Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. Kite Pharma, Inc. (1510580) 10-Q published on Aug 08, 2017 at 8:02 am
Reporting Period: Jun 29, 2017
Under the Fosun Kite Agreement, the Company received an upfront cash payment of $40.0 million from Fosun Kite Biotechnology in May 2017 and noncash consideration in the form of foreign withholding taxes that Fosun Kite Biotechnology agreed to pay on the Company’s behalf, amounting to approximately $6.7 million. At the inception of the Fosun Kite Agreement, the Company’s significant deliverables consisted of an exclusive license to develop and commercialize KTE-C19 in China, providing certain technical assistance and technology transfer services related to the manufacturing of the licensed product and the equivalent of significant participation in a joint steering committee ("JSC Equivalent") through the Company’s substantive participation in the activities of Fosun Kite Biotechnology based on its participation on the Fosun Kite Biotechnology board of directors. The Company concluded that the license is not a separate unit of accounting because Fosun Kite Biotechnology cannot obtain a benefit from the license rights for their intended purpose without the manufacturing technology transfer and the JSC Equivalent participation. Therefore, the $46.7 million upfront consideration was initially recorded in deferred revenue and is being recognized ratably as revenue over the period of the last deliverable, substantive JSC Equivalent participation, which is initially determined to be approximately four and a half years.
In April 2017, the Company issued a broad-based grant of 297,795 performance-based RSUs primarily to employees of the Company. The majority of the performance-based RSUs vest in total upon the date FDA approval is obtained for KTE-C19. For 50,000 of the performance-based RSUs, in addition to the FDA approval vesting condition, there is also a one year service condition post-approval that is required for vesting. For grants subject to performance conditions, the fair value of the grant is fixed at the grant date; however, the amount of compensation expense will only be recognized if it is probable the performance condition will be met. As of June 30, 2017, the Company has not recorded any compensation expense related to the performance-based grants and will only record expense once FDA approval of KTE-C19 is obtained. For the grants with the additional service condition, the expense recorded if the performance condition is met would be recognized ratably over the entire service period with a cumulative catch-up adjustment for the service period prior to approval.
In January 2017, the Company entered into an agreement with Fosun Pharma to create a joint venture for the purpose of developing, manufacturing and commercializing KTE-C19 in the China Market. In April 2017, the joint venture company, Fosun Kite Biotechnology was established and obtained its business license in China. In May 2017, upon consummation of the joint venture, the Company and Fosun Pharma each received a 50% equity interest in the entity in exchange for their contributions to the entity. The Company determined that Fosun Kite Biotechnology was considered a variable interest entity and concluded that it is not the primary beneficiary of the variable interest entity as based on the joint control mechanisms in the joint venture agreement the company does not have the power to direct the activities of Fosun Kite Biotechnology that most significantly affects its economic performance. As such, the Company did not consolidate Fosun Kite Biotechnology’s results in the consolidated financial statements. The Company therefore accounts for its interest in Fosun Kite Biotechnology under the equity method.
The carrying amount of the Company’s basis in the joint venture is zero as noncash intellectual property and know-how was contributed by the Company for its interest in the joint venture and such contribution was recorded at carryover basis. As the carrying amount is zero and the Company does not have any obligations to provide further funding to the joint venture or to absorb any future losses, the Company currently does not record any losses related to the joint ventures activities. Furthermore, the Company has determined the hypothetical liquidation at book value (“HLBV”) method would best represent the economics of its share of any income or losses in the future given that there is a disproportionate sharing of gains and losses resulting from the preferential return rights in the benefit of Fosun Pharma on liquidation. This allocation methodology uses a balance sheet approach, which measures the Company’s share of income or loss by calculating the change in the amount of net assets the Company would legally be able to claim based on a hypothetical liquidation of the entity at the beginning and end of a reporting period. See Notes 3 and 6 for further details.
The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications that we own or in-license may fail to result in issued patents with claims that cover our product candidates or uses thereof in the United States or in other foreign countries. Even if the patents do successfully issue, third parties may challenge the patentability, validity, enforceability or scope thereof, for example through inter partes review, or IPR, post-grant review or ex parte reexamination before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions, which may result in such patents being cancelled, narrowed, invalidated or held unenforceable. For example, on November 16, 2015, March 18, 2016 and August 5, 2016, one or more anonymous parties filed for ex parte reexaminations of certain patents that we licensed pursuant to our agreement with Cabaret. On December 12, 2016, we achieved a favorable outcome in one of these reexaminations: the USPTO maintained the patent with its expiration date unchanged. On June 26, 2017, we also achieved a favorable outcome in the remaining two reexaminations of one of our CAR-related patents, expiring in 2027. The USPTO issued a Notice of Intent to Issue a Reexamination Certificate, confirming the patentability of amended claims in this patent. Even with the favorable outcomes at the USPTO or if our patents and applications are unchallenged, they may not adequately protect our intellectual property or prevent others from designing around our claims.
If the breadth or strength of protection provided by the patents and patent applications we hold with respect to our product candidates is threatened, it could dissuade companies from collaborating with us to develop, and threaten our ability to commercialize, our product candidates. Further, if we encounter delays in our clinical trials, the period of time during which we could market our product candidates under patent protection would be reduced. United States patent applications containing or that at any time contained a claim not entitled to a priority date before March 16, 2013 are subject to the “first to file” system implemented by the America Invents Act (2011).