Document
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-36014
AGIOS PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware26-0662915
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
88 Sidney Street, Cambridge, Massachusetts
02139
(Address of Principal Executive Offices)(Zip Code)
(617649-8600
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, Par Value $0.001 per shareAGIONasdaq 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 the definitions 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    ☒
Number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on July 26, 2019: 58,752,886


Table of Contents
AGIOS PHARMACEUTICALS, INC.
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019
TABLE OF CONTENTS
 
Page
No.
Item 1.
Item 2.
Item 3.
Item 4.
Item 1A.
Item 6.



Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements (Unaudited)
AGIOS PHARMACEUTICALS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
June 30,
2019
December 31,
2018
Assets
Current assets:
Cash and cash equivalents$83,580 $70,502 
Marketable securities411,810 514,800 
Accounts receivable, net7,147 5,076 
Collaboration receivable – related party2,524 2,462 
Collaboration receivable – other2,222 670 
Royalty receivable – related party2,700 2,234 
Inventory 4,659 869 
Prepaid expenses and other current assets19,063 17,167 
Total current assets533,705 613,780 
Marketable securities128,649 220,119 
Operating lease assets98,500 — 
Property and equipment, net23,016 24,320 
Other non-current assets 238 
Total assets$783,870 $858,457 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$15,435 $17,880 
Accrued expenses49,218 42,147 
Deferred revenue – related party18,454 32,710 
Operating lease liabilities6,397 — 
Deferred rent 766 
Total current liabilities89,504 93,503 
Deferred revenue, net of current portion – related party51,616 59,809 
Operating lease liabilities, net of current portion110,073 — 
Deferred rent, net of current portion 17,608 
Total liabilities251,193 170,920 
Stockholders’ equity:
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued or outstanding at June 30, 2019 and December 31, 2018
  
Common stock, $0.001 par value; 125,000,000 shares authorized; 58,749,186 and 58,218,653 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
59 58 
Additional paid-in capital1,839,710 1,794,283 
Accumulated other comprehensive income (loss) 490 (2,171)
Accumulated deficit(1,307,582)(1,104,633)
Total stockholders’ equity532,677 687,537 
Total liabilities and stockholders’ equity$783,870 $858,457 
See accompanying Notes to Condensed Consolidated Financial Statements.
1

Table of Contents
AGIOS PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)

Three Months Ended June 30,Six Months Ended June 30,
2019201820192018
Revenues:
Product revenue, net$13,727 $ $22,865 $ 
Collaboration revenue – related party8,979 26,401 26,898 33,746 
Collaboration revenue – other812 12,440 1,782 12,440 
Royalty revenue – related party2,703 1,573 4,903 2,990 
Total revenue26,221 40,414 56,448 49,176 
Cost and expenses:
Cost of sales 303  637  
Research and development 107,389 86,730 202,974 164,954 
Selling, general and administrative32,390 26,633 64,181 51,183 
Total cost and expenses140,082 113,363 267,792 216,137 
Loss from operations (113,861)(72,949)(211,344)(166,961)
Interest income 3,990 4,204 8,395 7,391 
Net loss $(109,871)$(68,745)$(202,949)$(159,570)
Net loss per share – basic and diluted $(1.87)$(1.19)$(3.46)$(2.81)
Weighted-average number of common shares used in computing net loss per share – basic and diluted 58,722,244 57,721,786 58,589,167 56,713,795 

See accompanying Notes to Condensed Consolidated Financial Statements.
2

Table of Contents
AGIOS PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)


Three Months Ended June 30,Six Months Ended June 30,
2019201820192018
Net loss$(109,871)$(68,745)$(202,949)$(159,570)
Other comprehensive income (loss)
Unrealized gain (loss) on available-for-sale securities974 245 2,661 (1,009)
Comprehensive loss$(108,897)$(68,500)$(200,288)$(160,579)

See accompanying Notes to Condensed Consolidated Financial Statements.

3

Table of Contents
AGIOS PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
(Unaudited)
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 201858,218,653 $58 $1,794,283 $(2,171)$(1,104,633)$687,537 
Common stock issued under stock incentive plan and ESPP441,168 1 6,002 — — 6,003 
Stock-based compensation expense— — 18,108 — — 18,108 
Other comprehensive income— — — 1,687 — 1,687 
Net loss— — — — (93,078)(93,078)
Balance at March 31, 201958,659,821 $59 $1,818,393 $(484)$(1,197,711)$620,257 
Common stock issued under stock incentive plan and ESPP89,365 $— $2,770 $— $— $2,770 
Stock-based compensation expense— — 18,547 — — 18,547 
Other comprehensive income— — — 974 — 974 
Net loss— — — — (109,871)(109,871)
Balance at June 30, 201958,749,186 $59 $1,839,710 $490 $(1,307,582)$532,677 

Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 201748,826,153 $49 $1,174,904 $(1,389)$(798,061)$375,503 
Issuance of common stock for follow-on offering8,152,986 8 516,198 — — 516,206 
Common stock issued under stock incentive plan and ESPP562,474 1 12,331 — — 12,332 
Stock-based compensation expense— — 14,522 — — 14,522 
Other comprehensive loss— — — (1,254)— (1,254)
Cumulative effect of ASC 606— — — — 39,456 39,456 
Net loss— — — — (90,825)(90,825)
Other— — (346)— — (346)
Balance at March 31, 201857,541,613 $58 $1,717,609 $(2,643)$(849,430)$865,594 
Common stock issued under stock incentive plan and ESPP391,423 $— $9,638 $— $— $9,638 
Stock-based compensation expense— — 16,455 — — 16,455 
Other comprehensive income— — — 245 — 245 
Net loss— — — — (68,745)(68,745)
Other— — (45)— — (45)
Balance at June 30, 201857,933,036 $58 $1,743,657 $(2,398)$(918,175)$823,142 

See accompanying Notes to Condensed Consolidated Financial Statements.
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AGIOS PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended June 30,
20192018
Operating activities
Net loss $(202,949)$(159,570)
Adjustments to reconcile net loss to net cash used in operating activities: 
Depreciation4,042 3,464 
Stock-based compensation expense36,655 30,977 
Net accretion of premium and discounts on investments(2,019)(1,291)
(Gain) loss on disposal of property and equipment (20)
Non-cash operating lease expense4,208 — 
Changes in operating assets and liabilities:
Accounts receivable, net(2,071) 
Collaboration receivable – related party(62)(16,878)
Collaboration receivable – other(1,552)(440)
Royalty receivable – related party(466)(351)
Inventory(3,790) 
Prepaid expenses and other current and non-current assets(2,517)2,413 
Accounts payable(1,874)(6,198)
Accrued expenses7,071 (7,841)
Deferred revenue – related party(22,449)(10,644)
Operating lease liabilities(3,649)— 
Deferred rent (16)
Net cash used in operating activities (191,422)(166,395)
Investing activities
Purchases of marketable securities(144,231)(592,664)
Proceeds from maturities and sales of marketable securities343,372 331,666 
Purchases of property and equipment(3,309)(2,793)
Net cash provided by (used in) investing activities 195,832 (263,791)
Financing activities
Payment of public offering costs, net of reimbursements (391)
Proceeds from public offering of common stock, net of commissions 516,206 
Net proceeds from stock option exercises and employee stock purchase plan8,668 21,970 
Net cash provided by financing activities 8,668 537,785 
Net change in cash and cash equivalents13,078 107,599 
Cash and cash equivalents at beginning of the period70,502 102,724 
Cash and cash equivalents at end of the period$83,580 $210,323 
Supplemental disclosure of non-cash investing and financing transactions
Additions to property and equipment in accounts payable and accrued expenses$535 $1,365 
Proceeds from stock option exercises in other current assets$112 $ 
Operating lease liabilities arising from obtaining operating lease assets$42,856 $— 
See accompanying Notes to Condensed Consolidated Financial Statements.
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AGIOS PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Overview and Basis of Presentation
References to Agios
Throughout this Quarterly Report on Form 10-Q, “we,” “us,” and “our,” and similar expressions, except where the context requires otherwise, refer to Agios Pharmaceuticals, Inc. and its consolidated subsidiaries, and “our Board of Directors” refers to the board of directors of Agios Pharmaceuticals, Inc.
Overview
We are a biopharmaceutical company committed to the fundamental transformation of patients’ lives through scientific leadership in the field of cellular metabolism and adjacent areas of biology, with the goal of making transformative, first- or best-in-class medicines for the treatment of cancer and rare genetic diseases, or RGDs. To address both cancer and RGDs, we take a systems biology approach to deeply understand disease states, drive the discovery and validation of novel therapeutic targets, and define patient selection strategies, thereby increasing the probability that our experimental medicines will have the desired therapeutic effect. We are located in Cambridge, Massachusetts.
Basis of presentation
The condensed consolidated balance sheet as of June 30, 2019, the condensed consolidated statements of operations, comprehensive loss and stockholders' equity for the three and six months ended June 30, 2019 and 2018, and the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 are unaudited. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of our management, reflect all adjustments, which include only normal recurring adjustments, necessary to fairly state our financial position as of June 30, 2019, our results of operations and stockholders' equity for the three and six months ended June 30, 2019 and 2018, and cash flows for the six months ended June 30, 2019 and 2018. The financial data and the other financial information disclosed in these notes to the condensed consolidated financial statements related to the three and six-month periods are also unaudited. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other future annual or interim period. The year-end condensed consolidated balance sheet data was derived from our audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles, or U.S. GAAP. Accordingly, the condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 that was filed with the Securities and Exchange Commission, or the SEC, on February 14, 2019.
Our condensed consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in conformity with U.S. GAAP.
Liquidity
As of June 30, 2019, we had cash, cash equivalents and marketable securities of $624.0 million. Although we have incurred recurring losses and expect to continue to incur losses for the foreseeable future, we expect our cash, cash equivalents and marketable securities will be sufficient to fund current operations for at least the next twelve months from the issuance date of these financial statements.
2. Summary of Significant Accounting Policies
Leases
In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-02, Leases (Topic 842), which was codified as Accounting Standards Codification, or ASC, 842, Leases, and amended through subsequent ASUs. We adopted ASC 842 effective January 1, 2019 using the modified retrospective transition approach and elected the package of practical expedients, both provided for under ASU 2018-11, Leases (Topic 842): Targeted Improvements. The package of practical expedients allows us not to reassess whether contracts are or contain leases, lease classification, and whether initial direct costs qualify for capitalization. Additionally, as an accounting policy, we have chosen not to separate the non-lease components from the lease components for our building leases and, instead, accounted for non-lease and lease components as a single component.
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Impact of Adoption of ASC 842
Upon adoption of ASC 842 on January 1, 2019, we recorded operating lease assets of $59.9 million and operating lease liabilities of $77.3 million. The adoption of ASC 842 did not have a material impact on our condensed consolidated statements of operations. Prior periods are presented in accordance with ASC 840, Leases.
Leases Accounting Policy
We determine if an arrangement is a lease at inception. An arrangement is determined to contain a lease if the contract conveys the right to control the use of an identified property, plant, or equipment for a period of time in exchange for consideration. If we can benefit from the various underlying assets of a lease on their own or together with other resources that are readily available, or if the various underlying assets are neither highly dependent on nor highly interrelated with other underlying assets in the arrangement, they are considered to be a separate lease component. In the event multiple underlying assets are identified, the lease consideration is allocated to the various components based on each of the component’s relative fair value.
Operating lease 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 leasing arrangement. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, in determining the operating lease liabilities we use an estimate of our incremental borrowing rate. The incremental borrowing rate is determined using two alternative credit scoring models to estimate our credit rating, adjusted for collateralization. The calculation of the operating lease assets includes any lease payments made and excludes any lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
For operating leases, we record operating lease assets and liabilities in our consolidated balance sheets. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Short-term leases, or leases that have a lease term of 12 months or less at commencement date, are excluded from this treatment and are recognized on a straight-line basis over the term of the lease.
Recent accounting pronouncements
Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.
3. Fair Value Measurements
We record cash equivalents and marketable securities at fair value. ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
The following table summarizes our cash equivalents and marketable securities measured at fair value on a recurring basis as of June 30, 2019 (in thousands):
Level 1Level 2Level 3Total
Cash equivalents$27,012 $10,995 $ $38,007 
Marketable securities:
Certificates of deposit 240  240 
U.S. Treasuries 186,449  186,449 
Government securities 87,368  87,368 
Corporate debt securities 266,402  266,402 
Total cash equivalents and marketable securities$27,012 $551,454 $ $578,466 
Cash equivalents and marketable securities have been initially valued at the transaction price and subsequently, at the end of each reporting period, valued utilizing third-party pricing services or other market observable data. The pricing services utilize
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industry standard valuation models, including both income and market-based approaches, and observable market inputs to determine value. After completing our validation procedures, we did not adjust or override any fair value measurements provided by the pricing services as of June 30, 2019.
There have been no changes to the valuation methods during the six months ended June 30, 2019. We evaluate transfers between levels at the end of each reporting period. There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2019. We have no financial assets or liabilities that were classified as Level 3 at any point during the six months ended June 30, 2019.
4. Marketable Securities
Our marketable securities are classified as available-for-sale pursuant to ASC 320, Investments – Debt and Equity Securities, and are recorded at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive income (loss) in the condensed consolidated balance sheets and statements of stockholders’ equity and a component of total comprehensive loss in the condensed consolidated statements of comprehensive loss, until realized. Realized gains and losses are included in investment income on a specific-identification basis. There were no material realized gains or losses on marketable securities for the three and six months ended June 30, 2019 and 2018.
Marketable securities at June 30, 2019 consisted of the following (in thousands):
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Current:
Certificates of deposit$240 $ $ $240 
U.S. Treasuries186,295 211 (57)186,449 
Government securities54,836 20 (34)54,822 
Corporate debt securities170,255 148 (104)170,299 
Non-current:
Government securities32,575 19 (48)32,546 
Corporate debt securities95,657 491 (45)96,103 
Total marketable securities$539,858 $889 $(288)$540,459 
Marketable securities at December 31, 2018 consisted of the following (in thousands):
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Current:
Certificates of deposit$960 $ $(4)$956 
U.S. Treasuries231,101 7 (228)230,880 
Government securities75,335  (121)75,214 
Corporate debt securities208,233  (483)207,750 
Non-current:
U.S. Treasuries12,202 4 (125)12,081 
Government securities70,177 10 (188)69,999 
Corporate debt securities139,082 12 (1,055)138,039 
Total marketable securities$737,090 $33 $(2,204)$734,919 
As of June 30, 2019 and December 31, 2018, we held both current and non-current investments. Investments classified as current have maturities of less than one year. Investments classified as non-current are those that: (i) have a maturity of greater than one year, and (ii) we do not intend to liquidate within the next twelve months, although these funds are available for use and, therefore, are classified as available-for-sale.
As of June 30, 2019 and December 31, 2018, we held 79 and 242 debt securities, respectively, that were in an unrealized loss position for less than one year. The aggregate fair value of debt securities in an unrealized loss position at June 30, 2019 and December 31, 2018 was $175.5 million and $639.3 million, respectively. There were no individual securities that were in a significant unrealized loss position as of June 30, 2019 and December 31, 2018. Given our intent and ability to hold such
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securities until recovery, and the lack of significant change in the credit risk of these investments, we do not consider these marketable securities to be other-than-temporarily impaired as of June 30, 2019 and December 31, 2018.
5. Inventory
Inventory, which consists of commercial supply of TIBSOVO® (ivosidenib), consists of the following (in thousands):
June 30,
2019
December 31,
2018
Raw materials$180 $ 
Work-in-process4,392 788 
Finished goods87 81 
Total inventory$4,659 $869 

6. Leases
On April 11, 2019, we entered into an agreement to lease approximately 13,000 square feet of office space located at 38 Sidney Street, Cambridge, Massachusetts, or the 38 Sidney Lease, with Thirty-Eight Sidney Street, LLC. The initial term of the 38 Sidney Lease commenced on May 1, 2019 and expires on February 29, 2028. At the end of the lease term, we have the option to extend the 38 Sidney Lease for two consecutive terms of five years at fair market rent at the time of the extension. The 38 Sidney Lease provides us with the right to lease additional space within the 38 Sidney Street building and also includes rent escalation clauses and a tenant improvement allowance of $1.0 million.
In connection with the 38 Sidney Lease, we also amended our existing building leases at 88 Sidney Street, Cambridge, Massachusetts and at 64 Sidney Street, Cambridge, Massachusetts to extend the initial terms of those leases by approximately three years through February 29, 2028. The amendments also provide us with the right to lease additional space at the 64 Sidney Street building. Our existing extension options for the 88 Sidney Street building and 64 Sidney Street building continue as set forth in the existing leases for those buildings.
Our building leases are comprised of office and laboratory space under non-cancelable operating leases. These lease agreements have remaining lease terms of nine years and contain various clauses for renewal at our option. The renewal options were not included in the calculation of the operating lease assets and the operating lease liabilities as the renewal option is not reasonably certain of being exercised. The lease agreements do not contain residual value guarantees. Operating lease costs for the three and six months ended June 30, 2019 were $3.8 million and $6.8 million, respectively, and cash paid for amounts included in the measurement of operating lease liabilities for the three and six months ended June 30, 2019 were $3.2 million and $6.3 million, respectively.
We have not entered into any material short-term leases or financing leases as of June 30, 2019.
As of June 30, 2019, undiscounted minimum rental commitments under non-cancelable leases, for each of the next five years and total thereafter were as follows (in thousands):
Remaining 2019$5,695 
202014,015 
202114,380 
202216,773 
202318,126 
202418,660 
Thereafter63,891 
$151,540 
In arriving at the operating lease liabilities as of June 30, 2019, we applied the weighted-average incremental borrowing rate of 5.7% over a weighted-average remaining lease term of 8.7 years.
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As of June 30, 2019, the following represents the difference between the remaining undiscounted minimum rental commitments under non-cancelable leases and the operating lease liabilities (in thousands):
Undiscounted minimum rental commitments$151,540 
Present value adjustment using incremental borrowing rate(35,070)
Operating lease liabilities $116,470 
As of December 31, 2018, minimum rental commitments under non-cancelable leases, for each of the next five years and total thereafter were as follows (in thousands):
2019$12,759 
202013,135 
202113,473 
202215,552 
202317,145 
Thereafter19,223 
$91,287 
7. Accrued Expenses
Accrued expenses consist of the following (in thousands):
June 30,
2019
December 31,
2018
Accrued compensation$10,541 $20,843 
Accrued research and development costs30,189 14,777 
Accrued professional fees6,357 5,441 
Accrued other2,131 1,086 
Total accrued expenses$49,218 $42,147 

8. Product Revenue
We sell TIBSOVO®, our wholly owned product, to a limited number of specialty distributors and specialty pharmacy providers in the U.S., or collectively, the Customers. The Customers subsequently resell TIBSOVO® to pharmacies or dispense directly to patients. In addition to distribution agreements with Customers, we enter into arrangements with healthcare providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of TIBSOVO®.
The performance obligation related to the sale of TIBSOVO® is satisfied and revenue is recognized when the Customer obtains control of the product, which occurs at a point in time, typically upon delivery to the Customer.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price, or transaction price, which includes estimates of variable consideration for which reserves are established and result from contractual adjustments, government rebates, returns and other allowances that are offered within the contracts with our Customers, healthcare providers, payors and other indirect customers relating to the sale of our products.
Contractual Adjustments
We generally provide Customers with discounts, including prompt pay discounts, and allowances that are explicitly stated in the contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we receive sales order management, data and distribution services from certain Customers.
Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are estimated using the expected value method, based upon a range of possible
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outcomes that are probability-weighted for the estimated channel mix and are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue.
Government Rebates
Government rebates consist of Medicare, TriCare, and Medicaid rebates, which we estimate using the expected value method, based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program.
Returns
We estimate the amount of product sales that may be returned by Customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We currently estimate product return liabilities using the expected value method, based on available industry data, including our visibility into the inventory remaining in the distribution channel.
Total net product revenue from U.S. sales of TIBSOVO®, which is our only source of product revenue, was $13.7 million and $22.9 million for the three and six months ended June 30, 2019, respectively. We did not record any product revenues during the three and six months ended June 30, 2018. The following table summarizes balances and activity in each of the product revenue allowance and reserve categories for the six months ended June 30, 2019 (in thousands):
Contractual AdjustmentsGovernment RebatesReturnsTotal
Balance at December 31, 2018$592 $325 $334 $1,251 
Current provisions relating to sales in the current year3,145 820 586 4,551 
Adjustments relating to prior years8   8 
Payments/returns relating to sales in the current year(2,450)(355) (2,805)
Payments/returns relating to sales in the prior years(598)(230) (828)
Balance at June 30, 2019$697 $560 $920 $2,177 
Total revenue-related reserves above, included in our condensed consolidated balance sheets, are summarized as follows (in thousands):
June 30,
2019
December 31,
2018
Reduction of accounts receivable$416 $326 
Component of accrued expenses 1,761 925 
Total revenue-related reserves$2,177 $1,251 
The following table presents changes in our contract assets during the six months ended June 30, 2019 (in thousands):
December 31,
2018
AdditionsDeductionsJune 30,
2019
Contract assets (1)
Accounts receivable, net$5,076 $27,395 $(25,324)$7,147 
(1) Additions to contract assets relate to amounts billed to Customers for product sales during the reporting period. Deductions to contract assets primarily relate to collection of receivables during the reporting period.
9. Collaboration and License Agreements
Accounting analysis and revenue recognition
Our collaboration and license agreements typically involve us granting licenses of our intellectual property and performing research and development services in exchange of upfront fees, milestone payments and royalty payments. Since December 31, 2018, there have been no material changes to the key terms of our collaboration or license agreements. For further information on the terms and conditions of our existing collaboration and license agreements, please see the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
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Collaboration revenue
On January 1, 2018 we adopted ASC 606, Revenue from Contracts with Customers, under the modified retrospective method. Prior to January 1, 2018, we accounted for collaboration agreements under ASC 605-25, Multiple Element Arrangements. In determining the appropriate amount of revenue to be recognized under ASC 606, we performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measured the transaction price, including the constraint on variable consideration; (iv) allocated the transaction price to the performance obligations; and (v) recognized revenue when (or as) we satisfied each performance obligation.
Royalty revenue
For arrangements that include sales-based royalties and sales-based milestones and in which the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue upon the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Milestone revenue
At each reporting period we evaluate whether milestones are considered probable of being reached and, to the extent that a significant reversal would not occur in future periods, estimate the amount to be included in the transaction price using the most likely amount method. Milestone payments that are not within our control, such as regulatory approvals, are not considered probable of being achieved and are excluded from the transaction price until those approvals are received.
Celgene Corporation
We have entered into the following collaboration agreements, or collectively, the Collaboration Agreements, with Celgene Corporation, or Celgene, which is a related party through ownership of our common stock:
In April 2010, we entered into a discovery and development collaboration and license agreement focused on cancer metabolism, or the 2010 Agreement, which was amended in October 2011 and July 2014. The discovery phase of the 2010 Agreement expired in April 2016. On August 15, 2016, we terminated the 2010 Agreement as to the program directed to the isocitrate dehydrogenase 1, or IDH1, target, for which ivosidenib was the lead development candidate. Accordingly, the sole program remaining under the 2010 Agreement is IDHIFA® (enasidenib), a co-commercialized licensed program for which Celgene leads and funds global development and commercialization activities. Under the remaining terms of the 2010 Agreement, we are eligible to receive up to $80.0 million in potential milestone payments for the enasidenib program. The potential milestone payments are comprised of: (i) up to $55.0 million in milestone payments upon achievement of specified ex-U.S. regulatory milestone events, and (ii) a $25.0 million milestone payment upon achievement of a specified ex-U.S. commercial milestone event, as well as royalties at tiered, low-double digit to mid-teen percentage rates on net sales of IDHIFA®.
In April 2015, we entered into a joint worldwide development and profit share collaboration and license agreement with Celgene, and our wholly owned subsidiary, Agios International Sarl, entered into a collaboration and license agreement with Celgene International II Sarl, or collectively, the AG-881 Agreements, to establish a worldwide collaboration focused on the development and commercialization of vorasidenib products. Under the AG-881 Agreements, we and Celgene split all worldwide development costs for vorasidenib, subject to specified exceptions. The AG-881 Agreements were terminated effective September 4, 2018, upon which we received sole global rights to vorasidenib. In connection with the termination of the AG-881 Agreements, Celgene will be eligible to receive royalties from us at a low single-digit percentage rate on worldwide net sales of products containing vorasidenib.
In May 2016, we entered into a master research and collaboration agreement with Celgene, or the 2016 Agreement, focused on metabolic immuno-oncology, or MIO. The initial four-year research term of the 2016 Agreement may be extended for up to two, or in specified cases, up to four additional one-year terms by paying a $40.0 million per year extension fee. Celgene has designated AG-270, our methionine adenosyltransferase 2a, or MAT2A, inhibitor, as a development candidate under the 2016 Agreement, and has the option, upon payment of an option exercise fee of at least $30.0 million, to participate in a worldwide 50/50 cost and profit share with us for AG-270, under which we are eligible for up to $169.0 million in potential milestone payments for the program, comprised of: (i) a $20.0 million milestone-based payment upon achievement of a specified clinical development event and (ii) up to $149.0 million in milestone-based payments upon achievement of specified regulatory milestone events. We are also eligible to receive designation, option exercise and milestone and royalty payments for other programs that may be designated for further development under the 2016 Agreement.
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Collaboration revenue
During the three and six months ended June 30, 2019 and 2018, we recognized the following collaboration revenue (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2019201820192018
Services performed that were considered performance obligations as of the modification dates
Licenses$ $15,000 $ $15,000 
On-going research and development services8,155 9,830 25,220 16,194 
Services performed that were not considered performance obligations as of the modification dates
Development activities 590  590 
Commercialization activities824 981 1,678 1,962 
Total collaboration revenue - related party$8,979 $26,401 $26,898 $33,746 
The following table presents changes in our contract assets and liabilities during the six months ended June 30, 2019 (in thousands):
December 31,
2018
AdditionsDeductionsJune 30,
2019
Contract assets (1)
Collaboration receivable – related party$2,462 $4,452 $(4,390)$2,524 
Royalty receivable – related party2,234 4,900 (4,434)2,700 
Contract liabilities (2)
Deferred revenue – related party, current and net of current portions92,519 3,705 (26,154)70,070 
(1) Additions to contract assets relate to amounts billed to Celgene during the reporting period. Deductions to contract assets relate to collection of receivables during the reporting period.
(2) Additions to contract liabilities relate to consideration from Celgene during the reporting period. Deductions to contract liabilities relate to deferred revenue recognized as revenue during the reporting period.
During the three and six months ended June 30, 2019 and 2018, we recognized the following as revenue due to changes in the contract liability balances (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2019201820192018
Amounts included in the contract liability at the beginning of the period$8,009 $9,932 $24,419 $15,917 
Performance obligations satisfied in previous periods 220 543
As of June 30, 2019, the aggregate amount of the transaction price allocated to performance obligations that are partially unsatisfied was $75.5 million. This amount is expected to be recognized as performance obligations are satisfied through March 2023.
Royalty revenue
As the underlying performance obligation, or delivery of the enasidenib license, had been satisfied as of June 2014, royalty revenue is recognized as the related sales occur. During the three and six months ended June 30, 2019 and 2018, we recognized the following as royalty revenue (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2019201820192018
Royalty revenue – related party$2,703 $1,573 $4,903 $2,990 
Milestone revenue
During the three months ended June 30, 2018, Celgene submitted a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, for IDHIFA® for isocitrate dehydrogenase 2, or IDH2, mutant-positive relapsed or
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refractory, or R/R, acute myeloid leukemia, or AML. As a result of the filing, we recognized a $15.0 million milestone payment as collaboration revenue - related party. No other milestones were achieved during the three and six months ended June 30, 2019 or 2018. The next potential milestone expected to be achieved under our Collaboration Agreements is the first regulatory approval in any of China, Japan or a major European country, which would result in a milestone payment of $35.0 million under the 2010 Agreement.
CStone Pharmaceuticals
In June 2018, we and CStone Pharmaceuticals, or CStone, entered into an exclusive license agreement, or the CStone Agreement, to grant CStone specified intellectual property licenses to enable CStone to develop and commercialize certain products containing ivosidenib in mainland China, Hong Kong, Macau and Taiwan, or the CStone Territory. We retain development and commercialization rights for the rest of the world. Pursuant to the CStone Agreement, CStone will initially be responsible for the development and commercialization of ivosidenib in AML, cholangiocarcinoma, and, at our discretion, brain cancer indications. CStone is responsible for all costs it incurs in developing, obtaining regulatory approval of, and commercializing ivosidenib in the CStone Territory, as well as certain costs incurred by us. Pursuant to the CStone Agreement, we received an initial upfront payment in the amount of $12.0 million and are entitled to receive up to an additional $412.0 million in milestone payments upon the achievement of certain development, regulatory and sales milestone events. We will also be entitled to receive tiered royalties, ranging from 15% to 19% percent, on annual net sales, if any, of ivosidenib in the CStone Territory.
Collaboration revenue
During the three and six months ended June 30, 2019 and 2018, we recognized the following collaboration revenue - other (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2019201820192018
Services performed that were considered performance obligations as of the inception date
License$ $12,440 $ $12,440 
Services performed that were not considered performance obligations as of the inception date
Other Services812  1,782  
Total collaboration revenue - other$812 $12,440 $1,782 $12,440 
The following table presents changes in our contract assets during the six months ended June 30, 2019 (in thousands):
December 31,
2018
AdditionsDeductionsJune 30,
2019
Contract assets (1)
Collaboration receivable - other$670 $1,782 $(230)$2,222 
(1) Additions to contract assets relate to amounts receivable from CStone. Deductions to contract assets relate to collection of receivables during the reporting period.
As of June 30, 2019, the aggregate amount of the transaction price allocated to performance obligations that are partially unsatisfied was $0.7 million.
Royalty revenue
The license was determined to be the predominant item to which sales-based royalties and sales-based milestones relate. As the license was delivered in June 2018, we will recognize royalty revenue when the related sales occur. To date, no royalties have been received under the CStone Agreement.
Milestone revenue
No milestones were earned during the three and six months ended June 30, 2019 and 2018. The next potential milestone expected to be achieved under the CStone Agreement is the dosing of the first patient in a local study in a hematological indication in mainland China. Achievement of this event will result in a milestone payment of $5.0 million.
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