control as may be provided in the Stock Award Agreement for such Stock Award or as may be
provided in any other written agreement between the Company or any Affiliate and the Participant, but in the
absence of such provision, no such acceleration shall occur.
11. TERMINATION OR SUSPENSION OF THE PLAN.
(a) Plan Term. The Board may suspend or terminate the Plan at any time. Unless terminated sooner by the
Board, the Plan shall automatically terminate on the day before the tenth (10th) anniversary of the earlier of (i) the
date the Plan is adopted by the Board, or (ii) the date the Plan is approved by the stockholders of the Company.
No Awards may be granted under the Plan while the Plan is suspended or after it is terminated.
(b) No Impairment of Rights. Suspension or termination of the Plan shall not impair rights and obligations
under any Award granted while the Plan is in effect except with the written consent of the affected Participant.
12. EFFECTIVE DATE OF PLAN. THIS PLAN SHALL BECOME EFFECTIVE ON THE EFFECTIVE DATE.
13. CHOICE OF LAW. THE LAWS OF THE STATE OF CALIFORNIA SHALL GOVERN ALL QUESTIONS
CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS PLAN, WITHOUT REGARD TO THAT
STATE’S CONFLICT OF LAWS RULES.
14. DEFINITIONS. AS USED IN THE PLAN, THE FOLLOWING DEFINITIONS SHALL APPLY TO THE CAPITALIZED
TERMS INDICATED BELOW:
(a) “Affiliate” means, at the time of determination, any “parent” or “subsidiary” of the Company as such
terms are defined in Rule 405 promulgated under the Securities Act. The Board shall have the authority to
determine the time or times at which “parent” or “subsidiary” status is determined within the foregoing
definition.
(b) “Annual Meeting” means the first meeting of the Company’s stockholders held each calendar year at
which Directors of the Company are selected.
(c) “Award” means a Stock Award.
(d) “Award Agreement” means a written agreement between the Company and a Participant evidencing the
terms and conditions of an Award.
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(e) “Board” means the Board of Directors of the Company.
(f) “Capitalization Adjustment” means any change that is made in, or other events that occur with respect
to, the Common Stock subject to the Plan or subject to any Stock Award after the Effective Date without the
receipt of consideration by the Company through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, stock
split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or any
similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards
No. 123 (revised). Notwithstanding the foregoing, the conversion of any convertible securities of the Company
shall not be treated as a Capitalization Adjustment.
(g) “Cause” shall mean, with respect to a Participant, the occurrence of any of the following events: (i) such
Participant’s commission of any crime involving fraud, dishonesty or moral turpitude; (ii) such Participant’s
attempted commission of or participation in a fraud or act of dishonesty against the Company that results in (or
might have reasonably resulted in) material harm to the business of the Company; (iii) such Participant’s
intentional, material violation of any contract or agreement between Participant and the Company or any
statutory duty Participant owes to the Company; or (iv) such Participant’s conduct that constitutes gross
insubordination, incompetence or habitual neglect of duties and that results in (or might have reasonably resulted
in) material harm to the business of the Company; provided, however, that the action or conduct described in
clauses (iii) and (iv) above will constitute “Cause” only if such action or conduct continues after the Company
has provided such Participant with written notice thereof and not less than five business days to cure the same.
(h) “Change in Control” means the occurrence, in a single transaction or in a series of related transactions,
of any one or more of the following events:
(i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company
representing more than fifty percent (50%) of the combined voting power of the Company’s then
outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding
the foregoing, a Change in Control shall not be deemed to occur (A) on account of the acquisition of
securities of the Company directly from the Company, (B) on account of the acquisition of securities of the
Company by an investor, any affiliate thereof or any other Exchange Act Person that acquires the
Company’s securities in a transaction or series of related transactions the primary purpose of which is to
obtain financing for the Company through the issuance of equity securities, or (C) solely because the level
of Ownership held by any Exchange Act Person (the “Subject Person”) exceeds the designated percentage
threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting
securities by the Company reducing the number of shares outstanding, provided that if a Change in Control
would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the
Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting
securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of
the then outstanding voting securities Owned by the Subject Person over the designated percentage
threshold, then a Change in Control shall be deemed to occur;
(ii) there is consummated a merger, consolidation or similar transaction involving (directly or
indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar
transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly,
either (A) outstanding voting securities representing more than fifty percent (50%) of the combined
outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or
(B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving
Entity in such merger, consolidation or similar transaction, in each case in substantially the same
proportions as their Ownership of the outstanding voting securities of the Company immediately prior to
such transaction;
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(iii) the stockholders of the Company approve or the Board approves a plan of complete dissolution or
liquidation of the Company, or a complete dissolution or liquidation of the Company shall otherwise occur,
except for a liquidation into a parent corporation;
(iv) there is consummated a sale, lease, exclusive license or other disposition of all or substantially all
of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other
disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an
Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are
Owned by stockholders of the Company in substantially the same proportions as their Ownership of the
outstanding voting securities of the Company immediately prior to such sale, lease, license or other
disposition; or
(v) individuals who, on the date the Plan is adopted by the Board, are members of the Board (the
“Incumbent Board”) cease for any reason to constitute at least a majority of the members of the Board;
provided, however, that if the appointment or election (or nomination for election) of any new Board
member was approved or recommended by a majority vote of the members of the Incumbent Board then
still in office, such new member shall, for purposes of this Plan, be considered as a member of the
Incumbent Board.
Notwithstanding the foregoing or any other provision of this Plan, the term Change in Control shall not
include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile
of the Company.
(i) “Code” means the Internal Revenue Code of 1986, as amended, including any applicable regulations and
guidance thereunder.
(j) “Committee” means a committee of one or more Directors to whom authority has been delegated by the
Board in accordance with Section 2(d).
(k) “Common Stock” means the common stock of the Company.
(l) “Company” means Neurocrine Biosciences, Inc., a Delaware corporation.
(m) “Consultant” means any person, including an advisor, who is (i) engaged by the Company or an
Affiliate to render consulting or advisory services and is compensated for such services, or (ii) serving as a
member of the board of directors of an Affiliate and is compensated for such services. However, service solely as
a Director, or payment of a fee for such service, shall not cause a Director to be considered a “Consultant” for
purposes of the Plan. Notwithstanding the foregoing, a person is treated as a Consultant under this Plan only if a
Form S-8 Registration Statement under the Securities Act is available to register either the offer or the sale of the
Company’s securities to such person.
(n) “Continuous Service” means that the Participant’s service with the Company or an Affiliate, whether as
an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the
Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in
the entity for which the Participant renders such service, provided that there is no interruption or termination of
the Participant’s service with the Company or an Affiliate, shall not terminate a Participant’s Continuous Service;
provided, however, if the Entity for which a Participant is rendering services ceases to qualify as an Affiliate, as
determined by the Board, in its sole discretion, such Participant’s Continuous Service shall be considered to have
terminated on the date such Entity ceases to qualify as an Affiliate. To the extent permitted by law, the Board or
the chief executive officer of the Company, in that party’s sole discretion, may determine whether Continuous
Service shall be considered interrupted in the case of (i) any leave of absence approved by the Board or Chief
Executive Officer, including sick leave, military leave or any other personal leave, or (ii) transfers between the
Company, an Affiliate, or their successors. Notwithstanding the foregoing, a leave of absence shall be treated as
A-18
Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the
Company’s leave of absence policy, in the written terms of any leave of absence agreement or policy applicable
to the Participant, or as otherwise required by law.
(o) “Corporate Transaction” means the consummation, in a single transaction or in a series of related
transactions, of any one or more of the following events:
(i) a sale or other disposition of all or substantially all, as determined by the Board, in its sole
discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii) a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the
Company;
(iii) a merger, consolidation or similar transaction following which the Company is not the surviving
corporation; or
(iv) a merger, consolidation or similar transaction following which the Company is the surviving
corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation
or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar
transaction into other property, whether in the form of securities, cash or otherwise.
(p) “Covered Employee” shall have the meaning provided in Section 162(m)(3) of the Code.
(q) “Director” means a member of the Board.
(r) “Director Grant Program” means the grant program in effect under Section 7 of the Plan.
(s) “Disability” means, with respect to a Participant, the inability of such Participant to engage in any
substantial gainful activity by reason of any medically determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to last for a continuous period of not less than
twelve (12) months, as provided in Sections 22(e)(3) and 409A(a)(2)(c)(i) of the Code, and shall be determined
by the Board on the basis of such medical evidence as the Board deems warranted under the circumstances.
(t) “Effective Date” means the effective date of this Plan document, which is the date of the annual meeting
of stockholders of the Company held in 2011 provided this Plan is approved by the Company’s stockholders at
such meeting.
(u) “Eligible Director” means a Director who is not an Employee and is eligible to participate in the
Director Grant Program.
(v) “Employee” means any person employed by the Company or an Affiliate. However, service solely as a
Director, or payment of a fee for such services, shall not cause a Director to be considered an “Employee” for
purposes of the Plan.
(w) “Entity” means a corporation, partnership, limited liability company or other entity.
(x) “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
(y) “Exchange Act Person” means any natural person, Entity or “group” (within the meaning of
Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” shall not include (i) the
Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of
the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company
or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to a registered
A-19
public offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their Ownership of stock of the Company; or (v) any natural
person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the
Effective Date, is the Owner, directly or indirectly, of securities of the Company representing more than fifty
percent (50%) of the combined voting power of the Company’s then outstanding securities.
(z) “Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or traded on any established
market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock as
quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the
Common Stock) on the date of determination, as reported in a source the Board deems reliable.
(ii) Unless otherwise provided by the Board, if there is no closing sales price for the Common Stock on
the date of determination, then the Fair Market Value shall be the closing selling price on the last preceding
date for which such quotation exists.
(iii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined
by the Board in good faith and in a manner that complies with Sections 409A and 422 of the Code.
(aa) “Full Value Award” generally means any Award granted under the Plan, but does not include any
Option or a SAR granted pursuant to Section 5 of the Plan.
(bb) “Incentive Stock Option” means an option granted pursuant to Section 5 of the Plan that is intended to
be, and qualifies as, an “incentive stock option” within the meaning of Section 422 of the Code.
(cc) “Non-Employee Director” means a Director who either (i) is not a current employee or officer of the
Company or an Affiliate, does not receive compensation, either directly or indirectly, from the Company or an
Affiliate for services rendered as a consultant or in any capacity other than as a Director (except for an amount as
to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act (“Regulation S-K”)), does not possess an interest in any other transaction for which disclosure
would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship for which
disclosure would be required pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered a
“non-employee director” for purposes of Rule 16b-3.
(dd) “Nonstatutory Stock Option” means any option granted pursuant to Section 5 of the Plan that does not
qualify as an Incentive Stock Option.
(ee) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the
Exchange Act.
(ff) “Option” means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of
Common Stock granted pursuant to the Plan.
(gg) “Option Agreement” means a written agreement between the Company and an Optionholder
evidencing the terms and conditions of an Option grant. Each Option Agreement shall be subject to the terms and
conditions of the Plan.
(hh) “Optionholder” means a person to whom an Option is granted pursuant to the Plan or, if applicable,
such other person who holds an outstanding Option.
(ii) “Other Stock Award” means an award based in whole or in part by reference to the Common Stock
which is granted pursuant to the terms and conditions of Section 6(d).
A-20
(jj) “Other Stock Award Agreement” means a written agreement between the Company and a holder of an
Other Stock Award evidencing the terms and conditions of an Other Stock Award grant. Each Other Stock
Award Agreement shall be subject to the terms and conditions of the Plan.
(kk) “Outside Director” means a Director who either (i) is not a current employee of the Company or an
“affiliated corporation” (within the meaning of Treasury Regulations promulgated under Section 162(m) of the
Code), is not a former employee of the Company or an “affiliated corporation” who receives compensation for
prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, has not been an
officer of the Company or an “affiliated corporation,” and does not receive remuneration from the Company or
an “affiliated corporation,” either directly or indirectly, in any capacity other than as a Director, or (ii) is
otherwise considered an “outside director” for purposes of Section 162(m) of the Code.
(ll) “Own,” “Owned,” “Owner,” “Ownership” A person or Entity shall be deemed to “Own,” to have
“Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or Entity, directly
or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting
power, which includes the power to vote or to direct the voting, with respect to such securities.
(mm) “Participant” means a person to whom an Award is granted pursuant to the Plan or, if applicable,
such other person who holds an outstanding Stock Award.
(nn) “Performance Criteria” means the one or more criteria that the Board shall select for purposes of
establishing the Performance Goals for a Performance Period. The Performance Criteria that shall be used to
establish such Performance Goals may be based on any one of, or combination of, the following as determined
by the Board: (i) earnings (including earnings per share and net earnings, in either case before or after any or all
of: interest, taxes, depreciation and amortization, legal settlements or other income (expense), or stock-based
compensation, other non-cash expenses and changes in deferred revenue); (ii) total stockholder return; (iii) return
on equity or average stockholder’s equity; (iv) return on assets, investment, or capital employed; (v) stock price;
(vi) margin (including gross margin); (vii) income (before or after taxes); (viii) operating income; (ix) operating
income after taxes; (x) pre-tax profit; (xi) operating cash flow; (xii) sales or revenue targets; (xiii) increases in
revenue or product revenue; (xiv) expenses and cost reduction goals; (xv) improvement in or attainment of
working capital levels; (xvi) economic value added (or an equivalent metric); (xvii) market share; (xviii) cash
flow; (xix) cash flow per share; (xx) cash burn; (xxi) share price performance; (xxii) debt reduction;
(xxiii) implementation or completion of projects or processes (including, without limitation, discovery of a
pre-clinical drug candidate, recommendation of a drug candidate to enter a clinical trial, clinical trial initiation,
clinical trial enrollment and dates, clinical trial results, regulatory filing submissions, regulatory filing
acceptances, regulatory or advisory committee interactions, regulatory approvals, presentation of studies and
launch of commercial plans, compliance programs or education campaigns); (xxiv) customer satisfaction;
(xxv) stockholders’ equity; (xxvi) capital expenditures; (xxvii) debt levels; (xxviii) financings; (xxix) operating
profit or net operating profit; (xxx) workforce diversity; (xxxi) growth of net income or operating income;
(xxxii) billings; (xxxiii) employee hiring; (xxxiv) funds from operations; (xxxv) budget management;
(xxxvi) strategic partnerships or transactions (including acquisitions, joint ventures or licensing transactions);
(xxxvii) engagement of thought leaders and patient advocacy groups; (xxxviii) enhancement of intellectual
property portfolio, filing of patent applications and granting of patents; (xxxix) litigation preparation and
management; and (xl) to the extent that an Award is not intended to comply with Section 162(m) of the Code,
other measures of performance selected by the Board.
(oo) “Performance Goals” means, for a Performance Period, the one or more goals established by the Board
for the Performance Period based upon the Performance Criteria. Performance Goals may be based on a
Company-wide basis, with respect to one or more business units, divisions, Affiliates, or business segments, and
in either absolute terms or relative to the performance of one or more comparable companies or the performance
of one or more relevant indices. Unless specified otherwise by the Board (i) in the Award Agreement at the time
the Award is granted or (ii) in such other document setting forth the Performance Goals at the time the
A-21
Performance Goals are established, the Board shall appropriately make adjustments in the method of calculating
the attainment of Performance Goals for a Performance Period as follows: (1) to exclude restructuring and/or
other nonrecurring charges; (2) to exclude exchange rate effects, as applicable, for non-U.S. dollar denominated
Performance Goals; (3) to exclude the effects of changes to generally accepted accounting principles; (4) to
exclude the effects of any statutory adjustments to corporate tax rates; (5) to exclude the effects of items that are
“unusual” in nature or occur “infrequently” as determined under generally accepted accounting principles; (6) to
exclude the dilutive effects of acquisitions or joint ventures; (7) to assume that any business divested by the
Company achieved performance objectives at targeted levels during the balance of a Performance Period
following such divestiture; (8) to exclude the effect of any change in the outstanding shares of common stock of
the Company by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger,
consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions
to common stockholders other than regular cash dividends; (9) to exclude the effects of stock based
compensation and the award of bonuses under the Company’s bonus plans; (10) to exclude costs incurred in
connection with potential acquisitions or divestitures that are required to be expensed under generally accepted
accounting principles; (11) to exclude the goodwill and intangible asset impairment charges that are required to
be recorded under generally accepted accounting principles; and (12) to exclude the effects of the timing of
acceptance for review and/or approval of submissions to the U.S. Food and Drug Administration or any other
regulatory body.
(pp) “Performance Period” means the period of time selected by the Board over which the attainment of
one or more Performance Goals will be measured for the purpose of determining a Participant’s right to and the
payment of a Stock Award. Performance Periods may be of varying and overlapping duration, at the sole
discretion of the Board.
(qq) “Performance Stock Award” means a Stock Award granted under the terms and conditions of
Section 6(c)(i).
(rr) “Plan” means this Neurocrine Biosciences, Inc. 2011 Equity Incentive Plan.
(ss) “Restricted Stock Award” means an award of shares of Common Stock which is granted pursuant to the
terms and conditions of Section 6(a).
(tt) “Restricted Stock Award Agreement” means a written agreement between the Company and a holder of
a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock Award grant. Each
Restricted Stock Award Agreement shall be subject to the terms and conditions of the Plan.
(uu) “Restricted Stock Unit Award” means a right to receive shares of Common Stock which is granted
pursuant to the terms and conditions of Section 6(b).
(vv) “Restricted Stock Unit Award Agreement” means a written agreement between the Company and a
holder of a Restricted Stock Unit Award evidencing the terms and conditions of a Restricted Stock Unit Award
grant. Each Restricted Stock Unit Award Agreement shall be subject to the terms and conditions of the Plan.
(ww) “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3,
as in effect from time to time.
(xx) “Securities Act” means the Securities Act of 1933, as amended.
(yy) “Stock Appreciation Right” or “SAR” means a right to receive the appreciation on Common Stock that
is granted pursuant to the terms and conditions of Section 5.
(zz) “Stock Appreciation Right Agreement” or “SAR Agreement”) means a written agreement between the
Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock
Appreciation Right grant. Each Stock Appreciation Right Agreement shall be subject to the terms and conditions
of the Plan.
A-22
(aaa) “Stock Award” means any right to receive Common Stock granted under the Plan, including an
Incentive Stock Option, a Nonstatutory Stock Option, a Restricted Stock Award, a Restricted Stock Unit Award,
a SAR, a Performance Stock Award or any Other Stock Award.
(bbb) “Stock Award Agreement” means a written agreement between the Company and a Participant
evidencing the terms and conditions of a Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.
(ccc) “Subsidiary” means, with respect to the Company, (i) any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of
directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such
corporation shall have or might have voting power by reason of the happening of any contingency) is at the time,
directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity
in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or
capital contribution) of more than fifty percent (50%).
(ddd) “Ten Percent Stockholder” means a person who Owns (or is deemed to Own pursuant to
Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Affiliate.
A-23
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(cid:1408) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
(cid:1407) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-22705
NEUROCRINE BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
12780 El Camino Real, San Diego, CA
(Address of principal executive offices)
33-0525145
(I.R.S. Employer
Identification Number)
92130
(Zip Code)
Registrant’s telephone number, including area code:
(858) 617-7600
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value
Name of Each Exchange on Which Registered
The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1408) No (cid:1407)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
or Section 15(d) of the Act. Yes (cid:1407) No (cid:1408)
ff
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes (cid:1408) No (cid:1407)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes (cid:1408) No (cid:1407)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. (cid:1408)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(cid:1408)
(cid:1407)
Accelerated filer
Smaller reporting company
Emerging growth company
(cid:1407)
(cid:1407)
(cid:1407)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
ff
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:1407)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:1407) No (cid:1408)
The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2018 totaled approximately $7,461,776,662 based on the
closing price for the registrant’s Common Stock on that day as reported by the Nasdaq Stock Market. Such value excludes Common Stock held by executive officers,
directors and 10% or greater stockholders as of June 30, 2018. The identification of 10% or greater stockholders as of June 30, 2018 is based on applicable
Schedule 13G and amended Schedule 13G reports. This calculation does not reflect a determination that such parties are affiliates for any other purposes.
As of February 1, 2019, there were 90,821,267 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Description
Portions of the registrant’s notice of annual meeting of stockholders and proxy statement to be filed pursuant to Regulation 14A
within 120 days after registrant’s fiscal year end of December 31, 2018 are incorporated by reference into Part III of this report
10-K Part
III
TABLE OF CONTENTS
PART I
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
.................................................................................................................................................................................
.........................................................................................................................................................................
................................................................................................................................................
.............................................................................................................................................................................
................................................................................................................................................................
......................................................................................................................................................
.
Mine Safety Disclosures
3
19
36
36
36
36
PART II
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
.........
.......................................................................................................................................................
..............................................
..............................................................................................
...................................................................................................................
.............................................
......................................................................................................................................................
................................................................................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Financial Statements and Supplementary Data
37
38
39
46
47
73
73
76
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
..................................................................................................
.....................................................................................................................................................
...........................
....................................................................
..............................................................................................................................
77
77
77
77
77
Item 15.
Exhibits, Financial Statement Schedules
.............................................................................................................................
78
PART IV
INGREZZA® is a registered trademark of Neurocrine Biosciences, Inc. Any other brand names or trademarks appearing in this Annual
Report that are not the property of Neurocrine Biosciences, Inc. are the property of their respective holders.
2
PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the information incorporated herein by reference contain forward-looking statements that
involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our
management, these statements can only be based on facts and factors currently known by us. Consequently, these forward-looking
statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and
outcomes discussed in the forward-looking statements.
Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “hopes,”
“may,” “will,” “plan,” “intends,” “estimates,” “could,” “should,” “would,” “continue,” “seeks,” “pro forma,” or “anticipates,” or other
similar words (including their use in the negative), or by discussions of future matters such as the development of new products,
technology enhancements, possible changes in legislation and other statements that are not historical. These statements include but are
not limited to statements under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Business,” as well as other sections in this report. You should be aware that the occurrence of any of the
events discussed under the heading in Part II titled “Item 1A. Risk Factors” and elsewhere in this report could substantially harm our
business, results of operations and financial condition and that if any of these events occurs, the trading price of our common stock
f
could decline and you could lose all or a part of the value of your shares of our common stock.
y
The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever
they may appear in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of
the date of this report. Except as required by law, we assume no obligation to update our forward-looking statements, even if new
information becomes available in the future.
a
ITEM 1.
BUSINESS S
Overview
We were originally incorporated in California in January 1992 and reincorporated in Delaware in May 1996. We are a company
focused on discovering, developing, and commercializing innovative and life-changing pharmaceuticals, in diseases with high unmet
medical needs, through our novel research and development (R&D) platform, focused on neurological and endocrine related diseases
and disorders. Utilizing a portfolio approach to drug discovery, we have multiple small molecule drug candidates at various stages of
pharmaceutical development. We develop proprietary pharmaceuticals for our pipeline, as well as collaborate with other
pharmaceutical companies on our products and product candidates.
On April 11, 2017, the United States Food and Drug Administration (FDA) approved INGREZZA® (valbenazine) capsules for
the treatment of adults with tardive dyskinesia (TD). We market INGREZZA for TD in the United States (U.S.) through our specialty
sales force focused primarily on physicians who treat TD patients, including psychiatrists and neurologists. The commercial launch of
INGREZZA occurred on May 1, 2017.
uu
On July 24, 2018, we were notified by AbbVie Inc. (AbbVie) that FDA approval was granted for ORILISSA® (elagolix) for the
management of moderate to severe endometriosis pain in women. Discovered and developed through Phase II clinical trials by us,
ORILISSA, the first FDA-approved oral medication for the management of endometriosis with associated moderate to severe pain in
over a decade, began to be marketed by AbbVie in August 2018 as part of a collaboration to develop and commercialize elagolix for
women’s health.
h
ff
Our clinical development programs include opicapone as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in
adult Parkinson's disease patients, elagolix for uterine fibroids partnered with AbbVie, NBI-74788 for the treatment of congenital
adrenal hyperplasia (CAH), and a vesicular monoamine transporter 2 (VMAT2) inhibitor and a first-in-class central nervous system
(CNS) compound each with potential use in the treatment of neurologic and psychiatric disorders.
AbbVie initiated Phase III studies of elagolix in patients with uterine fibroids in ea
rly 2016. The Phase III program included two
replicate, pivotal, six-month efficacy and safety studies followed by a six-month safety and efficacy extension study. AbbVie provided
positive topline efficacy data from the Phase III studies in women with uterine fibroids in the first quarter of 2018 and additional data
from the six-month safety extension study in the third quarter of 2018. We believe the results from these studies will form the basis for
an anticipated new drug application (NDA) submission to the FDA in the middle of 2019 for the approval of elagolix in the treat
tt
ment
of uterine fibroids.
n
f
3
We currently have three major collaborations. Two of these collaborations involve out-licensing of our proprietary technology
to pharmaceutical partners. In June 2010, we announced an exclusive worldwide collaboration with AbbVie to develop and
commercialize elagolix and all next-generation gonadotropin-releasing hormone (GnRH) antagonists (collectively, GnRH
compounds). In March 2015, we entered into a collaboration and license agreement with Mitsubishi Tanabe Pharma Corporation
(Mitsubishi Tanabe) for the development and commercialization of INGREZZA for movement disorders in Japan and other select
Asian markets. The third collaboration agreement, which was entered into in February 2017, is one in which we in-licensed
technology from BIAL – Portela & Ca, S.A. (BIAL) for the development and commercialization of opicapone for the treatment of
human diseases and conditions, including Parkinson’s disease, in the U.S. and Canada.
On January 28, 2019, we entered into a collaboration and license agreement with a clinical-stage gene therapy company,
Voyager Therapeutics, Inc., or Voyager. The collaboration is focused on the development and commercialization of four programs
using Voyager’s proprietary gene therapy platforms. The four programs consist of Voyager’s VY-AADC program for Parkinson’s
disease and VY-FXN01 program for Friedreich’s ataxia, as well as rights to two programs to be determined by the parties in the
future. The effectiveness of the agreement is subject to certain conditions, including the expiration or termination of the applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing
conditions. Refer to Note 13 to the consolidated financial statements for more information on the agreement.
Our Product Pipeline
The following table summarizes our approved products and our most advanced product candidates currently in clinical
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development and is followed by detailed descriptions of each program:
Program
Approved products:
A
INGREZZA
ORILISSA
Product candidates in clinical development:
PP
elagolix
opicapone
NBI-74788
r
New VMAT2 Inhibitor
New CNS Compound
Target Indication(s)
Status
Rights
Tardive Dyskinesia
Marketed
Endometriosis
Uterine Fibroids
Parkinson’s Disease
Classic Congenital
Adrenal Hyperplasia
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Neurology/Psychiatry
Disorders
Neurology/Psychiatry
Disorders
Marketed
Phase III
Phase III
Phase II
Phase I
Phase I
Neurocrine/Mitsubishi
Tanabe (Asia-Pacific)
AbbVie
AbbVie
Neurocrine (U.S. and
Canada)/BIAL
Neurocrine
Neurocrine
Neurocrine
“Marketed” indicates that we or our collaborator have received FDA regulatory approval of the product, for the specified target
indication.
“Phase III” indicates that we or our collaborators are conducting large-scale, multicenter comparative clinical trials on patients
afflicted with a target disease in order to provide substantial evidence for efficacy and safety of the product candidate.
“Phase II” indicates that we or our collaborators are conducting clinical trials on groups of
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disease in order to determine preliminary efficacy, optimal dosages, and expanded evidence of safety of the product candidate.
patients afflicted with a specific
“Phase I” indicates that we are conducting or initiating clinical trials with a smaller number of subjects to determine early safety
profile, maximally tolerated dose, and pharmacological properties of the product candidate in human volunteers.
INGREZZA (valbenazine) – VMAT2 Inhibitor
VMAT2 is a protein concentrated in the human brain that is essential for the transmission of nerve impulses between neurons.
VMAT2 is primarily responsible for packaging and transporting monoamines (dopamine, norepinephrine, serotonin, and histamine) in
neurons. Specifically, dopamine enables neurotransmission among nerve cells that are involved in voluntary and involuntary motor
control. Disease states such as TD, Tourette syndrome, Huntington’s chorea, schizophrenia, and tardive dystonia are characterized in
part by a hyperdopaminergic state in the brain, and modulation of neuronal dopamine levels may provide symptomatic benefits for
patients with these conditions, among others.
INGREZZA as a Treatment for TD. TD is defined by hyperkinetic involuntary movements which arise after months or years of
treatment with dopamine receptor blocking agents, e.g. antipsychotics used for treating schizophrenia, bipolar disorder, and
depression, and Reglan® (metoclopramide) for nausea and vomiting and gastric emptying in patients with gastroparesis. Features of
mm
4
TD may include grimacing, tongue protrusion, lip smacking, puckering and pursing of the lips, and rapid eye blinking. Rapid
movements of the extremities may also occur. The impact on daily function and the quality of life for individuals suffering fro
m TD
can be substantial. While the prevalence rates of TD can vary greatly in accordance with the population being studied, it is estimated
that approximately 500,000 individuals are affected by TD in the U.S. alone (Kantar Health).
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On April 11, 2017, INGREZZA became the first drug approved by the FDA for the treatment of TD. INGREZZA provides a
once-daily dosing treatment option for TD causing reversible reduction of dopamine release at the nerve terminal by selectively
inhibiting the pre-synaptic VMAT2. In vitro, INGREZZA is a highly selective inhibitor of human VMAT2 showing little or no
affinity for VMAT1, other receptors, such as dopamine D2 receptors, other transporters or ion channels. INGREZZA for TD has two
dosing options (40 mg and 80 mg) with 40 mg taken for the first seven days of treatment with an option of 40 mg or 80 mg thereafter
depending on a patient’s dosing needs. INGREZZA was generally well tolerated during our clinical trials with no apparent drug-drug
interactions with the most common emergent adverse event being mild and transient somnolence.
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In connection with the FDA approval of INGREZZA for TD, we committed to conduct certain post-marketing studies including
Phase 1 (e.g., pharmacokinetics in volunteers with renal impairment) and Phase 4 (e.g., randomized placebo-controlled withdrawal in
TD patients) studies. We expect to conduct these studies over the next four years.
Valbenazine as a Treatment for Tourette Syndrome. In the fourth quarter of 2017, we initiated T-Force GOLD, a Phase IIb study
of valbenazine in pediatric patients with Tourette syndrome, a neurological disorder that consists of rapid, non-rhythmic stereotyped
motor and vocal tics. T-Force GOLD was a multicenter, randomized, double-blind, placebo-controlled, parallel-group study
evaluating the safety, tolerability and efficacy, with optimized dosing of once-daily valbenazine in approximately 120 pediatric
patients with moderate to severe Tourette syndrome over 12 weeks of treatment. In the second quarter of 2018, we started T-Force
PLATINUM, a double-blind, placebo-controlled, randomized withdrawal study of valbenazine in pediatric patients with Tourette
syndrome. This study is designed to evaluate longer term efficacy and safety in patients who initial responded to open-label therapy
with optimized doses of valbenazine. On December 12, 2018, we announced that topline data from the T-Force GOLD study failed to
meet the primary endpoint as assessed by the placebo adjusted change from baseline in Yale Global Tic Severity Scale assessed at
week 12. We continue to analyze the complete dataset from the study to determine the next steps for valbenazine in Tourette
syndrome.
elagolix – GnRH Antagonist
GnRH is the endogenous peptide that binds to the GnRH receptor and stimulates the secretion of the pituitary hormones that are
GnRH
responsible for sex steroid production and normal reproductive function. Researchers have found that chronic administration of
agonists, after initial stimulation, reversibly shuts down this transmitter pathway and is clinically useful in treating hormon
e-dependent
diseases such as endometriosis and uterine fibroids. Several companies have developed peptide GnRH agonists on this principle, such
as Lupron® and Zoladex®. However, since these molecules are peptides, they must be injected via a depot formulation rather than the
preferred oral route of administration. In addition, GnRH agonists can take up to several weeks to exert their desired effect once the
initial stimulation has occurred, a factor not seen with the use of GnRH antagonists. Upon administration, GnRH agonists have shown
a tendency to exacerbate the condition via a hormonal flare. More importantly the profound suppression effect observed with GnRH
n
agonists is similar to that seen after menopause and can be a
ssociated with hot flushes and the loss of bone mineral density.
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Orally active, nonpeptide GnRH antagonists potentially offer several advantages over injectable GnRH peptide drugs, including
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rapid onset of hormone suppression without hormonal flare. Also, injection site reactions commonly observed in peptide depots area
avoided and dosing can be rapidly discontinued if necessary – a clinical management option not available with long-acting depot
injections. Additionally, by using GnRH antagonists, it may be possible to alter the level of pituitary GnRH suppression thereby
titrating circulating hormone levels.
In June 2010, we entered into an exclusive worldwide collaboration with AbbVie to develop and commercialize GnRH
compounds for women’s and men’s health indications. Under the terms of the agreement, AbbVie is responsible for all development,
marketing and commercialization costs and has responsibility for all regulatory interactions with the FDA related to elagolix and other
GnRH compounds covered by the collaboration. Following our entry into the collaboration, AbbVie undertook the development of
elagolix in uterine fibroids.
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Endometriosis. Endometriosis is associated with a multitude of symptoms, some of the most common of which include pain
related both to menstruation (dysmenorrhea) and sexual intercourse (dyspareunia) as well as chronic pelvic pain throughout the
menstrual cycle, infertility, and menorrhagia, among many others. The wide range of symptoms associated with endometriosis serves
to complicate and delay diagnosis due to the significant overlap of symptoms with the disease profiles of other conditions. The World
Endometriosis Research Foundation estimates that there are over 170 million women worldwide who suffer from endometriosis,
including approximately 7.5 million women in the U.S. alone. We believe that the availability of an oral treatment, lacking the side
effect profile of the currently available peptide GnRH agonists, may be a desirable alternative to current pharmaceutical therapies and
ultimately encourage a significantly higher treatment rate.
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5
During the third quarter of 2017, AbbVie submitted an NDA for elagolix for the treatment of endometriosis to the FDA. The
NDA was accepted for priority review by the FDA. In July and October 2018, respectively, AbbVie announced FDA and Health
Canada approval for ORILISSA, for the management of endometriosis with associated moderate to severe pain in women. AbbVie
began commercialization of ORILISSA in the U.S. in August 2018.
Uterine Fibroids. Uterine fibroids are benign hormonally responsive tumors that form in the wall of the uterus. They are the
most common solid tumor in women with a prevalence rate of at least 25% (American College of Obstetricians and Gynecologists).
While many women do not have symptoms, depending on the size, location and number, uterine fibroids can cause symptoms such as:
longer, more frequent, or heavy menstrual bleeding, menstrual pain, vaginal bleeding at time other than menstruation, pain in thet
abdomen or lower back, pain during sex, difficulty urinating, frequent urination, constipation or rectal pain. Due to the severity of
symptoms, treatment sometimes requires surgery, including the removal of the uterus. In fact, uterine fibroids is a leading indication
for hysterectomy in the U.S., with approximately 250,000 hysterectomies performed each year related to uterine fibroids (Whiteman et
al AJOG 2008,
G
intervention.
198, e1). We believe that a safe and effective oral therapy would be a preferred treatment regimen rather than surgical
AbbVie initiated Phase III studies of elagolix in patients with uterine fibroids in ea
n
rly 2016. The Phase III program included two
replicate, pivotal, six-month efficacy and safety studies followed by a six-month safety and efficacy extension study. AbbVie
evaluated 300mg of elagolix dosed twice daily both alone and in combination with hormonal add-back therapy
(estradiol/norethindrone acetate). The primary endpoint in these Phase III studies was the same as that employed in the Phase IIb
study: percent of subjects with reduction in uterine blood flow as measured by the alkaline hematin method.
AbbVie provided positive top-line efficacy data from the two Phase III studies in women with uterine fibroids in the first quarter
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of 2018 and additional data from the six-month safety extension study in the third quarter of 2018. The ELARIS UF-I and UF-II
studies of elagolix met all primary and ranked secondary endpoints at month six. These replicate Phase III studies were randomi
parallel, double-blind, placebo-controlled clinical trials evaluating elagolix alone or in combination with low-dose hormone (add-
back) therapy in women with heavy uterine bleeding associated with uterine fibroids. The studies enrolled approximately 400 patients
each for an initial six-month placebo-controlled dosing period. At the end of the six months of placebo-controlled evaluation, patients
were eligible to enter an additional six-month safety extension study. The primary efficacy endpoint of the study was an assessment of
the change in menstrual blood loss utilizing the alkaline hematin method comparing baseline to month six. Additional secondary
efficacy endpoints were evaluated including the change in fibroid volume and hemoglobin. Bone mineral density was assessed via
dual-energy x-ray absorptiometry scan at baseline, at the conclusion of dosing, and at six months post-dosing. We believe the results
from these studies will form the basis for an anticipated NDA submission to the FDA in the middle of 2019 for the approval of
elagolix in the treatment of uterine fibroids.
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opicapone – Catechol-O-methyltransferase Inhibitor
Catechol-O-methyltransferase (COMT) inhibitors are utilized to prolong the duration of effect of levodopa, the primary
treatment option for Parkinson’s disease patients. Administration of levodopa often results in adequate control of Parkinson’s
symptoms, also referred to as “on-time,” however, there are periods of the day where the effects of levodopa wear off and motor
symptoms worsen. These periods are considered “off-time.” Opicapone is a novel, once-daily, peripherally-acting, highly-selective
COMT inhibitor utilized as adjunct therapy to levodopa/carbidopa in patients with Parkinson’s disease experiencing motor
fluctuations. Opicapone works through decreasing the conversion rate of levodopa into 3-O-methyldopa, thereby reducing the off-time
period in patients with Parkinson’s and extending the on-time period.
In February 2017, we entered into an exclusive license agreement with BIAL for the development and commercialization of
opicapone for the treatment of human diseases and conditions, including Parkinson’s disease, in the U.S. and Canada. Under the terms
of the agreement, we will be responsible for the development and commercialization of opicapone in the U.S. and Canada.
Parkinson’s Disease. Parkinson’s disease is a chronic and progressive movement disorder that affects approximately 1 million
people in the United States. The disease is characterized by a loss of neurons in the substantia nigra, the area of the brain where
dopamine is produced. Dopamine production and synthesis is necessary for coordination and movement. As Parkinson’s progresses,
dopamine production steadily decreases resulting in tremor, slowed movement (bradykinesia), impaired posture and balance, and
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speech and writing problems. There is no present cure for Parkinson’s and management consists of controlling the motor symptoms
primarily through administration of levodopa therapies. While this improves the control of Parkinson’s symptoms, as the disease
progresses the beneficial effects of levodopa begin to wear off, symptoms worsen, and patients
motor fluctuations are improved with the addition of a COMT inhibitor to levodopa.
experience motor fluctuations. These
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In June 2016, the European Medicines Agency authorized ONGENTYS® (opicapone) as an adjunct therapy to preparations of
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levodopa/DOPA decarboxylase inhibitors in adult patients with Parkinson’s disease and end-of-dose motor fluctuations who cannot be
stabilized on those combinations. This approval was based on data from a clinical development program that included 28 clinical
studies of more than 900 patients treated with opicapone in 30 countries worldwide.
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6
The two pivotal Phase III studies utilized for approval with the European Medicines Agency, BIPARK-I and BIPARK-II,
demonstrated that opicapone once-daily achieved a statistically significant decrease in off-time periods for Parkinson’s patients
compared to placebo. The BIPARK-I study was a placebo-controlled study of approximately 600 patients that also included
entacapone as an active comparator. The results of this study also showed that once-daily opicapone was non-inferior to entacapone
400 patients that also
which is dosed multiple times per day. The BIPARK-II study was a placebo-controlled study of approximately
showed a significant decrease in off-time periods for Parkinson’s patients. In both studies, opicapone was associated with sign
ificant
improvements in both patient and clinician global assessments of change. The data from these two Phase III trials also demonstrated
that opicapone improved motor fluctuations in levodopa-treated patients regardless of concomitant dopamine agonist or monoamine
oxidase type B inhibitors used. Opicapone was generally well tolerated and was not associated with relevant electrocardiographic or
hepatic adverse events.
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Both of the BIPARK Phase III trials included a one-year open-label extension where opicapone sustained the decrease in off-
time and increase in on-time periods that was demonstrated during the double-blind placebo-controlled portion of the studies.
We held a meeting with the FDA in January 2018 to discuss a potential NDA submission for opicapone. Based upon the
BIPARK-I and BIPARK-II pivotal Phase III studies conducted by BIAL, the FDA did not require additional Phase III trials in
connection with an NDA submission for opicapone. We anticipate submitting an NDA to the FDA for opicapone in the second quarter
of 2019.
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NBI-74788 – Corticotropin-Releasing Factor Receptor1r Antagonist
Corticotropin-releasing factor1 (CRF1) is a hypothalamic hormone released directly into the hypophyseal portal vasculature
which acts on the CRF1 receptor, a G protein-coupled receptor (GPCR), in the anterior pituitary to stimulate the release of
adrenocorticotropin hormone (ACTH). The primary role of ACTH is the stimulation of the synthesis and release of adrenal steroids
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including cortisol. Cortisol from the adrenals have a negative feedback role at the level of the hypothalamus that decreases CR
release as well as at the level of the pituitary to inhibit the release of ACTH. This tight control loop is known as the hypothalamic-
pituitary-adrenal axis. Blockade of CRF1 receptors at the pituitary has been shown to decrease the release of ACTH and subsequently
attenuate the production and release of adrenal steroids.
FRR 1
Classic CAH. Classic CAH is a group of autosomal recessive genetic disorders that affects approximately 20,000-30,000 people
in the U.S. and results in an enzyme deficiency altering the production of adrenal steroids. Because of this deficiency, the adrenal
glands have little to no cortisol biosynthesis resulting in a potentially life-threatening condition. If left untreated, classic CAH can
result in salt wasting, dehydration, and eventually death. Even with cortisol replacement, persistent elevation of ACTH from the
pituitary gland results in excessive androgen levels leading to virilization of females including precocious puberty, menstrual
irregularity, short stature, hirsutism, acne and fertility problems.
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Corticosteroids are the current standard of care for classic CAH and are used chronically to both correct the endogenous cortisol
deficiency and to reduce the excessive ACTH levels and androgen excess. However, the dose and duration of steroid use required to
suppress ACTH is well above the normal physiological level of cortisol; resulting in metabolic syndrome, bone loss, growth
impairment, and Cushing’s syndrome as common and serious side effects.
NBI-74788 is a potent, selective, orally-active, CRF1 receptor antagonist as demonstrated in a range of in vitro and in vivo
assays. Blockade of CRF1 receptors at the pituitary has been shown to decrease the release of ACTH, which in turn decreases the
production of adrenal steroids including androgens, and potentially the symptoms associated with classic CAH. Lower ACTH levels
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would also reduce the amount of exogenous corticosteroid necessary for classic CAH patients to thrive avoiding the side-effects
currently associated with excessive steroid therapy.
We conducted a Phase I single ascending dose study of NBI-74788 in healthy volunteers in 2017. Based on the positive results
of this Phase I study, we initiated a Phase II clinical trial of NBI-74788 in adult patients with classic CAH. This clinical study is
designed to be an open-label, pharmacokinetic/pharmacodynamic study assessing two ascending dose levels of 14 days dosing of
NBI-74788 in up to 20 study participants. Key pharmacodynamic biomarker measurements include ACTH, 17-hydroxyprogesterone
(17-OHP), androgen, and cortisol levels collected the morning following bedtime dosing on Day 1 and Day 14. We recently expanded
this study to include up to 10 additional patients to further optimize dosing flexibility and convenience. Initial results from this study
are expected in the first quarter of 2019.
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We intend to apply for orphan drug designation for NBI-74788 in the treatment of classic CAH. Orphan drug designation is
granted by the FDA to medicines intended for the treatment, diagnosis or prevention of rare diseases or disorders that affect fewer than
200,000 people in the U.S. and provides sponsors with development and commercial incentives for such designated compounds and
medicines.
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7
New VMAT2 Inhibitor
We have filed an investigational new drug application (IND) and completed dosing in the single ascending dose portion of a
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Phase I study designed to assess initial safety, tolerability, and pharmacokinetics of a
This compound has the potential to be used in the treatment of several neurology and/or psychiatry disorders. The multiple dosing
portion of this Phase 1 study is ongoing and expected to be completed during the first half of 2019.
novel, internally discovered VMAT2 inhibitor.
New CNS Compound
We have filed an IND and completed dosing in a Phase I single ascending dose study for an internally discovered first-in-class
CNS compound with potential use in the treatment of several neurology and/or psychiatry disorders. This study is a randomized,
double-blind, single ascending dose study to evaluate the safety, tolerability, and pharmacokinetic profile of the compound in healthy
participants. We are currently analyzing the data from this study to inform the design of future clinical st
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udies for the progr
am.
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Research Programs
Our R&D focus is on addressing diseases and disorders of the central nervous and endocrine systems, which include therapeutic
categories ranging from hypothalamic-pituitary-adrenal disorders to stress-related disorders and neurological/neuropsychiatric
diseases. CNS and endocrinology drug therapies are among the largest therapeutic categories, accounting for over $110 billion in drug
sales in the U.S. alone according to IQVIA (2018).
CNS and Neuroendocrine Disorders (Targeted by GPCRs, Solute Carrier Proteins, and Ion Channels)
GPCRs are the largest known gene superfamily of the human genome. Greater than 30% of all marketed prescription drugs act
on GPCRs; which makes this class of proteins historically the most successful therapeutic target family. However, only a small
fraction of the GPCR gene superfamily has been exploited. Ion channels appear to be represented by approximately 400 genes in the
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human genome and are currently the targets for approximately 7% of the current marketed drugs. We believe that next-generation
therapies derived from targeting GPCRs and ion channels will be discovered through the understanding of the complex relationships
of drug/receptor interactions and their subsequent impact on efficacy, downstream signaling networks and regulation.
Our GPCR research platform has met this requirement by integrating drug discovery research efforts with a suite of assays and
assay systems and automated analytical techniques. This process, now also applied to solute carrier proteins and ion channels,
provides an unbiased profile of pharmacological protein/ligan
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allowing for rapid discovery of initial leads and advancement into preclinical and clinical development. Importantly, this design cycle
is not limited to GPCRs, solute carrier proteins, or ion channel targets, but can be utilized for other recently identified proteins that
play a role in human disease where current treatments or therapies are either inadequate or nonexistent.
d interactions coupled with in vivo efficacy using discrete animal models
Our Business Strategy
Our goal is to become the leading biopharmaceutical company focused on neurological and endocrine-related diseases and
disorders. The following are the key elements of our business strategy:
Maintaining Certain Commercial Rights to Our Product Portfolio to Evolve into a Fully-Integrated Pharmaceutical Company.
In April 2017, we received approval from the FDA for INGREZZA for the treatment of TD. We market INGREZZA for TD in the
U.S. The commercial launch of INGREZZA occurred on May 1, 2017. We have built a specialty sales force in the U.S. of
approximately 250 experienced sales professionals. This specialty sales force focuses on promotion to physicians who treat TD
patients, primarily neurologists and psychiatrists. Our commercial team is comprised of experienced professionals in marketing,
access and reimbursement, managed markets, market research, commercial operations, and sales force planning and management. In
addition, our commercial infrastructure includes capabilities in manufacturing, medical affairs, quality control, and compliance. We
intend to retain commercial rights to certain products, including INGREZZA, that we can effectively and efficiently develop, secure
regulatory approval and commercialize, which includes products with a concentrated prescriber base and well-defined patient
population that can be accessed with an efficient patient and prescriber outreach program.
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Advancing Life-Changing Discoveries in Neurology, Neuro-Endocrin
ology, and Psychiatry. We believe that by continuing to
advance and extend our product pipeline, we can mitigate some of the clinical development risks associated with drug development.nn
We currently have multiple programs in various stages of research and development. Our two lead late-stage clinical programs are rr
elagolix, a GnRH antagonist in Phase III development for uterine fibroids that is partnered with AbbVie, and opicapone, a highly-
selective COMT inhibitor that is an adjunct therapy to preparations of levodopa/DOPA decarboxylase inhibitors for adult patients with
Parkinson’s disease and was in-licensed from BIAL. In addition, we are conducting a Phase II study of NBI-74788 in adult patientsnn
with classic CAH, a group of autosomal recessive genetic disorders. We take a portfolio approach to managing our pipeline that
balances the size of the market opportunities with clear and defined clinical and regulatory paths to approval. By doing so, we focus
our internal development resources on innovative therapies with improved probabilities of technical and commercial success.
8
Selectively Establishing Corporate Collaborations with Global Pharmaceutical Companies to Assist in the Development of Our
Products and Mitigate Financial Risk while Retaining Significant Commercial Upside. We leverage the development, regulatory, and
commercialization expertise of our corporate collaborators to accelerate the development of certain of our product candidates, while
typically retaining co-promotional rights, and at times commercial rights, in North America. For example, we have collaborated with
AbbVie for the development and commercialization of ORILISSA, which has received FDA and Health Canada approval for the
management of endometriosis, and with respect to our collaboration with Mitsubishi Tanabe Pharma Corporation (Mitsubishi Tanabe)
for the development and commercialization of INGREZZA for movement disorders in Japan and other select Asian markets. We
intend to further leverage our resources by selectively entering into additional strategic alliances to enhance our internal development
and commercialization capabilities by licensing our technology.
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Identifying Novel Drugs to Address Unmet Market Opportunities. We seek to identify and validate novel drugs on characterized
targets for internal development or collaboration. For example, in 2018, we initiated Phase I studies for a new VMAT2 inhibitor and a
new CNS compound. In 2017, based on the positive results of a Phase I study we conducted of NBI-74788 in healthy volunteers, we
initiated a Phase II study of NBI-74788 in adult patients with classic CAH. We believe the creativity and productivity of our discovery
research group will continue to be a critical component for our continued success.
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Acquiring Rights to Complementary Drug Candidates and Technologies. We plan to continue to selectively acquire rights to
products in various stages of development to take advantage of our drug development capabilities. For example, in October 2018,
entered into a research collaboration with Jnana Therapeutics, Inc. aimed at discovering novel small molecule therapeutics for
multiple targets for CNS disorders. Under the terms of the agreement, we will work jointly to identify novel compounds, after which
time we will be responsible for further lead optimization, and the development and commercialization of any potential therapies
arising from the collaboration. In February 2017, we entered into an exclusive license agreement with BIAL for the development and
commercialization of opicapone for the treatment of human diseases and conditions, including Parkinson’s disease, in the U.S. and
Canada. Under the terms of the agreement, we will be responsible for the development and commercialization of opicapone in the
U.S. and Canada.
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Our Corporate Collaborations and Strategic Alliances
One of our business strategies is to utilize strategic alliances to enhance our development and commercialization capabilities.
The following is a summary of our significant collaborations/alliances:
AbbVie. In June 2010, we announced an exclusive worldwide collaboration with AbbVie to deve
a
lop and commercialize GnRH
Compounds for women’s and men’s health. AbbVie made an upfront payment of $75 million and has agreed to make additional
development and regulatory event-based payments of up to $480 million and up to an additional $50 million in commercial event-
based payments. Under the terms of the agreement, AbbVie is responsible for all development, marketing and commercialization
costs. We received funding for certain internal collaboration expenses which included reimbursement from AbbVie for internal and
external expenses related to the GnRH Compounds and personnel funding through the end of 2012. We are entitled to a percentage of
worldwide sales of GnRH Compounds for the longer of ten years or the life of the related patent rights. AbbVie may terminate th
e
r
collaboration at its discretion upon 180 days written notice to us. In such event, we would be entitled to specified payments for
ongoing clinical development and related activities and all GnRH Compound product rights would revert to us. Since the inception of
the agreement, we have recorded revenues of $75 million related to the amortization of up-front license fees, $115 million in
milestone revenue, $37 million in sponsored development revenue, and approximately $1.6 million in sales-b
AbbVie net sales of ORILISSA.
ased royalty revenue on
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Mitsubishi Tanabe. In March 2015, we entered into a collaboration and license agreement with Mitsubishi Tanabe for the
development and commercialization of INGREZZA for movement disorders in Japan and other select Asian markets. Mitsubishi
Tanabe made an up-front license fee payment of $30 million and has agreed to make additional development and commercialization
event-based payments totaling up to $85 million, payments for the manufacture of pharmaceutical products, and royalties on product
sales in select territories in Asia. Under the terms of the agreement, Mitsubishi Tanabe is responsible for all development, marketing,
and commercialization costs in Japan and other select Asian markets, with the exception of a single Huntington’s chorea trial to be
performed by us, at an estimated cost of approximately $12 million, should Mitsubishi
Tanabe request the clinical trial. We will be
entitled to a percentage of sales of INGREZZA in Japan and other select Asian markets for the longer of ten years or the life of the
related patent rights. Mitsubishi Tanabe may terminate the agreement at its discretion upon 180 days written notice to us. In such
event, all INGREZZA product rights for Japan and other select Asian markets would revert to us. Since the inception of the
agreement, we have recorded revenues of $19.8 million related to the up-front license fee, and $15 million in milestone revenue.
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BIAL. In February 2017, we entered into an exclusive license agreement with BIAL for the development and commercialization
of opicapone for the treatment of human diseases and conditions, including Parkinson’s disease, in the U.S. and Canada. Under the
terms of the agreement, we are responsible for the management and cost of all opicapone development and commercialization
activities in the U.S. and Canada. Under the terms of the agreement, we paid BIAL an upfront license fee of $30 million. In addition,
during the first quarter of 2018, the FDA provided guidance on the regulatory path forward to support an NDA for opicapone for
Parkinson’s disease, in which the FDA did not request that we conduct an additional Phase III study in connection with the submission
of an NDA to the FDA, resulting in a $10 million event-based milestone payment to BIAL. We may also be required to pay up to an
additional $105 million in milestone payments associated with the regulatory approval and net sales of products containing opicapone.
In addition, we will pay BIAL a percentage of net sales (with a floor minimum) in exchange for the manufacture and supply of
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9
opicapone drug product. Either party may terminate the agreement earlier if the other party materially breaches the agreement and
does not cure the breach within a specified notice period, or upon the other party’s insolvency. BIAL may terminate the agreement if
we fail to use commercially reasonable efforts or fail to file an NDA for a licensed product by a specified date or under certain
circumstances involving a change of control.
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Intellectual Property
We seek to protect our lead compounds, compound libraries, expressed proteins, synthetic organic processes, formulations,
assays, cloned targets, screening technology and other technologies by filing, or by causing to be filed on our behalf, patent
applications in the U.S. and abroad. Additionally, we have licensed from institutions the rights to issued U.S. patents, pending U.S.
patent applications, and issued and pending foreign filings. We face the risk that one or more of the above patent applications may be
denied. We also face the risk that issued patents that we own, or license, may be challenged or circumvented or may otherwise not
provide protection for any commercially viable products we develop.
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The technologies we use in our research, as well as the drug
targets we select, may infringe the patents or violate the proprietary
rights of third parties. If this occurs, we may be required to obtain licenses to patents or proprietary rights of others in order to
continue with the commercialization of our products.
In addition to the granted and potential patent protection, the U.S., the European Union (EU), and Japan all provide data and
marketing exclusivity for new medicinal compounds. If this protection is available, no competitor may use the original applicant’s
data as the basis of a generic marketing application during the period of data and marketing exclusivity. This period of exclusivity is
generally five years in the U.S., six years in Japan and ten years in the EU, measured from the date of FDA, or corresponding foreign
regulatory authority, approval.
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INGREZZA, our highly selective VMAT2 inhibitor is covered by U.S. Patent No. 8,039,627, which expires in 2029 (not
including a potential patent term extension of up to two years) and U.S. Patent No. 8,357,697, which expires in 2027.
Elagolix, our small molecule GnRH antagonist currently in clinical trials for the treatment of endometriosis and uterine fibroids,
is covered by six issued U.S. patents relating to composition of matter, pharmaceutical compositions, and methods of use. U.S. Patent
Nos. 6,872,728, 7,179,815 and 7,462,625 are due to expire in 2021 (not including potential patent term extensions of up to five
years)
while U.S. Patent Nos. 7,056,927, 7,176,211 and 7,419,983 are due to expire in 2024 (not including potential patent term extensions of
up to five years).
m
Opicapone, a highly selective COMT inhibitor for Parkinson’s disease is covered by U.S. Patent No. 8,168,793, among others,
which expires in 2029 (not including a potential patent term extension of up to five years).
Manufacturing and Distribution
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We currently rely on, and expect to continue to rely on, contract manufacturers
to produce INGREZZA, as well as for our
existing and future product candidates. We believe this outsourcing manufacturing strategy will enable us to direct our financial
resources to our commercialization efforts without devoting the resources and capital required to build manufacturing facilities.
We have established an internal pharmaceutical development group to develop manufacturing methods for our product
candidates, to optimize manufacturing processes, and to select and transfer these manufacturing technologies to our suppliers. We
have also established an internal commercial supply team to manage all aspects related to the INGREZZA commercial supply chain.
We have entered into long-term contracts with multiple manufacturers to ensure adequate product supply and to mitigate risk, and we
expect to continue to expand and diversify our third-party manufacturing relationships during 2019.
There currently are a limited number of these manufacturers. Furthermore, some of the contract manufacturers that we have
identified to date only have limited experience at manufacturing, formulating, analyzing and packaging our products and product
candidates in quantities sufficient for conducting clinical trials or for commercialization. We attempt to acquire adequate inv
materials and/or finished product to avoid significant supply disruption.
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entory of
Additionally, we have retained third-party service providers to perform a variety of functions related to the distribution of
INGREZZA, including shipping, warehousing, customer service, order-taking and processing, invoicing, collections, and other
distribution-related activities.
We have entered into distribution agreements for INGREZZA with a limited number of specialty pharmacies (SPs) and a
specialty distributor (SD) (collectively, customers), and all of our product sales are to these customers. SPs subsequently dispense
INGREZZA to patients based on the fulfillment of a prescription and the SD sells INGREZZA primarily to closed-door pharmacies
and government facilities. Our agreements with SPs and the SD provide for transfer of title to the product at the time the product is
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delivered to the SPs or SD. Our three largest customers represented approximately 93% of
our product revenue for the year ended
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December 31, 2018.
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INGREZZA Manufacturers
We entered into a commercial supply agreement with Fabbrica Italiana Sintetici S.p.A. (F.I.S.) in March 2017, for F.I.S.’s
manufacture of commercial supplies of the active pharmaceutical ingredient, or API, for INGREZZA at F.I.S.’s manufacturing site in
Italy. Under the terms of the agreement, F.I.S. is responsible for manufacturing the INGREZZA API, conducting quality control,
quality assurance, validation activities, stability testing, packaging, and other servic
API. In the second quarter of 2018, we received our first order of INGREZZA API under this agreement.
es related to the manufacture of the INGREZZA
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The agreement requires two years’ notice prior to a termination without cause, provided that no such notice may be given prior
to March 2022.
We entered into a master manufacturing services agreement with Patheon UK Limited (Patheon) in November 2016, and two
associated product agreements in 2017 and 2018, for Patheon’s manufacture of commercial supplies of INGREZZA at its
manufacturing sites. Under the terms of the agreements, we are responsible for supplying the API for INGREZZA to Patheon. Patheon
is responsible for manufacturing the INGREZZA capsules, conducting quality control, quality assurance, validation activities, stability
testing, packaging and providing related services for the manufacture of the INGREZZA capsules.
Pursuant to the agreements, we have agreed to order from Patheon certain annual bindi
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ng minimum amounts of INGREZZA
capsules based on an agreed upon pricing schedule. The agreements have an initial term ending in December 2021 and will
automatically renew after the initial term for successive terms of two years, unless either party gives notice of its intention to terminate
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the agreements within at least 18 months prior to the end of the then current term.
Commercial Packaging Agreements
We entered into two commercial packaging agreements with third-party vendors that provide, among other things, services
related to the packaging of INGREZZA, tooling purchases and repairs, analytical work, auditing of suppliers, and storage. One such
vendor is located in Illinois and the other is located in Pennsylvania. We do not believe that these commercial packaging related
agreements are material because our business is not substantially dependent on any individual agreement.
Marketing and Sales
During 2017, we built a specialty sales force in the U.S of experienced sales professionals. This specialty sales force focuses on
educating physicians who treat TD patients, primarily neurologists and psychiatrists. Our commercial team is comprised of
experienced professionals in marketing, access and reimbursement, managed markets, market research, commercial operations, and
sales force planning and management. During 2018, we expanded our sales force by approximately 50% to approximately 250
experienced sales professionals to enhance our ability to develop the TD market. In addition, our commercial infrastructure includes
capabilities in manufacturing, medical affairs, quality control, and compliance.
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Government Regulation
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Our business activities, which include the manufacture and marketing of INGREZZA as well as our other potential products
currently in research and development, are subject to extensive regulation by the U.S. and other countries. Regulation by government
authorities in the U.S. and foreign countries is a significant factor in the development, manufacture, distribution, marketing and sale of
our proposed products and in our ongoing research and product development activities. All of our products in development will
require regulatory approval by government agencies prior to commercialization. In particular, human therapeutic products are subject
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to rigorous preclinical studies and clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign
countries. The process of obtaining these approvals and the subsequent compliance with appropriate federal and state statutes andaa
regulations require the expenditure of substantial time and financial resources. In the U.S., various federal and state statutes and
regulation also govern or influence testing, manufacturing, safety, labeling, storage, and record-keeping of human therapeutic products
and their marketing. Recent federal legislation imposes additional obligations on pharmaceutical manufacturers regarding product
tracking and tracing.
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In addition, federal and state healthcare laws restrict business practices in the pharmaceutical industry. These laws include,
without limitation, federal and state fraud and abuse laws, false claims laws, data privacy and security laws, as well as transparency
laws regarding payments or other items of value provided to healthcare providers. We have a comprehensive compliance program to
ensure our business practices remain compliant.
The federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug manufacturer (or a
party acting on its behalf) to knowingly and willfully, directly or indirectly, solicit, receive, offer, or pay any remuneration that is
intended to induce the referral of business, including the purchase, order, lease of any good, facility, item or service for which
payment may be made under a federal healthcare program, such as Medicare or Medicaid. The term “remuneration” has been broadly
interpreted to include anything of value.
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Federal civil and criminal false claims laws, including the federal civil False Claims Act, and the federal civil monetary
penalties law, which prohibit among other things, any person or entity from knowingly presenting, or causing to be presented, for
payment to, or approval by, federal programs, including Medicare and Medicaid, claims for items or services, including drugs, that are
false or fraudulent or not provided as claimed and knowingly making, or causing to be made, a false record or statement material to a
false or fraudulent claim to avoid, decrease or conceal an obligation to pay money to the federal government.
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The Health Insurance Portability and Accountability Act of 1996 (HIPAA) created additional federal criminal statutes that
prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit
program, including private third-party payors, knowingly and willfully stealing from a healthcare benefit program, willfully
obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a
material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for
healthcare benefits, items or services.
Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of
payor, in addition to items and services reimbursed under Medicaid and other state programs. Add
product is sold in a foreign country, we may be subject to similar foreign laws.
d
itionally, to the extent that our
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and their implementing
regulations, requires certain types of individuals and entities to abide by standards relating to the privacy and security of individually
identifiable health information, including the adoption of administrative, physical and technical safeguards to protect such
information. In addition, certain state laws govern the privacy and security of health information in certain circumstances, some of
which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect,
thus complicating compliance efforts.
The federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics and medical supplies
for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to
report annually to the Centers for Medicare and Medicaid Services (CMS) information related to payments or other transfers of value
made to physicians and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report
annually to CMS ownership and investment interests held by the physicians and their immediate family members.
Failure to comply with these laws, where applicable, can result in significant penalties, including the imposition of significant aa
civil, criminal and administrative penalties, damages, monetary fines, disgorgement, individual imprisonment, possible exclusion from
participation in Medicare, Medicaid and other federal healthcare programs, additional reporting requirements and oversight if we
become subject to a corporate integrity agreement or similar agreement to resolve allegations
of non-compliance with these laws,
contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could
adversely affect our ability to operate our business and our results of operations.
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Development and Marketing Approval for Products
Preclinical studies generally are conducted in laboratory animals to evaluate the potential safety and efficacy of a product. Drug
developers submit the results of preclinical studies to the FDA as a part of an IND application before clinical trials can begin in
humans. Typically, clinical evaluation involves a time consuming and costly three-phase process.
Phase I Clinical trials are conducted with a small number of subjects to determine the early safety profile, maximum tolerated
and pharmacokinetic properties of the product in human volunteers. It is rare to evidence pharmacology in these early
studies.
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Phase II Clinical trials are conducted with groups of patients afflicted with a specif
ic disease in order to determine prelimin
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ary
efficacy, optimal dosages and expanded evidence of safety.
Phase III Large-scale, multi-center, comparative clinical trials are conducted with patients afflicted with a specific disease in order to
determine safety and efficacy as primary support for regulatory approval by the FDA to market a product candidate for a
specific disease.
The FDA closely monitors the progress of each of the three phases of clinical trials that are conducted in the U.S. and may, at its
discretion, re-evaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and the FDA’s assessment
of the risk/benefit ratio to the patient. Institutional Review Boards, Institutional Ethics Committees, and Data Safety Monitoring
Boards may also place holds on our clinical trials or recommend that we voluntarily do so. To date, we have also conducted some of
our clinical trials in Europe, Canada, Oceania, and South Africa. Clinical trials conducted in foreign countries are also subject to
oversight by regulatory authorities in those countries.
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Once Phase III trials are completed, drug developers submit the results of preclinical studies and clinical trials to the FDA i
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form of an NDA or a biologics license application for approval to commence commercial sales. In most cases, the submission of an aa
NDA is subject to a substantial application user fee. Under the Prescription Drug User Fee Act (PDUFA) guidelines that are currently
n the
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in effect, the FDA has a goal of ten months from the date of filing of a standard NDA for a new molecular entity to review and act on
the submission. This review typically takes twelve months from the date the NDA is submitted to FDA because the FDA has
approximately two months to make a “filing” decision.
In addition, under the Pediatric Research Equity Act of 2003 as amended and reauthorized, certain NDAs or supplements to an
NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant
pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and
effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric
data until after approval of the product for use in adults or full or partial waivers from the pediatric data requirements.
The FDA also may require submission of a risk evaluation and mitigation strategy plan to ensure that the benefits of the drug
outweigh its risks. The risk evaluation and mitigation strategy plan could include medicati
assessment plans, and/or elements to assure safe use, such as restricted distribution methods, patient registries, or other risk
minimization tools.
on guides, physician communication plans,
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The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing,
to determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather
than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted
application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins
an in-depth substantive review. The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective
and whether the facility in which it is manufactured, processed, packaged or held meets standards designed to assure the product’s
continued safety, quality and purity.
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The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent
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experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether
application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee,
but it considers such recommendations carefully when making decisions.
the
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Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA
will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with current
Good Manufacturing Practice requirements and adequate to assure consistent production of the product within required specifications.
Additionally, before approving an NDA, the FDA may inspect one or more clinical trial sites to assure compliance with Good Clinical
Practice requirements.
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After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection
reports regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a
complete response letter. A complete response letter generally contains a statement of specific conditions that must be met in order to
secure final approval of the NDA and may require additional clinical or preclinical testing in order for FDA to reconsider the
application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy
the regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue
an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific
indications.
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Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications,
warnings or precautions be included in the product labeling, require that post-approval studies, including Phase IV clinical trials, be
conducted to further assess a drug’s safety after approval, require testing and surveillance programs to monitor the product after
commercialization, or impose other conditions, including distribution and use restrictions or other risk management mechanisms under
a risk evaluation and mitigation strategy, which can materially affect the potential market and profitability of the product. T
may prevent or limit further marketing of a product based on the results of pos
t-marketing studies or surveillance programs. After
approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional
labeling claims, are subject to further testing requirements and FDA review and approval.
he FDA
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We will also have to complete an approval process similar to that in the U.S. in virtually every foreign target market for our
products in order to commercialize our product candidates in those countries. The approval procedure and the time required for
approval vary from country to country and may involve additional testing. Foreign approvals may not be granted on a timely basis, or
at all. In addition, regulatory approval of prices is required in most countries other than the U.S. The resulting prices may not be
sufficient to generate an acceptable return to us or our corporate collaborators.
Orphan Drug Designation
Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition,
which is a disease or condition that affects fewer than 200,000 individuals in the U.S., or if it affects more than 200,000, there is no
13
reasonable expectation that sales of the drug in the U.S. will be sufficient to offset the costs of developing and making the drug
available in the U.S. Orphan drug designation must be requested before submitting an NDA. Orphan drug designation does not conv
any advantage in or shorten the duration of the regulatory review and approval process.
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If the FDA approves a sponsor’s marketing application for a designated orphan drug for use in the rare disease or condition for
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which it was designated, the sponsor is eligible for a seven-year period of marketing exclusivity, during which the FDA may not
approve another sponsor’s marketing application for a drug with the same active moiety and intended for the same use or indication as
ly
the approved orphan drug, except in limited circumstances, su
superior. During a sponsor’s orphan drug exclusivity period, competitors, however, may receive approval for drugs with different
active moieties for the same indication as the approved orphan drug, or for drugs with the same active moiety as the approved orphan
drug, but for different indications. Orphan drug exclusivity could block the approval of one of our products for seven years if a
competitor obtains approval for a drug with the same active moiety intended for the same indication before we do, unless we are able
to demonstrate that grounds for withdrawal of the orphan drug exclusivity exist, or that our product is clinically superior. Further, if a
designated orphan drug receives marketing approval for an indication broader than the rare disease or condition for which it received
orphan drug designation, it may not be entitled to exclusivity.
ch as if a subsequent sponsor demonstrates its product is clinical
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Special FDA Expedited Review and Approval Programs
The FDA has various programs, including fast track designation, accelerated approval, priority review, and breakthrough
therapy designation, which are intended to expedite or simplify the process for the development and FDA review of drugs that are
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intended for the treatment of serious or life-threatening diseases or conditions and demonstrate the potential to address unmet
needs. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDA review
procedures.
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medical
To be eligible for a fast track designation, the FDA must determine, based on the request of a sponsor, that a product is intended
to treat a serious or life-threatening disease or condition and demonstrates the potential to address an unmet medical need. The FDA
will determine that a product will fill an unmet medical need if it will provide a therapy where none exists or provide a therapy that
may be potentially superior to existing therapy based on efficacy or safety factors. The FDA may review sections of the NDA for a
fast track product on a rolling basis before the complete application is submitted, if the sponsor provides
of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the
sponsor pays any required user fees upon submission of the first section of the NDA.
a schedule for the submission
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The FDA may give a priority review designation to drugs that offer major advances in treatment or provide a treatment where
no adequate therapy exists. A priority review means that the goal for the FDA to review an application is six months, rather than the
standard review of ten months under current PDUFA guidelines. These six and ten-month review periods are measured from the filing
date rather than the receipt date for NDAs for new molecular entities, which typically adds approximately two months to the timeline
for review and decision from the date of submission. Most products that are eligible for fast track designation are also likely to be
considered appropriate to receive a priority review.
In addition, products studied for their safety and effectiveness in tr
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eating serious or life-threatening illnesses and that provide
meaningful therapeutic benefit over existing treatments may be eligible for accelerated approval and may be approved on the basis of
adequate and well-controlled clinical trials establishing that the drug product has an effect on a surrogate en
dpoint that is reasonably
likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is
reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity,
rarity or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may
require a sponsor of a drug receiving accelerated approval to perform post-marketing studies to verify and describe the predicted effect
on irreversible morbidity or mortality or other clinical endpoint, and the drug may be subject to accelerated withdrawal procedures.
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A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a
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serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial
improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed
early in clinical development. Drugs designated as breakthrough therapies are also eligible for accelerated approval. The FDA must mm
take certain actions, such as holding timely meetings and providing advice, intended to expedite the development and review of an
application for approval of a breakthrough therapy.
Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the
conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
Post-Approval Requirements
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA,
including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution,
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advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved
product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also are
continuing, annual program user fee requirements for any marketed products, as well as new application fees for supplemental
applications with clinical data.
The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA
may require post-marketing testing, including Phase IV clinical trials, and surveillance to further assess and monitor the product’s
safety and effectiveness after commercialization.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to
register their establishments with the FDA and state agencies and are subject to periodic unannoun
these state agencies for compliance with current Good Manufacturing Practices (cGMP) requirements. Changes to the manufacturing
process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require
investigation and correction of any deviations from cGMP requirements and impose reporting and documentation requirements upon
the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to
expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.
ced inspections by the FDA and
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Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is
not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a
product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply
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regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety information; imposition of
post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a risk
evaluation and mitigation strategies program. Other potential consequences include, among other things:
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with
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restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or
product recalls;
fines, warning letters or holds on post-approval clinical trials;
refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product
approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may
be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other
agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have
improperly promoted off-label uses may be subject to significant liability.
Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain
regulatory approval. In the U.S. and markets in other countries, sales of any products for which we receive regulatory approval will
depend, in part, on the extent to which third-party payors provide coverage and establish adequate reimbursement levels for such drug
products.
In the U.S., third-party payors include federal and state healthcare programs, government authorities, private managed care
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providers, private health insurers and other organizations. Third-party payors are in
medical necessity and reviewing the cost-effectiveness of medical drug products and medical services, in addition to questioning their
safety and efficacy. Such payors may limit coverage to specific drug products on an approved list, also known as a formulary, which
might not include all of the FDA-approved drugs for a particular indication. We may need to conduct expensive pharmaco-economic
studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain
the FDA approvals. Nonetheless, our products or product candidates, including INGREZZA, may not be considered medically
necessary or cost-effective.
creasingly challenging the price, examining the
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Moreover, the process for determining whether a third-party payor will provide coverage for a drug product may be separate
from the process for setting the price of a drug product or for establishing the reimbursement rate that such a payor will pay for the
drug product. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be
approved. Further, one payor’s determination to provide coverage for a drug product does not assure that other payors will also
provide coverage for the drug product. Adequate third-party payor reimbursement may not be available to enable us to maintain price
levels sufficient to realize an appropriate return on our investment in product development.
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The marketability of any product or product candidates for which we or our collaborators receive regulatory approval for
commercial sale may suffer if third-party payors fail to provide coverage and adequate reimbursement. In addition, emphasis on
managed care in the U.S. has increased and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage
policies and third-party payor reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is
attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates
may be implemented in the future.
Healthcare Reform
The U.S. and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to
change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in
the U.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing
healthcare costs, improving quality or expanding access. In the U.S., the pharmaceutical industry has been a particular focus of these
efforts and has been significantly affected by major legislative initiatives.
By way of example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act of 2010, collectively the ACA, was signed into law, which intended to broaden access to health
insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add transparency
requirements for the healthcare and health insurance industries, impose taxes and fees on the health industry and impose additional
health policy reforms. Among the provisions of the ACA of importance to our potential drug candidates are:
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an annual, nondeductible fee on any entity that manufactures, or imports, specified branded prescription drugs and
biologic agents, apportioned among these entities according to their market share in certain government healthcare
programs;
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an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1%
and 13.0% of the average manufacturer price for branded and generic drugs, respectively;
a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for
drugs that are inhaled, infused, instilled, implanted or injected;
extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in
Medicaid managed care organizations;
expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage
to certain individuals with income at or below 133% of the federal poverty level,
manufacturer’s Medicaid rebate liability;
thereby potentially increasing a
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a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 70% point-of-sale
discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a
condition for a manufacturer’s outpatient drugs to be covered under Medicare Part D;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; and
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical
effectiveness research, along with funding for such research.
We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more
rigorous coverage criteria and lower reimbursement, and in additional downward pressure on the price that we receive for any
approved product. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar
reduction in payments from private third-party payor.
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Some of the provisions of the ACA have yet to be fully implemented, and there have been legal and political challenges to
er
certain aspects of the ACA. Since January 2017, the current presidential administration has signed two executive orders and oth
directives designed to delay, circumvent, or loosen certain requirements mandated by the ACA. Concurrently, Congress has
considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed repeal legislation,
the newly enacted federal income tax law, known as the Tax Cuts and Jobs Act, includes a provision repealing, effective January 1, y
2019, the tax-based shared responsibility payment imposed by the ACA on certain indi
viduals who fail to maintain qualifying health
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coverage for all or part of a year that is commonly referred to as the “individual mandate”. On January 22, 2
presidential administration signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of
certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the
annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt
medical devices. The Bipartisan Budget Act of 2018, or the BBA, among other things, amends the ACA, effective January 1, 2019, to
close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” In July 2018, CMS published a final
rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers under the
ACA risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to
018, the current
d
n
16
determine this risk adjustment. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its
entirety because the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act. While the Texas U.S.
District Court Judge, as well as the current presidential administration and CMS, have stated that the ruling will have no immediate
effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the
ACA will impact the ACA.
Other legislative changes have been proposed and adopted since the ACA was enacted. These changes include aggregate
aa
reductions to Medicare payments to providers of up to 2% per fiscal year pursuant to the Budget Control Act of 2011, which bega
n in
2013 and will remain in effect through 2027 unless ad
ditional Congressional action is taken. The American Taxpayer Relief Act of
2012, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers,
increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
t
t
Additional changes that may affect our business include the expansion of new programs such as Medicare payment for
performance initiatives for physicians under the Medicare Access and CHIP Reauthorization Act of 2015, which will be fully
implemented in 2019. At this time, it is unclear how the introduction of the Medicare quality payment program will impact overall
physician reimbursement.
Also, there has been heightened governmental scrutiny recently over pharmaceutical pricing practices in light of the rising cost
d
of prescription drugs and biologics. Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted
federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship
between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. At
the federal level, the current presidential administration’s budget proposal
for fiscal year 2019 contains further drug price control
measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to
permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drugdd
prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Additionally, the current presidential
administration released a “Blueprint” to lower drug prices and reduce out-of-pocket costs of drugs that contains additional proposals to
increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to
lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. The U.S. Department of
Health and Human Services has already started the process of soliciting feedback on some of these measures and, at the same, is
immediately implementing others under its existing authority. For example, in September 2018, CMS announced that it will allow
Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS
t
proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and biological products, for
which payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost,
or list price, of that drug or biological product. Although a number of these, and other proposed measures will require authorization
through additional legislation to become effective Congress and the current presidential administration have each indicated that it will
continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly
passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or
patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency
measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
aa
Further, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of
2017, or the Right to Try Act, was signed into law. The law, among other things, provides a federal framework for certain patients to
access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for
FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without
obtaining FDA permission under the FDA expanded access program. There is no obligation for a pharmaceutical manufacturer to
make its drug products available to eligible patients as a result of the Right to Try Act.
aa
Competition
The biotechnology and pharmaceutical industries are subject to rapid and intense technological change. We face, and will
continue to face, competition in the development and marketing of our product candidates from biotechnology and pharmaceutical
companies, research institutions, government agencies and academic institutions. Competition may also arise from, among other
things:
•
•
•
other drug development technologies;
methods of preventing or reducing the incidence of disease, including vaccines; and
new small molecule or other classes of therapeutic agents.
Developments by others may render our products, product candidates, or technologies obsolete or noncompetitive.
17
In April 2017, INGREZZA, was approved by the FDA for TD. There are currently two FDA approved drug therapies for TD;
INGREZZA and AUSTEDO® (deutetrabenazine), a deuterium labeled version of XENAZINE® (tetrabenazine) and VMAT2 inhibitor
that was developed by Teva Pharmaceutical Industries Ltd. (Teva). In addition, off-label treatment regimens for TD consist of
utilizing various atypical antipsychotic medications (e.g., clozapine), benzodiazepines (off-label) or botulinum toxin injections to treat
the movements associated with TD.
Other potential indications for our VMAT2 inhibitors include the chorea associated with Huntington’s disease, tardive dystonia,
and other potential diseases and disorders. Currently, AUSTEDO, XENAZINE, which is marketed by Lundbeck, and generic
alternatives to XENAZINE are approved for the chorea associated with Huntington’s disease.
On July 24, 2018, AbbVie, in collaboration with us, announced FDA approval for ORILISSA for the management of
endometriosis with associated moderate to severe pain in women. In addition, in conjunction with our partner AbbVie, we are
developing elagolix for the treatment of heavy menstrual bleeding associated with uterine fibroids. AbbVie initiated Phase III studies
of elagolix in patients with uterine fibroids in early 2016. The Phase III program included two replicate, pivotal, six-month efficacy
and safety studies followed by a six-month safety and efficacy extension study. AbbVie provided positive top-line efficacy data from
the two Phase III studies in women with uterine fibroids in the first quarter of 2018 and additional data from the six-month safety
NDA
extension study in the third quarter of 2018. We believe the results from these studies will form the basis for an anticipated
submission to the FDA in 2019 for the approval of elagolix in the treatment of uterine fibroids. There are no current pharmaceutical
therapies approved in the U.S. for the chronic treatment of uterine fibroids. ObsEva SA has initiated a Phase IIb endometriosis study
with its GnRH receptor antagonist, OBE2109, and has initiated Phase III studies of uterine fibroids patients with the same molecule.
Myovant Sciences, Inc. is investigating its GnRH receptor antagonist, relugolix, in Phase III trials of endometriosis, uterine fibroids
and prostate cancer patients. LUPRON DEPOT® (leuprolide), marketed by AbbVie, is approved for short-term use to improve the
outcome of uterine fibroid surgery. However, approximately 250,000 hysterectomies are performed annually in the U.S. as a direct
result of uterine fibroids, as well as myomectomies (surgery) to remove the fibroids. Our oral small molecule pharmaceutical agent,
elagolix, would compete directly with these current invasive standards of care.
m
a
LUPRON DEPOT, SYNAREL® (nafarelin), and depo-subQ provera104® (medroxyprogesterone), which are marketed by
Pfizer, are products that have been approved for the treatment of endometriosis, infertility, and central precocious puberty. These
drugs, and any generic alternatives, may compete with any small molecule non-peptide GnRH antagonists we, in conjunction with our
collaborative partner AbbVie, develop for these indications. Approximately 130,000 hysterectomies are performed annually in the
U.S. as a direct result of endometriosis, as well as a significant number of laparoscopic procedur
t
oral small molecule pharmaceutical agent, elagolix, would also compete directly with these current invasive standards of care.
es to ablate endometrial explants. Our
y
Opicapone is a COMT inhibitor to be utilized as an adjunct therapy in the treatment of Parkinson’s disease. COMT inhibitors
prolong the duration of effect of levodopa which is
the primary treatment option for Parkinson’s disease patients. There are currently
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two FDA approved COMT inhibitors, COMTAN® (entacapone) originally developed by Orion Pharma and TASMAR®RR (tolcapone)
originally developed by Hoffman-LaRoche Inc. Opicapone would compete directly with these two drugs and their generic equivalents.
u
NBI-74788 is currently being investigated for the treatment of classic CAH, for which there are limited therapies. High doses of
corticosteroids are the current standard of care to both correct the endogenous cortisol deficiency as well as reduce the excessive
ACTH levels. However, the level of dose as well as the duration of steroid use required to suppress ACTH is well above the normal
physiological level of cortisol; resulting in metabolic syndrome, bone loss, growth impairment, and Cushing’s syndrome as common
and serious side effects. Both Millendo Therapeutics, with its acetyl-CoA acetyltransferase 1 inhibitor ATR-101, and Spruce
Biosciences, with its CRF1 antagonist SPR001, are in clinical development for the treatment of classic CAH.
If one or more of these competitive products or programs are successful, it may reduce or eliminate the market for our products.
Compared to us, many of our competitors and potential competitors have substantially greater:
•
•
•
•
•
•
•
capital resources;
commercial experience;
research and development resources, including personnel and technology;
regulatory experience;
preclinical study and clinical testing experience;
manufacturing and marketing experience; and
production facilities.
Any of these competitive factors could harm our business, prospects, financial condition and results of operations, which could
negatively affect our stock price.
18
Employees
As of December 31, 2018, we had approximately 585 full-time employees. None of our employees are represented by a
collective bargaining arrangement, and we believe our relationship with our employees is good.
Insurance
We maintain product liability insurance coverage for INGREZZA and our clinical trials in amounts consistent with industry
standards. However, insurance coverage is becoming increasingly expensive, and we may not be able to obtain or maintain insurance
coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
y
on Form 8-K and amendments to reports
filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as am
ended, are available free of charge on our
f
website at www.neurocrine.com , as soon as reasonably practicable after such reports are available on the Securities and Exchange
Commission (SEC) website at www.sec.gov.
Additionally, copies of our Annual Report will be made available, free of charge, upon written request.
ITEM 1A. RISK FACTORSS
The following information sets forth risk factors that could cause our actual results to differ
materially from those contained in
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forward-looking statements we have made in this Annual Report on Form 10-K and those we may make from time to time. If any of
the following risks actually occur, our business, operating results, prospects or financial condition could be harmed. Additional risks
not presently known to us, or that we currently deem immaterial, may also affect our business operations.
y
d
Risks Related to Our Company
We have limited marketing experience, and have only recently established our sales force, distribution and reimbursement
capabilities, and we may not be able to continue to successfully commercialize INGREZZA, or any of our product candidates if
they are approved in the future.
Our ability to produce INGREZZA revenues consistent with expectations ultimately depends on our ability to sell our products
and secure adequate third-party reimbursement if and when they are approved by the FDA. Our limited experience in marketing and
selling pharmaceutical products began with INGREZZA approval in 2017, when we hi
II
distribution and reimbursement capabilities, all of which are necessary to successfully commercialize INGREZZA. While our team
members and consultants have experience marketing and selling pharmaceutical products, we may face difficulties related to
managing the rapid growth of our personnel and infrastructure, and there can be no guarantee that we will be able to maintain the
personnel, systems, arrangements and capabilities necessary to successfully commercialize INGREZZA or any product candidate
approved by the FDA in the future. If we fail to maintain successful marketing, sales and reimbursement capabilities or fail to enter
into successful marketing arrangements with third parties, our product revenues may suffer.
red our sales force and established our
Use of our approved products or those of our collaborators, including INGREZZA and ORILISSA, could be associated with side
effects or adverse events.
As with most pharmaceutical products, use of our approved products or those of our collaborators, including INGREZZA and
ORILISSA, could be associated with side effects or adverse events which can vary in severity (from minor reactions to death) and
frequency (infrequent or prevalent). Side effects or adverse events associated with the use of our products or those of our collaborators
may be observed at any time, including after a product is commercialized, and reports of any such side effects or adverse events may
negatively impact demand for our or our collaborators’ products or affect our or our collaborators’ ability to maintain regulatory
approval for such products. Side effects or other safety issues associated with the use of our approved products or those of our
collaborators could require us or our collaborators to halt commercialization of these products or expose us to product liability
lawsuits which will harm our business. We or our collaborators may be required by regulatory agencies to conduct additional studies
regarding the safety and efficacy of our products which we have not planned or anticipated. Furthermore, there can be no assurance
that we or our collaborators will resolve any issues related to any product related adverse events to the satisfaction of the FDA or any
regulatory agency in a timely manner or ever, which could harm our busine
ss, prospects and financial condition.
aa
r
19
We currently depend on single source suppliers. The loss of these suppliers, or delays or problems in the supply of INGREZZA,
could materially and adversely affect our ability to successfully commercialize INGREZZA.
The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of
process controls required to consistently produce the active pharmaceutical ingredients and the finished product in sufficient quantities
while meeting detailed product specifications on a repeated basis. Manufacturers of pharmaceutical products may encounter
difficulties in production, including difficulties with production costs and yields, process controls, quality control and quality
assurance, including testing of stability, impurities and impurity levels and other product specif
ff
ications by validated test me
y
compliance with strictly enforced U.S., state, and non-U.S. regulations. We depend on single source suppliers for each of the
production of INGREZZA and its active pharmaceutical ingredients. If our third-party suppliers for INGREZZA encounter these or
any other manufacturing, quality or compliance difficulties, we may be unable to meet commercial demand for INGREZZA, which
could materially and adversely affect our ability to successfully commercialize INGREZZA. We also depend on BIAL, and its
suppliers, for the production of opicapone drug substance
and drug product.
thods, and
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In addition, if our suppliers fail or refuse to supply us with INGREZZA or its active pharmaceutical ingredient for any reason, it
would take a significant amount of time and expense to qualify a new supplier. The FDA and similar international regulatory bod
must approve manufacturers of the active and inactive pharmaceutical ingredients and certain packaging materials used in
pharmaceutical products. The loss of a supplier could require us to obtain regulatory clearance and to incur validation and other costs
associated with the transfer of the active pharmaceutical ingredients or product manufacturing processes. If there are delays in
qualifying new suppliers or facilities or a new supplier is unable to meet FDA or a similar international regulatory body’s
requirements for approval, there could be a shortage of INGREZZA, which could materially and adversely affect our ability to
successfully commercialize INGREZZA. If BIAL is unable or refuses to supply us with opicapone drug product for any reason, we
have limited opportunity to qualify a new supplier. The inability to obtain sufficient quantities of opicapone drug product could
materially and adversely affect our ability to successfully commercialize opicapone.
ies
r
r
We have no manufacturing capabilities. If third-party manufacturers of INGREZZA or any of our product candidates fail to
devote sufficient time and resources to our concerns, or if their performance is substandard, our clinical trials and product
introductions may be delayed, and our costs may rise.
We have in the past utilized, and intend to continue to utilize, third-party manufacturers to produce
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the drug compounds we use
in our clinical trials and for the commercialization of our products. We have limited experience in manufacturing products for
commercial purposes and do not currently have any manufacturing facilities. Consequently, we depend on, and will continue to
depend on, several contract manufacturers for all production of products for development and commercial purposes, including
INGREZZA. If we are unable to obtain or retain third-party manufacturers, we will not be able to develop or commercialize our
products, including INGREZZA. The manufacture of our products for clinical trials and commercial purposes is subject to specific
FDA regulations, including current Good Manufacturing Practice regulations. Our third-party manufacturers might not comply with
FDA regulations relating to manufacturing our products for clinical trials and commercial purposes or other regulatory requirements
now or in the future. Our reliance on contract manufacturers also exposes us to the following risks:
tt
•
•
•
•
contract manufacturers may encounter difficulties in achieving volume production, quality control and quality assurance,
and also may experience shortages in qualified personnel. As a result, our contract manufacturers might not be able to
meet our clinical schedules or adequately manufacture our products in commercial quantities when required;
switching manufacturers may be difficult because the number of potential manufacturers is limited. It may be difficult or
impossible for us to find a replacement manufacturer quickly on acceptable terms, or at all;
our contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the
aa
time required to successfully produce, store or distribute our products; and
drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the U.S. Drug Enforcement
Administration, and other agencies to ensure strict compliance with cGMP and other government regulations and
corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these
regulations and standards.
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Our current dependence upon third parties for the manufacture of our products may reduce our profit margin, if any, on the sale
of INGREZZA or our future products and our ability to develop and deliver products on a timely and competitive basis.
20
We are subject to ongoing obligations and continued regulatory review for INGRE
EE
idates, if approved, could be
subject to labeling and other
expense and market withdrawal. Additionally, our other product cand
dd
restrictions and market withdrawal and we may be subject to penalties if we fail to comply with re
e
gulatory requirements or
experience unanticipated problems with our products.
ZZA, which may result in
significant additional
dd
f
i
We received FDA regulatory approval for INGREZZA in April 2017. This approval and other regulatory approvals for any of
our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to
the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase IV clinical trials, and
ect to the FDA’s approval of INGREZZA for TD,
ff
surveillance to monitor the safety and efficacy of the product candidate. With resp
we are subject to certain post-marketing requirements and commitments. Failure to comply with these post-marketing requirements
and commitments could result in withdrawal of our marketing approval for INGREZZA. In addition, with respect to INGREZZA, and
any product candidate that the FDA or a comparable foreign regulatory authority approves, the manufacturing processes, labeling,
packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to
extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing
information and reports, registration, as well as continued compliance with current Good Manufacturing Practices for any clinical
trials that we conduct post-approval. Later discovery of previously unknown problems with a product, including adverse events of
unanticipated severity or frequency (especially for a product, such as INGREZZA, which has been administered in only a limited
patient population to date), or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory
requirements, may result in, among other things:
b
aa
•
•
•
•
•
restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or
mandatory product recalls;
fines, warning letters or holds on clinical trials;
refusal by the FDA to approve pending applications or supplements to approved applications filed by us, or suspension or
revocation of product license approvals;
product seizure or detention, or refusal to permit the import or export of products; and
product injunctions or the imposition of civil or criminal penalties.
The FDA’s policies may change, and additional government regulations may be enacted that could prevent, limit or delay
regulatory approval of any of our product candidates or future indications for currently approved products. If we are slow or unable to
adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory
compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business, prospects
and ability to achieve or sustain profitability on a sustained basis.
n
uu
d
If physicians and patients do not accept INGREZZA or any of our other products, or our sales and marketing efforts are not
effective, we may not generate sufficient revenue.
The commercial success of INGREZZA or any of our other products, if approved for marketing, will depend upon the
acceptance of those products as safe and effective by the medical community and patients.
The market acceptance of INGREZZA or any of our other products could be affected by a number of factors, including:
•
•
•
•
•
•
the timing of receipt of marketing approvals for indications;
the safety and efficacy of the products;
the pricing of our products;
qq
the availability of coverage and adequate reimbursement for the products;
the success of existing products addressing our target markets or the emergence of equivalent or superior products; and
the cost-effectiveness of the products.
In addition, market acceptance depends on the effectiveness of our marketing strategy and distribution support, and, to date,
although we have hired experienced sales and marketing professionals, we have very limited sales and marketing experience. We may
face difficulties related to managing the growth of our sales and marketing organization, and it is possible that the rapid expansion in
our sales and marketing team may have a short-term negative effect on our external sales and marketing efforts given the need to
devote significant time to the training and integration of these personnel. If our sales and marketing efforts are not effective and the
medical community and patients do not ultimately accept our products as being safe, effective, superior and/or cost-effective, we may
not generate sufficient revenue.
21
Our clinical trials may fail to demonstrate the safety and efficacy of our product candidates, which could prevent or significantly
delay their regulatory approval.
Before obtaining regulatory approval for the sale of any of our potential products, we must subject these product candidates to
extensive preclinical and clinical testing to demonstrate their safety and efficacy for humans. Clinical trials are expensive, time-
consuming and may take years to complete.
In connection with the clinical trials of our product candidates, we face the risks that:
•
•
•
•
•
•
•
•
•
•
the FDA or similar foreign regulatory authority may not allow an IND application or foreign equivalent filings required to
initiate human clinical studies for our drug candidates or the FDA may require additional preclinical studies as a condition
of the initiation of Phase I clinical studies, or additional clinical studies for progression from Phase I to Phase II, or
Phase II to Phase III, or for NDA approval;
r
the product candidate may not prove to be effective or as effective as other competing product candidates;
we may discover that a product candidate may cause harmful side effects or results of required toxicology studies may not
be acceptable to the FDA;
the results may not replicate the results of earlier, smaller trials;
the FDA or similar foreign regulatory authorities may require use of new or experimental endpoints that may prove
insensitive to treatment effects;
we or the FDA or similar foreign regulatory authorities may suspend the trials;
the results may not be statistically significant;
patient recruitment may be slower than expected;
patients may drop out of the trials; and
regulatory requirements may change.
f
These risks and uncertainties impact all of our clinical programs. For example, any of
the clinical, regulatory or operational
f
events described above could change our planned clinical and regulatory activities for the opicapone program in Parkinson’s disease
and/or our NBI-74788 program for the treatment of CAH. Additionally, any of these events described above could result in suspension
of a program and/or obviate any filings for necessary regulatory approvals.
In addition, late-stage clinical trials are often conducted with patients having the most advanced stages of disease. During the
course of treatment, these patients can die or suffer other adverse medical effects for reasons that may not be related to the
pharmaceutical agent being tested but which can nevertheless adversely affect clinical trial results. Any failure or substantial delay in
completing clinical trials for our product candidates may severely harm our business.
Even if the clinical trials are successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will
interpret the results as we do, and more trials could be required before we submit our product candidates for approval. To the extent
that the results of the trials are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application,
nd significant additional resources,
approval of our product candidates may be significantly delayed, or we may be required to expe
which may not be available to us, to conduct additional trials in support of potential approval of our product candidates.
r
Because the development of our product candidates is subject to a substantial degree of technological uncertainty, we may not
succeed in developing any of our product candidates.
All of our product candidates are currently in research or clinical development with the exceptions of INGREZZA, which has
been approved by the FDA for TD, and ORILISSA (partnered with AbbVie), which has been approved by the FDA for the
management of moderate to severe endometriosis pain in women. Only a small number of research and development programs
ultimately result in commercially successful drugs. Potential products that appear to be
not reach the market for a number of reasons. These reasons include the possibilities that the potential products may:
promising at early stages of development may
rr
•
•
•
•
•
be found ineffective or cause harmful side effects during preclinical studies or clinical trials;
fail to receive necessary regulatory approvals on a timely basis or at all;
be precluded from commercialization by proprietary rights of third parties;
be difficult to manufacture on a large scale; or
be uneconomical to commercialize or fail to achieve market acceptance.
22
If any of our product candidates encounters any of these potential problems, we may never successfully market that product
candidate.
We depend on our current collaborators for the development and commercialization of our products and product candidates that
we out-license and in-license and may need to enter into future collaborations to develop and commercialize certain of our product
candidates.
Our strategy for fully developing and commercializing ORILISSA is dependent upon maintaining our current collaboration
agreement with AbbVie. This collaboration agreement provides for significant future payments should certain development,
regulatory and commercial milestones be achieved, and royalties on future sales of elagolix. Under this agreement, AbbVie is
responsible for, among other things, conducting clinical trials and obtaining required regulatory approvals for elagolix; as well as
manufacturing and commercialization of ORILISSA.
Because of our reliance on AbbVie, the commercialization and continued development of ORILISSA could be substantially
delayed, and our ability to receive future funding could be substantially impaired, if AbbVie:
•
•
•
•
•
•
•
•
•
does not successfully commercialize ORILISSA for endometriosis;
fails to gain regulatory approval of elagolix;
for uterine fibroids, and if applicable, successfully launch and commercialize elagolix for that indication;
does not conduct its collaborative activities in a timely manner;
does not devote sufficient time and resources to our partnered program;
terminates its agreement with us;
develops, either alone or with others, products that may compete with elagolix;
disputes our respective allocations of rights to any products or technology developed
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during our collaboration; or
merges with a third party that wants to terminate our agreement.
In March 2015, we entered into a collaboration and license agreement with Mitsubishi Tanabe to develop and commercialize
INGREZZA in Japan and other select Asian markets. We will rely on Mitsubishi Tanabe to achieve certain development, regulatory
and commercial milestones which, if achieved, could generate significant future revenue for us. Our collaboration with Mitsubishi
Tanabe is subject to risks and uncertainties similar to those described above. In addition, we may need to enter into other out-licensing
collaborations to assist in the development and commercialization of other product candidates we are developing now or may develop
in the future, and any such future collaborations would be subject to similar risks and uncertainties.
In February 2017, we entered into a license agreement with BIAL for the development and commercialization of opicapone for
the treatment of human diseases and conditions, including Parkinson’s disease, in the U.S. and Canada. Under the terms of the
agreement, we are responsible for the management of all opicapone development and commercialization activities; however, we will
depend on BIAL to supply all drug product and investigation medicinal product for our development and commercialization activities.
In addition, pursuant to the license agreement, the parties have established a joint steering committee with overall coordination and
strategic oversight over activities under the agreement and to provide a forum for regular exchange of information, and BIAL has the
right to co-promote licensed products during certain periods of time and to engage in certain marketing-related activities in
cooperation with us. Accordingly, our strategy for developing and commercializing opicapone is dependent upon maintaining our
current collaboration with BIAL. Because of our reliance on BIAL for certain aspects related to the development and
commercialization of opicapone, any disagreement with BIAL, or BIAL’s decision to not devote sufficient time and resources to our
collaboration or to not conduct activities in a timely manner, could substantially delay and/or prohibit our ability to develop and
commercialize opicapone.
These issues and possible disagreements with AbbVie, Mitsubishi Tanabe, BIAL, or any future corporate collaborators could
lead to delays in the collaborative research, development or commercialization of our product candidates. Furthermore, disagreements
with these parties could require or result in litigation or arbitration, which would be time-consuming and expensive. If any of these
issues arise, it may delay the development and commercialization of drug candidates and, ultimately, our generation of product
revenues.
f
23
We do not and will not have access to all information regarding the products and product candidates we licensed to AbbVie.
We do not and will not have access to all information regarding ORILISSA, including potentially material information about
commercialization plans, medical information strategies, clinical trial design and execution, safety reports from clinical trials, safety
reports, regulatory affairs, process development, manufacturing and other areas known by AbbVie. In addition, we have
confidentiality obligations under our agreement with AbbVie. Thus, our ability to keep our shareholders informed about the status of
ORILISSA will be limited by the degree to which AbbVie keeps us informed and allows us to disclose such information to the public.
If AbbVie fails to keep us informed about commercialization efforts related to ORILISSA,
or the status of the clinical development or
regulatory approval pathway of other product candidates licensed to it, we may make operational and/or investment decisions that we
would not have made had we been fully informed, which may materially and adversely affect our business and operations.
a
tt
Governmental and third-party payors may impose sales and pharmaceutical pricing controls on our products or limit coverage
and/or reimbursement for our products that could limit our product revenues and delay sustained profitability.
Our ability to commercialize any products successfully, including INGREZZA, will depend in part on the extent to which
coverage and adequate reimbursement for these products and related treatments will be available. The continuing efforts of
government and third-party payors to contain or reduce the costs of health care through various means may reduce our potential
revenues. These payors’ efforts could decrease the price that we receive for any products we may develop and sell in the future.
Assuming we obtain coverage for a given product by a third-party payor, the resulting reimbursement payment rates may not be
adequate or may require co-payments that patients find unacceptably high. Patients who are prescribed medications for the treatment
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of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all or part of the cos
with their prescription drugs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to
cover all or a significant portion of the cost of our products. Coverage decisions may depend upon clinical and economic standardsa
that disfavor new drug products when more established or lower cost therapeutic alternatives are already available or subsequently
become available regardless of whether they are approved by the FDA for that particular use.
ts associated
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Government authorities and other third-party payors are developing increasingly sophisticated methods of controlling healthcare
costs, such as by limiting coverage and the amount of reimbursement for particular medications. Further, no uniform policy
requirement for coverage and reimbursement for drug products exists among third-party payors in the U.S. Therefore, coverage and
reimbursement for drug products can differ significantly from payor to payor. As a result, the coverage determination process is often
a time-consuming and costly process that will require us to provide scien
payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or
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instance. In addition, communications from government officials regarding health care costs and pharmaceutical pricing could have a
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negative impact on our stock price, even if such communications do not ultimately im
f
our products.
tific and clinical support for the use of our products to each
pact coverage or reimbursement decisions fo
obtained in the fi
rst
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y
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a
There may also be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be
more limited than the purposes for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover,
eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs,
including research, development, manufacture, sale and distribution. If coverage and reimbursement are not available or
reimbursement is available only to limited levels, we may not successfully commercialize INGREZZA or any other product candidate
for which we obtain marketing approval. Our inability to promptly obtain coverage and profitable reimbursement rates from both
government-funded and private payors for any approved products that we develop could have a material adverse effect on our
operating results, our ability to raise capital needed to commercialize products and our overall financial condition.
We license some of our core technologies and drug candidates from third parties. If we default on any of our obligations under
those licenses, or violate the terms of these licenses, we could lose our rights to those technologies and drug candidates or be forced
to pay damages.
We are dependent on licenses from third parties for some of our key technologies. These licenses typically subject us to various
commercialization, reporting and other obligations. If we fail to comply with these obligations, we could lose important rights. If we
were to default on our obligations under any of our licenses, we could lose some or all of our rights to develop, market and sell
products covered by these licenses. For example, BIAL may terminate our license agreement, pursuant to which we have rights to
develop and commercialize opicapone, if we fail to use commercially reasonable efforts, fail to submit an NDA for a licensed product
by a specified date, or otherwise breach the license agreement. In addition, if we were to violate any of the terms of our lice
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could become subject to damages. Likewise, if we were to lose our rights under a license to use proprietary research tools, it could
adversely affect our existing collaborations or adversely affect our ability to form new collaborations. We also face the risk that our
licensors could, for a number of reasons, lose patent protection or lose their rights to the technologies we have licensed, the
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impairing or extinguishing our rights under our licenses with them.
nses, we
reby
24
The independent clinical investigators and contract rese
be diligent, careful or timely, and may make mistakes, in the conduct of our trials.
i
arch organizations that we rely upon to conduct our clinical trials may not
y
We depend on independent clinical investigators and contract research organizations (CROs) to conduct our clinical trials under
their agreements with us. The investigators are not our employees, and we cannot control the amount or timing of resources that they
devote to our programs. If our independent investigators fail to devote sufficient time and resources to our drug development
programs, or if their performance is substandard, or not in compliance with Good Clinical Practices, it may delay or prevent the
approval of our FDA applications and our introduction of new drugs. The CROs we contract with for execution of our clinical trials
play a significant role in the conduct of the trials and the subsequent collection and analysis of data. Failure of the CROs to
obligations could adversely affect clinical development of our products. Moreover, these independent investigators and CROs may
also have relationships with other commercial entities, some of which may compete with us. If independent investigators and CROs
assist our competitors at our expense, it could harm our competitive position.
meet their
f
t
We could face liability if a regulatory authority determines that we are promoting INGREZZA, or any of our product candidates
that receives regulatory approval, for “off-label” uses.
n
A company may not promote “off-label” uses for its drug products. An off-label use is the use of a product for an indication that
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oved by
is not described in the product’s FDA-approved label in the U.S. or for uses in other jurisdictions that differ from those appr
the applicable regulatory agencies. Physicians, on the other hand, may prescribe products for off-label uses. Although the FDA and
other regulatory agencies do not regulate a physician’s choice of drug treatment made in the physician’s independent medical
judgment, they do restrict promotional communications from companies or their sales force with respect to off-label uses of products
for which marketing clearance has not been issued. A company that is found to have promoted off-label use of its product may be
subject to significant liability, including civil and criminal sanctions. We intend to comply with the requirements and restrictions of
the FDA and other regulatory agencies with respect to our promotion of our products, including INGREZZA, but we cannot be sure
that the FDA or other regulatory agencies will agree that we have not violated their restrictions. As a result, we may be subject to
criminal and civil liability. In addition, our management’s attention could be diverted to handle any such alleged violations. A
significant number of companies have been the target of inquiries and investigations by various U.S. federal and state regulatory,
investigative, prosecutorial and administrative entities in connection with the promotion of products for unapproved uses and o
sales practices, including the Department of Justice and various U.S. Attorneys’ Offices, the Office of Inspector General of the
Department of Health and Human Services, the FDA, the Federal Trade Commission and various state Attorneys General offices.
These investigations have alleged violations of various U.S. federal and state laws and regulations, including claims asserting antitrust
violations, violations of the federal civil False Claims Act, the Prescription Drug Marketing Act, anti-kickback laws, and other alleged
violations in connection with the promotion of products for unapproved uses, pricing and Medicare and/or Medicaid reimbursement. If
the FDA or any other governmental agency initiates an enforcement action against us or if we are the subject of a qui tam suit and it is
determined that we violated prohibitions relating to the promotion of products for unapproved uses, we could be subject to substantial
civil or criminal fines or damage awards and other sanctions such as consent decrees and corporate integrity agreements pursuant to
which our activities would be subject to ongoing scrutiny and monitoring to ensure compliance with applicable laws and regulations.
Any such fines, awards or other sanctions would have an adverse effect on our revenue, business, financial prospects, and reputation.
ther
a
Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect
our business, financial condition and results of operations.
ll
To date, we have sold $517.5 million aggregate principal amount of 2.25% convertible senior
t
notes due May 15, 2024 (2024
Notes). We may also incur additional indebtedness to meet future financing needs. Our indebtedness could have significant negative
consequences for our security holders and our business, results of operations and financial condition by, among other things:
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•
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increasing our vulnerability to adverse economic and industry conditions;
limiting our ability to obtain additional financing;
requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, which will
reduce the amount of cash available for other purposes;
limiting our flexibility to plan for, or react to, changes in our business;
diluting the interests of our existing stockholders as a result of issuing shares of our common stock upon conversion of the
2024 Notes; and
placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to
capital.
d
25
t
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay
amounts due under the 2024 Notes and any additional indebtedness that we may incur. In addition, our cash needs may increase in the
future. In addition, any future indebtedness that we may incur may contain financial and other restrictive covenants that limit our
ability to operate our business, raise capital or make payments under our other indebtedness. If we fail to comply with these covenants
or to make payments under our indebtedness when due, then we would be in default under that indebtedness, which could, in turn,
result in that and our other indebtedness becoming immediately payable in full.
t
dd
The conditional conversion feature of the 2024 Notes, if triggered, may adversely affect our financial cond
or liquidity.
ff
ition, operating res
ults,
In the event the conditional conversion feature of the 2024 Notes is triggered, holders of 2024 Notes will be entitled to convert
holders of the 2024 Notes elects to convert
their 2024 Notes at any time during specified periods at their option. If one or more of the
their notes, unless we satisfy our conversion obligation by delivering only shares of our common stock, we would be required to settle
all or a portion of our conversion obligation through the payment of cash, which could adversely affect our liquidity. The conditional
convertibility of the 2024 Notes will be monitored at each quarterly reporting date and analyzed dependent upon market prices of our
common stock during the prescribed measurement periods.
r
We have a history of losses and expect to increase our expenses for the foreseeable future, and we may never achieve sustained
profitability.
Since our inception, we have incurred significant net losses and negative cash flow from operations. As a result of historical
operating losses, we had an accumulated deficit of approximately $1.2 billion as of December 31, 2018.
In April 2017, we received FDA approval of INGREZZA for TD, and in July 2018, our partner AbbVie received FDA approval
for ORILISSA for management of moderate to severe endometriosis pain in women. However, we have not yet obtained regulatory
approvals for any other product candidates. Even if we succeed in commercializing INGREZZA or developing and commercializing
any of our other product candidates, we may not be profitable. We also expect to continue to incur significant operating and capital
expenditures as we:
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commercialize INGREZZA for TD;
seek regulatory approvals for our product candidates;
develop, formulate, manufacture and commercialize our product candidates;
in-license or acquire new product development opportunities;
implement additional internal systems and infrastructure; and
hire additional clinical, scientific, sales and marketing personnel.
We expect to increase our expenses and other investments in the coming years as we fund our operations, in-licensing or
acquisition opportunities, and capital expenditures. While we were profitable for the year ended December 31, 2018, our future
operating results and profitability may fluctuate from period to period due to the factors described above, and we will need to generate
significant revenues to achieve and maintain profitability and positive cash flow on a sustained basis. We may not be able to generate
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these revenues, and we may never achieve profitability on a sustained basis in the future. Our f
ailure to maintain or increase
i
profitability on a sustained basis could negatively impact the market price of our common stock.
We have recently increased the size of our organization and will need to continue to increase the size of our organization. We may
encounter difficulties with managing our growth, which could adversely affect our results of operations.
As of December 31, 2018, we had approximately 585 full-time employees. Although we have substantially increased the size of
our organization, we may need to add additional qualified personnel and resources, especially now that we have a commercial sales
force. Our current infrastructure may be inadequate to support our development and commercialization efforts and expected growth.tt
Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit,
maintain and integrate additional employees, and may take time away from running other aspects of our business, including
development and commercialization of our product candidates.
Our future financial performance and our ability to commercialize INGREZZA and any other product candidates that receive
regulatory approval will depend, in part, on our ability to manage any future growth effectively. In particular, as we commercialize
INGREZZA, we will need to support the training and ongoing activities of our sales force and will likely need to continue to expand
the size of our employee base for managerial, operational, financial and other resources. To that end, we must be able to successfully:
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manage our development efforts effectively;
integrate additional management, administrative and manufacturing personnel;
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further develop our marketing and sales organization; and
maintain sufficient administrative, accounting and management information systems and controls.
We may not be able to accomplish these tasks or successfully manage our operations and, accordingly, may not achieve our
research, development, and commercialization goals. Our failure to accomplish any of these goals could harm our financial results and
prospects.
We may be subject to claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former
employers.
As is commonplace in the biotechnology industry, we employ individuals who were previously employed at other
biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are
currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade
secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if
we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
If we are unable to retain and recruit qualified scientists or if any of our key senior executives discontinues his or her employment
with us, it may delay our development efforts or impact our commercialization of INGRE
EE
ZZA or any product candidate approved
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by the FDA.
ll
We are highly dependent on the principal members of our management and scientific staff. The loss of any of these people could
t
impede the achievement of our objectives, including the successful commercialization of INGREZZA or any product candidate
approved by the FDA. Furthermore, recruiting and retaining qualified scientific personnel to perform research and development work
in the future, along with personnel with experience marketing and selling pharmaceutical products, is critical to our success. We may
be unable to attract and retain personnel on acceptable terms given the competition among biotechnology, pharmaceutical and health
care companies, universities and non-profit research institutions for experienced scientists and individuals with experience marketing
and selling pharmaceutical products. We may face particular retention challenges in light of the recent rapid growth in our personnel
and infrastructure and the perceived impact of those changes upon our
corporate culture. In addition, we rely on a significant number
of consultants to assist us in formulating our research and development strategy and our commercialization strategy. Our consultants
may have commitments to, or advisory or consulting agreements with, other entities that may limit their availability to us.
aa
t
If the market opportunities for our products and product candidates are smaller than we believe they are, our revenues may be
adversely affected and our business may suffer.
Certain of the diseases that INGREZZA and our product candidates are being developed to address are in underserved and
underdiagnosed populations. Our projections of both the number of people who have these diseases, as well as the subset of peop
le
with these diseases who will seek treatment utilizing our products or product candidates, may not be accurate. If our estimates of the
prevalence or number of patients potentially on therapy prove to be inaccurate, the market opportunities for INGREZZA and our
product candidates may be smaller than we believe they are, our prospects for generating expected revenue may be adversely affected
and our business may suffer.
f
Because our operating results may vary significantly in future periods, our stock price may decline.
Our quarterly revenues, expenses and operating results have fluctuated in the past and are likely to fluctuate significantly in the
n
future. Our financial results are unpredictable and may fluctuate, for among other reasons, due to commercial sales of INGREZZA,
royalties from out-licensed products, the impact of Medicare Part D coverage, our achievement of product development objectives and
milestones, clinical trial enrollment and expenses, research and development expenses and the timing and nature of contract
manufacturing and contract research payments. In addition, we recently received regulatory approval from the FDA for INGREZZA
in TD and our revenues will be dependent on our ability to sell INGREZZA and to secure adequate third-party reimbursement. A high
portion of our costs are predetermined on an annual basis, due in part to our significant research and development costs. Thus, small
declines in revenue could disproportionately affect financial results in a quarter. While we were profitable for the year ended
December 31, 2018, our future operating results and profitability may fluctuate from period to period, and even if we become
profitable on a quarterly or annual basis, we may not be able to sustain or increase our profitability. Moreover, as our company and
our market capitalization have grown, our financial performance has become increasingly subject to quarterly and annual comparisons
with the expectations of securities analysts or investors. The failure of our financial results to meet these expectations, either in a
single quarterly or annual period over a sustained period time, could cause our stock price to decline.
tt
27
U.S. federal income tax reform could adversely affect our business and financial condition.
On December 22, 2017, U.S. federal income tax legislation was signed into law (H.R. 1, “An Act to provide for reconciliation
pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”, informally titled the Tax Cuts and Jobs Act,
or the Tax Act). The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the
corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, repeal of the alternative minimum tax for corporations,
limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the
deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time
taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings
(subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation
expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate
income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected. In
addition, it is uncertain if and to what extent various states will conform to the Tax Act. The impact of the Tax Act on holders of our
common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with
qq
respect to this legislation and the potential tax consequences of investing in or holding our common stock.
ff
Our ability to use net operating loss carryforwards and certain other tax attributes may be limited.
Our net operating loss, or NOL, carryforwards generated in tax years ending on or prior to December 31, 2017, are only
permitted to be carried forward for 20 years under applicable U.S. tax law. Under the Tax Act, our federal NOLs generated in tax
years ending after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal NOLs generated ind
tax years beginning after December 31, 2017, is limited. It is uncertain if and to what extent various states will conform to the Tax
Act. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state
law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its
equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax
attributes to offset its post-change income or taxes may be limited. We do not believe we have experienced any previous ownership
changes, but the determination is complex and there can be no assurance we are correct. Furthermore, we may experience ownershipi
changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control.
tt
As a result, our pre-2018 NOL carryforwards may expire prior to being used and our NOL carryforwards generated thereafter
will be subject to a percentage limitation and, if we undergo an ownership change (or if we previously underwent such an ownership
change), our ability to use all of our pre-change NOLs and other pre-change tax attributes (such as research tax credits) to offset our
post-change income or taxes may be limited. Similar provisions of state tax law may also apply to limit our use of accumulated
state
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tax attributes. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited,
which could accelerate or permanently increase state taxes owed. As a result, we may be unable to use all or a material portion of our
NOLs and other tax attributes, which could adversely affect our future cash flows.
n
ff
Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in
i
excess of accrued amounts.
Our effective tax rate is derived from a combination of applicable tax rates in the various places that we operate. In preparing
our financial statements, we estimate the amount of tax that will become payable in each of such places. Nevertheless, our effective
tax rate may be different than experienced in the past due to numerous factors, including passage of the newly enacted federal income
examinations and audits of our tax filings, our inability
a
tax law, changes in the mix of our profitability from state to state, the results of
to secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws. Any
of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current nn
expectations and may result in tax obligations in excess of amounts accrued in our financial statements.
The price of our common stock is volatile.
The market prices for securities of biotechnology and pharmaceutical companies historically have been highly volatile, and the
market for these securities has from time to time experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. Furthermore, especially as we and our market capitalization have grown, the price of
our common stock has been increasingly affected by quarterly and annual comparisons with the valuations and recommendations of
the analysts who cover our business. If our results do not meet these analysts’ forecasts, the expectations of our investors or the
financial guidance we provide to investors in any period, which is based on assumptions that may be incorrect or that may change
from quarter to quarter, the market price of our common stock could decline. Over the course of the last 12 months, the price of our
common stock has ranged from approximately $127.00 per share to approximately $65.00 per share. The market price of our common
stock may fluctuate in response to many factors, including:
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sales of INGREZZA and ORILISSA;
the status and cost of our post-marketing commitments for INGREZZA;
the results of our clinical trials;
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reports of safety issues related to INGREZZA or ORILISSA;
developments concerning new and existing collaboration agreements;
announcements of technological innovations or new therapeutic products by us or others;
r
general economic and market conditions, including economic and market conditions affecting the biotechnology industry;
developments in patent or other proprietary rights;
developments related to the FDA;
future sales of our common stock by us or our stockholders;
comments by securities analysts;
additions or departures of key personnel;
fluctuations in our operating results;
potential litigation matters;
government regulation;
government and third-party payor coverage and reimbursement;
failure of any of our product candidates, if approved, to achieve commercial success; and
public concern as to the safety of our drugs.
If we cannot raise additional funding, we may be unable to complete development of our product candidates or establish
commercial and manufacturing capabilities in the future.
We may require additional funding to effectively commercialize INGREZZA, to continue our research and product development
programs, to conduct preclinical studies and clinical trials, for operating expenses, to pursue regulatory approvals for our product
candidates, for the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims, if any, and
the cost of product in-licensing and any possible acquisitions. In addition, we may require additional funding to establish
manufacturing and marketing capabilities in the future. We believe that our existing capital resources, together with investment
income, and future payments due under our strategic alliances, will be sufficient to satisfy our current and projected funding
requirements for at least the next 12 months. However, these resources might be insufficient to conduct research and development nn
programs, the cost of product in-taking and possible acquisitions, fully commercialize products and operate the company to the full
extent currently planned. If we cannot obtain adequate funds, we may be required to curtail significantly our commercial plans or one
or more of our research and development programs or obtain funds through additional arrangements with corporate collaborators or
others that may require us to relinquish rights to some of our technologies or product candidates.
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Our future capital requirements will depend on many factors, including:
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the commercial success of INGREZZA and/or ORILISSA;
debt service obligations on the 2024 Notes;
continued scientific progress in our R&D and clinical development programs;
the magnitude and complexity of our research and development programs;
progress with preclinical testing and clinical trials;
the time and costs involved in obtaining regulatory approvals;
the costs involved in filing and pursuing patent applications, enforcing patent claims, or engaging in interference
proceedings or other patent litigation;
competing technological and market developments;
the establishment of additional strategic alliances;
developments related to any future litigation;
the cost of commercialization activities and arrangements, including manufacturing of our product candidates; and
the cost of product in-licensing and any possible acquisitions.
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We intend to seek additional funding through strategic alliances and may seek additional funding through public or private sales
of our securities, including equity securities. For example, for so long as we continue to satisfy the requirements to be deemed a well-
known seasoned issuer, we can utilize a shelf registration statement currently on file with the SEC, to allow us to issue an unlimited
number of securities from time to time. In addition, during the second quarter of 2017, we issued the 2024 Notes and we have
previously financed capital purchases and may continue to pursue opportunities to obtain additional debt financing in the future. rr
Additional equity or debt financing might not be available on reasonable terms, if at all. Any additional equity financings will be
dilutive to our stockholders and any additional debt financings may involve operating covenants that restrict our business.
Compliance with changing regulation of corporate governance and
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public disclosure may result in additional expenses.
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Changing laws, regulations and standards relating to corporate governance and public disclosure,
including the Sarbanes-Oxley
Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, new SEC regulations and Nasdaq rules, are creating
uncertainty for companies such as ours. These laws, regulations and standards are subject to varying interpretations in some cases due
to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided b
y
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regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of
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corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have
resulted in, and are likely to continue to result in, increased sales, general and administrative expenses and management time related to
compliance activities. If we fail to comply with these laws, regulations and standards, our reputation may be harmed and we might be
subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial
results and the market price of our common stock.
Risks Related to Our Industry
Health care reform measures and other recent legislative initiatives could adversely affect our business.
The business and financial condition of pharmaceutical and biotechnology companies are affected by the efforts of
governmental and third-party payors to contain or reduce the costs of health care. In the U.S., comprehensive health care reform
legislation was enacted by the Federal government and we expect that there will continue to be a number of federal and state proposals
to implement government control over the pricing of prescription pharmaceuticals. In addition, increasing emphasis on reducing the
cost of health care in the U.S. will continue to put pressure on the rate of adoption and pricing of prescription pharmaceuticals.
Moreover, in some foreign jurisdictions, pricing of prescription pharmaceuticals is already subject to government control.
Additionally, other recent federal and state legislation imposes new obligations on manufacturers of pharmaceutical products, among
others, related to product tracking and tracing. Among the requirements of this new legislation, manufacturers are required to provide
certain information regarding the drug product provided to individuals and entities to which product ownership is transferred, label
drug product with a product identifier, and keep certain records regarding distribution of the drug product. Further, under this new
legislation, manufacturers will have drug product investigation, quarantine, disposition, notification and purchaser license verification
responsibilities related to counterfeit, diverted, stolen, and intentionally adulterated products, as well as products that are the subject of
fraudulent transactions or which are otherwise unfit for distribution such that they would be reasonably likely to result in serious
health consequences or death.
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Additionally, in March 2010, Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010, or collectively the ACA, was signed into law, which was intended to broaden access to health insurance,
reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add transparency requirements for
the healthcare and health insurance industries, impose taxes and fees on the health industry and impose additional health policy
reforms. Among the provisions of the ACA of importance to our potential drug candidates are:
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an annual, nondeductible fee on any entity that manufactures, or imports, specified
branded prescription drugs and
biologic agents, apportioned among these entities according to their market share in certain government healthcare
programs;
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an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1%
and 13.0% of the average manufacturer price for branded and generic drugs, respectively;
a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for
drugs that are inhaled, infused, instilled, implanted or injected;
extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in
Medicaid managed care organizations;
expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage
to certain individuals with income at or below 133% of the federal poverty level,
manufacturer’s Medicaid rebate liability;
thereby potentially increasing a
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a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 70% point-of-sale
discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a
condition for a manufacturer’s outpatient drugs to be covered under Medicare Part D;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; and
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical
effectiveness research, along with funding for such research.
Some of the provisions of the ACA have yet to be fully implemented, and there have been legal and political challenges to
certain aspects of the ACA. Since January 2017, two executive orders and other directives designed to delay, circumvent, or loosen
certain requirements mandated by the ACA have been put into place. Concurrently, Congress has considered legislation that would
repeal or repeal and replace all or part of the ACA. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act
includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain
individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual
mandate”. On January 22, 2018, a continuing resolution was enacted on appropriations for fiscal year 2018 that delayed the
implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored
insurance plans, the annual fee imposed on certain health insurance providers based
n
ong other things, amends the ACA, effective
tax on non-exempt medical devices. The Bipartisan Budget Act of 2018, or the BBA, am
January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. In July 2018, the
Centers for Medicare and Medicaid Services, or CMS, published a final rule permitting fu
rther collections and payments to and from
certain ACA-qualified health plans and health insurance issuers under the ACA risk adjustment program in response to the outcome of
federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14, 2018, a Texas U.S.
District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress
as part of the Tax Cuts and Jobs Act. While the Texas U.S. District Court Judge, as well as the current presidential administration and
CMS, have stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision,
subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA and our business.
on market share, and the medical device excise
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Other legislative changes have been proposed and adopted since the ACA was enacted. These changes include aggregate
reductions to Medicare payments to providers of up to 2% per fiscal year pursuant to the Budget Control Act of 2011, which began in
2013 and, due to subsequent legislative amendments to the statute, including the BBA, will remain in effect through 2027 unless
additional Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, further reduced Medicare
payments to several providers, including hospitals and cancer treatment centers, increased the statute of limitations period for the
government to recover overpayments to providers from three to five years.
aa
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Additional changes that may affect our business include the expansion of new programs such as Medicare payment for
performance initiatives for physicians under the Medicare Access and CHIP Reauthorization Act of 2015, which will be fully
implemented in 2019. At this time, it is unclear how the introduction of the Medicare quality payment program will impact overall
physician reimbursement.
Also, there has been heightened governmental scrutiny recently over pharmaceutical pricing practices in light of the rising cost
d
of prescription drugs and biologics. Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted
federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship
between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. At
the federal level, the current presidential administration’s budget proposal
for fiscal year 2019 contains further drug price control
measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to
permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drugdd
prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Further, the current presidential
administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to
increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to
lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. The U.S. Department of
Health and Human Services has already started the process of soliciting feedback on certain of these measures and, additionally, is
immediately implementing others under its existing authority. For example, in September 2018, CMS announced that it will allow
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Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS
proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and biological products, for
which payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost,
or list price, of that drug or biological product. Although a number of these, and other potential, proposals will require authorization
through additional legislation to become effective, Congress and the executive branch have each indicated that it will continue to seek
new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed
legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient
reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures,
and, in some cases, designed to encourage importation from other countries and bulk purchasing.
31
We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more
rigorous coverage criteria and lower reimbursement, and in additional downward pressure on the price that we receive for any
approved product. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar
reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may
prevent us from being able to generate revenue, attain sustained profitability or commercialize our drugs.
r
Additionally, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act
of 2017 was signed into law. The law, among other things, provides a federal framework for certain patients to access certain
investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval.
Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA
permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug products
available to eligible patients as a result of the Right to Try Act.
We are currently unable to predict what additional legislation or regulation, if any, relating to the health care industry may be
enacted in the future or what effect recently enacted federal legislation or any such additional legislation or regulation would have on
our business. The pendency or approval of such proposals or reforms could result in a decrease in our stock price or limit our ability to
raise capital or to enter into collaboration agreements for the further development and commercialization of our programs and
products.
We face intense competition, and if we are unable to compete effectively, the demand for ou
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r products may be reduced.
The biotechnology and pharmaceutical industries are subject to rapid and intense technological change. We face, and will
continue to face, competition in the development and marketing of our products and product candidates from academic institutions,
government agencies, research institutions and biotechnology and pharmaceutical companies.
Competition may also arise from, among other things:
•
•
•
other drug development technologies;
methods of preventing or reducing the incidence of disease, including vaccines; and
new small molecule or other classes of therapeutic agents.
Developments by others may render our product candidates or technologies obsolete or noncompetitive.
We are commercializing and performing research on or developing products for the treatment of several disorders including
f
endometriosis, TD, uterine fibroids, essential tremor, classic congenital adrenal hyperplasia, pain, and other neurological and
endocrine-related diseases and disorders, and there are a number of competitors to our products and product candidates. If one or more
of our competitors’ products or programs are successful, the market for our products may be reduced or eliminated. For example, in
August 2017, Teva received approval for AUSTEDO to treat TD.
Compared to us, many of our competitors and potential competitors have substantially greater:
•
•
•
•
•
•
capital resources;
research and development resources, including personnel and technology;
regulatory experience;
preclinical study and clinical testing experience;
manufacturing, marketing and distribution experience; and
production facilities.
If we are unable to protect our intellectual property, our competitors could develop and market products based on our discoveries,
which may reduce demand for our products.
Our success will depend on our ability to, among other things:
•
•
•
•
obtain patent protection for our products;
preserve our trade secrets;
prevent third parties from infringing upon our proprietary rights; and
operate without infringing upon the proprietary rights of others, both in the U.S. and internationally.
32
Because of the substantial length of time and expense associated with bringing new products through the development and
regulatory approval processes in order to reach the marketplace, the pharmaceutical industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products and processes. Accordingly, we intend to seek patent nn
protection for our proprietary technology and compounds. However, we face the risk that we may not obtain any of these patents and
that the breadth of claims we obtain, if any, may not provide adequate protection of our proprietary technology or compounds.
We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation
to develop and maintain our competitive position, which we seek to protect, in part, through confidentiality agreements with our
commercial collaborators, employees and consultants. We also have invention or patent assignment agreements with our employees
and some, but not all, of our commercial collaborators and consultants. However, if our employees, commercial collaborators or
consultants breach these agreements, we may not have adequate remedies for any such breach, and our trade secrets may otherwise
become known or independently discovered by our competitors.
r
In addition, although we own a number of patents, the issuance of a patent is not
conclusive as to its validity or enforceability,
and third parties may challenge the validity or enforceability of our patents. We cannot assure you how much protection, if any, will
be given to our patents if we attempt to enforce them and they are challenged in court or in other proceedings. It is possible that a
competitor may successfully challenge our patents or that challenges will result in limitations of their coverage. Moreover,
competitors may infringe our patents or successfully avoid them through design innov
ation. To prevent infringement or unauthorized
use, we may need to file infringement claims, which are expensive and time-consuming. In addition, in an infringement proceeding a
court may decide that a patent of ours is not valid or is unenforceable or may refuse to stop the other party from using the technology
at issue on the grounds that our patents do not cover its technology. Interference proceedings declared by the U.S. Patent and
Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications or those of our
licensors. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and be a distraction to
management. We cannot assure you that we will be able to prevent misappropriation of our proprietary rights, particularly in countries
where the laws may not protect such rights as fully as in the U.S.
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If we fail to obtain or maintain orphan drug designation or other regulatory exclusivity for some of our product candidates, ou
competitive position would be harmed.
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A product candidate that receives orphan drug designation can benefit from a streamli
ned regulatory process as well as potential
commercial benefits following approval. Currently, this designation provides market exclusivity in the U.S. and the EU for seven
years and ten years, respectively, if a product is the first such product approved for such orphan indication. This market exclusivity
does not, however, pertain to indications other than those for which the drug was specifically designated in the approval, nor does it
prevent other types of drugs from receiving orphan designations or approvals in these same indications. Further, even after an orphan
drug is approved, the FDA can subsequently approve the same drug for the same
condition if the FDA concludes that the new drug is
clinically superior to the orphan product or a market shortage occurs.
u
In the EU, orphan exclusivity may be reduced to six years if the drug no longer satisfies the original designation criteria or can
be lost altogether if the marketing authorization holder consents to a second orphan drug application or cannot
supply enough drug, or
when a second applicant demonstrates its drug is “clinically superior” to the original orphan drug. We may not be successful obtaining
orphan drug designations for any indications and, even if we succeed, such orphan drug designations may fail to result in or maintain
orphan drug exclusivity upon approval, which would harm our competitive position.
a
The technologies we use in our research as well as the drug targets we select may infringe the patents or violate the proprietary
rights of third parties.
We cannot assure you that third parties will not assert patent or other intellectual property infringement claims against us or our
r
collaborators with respect to technologies used in potential products. If a patent infringement suit were
collaborators, we or our collaborators could be forced to stop or delay developing, manufacturing or selling potential products that are
claimed to infringe a third party’s intellectual property unless that party grants us or our collaborators rights to use its in
property. In such cases, we could be required to obtain licenses to patents or proprietary rights of others in order to continue to
commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of
third parties on acceptable terms, or at all. Even if our collaborators or we were able to obtain rights to the third party’s intellectual
property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we
may be unable to commercialize some of our potential products or may have to cease some of our business operations as a result of
patent infringement claims, which could severely harm our business.
brought against us or our
tellectual
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33
Our employees, independent contractors, principal investigators, consultants, commercial partners and vendors may engage in
misconduct or other improper activities, including non-compliance with regulatory standards and requirements.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees and independent contractors, such
mm
as principal investigators, consultants, commercial partners and vendors, or by employees of our commercial partners could include
failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we
have established, to comply with federal and state healthcare fraud and abuse laws, to report financial information or data acc
aa
to maintain the confidentiality of our trade secrets or the trade secrets of our co
mmercial partners, or to disclose unauthorized
activities to us. In particular, sales, marketing and other business arrangements in the healthcare industry are subject to extensive laws
intended to prevent fraud, kickbacks, self-dealing and other abusive practices. Employee and independent contractor misconduct could
also involve the improper use of individually identifiable information, including, without limitation, information obtained in the
course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. Any action against our
employees, independent contractors, principal investigators, consultants, commercial partners or vendors for violations of thes
could result in significant civil, criminal, and administrative penalties, fines, and imprisonment.
urately,
e laws
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Any relationships with healthcare professionals, principal investigators, consultants, customers (actual and potential) and third-
party payors in connection with our current and future business activities are and will continue to be subject, directly or indirectly,
to federal and state healthcare laws. If we are unable to comply, or have not fully complied, with such laws, we could face
penalties, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of o
operations.
dd
f
ii
ur
Our business operations and activities may be directly, or indirectly, subject to various federal and state healthcare laws,
including without limitation, fraud and abuse laws, false claims laws, data privacy and security laws, as well as transparency laws
regarding payments or other items of value provided to healthcare providers. These laws may restrict or prohibit a wide range of
business activities, including, but not limited to, research, manufacturing, distribution, pricing, discounting, marketing and promotion,
sales commission, customer incentive programs and other business arrangements. These laws may impact, among other things, our
current activities with principal investigators and research subjects, as well as current and future sales, marketing, patient co-payment
assistance and education programs.
Such laws include:
•
•
•
•
•
•
the federal Anti-Kickback Statute which prohibits, among other things, persons and entities from knowingly and willfully
soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or
in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for
which payment may be made under a federal healthcare program such as Medicare and Medicaid;
the federal civil and criminal false claims laws, including the federal civil False Claims Act, and civil monetary penalties
laws, which impose criminal and civil penalties against individuals or entities for, among other things, knowingly
presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or
making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
HIPAA, which imposes criminal and civil liability for, among other things, executing a scheme
benefit program or making false statements relating to healthcare matters;
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to defraud any healthcare
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and its implementing
regulations, which also imposes obligations, including mandatory contractual terms, on certain types of individuals and
entities, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and
medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program,
with specific exceptions, to report annually to CMS information related to payments or other transfers of value made to
physicians and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report
d
annually to CMS ownership and investment interests held by physicians and their immediate family members; and
analogous state, local, and foreign laws and regulations, such as state anti-kickback and false claims laws, which may
apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-
governmental third party payors, including private insurers; state laws that require pharmaceutical companies to comply
with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by
the federal government; state laws that require drug manufacturers to report information related to payments and other
transfers of value to physicians and other healthcare providers or marketing expenditures; state and local laws that require
the registration of pharmaceutical sales representatives; state and local “drug takeback” laws and regulations; and state
and foreign laws governing the privacy and security of health information in some circumstances, many of which differ
from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
34
Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. It is
possible that governmental and enforcement authorities will conclude that our business practices may not comply with current or
future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws. If our operations or activities
are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be
subject to, without limitation, civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion
from participation in Medicare, Medicaid and other federal healthcare programs, additional reporting requirements and oversight if we
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become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws,
contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of our operations, any
of which could adversely affect our ability to operate.
r
In addition, any sales of our product once commercialized outside the U.S. will also likely subject us to foreign equivalents of
the healthcare laws mentioned above, among other foreign laws.
We face potential product liability exposure far in excess of our limited insurance coverage.
f
The use of any of our potential products in clinical trials, and the sale of any approved products, including INGREZZA, may
expose us to liability claims. These claims might be made directly by consumers, health care providers, pharmaceutical companies or
others selling our products. We have obtained limited product liability insurance coverage for our clinical trials in the amount of $25
million per occurrence and $25 million in the aggregate. However, our insurance may not reimburse us or may not be sufficient to
reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and we
may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to
liability. Upon FDA approval of INGREZZA we expanded our insurance coverage to include product liability insurance related to thett
sale of INGREZZA in the amount of $25 million per occurrence and $25 million in the aggregate. However, we may be unable to
obtain commercially reasonable product liability insurance for any products approved in the future for marketing. On occasion, juries
have awarded large judgments in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability
claim or series of claims brought against us would decrease our cash reserves and could cause our stock price to fall. Furthermore,
regardless of the eventual outcome of a product liability claim, any product liability claim against us may decrease demand for our
approved products, including INGREZZA, damage our reputation, result in regulatory investigations that could require costly recalls
or product modifications, cause clinical trial participants to withdrawal, result in costs to defend the related litigation, decrease our
revenue, and divert management’s attention from managing our business.
nn
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Our activities involve hazardous materials, and we may be liable for any resulting contamination or injuries.
Our research activities involve the controlled use of hazardous materials. We cannot eliminate the risk of accidental
contamination or injury from these materials. If an accident occurs, a court may hold us liable for any resulting damages, which may
harm our results of operations and cause us to use a substantial portion of our cash reserves, which would force us to seek additional
financing.
Cyber security breaches and other disruptions could compromise our information and expose us to liability, which would cause
our business and reputation to suffer.
We are increasingly dependent on information technology systems and infrastructure, including mobile technologies, to operate
rmation,
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our business. In the ordinary course of our business, we collect and store confidential and sensitive electronic information on our
networks and in our data centers. This information includes, among other things, our intellectual property and proprietary info
the confidential information of our collaborators and licensees, and the personally identifiable information of our employees. It is
important to our operations and business strategy that this electronic information remains secure and is perceived to be secure. The
size and complexity of our information technology systems, and those of third-party vendors with whom we contract, and the volu
of data we retain, make such systems potentially vulnerable to breakdown, malicious intrusion, security breaches and other cyber-
attacks. Information security risks have significantly increased in recent years in part due to the proliferation of new technologies and
the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state
actors. A security breach or privacy violation that leads to disclosure or modification of or prevents access to personally identifiable
information or other protected information could harm our reputation, compel us to comply with federal and/or state breach
notification laws and foreign law equivalents, subject us to mandatory corrective action, require us to verify the correctness of
database contents and otherwise subject us to liability under laws and regulations that protect personal data, resulting in increased
costs or loss of revenue. Similarly, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in
delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. If we are unable to
prevent such security breaches or privacy violations or implement satisfactory remedial measures, our operations could be disrupted,
and we may suffer loss of reputation, financial loss and other regulatory penalties because of lost or misappropriated information. In
addition, these breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to
increased harm of the type described above. Moreover, the prevalent use of mobile devices that access confidential information
increases the risk of data security breaches, which could lead to the loss of confidential information, trade secrets or other intellectual
property. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or
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35
enhance our protective measures or to investigate and remediate any information security vulnerabilities. While we have implemented
security measures to protect our data security and information technology systems, such measures may not prevent such events.
Significant disruptions of our information technology systems or breaches of data security could have a material adverse effect on our
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business, financial condition and results of operations.
Compliance with global privacy and data security requirements could result in additional costs and liabilities to us or inhibit our
ability to collect and process data globally, and the failure to comply with such requirements could have a material adverse effect
on our business, financial condition or results of operations.
ff
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The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of information worldwide
is rapidly evolving and is likely to remain uncertain for the foreseeable future. For example, the EU’s General Data Protection
Regulation, or GDPR, imposes strict obligations on the processing of personal data, including personal health data, and the free
movement of such data. The GDPR applies to any company established in the EU as well as any company outside the EU that
processes personal data in connection with the offering of goods or services to individuals in the EU or the monitoring of their
behavior. The GDPR enhances data protection obligations for processors and controllers of personal data, including, for example,
obligations relating to: processing health and other sensitive data; obtaining consen
t of individuals; providing notice to individuals
regarding data processing activities; responding to data subject requests; taking certain measures when engaging third-party
processors; notifying data subjects and regulators of data breaches; implementing safeguards to protect the security and confidentiality
of personal data; and transferring personal data to countries outside the EU, including the U.S. The GDPR imposes substantial fines
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for breaches of data protection requirements, which can be up to four percent of global revenue or 20 million euros, whichever is
greater, and it also confers a private right of action on data subjects for breaches of data protection requirements. The GDPR and other
changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as healthcare data or
other personal information from our clinical trials, could require us to change our business practices or lead to government
enforcement actions, private litigation or significant penalties against us and could have a material adverse effect on our business,
financial condition or results of operations.
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ITEM 1B. UNRESOLVED STAFF COMMENTSS
None.
ITEM 2.
PROPERTIES S
We lease our corporate headquarters, which are located in San Diego, California, and consist of 140,000 square feet of
laboratory and office space located at 12780 El Camino Real, 45,000 square feet of office space located at 12777 High Bluff Drive,
and 7,500 square feet of office space located at 12790 El Camino Real.
f
We believe that our property and equipment are generally well maintained and in good operating condition.
ITEM 3.
LEGAL PROCEEDINGS S
The information set forth under Note 12 “Commitments and Contingencies” to our consolidated financial statements included in
Part II, Item 8 of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURESS
None.
36
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIESS
Our common stock is traded on the Nasdaq Global Select Market under the symbol “NBIX.” The following table sets forth for
the periods indicated the high and low sale price for our common stock. These prices do not include retail markups, markdowns or
commissions.
Year Ended December 31, 2018
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Year Ended December 31, 2017
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
High
Low
$
$
$
$
$
$
$
$
92.98 $
106.26 $
126.98 $
125.59 $
47.43 $
55.38 $
61.51 $
78.05 $
74.12
74.34
96.98
64.72
38.38
39.21
44.75
57.71
As of February 1, 2019, there were approximately 51 stockholders of record of our common stock. We have not paid any cash
dividends on our common stock since inception and do not anticipate paying cash dividends in the foreseeable future.
Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report
on Form 10-K.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities during fiscal 2018.
Stock Performance Graph and Cumulative Total Return*
The graph below shows the cumulative total stockholder return assuming the investment of $100 on December 31, 2013 (and
the reinvestment of dividends thereafter) in each of (i) Neurocrine Biosciences, Inc.’s common stock, (ii) the Nasdaq Composite Index
and (iii) the Nasdaq Biotechnology Index. The comparisons in the graph below are based upon historical data and are not indicative
of, or intended to forecast, future performance of our common stock or Indexes.
ff
900
800
700
600
500
400
300
200
100
-
D
O
L
L
A
R
S
12/13
12/14
12/15
12/16
12/17
12/18
NEUROCRINE BIOSCIENCES, INC.
NASDAQ COMPOSITE
NASDAQ BIOTECHNOLOGY
*
The material in this section is not “soliciting material”, is not deemed “filed” with the Securities and Exchange Commission
(SEC) and is not to be incorporated by reference into any of our SEC filings whether made before or after the date hereof and
irrespective of any general incorporation language in any such SEC filing except to the extent we specifically incorporate this
section by reference.
37
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data have been derived from our audited financial statements. The information set forth below
is not necessarily indicative of our results of future operations and should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto appearing elsewhere i
n this
Annual Report on Form 10-K.
f
(in thousands, except per share data)
STATEMENT OF COMPREHENSIVE INCOME (LOSS) DATA
Revenues:
2018
2017
2016
2015
2014
Product sales, net
Collaboration revenue
Total revenues
Operating expenses:
Cost of sales
Research and development
Sales, general and administrative
Total operating expenses
Income (loss) from operations
Other (expense) income:
Interest expense
Investment income and other, net
Total other (expense) income
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Shares used in calculation of net income (loss) per share:
Weighted average common shares outstanding, basic
Weighted average common shares outstanding, diluted
BALANCE SHEET DATA
Cash, cash equivalents and investments
Working capital
Total assets
Convertible senior notes
Accumulated deficit
Total stockholders’ equitytt
$
$
$
$
$
409,608
41,632
451,240
4,889
160,524
248,932
414,345
36,895
$
$
116,626
45,000
161,626
—— $
15,000
15,000
—— $
19,769
19,769
——
——
——
1,254
121,827
169,906
292,987
(131,361)
——
94,291
68,081
162,372
(147,372)
——
81,491
32,480
113,971
(94,202)
(30,530)
15,476
(15,054)
21,841
730
21,111
(19,523)
8,342
(11,181)
(142,542)
——
——
6,282
6,282
(141,090)
——
$ (142,542) $ (141,090) $
——
5,273
5,273
(88,929)
——
(88,929) $
——
46,425
17,986
64,411
(64,411)
——
3,869
3,869
(60,542)
——
(60,542)
$
$
$
0.23
0.22
90,235
95,386
866,941
649,544
993,151
388,496
(1,177,755)
480,765
(1.62) $
(1.62) $
(1.63) $
(1.63) $
(1.05) $
(1.05) $
(0.81)
(0.81)
88,089
88,089
86,713
86,713
84,496
84,496
74,577
74,577
763,290
500,493
817,591
369,618
(1,198,866)
372,138
$
350,840 $ 461,679
358,359
280,028
474,785
365,086
——
——
(915,234)
(1,056,324)
424,454
314,877
$
231,301
182,539
243,033
——
(826,305)
208,699
38
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS S
ee
The following Management’s Discussion and Analysis of Financial Condition and Re
sults of Operations section contains
d
forward-looking statements pertaining to, among other things, the commercialization of our product and product candidates, the
expected continuation of our collaborative agreements, the receipt of research and development payments thereunder, the future
achievement of various milestones in product development and the receipt of payments related thereto, the potential receipt of royalty
payments, preclinical testing and clinical trials of potential products, the period of time that our existing capital resources will meet
our funding requirements, and our financial results of operations. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various risks and uncertainties, including those set forth in this Annual Report on
Form 10-K under the heading “Item 1A. Risk Factors.” See “Forward-Looking Statements” in Part I of this Annual Report on
Form 10-K.
i
Overview
We are a company focused on discovering, developing, and commercializing innovative and life-changing pharmaceuticals, in
diseases with high unmet medical needs, through our novel research and development (R&D) platform, focused on neurological and
endocrine related diseases and disorders. Utilizing a portfolio approach to drug discovery, we have multiple small molecule drug
candidates at various stages of pharmaceutical development. We develop proprietary pharmaceuticals for our pipeline, as well as
collaborate with other pharmaceutical companies on our products and product candidates.
On April 11, 2017, the United States Food and Drug Administration (FDA) approved INGREZZA® (valbenazine) capsules for
the treatment of adults with tardive dyskinesia (TD). We market INGREZZA for TD in the United States (U.S.) through our specialty
sales force focused primarily on physicians who treat TD patients, including psychiatrists and neurologists. The commercial launch of
INGREZZA occurred on May 1, 2017.
uu
On July 24, 2018, we were notified by AbbVie Inc. (AbbVie) that FDA approval was granted for ORILISSA® (elagolix) for the
management of moderate to severe endometriosis pain in women. Discovered and developed through Phase II clinical trials by us,
ORILISSA, the first FDA-approved oral medication for the management of endometriosis with associated moderate to severe pain in
over a decade, began to be marketed by AbbVie in August 2018 as part of a collaboration to develop and commercialize elagolix for
women’s health.
h
ff
Our clinical development programs include opicapone as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in
adult Parkinson's disease patients, elagolix for uterine fibroids partnered with AbbVie, NBI-74788 for the treatment of congenital
adrenal hyperplasia (CAH), and a vesicular monoamine transporter 2 (VMAT2) inhibitor and a first-in-class central nervous system
(CNS) compound each with potential use in the treatment of neurologic and psychiatric disorders.
AbbVie initiated Phase III studies of elagolix in patients with uterine fibroids in ea
rly 2016. The Phase III program included two
replicate, pivotal, six-month efficacy and safety studies followed by a six-month safety and efficacy extension study. AbbVie provided
positive topline efficacy data from the Phase III studies in women with uterine fibroids in the first quarter of 2018 and additional data
from the six-month safety extension study in the third quarter of 2018. We believe the results from these studies will form the basis for
an anticipated new drug application (NDA) submission to the FDA in the middle of 2019 for the approval of elagolix in the treat
tt
ment
of uterine fibroids.
n
f
We currently have three major collaborations. Two of these collaborations involve out-licensing of our proprietary technology
to pharmaceutical partners. In June 2010, we announced an exclusive worldwide collaboration with AbbVie to develop and
commercialize elagolix and all next-generation gonadotropin-releasing hormone (GnRH) antagonists (collectively, GnRH
Compounds). In March 2015, we entered into a collaboration and license agreement with Mitsubishi Tanabe Pharma Corporation
(Mitsubishi Tanabe) for the development and commercialization of INGREZZA for movement disorders in Japan and other select
Asian markets. The third collaboration agreement, which was entered into in February 2018, is one in which we in-licensed
technology from BIAL – Portela & Ca, S.A. (BIAL) for the development and commercialization of opicapone for the treatment of
human diseases and conditions, including Parkinson’s disease, in the U.S. and Canada.
On January 28, 2019, we entered into a collaboration and license agreement with a clinical-stage gene therapy company,
Voyager Therapeutics, Inc., or Voyager. The collaboration is focused on the development and commercialization of four programs
using Voyager’s proprietary gene therapy platforms. The four programs consist of Voyager’s VY-AADC program for Parkinson’s
disease and VY-FXN01 program for Friedreich’s ataxia, as well as rights to two programs to be determined by the parties in the
future. The effectiveness of the agreement is subject to certain conditions, including the expiration or termination of the applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing
conditions. Refer to Note 13 to the consolidated financial statements for more information on the agreement.
39
We have funded our operations primarily through private and public offerings of our common stock, debt securities, and
payments received under collaboration agreements. While we independently develop many of our product candidates, we entered into
collaborations for several of our programs and intend to rely on our product revenues and existing and future collaborations to meet
our funding requirements. While we were profitable for the year ended December 31, 2018, our future operating results and
profitability may fluctuate from period to period as product candidates are advanced through the various stages of clinical
development and as we proceed with the commercial launch of INGREZZA and other potential future pipeline products. As of
December 31, 2018, we had an accumulated deficit of approximately $1.2 billion.
Results of Operations
Revenues
The following table presents our revenues by category during the periods presented:
(in thousands)
Revenues:
INGREZZA product sales, net
Collaboration revenue
Total revenues
Product Sales, net
2018
Year Ended December 31,
2017
2016
$
$
409,608
41,632
451,240
$
$
116,626
45,000
161,626
$
$
——
15,000
15,000
In April 2017, the FDA approved INGREZZA for the treatment of TD. INGREZZA became available for prescription in late
April 2017. Net product sales were $409.6 million for 2018 and $116.6 million for 2017. There were no net product sales for 2016.
Collaboration Revenue
In July 2018, we were notified by AbbVie that FDA approval was granted for ORILISSA for the management of moderate to
severe endometriosis pain in women, resulting in the achievement of a $40 million event-based milestone, which we recognized as
revenue in the third quarter of 2018. We also recognized sales-based royalties of approximately $1.6 million for 2018, which are
payable to us by AbbVie on quarterly net sales of ORILISSA.
In October 2017, AbbVie’s NDA submission for elagolix in endometriosis was accepted as filed by the FDA, resulting in the
achievement of a $30 million event-based milestone, which we recognized as revenue in the fourth quarter of 2017. We also
recognized $15 million in development event-based payments as revenue in 2017, resulting from Mitsubishi Tanabe’s initiation of
Phase II/III development of INGREZZA in TD in Asia.
In 2016, we recognized $15 million in event-based revenue as a result of AbbVie initiating Phase III clinical studies of elagolix
in patients with uterine fibroids.
Operating Expenses
Cost of Sales
Cost of sales was $4.9 million for 2018 and $1.3 million for 2017. Cost of sales for product sold in 2018 and 2017 excluded
costs that were previously charged to R&D expense prior to FDA approval of INGREZZA for TD. This reduced cost drug product had
a positive impact on our cost of sales and related product gross margins for 2018 and 2017. In the first quarter of 2019, we will begin
to incur a higher cost of sales that includes the cost of INGREZZA active pharmaceutical ingredients produced following FDA
approval. There was no cost of sales for 2016.
Research and Development
R&D expenditures include costs related to preclinical and clinical trials, scientific personnel, equipment, consultants, sponsored
research, share-based compensation, and allocated facility and depreciation costs. We do not track fully burdened R&D costs
separately for each of our drug candidates. We review our R&D expenses by focusing on the following categories: external
development, personnel, facility and depreciation, and other. External development expenses consist of costs associated with our
external preclinical and clinical trials, including pharmaceutical development and manufacturing. In-process R&D expenses and
collaboration payments include upfront and milestone payments made in connection with strategic licensing arrangements we have
entered into with third parties. Personnel expenses include salaries and wages, share-based compensation, payroll taxes, and benefits
for those individuals involved in ongoing R&D efforts. Other R&D expenses primarily represent lab supply expenses and scientific
consulting expenses.
40
The following table presents our total R&D expenses by category during the periods presented:
(in millions)
External development expense:
VMAT2
CRF1
Other
Total external development expense
In-process R&D expenses and collaboration payaa ments
R&D personnel expense
R&D facilitytt and depreciation expense
Other R&D expense
Total R&D expense
2018
Year Ended December 31,
2017
2016
$
$
37.5
9.8
5.6
52.9
15.0
62.0
8.1
22.5
160.5
$
$
20.9
3.9
3.4
28.2
30.0
42.2
5.8
15.6
121.8
$
$
32.4
2.5
1.0
35.9
——
34.1
6.3
18.0
94.3
R&D expense increased $38.7 million, from $121.8 million in 2017 to $160.5 million in 2018, primarily due to the ongoing
progression of our product candidate pipeline and increased personnel expenses on higher headcount, including increased non-cash
share-based compensation of $11.7 million, which included a non-recurring charge of $7.7 million related to the modification of
certain options and RSUs. In-process R&D expenses and collaboration payments decreased from $30 million in 2017 to $15 million in
2018, primarily due to a $20 million decrease in payments to BIAL. Excluding the decrease in payments to BIAL, R&D expense for
2018 increased $58.7 million compared to 2017.
R&D expense increased $27.5 million, from $94.3 million in 2016 to $121.8 million in 2017, primarily due to a $30 million
payment to BIAL to in-license opicapone.
Sales, General and Administrative
Sales, general and administrative (SG&A) expense increased $79.0 million, from $169.9 million in 2017 to $248.9 million in
2018, primarily due to our commercial launch for INGREZZA in April 2017 and the subsequent sales force expansion in the third
quarter of 2018, which included higher personnel related costs of $32.0 million compared to 2017, including increased non-cash
f
share-based compensation of $3.9 million.
SG&A expense increased to $101.8 million, from $68.1 million in 2016 to $169.9 million in 2017, primarily due to our
commercial launch for INGREZZA in April 2017, an increase of $56.7 million in personnel related costs, including increased non-
cash share-based compensation of $8.2 million, and an increase of $36.6 million in external costs resulting from market research,
patient support, commercial launch activities, and other professional services.
Other (Expense) Income
Other expense, net, increased $3.9 million, from $11.2 million in 2017 to $15.1 million in 2018, due to higher interest expense
in 2018 resulting from our issuance of $517.5 million of 2.25% convertible senior notes due May 15, 2024 (2024 Notes) in May 2017.
Other expense, net, increased $17.5 million, from an income position of $6.3 million in 2016 to an expense position of $11.2
million in 2017, due to the incurrence of interest expense resulting from our issuance of the 2024 Notes in May 2017.
Provision for Income Taxes
Our provision for income taxes for 2018 was $0.7 million for estimated current state income taxes. As of December 31, 2018,
we have recorded a full valuation allowance against our net deferred tax assets as realization is uncertain. As a result, our tax expense
varies from the statutory tax rate primarily due to the change in the valuation recorded for the year, net of other permanent book/tax
differences, tax credits generated, and impacts of changes in tax laws. We did not record a provision for income taxes for 2017 or
2016.
Net Income (Loss)
Net income for 2018 was $21.1 million, or $0.22 diluted net income per share, compared to a net loss of $142.5 million, or
$1.62 net loss per share, for 2017 and a net loss of $141.1 million, or $1.63 net loss per share, for 2016. The change from 2017 to 2018
was primarily the result of increased INGREZZA net product sales, offset by ongoing support for the
INGREZZA for TD and progression of our clinical pipeline. The change from 2016 to 2017 was primarily the result of increased
operating expenses due to the in-licensing of opicapone and costs associated with the commercial launch of INGREZZA for TD,
offset by increased revenues primarily driven by sales of INGREZZA.
commercial launch of
u
41
Liquidity and Capital Resources
At December 31, 2018, our cash, cash equivalents, and investments totaled $866.9 million compared to $763.3 million at
December 31, 2017.
Net cash provided by operating activities in 2018 was $101.4 million, compared to net cash used in operating activities of $94.3
million in 2017 and $106.2 million in 2016. The significant change to positive cash flow generated from operations from 2017 to 2018
was primarily driven by increased INGREZZA net product sales and the achievement of the $40.0 million event-based milestone
related to the FDA’s approval of ORILISSA. The net loss from 2017 increased by $1.4 million over 2016 levels but included
increased non-cash share-based compensation of $14.1 million and the amortization of the debt discount of approximately $10.9
million resulting from our issuance of the 2024 Note
s in May 2017.
f
Net cash used in investing activities was $242.9 million in 2018 and $251.3 million in 2017, compared to net cash provided by
investing activities of $113.0 million in 2016. The change in net cash used in investing activities resulted primarily from timing
differences in investment purchases, sales and maturities of investments, fluctuation of our portfolio-mix between cash equivalents
and short-term and long-term investment holdings, and an increase in additions to our property and equipment, which in 2018
consisted predominantly of tenant improvements to our corporate facilities.
Net cash provided by financing activities was $29.5 million in 2018, $516.6 million in 2017, and $2.4 million in 2016. The
change in cash provided by financing activities was primarily due to net proceeds of approximately $502.8 million from our issuance
of the 2024 Notes in May 2017. Proceeds from stock option exercises were approximately $29.5 million in 2018, $13.9 million in
2017, and $2.4 million in 2016.
Shelf Registration Statement. In February 2017, we filed an automatic shelf registration statement which immediately became
effective by rule of the Securities and Exchange Commission (SEC). For so long as we continue to satisfy the requirements to be
deemed a well-known seasoned issuer, this shelf registration statement allows us to issue an unlimited number of securities from time
to time. We sold no securities under this shelf registration statement in 2018 or 2017.
Convertible Debt. In May 2017, we issued the 2024 Notes. Refer to Note 5 to the consolidated financial statements for more
information on the 2024 Notes.
Off-Balance Sheet Arrangements
As of December 31, 2018, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon financial statements that we have
prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of
these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities
and expenses, and related disclosures. On an on-going basis, we evaluate these estimates, including those related to revenue
recognition and share-based compensation. Estimates are based on historical experience, information received from third parties and
on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis fo
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. Historically, revisions to our estimates have not resulted in
a material change to the financial statements. The items in our financial statements requiring significant estimates and judgments are
as follows:
r
a
Product Revenue Recognition
Our net product sales consist of U.S. sales of INGREZZA and are recognized when the customer obtains control of our product
in an amount that reflects the consideration we expect to receive from the customer in exchange for that product. If the consideration
promised under the associated contract includes a variable amount, we estimate the consideration we expect to receive for transferring
the good to the customer. There are two methods for determining the amount of variable consideration: (i) the expected value method,
which is the sum of probability-weighted amounts in a range of possible consideration amounts, and; (ii) the mostly likely amount uu
method, which identifies the single most likely amount in a range of possible consideration amounts.
t
Revenue from product sales is recorded at the net sales (transaction) price, which includes an estimate of variable consideration
acks, rebates, co-pay assistance, and
for which reserves are established and which results from contractual discounts, returns, chargeb
other allowances relating to sales of our products. The following represent our significant categories of sales discounts and
allowances:
tt
42
Trade Discounts and Allowances: We generally provide customers with discounts, that include prompt payment, discounts for
sales data, and other off-invoice discounts that are explicitly stated in the associated contracts and are recorded as a reduction of
revenue in the period the related product revenue is recognized.
Product Returns: We offer our customers limited product return rights for damages and shipment errors provided it is within a
very limited period after the original shipping date as set forth in the applicable individual distribution agreement. We do not allow
product returns for product that has been dispensed to a patient or for drug expiration. We receive real-time shipping and inventory
reports from our customers and have the ability to control the amount of product that is sold to our customers. Product returns to date
have not been significant and we have not considered it necessary to record a reserve for product returns.
Government Rebates: We are subject to discount obligations under state Medicaid programs and Medicare prescription drug
coverage gap program. We estimate our Medicaid and Medicare prescription drug coverage gap rebates based upon a range of
r mix. These reserves are recorded in the same period the
t
possible outcomes that are probability-weighted for the estimated payo
related revenue is recognized, resulting in a reduction of product revenue and the
establishment of a current liability that is included in
n
accrued expenses on the consolidated balance sheet. Our liability for these rebates consists of invoices received for claims from prior
quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and
estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel
inventories at the end of each reporting period.
Provider Chargebacks and Discounts: Chargebacks for fees and discounts to providers represent the estimated obligations
resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to
customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product
and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related
revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are generally
determined at the time of resale to the qualified healthcare provider by customers, and we
generally issue credits for such amounts
ff
following the customer’s notification to us of the resale. Reserves for chargebacks consist of credits that we expect to issue for units
that remain in the distribution channel inventories at each reporting period end that we expect will be sold to qualified healthcare
providers.
tt
Co-Payment Assistance: We offer co-payment assistance to commercially insured patients meeting certain eligibility
requirements. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we
expect to receive associated with product that has been recognized as revenue but remains in the distribution channel inventories at the
end of each reporting period.
Share-Based Compensation
For purposes of calculating share-based compensation, we estimate the fair value of share-based compensation awards using a
Black-Scholes option-pricing model. The determination of the fair value of share-based compensation awards utilizing the Black-
Scholes model is affected by our stock price and a number of assumptions, including but not limited to expected stock price volatility
over the term of the awards and the expected term of stock options. Our stock options have characteristics significantly different from
those of traded options, and changes in the assumptions can materially affect the fair value estimates. For example, an increase in the
underlying stock price results in a significant increase in the Black-Scholes option-pricing.
If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what
we have recorded in the past. If there is a difference between the assumptions used in determining share-based compensation expense
and the actual factors which become known over time, we may change the input factors used in determining share-based
compensation expense for future grants. These changes, if any, may materially impact our results of opera
changes are made. For actual forfeitures, we recognize the adjustment to compensation expense in th
tions in the period such
e period the forfeitures occur.
y
t
Additional Information
Refer to Note 1 to the consolidated financial statements for information on accounting pronouncements that have impacted or
are expected to materially impact our consolidated financial condition, results of operations, or cash flows.
Factors That May Affect Future Financial Condition and Liquidity
We anticipate increases in expenditures as we execute on our commercialization plan for INGREZZA and continue our R&D
u
activities. Our strategies to develop some of our programs may include collaborative agreements with major pharmaceutical
companies and sales of our securities in both public and private offerings. Such collaborative agreements may include a partial
recovery of our research costs through license fees, contract research funding, and milestone revenues and such collaborators may be
financially and managerially responsible for clinical development and commercialization. In these cases, the estimated completion
date would largely be under the control of the collaborator. We cannot forecast, with any degree of certainty, which other proprietary
products or indications, if any, will be subject to collaborative arrangements of this nature, in whole or in part, and how such
arrangements would affect our capital requirements.
43
Our in-license, research, and clinical development agreements are generally cancelable with written notice within 180 days or
less. In addition to the minimum annual payments due under certain in-license and research agreements, including a $30 million
upfront license fee paid to BIAL in February 2017, we may be required to pay up to approximately $105 million in milestone
payments, plus sales royalties, in the event that all scientific research, development and commercialization milestones under these
tt
agreements are achieved.
The funding necessary to execute our business strategies is subject to numerous uncertainties, which may adversely affect our
liquidity and capital resources. Marketing of approved pharmaceuticals and completion of clinical trials may take several years or
more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product
candidate. It is also important to note that if a clinical candidate is identified, the further development of that candidate can be halted
or abandoned at any time due to a number of factors. These factors include, but are not limited to, funding constraints, safety or a
change in market demand.
ff
The nature and efforts required to develop our product candidates into commercially viable products include research to identify ff
a clinical candidate, preclinical development, clinical testing, FDA approval and commercialization. In the pharmaceutical industry,
total R&D spend for a drug candidate that successfully completes all stages of R&D and is commercialized may exceed $2 billion.
Further, it can take in excess of ten years to complete all stages of R&D for a drug candidate.
We test our potential product candidates in numerous preclinical studies to identify disease indications for which our product
candidates may show efficacy. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As
we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for certain indications in order
to focus our resources on more promising product candidates or indications. The duration and the cost of clinical trials may vary
significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the
following:
aa
•
•
•
•
we or the FDA or similar foreign regulatory authorities may suspend the trials;
we may discover that a product candidate may cause harmful side effects;
patient recruitment may be slower than expected; and
patients may drop out of the trials.
For each of our programs, we periodically assess the scientific progress and merits of the programs to determine if continued
R&D is economically viable. Certain of our programs have been terminated due to the lack of scientific progress and lack of prospects
for ultimate commercialization. Because of the uncertainties associated with R&D of these programs, we may not be successful in
achieving commercialization. As such, the ultimate timeline and costs to commercialize a product cannot be accurately estimated.
Other than INGREZZA, which has been approved by the FDA for the treatment of TD, and ORILISSA (partnered with
AbbVie), which has been approved by the FDA for the management of moderate to severe endometriosis pain in women, our product
candidates have not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products in
the U.S. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude
that our clinical data establish safety and efficacy. We must satisfy the requirements of similar regulatory authorities in foreign
countries in order to market products in those countries. The results from preclinical testing and early clinical trials may not be
predictive of results in later clinical trials. It is possible for a candidate to show promising results in clinical trials, but subsequently
fail to establish sufficient safety and efficacy data necessary to obtain regulatory approvals.
As a result of the uncertainties discussed above, among others, the duration and completion costs of our R&D projects, clinical
trials, and post-marketing studies are difficult to estimate and are subject to considerable variation. Our inability to complete our R&D
projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our
capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources
of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on
terms reasonably acceptable to us, would jeopardize the future success of our business.
We currently have limited experience in marketing and selling pharmaceutical products. If we fail to maintain successful
t
marketing, sales, and reimbursement capabilities, or fail to enter in
may suffer. We also may be required to make further substantial expenditures if unforeseen difficulties arise in other areas of
f
business. In particular, our future capital requirements will depend on many factors, including:
to successful arrangements with third parties, our product revenues
our
d
ff
t
•
•
•
•
the commercial success of INGREZZA and/or ORILISSA;
debt service obligations on the 2024 Notes;
continued scientific progress in our R&D and clinical development programs;
the magnitude and complexity of our research and development programs;
44
•
•
•
•
•
•
•
•
progress with preclinical testing and clinical trials;
the time and costs involved in obtaining regulatory approvals;
the costs involved in filing and pursuing patent applications, enforcing patent claims, or engaging in interference
proceedings or other patent litigation;
competing technological and market developments;
the establishment of additional strategic alliances;
developments related to any future litigation;
the cost of commercialization activities and arrangements, including manufacturing of our product candidates; and
the cost of product in-licensing and any possible acquisitions.
We believe that our existing capital resources, together with investment income and future payments due under our strategic
alliances, will be sufficient to satisfy our current and projected funding requirements for at least the next 12 months. Howeve
r, we
uu
f
cannot guarantee that our existing capital resources and anticipated revenues will be sufficient to conduct and complete all of our
research and development programs or commercialization activities as planned.
We may require additional funding to effectively commercialize INGREZZA, to continue our research and product development
programs, to conduct preclinical studies and clinical trials, for operating expenses, to pursue regulatory approvals for our product
candidates, for the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims, if any, the
cost of product in-licensing and any possible acquisitions, and we may require additional funding to establish manufacturing and
marketing capabilities in the future. We may seek to access the public or private equity markets whenever conditions are favorable.
a
For example, we have an effective shelf registration statement on file with the SEC which allows us to issue an unlimited number of
shares of our securities from time to time. In addition, we issued $517.5 million of convertible debt in May 2017 and we have
previously financed capital purchases and may continue to pursue opportunities to obtain additional debt financing in the future. We
rr
may also seek additional funding through strategic alliances or other financing mechanis
tt
funding will be available on terms acceptable to us, if at all. Any additional equity financings will be dilutive to our stockholders and
any additional debt may involve operating covenants that may restrict our business. If adequate funds are not available through these
means, we may be required to curtail significantly one or more of our research or development programs or obtain funds through
arrangements with collaborators or others. This may require us to relinquish rights to certain of our technologies, products or product
candidates. To the extent that we are unable to obtain third-party funding for such expenses, we expect that increased expenses will
result in increased cash flow losses from operations. We cannot assure you that we will successfully develop our products under
development or that our approved products will generate revenues sufficient to enable us to earn a profit.
ms. We cannot assure you that adequate
aa
r
Contractual Obligations
Our contractual obligations as of December 31, 2018, are as follows:
(in millions)
Contractual obligations:
2024 Notes and related interest (1)
Operating leases (2)
Total contractual obligations
Total
2019
2020
2021
2022
2023 and
Thereafter
$
$
581.4
101.9
683.3
$
$
11.6
7.4
19.0
$
$
11.6
8.4
20.0
$
$
11.6 $
8.6
20.2 $
11.6
8.9
20.5
$
$
535.0
68.6
603.6
(1) Amounts for the 2024 Notes and related interest in the table above assume that we will hold the 2024 Notes until maturity.
(2) Amounts for operating leases presented in the table above reflect future minimum rental commitments under non-cancelable operating leases as of December 31 for
each of the periods presented.
n
2024 Notes and Related Interest. In May 2017, we completed a private placement of $517.5 million in
aggregate principal
t
amount of 2.25% convertible senior notes scheduled to mature on May 15, 2024, unless earlier converted, redeemed, or repurchased.
We may not redeem the 2024 Notes prior to May 15, 2021. On or after this date, at our election, we may redeem all, or any portion, of
the 2024 Notes under certain circumstances. The 2024 Notes do not contain any financial or operating covenants or any restrictions on
omary
r
the payment of dividends, the issuance of other indebtedness, or the issuance or repurchase of securities by us. There are cust
events of default with respect to the 2024 Notes, including that upon certain events of default, 100% of the principal and accrued and
rr
unpaid interest on the 2024 Notes will automatically become due and payable. Refer to Note 5 to the consolidated financial statements
for more information on the 2024 Notes.
45
Operating Leases. We lease our corporate headquarters, which consist of laboratory and office space located San Diego,
California, under various operating lease agreements. In addition to minimum rental commitments, these operating leases may require
qq
us to pay additional amounts for taxes, insurance, maintenance, and other operating expenses. The non-cancelable lease terms for
these operating leases expire at various dates between 2020 and 2029 and do not include renewal options. Refer to Note 10 to the
consolidated financial statements for more information on the major facilities that we occupy under lease arrangements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKK
Interest Rate Risk
We are exposed to interest rate risk on our short-term investments. The primary
n
objective of our investment activities is to
preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest
in highly liquid and high-quality government and other debt securities. To minimize our exposure due to adverse shifts in interest
rates, we invest in short-term securities and ensure that the maximum average maturity of our investments does not exceed 12 months.
If a 10% change in interest rates were to have occurred on December 31, 2018, this change would not have had a material effect on the
fair value of our investment portfolio as of that date. Due to the short holding period of our investments, we have concluded that we do
not have a material financial market risk exposure.
tt
46
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NEUROCRINE BIOSCIENCES, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 and
2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements
...........................................................................................................................................................................................................
...........................................
..........................................................
.......................................................................................................................................
.....................................................................................................................
............................................................................................................
50
51
52
53
Page
48
49
47
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Neurocrine Biosciences, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Neurocrine Biosciences, Inc. (the “Company”) as of
December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive income (loss), stockholders’
equity, and cash flows, for each of the three years in the period ended December 31, 2018 and the related notes (collectively referred
to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
aa
ff
We also have audited, in accordance with the standards of the Public Comp
f
any Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework), and our report dated February 7, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or
fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
tt
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1992.
San Diego, California
February 7, 2019
48
NEUROCRINE BIOSCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments, available-for-sale
Accounts receivable
Inventoryrr
Other current assets
Total current assets
Propertyt and equipment, net
Long-term investments, available-for-sale
Restricted cash
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
Other current liabilities
Total current liabilities
Deferred gain on sale of real estate
Deferred revenue
Deferred rent
Convertible senior notes
Total liabilities
Commitments and contingencies
Stockholders’ equityt :
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares
issued and outstanding
Common stock, $0.001 par value; 220,000,000 shares authorized; issued and
outstanding shares were 90,797,087 and 88,793,903 at December 31, 2018
and 2017, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equitytt
Total liabilities and stockholders’ equitytt
December 31,
2018
2017
141,714 $
509,199
56,240
10,864
19,760
737,777
33,869
216,028
5,477
993,151 $
86,377 $
1,856
88,233
7,312
10,231
18,114
388,496
512,386
254,712
261,217
31,127
1,024
6,839
554,919
10,811
247,361
4,500
817,591
53,520
906
54,426
8,043
10,231
3,135
369,618
445,453
——
——
91
1,660,361
(1,932)
(1,177,755)
480,765
993,151 $
89
1,572,765
(1,850)
(1,198,866)
372,138
817,591
$
$
$
$
See accompanying notes to consolidated financial statements.
49
NEUROCRINE BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Revenues:
Product sales, net
Collaboration revenue
Total revenues
Operating expenses:
Cost of sales
Research and development
Sales, general and administrative
Total operating expenses
Income (loss) from operations
Other (expense) income:
Interest expense
Investment income and other, net
Total other (expense) income
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Shares used in the calculation of net income (loss) per share:
Weighted average common shares outstanding, basic
Weighted average common shares outstanding, diluted
Other comprehensive income (loss):
Net income (loss)
Unrealized (loss) gain on available-for-sale securities
Comprehensive income (loss)
2018
Year Ended December 31,
2017
2016
409,608
41,632
451,240
4,889
160,524
248,932
414,345
36,895
(30,530)
15,476
(15,054)
21,841
730
21,111
0.23
0.22
90,235
95,386
$
$
116,626
45,000
161,626
1,254
121,827
169,906
292,987
(131,361)
(19,523)
8,342
(11,181)
(142,542)
——
(142,542) $
(1.62) $
(1.62) $
88,089
88,089
$
$
$
——
15,000
15,000
——
94,291
68,081
162,372
(147,372)
——
6,282
6,282
(141,090)
——
(141,090)
(1.63)
(1.63)
86,713
86,713
21,111
(82)
21,029
$
$
(142,542) $
(1,532)
(144,074) $
(141,090)
659
(140,431)
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
50
NEUROCRINE BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Amount
Accumulated
Other
Comprehensive Accumulated
(Loss) Gain
Deficit
Total
Stockholders’
Equity
(in thousands)
BALANCE AT DECEMBER 31, 2015
Net loss
Unrealized gains on available-for-sale investments
Share-based compensation expense
Issuance of common stock for vested restricted
stock units
Issuance of common stock for stock option
exercises
BALANCE AT DECEMBER 31, 2016
Net loss
Unrealized losses on available-for-sale investments
Share-based compensation expense
Issuance of common stock for vested restricted
stock units
Issuance of common stock for stock option
exercises
Equity component of convertible debt, net of
issuance costs
BALANCE AT DECEMBER 31, 2017
Net income
Unrealized losses on available-for-sale investments
Share-based compensation expense
Issuance of common stock for vested restricted
stock units
Issuance of common stock for stock option
exercises
BALANCE AT DECEMBER 31, 2018
Shares
86,263 $
——
——
——
284
336
86,883 $
——
——
——
562
1,349
——
88,794 $
——
——
——
429
1,574
90,797 $
Additional
Paid
in Capital
86 $1,340,579 $
——
——
——
——
——
28,464
——
1
——
2,389
87 $1,371,432 $
——
——
——
——
——
42,522
1
1
——
13,863
144,948
——
89 $1,572,765 $
——
——
——
——
——
58,068
——
2
(977 ) $ (915,234) $ 424,454
(141,090)
659
28,464
(141,090)
——
——
——
659
——
——
——
——
——
——
2,390
(318 ) $ (1,056,324) $ 314,877
(142,542)
(1,532)
42,522
(142,542)
——
——
——
(1,532)
——
——
——
——
——
1
13,864
——
——
144,948
(1,850) $ (1,198,866) $ 372,138
21,111
21,111
(82)
——
58,068
——
——
(82)
——
——
——
——
——
29,528
91 $1,660,361 $
——
29,530
(1,932) $ (1,177,755) $ 480,765
——
See accompanying notes to consolidated financial statements.
51
NEUROCRINE BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Reconciliation of net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization
Amortization of debt discount
Amortization of debt issuance costs
Amortization of premiums on investments
Share-based compensation expense
Deferred rent
Gain on sales of assets, net
Cease-use expense
Change in operating assets and liabilities:
Accounts receivable
Inventoryrr
Reimbursements for tenant improvements
Accounts payable and accrued liabilities
Other current assets and liabilities, net
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments
Sales and maturities of investments
Purchases of propertyt and equipment
Proceeds from sales of propertytt and equipment
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock
Proceeds from issuance of senior convertible notes, net
Net cash provided by financing activities
Net change in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of the period
Cash, cash equivalents, and restricted cash at end of the period
SUPPLEMENTAL DISCLOSURES
Cash paid for interest
Non-cash capital expenditures
Year Ended December 31,
2017
2016
2018
$
21,111 $
(142,542) $
(141,090)
4,024
17,552
1,326
1,449
58,068
351
(760)
——
(25,113 )
(3,524)
8,701
24,223
(6,044)
101,364
(545,962)
327,825
(24,812 )
34
(242,915)
29,530
——
29,530
(112,021)
259,212
147,191 $
2,400
10,937
848
1,756
42,522
1,203
(2,104)
(544)
(31,127)
(1,024)
——
27,338
(3,994)
(94,331)
(583,408)
339,088
(6,940)
7
(251,253)
13,865
502,781
516,646
171,062
88,150
259,212 $
11,644 $
2,318 $
6,242 $
—— $
1,453
——
——
3,520
28,464
(294)
(3,431)
(584)
——
——
——
4,398
1,383
(106,181)
(298,776)
415,826
(4,108)
13
112,955
2,390
——
2,390
9,164
78,986
88,150
——
——
$
$
$
See accompanying notes to consolidated financial statements.
52
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities. Neurocrine Biosciences, Inc. (the Company or Neurocrine) was incorporated in California in 1992 and
reincorporated in Delaware in 1996. Neurocrine Continental, Inc., is a Delaware corporation and a wholly owned subsidiary of the
Company. The Company also has two wholly-owned Irish subsidiaries, Neurocrine Therapeutics, Ltd. and Neurocrine Europe, Ltd.
both of which were formed in December 2014 and are inactive. The Company discovers, develops, and commercializes innovative
and life-changing pharmaceuticals, in diseases with high unmet medical needs, through its novel research and development (R&D)
platform, focused on neurological and endocrine related diseases and disorders.
The Company discovered, developed, and markets INGREZZA® (valbenazine), the first United States Food and Drug
Administration (FDA)-approved product indicated for the treatment of adults with tardive dyskinesia (TD), an involuntary moveme
nt
disorder. Discovered and developed through Phase II clinical trials by the Company, ORILISSA® (elagolix), the first FDA-approved
oral medication for the management of endometriosis associated with moderate to severe pain in over a decade, is marketed by
AbbVie Inc. (AbbVie) as part of a collaboration to develop and commercialize elagolix for women’s health. The Company’s clinical
development programs include opicapone as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in Parkinson's disease
patients, elagolix for uterine fibroids partnered with AbbVie, NBI-74788 for the treatment of congenital adrenal hyperplasia (CAH),
and a vesicular monoamine transporter 2 (VMAT2) inhibitor and a first-in-class central nervous system (CNS) compound each with
potential use in the treatment of neurologic and psychiatric disorders.
h
f
Principles of Consolidation. The consolidated financial statements include the accounts of Neurocrine as well as its wholly
owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. Actual results could differ from those estimates.
Industry Segment and Geographic Information. The Company operates in a single industry segment – the discovery,
development, and marketing of pharmaceuticals for the treatment of neurological and endocrine based diseases and disorders. The
Company had no foreign based operations during any of the years presented.
Cash Equivalents. The Company considers all highly liquid investments that are readily convertible into cash and have an
original maturity of three months or less at the time of purchase to be cash equivalents.
Short-Term and Long-Term Investments Available-for-Sale. Certain investments are classified as available-for-sale and
d
carried at fair value, with any unrealized gains and losses reported in other comprehensive loss. The amortized cost of investments in
debt securities is adjusted for the amortization of premiums and accretion of discounts to maturity, which are included in investment
income and other, net. The cost of investments in debt securities sold is based on the specific identification method. Realized gains
and losses, interest and dividends, and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are
included in investment income and other, net.
d
uu
Accounts Receivable. Accounts receivable are recorded net of customer allowances for prompt payment discounts, chargebacks,
and any allowance for doubtful accounts. The Company estimates the allowance for doubtful accounts based on existing contractual
payment terms, actual payment patterns of its customers, and individual customer circumstances. To date, an allowance for doubtful
accounts has not been required.
Fair Value of Financial Instruments. Certain financial instruments, including cash, cash equivalents, accounts receivable,
accounts payable, and accrued liabilities are carried at cost, which the Company believes approximates fair value because of the short-
term nature of these instruments. The $517.5 million of 2.25% convertible senior notes due May 15, 2024 (2024 Notes) were recorded
at the estimated value of a similar non-convertible instrument on the date of issuance and accretes to the face value of the 2024 Notes
over their 7-year term. The fair value of the 2024 Notes is estimated utilizing market quotations from an over-the-counter trading
market and approximated 119% and 128% of the face value of the 2024 Notes at December 31, 2018 and 2017, respectively.
Inventory. Inventory is stated at the lower of cost or estimated net realizable value. The Company currently uses actual costing
to determine the cost basis for its inventory. Inventory is valued on a first-in, firs
manufacturing costs. The Company capitalizes inventory costs associated with its products upon regulatory approval when, based on
management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized;
otherwise, such costs are expensed.
t-out basis and consists primarily of third-party
rr
53
Prior to FDA approval of INGREZZA, all costs related to its manufacture were included in R&D expense in the period incurred.
tt
Historically, the Company’s physical inventory included active pharmaceutical ingredients produced prior to FDA approval of
INGREZZA and accordingly had no cost basis as the cost associated with producing this material was expensed in the period incurred.
rr
Costs associated with the manufacture of bulk drug product, finished bottling, and other labeling activities that occurred post FDA
approval of INGREZZA are included in the inventory value.
t
The Company reduces its inventory to net realizable value for potential excess, dated, or obsolete inventory based on an analysis
of forecasted demand compared to quantities on hand and any firm purchase orders, as well as product shelf life. To date, such
reserves have not been significant.
Property and Equipment. Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets
using the straight-line method. Equipment is depreciated over an average estimated useful life of 3 to 7 years. Leasehold
improvements are depreciated over the shorter of their estimated useful lives or the remaining lease term. Depreciation expense
$4.0 million for 2018, $2.4 million for 2017, and $1.5 million for 2016.
ff
was
Impairment of Long-Lived Assets. The Company reviews long-lived assets for impairment whenever ev
ents or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment exist, the Company
assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be r
y
through undiscounted future operating cash flows. If the carrying amount is not recoverable, the Company measures the amount of
any impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the
use of the asset.
ecovered
mm
Revenue Recognition. The Company recognizes revenue when the customer obtains control of the product in an amount that
reflects the consideration the Company expects to receive from the customer in exchange for that product. To determine revenue
recognition, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the
contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The Company only applies the
five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the
good transferred to the customer. Once a contract is determined to be within the scope of A
ccounting Standards Codification 606,
Revenue from Contracts with Customers (Topic 606), at contract inception, the Company assesses the goods promised within the
contract to determine those that are performance obligations and assesses whether each promised good is distinct. The Company thentt
recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the
performance obligation is satisfied.
d
Product Sales, Net. The Company’s product sales consist of sales of INGREZZA in the U.S. INGREZZA was approved by the
FDA on April 11, 2017 and the Company commenced shipments of INGREZZA to specialty pharmacies (SPs) and a specialty
distributor (SD) (collectively, customers) in April 2017. The SPs dispense product to a patient based on the fulfillment of a
prescription and the SD sells product to closed-door pharmacies and government facilities. The Company’s agreements with the
customers provide for transfer of title to the product at the time the product is delivered to the customers. In addition, except for
limited circumstances, the customers have no right of product return. Product sales are recognized when the customers obtain co
of the Company’s product, typically upon delivery to the customers.
d
ee
ntrol
Revenue from product sales are recorded at the net sales price (transaction price), which includes an estimate of variable
consideration for which reserves are established and which results from contractual discounts, returns, chargebacks, rebates, co-pay
assistance, and other allowances relating to sales of the Company’s products. These reserves are based on the amounts earned or to be
claimed on the related sales and are classified as reductions of accounts receivable (if the amounts are payable to the customers) or a
ee
current liability (if the amounts are payable to parties other than the customers). Where appropriate, these estimates take into
consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company’s historical
experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted
customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to
which it is entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price
may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount
of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ
y
from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these
estimates, which would affect net product revenue and earnings in the period such variances become known.
h
r
Shipping and handling costs related to the Company’s product sales are included in sales, general and administrative expenses.
54
Collaborative and Other Revenue. The Company enters into collaboration and licensing agreements under which it licenses
certain rights to its product candidates to third parties. The terms of these arrangements typically include payment to the Company of
one or more of the following: non-refundable, up-front license fees; development, regulatory, and commercial milestone payments;
payments for manufacturing supply services; and royalties on net sales of licensed products.
mm
As part of the accounting for these arrangements, the Company develops assumptions that require judgment to determine the
n
stand-alone selling price for each performance obligation identified in the contract. The Company us
the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs,
discount rates, and probabilities of technical and regulatory success.
es key assumptions to determine
Royalty Revenue: For arrangements that include sales-based royalties, including milestone payments based on the level of sales,
and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i)
r
when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated ha
s been
satisfied (or partially satisfied). Sales-based royalties for ORILISSA are calculated as a percentage of AbbVie net sales as defined in
the Company’s agreement with AbbVie. Each quarterly period, sales-based royalties are recorded based on estimated quarterly net
sales of ORILISSA. Differences between actual results and estimated amounts are adjusted for in the period in which they become
known, which typically follows the quarterly period in which the estimate was made.
r
Licenses of Intellectual Property: If the license to the Company’s intellectual property embedded within a collaboration and/or
licensing arrangement is determined to be distinct from the other performance obligations identified in the arrangement, the Company
recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the
licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment
to assess the nature of the combined performance obligation to determine whether the obligation is satisfied over time or at a point in
time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-uu
front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of
performance and related revenue recognition.
The Company receives payments from its licensees based on billing schedules established in each agreement. Up-front
payments and fees are recorded as deferred revenue upon receipt, or when due, and may require deferral of revenue recognition to a
future period until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable
when the Company’s right to consideration is unconditional.
Milestone Payments: At the inception of each arrangement that includes development, commercialization, and regulatory
milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the
amount to be included in the transaction price using the most likely amount method. Performance milestone payments represent a
form of variable consideration. If it is probable that a significant revenue reversal would not occur, the associated milestone value is
included in the transaction price. Milestone payments that are not within the Company’s control or that of the licensee, such as
regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then
allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or
when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-
evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its
estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect
milestone and license fees revenues and earnings in the period of adjustment.
Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for
either clinical development or commercial supply at the licensee’s discretion are generally considered as options. The Company
assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations.
Concentration of Credit Risk. The Company does not currently have any of its own manufacturing facilities, and therefore it
depends on an outsourced manufacturing strategy for the production of INGREZZA for commercial use and for the production of its
ff
product candidates for clinical trials. The Company has contracts in place with one third-party manufacturer that is approved for the
commercial production of INGREZZA’s capsules at 2 separate sites and one third-party manufacturer that is approved for the
production of INGREZZA’s active pharmaceutical ingredient. Although there are potential sources of supply other than the
Company’s existing suppliers, any new supplier would be required to qualify under applicable regulatory requirements.
The Company has entered into distribution agreements with a limited number of SPs and SDs, and all of the Company’s product
sales are to these customers. The Company’s 3 largest customers represented 93% of the Company’s product revenue for the year
ended December 31, 2018 and 2017 and substantially all of the Company’s accounts receivable balance at December 31, 2018 and
2017.
55
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash
equivalents, investments, and accounts receivables. The Company established guidelines to limit its exposure to credit risk by placing
investments with high credit quality financial institutions, diversifying its investment portfolio and placing investments with maturities
that maintain safety and liquidity.
h
Cost of Sales. Cost of sales includes third-party manufacturing, transportation, freight, and indirect overhead costs associated
with the manufacture and distribution of INGREZZA, sales-based license costs on AbbVie net sales of ORILISSA, as defined in the
m
Company’s agreement with AbbVie, and period costs resulting from certain inventory manufacturing services and variances and
adjustment charges. A portion of the costs associated with the manufacture of INGREZZA sold to date was expensed as R&D prior to
the FDA’s approval of INGREZZA and is therefore excluded from cost of sales during this period.
Research and Development Expenses. R&D expenses consist primarily of salaries, payroll taxes, employee benefits, and share-
based compensation charges for those individuals involved in ongoing research and development efforts; as well as scientific
consulting fees, preclinical and clinical trial costs, R&D facilities costs, laboratory supply costs, and depreciation of scien
nn
tific
equipment. All such costs are charged to R&D expense as incurred. These expenses result from the Company’s independent R&D
efforts, as well as efforts associated with collaborations, in-licenses, and third-party funded research arrangements.
u
Advertising Expense. In connection with the FDA approval and commercial launch of INGREZZA in April 2017, the Company
began to incur advertising costs, which are expensed when services are performed, or goods are delivered. The Company incurred
advertising costs related to its marketed product, INGREZZA, of $20.5 million in 2018 and $10.1 million in 2017.
Share-Based Compensation. The Company grants stock options to purchase its common stock to eligible employees and
directors and also grants certain employees restricted stock units (RSUs) and performance-based restricted stock units (PRSUs).
Additionally, the Company allows employees to participate in an employee stock purchase plan (ESPP).
The Company estimates the fair value of stock options and shares to be issued under the ESPP using the Black-Scholes option-
pricing model on the date of grant. Restricted stock units are valued based on the closing price of the Company’s common stock on the
date of grant. The fair value of equity instruments expected to vest are recognized and amortized on a straight-line basis over the
requisite service period of the award, which is generally 3 to 4 years; however, certain provisions in the Company’s equity
compensation plans provide for shorter vesting periods under certain circumstances. The fair value of shares to be issued under the
ESPP are recognized and amortized on a straight-line basis over the purchase period, which is generally 6 months. Additionally, the
Company granted certain PRSUs that vest upon the achievement of certain pre-defined company-specific performance-based criteria
.
f
Expense related to these PRSUs is generally recognized ratably over the expected performance period once the pre-defined
performance-based criteria for vesting becomes probable.
r
r
Net Income (Loss) Per Share. Basic net income (loss) per share is computed using the weighted average number of common
shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and
potentially dilutive shares outstanding during the period, including the potentially dilutive shares resulting from the conversion of the
2024 Notes, and excluding the effect of stock options and restricted stock outstanding for periods when their effect is anti-dilutive,
using the treasury stock method.
Convertible debt instruments that may be settled entirely or partly in cash (such as the 2024 Notes) may, in certain
circumstances where the borrower has the ability and intent to settle in cash, be accounted for under the treasury stock method. The
Company issued the 2024 Notes with a combination settlement feature, which the Company has the ability and intent to use upon
conversion of the notes, to settle the principal amount of debt for cash and the excess of the principal portion in shares of its common
stock. As a result, of the approximately 6.8 million shares underlying the 2024 Notes, only the shares required to settle the excess of
the principal portion would be considered dilutive under the treasury stock method. Further, approximately 0.3 million PRSUs haveaa
been excluded from the calculation of diluted net income per share
periods, basic net loss per share and diluted net loss per share are identical because the otherwise dilutive potential common shares
become anti-dilutive and are therefore excluded.
as the performance condition has not been achieved. In loss
f
Recently Adopted Accounting Pronouncements.
In May 2014, the Financial Accounting Standards Board (FASB) issued Account Standards Update (ASU) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”, which supersedes all existing revenue recognition requirements, including
most industry-specific guidance. This new standard amends the guidance for the recognition of revenue from contracts with customers
to transfer goods and services. The FASB subsequently issued additional, clarifying standards to address issues arising from
implementation of the new revenue recognition standard. The Company adopted this standard on January 1, 2018, using the modified
retrospective method, and applied the standard only to contracts that were not completed prior to January 1, 2018. The adoption
n
of the
new revenue standard did not change the Company’s revenue recognition. As the Company did not identify any accounting changes
that impacted the amount of reported revenues with respect to product revenues, or revenue from collaboration and license
agreements, no adjustment to retained earnings was required upon adoption.
rr
56
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which clarifies
n
the presentation of restricted cash and restricted cash equivalents in the statements of cash flows. Under this ASU, restricted
d
restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning and end-of-period total
amounts presented on the statements of cash flows. This ASU is intended to reduce diversity in practice in the classification and
aa
presentation of changes in restricted cash on the statement of cash flows. This ASU requires that the statement of cash flows explain
the change in total cash and equivalents and amounts generally described as restricted cash or restricted cash equivalents when
reconciling the beginning and end-of-period total amounts. This ASU also requires a reconciliation between the total of cash and
equivalents and restricted cash presented on the statement of cash flows and the cash and equivalents balance presented on the balance
sheet. This amended guidance was retrospectively adopted on January 1, 2018 and requir
es that cash, cash equivalents, and restricted
rr
cash reported on the consolidated statements of cash flows now includes restricted cash of $5.5 million as of December 31, 2018 and
$4.5 million as of December 31, 2017, as well as previously reported cash and cash equivalents.
cash and
r
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which requires lessees to recognize leases on the
balance sheet and disclose key information about leasing arrangements. Topic 842 establishes a right-of-use (ROU) model that
requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months.
Topic 842 also requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and
uncertainty of cash flows arising from leases.
Topic 842 is effective for the Company beginning January 1, 2019, using a modified retrospective approach, with early adoption
permitted. An entity may choose to use either the effective date or the beginning of the earliest comparative period presented in the
financial statements as the date of initial application. The Company expects to adopt Topic 842 on January 1, 2019, using a modified
retrospective approach, and to choose the effective date as the date of initial applicatio
n. Consequently, financial information will not
ff
be updated, and the disclosures required under Topic 842 will not be provided for dates and periods prior to January 1, 2019.
Topic 842 provides a number of optional practical expedients and accounting policy elections. The Company expects to elect
the package of practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the
lease classification of any expired or existing leases, or initial direct costs for any existing leases. Further, the Company expects to
elect accounting policies not to apply the recognition requirements under Topic 842 to any of the Company’s short-term leases,
instead recognizing the lease payments in profit or loss on a straight-line basis over the lease term, and to account for each separate
lease and associated nonlease components as a single lease component for all of its leases.
The Company expects Topic 842 will have a material effect on its consolidated balance sheets. However, the Company does not
expect Topic 842 will have a material effect on its consolidated statements of operations and comprehensive income (loss) or
consolidated statements of cash flows. While the Company continues to assess all of the effects of adoption, the most significant a
effects relate to (1) the recognition of right-of-use (ROU) assets of approximately $49 million and lease liabilities of approximately
$69 million, primarily resulting from leases of office and laboratory space; (2) the recognition of an existing deferred gain on a sale of
real estate of approximately $8 million as a cumulative-effect adjustment to equity; (3) the derecognition of deferred rent of
approximately $20 million for certain lease incentives received; and (4) significant new disclosure requirements.
d
In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting”, which expands the scope of Topic 718 to include share-based payment transactions
for acquiring goods and services from nonemployees and applies to all share-based payment transactions in which a grantor acquires
goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This ASU does not
apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods
or services to customers as part of a contract accounted for under Topic 606. This update is effective for public business entities for
fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company does not expect this
update will have a material impact on its consolidated financial statements and related disclosures.
g
57
NOTE 2. SIGNIFICANT COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
Mitsubishi Tanabe Pharma Corporation. During 2015, the Company entered into a collaboration and license agreement with
Mitsubishi Tanabe Pharma Corporation (Mitsubishi Tanabe) for the development and commercialization of INGREZZA for
movement disorders in Japan and other select Asian markets. Mitsubishi Tanabe made an up-front license fee of $30 million and has
agreed to make payments up to $85 million in development and commercialization event-based payments, payments for the
manufacture of pharmaceutical products, and royalties on product sales in select territories in Asia.
Under the terms of the agreement, Mitsubishi Tanabe is responsible for all third-party development, marketing and
commercialization costs in Japan and other select Asian markets and the Company would be entitled to a percentage of sales of
INGREZZA in Japan and other select Asian markets for the longer of ten
collaboration effort between the parties to advance INGREZZA towards commercialization in Japan and other select Asian markets is
governed by joint steering and development committees with representatives from both parties. There are no performance,
cancellation, termination, or refund provisions in the agreement that would have a material financial consequence to the Company. nn
The Company does not directly control when event-based payments will be achieved or when royalty payments will begin. Mitsubishi
Tanabe may terminate the agreement at its discretion upon 180 days written notice to the Company. In such event, all INGREZZA
product rights for Japan and other select Asian markets would revert to the Company.
years or the life of the related patent rights. Further, the
a
tt
The Company assessed this arrangement in accordance with Topic 606 and identified the following performance obligations: (i)
INGREZZA technology license and existing know-how; and (ii) development activities to initiate a clinical trial of INGREZZA for
Huntington’s chorea, at an estimated cost of approximately $12 million, should Mits
t
ubishi Tanabe request. The Company has the
s deemed to not be a performance
aa
option to participate on the joint steering committee, but since participation is at its option it wa
obligation. The option for Mitsubishi Tanabe to engage the Company to manufacture and supply pharmaceutical products, not at a
discount, was not considered a material right and therefore not a performance obligation. Based on these assessments, the Companyaa
identified the license and the development activities as the only performance obligations at the inception of the agreement, which were
both deemed to be distinct.
To evaluate the appropriate transaction price, the Company determined that the up-front amount constituted the entirety of the
consideration to be included in the transaction price and to be allocated to the performance obligations based on the Company’s best
estimate of their relative stand-alone selling prices. For the license, the stand-alone selling price was calculated using an income
approach model and included the following key assumptions: the development timeline, revenue forecast, discount rate, and
probabilities of technical and regulatory success. The relative selling price of the Company’s development activities to initiate a
aa
clinical trial of INGREZZA for Huntington’s chorea was based on an assessment of costs to perform the study, based upon a peer
company analysis for similar studies. The Company believes a change in the assumptions used to determine its stand-alone selling
price for the license most likely would not have a significant effect on the allocation of consideration received (or receivable) to the
performance obligations.
At execution, the transaction price included only the $30 million up-front consideration received. None of the development or
regulatory milestones have been included in the transaction price, as all milestone amounts were fully constrained. As part of
evaluation of the constraint, the Company considered numerous factors, including that achievement of the milestones is outside of its
control and contingent upon success in future clinical trials and the licensee’s efforts. Any consideration related to sales-based
milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the
price. The Company will re-evaluate
license granted to Mitsubishi Tanabe and therefore have also been excluded from the transaction
the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
its
n
uu
To date, the Company has recognized revenue under this agreement of $19.8 million associated with the delivery of a
technology license and existing know-how, and $15 million in deve
kk
initiation of Phase II/III development of INGREZZA in tardive dyskinesia (TD) in Asia. In accordance with the Company’s
continuing performance obligations, $10.2 million of the $30 million up-front payment is being deferred and recognized in future
periods. Under the terms of the agreement, there is no general obligation to return the up-front payment
deliverable. No revenue was recognized under the Mitsubishi Tanabe agreement for 2018 or 2016. In 2017, the Company recognized
$15 million in development event-based payments resulting from Mitsubishi Tanabe’s initiation of Phase II/III development of
INGREZZA in TD in Asia.
lopment event-based payments resulting from Mitsubishi Tanabe’s
for any non-contingent
tt
AbbVie. In June 2010, the Company announced an exclusive worldwide collaboration with AbbVie, to develop and
commercialize elagolix and all next-generation gonadotropin-releasing factor (GnRH) antagonists (collectively, GnRH Compounds)
for women’s and men’s health. AbbVie made an upfront payment of $75 million and has agreed to make additional development and
regulatory event-based payments of up to $480 million, of which $115 million has been earned as of December 31, 2018, and up to an
additional $50 million in commercial event-based payments.
58
Under the terms of the agreement, AbbVie is responsible for all third-party development, marketing and commercialization
costs. The Company will be entitled to a percentage of worldwide sales of GnRH Compounds for the longer of ten years or the life of
ff
the related patent rights. AbbVie may terminate the collaboration at its discretion upon 180 days written notice to the Company. In
such event, the Company would be entitled to specified payments for ongoing clinical development and related activities and all
GnRH Compound product rights would revert to the Company.
The Company evaluated the terms of this agreement under Topic 606 and determined that there is one performance obligation,
the exclusive worldwide license with rights to develop, manufacture, and commercialize elagolix. At execution, the transaction price
included only the $75 million up-front consideration received. None of the development or regulatory milestones were included in the
transaction price, as all milestone amounts were fully constrained. As part of the Company’s evaluation of the constraint, the
Company considered numerous factors, including that achievement of the milestones is outside of its control and contingent upon
success in future clinical trials and the licensee’s efforts. Any consideration related to sales-based milestones (including royalties) will
be recognized when the related sales occur as they were determined to relate predominantly to the license granted to AbbVie and
therefore have also been excluded from the transaction price. The Company will re-evaluate the transaction price in each reporting
period and as uncertain events are resolved or other changes in circumstances occur.
On July 24, 2018, AbbVie received approval from the FDA for ORILISSA for the management of moderate to severe
endometriosis pain in women, resulting in the achievement of a $40 million event-based milestone, which the Company recognized as
revenue for 2018. The Company also recognized sales-based royalties on AbbVie net sales of ORILISSA of approximately $1.6
million for 2018. In 2017, event-based revenue of $30 million was recognized based on AbbVie’s new drug application (NDA)
submission for elagolix in endometriosis being accepted by the FDA. In 2016, event-based revenue of $15 million was recognized
related to AbbVie’s initiation of Phase III development of elagolix in uterine fibroids.
BIAL – Portela & Ca, S.A. In February 2017, the Company entered into an exclusive license agreement with BIAL – Portela
f
& Ca, S.A. (BIAL) for the development and commercialization of opicapone for the treatment of hu
including Parkinson’s disease, in the U.S. and Canada. The Company paid BIAL an upfront license fee of $30 million, which was
expensed in 2017 as in-process R&D. During the first quarter of 2018, the FDA provided guidance on the regulatory path forward to
support an NDA for opicapone for Parkinson’s Disease, in which the FDA did not request that the Company conduct an additional
Phase III study, resulting in a $10 million event-based milestone payment to BIAL, which was expense as incurred. The Company
may be required to pay up to an additional $105 million in milestone payments associated with the regulatory approval and net sales of
opicapone. Prior to FDA approval of opicapone, the Company may also be required to pay up to an additional $10 million in
milestones based on certain regulatory and clinical results and FDA acceptance of the Company’s NDA submission for opicapone.
Upon commercialization of opicapone, the Company agreed to determine certain annual sales forecasts. In the event the Company
fails to meet the minimum sales requirements for a particular year, it would be required to pay BIAL an amount equal to the difference
between the actual net sales and minimum sales requirements for such year. In the event the Company fails to meet the minimum sales
requirements for any two years, BIAL may terminate the agreement.
man diseases and conditions,
ff
Under the terms of the agreement, the Company is responsible for the management and cost of all opicapone development and
commercialization activities in the U.S. and Canada. Further, unless terminated earlier, the agreement will continue on a licensed
product-by-product and country-by-country basis until a generic product in respect of such licensed product under the agreement ist
sold in a country and sales of such generic product are greater than a specified percentage of total sales of such licensed pro
duct in
such country. Upon the Company’s written request prior to the estimated expiration of the term in respect of a licensed product, the
parties shall negotiate a good faith continuation of BIAL’s supply of such licensed product after the term. After the term, and if BIAL
is not supplying a certain licensed product, the Company shall pay BIAL a trademark royalty based on the net sales of such licensed
product. Either party may terminate the agreement earlier if the other party materially breaches the agreement and does not cure the
breach within a specified notice period, or upon the other party’s insolvency. BIAL may ter
minate the agreement if the Company fails
to use commercially reasonable efforts or to submit an NDA for a licensed product by a specified date or under certain circumstances
involving a change of control of the Company. In certain circumstances where BIAL elects to terminate the agreement in connection
with the Company’s change of control, BIAL shall pay the Company a termination fee. The Company may terminate the agreement at
any time for any reason upon six months written notice to BIAL if prior to the first NDA approval in the U.S., and upon 9 months
written notice to BIAL if such notice is given after the first NDA approval in the U.S. If the Company’s termination request occurs
prior to the first NDA approval in the U.S., it shall pay BIAL a termination fee except under certain conditions specified in the
agreement.
d
f
tt
t
59
NOTE 3. INVESTMENTS
Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in comprehensive income
(loss). The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and accretion are included in investment income. Realized gains and losses and declines in value judged
to be other-than-temporary, if any, on available-for-sale securities are included in investment income and other, net. The cost of
securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are
included in investment income and other, net.
uu
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t
Investments at December 31, 2018 and 2017 consisted of the following:
(in thousands)
Commercial paper
Corporate debt securities
Securities of government-sponsored entities
Total investments
December 31,
2018
2017
$
$
94,572 $
544,978
85,677
725,227 $
75,362
414,815
18,401
508,578
The following is a summary of investments classified as available-for-sale securities:
(in thousands)
December 31, 2018:
Classified as current assets:
Commercial paper
Corporate debt securities
Securities of government-sponsored entities
Total short-term available-for-sale securities
Classified as non-current assets:
Corporate debt securities
Securities of government-sponsored entities
Total long-term available-for-sale securities
December 31, 2017:
Classified as current assets:
Commercial paper
Corporate debt securities
Securities of government-sponsored entities
Total short-term available-for-sale securities
Classified as non-current assets:
Corporate debt securities
Securities of government-sponsored entities
Total long-term available-for-sale securities
Contractual
Maturity
(in years)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Aggregate
Estimated
Fair
Value
Less than 1 $
Less than 1
Less than 1
$
94,617
395,385
20,887
510,889
1 to 2 $
1 to 2
$
151,594
64,676
216,270
Less than 1 $
Less than 1
Less than 1
$
75,396
178,776
7,503
261,675
1 to 2 $
1 to 2
$
237,749
11,004
248,753
$
$
$
$
$
$
$
$
—— $
——
8
8 $
(45) $
(1,598)
(55)
(1,698) $
94,572
393,787
20,840
509,199
66 $
162
228 $
(469) $
(1)
(470) $
151,191
64,837
216,028
1 $
——
——
1 $
—— $
——
—— $
(35) $
(400)
(24)
(459) $
75,362
178,376
7,479
261,217
(1,310) $
(82)
(1,392) $
236,439
10,922
247,361
60
The following table presents gross unrealized losses and fair value for those available-for-sale investments that were in an
unrealized loss position as of December 31, 2018 and 2017, aggregated by investment category and length of time that individual
securities have been in a continuous loss position:
(in thousands)
December 31, 2018:
Commercial paper
Corporate debt securities
Securities of government-sponsored entities
Total
December 31, 2017:
Commercial paper
Corporate debt securities
Securities of government-sponsored entities
Total
Less Than 12 Months
12 Months or Greater
Total
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
$
51,927
274,696
4,999
$ 331,622
$
62,602
386,728
10,922
$ 460,252
$
$
$
$
—— $
(45) $
(746)
(1)
234,798
10,947
(792) $ 245,745
$
—— $ 51,927
(1,321) 509,494
15,946
(1,376) $ 577,367
(55)
(35) $
(1,660)
(82)
(1,777) $
—— $
28,087
7,479
35,566
$
—— $ 62,602
(50) 414,815
18,401
(24)
(74) $ 495,818
$
$
$
$
(45)
(2,067)
(56)
(2,168)
(35)
(1,710)
(106)
(1,851)
At each reporting date, the Company performs an evaluation of impairment to determine if any unrealized losses are other-than-
temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which
fair value has been less than the cost basis, the financial condition of the issuer, and the Company’s intent and ability to hold the
investment until recovery of its amortized cost basis. The Company intends, and has the ability, to hold its investments in unrealized
loss positions until their amortized cost basis has been recovered. Based on its evaluation, the Company determined that its unrealized
losses were not other-than-temporary at December 31, 2018 and 2017.
nn
NOTE 4. FAIR VALUE MEASUREMENTS
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an
n
orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-
tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs include quoted prices for similar instruments in active markets and/or quoted prices for identical or similar instruments
i
in markets that are not active near the measurement date; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own
assumptions.
The Company classifies cash equivalents and available-for-sale investments within Level 1 or Level 2. The fair value of the
Company’s high-quality investment grade corporate debt securities is determined using proprietary valuation models and analytical
tools. These valuation models and analytical tools use market pricing or prices for similar instrume
nts that are both objective and
publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids and/or offers. The Company did not reclassify any investments between levels in the fair value
hierarchy during the years ended December 31, 2018 and 2017.
r
61
The Company’s assets, which are measured at fair value on a recurring basis as of December 31, 2018 and 2017, were
m
determined using the inputs described above:
(in millions)
December 31, 2018:
Classified as current assets:
Cash and money market funds
Commercial paper
Securities of government-sponsored entities
Corporate debt securities
Subtotal
Classified as long-term assets:
Cash and money market funds
Certificates of deposit
Securities of government-sponsored entities
Corporate debt securities
Total
Less cash, cash equivalents and restricted cash
Total investments
December 31, 2017:
Classified as current assets:
Cash and money market funds
Commercial paper
Securities of government-sponsored entities
Corporate debt securities
Subtotal
Classified as long-term assets:
Cash and money market funds
Certificates of deposit
Securities of government-sponsored entities
Corporate debt securities
Total
Less cash, cash equivalents and restricted cash
Total investments
Fair Value Measurements Using
Carrying
Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
141.7
94.6
20.8
393.8
650.9
1.5
4.0
64.8
151.2
872.4
(147.2)
725.2
170.2
159.9
7.5
178.4
516.0
1.5
3.0
10.9
236.4
767.8
(259.2)
508.6
$
$
$
$
141.7
——
——
——
141.7
1.5
4.0
——
——
147.2
(147.2)
——
170.2
——
——
——
170.2
1.5
3.0
——
——
174.7
(174.6)
0.1
$
—— $
94.6
20.8
393.8
509.2
——
——
64.8
151.2
725.2
——
725.2
$
—— $
159.9
7.5
178.4
345.8
——
——
10.9
236.4
593.1
(84.6)
508.5
$
$
$
$
——
——
——
——
——
——
——
——
——
——
——
——
——
——
——
——
——
——
——
——
——
——
——
——
The fair value of the 2024 Notes, calculated utilizing market quotations from an over-the-counter trading market for these notes
(Level 2), was approximately $616.1 million as of December 31, 2018 and $662.1 million as of December 31, 2017. Refer to Note 5
to the consolidated financial statements for more information on the 2024 Notes.
NOTE 5. CONVERTIBLE SENIOR NOTES
On May 2, 2017, the Company completed a private placement of $517.5 million in aggregate principal amount
of 2.25% convertible senior notes due 2024 and entered into an indenture agreement that sets forth the details of all the terms and
conditions of the 2024 Notes (2024 Indenture). The 2024 Notes accrue interest at a fixed rate of 2.25% per year, payable semiannually
in arrears on May 15 and November 15 of each year, beginning on November 15, 2017. The 2024 Notes mature on May 15, 2024. The
net proceeds from the issuance of the 2024 Notes were approximately $502.8 million, after deducting commissions and the offering
expenses payable by the Company.
Holders of the 2024 Notes may convert the 2024 Notes at any time prior to the close of business on the business day
immediately preceding May 15, 2024, only under the following circumstances:
(i)
during any calendar quarter commencing after the calendar quarter ending on September 30, 2017 (and only during such
calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or
not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately
preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day;
62
(ii)
during the 5 business-day period immediately after any 5 consecutive trading-day period (the measurement period) in
which the trading price (as defined in the 2024 Indenture) per $1,000 principal amount of the 2024 Notes for each trading
day of the measurement period was less than 98% of the product of the last reported sale
price of the Company’s common
dd
stock and the conversion rate on each such trading day;
(iii) upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of the Company’s
assets; or
(iv)
if the Company calls the 2024 Notes for redemption, until the close of business on the business day immediately
preceding the redemption date.
On or after January 15, 2024, until the close of business on the scheduled trading day immediately preceding May 15, 2024,
holders may convert their 2024 Notes at any time.
Upon conversion, holders will receive the principal amount of their 2024 Notes and any excess conversion value, calculated
based on the per share volume-weighted average price (VWAP) for each of the 30 consecutive trading days during the observation
period. For both the principal and excess conversion value, holders may receive cash, shares of the Company’s common stock or a
combination of cash and shares of its common stock, at the Company’s option.
It is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves
repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the principal portion
in shares of common stock or cash. In general, for each $1,000 in principal, the “principal portion” of cash upon settlement is defined
as the lesser of $1,000, and the conversion value during the 25-day observation period as described in the indenture for the notes. The
conversion value is the sum of the daily conversion value which is the product of the effective conversion rate divided by 25 d
ays and
the daily VWAP of the Company’s common stock. The “share amount” is the cumulative “daily share amount” during the observation
period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x
daily VWAP) and $1,000.
n
ff
The initial conversion rate for the 2024 Notes is 13.1711 shares of common stock per $1,000 principal amount, which is
equivalent to an initial conversion price of approximately $75.92 per share of the Company’s common stock. At the initial conversion
rate, settlement of the 2024 Notes for shares of the Company’s common stock would approximate 6.8 million shares. The conversion
rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. The initial conversion
price of the 2024 Notes represented a premium of approximately 42.5% to the closing sale price of $53.28 per share of the Company’s
common stock on the Nasdaq Global Select Market on April 26, 2017, the date the Company priced the private offering of the 2024
Notes.
aa
In the event of conversion, holders would forgo all future interest payments, any unpaid accrued interest and the possibility of
further stock price appreciation. Upon the receipt of conversion requests, the settlement of the 2024 Notes will be paid pursuant to the
terms of the 2024 Indenture. In the event that all of the 2024 Notes are converted, the Company would be required to repay the $517.5
million in principal value and any conversion premium in any combination of cash and shares of its common stock (at the Company’s
option).
On or after, but not prior to May 15, 2021, the Company may redeem for cash all or part of the 2024 Notes if the last reported
sale price (as defined in the 2024 Indenture) of its common stock has been at least 130% of the conversion price then in effect for at
t
tt
least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending on, and including, the t
rading
day immediately before the date which the Company provides notice of redemption. The redemption price will equal the sum of
(i) 100% of the principal amount of the 2024 Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest,
if any, to, but excluding, the redemption date. No sinking fund is provided for the 2024 Notes.
m
aa
If the Company undergoes a fundamental change, as defined in the 2024 Indenture, subject to certain conditions, holders of the
2024 Notes may require the Company to repurchase for cash all or part of their 2024 Notes at a repurchase price equal to 100% of the
principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change
repurchase date. In addition, if a ‘‘make-whole fundamental change’’ (as defined in the 2024 Indenture) occurs prior to January 15,
2024, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert the 2024 Notes in
connection with the make-whole fundamental change.
y
The 2024 Notes are the Company’s general unsecured obligations that rank senior in right of payment to all of its indebtedness
t
that is expressly subordinated in right of payment to the 2024 Notes, and equal in right of payment to the Company’s unsecured
indebtedness.
63
While the 2024 Notes are currently classified as long-term on the Company’s consolidated balance sheets, the future
convertibility and resulting balance sheet classification of this liability will be monitored at each quarterly reporting date and will be
analyzed dependent upon market prices of the Company’s common stock during the prescribed measurement periods. In the event that aa
the holders of the 2024 Notes have the election to convert the 2024 Notes at any time during the prescribed measurement period, the
2024 Notes would then be considered a current obligation and classified as such.
As of December 31, 2018, the fair value of the 2024 Notes, which was estimated utilizing market quotations from an over-the-
counter trading market, approximated 119% of their face value.
An entity must separately account for the liability and equity components of convertible debt instruments (such as the 2024
rr
Notes) that may be settled entirely or partially in cash upon conversion in a manner
rr
The liability component of the instrument was valued in a manner that reflects the market interest rate for a similar nonconvertible
instrument at the date of issuance. The initial carrying value of the liability component of $368.3 million was calculated using
a 7.5% assumed borrowing rate. The equity component of $149.2 million, representing the conversion option, was determined by
deducting the fair value of the liability component from the par value of the 2024 Notes and is recorded in additional paid-in capital on
the consolidated balance sheet at the issuance date. That equity component is treated as a discount on the liability component of the
2024 Notes, which is amortized over the 7-year term of the 2024 Notes using the effective interest rate method. The equity component
is not re-measured as long as it continues to meet the conditions for equity classification.
that reflects the issuer’s economic interest cost.
The Company allocated the total transaction costs of approximately $14.7 million related to the i
y
ssuance of the 2024 Notes to
the liability and equity components of the 2024 Notes based on their relative values. Transaction costs attributable to the liability
component are amortized to interest expense over the seven-year term of the 2024 Notes, and transaction costs attributable to the
equity component are netted with the equity component in stockholders’ equity.
a
tt
The 2024 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the
issuance of other indebtedness or the issuance or repurchase of securities by the Company. The 2024 Indenture contains customary rr
events of default with respect to the 2024 Notes, including that upon certain events of default, 100% of the principal and accrued and
unpaid interest on the 2024 Notes will automatically become due and payable.
rr
Convertible senior notes, net of discounts and deferred financing costs consisted of the following:
(in thousands)
Principal
Deferred financing costs
Debt discount, net
Net carryrr ing amount
NOTE 6. OTHER BALANCE SHEET DETAILS
Inventory consisted of the following:
(in thousands)
Raw materials
Work in process
Finished goods
Total inventoryrr
December 31,
2018
2017
517,500 $
(8,326)
(120,678)
388,496 $
517,500
(9,652)
(138,230)
369,618
December 31,
2018
2017
7,855 $
2,208
801
10,864 $
——
491
533
1,024
$
$
$
$
64
Property and equipment, net, consisted of the following:
(in thousands)
Tenant improvements
Furniture and fixtures
Scientific equipment
Computer equipment
Less accumulated depreciation
Propertyt and equipment, net
Accounts payable and accrued liabilities consisted of the following:
(in thousands)
Accrued employee related costs
Accounts payable
Accrued development costs
Other accrued liabilities
Total accounts payable and accrued liabilities
NOTE 7. NET INCOME (LOSS) PER SHARE
Net income (loss) per share was calculated as follows:
December 31,
2018
2017
$
19,857
2,968
28,163
11,152
62,140
(28,271 )
33,869 $
2,019
1,303
26,248
8,821
38,391
(27,580)
10,811
December 31,
2018
2017
27,341 $
13,801
7,069
38,166
86,377 $
24,901
5,648
4,799
18,172
53,520
$
$
$
$
(in thousands, except per share data)
Net income (loss) - basic and diluted
Weighted-average common shares outstanding:
Basic
Effect of dilutive securities:
Employee stock purchase program
Stock options
Restricted stock units
2024 Notes
Diluted
Net income (loss) per share:
Basic
Diluted
2018
$
21,111
Year Ended December 31,
2017
(142,542) $
$
2016
(141,090)
90,235
11
3,228
564
1,348
95,386
88,089
——
——
——
——
88,089
86,713
——
——
——
——
86,713
$
$
0.23
0.22
$
$
(1.62) $
(1.62) $
(1.63)
(1.63)
Shares which have been excluded from diluted per share amounts because their effect would have been anti-dilutive include the
following:
(in thousands)
Stock options and restricted stock units
2018
887
Year Ended December 31,
2017
7,436
2016
6,995
65
NOTE 8. SHARE-BASED COMPENSATION
Share-Based Compensation Plans. In May 2011, the Company adopted the Neurocrine Biosciences, Inc. 2011 Equity Incentive
Plan (the 2011 Plan) pursuant to which 19 million shares of Company’s common stock are authorized for issuance. The 2011 Plan
provides for the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended (the Code), nonstatutory stock options, restricted stock awards, restricted stock unit awards (RSUs), stock appreciation
rights, performance stock awards, performance-based restricted stock units (PRSUs) and other forms of equity compensation. In May
2018, the Company adopted the Neurocrine Biosciences, Inc. ESPP pursuant to which 300,000 shares of the Company’s common
stock are authorized for issuance. No purchases have occurred under the ESPP during the year ended December 31, 2018.
f
The Company also issues stock options and RSUs under the Neurocrine Biosciences, Inc. Inducement Plan (Inducement Plan) to
certain employees. The Company granted 70,000 stock options and 20,000 RSUs pursuant to the Inducement Plan in 2018 and granted
410,000 stock options and 12,500 RSUs pursuant to the Inducement Plan in 2017. The Company did not grant any stock options or
RSUs pursuant to the Inducement Plan during 2016. These stock option grants have a 4-year vesting period and the RSUs generally
have vesting periods of 3 to 4 years. The Company currently has 245,162 in stock options and RSUs outstanding under this
Inducement Plan.
As of December 31, 2018, approximately 6.8 million shares of common stock remained available for the future grant of awards
under the 2011 Plan. Only share awards made under the 2011 Plan that are subsequently cancelled due to forfeiture or expiration are
returned to the share pool available for future grants.
n
The Company issues new shares upon the exercise of stock options, the issuance of stock bonus awards, and the vesting of
RSUs and PRSUs, and has 7.2 million shares of common stock reserved for such issuances as of December 31, 2018.
Vesting Provisions of Share-Based Compensation. Stock options generally have terms from 7 to 10 years from the date of
grant, and generally vest over a 3 to 4-year period. The maximum contractual term for all options granted from the 2011 Plan is 10
years. RSUs granted under the 2011 Plan generally have vesting periods of 4 years. PRSUs granted under the 2011 Plan vest based on
the achievement of certain pre-defined Company-specific performance criteria and expire 4 to 5 years from the grant date.
Share-Based Compensation. The compensation cost that has been included in the statement of comprehensive income (loss) for
all share-based compensation arrangements is as follows:
(in thousands)
Sales, general and administrative expense
Research and development expense
Share-based compensation expense
2018
Year Ended December 31,
2017
2016
$
$
31,847
26,221
58,068
$
$
27,951
14,571
42,522
$
$
16,770
11,694
28,464
Stock Options. The exercise price of all stock options granted during the years ended December 31, 2018, 2017 and 2016 was
equal to the closing price of the Company’s common stock on the date of grant. The estimated fair value of each stock option award
granted was determined on the date of grant using the Black-Scholes option-pricing valuation model with the following weighted-
t
average assumptions for option grants during the three years ended December 31, 2018:
(in thousands)
Risk-free interest rate
Expected volatility of common stock
Dividend yield
Expected option term
2018
Year Ended December 31,
2017
2016
2.5%
59.5%
0.0%
2.0%
58.0%
0.0%
1.4%
60.0%
0.0%
4.7 years
5.7 years
5.6 years
The Company estimates the fair value of stock options using a Black-Scholes option-pricing model on the date of grant. The fair
values of equity instruments are recognized and amortized on a straight-line basis over the requisite service period. The Black-Scholes
option-pricing model incorporates various and highly sensitive assumptions including expected volatility, term, and interest rates. The
expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate
with the estimated expected term of the Company’s stock optio
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experience as well as the status of the employee. For example, directors and officers have a longer expected option term than all other
employees. The risk-free rate for periods within the contractual life of the option is based upon observed interest rates appropriate for
the expected term of the Company’s employee stock options. The Company has never declared or paid dividends and has no plans to
do so in the foreseeable future.
ns. The expected option term is estimated based on historical
aa
66
The Company’s determination of fair value is affected by its stock price as well as a number of assumptions that require
judgment. The weighted-average fair values of stock options granted during the years ended December 31, 2018, 2017 and 2016,
estimated as of the grant date using the Black-Scholes option-pricing model, were $43.42, $25.11 and $21.49, respectively.
A summary of the status of the Company’s stock options as of December 31, 2018, 2017 and 2016 and of changes in options
outstanding under the plans during the three years ended December 31, 2018 is as follows:
(in thousands, except weighted average data)
Outstanding at Januaryr 1
Granted
Exercised
Canceled
Outstanding at December 31
2018
Weighted
Average
Exercise Price
28.83
$
84.97
18.95
64.67
41.38
$
Options
6,356
1,040
(1,592)
(58)
5,746
2017
Weighted
Average
Options
6,112
1,807
(1,353)
(210)
6,356
Exercise Price Options
20.01
$
46.55
10.41
43.05
28.83
5,507
1,077
(341)
(131)
6,112
$
2016
Weighted
Average
Exercise Price
15.63
$
40.19
7.60
34.35
20.01
$
Stock options outstanding at December 31, 2018 had a weighted average remaining contractual term of 6.7 years.
For the year ended December 31, 2018, 2017 and 2016 share-based compensation expense related to stock options was $35.4
million, $28.2 million, and $18.4 million, respectively. As of December 31, 2018, there was approximately $55.4 million of
unamortized compensation cost related to stock options, which is expected to be recognized over a weighted average remaining
vesting period of approximately 2.3 years. As of December 31, 2018, there were approximately 3.9 million stock options exercisablea
with a weighted average exercise price of $31.07 and a weighted-average remaining contractual term of 5.9 years. The total intrinsic
value, which is the amount by which the exercise price was exceeded by the sale price of the Company’s common stock on the date of
sale, of stock option exercises during the years ended December 31, 2018, 2017, and 2016 was $117.0 million, $61.4 million, and
$13.2 million, respectively. As of December 31, 2018, the total intrinsic value of stock options outstanding and exercisable was
$186.3 million and $158.2 million, respectively. Cash received from stock option exercises for the years ended December 31, 2018,
2017, and 2016 was $29.5 million, $13.9 million, and $2.4 million, respectively.
Restricted Stock Units. The fair value of RSUs is based on the closing sale price of the Company’s common stock on the date of
issuance. For the year ended December 31, 2018, 2017, and 2016, share-based compensation expense related to RSUs was $21.9
million, $13.9 million, and $8.3 million, respectively. As of December 31, 2018, there was approximately $51.6 million of
unamortized compensation cost related to RSUs, which is expected to be recognized over a weighted average remaining vesting
period of approximately 2.3 years.
The total intrinsic value of RSUs converted into common shares during the years ended December 31, 2018, 2017, and 2016
was $35.5 million, $14.9 million, and $12.2 million, respectively. The RSUs, at the election of eligible employees, may be subject to
deferred delivery arrangement. The total intrinsic value of RSUs outstanding at December 31, 2018 was $80.9 million based on the
Company’s closing stock price on that date.
A summary of the status of the Company’s RSUs as of December 31, 2018, 2017, and 2016 and of changes in RSUs outstanding
under the plans for the three years ended December 31, 2018 is as follows:
(in thousands, except weighted average data)
Outstanding at January 1
Granted
Cancelled
Converted into common shares
Outstanding at December 31
2018
Weighted Average
Grant Date Fair
Value per Unit
Number of
f
Units
2017
Weighted Average
Grant Date Fair
Value per Unit
Number of
f
Units
2016
Weighted Average
Grant Date Fair
Value per Unit
Number of
f
Units
1,080 $
540
(58)
(429)
1,133 $
40.30
85.29
36.21
59.23
62.31
883 $
588
(41)
(350)
1,080 $
29.33
47.21
40.62
24.19
40.30
910 $
326
(69)
(284)
883 $
24.23
36.73
32.50
20.71
29.33
Performance-Based Restricted Stock Units. During each of the years ended December 31, 2018 and 2016, the Company
granted approximately 0.2 million PRSUs that vest based on the achievement of certain pre-defined Company-specific performance
criteria and expire approximately 4 to 5 years from the grant date. No PRSUs were granted during the year ended December 31, 2017.
Additionally, 0.2 million PRSUs were earned during the year ended December 31, 2017. The fair value of PRSUs is estimated based
on the closing sale price of the Company’s common stock on the date of grant. Expense recognition for PRSUs commences when
attainment of the performance-based criteria is determined to be probable. During 2018, the Company recognized no expense related
to PRSUs. During 2017 and 2016, the Company recognized approximately $0.4 million and $1.8 million, respectively, in expense
related to PRSUs. At December 31, 2018, the total unrecognized estimated compensation expense related to PRSUs was $19.7 million
uu
f
67
and the total intrinsic value of PRSUs outstanding was $23.6 million based on the Company’s closing stock price on that date. The
total intrinsic value of PRSUs converted into common shares was $8.8 million during the year ended December 31, 2017. No PRSUs
were earned during the years ended December 31, 2018 or 2016.
Employee Stock Purchase Plan. Under the ESPP, eligible employees may purchase shares of the Company’s common stock at
a discount semi-annually based on a percentage of their annual compensation. The ESPP provides for the granting of up to 300,000
shares of the Company’s common stock to eligible employees. The discounted purchase price is equal to the lower of 85% of (i) the
market value per share of the common stock on the first day of the offering period or (ii) the market value per share of common stock
on the purchase date. Share-based compensation expense recognized under the ESPP was $0.8 million for the year ended December
31, 2018.
n
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NOTE 9. INCOME TAXES
The components of the income tax expense for continuing operations are as follows:
(in thousands)
Current:
Federal
State
Total income tax expense
2018
2017
2016
$
$
(100) $
830
730
$
—— $
——
—— $
——
——
——
The provision for income taxes on earnings subject to income taxes differs from the statutory federal rate at December 31, 2018,
2017 and 2016, due to the following:
(in thousands)
Federal income taxes at 21% for 2018 and 35% for 2017 and 2016
State income tax, net of federal benefit
Tax effect on non-deductible expenses
Share-based compensation expense
Officer compensation
Change in tax rate
Expired tax attributes
Research credits
Change in valuation allowance
Other
2018
2017
2016
$
$
4,587
361
446
(9,778)
915
(198)
13,874
(13,526)
4,306
(257)
730
$
$
(49,889) $
(4,013)
433
(19,589)
2,163
154,415
2,998
(5,596)
(79,966)
(956)
—— $
(49,383)
2
(321)
(5,077)
——
——
6,708
(5,554)
53,414
211
——
68
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2018 and 2017 are listed below.
A valuation allowance of $335.2 million and $330.9 million at December 31, 2018 and 2017, respectively, has been recognized to
offset net deferred tax assets as realization of such assets is uncertain. Amounts are shown as of December 31 as of each respective
year:
(in thousands)
Deferred tax assets:
Net operating losses
R&D credits
Capitalized R&D
Share-based compensation
Other
Total deferred tax assets
Deferred tax liabilities:
Convertible senior notes
Fixed assets
Total deferred tax liabilities
Net of deferred tax assets and liabilities
Valuation allowance
Net deferred tax assets
2018
2017
$
223,800 $
62,200
34,800
17,300
28,600
366,700
(26,400 )
(5,100)
(31,500 )
335,200
(335,200)
$
—— $
238,500
47,500
47,500
14,600
14,600
362,700
(31,300)
(500)
(31,800)
330,900
(330,900)
——
At December 31, 2018, the Company had federal and state income tax net operating loss carry forwards of approximately
$1.0 billion and $398.0 million, respectively. The federal net operating losses will begin to expire in 2021, unless previously utilized.
y
A portion of the California net operating loss carry forwards expired in 2018. The remaining California net operating losses will
begin to expire in 2028 and the net operating losses related to other states will begin to expire in 2026.
In addition, the Company has federal and California R&D tax credit carry forwards of $63.6 million and $41.6 million,
respectively. A portion of the federal R&D tax credit carry forwards expired in 2018. The remaining federal R&D tax credits will
continue to expire beginning in 2019, unless previously utilized. The California R&D tax credits carry forward indefinitely.
Additionally, the future utilization of the Company’s net operating loss and R&D tax credit carry forwards to offset future
taxable income may be subject to annual limitations, pursuant to Internal Revenue Code Sections 382 and 383, as a result of
ownership changes that could result in the future. The Company has determined that no ownership changes have occurred through
December 31, 2018.
On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was enacted, reducing the corporate income tax rate from 35% to
21% effective on January 1, 2018. The carrying value of the Company's deferred tax assets is also determined by the enacted U.S.
corporate income tax rate. Consequently, any changes in the U.S. corporate income tax rate have impacted the carrying value of the
Company’s deferred tax assets. Under the new corporate income tax rate of 21%, deferred income taxes decreased, with a
corresponding decrease to the valuation allowance. Therefore, the TCJA had no impact on the Company's 2017 earnings. As of
December 31, 2018, the Company has completed its accounting of the tax effects from the enactment of the TCJA.
Under the FASB's accounting guidance related to uncertain tax positions, among other things, the impact of an uncertain income
tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit
by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being
sustained. Additionally, the FASB provides accounting guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition.
nn
The Company’s policy is to recognize interest or penalties related to income tax matters in income tax expense. Interest and
aa
penalties related to income tax matters were not material for the years ended December 31, 2018 or 2017.
The Company is subject to taxation in the U.S. and various state jurisdictions. The Company’s tax years for 2001 (federal) and
2008 (California) and forward are subject to examination by the U.S. and state tax authorities due to the carry forward of unutilized
net operating losses and R&D tax credits.
69
The following table summarizes the activity related to unrecognized tax benefits:
(in thousands)
Balance as of the beginning of the year
Increases related to prior year tax positions
Increases related to current year tax positions
Expiration of the statute of limitations for the assessment of taxes
Balance as of the end of the year
2018
2017
2016
$
$
37,403
6,103
11,726
(457)
54,775
$
$
34,112
——
3,291
——
37,403
$
$
33,074
260
2,211
(1,433)
34,112
The Company, under authoritative guidance, excluded those deferred tax assets that are not more-likely-than-not to be sustained
under the technical merits of the tax position. These unrecognized tax benefits totaled $11.7 million for current year tax positions, as
reflected in the table above.
As of December 31, 2018, the Company had $50.1 million of unrecognized tax benefits that, if recognized and realized, would
affect the effective tax rate.
In the next 12 months, the Company does not expect a significant change in its unrecognized tax benefits.
NOTE 10. LEASES
In December 2007, the Company closed the sale of its facility and associated real property for a purchase price of $109 million.
Concurrent with the sale, the Company retired the entire $47.7 million in mortgage debt previously outstanding with respect to the
facility and associated real property and received cash of $61.0 million, net of transaction costs and debt retirement. The ultimate
result of this real estate sale was a net deferred gain of $39.1 million, of which the Company recognized $0.7 million in 2018,
$2.1 million in 2017, and $3.4 million in 2016. As of December 31, 2018, the remaining balance of the net deferred gain was
approximately $7.3 million, which the Company expects to recognize as a cumulative-eff
ff
ect adjustment to equity upon adoption of
Topic 842 on January 1, 2019. Refer to Note 1 to the consolidated financial statements for more information on the impact of
adoption.
nn
Upon the closing of the sale of the facility and associated real property, the Company entered into an agreement (original lease)
whereby it leased back the Company’s corporate headquarters, comprised of two buildings located in San Diego, California, for a
naa
initial term of 12 years. In 2008 through 2011, the Company entered into a series of subsequent amendments to the original lease,
whereby the Company vacated a building and continued to occupy one building.
n
In June 2017, the Company entered into an amendment to extend the current term of the original lease through December 31,
2029. Under the terms of the amendment, the Company reduced the base rental rate by approximately 8% and will continue to pay
base annual rent (subject to an annual fixed percentage increase), plus a 3.5% annual management fee, property taxes, and other
normal and necessary expenses, such as utilities, repairs, and maintenance. Certain incentives were included in the lease, including
approximately $13.1 million in tenant improvement allowances, three months of rent abatement, and a reduction in the required
security deposit amount from $4.7 million to $3.0 million. In lieu of a cash security deposit, Wells Fargo Bank, N.A. issued on the
Company’s behalf a $3.0 million letter of credit, which is secured by a deposit of equal amount with the same bank. The Company has
y
the right to extend the lease for 2 consecutive 10-year terms and right of first offer for future rental of adjacent office space owned by
the landlord.
n
l
In May 2018, the Company entered into an agreement to lease 44,718 square feet of office space, which commenced on July 1,
2018, for a term of 10 years and 10 months. Under the terms of the lease, the Company will pay base annual rent (subject to an annual
fixed percentage increase), plus property taxes, and other normal and necessary expenses, such as utilities, repairs, and maintenance.
Certain incentives were included in the lease, including approximately $4.2 million in tenant improvement allowances and twelve
months of rent abatement. In lieu of a cash security deposit, Wells Fargo Bank, N.A. issued on the Company’s behalf a $1.0 million
letter of credit, which is secured by a deposit of equal amount with the same bank. The Company does not have the right to extend the
lease or right of first offer for future rental of adjacent office space owned by the landlord.
The Company recognizes rent expense on a straight-line basis over the term of the associated lease. Accordingly, rent expense
recognized in excess of rent paid is reflected as a liability in the Company’s consolidated balance sheets. Gross rent expense
approximately $6.9 million for 2018, $5.9 million for 2017, and $6.0 million for 2016.
ff
was
70
NOTE 11. RETIREMENT PLAN
The Company has a 401(k) defined contribution savings plan (401(k) Plan). The 401(k) Plan is for the benefit of all qualifying
employees and permits voluntary contributions by employees up to 60% of base salary limited by the IRS-imposed maximum.
Employer contributions were $1.8 million, $1.1 million, and $0.6 million for the years ended December 31, 2018, 2017 and 2016,
respectively.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Product Liability. The Company’s business exposes it to liability risks from its potential drug products. A successful product
liability claim or series of claims brought against the Company could result in payment of significant amounts of money and divert
management’s attention from running the business. The Company may not be able to maintain insurance on acceptable terms, or the
insurance may not provide adequate protection in the case of a product liability claim. To the extent that product liability insurance, if
available, does not cover potential claims, the Company would be required to self-insure the risks associated with such claims. The
Company believes that it carries reasonably adequate insurance for product liability claims.
Licensing and Research Agreements. The Company entered into in-licensing agreements with various universities and research
organizations, which are generally cancelable at the option of the Company with terms ranging from 0-180 days written notice. Under
the terms of these agreements, the Company received licenses to research tools, know-how, and technology claimed in certain patents
or patent applications. The Company is required to pay fees, milestones, and/or royalties on future sales of products employing the
technology or falling under claims of a patent, and some of the agreements require minimum royalty payments. Some of the
agreements also require the Company to pay expenses arising from the prosecution and maintenance of the patents covering the in
-
m
licensed technology. The Company continually reassesses the value of the license agreements and cancels them when research efforts
are discontinued on these programs. As of December 31, 2018, the Company may be required to pay milestone payments of up to
$1.0 billion over the lives of these agreements, in addition to royalties on sales of the affected products at rates ranging up to 6%. Due
to the uncertainties of the development process, the timing and probability of the milestone and royalty payments cannot be accurately
estimated.
p
The Company is not aware of any proceedings or claims that it believes will have, individually or in the aggregate, a material
adverse effect on its business, financial condition or results of operations.
NOTE 13. SUBSEQUENT EVENTS
On January 28, 2019, the Company entered into a collaboration and license agreement with a clinical-stage gene therapy
company, Voyager Therapeutics, Inc., or Voyager. The collaboration is focused on the development and commercialization of four
programs using Voyager’s proprietary gene therapy platforms. The four programs consist of Voyager’s VY-AADC program for
Parkinson’s disease, Voyager’s VY-FXN01 program for Friedreich’s ataxia, as well as rights to two programs to be determined by the
parties in the future. In connection with the agreement, the Company agreed to pay Voyager a $115 million upfront cash payment and
entered into an agreement to purchase $50 million of Voyager’s common stock. Pursuant to development plans agreed to by the
Company and Voyager, unless Voyager exercises the co-development and co-commercialization rights that are described below, the
Company has agreed to be responsible for all development costs. Upon the occurrence of a specified event for each program, the
Company has agreed to assume responsibility for development, manufacturing, and commercialization activities for such program.
Additionally, Voyager may be entitled to earn up to $1.7 billion in development, regulatory, and commercial milestones across the
four programs and royalties for net sales in and outside the U.S.
tt
Under the terms of the agreement, on a program-by-program basis, upon the achievement of milestones or metrics specified in
the agreement for VY-AADC and VY-FXN01, Voyager will have the option to co-develop and co-commercialize such program with
the Company in the U.S. under cost- and profit-sharing arrangements, and Voyager agrees to forfeit certain milestones and royalties
related to such program for which Voyager has exercised its co-develop and co-commercialize option.
mm
ll
The effectiveness of the agreement and the closing of the sale and issuance of the Voyager common stock described above are
subject to certain conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and other customary closing conditions.
71
NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of the Company for the years ended December 31, 2018 and 2017:
(in thousands, except per share data)
2018:
Revenues
Operating expenses
Net (loss) income
Net (loss) income per share:
Basic
Diluted
Shares used in the calculation of net (loss) income per share:
Basic
Diluted
2017:
Revenues
Operating expenses
Net (loss) income
Net (loss) income per share:
Basic
Diluted
Shares used in the calculation of net (loss) income per share:
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
$
$
$
$
71,086
$
$
108,533
(41,818) $
96,905 $
98,757 $
(5,913) $
151,757
97,434
50,764
(0.47) $
(0.47) $
(0.07) $
(0.07) $
0.56
0.52
89,526
89,526
90,100
90,100
90,555
96,798
$
$
$
$
$
—— $
79,932
$
(78,326) $
6,335 $
63,603 $
(59,985 ) $
$
60,774
66,769
$
(11,125) $
(0.90) $
(0.90) $
(0.68) $
(0.68) $
(0.13) $
(0.13) $
87,283
87,283
88,063
88,063
88,325
88,325
131,492
109,621
18,078
0.20
0.19
90,742
95,724
94,517
82,683
6,894
0.08
0.07
88,665
92,659
72
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSUREE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURESS
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can
only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance,
management necessarily was required to apply its judgment in evaluating the cost-benef
ff
it relationship of possible controls and
procedures.
aa
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
n
our disclosure controls and procedures as of the end of the year covered by this report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance
level.
c
73
Management’s Report on Internal Control Over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive
Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasona
a
ble
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles, and includes those policies and procedures that:
t
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of our management and directors; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of
r
its inherent limitations. Internal control over financial reporting is a process that in
volves human diligence and compliance and is
subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements
may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are
known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not
eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for
the company.
aa
aa
rr
tt
Management has used the framework set forth in the report entitled Internal Control-Integrated Framework
tt
(2013 framework) published by the Committee of Sponsoring Organizations of the Treadw
as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, management has
concluded that our internal control over financial reporting was effective as of December 31, 2018. Ernst & Young, LLP, our
independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting as of
December 31, 2018, which is included herein.
ay Commission (2013 framework), known
f
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially
ff
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
74
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Neurocrine Biosciences, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Neurocrine Biosciences, Inc.’s internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework), (the COSO criteria). In our opinion, Neurocrine Biosciences, Inc. (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018,
based on the COSO criteria.
rr
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of
operations and comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended
December 31, 2018, and the related notes and our report dated February 7, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
tt
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
aa
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a
material effect on the financial statements.
a
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Diego, California
February 7, 2019
75
ITEM 9B. OTHER INFORMATIONN
None.
76
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item will be contained in our Definitive Proxy Statement for our 2019 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31,
2018. Such information is incorporated herein by reference.
We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, and to all of our other
officers, directors, employees and agents. The code of ethics is available at the Corporate Governance section of the Investors page on
our website at www.neurocrine.com. We intend to disclose future amendments to, or waivers from, certain provisions of our code of
ethics on the above website within four business days following the date of such amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION N
Information required by this item will be contained in our Definitive Proxy Statement for our 2019 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31,
2018. Such information is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS S
Information required by this item will be contained in our Definitive Proxy Statement for our 2019 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31,
2018. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE E
Information required by this item will be contained in our Definitive Proxy Statement for our 2019 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31,
2018. Such information is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES S
Information required by this item will be contained in our Definitive Proxy Statement for our 2019 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31,
2018. Such information is incorporated herein by reference.
77
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report.
1. List of Financial Statements. The following are included in Item 8 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements (includes unaudited Selected Quarterly Financial Data)
2. List of all Financial Statement schedules. All schedules are omitted because they are not applicable, or the required
information is shown in the Financial Statements or notes thereto.
3. List of Exhibits required by Item 601 of Regulation S-K. See part (b) below.
(b) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this report:
Exhibit
Number Description
3.1
3.2
4.1
4.2
4.3
Certificate of Incorporation, as amended(1)
Bylaws, as amended(2)
Form of Common Stock Certificate(3)
Indenture, dated as of May 2, 2017, by and between the Company and U.S. Bank National Association, as Trustee(4)
Form of Note representing the Company’s 2.25% Convertible Notes due 2024(5)
Collaboration and License Agreements
g
10.1*
10.2*
10.3*
Collaboration Agreement dated June 15, 2010, by and between Abbott International Luxembourg S.a.r.l. and the
Company as amended on August 31, 2011(6)
First Amendment to Collaboration and License Agreement Dated August 31, 2011 between the Company and Abbott
International Luxemburg S.a.r.l.(7)
Collaboration and License Agreement dated March 31, 2015 between Mitsubishi Tanabe Pharma Corporation and the
Company(8)
10.4*
License Agreement dated February 9, 2017 between BIAL– Portela & CA, S.A. and the Company(9)
Collaboration and License Agreement dated January 28, 2019 between Voyager Therapeutics, Inc. and the Company
10.6
10.7
Stock Purchase Agreement dated January 28, 2019 between Voyager Therapeutics, Inc. and the Company
Investor Agreement dated January 28, 2019 between Voyager Therapeutics, Inc. and the Company
f
ManuMM fu acturin
ff
g g
g Ag greements
10.8*
Master Manufacturing Services Agreement dated November 28, 2016, by and between Patheon UK Limited and the
Company(10)
10.9*
Product Agreement dated November 28, 2016, by and between Patheon UK Limited and the Company(11)
10.10*
10.11*
Commercial Supply Agreement dated March 9, 2017 between F.I.S. – FABBRICA ITALIANA SINTETICI S.p.A. and
the Company
Amended and Restated Product Agreement dated June 27, 2017 by and between Patheon UK Limited and the
Company(12)
Equitytt Plans and Related Agreements
q
g
y
10.12** Neurocrine Biosciences, Inc. 2003 Incentive Stock Plan, as amended and form of stock option agreement and restricted
78
stock unit agreement(13)
10.13** Neurocrine Biosciences, Inc. 2011 Equity Incentive Plan, as amended(14)
10.14**
Form of Stock Option Grant Notice and Option Agreement for use under the Neurocrine Biosciences, Inc. 2011 Equity
Incentive Plan, and Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement for use under the
Neurocrine Biosciences, Inc. 2011 Equity Incentive Plan(15)
10.15** Neurocrine Biosciences, Inc. Inducement Plan, as amended(16)
10.16**
Form of Stock Option Grant Notice and Option Agreement for use under the Neurocrine Biosciences, Inc. Inducement
Plan, and Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement for use under the Neurocrine
Biosciences, Inc. Inducement Plan(17)
10.17** Neurocrine Biosciences, Inc. 2018 Employee Stock Purchase Plan dated May 30, 2018(18)
ff
Agreements with OffO icers and Directors
ff
g
10.18**
Amended and Restated Employment Agreement effective August 1, 2007 between the Company and Kevin C.
Gorman, Ph.D.(19)
10.19** Amended and Restated Employment Agreement effective August 6, 2007 between the Company and Christopher F.
O’Brien M.D.(20)
10.20**
Amended and Restated Employment Agreement effective August 14, 2007 between the Company and Haig P.
Bozigian, Ph.D.(21)
10.21** Form of Amendment to Employment Agreement for executive officers, effective as of December 15, 2010(22)
10.22** Employment Agreement dated May 26, 2015 between the Company and Eric Benevich(23)
10.23** Employment Agreement effective November 29, 2017 between the Company and Matthew C. Abernethy(24)
10.24** Form of Indemnity Agreement entered into between the Company and its officers and directors(25)
y
Agreements Related to Real Propertytt
g
p
10.25
Amended and Restated Lease dated November 1, 2011 between the Company and Kilroy Realty, L.P.(26)
10.26
First Amendment to Amended and Restated Lease between the Company and Kilroy Realty, L.P., dated June 5, 2017(27)
10.27
10.28
21.1
23.1
31.1
31.2
Second Amendment to Amended and Restated Lease between the Company and Kilroy Realty, L.P., dated October 12,
2017(28)
Letter of Credit dated December 3, 2007, issued by Wells Fargo Bank, N.A. for the benefit of Kilroy Realty, L.P., as
amended on November 20, 2014 and June 19, 2017(29)
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange
Act of 1934
Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange
Act of 1934
32***
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomym Extension Schema Document.
101.CAL XBRL Taxonomymm Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomymm Extension Definition Linkbase Document.
101.LAB XBRL Taxonomymm Extension Label Linkbase Document.
101.PRE XBRL Taxonomymm Extension Presentation Linkbase Document.
(1)
(2)
Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed on November 5, 2018
Incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed on November 5, 2018
79
Incorporated by reference to the Company’s Registration Statement on Form S-1 (Registration No. 333-03172)
(3)
Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on May 2, 2017
(4)
Incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on May 2, 2017
(5)
Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed on July 29, 2010
(6)
Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed on October 31, 2011
(7)
Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on April 30, 2015
(8)
(9)
Incorporated by reference to Exhibit 99.4 of the Company’s Current Report on Form 8-K filed on April 25, 2017
(10) Incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on April 25, 2017
(11) Incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed on April 25, 2017
(12) Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed on November 1, 2017
(13) Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on July 30, 2009
(14) Incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on May 30, 2018
(15) Incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on June 1, 2015
(16) Incorporated by reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K filed on February 13, 2018
(17) Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on July 29, 2015
(18) Incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed on May 30, 2018
(19) Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed on August 3, 2007
(20) Incorporated by reference to Exhibit 10.35 of the Company’s Annual Report on Form 10-K filed on February 10, 2011
(21) Incorporated by reference to Exhibit 10.37 of the Company’s Annual Report on Form 10-K filed on February 11, 2008
(22) Incorporated by reference to Exhibit 10.35 of the Company’s Annual Report on Form 10-K filed on February 11, 2008
(23) Incorporated by reference to Exhibit 10.32 of the Company’s Annual Report on Form 10-K filed on February 14, 2017
(24) Incorporated by reference to Exhibit 10.26 of the Company’s Annual Report on Form 10-K filed on February 13, 2018
(25) Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on November 1, 2017
(26) Incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed on January 18, 2012
(27) Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on August 3, 2017
(28) Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed on November 1, 2017
(29) Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on December 10, 2007; Exhibit
10.5 of the Company’s Annual Report on Form 10-K filed on February 9, 2015; and Exhibit 10.2 of the Company’s Quarterly
Report on Form 10-Q filed on August 3, 2017
*
Confidential treatment has been granted with respect to certain portions of the exhibit.
** Management contract or compensatory plan or arrangement.
*** These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350 and are not
being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into
any filing of Neurocrine Biosciences, Inc., whether made before or after the date hereof, regardless of any general incorporation
language in such filing.
Except as specifically noted above, the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K have a Commission File Number of 000-22705.
(c) Financial Statement Schedules. See Item 15(a)(2) above.
80
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
NEUROCRINE BIOSCIENCES, INC.
A Delaware Corporation
By:
/s/ Kevin C. Gorman
Kevin C. Gorman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
Date: February 7, 2019
/s/ Kevin C. Gorman
Kevin C. Gorman
Signature
/s/ Matthew C. Abernethyy
Matthew C. Abernethyhh
/s/ William H. Rastetter
William H. Rastetter
/s/ Gary A. Lyons
y
y
Gary A. Lyons
/s/ George J. Morrow
George J. Morrow
/s/ Richard F. Pops
Richard F. Pops
/s/ Alfred W. Sandrock, Jr.
Alfred W. Sandrock, Jr.
p
/s/ Stephen A. Sherwin
Stephen A. Sherwin
Title
Chief Executive Officer
and Director
(Principal Executive Officer)
Date
February 7, 2019
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 7, 2019
Chairman of the Board of Directors
February 7, 2019
Director
Director
Director
Director
Director
February 7, 2019
February 7, 2019
February 7, 2019
February 7, 2019
February 7, 2019
81
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Neurocrine Biosciences
Corporate Information
CORPORATE
MANAGEMENT
Kevin C. Gorman, Ph.D.
Chief Executive Officer
BOARD OF
DIRECTORS
Matthew C. Abernethy
Chief Financial Officer
Eric Benevich
Chief Commercial Officer
Haig P. Bozigian, Ph.D.
Chief Development Officer
Julie S. Cooke
Chief Human Resources Officer
William H. Rastetter, Ph.D.
Chairman of the Board,
Neurocrine Biosciences, Inc.
and Fate Therapeutics
Kevin C. Gorman, Ph.D.
Chief Executive Officer,
Neurocrine Biosciences, Inc.
Gary A. Lyons
Former President and Chief Executive
Officer, Neurocrine Biosciences, Inc.
George J. Morrow
Former Executive Vice President, Global
Commercial Operations, Amgen Inc.
Kyle W. Gano, Ph.D.
Chief Business Development Officer
Dimitri E. Grigoriadis, Ph.D.
Chief Research Officer
Darin M. Lippoldt, J.D.
Chief Legal Officer
Malcolm C. Lloyd-Smith
Chief Regulatory Officer
Eiry W. Roberts, M.D.
Chief Medical Officer
Richard F. Pops
Chairman of the Board
and Chief Executive Officer,
Alkermes plc
Alfred W. Sandrock, Jr., M.D., Ph.D.
Executive Vice President and
Chief Medical Officer, Biogen Inc.
Stephen A. Sherwin, M.D.
Former Chairman of the Board
and Chief Executive Officer,
Cell Genesys, Inc.
STOCKHOLDER
INFORMATION
Transfer Agent
American Stock Transfer
Auditors
Ernst & Young LLP
Corporate Counsel
Cooley LLP
12780 EL CAMIN O R EAL, SAN DIEG O, CA 9 21 30 ( 858 ) 617- 7 60 0
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