NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business and Summary of Significant Accounting Policies
CTI BioPharma Corp., also referred to in these financial statements as “we,” “us,” “our,” the “Company” and “CTI,” is a commercial biopharmaceutical company focused on the acquisition, development and commercialization of novel targeted therapies for blood-related cancers where there is a significant unmet medical need. Our goal is to build a profitable company by generating income from products we develop and commercialize, either alone or with partners. We have one commercially approved product, VONJO® (pacritinib), which received Accelerated Approval on February 28, 2022 from the U.S. Food and Drug Administration, or FDA, in the United States, for the treatment of adult patients with intermediate or high-risk primary or secondary (post-polycythemia vera or post-essential thrombocythemia) myelofibrosis with a platelet count below 50 x 109/L. We commercially launched VONJO in March 2022. We are conducting the Phase 3 PACIFICA study of VONJO in patients with myelofibrosis and severe thrombocytopenia as a post-marketing requirement.
We operate in a highly regulated and competitive environment. The manufacturing and marketing of pharmaceutical products requires approval from, and is subject to ongoing oversight by, the FDA, the European Medicines Agency, or the EMA, in the EU, and comparable agencies in other countries. Obtaining approval for a new therapeutic product is never certain, may take many years and may involve the expenditure of substantial resources.
On May 10, 2023, CTI entered into an Agreement and Plan of Merger, or the Merger Agreement, with Swedish Orphan Biovitrum AB (publ), a Swedish public limited liability company, or Sobi, and Cleopatra Acquisition Corp., a Delaware corporation and a wholly owned, indirect subsidiary of Sobi, or the Purchaser. For additional information regarding the pending Merger, please see “Note 6. Subsequent Events”.
Basis of Presentation
The accompanying unaudited financial information as of and for the three months ended March 31, 2023 and 2022 has been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position at such dates and the operating results and cash flows for such periods. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules of the U.S. Securities and Exchange Commission, or the SEC. These unaudited condensed financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2022 included in our Annual Report on Form 10-K filed with the SEC on March 6, 2023.
The condensed balance sheet at December 31, 2022 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the condensed financial statements and accompanying notes. Estimates are used for, but not limited to, evaluation of going concern and classification of liabilities, net product sales, clinical accruals, intangible assets, interest expense on royalty financing obligation, income taxes, equity-based compensation and the collectability of receivables. Given the global economic climate, these estimates are becoming more challenging, and actual results could differ materially from those estimates. See Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in this Quarterly Report on Form 10-Q for further information.
Liquidity
The accompanying condensed financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business within
one year after the date the condensed financial statements are issued. Our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the condensed financial statements are issued.
While we have seen strong refill demand and expect revenues from VONJO to be one of our primary sources of liquidity, we may not be able to accurately predict the market acceptance or growth trajectory of VONJO’s revenues. We project operating expenses, when offset against our projected revenues, will result in operating losses for the foreseeable future as we expect to conduct research, development, testing and regulatory compliance activities with respect to other development pathways for pacritinib. We have incurred a net operating loss every year since our formation and expect to continue to incur net losses for the foreseeable future. As of March 31, 2023, we had an accumulated deficit of $2.5 billion. Our available cash, cash equivalents and short-term investments were $59.0 million as of March 31, 2023. We expect that our present financial resources, together with expected cash receipts from net product sales of VONJO, will be sufficient to meet our obligations as they come due and to fund our operations into the first quarter of 2024. Based on our evaluation completed pursuant to ASC 205-40 Presentation of Financial Statements-Going Concern, these factors raise substantial doubt about our ability to continue as a going concern within one year after the date that the condensed financial statements are issued.
We will require additional capital in order to pursue our longer-term strategic objectives. We expect to satisfy our capital needs through existing capital balances, revenues from VONJO, and a combination of public or private equity financings, partnerships, collaborations, joint ventures, disposition of assets, debt financings or restructurings, bank borrowings or other sources of financing. However, we have a limited number of authorized shares of common stock available for issuance and additional funding may not be available on favorable terms or at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If we fail to obtain additional capital when needed, our ability to operate as a going concern will be harmed, and we may be required to delay, scale back or eliminate some or all of our research and development programs and commercialization efforts and/or reduce our selling, general and administrative expenses, be unable to attract and retain highly-qualified personnel, be unable to obtain and maintain contracts necessary to continue our operations at affordable rates with competitive terms, be unable to or elect to refrain from making our contractually required payments when due (including debt payments) and/or be forced to cease operations, liquidate our assets and possibly seek bankruptcy protection.
Our future capital requirements will depend on many factors, including: our ability to generate sales of VONJO; the cost of ongoing organization and maintenance of our commercial infrastructure and distribution capabilities; our ability to reach milestones triggering payments to be made or received under certain of our contractual arrangements; the cost of manufacturing VONJO; the cost of manufacturing clinical supplies of our product candidates or of establishing commercial supplies of any products that we may develop in the future; developments in and expenses associated with our research and development activities; our clinical development plans and any changes that we may initiate or that may be requested by the FDA or other regulators as we seek approval for products that we may develop in the future; acquisitions or collaborations with respect to compounds or other assets; competitive market developments; disruptions or other delays to our business and clinical trials resulting from ongoing worldwide current events; and other unplanned business developments.
In addition, our ability to comply with covenants under our Credit Agreement, or the Credit Agreement, with Drug Royalty III LP 2, or DRI, may be affected by events beyond our control, and we may not be able to meet those covenants. A breach of any of these covenants, including a material adverse change in our business, operations or condition (financial or otherwise), could result in an event of default under the Credit Agreement, which could cause all of the outstanding indebtedness under the facility to become immediately due and payable. The accompanying condensed financial statements do not include adjustments, if any, that may result from the outcome of this uncertainty.
Cash, Cash Equivalents and Short-Term Investments
As of March 31, 2023 and December 31, 2022, our cash, cash equivalents and short-term investments consisted of cash, money market funds and corporate debt securities. Cash equivalents and short-term investments are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. There are three levels of inputs used to measure fair value, with Level 1 having the highest priority and Level 3 having the lowest:
•Level 1—Valuations based on unadjusted quoted prices for identical assets and liabilities in active markets.
•Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
•Level 3—Valuations based on unobservable inputs that are supported by little or no market activity, reflecting our own assumptions. These valuations require significant judgment or estimation.
We measure the fair value of money market funds based on the closing price reported by the fund sponsor from an actively traded exchange. We value all other securities using broker quotes that utilize observable market inputs. We did not hold cash, cash equivalents and short-term investments categorized as Level 3 assets as of March 31, 2023 and December 31, 2022.
The following table summarizes, by major security type, our cash, cash equivalents and short-term investments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Cost or Amortized Cost | | | | Gross Unrealized Losses | | Total Estimated Fair Value | | Total Estimated
Fair Value |
| Financial Assets | | | | | | | | | |
Cash | $ | 167 | | | | | $ | — | | | $ | 167 | | | $ | 337 | |
| Level 1 securities: | | | | | | | | | |
Money market funds | 24,042 | | | | | — | | | 24,042 | | | 30,083 | |
| | | | | | | | | |
| Level 2 securities: | | | | | | | | | |
| | | | | | | | | |
Corporate debt securities | 34,813 | | | | | (11) | | | 34,802 | | | 49,519 | |
| Total cash, cash equivalents and short-term investments | $ | 59,022 | | | | | $ | (11) | | | $ | 59,011 | | | $ | 79,939 | |
| | | | | | | | | |
| | | | | | | | | |
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Concentrations of Credit Risk and Uncertainties
Cash, cash equivalents, short-term investments and accounts receivable are financial instruments that potentially subject us to concentrations of credit risk. All of our accounts receivable relate to VONJO product sales. We have not experienced any significant credit losses on cash, cash equivalents, short-term investments or accounts receivable to date and do not require collateral on accounts receivable. To estimate credit losses for accounts receivable, we consider our historical experience and other currently available information, including customer financial condition, as well as current and forecasted economic conditions affecting our customers. We consider the risk of potential credit losses to be low based on our evaluation of the creditworthiness of our customers who are specialty distributors and specialty pharmacies.
We source our drug products for commercial operations and clinical trials from a concentrated group of third-party suppliers and contractors. If we are unable to obtain sufficient quantities of source materials, manufacture or distribute our products to customers from existing suppliers and service providers, or obtain the materials or services from other suppliers or manufacturers, certain sales and research and development activities may be delayed.
Accounts Receivable
Accounts receivable, net consist of amounts due from customers, net of customer allowances for prompt-pay discounts, chargebacks, rebates and product returns, as well as distribution service fees. Accounts receivable are stated at amortized cost less allowance for credit losses. Our standard credit terms range from 30 days to 66 days, and all arrangements are payable within one year of the transfer of control of the product; as such, we do not adjust our revenues for the effects of a significant financing component. We analyze past due accounts for collectability and periodically evaluate the creditworthiness of our customers. As of March 31, 2023, we determined that an allowance for credit losses was not required based on our review of customer accounts and individual circumstances.
Inventories
Prior to regulatory approval, we expense costs related to the production of inventories as research and development expenses in the period in which they are incurred because product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. Subsequent to regulatory approval, we capitalize costs incurred to manufacture our products as inventories when the related costs are expected to be recoverable through the commercialization of the product. VONJO inventory that is deployed for clinical, research or development purposes is charged to research and development expense.
As of March 31, 2023, inventories consist of active pharmaceutical ingredients and capitalized shipping, packaging and labeling costs incurred subsequent to FDA approval of VONJO. Inventories are recorded at the lower of cost and net realizable
value with the cost of inventories determined on a specific identification basis in a manner that approximates the first-in, first-out method. We perform an assessment of the recoverability of capitalized inventory during each reporting period and write down any excess and obsolete inventories to their net realizable value in the period in which the impairment is first identified.
Intangible Assets
Intangible assets as of March 31, 2023 consist of a capitalized milestone payment incurred upon FDA approval and commercialization of VONJO during the first quarter of 2022. Intangible assets are amortized on a straight-line basis over the patent life of the VONJO product compound, which was 11.9 years upon FDA approval, with a remaining amortization period of 10.8 years as of March 31, 2023. For the three months ended March 31, 2023 and 2022, we recognized $0.5 million and $0.2 million of amortization expense, respectively, which was included in Cost of sales. The gross carrying amount and accumulated amortization were $25.0 million and $2.3 million, respectively, as of March 31, 2023.
We review for impairment when events or circumstances indicate that the carrying value of intangible assets may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. Such estimated undiscounted future cash flows are derived from projected sales of VONJO and other competitive factors. The amount of impairment is measured as the difference between the carrying amount and the fair value of the impaired asset.
Credit Agreement
All amounts due under the Credit Agreement with DRI, which include a term loan in the principal amount of $50.0 million and the end-of-facility lender fee of $1.0 million, have been recorded in current liabilities on the condensed balance sheets as of March 31, 2023 and December 31, 2022 due to the considerations discussed in Liquidity above and the assessment that the events of default clause, which includes a material adverse effect provision under the Credit Agreement, is not within our control. We have not been notified of an event of default by DRI as of the date of the filing of this Quarterly Report on Form 10-Q. In addition, the Credit Agreement contains a minimum liquidity covenant requiring us to maintain at least $10.0 million of unrestricted cash and cash equivalents, subject to certain exceptions. See Part II, Item 8, “Notes to Consolidated Financial Statements, Note 8. Debt Financing Arrangements” of our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding the Credit Agreement with DRI. Upon the closing of the pending acquisition by Sobi, the loan under the Credit Agreement will be repaid in full, unless otherwise directed by DRI, including the end-of-facility lender fee of $1.0 million and a prepayment charge of approximately $2.2 million.
Royalty Financing Obligation
In August 2021, we entered into a Purchase and Sale Agreement, or the Royalty Financing Agreement, with DRI. We evaluated the terms of the Royalty Financing Agreement and concluded that the features of the funding from DRI are similar to those of a debt instrument. Accordingly, the funding from DRI is recorded as Royalty financing obligation on our balance sheet. The Royalty Financing Agreement does not contain subjective acceleration clauses or provisions that would require repayment of funding; as such, the funding received under the Royalty Financing Agreement is classified in long-term liabilities. See Part I, Item 1, “Notes to Condensed Financial Statements, Note 5. Royalty Financing Agreement ” of this Quarterly Report on Form 10-Q for additional details.
Revenue Recognition
ASC 606 Revenue from Contracts with Customers applies to all contracts with customers, except for contracts that are within the scope of other authoritative literature. Under ASC 606, we recognize revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to be entitled to in exchange for those goods or services.
To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform 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) we satisfy a performance obligation. We apply the five-step model to arrangements that meet the definition of a contract under ASC 606, including when it is probable that we will collect the consideration we are entitled to in exchange for goods or services we transfer to the customer. At contract inception, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. Prior to recognizing revenue, we make estimates of the transaction price, including any variable consideration that is subject to a constraint. Variable consideration is included in the transaction price to the extent that it is
probable that there will not be a significant reversal in the amount of cumulative revenue recognized and when the uncertainty associated with the variable consideration is subsequently resolved. We recognize revenue for the amount of the transaction price that is allocated to the respective performance obligation as the performance obligation is satisfied.
Net Product Sales
On February 28, 2022, the FDA granted Accelerated Approval of VONJO for the treatment of adult patients with intermediate or high-risk primary or secondary (post-polycythemia vera or post-essential thrombocythemia) myelofibrosis with a platelet count below 50 x 109/L. We commercially launched VONJO in March 2022. We entered into a limited number of distribution arrangements with specialty distributors and specialty pharmacies in the United States to distribute VONJO. Our specialty pharmacy customers resell VONJO directly to patients while our specialty distributor customers resell VONJO to healthcare entities, who then resell to patients. Such specialty distributors and specialty pharmacies are referred to as our customers in the context of ASC 606.
We recognize revenue for product sales when our customers obtain control of the product, which generally occurs upon delivery. Upon receipt of the product by our customers, we recognize revenues net of variable consideration, which relates to allowances for customer credits, distribution service fees, product returns, chargebacks, rebates and co-payment assistance programs as discussed below. The reserves for these allowances are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than the customer). Taxes collected from the customer relating to product sales and remitted to governmental authorities are excluded from product sales.
Customer Credits and Distribution Service Fees: Our customers are offered prompt payment discounts. We expect our customers will pay timely enough to utilize prompt payment discounts and therefore we deduct the full amount of these discounts from total product sales when revenues are recognized. In addition, we pay a fee to our customers for their sales order management, data, and distribution services to us. Distribution service fees are also deducted from total product sales as they are incurred.
Returns: We offer our customers and other indirect purchasers a limited right of return for purchased units of VONJO for damaged, defective, in-dated or expired product beginning six months prior to the product’s expiration date and ending 12 months after the product’s expiration date. We estimate the amount of product returns initially based on data from similar products and other qualitative considerations, such as visibility into the inventory remaining in the distribution channel.
Chargebacks: Chargebacks result from our contractual commitments to provide our product to discount-eligible healthcare entities, group purchasing organizations, 340B eligible covered entities and federal government entities purchasing via the Federal Supply Schedule, at prices lower than the list prices charged to our customers. Our customers charge us back for the discount provided to the contracted entities. Our reserves for chargebacks consist of credits that we expect to issue for units that remain in the distribution channel inventory, which we expect will be sold to the contracted entities, as well as chargebacks that customers have claimed, but for which we have not yet issued a credit. We record reserves for chargebacks based on contractual terms in the same period that the related revenue is recognized.
Rebates: We are subject to discount and rebate obligations under government programs such as the Medicaid Drug Rebate Program, the Medicare Part D Coverage Gap Discounts Program and the 340B Drug Pricing Program, as well as under commercial contracts. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid. The allowance for rebates is based on statutory or contractual discount rates and expected utilization. Our estimates for the expected utilization of rebates are based on data received from our customers and historical utilization rates observed subsequent to product launch.
Our accrual for these rebates consists of invoices received for claims from prior and current quarters that have not been paid or for which an invoice has not yet been received as well as estimates of claims for the current period's shipment to our customers, which include estimated future claims that will be made for product that has been recognized as revenue but which remains in distribution channel inventories at the end of the reporting period.
Co-payment Assistance: We offer co-payment assistance to patients who have commercial insurance and meet certain eligibility requirements. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption based on data provided by the third-party administrator.
Cost of Sales
Cost of sales includes the cost of manufacturing inventories that are related to product sales, including overhead costs, amortization expense for intangible assets, and third-party royalties payable on net product sales. In addition, shipping and handling costs for product shipments are recorded in cost of sales as incurred. Cost of sales may also include costs related to
excess or obsolete inventory adjustment charges, abnormal costs, unabsorbed manufacturing and overhead costs and manufacturing variances. For the three months ended March 31, 2023 and 2022, cost of sales primarily consisted of amortization expense for intangible assets, shipping and handling costs, and third-party royalty costs. Substantially all of the manufacturing costs of VONJO product sold during the periods presented were previously expensed as research and development expenses.
Equity-Based Compensation Expense
Equity-based compensation expense is recognized over the requisite service periods on awards ultimately expected to vest. We apply estimated forfeiture rates at the time of grant and make revisions, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We recorded equity-based compensation expense of $2.5 million and $1.7 million for the three months ended March 31, 2023 and 2022, respectively. Substantially all of equity-based compensation expense was related to option awards and was included in Selling, general and administrative expenses for the periods presented.
Net Loss per Share
Basic net loss per common share is calculated based on net loss divided by the weighted average number of shares outstanding for the period. The calculation of diluted net loss per common share excludes the potential conversion of all dilutive convertible securities, such as convertible preferred stock, using the if-converted method, and the potential exercise or vesting of other dilutive securities, such as stock awards and warrants, using the treasury stock method, as their inclusion would have an anti-dilutive effect.
Common shares underlying stock awards, warrants and convertible preferred stock aggregating 58.3 million shares and 74.3 million shares for the three months ended March 31, 2023 and 2022, respectively, were excluded from the calculation of diluted net loss per share because they were anti-dilutive.
Milestone Payment
In October 2016, we entered into the Asset Return and Termination Agreement with Baxalta, pursuant to which, we were required to make a milestone payment to Takeda Pharmaceutical Company Limited, or Takeda, in the amount of approximately $10.3 million, upon the first regulatory approval or any pricing and reimbursement approvals of a product containing pacritinib. See Part II, Item 8, “Notes to Financial Statements, Note 10. Collaboration, Licensing and Milestone Agreements - Baxalta” of our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information. The milestone payment became payable upon FDA approval of VONJO on February 28, 2022 and was included in Accrued expenses as of December 31, 2022. The milestone payment was subsequently made to Takeda in March 2023.
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board, or FASB, issued accounting guidance to provide temporary optional expedients to ease the potential burden in accounting for reference rate reform. The guidance includes an optional expedient that simplifies accounting for contract modifications to loans receivable and debt, by prospectively adjusting the effective interest rate. In December 2022, the FASB issued guidance to defer the sunset of the reference rate reform guidance until December 31, 2024. In August 2021, we entered into the Credit Agreement, which has an interest rate referenced to the London Interbank Offered Rate, or LIBOR. We plan to elect the optional expedient for our credit facility by prospectively adjusting the effective interest rate if the cessation of the LIBOR occurs. We do not expect the adoption of this guidance to have a material impact on our condensed financial statements.
Although there were several other new accounting pronouncements issued or proposed by the FASB, we do not believe any of these have had or will have a material impact on our condensed financial statements.
2. Inventories
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Raw materials | $ | 153 | | | $ | 156 | |
| Work-in-process | 537 | | | 496 | |
| Finished goods | 87 | | | 81 | |
| Total inventories | $ | 777 | | | $ | 733 | |
3. Other Assets
Other assets consisted of the following (in thousands):
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| | March 31, 2023 | | December 31, 2022 |
| Operating lease right-of-use assets | $ | 1,889 | | | $ | 2,078 | |
| Prepaid manufacturing | 855 | | | 855 | |
| | | |
| | | |
| Clinical trial deposits | 370 | | | 370 | |
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| | | |
| Total other assets | $ | 3,114 | | | $ | 3,303 | |
4. Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
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| | March 31, 2023 | | December 31, 2022 |
| Operating lease liabilities - current | $ | 811 | | | $ | 781 | |
| End-of-facility lender fee (1) | 1,000 | | | 1,000 | |
| | | |
| Total other current liabilities | $ | 1,811 | | | $ | 1,781 | |
(1) The end-of-facility lender fee represents an amount payable to DRI upon repayment of our secured term loan under the Credit Agreement with DRI.
5. Royalty Financing Agreement
In August 2021, we entered into the Royalty Financing Agreement, pursuant to which we sold to DRI the right to receive certain royalty payments from us for a purchase price of up to $85.0 million in cash. Under the Royalty Financing Agreement, DRI is entitled to receive tiered royalties based on net product sales of VONJO in the United States in an amount equal to: (i) 9.60% of annual net sales of VONJO in the United States for annual net sales up to $125 million, (ii) 4.50% of annual net sales of VONJO in the United States for annual net sales between $125 million and $175 million, and (iii) 0.50% of annual net sales of VONJO in the United States for annual net sales between $175 million and $400 million. No royalty payments are payable on annual net sales of VONJO in the United States over $400 million. We are required to make payments of amounts owed to DRI each calendar quarter from and after the first commercial sale of the applicable product in the United States until the patent expiry of the VONJO product compound.
In March 2022, DRI funded the upfront purchase price of $60.0 million following FDA approval of VONJO in February 2022 and in January 2023, we received $6.5 million in additional funding in connection with the achievement of a certain minimum VONJO sales threshold. DRI will be required to provide up to $18.5 million of additional funding if certain minimum VONJO sales thresholds are met by the end of the third quarter of 2023.
Under the Royalty Financing Agreement, we agreed to specified affirmative and negative covenants, including without limitation covenants regarding periodic reporting of information by us to DRI, obligations to use commercially reasonable efforts to commercialize VONJO in the United States and restrictions on our ability to incur certain indebtedness, which restrictions are eliminated after the earliest of: (a) the date on which the trailing twelve months’ of VONJO sales equals at least $200 million, (b) the date on which the Company’s market capitalization (determined on an as-converted basis) is at least $1.0 billion for 20 consecutive trading days or (c) DRI receiving royalty payments in an amount equal to 100% of their purchase price. The Royalty Financing Agreement also contains representations and warranties, other covenants, indemnification obligations, settlement clauses and other provisions customary for transactions of this nature. The Royalty Financing Agreement does not contain subjective acceleration clauses or provisions that would require repayment of funding.
We evaluated the terms of the Royalty Financing Agreement and concluded that the features of the funding from DRI are similar to those of a debt instrument. Accordingly, the funding from DRI is recorded as Royalty financing obligation on our condensed balance sheet. In connection with the Royalty Financing Agreement, we recorded debt issuance costs of $1.8 million, of which $1.7 million remained unamortized as of March 31, 2023. The royalty financing obligation is amortized over the expected repayment term using an effective interest rate method that is calculated based on the rate that would enable the debt to be repaid in full over the patent life of the VONJO product compound, which was 11.8 years upon funding, with a remaining amortization period of 10.8 years as of March 31, 2023. The effective interest rate may vary during the term of the agreement depending on a number of factors, including the amount and timing of forecasted net product sales which affects the repayment timing and ultimate amount of repayment. As of March 31, 2023, the effective interest rate was 18.8%. We will evaluate the effective interest rate quarterly based on our current revenue forecasts utilizing the prospective method.
The activities related to the royalty financing obligation for the three months ended March 31, 2023 were as follows (in thousands):
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| |
| |
| Royalty financing obligation - beginning balance at January 1, 2023 | $ | 61,134 | |
| Additional funding received from DRI upon achievement of a sales milestone | 6,500 | |
| Accretion of imputed interest on the royalty financing obligation balance | 3,015 | |
| Amortization of debt issuance costs | 37 | |
| |
| Less: Royalty payable to DRI (classified in accrued expenses) | (2,315) | |
| Royalty financing obligation - ending balance at March 31, 2023 | $ | 68,371 | |
6. Subsequent Events
Agreement and Plan of Merger
On May 10, 2023, CTI entered into an Agreement and Plan of Merger, or the Merger Agreement, with Swedish Orphan Biovitrum AB (publ), a Swedish public limited liability company, or Sobi, and Cleopatra Acquisition Corp., a Delaware corporation and a wholly owned, indirect subsidiary of Sobi, or the Purchaser.
Pursuant to the Merger Agreement, upon the terms and subject to the conditions thereof, Purchaser will commence a tender offer, or the Offer, to acquire all of the outstanding shares of CTI common stock, or the Shares, at an offer price of $9.10 per Share, net to the seller in cash, without interest, subject to any applicable withholding taxes, or the Offer Price.
The obligation of Purchaser to purchase Shares tendered in the Offer is subject to the satisfaction or waiver of the conditions set forth in Annex I to the Merger Agreement, including (i) that there shall have been validly tendered and not validly withdrawn that number of Shares that, when added to any Shares then owned by Sobi and its controlled affiliates, represent at least one Share more than half of the sum of (A) all Shares then outstanding as of the expiration of the Offer, and (B) all Shares that CTI may be required to issue upon the vesting (including vesting solely as a result of the consummation of the Offer), conversion, settlement or exercise of all then-outstanding warrants, options, benefit plans, obligations or securities convertible or exchangeable into Shares or other rights to acquire or be issued Shares (in each case other than outstanding shares of CTI preferred stock), regardless of the conversion or exercise price or other terms and conditions thereof, or the Minimum Condition; (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, and receipt of clearance, approval or consent under any other applicable antitrust law; and (iii) those other conditions set forth in Annex I to the Merger Agreement.
Following the consummation of the Offer and upon the terms and subject to the conditions of the Merger Agreement, Purchaser will merge with and into CTI, with CTI surviving as a wholly owned, indirect subsidiary of Sobi, or the Merger. In the Merger, each Share issued and outstanding immediately prior to the effective time, or the Effective Time, of the Merger (other than certain excluded Shares as described in the Merger Agreement) will automatically be converted into the right to receive the Offer Price.
In addition, immediately prior to the Effective Time, each unexpired and unexercised option to purchase Shares under any CTI stock plan, or a Company Stock Option, whether or not vested, and that has an exercise price per Share that is less than the Offer Price, shall be cancelled and converted into the right to receive a payment in cash (without interest and less any applicable withholding taxes) equal to the product of (i) the total number of Shares subject to such Company Stock Option immediately prior to such cancellation and (ii) the excess, if any, of the Offer Price over the exercise price per Share subject to such Company Stock Option immediately prior to such cancellation. At the Effective Time, each Company Stock Option that is then outstanding and unexercised, whether or not vested, and that has an exercise price per Share that is equal to or greater than
the Offer Price shall be cancelled and the holder thereof shall not be entitled to any payment with respect to such cancelled Company Stock Option.
In addition, each share of CTI preferred stock that is issued and outstanding immediately prior to the Effective Time will be converted into the right to receive $91,000 per share (which is calculated in accordance with CTI’s certificate of designation applicable to such share of CTI preferred stock), without interest, subject to any applicable withholding taxes.
The Merger Agreement includes representations, warranties and covenants of the parties customary for a transaction of this nature. Among other things, until the earlier of the termination of the Merger Agreement or the Effective Time, CTI has agreed to operate its business in the ordinary course consistent with past practice and has agreed to certain other operating covenants, as set forth fully in the Merger Agreement. The Merger Agreement also prohibits CTI’s solicitation of proposals relating to alternative transactions and restricts CTI’s ability to furnish information to, or participate in any discussions or negotiations with, any third party with respect to any such transaction, subject to certain limited exceptions.
Either CTI or Sobi may terminate the Merger Agreement in certain circumstances, including if (i) the Offer is not completed by 11:59 p.m. Eastern Time on September 11, 2023, subject to automatic extension in the event that antitrust approval has not been obtained, or the Outside Date, (ii) a governmental authority of competent jurisdiction has issued a final, non-appealable judgment preventing the consummation of the Offer or the Merger or any applicable law by such a governmental authority makes consummation of the Offer or the Merger illegal, (iii) the Offer has expired without the acceptance of the Shares for payment or the purchase of Shares validly tendered pursuant to the Offer, in a circumstance in which all of the conditions to the Offer have been satisfied or waived (other than the Minimum Condition) following extension of the Offer pursuant to the Merger Agreement, or (vi) prior to the Offer Acceptance Time (as defined in the Merger Agreement) the other party breaches its representations, warranties or covenants in the Merger Agreement in a way that would cause certain conditions of the Offer not to be satisfied, subject to the right of the breaching party to cure the breach as set forth in the Merger Agreement. In addition, CTI may terminate the Merger Agreement, subject to compliance with specified process and notice requirements, in order to enter into an agreement with a third party who has made a “Superior Offer” (as defined in the Merger Agreement), and Sobi may terminate the Merger Agreement if (x) CTI’s board of directors has changed its recommendation in favor of the Offer and the Merger, failed to include its recommendation in the Schedule 14D-9, failed to publicly reaffirm its recommendation within five business days when requested by Sobi or has taken certain other specified actions described in the Merger Agreement (each a “Company Adverse Recommendation Change”) or (y) CTI has materially breached its obligations in respect of the non-solicitation provisions in the Merger Agreement.
In the event of a termination of the Merger Agreement under certain specified circumstances, including (i) termination by CTI to enter into an agreement providing for a Superior Offer (provided that CTI did not materially breach its non-solicitation obligations in any manner that results in such Superior Offer), (ii) termination by Sobi following a Company Adverse Recommendation Change, (iii) termination by Sobi due to the CTI board of directors’ failure to include its recommendation in the Schedule 14D-9, (iv) termination by Sobi because CTI has materially breached its obligations in respect of the non-solicitation provisions in the Merger Agreement, or (v) termination by either CTI or Sobi if the closing of the transactions contemplated by the Merger Agreement has not occurred by the Outside Date or termination by Sobi prior to the Offer Acceptance Time if CTI breaches its representations, warranties or covenants in the Merger Agreement in a way that would cause certain conditions of the Offer not to be satisfied (subject to CTI’s right to cure the breach as set forth in the Merger Agreement prior to such time of termination), and (A) a bona fide an “Acquisition Proposal” (as defined in the Merger Agreement) has been publicly disclosed after the date of the Merger Agreement and (B) within twelve months following such termination, CTI signs a definitive agreement for an Acquisition Proposal or consummates an Acquisition Proposal, in each case of the foregoing clauses (i)-(v), CTI is required to pay Sobi a termination fee equal to $59.0 million.
Tender and Support Agreement
Concurrently with the execution and delivery of the Merger Agreement, certain of CTI’s stockholders, or the Tendering Stockholders, entered into a Tender and Support Agreement, or the Support Agreement, with Sobi and Purchaser, pursuant to which each Tendering Stockholder agreed, among other things, to tender his or its Shares subject to the Support Agreement pursuant to the Offer and, if necessary, vote his or its Shares (i) in favor of (A) the approval and adoption of the Merger Agreement and the transactions contemplated thereunder or any other transaction pursuant to which Sobi proposes to acquire CTI in which CTI’s stockholders would receive aggregate cash consideration per Share equal to or greater than the cash consideration to be received by such stockholders in the Offer and the Merger and, (B) in the event any vote or consent of CTI’s stockholders is required to adopt the Merger Agreement or the transactions contemplated thereby, any other matter necessary for consummation of the transactions contemplated by the Merger Agreement, and (ii) against any (A) action or agreement which is intended or would reasonably be expected to impede, delay, postpone, interfere with, nullify or prevent in any material respect the Offer or the Merger, (B) Acquisition Proposal or action in furtherance thereof, (C) amendment to CTI’s certificate of incorporation or bylaws, (D) material change to the capitalization of CTI, (E) change in a majority of CTI’s board of directors or (F) action, proposal, transaction or agreement that would reasonably be expect to result in a breach of any covenant, representation or warranty or any other obligation of any Tendering Stockholder under the Support Agreement. In general, no Tendering Stockholders may propose, commit or agree to take any action inconsistent with any of the foregoing clauses (i) or (ii).
Each Tendering Stockholder also agrees that, except as provided in the Support Agreements, it will not (i) deposit (or permit the deposit of) any Shares or shares of CTI preferred stock subject to the Support Agreement (including shares of CTI preferred stock that are converted into Shares after the date of the Support Agreement) (collectively, the “Subject Shares) in a voting trust or grant any proxy or power of attorney or enter into any voting agreement or similar agreement with respect to any of the Subject Shares or otherwise enter into any contract with respect to any transfer or proposed transfer of such Subject Shares or any interest therein, or (ii) take or permit any other action that would in any way restrict, limit or interfere with the performance of such Tendering Stockholder’s obligations under the Support Agreement or otherwise make any representation or warranty of such Tendering Stockholder under the Support Agreement untrue or incorrect.
As of May 4, 2023, approximately 6.7% of the outstanding Shares are subject to the Support Agreement. The Support Agreement generally provides for termination upon the earlier of (i) the valid termination of the Merger Agreement, (ii) the effectiveness of the Merger at the Effective Time, (iii) the acquisition by Sobi of all the Subject Shares of the Tendering Stockholders, whether pursuant to the Offer, the Merger or otherwise, (iv) any amendment, change or waiver to the Merger Agreement that is effected without each Tendering Stockholder’s consent that changes the amount, form or timing (except with respect to extensions of the Offer in accordance with the terms of the Merger Agreement) of consideration payable to all of CTI’s stockholders or (v) the mutual written agreement of Sobi and each Tendering Stockholder.