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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
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 001-10865
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13177169&doc=15
AMAG Pharmaceuticals, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
04-2742593
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
1100 Winter Street,
Waltham,
Massachusetts
02451
(Address of Principal Executive Offices)
(Zip Code)
(617498-3300
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
AMAG
 
NASDAQ Global Select Market
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 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   No 
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   No 
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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
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 revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 
As of October 28, 2019, there were 33,915,766 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.


Table of Contents

AMAG PHARMACEUTICALS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
 
 
 
 
 
 
10 
 
 
 
 
 
 
 


2



Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:

3



Table of Contents

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
119,800

 
$
253,256

Marketable securities
71,744

 
140,915

Accounts receivable, net
77,588

 
75,347

Inventories
28,644

 
26,691

Prepaid and other current assets
43,063

 
18,961

Note receivable

 
10,000

Total current assets
340,839

 
525,170

Property and equipment, net
7,912

 
7,521

Goodwill
422,513

 
422,513

Intangible assets, net
187,577

 
217,033

Operating lease right-of-use asset
6,642

 

Deferred tax assets
630

 
1,260

Restricted cash
495

 
495

Other long-term assets

 
1,467

Total assets
$
966,608

 
$
1,175,459

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
26,554

 
$
14,487

Accrued expenses
172,285

 
129,537

Current portion of convertible notes, net

 
21,276

Current portion of operating lease liability
3,994

 

Current portion of deferred revenue
1,128

 

Current portion of acquisition-related contingent consideration
113

 
144

Total current liabilities
204,074

 
165,444

Long-term liabilities:
 

 
 

Convertible notes, net
273,124

 
261,933

Long-term operating lease liability
3,344

 

Long-term deferred revenue
5,171

 

Long-term acquisition-related contingent consideration
180

 
215

Other long-term liabilities
87

 
1,212

Total liabilities
485,980

 
428,804

Commitments and contingencies (Note P)


 


Stockholders’ equity:
 

 
 

Preferred stock, par value $0.01 per share, 2,000,000 shares authorized; none issued

 

Common stock, par value $0.01 per share, 117,500,000 shares authorized; 33,915,509 and 34,606,760 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
339

 
346

Additional paid-in capital
1,292,458

 
1,292,736

Accumulated other comprehensive loss
(3,199
)
 
(3,985
)
Accumulated deficit
(808,970
)
 
(542,442
)
Total stockholders’ equity
480,628

 
746,655

Total liabilities and stockholders’ equity
$
966,608

 
$
1,175,459

The accompanying notes are an integral part of these condensed consolidated financial statements.

4



Table of Contents

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2019
 
2018
2019
 
2018
Revenues:
 
 
 
    
 
    
Product sales, net
$
84,107

 
$
122,238

$
237,812

 
$
385,806

Other revenues
24

 

231

 
75

Total revenues
84,131

 
122,238

238,043

 
385,881

Costs and expenses:
 
 
 
 
 
 
Cost of product sales
21,105

 
46,489

63,871

 
187,176

Research and development expenses
15,330

 
10,133

48,377

 
32,635

Acquired in-process research and development

 
12,500

74,856

 
32,500

Selling, general and administrative expenses
65,720

 
72,451

217,727

 
161,780

Impairment of intangible assets

 

77,358

 

Restructuring expenses

 

7,420

 

Total costs and expenses
102,155

 
141,573

489,609

 
414,091

Operating loss
(18,024
)
 
(19,335
)
(251,566
)
 
(28,210
)
Other income (expense):
 
 
 
 
 
 
Interest expense
(6,419
)
 
(13,366
)
(19,199
)
 
(45,400
)
Loss on debt extinguishment

 
(35,922
)

 
(35,922
)
Interest and dividend income
840

 
1,612

3,650

 
3,207

Gains on marketable securities, net
263

 

263

 

Other income (expense)
(45
)
 
(19
)
298

 
(63
)
Total other expense, net
(5,361
)
 
(47,695
)
(14,988
)
 
(78,178
)
Loss from continuing operations before income taxes
(23,385
)
 
(67,030
)
(266,554
)
 
(106,388
)
Income tax expense (benefit)
232

 
(2,352
)
(26
)
 
42,204

Net loss from continuing operations
$
(23,617
)
 
$
(64,678
)
$
(266,528
)
 
$
(148,592
)
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
Income from discontinued operations
$

 
$
5,838

$

 
$
18,873

Gain on sale of CBR business

 
89,581


 
89,581

Income tax (benefit) expense

 
(98
)

 
3,346

Net income from discontinued operations
$

 
$
95,517


 
$
105,108

 
 
 
 
 
 
 
Net (loss) income
$
(23,617
)
 
$
30,839

$
(266,528
)
 
$
(43,484
)
 
 
 
 
 

 
 

Basic and diluted net (loss) income per share:
 

 
 

 
 
 
Loss from continuing operations
$
(0.70
)
 
$
(1.88
)
$
(7.83
)
 
$
(4.33
)
Income from discontinued operations

 
2.77


 
3.06

Basic and diluted net (loss) income per share
$
(0.70
)
 
$
0.89

$
(7.83
)
 
$
(1.27
)
 
 
 
 
 
 
 
Weighted average shares outstanding used to compute net (loss) income per share (basic and diluted)
33,906

 
34,492

34,058

 
34,339


The accompanying notes are an integral part of these condensed consolidated financial statements.

5



Table of Contents

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net (loss) income
$
(23,617
)
 
$
30,839

 
$
(266,528
)
 
$
(43,484
)
Other comprehensive loss:
 
 
 
 
 
 
 
Holding (losses) gains associated with marketable securities arising during period, net of tax
(167
)
 
134

 
786

 
(253
)
Total comprehensive (loss) income
$
(23,784
)
 
$
30,973

 
$
(265,742
)
 
$
(43,737
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

6



Table of Contents

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARES)
(Unaudited)


 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
    
Amount
    
Additional Paid-in Capital
    
Accumulated Other Comprehensive Loss
    
Accumulated Deficit
    
Total Stockholders' Equity
Balance at June 30, 2019
33,899,954

 
$
339

 
$
1,287,553

 
$
(3,032
)
 
$
(785,353
)
 
$
499,507

Net shares issued in connection with the exercise of stock options and vesting of restricted stock units, net of withholdings
15,555

 

 
(69
)
 

 

 
(69
)
Non-cash equity based compensation

 

 
4,974

 

 

 
4,974

Unrealized losses on securities, net of tax

 

 

 
(167
)
 

 
(167
)
Net loss

 

 

 

 
(23,617
)
 
(23,617
)
Balance at September 30, 2019
33,915,509

 
$
339

 
$
1,292,458

 
$
(3,199
)
 
$
(808,970
)
 
$
480,628




 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
    
Amount
    
Additional Paid-in Capital
    
Accumulated Other Comprehensive Loss
    
Accumulated Deficit
    
Total Stockholders' Equity
Balance at December 31, 2018
34,606,760

 
$
346

 
$
1,292,736

 
$
(3,985
)
 
$
(542,442
)
 
$
746,655

Net shares issued in connection with the exercise of stock options and vesting of restricted stock units, net of withholdings
278,474

 
3

 
(1,790
)
 

 

 
(1,787
)
Issuance of common stock under employee stock purchase plan
105,075

 
1

 
850

 

 

 
851

Repurchase of common stock pursuant to the share repurchase program
(1,074,800
)
 
(11
)
 
(13,719
)
 

 

 
(13,730
)
Non-cash equity based compensation

 

 
14,381

 

 

 
14,381

Unrealized gains on securities, net of tax

 

 

 
786

 

 
786

Net loss

 

 

 

 
(266,528
)
 
(266,528
)
Balance at September 30, 2019
33,915,509

 
$
339

 
$
1,292,458

 
$
(3,199
)
 
$
(808,970
)
 
$
480,628


The accompanying notes are an integral part of these condensed consolidated financial statements.


















7



Table of Contents

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES)
(Unaudited)



 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
    
Amount
    
Additional Paid-in Capital
    
Accumulated Other Comprehensive Loss
    
Accumulated Deficit
    
Total Stockholders' Equity
Balance at June 30, 2018
34,390,068

 
$
344

 
$
1,281,858

 
$
(4,295
)
 
$
(551,004
)
 
$
726,903

Net shares issued in connection with the exercise of stock options and vesting of restricted stock units, net of withholdings
132,889

 
1

 
892

 

 

 
893

Non-cash equity based compensation

 

 
3,477

 

 

 
3,477

Unrealized gains on securities, net of tax

 

 

 
134

 

 
134

Net loss

 

 

 

 
30,839

 
30,839

Balance at September 30, 2018
34,522,957

 
$
345

 
$
1,286,227

 
$
(4,161
)
 
$
(520,165
)
 
$
762,246


 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
    
Amount
    
Additional Paid-in Capital
    
Accumulated Other Comprehensive Loss
    
Accumulated Deficit
    
Total Stockholders' Equity
Balance at December 31, 2017
34,083,112

 
$
341

 
$
1,271,628

 
$
(3,908
)
 
$
(477,817
)
 
$
790,244

ASC 606 adoption adjustment, net of tax

 

 

 

 
1,136

 
1,136

Net shares issued in connection with the exercise of stock options and vesting of restricted stock units, net of withholdings
439,845

 
4

 

 

 

 
4

Non-cash equity based compensation

 

 
14,599

 

 

 
14,599

Unrealized losses on securities, net of tax

 

 

 
(253
)
 

 
(253
)
Net loss

 

 

 

 
(43,484
)
 
(43,484
)
Balance at September 30, 2018
34,522,957

 
$
345

 
$
1,286,227

 
$
(4,161
)
 
$
(520,165
)
 
$
762,246


The accompanying notes are an integral part of these condensed consolidated financial statements.


8



Table of Contents

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(266,528
)
 
$
(43,484
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
13,871

 
158,002

Impairment of intangible assets
77,358

 

Provision for bad debt expense
(12
)
 
754

Amortization of premium/discount on purchased securities
(64
)
 
96

Write-down of inventory
4,872

 

Gain on disposal of fixed assets

 
(99
)
Non-cash equity-based compensation expense 
14,381

 
14,599

Non-cash IPR&D expense
18,029

 

Loss on debt extinguishment

 
35,922

Amortization of debt discount and debt issuance costs
11,332

 
11,824

Gains on marketable securities, net
(263
)
 
(1
)
Change in fair value of contingent consideration
(16
)
 
(49,175
)
Deferred income taxes
408

 
43,747

Gain on sale of the CBR business

 
(89,581
)
Transaction costs

 
(14,111
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(2,229
)
 
7,175

Inventories
(6,824
)
 
3,587

Prepaid and other current assets
(24,075
)
 
1,101

Accounts payable and accrued expenses
53,092

 
(4,280
)
Deferred revenues
(101
)
 
8,658

Other assets and liabilities
1,038

 
159

Net cash (used in) provided by operating activities
(105,731
)
 
84,893

Cash flows from investing activities:
 
 
 
Proceeds from sales or maturities of marketable securities
85,321

 
60,146

Purchase of marketable securities
(14,815
)
 
(64,400
)
Milestone payment for Vyleesi developed technology
(60,000
)
 

Proceeds from the sale of the CBR business

 
519,303

Capital expenditures
(2,098
)
 
(1,913
)
Net cash provided by investing activities
8,408

 
513,136

Cash flows from financing activities:
 
 
 
Long-term debt principal payments

 
(475,000
)
Payments to settle convertible notes
(21,417
)
 

Payment of premium on debt extinguishment

 
(28,054
)
Payments of contingent consideration
(50
)
 
(87
)
Payments for repurchases of common stock
(13,730
)
 

Proceeds from the issuance of common stock under the ESPP
851

 

Proceeds from the exercise of common stock options
30

 
2,635

Payments of employee tax withholding related to equity-based compensation
(1,817
)
 
(2,632
)
Net cash used in financing activities
(36,133
)
 
(503,138
)
Net (decrease) increase in cash, cash equivalents, and restricted cash
(133,456
)
 
94,891

Cash, cash equivalents, and restricted cash at beginning of the period
253,751

 
192,770

Cash, cash equivalents, and restricted cash at end of the period
$
120,295

 
$
287,661

Supplemental data for cash flow information:
 
 
 
Cash paid for taxes
$
456

 
$
5,041

Cash paid for interest
$
5,467

 
$
43,546

Non-cash investing and financing activities:
 
 
 
Settlement of note receivable in connection with Perosphere acquisition
$
10,000

 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.

9



Table of Contents

AMAG PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
A.     DESCRIPTION OF BUSINESS
AMAG Pharmaceuticals, Inc., a Delaware corporation, was founded in 1981. We are a pharmaceutical company focused on bringing innovative products to patients with unmet medical needs by leveraging our development and commercial expertise to invest in and grow our pharmaceutical products across a range of therapeutic areas. Our currently marketed products support the health of patients in the areas of maternal and women’s health, anemia management and cancer supportive care, including Feraheme® (ferumoxytol injection) for intravenous use, Makena® (hydroxyprogesterone caproate injection) auto-injector, Intrarosa® (prasterone) vaginal inserts and MuGard® Mucoadhesive Oral Wound Rinse. On June 21, 2019, Vyleesi™ (bremelanotide injection) was approved by the U.S. Food and Drug Administration (the “FDA”) for the treatment of acquired, generalized hypoactive sexual desire disorder (“HSDD”) in premenopausal women and became commercially available in September 2019. In addition to our approved products, our portfolio includes two product candidates, AMAG-423 (digoxin immune fab (ovine)), which is being studied for the treatment of severe preeclampsia, and ciraparantag, which is being studied as an anticoagulant reversal agent.
In January 2019, we acquired Perosphere Pharmaceuticals Inc. (“Perosphere”) through the merger of our wholly-owned subsidiary, Magellan Merger Sub, Inc., a Delaware corporation, with and into Perosphere, with Perosphere continuing as the surviving entity and our wholly-owned subsidiary (the “Merger”). As a result of the acquisition of Perosphere, we acquired the global rights to ciraparantag, an anticoagulant reversal agent, which is being investigated for patients treated with novel oral anticoagulants or low molecular weight heparin when reversal of the anticoagulant effect of these products is needed for emergency surgery, urgent procedures or due to life-threatening or uncontrolled bleeding. See Note Q, “Acquisitions, Collaboration, License and Other Strategic Agreements” for further details on the Perosphere acquisition.

Throughout this Quarterly Report on Form 10-Q, AMAG Pharmaceuticals, Inc. and our consolidated subsidiaries are collectively referred to as “the Company,” “AMAG,” “we,” “us,” or “our.”
B.     BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments necessary for a fair statement of our financial position and results of operations for the interim periods presented. Such adjustments consisted only of normal recurring items. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
In accordance with GAAP for interim financial reports and the instructions for Form 10-Q and the rules of the Securities and Exchange Commission, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. Our accounting policies are described in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018 (our “Annual Report”). Interim results are not necessarily indicative of the results of operations for the full year. These interim financial statements should be read in conjunction with our Annual Report.
In August 2018, we completed the sale of our wholly-owned subsidiary, CBR Acquisition Holdings Corp, and the Cord Blood Registry® (“CBR”) business to GI Partners (“GI”), a private equity investment firm, pursuant to the June 14, 2018 Stock Purchase Agreement between us and affiliates of GI. As of June 30, 2018, our CBR business met the criteria for classification as a discontinued operation. All historical operating results for CBR are therefore reflected within discontinued operations in the consolidated statements of operations for the three and nine months ended September 30, 2018. For additional information, see Note C, “Discontinued Operations.
Principles of Consolidation
The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

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Use of Estimates and Assumptions
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates and assumptions are used to determine amounts and values of, but are not limited to: revenue recognition related to product and collaboration revenue; product sales allowances and accruals; allowance for doubtful accounts; marketable securities; inventory; acquisition date fair value and subsequent fair value estimates used to assess impairment of long-lived assets, including goodwill, in-process research and development (“IPR&D”) and other intangible assets; contingent consideration; debt obligations; certain accrued liabilities, including clinical trial accruals; income taxes, inclusive of valuation allowances; and equity-based compensation expense. Actual results could differ materially from those estimates.
Restricted Cash
We classified $0.5 million of our cash as restricted cash, a non-current asset on the balance sheet, as of September 30, 2019 and December 31, 2018. This amount represented the security deposit delivered to the landlord of our Waltham, Massachusetts headquarters in the form of an irrevocable letter of credit.
Concentrations and Significant Customer Information
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, and accounts receivable. We currently hold our excess cash primarily in institutional money market funds, corporate debt securities, U.S. treasury and government agency securities and certificates of deposit. As of September 30, 2019, we did not have a material concentration in any single investment.

Our operations are located entirely within the U.S. We focus primarily on developing, manufacturing, and commercializing our products and product candidates. We perform ongoing credit evaluations of our customers and generally do not require collateral. The following table sets forth customers who represented 10% or more of our total revenues for the three and nine months ended September 30, 2019 and 2018:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
McKesson Corporation
38
%
 
25
%
 
37
%
 
26
%
AmerisourceBergen Drug Corporation
28
%
 
24
%
 
28
%
 
26
%
Cardinal Health
11
%
 
<10%

 
12
%
 
<10%


 
Our net accounts receivable primarily represent amounts due for products sold directly to wholesalers, distributors, specialty pharmacies, and our former authorized generic partner. Accounts receivable for our products are recorded net of reserves for estimated chargeback obligations, prompt payment discounts and any allowance for doubtful accounts. At September 30, 2019 and December 31, 2018, two and three customers, respectively, accounted for 10% or more of our accounts receivable balances, representing approximately 70% and 73% in the aggregate of our total accounts receivable, respectively.
We are currently dependent on a single supplier for Feraheme drug substance (produced in two separate facilities) as well as a single supplier for our Makena auto-injector product. We have been and may continue to be exposed to a significant loss of revenue from the sale of our products in the event that our suppliers and/or manufacturers are not able to fulfill demand for any reason.
Revenue Recognition
Product revenues
Effective January 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services in an amount that reflects the consideration which we expect to receive 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:

a.Identify the contract(s) with a customer;
b.Identify the performance obligations in the contract;
c.Determine the transaction price;
d.Allocate the transaction price to the performance obligations in the contract; and

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e.Recognize revenue when (or as) the performance obligations are satisfied.

We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, if the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Collaboration Revenues

When we enter into collaboration agreements, we assess whether the agreements fall within the scope of ASC Topic 808, Collaborative Arrangements (“ASC 808”) based on whether the arrangements involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of ASC 808, we assess whether the payments between us and our collaboration partner fall within the scope of other accounting literature. If we conclude that payments from the collaboration partner to us represent consideration from a customer, such as license fees and contract research and development activities, we account for those payments within the scope of ASC 606. However, if we conclude that our collaboration partner is not a customer for certain activities and associated payments, such as for certain collaborative research, development, manufacturing and commercial activities, we present such payments as a reduction of research and development expense or general and administrative expense, based on where we present the related underlying expense.
 
Leases
Effective January 1, 2019, we adopted ASC Topic 842, Leases (“ASC 842”), and chose to apply the provisions of ASC 842 as of the effective date with no restatement of prior periods or cumulative adjustment to retained earnings. Upon adoption, we elected to utilize the package of transition practical expedients, which allowed us to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. We also made accounting policy elections to not separate lease and non-lease components for our real estate lease and to not recognize leases with an initial term of twelve months or less within our condensed consolidated balance sheets and to recognize those lease payments on a straight-line basis on our condensed consolidated statements of income over the lease term. We did not have any material short-term leases accounted for under this policy during the six months ended September 30, 2019.
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of operating lease liability, and long-term operating lease liability on our condensed consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease.
ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Our incremental borrowing rate is determined based on an evaluation of our creditworthiness and the prevailing market rates for collateralized debt with maturity dates commensurate with the term of each lease. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
The lease payments used to determine our ROU assets may include lease incentives, stated rent increases, and escalation clauses linked to rates of inflation when determinable and are recognized in our ROU assets on our condensed consolidated balance sheet. In addition, certain lease agreements contain lease and non-lease components. With the exception of our real estate leases, we separate lease payments for the identified assets from any non-lease payments included in the agreement. For our real estate leases, we account for the lease and non-lease components as a single lease component. Additionally, for vehicle and certain equipment leases, we apply a portfolio approach to effectively account for the related ROU assets and operating lease liabilities.
Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

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C.    DISCONTINUED OPERATIONS
On August 6, 2018, we completed the sale of our CBR business to GI Partners pursuant to the CBR Purchase Agreement. We determined that the sale of CBR represented a strategic shift that would have a major effect on our business and therefore met the criteria for classification as discontinued operations at June 30, 2018. All historical operating results for CBR were reflected within discontinued operations in the condensed consolidated statement of operations for the three and nine months ended September 30, 2018.
The following is a summary of net income from discontinued operations for the three and nine months ended September 30, 2018:    
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Service revenues, net
$
12,163

 
$
71,217

Costs and expenses:
 
 
 
Cost of services
1,576

 
12,559

Selling, general and administrative expenses
4,749

 
39,899

Total costs and expenses
6,325

 
52,458

Operating income
5,838

 
18,759

Other income

 
114

Income from discontinued operations
5,838

 
18,873

Gain on sale of CBR business
89,581

 
89,581

Income tax (benefit) expense
(98
)
 
3,346

Net income from discontinued operations
$
95,517

 
$
105,108



The cash flows related to discontinued operations have not been segregated and are included in the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2018. For the nine months ended September 30, 2018, capital expenditures related to the CBR business were $1.6 million. Depreciation and amortization expense related to the CBR business for the same period was $8.4 million. Excluding the gain of $89.6 million recognized on the sale of the CBR business and the related transaction expenses of $14.1 million presented in the Condensed Consolidated Statement of Cash Flows, there were no other significant operating or investing non-cash items related to the CBR business for the nine months ended September 30, 2018.

D.     REVENUE RECOGNITION
Our major sources of revenue during the reporting periods were product revenues from Makena, Feraheme, and Intrarosa.

Product Revenue and Allowances and Accruals

The following table provides information about disaggregated revenue by products for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Product sales, net
 
 
 
 
 
 
 
Feraheme
$
44,205

 
$
36,963

 
$
126,294

 
$
99,796

Makena
34,272

 
80,221

 
96,464

 
275,377

Intrarosa
5,607

 
4,925

 
14,898

 
10,331

Other
23

 
129

 
156

 
302

Total product sales, net
$
84,107

 
$
122,238

 
$
237,812

 
$
385,806



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Total gross product sales were offset by product sales allowances and accruals for the three and nine months ended September 30, 2019 and 2018 as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Gross product sales
$
254,073

 
$
238,856

 
$
704,976

 
$
776,458

Provision for product sales allowances and accruals:
 

 
 

 
 

 
 

Contractual adjustments
144,108

 
93,213

 
381,633

 
290,896

Governmental rebates
25,858

 
23,405

 
85,531

 
99,756

Total
169,966

 
116,618

 
467,164

 
390,652

Product sales, net
$
84,107

 
$
122,238

 
$
237,812

 
$
385,806



The following table summarizes the product revenue allowance and accrual activity for the three and nine months ended September 30, 2019 (in thousands):
 
Contractual
 
Governmental
 
 
 
Adjustments
 
Rebates
 
Total
Balance at December 31, 2018
$
57,199

 
$
29,114

 
$
86,313

Provisions related to current period sales
233,305

 
44,539

 
277,844

Adjustments related to prior period sales
4,200

 
15,134

 
19,334

Payments/returns relating to current period sales
(176,392
)
 
(11,909
)
 
(188,301
)
Payments/returns relating to prior period sales
(40,538
)
 
(36,362
)
 
(76,900
)
Balance at June 30, 2019
$
77,774

 
$
40,516

 
$
118,290

Provisions related to current period sales
139,697

 
27,296

 
166,993

Adjustments related to prior period sales
4,475

 
(1,438
)
 
3,037

Payments/returns relating to current period sales
(117,780
)
 
(4,899
)
 
(122,679
)
Payments/returns relating to prior period sales
(20,239
)
 
(2,611
)
 
(22,850
)
Balance at September 30, 2019
$
83,927

 
$
58,864

 
$
142,791



We receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional.

During the three and nine months ended September 30, 2019, we recorded adjustments of $(1.4) million and $13.7 million, respectively, for Medicaid rebates received that related to prior period sales and $4.5 million and $8.7 million, respectively, for contractual adjustments related to prior period sales. We concluded that these adjustments represented changes in estimate during the three and nine months ended September 30, 2019 due to higher Medicaid and payer utilization and subsequent rebate obligations than anticipated based on our historical experience.

Variable Consideration
Under ASC 606, we are required to make estimates of the net sales price, including estimates of variable consideration (such as rebates, chargebacks, discounts, copay assistance and other deductions), and recognize the estimated amount as revenue, when we transfer control of the product to our customers. In addition, we estimated variable consideration related to our share of net distributable profits from our former authorized generic partner, Prasco LLC (“Prasco”). We estimate variable consideration for our product revenues using an “expected value” method. No amounts recognized as part of our product revenues were constrained as of September 30, 2019.

Collaboration Revenue

During the first quarter of 2019, in conjunction with the Perosphere transaction, we assumed responsibility for a clinical trial collaboration agreement with a pharmaceutical company. This agreement provides for milestone payments to us, provided we meet certain clinical obligations in connection with our ciraparantag program. We also acquired $6.4 million of deferred revenue related to this agreement, which represents the fair value of upfront milestone payments received by Perosphere under this agreement prior to acquisition. During the quarter ended September 30, 2019, we were informed by the pharmaceutical

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company of its intention to terminate the clinical trial collaboration agreement. Although we do not believe this company has grounds for termination, we are engaged in discussions with such partner to come to a mutually agreeable resolution.

In accordance with ASC 808, we considered the nature and contractual terms of the arrangement and the nature of our business operations to determine the classification of payments under this agreement and concluded that the pharmaceutical company meets the definition of a customer. As a result, this agreement was accounted for under ASC 606. We determined that the promises to perform various research and development activities related to our ciraparantag program are not distinct because they are all necessary and highly interdependent with one another for the purpose of pursuing regulatory approval of ciraparantag. As such, these promises are combined into a single performance obligation, which is the submission for regulatory approval of ciraparantag in the U.S. and the European Union.

In order to evaluate the appropriate transaction price, we considered that the remaining $34.8 million of potential milestone payments relate to activities which cannot progress until FDA clearance is received for a device needed to conduct the future clinical trials. As a result, these amounts were excluded from the transaction price and fully constrained based on the probability of achievement, which is outside of our control. In addition, as of September 30, 2019, the transaction price is limited to the $6.3 million of deferred revenue acquired. We will reevaluate the transaction price, including all constrained amounts, at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, and, if necessary, adjust our estimate of the transaction price.
We will recognize revenue based on the transaction price determined at the end of each reporting period based on an input method in the form of research effort relative to expected research effort at the completion of the performance obligation. This is based on the relative costs of the research and development activities incurred and expected to be incurred in the future to satisfy the performance obligation, which is estimated to be completed over approximately two years. The estimated period of performance to satisfy the performance obligation and project cost is reviewed quarterly and adjusted, as needed, to reflect our current expectations regarding the costs and timing of the deliverable and will be updated in the event the agreement is terminated. These estimates are subject to a number of assumptions and actual results could differ materially from our assumptions in future periods.
As of September 30, 2019, deferred revenue related to the agreement amounted to $6.3 million, of which $1.1 million was included in current liabilities. No milestone payments were received during the nine months ended September 30, 2019. 

E.    MARKETABLE SECURITIES

As of September 30, 2019 and December 31, 2018, our marketable securities were classified as available-for-sale in accordance with accounting standards which provide guidance related to accounting and classification of certain investments in marketable securities. Available-for-sale marketable securities are those securities which we view as available for use in current operations, if needed. We generally classify our available-for-sale marketable securities as short-term investments on our condensed consolidated balance sheets even though the stated maturity date may be one year or more beyond the current balance sheet date. We report realized gains and losses as a separate line within the condensed consolidated statements of operations on a specific identification basis.


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The following is a summary of our marketable securities as of September 30, 2019 and December 31, 2018 (in thousands):
 
September 30, 2019
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
Short-term marketable securities:*
 
 
 
 
 
 
 
Corporate debt securities
$
41,596

 
$
130

 
$
(9
)
 
$
41,717

Certificates of deposit
3,500

 

 

 
3,500

U.S. treasury and government agency securities
6,247

 

 
(3
)
 
6,244

Commercial paper

 

 

 

Total short-term marketable securities
$
51,343

 
$
130

 
$
(12
)
 
$
51,461

Long-term marketable securities:**
 
 
 
 
 
 
 
Corporate debt securities
$
20,076

 
$
207

 
$

 
$
20,283

Total long-term marketable securities
20,076

 
207

 

 
20,283

Total marketable securities
$
71,419

 
$
337

 
$
(12
)
 
$
71,744


* Represents marketable securities with a remaining maturity of less than one year.
** Represents marketable securities with a remaining maturity of one to three years classified as short-term on our condensed consolidated balance sheets.
 
December 31, 2018
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
Short-term marketable securities:*
 
 
 
 
 
 
 
Corporate debt securities
$
51,184

 
$

 
$
(236
)
 
$
50,948

U.S. treasury and government agency securities
7,647

 

 
(34
)
 
7,613

Commercial paper
3,995

 

 

 
3,995

Certificates of deposit
12,000