FIBROGEN INC - Quarter Report: 2015 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended June 30, 2015

OR

For the transition period from                      to                     

Commission file number: 001-36740

FIBROGEN, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (415) 978-1200

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The number of shares of common stock outstanding as of July 31, 2015 was 60,564,900.

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FIBROGEN, INC.

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FIBROGEN, INC.

PART I—FINANCIAL INFORMATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

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

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FIBROGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

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

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FIBROGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

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

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FIBROGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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

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FIBROGEN, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Description of Operations

FibroGen, Inc. (“FibroGen,” the “Company,” or “we” and other similar pronouns) was incorporated in 1993 in Delaware and is a research-based biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics to treat serious unmet medical needs. Our focus in the areas of fibrosis and hypoxia-inducible factor (“HIF”) biology has generated multiple programs targeting various therapeutic areas. Our most advanced product candidate, roxadustat, or FG-4592, is an oral small molecule inhibitor of HIF prolyl hydroxylases (“HIF-PHs”) in Phase 3 clinical development for the treatment of anemia in chronic kidney disease (“CKD”). FG-3019 is our monoclonal antibody in Phase 2 clinical development for the treatment of idiopathic pulmonary fibrosis (“IPF”), pancreatic cancer and liver fibrosis. We have taken a global approach with respect to the development and future commercialization of our product candidates, and this includes development and commercialization in the People’s Republic of China (“China”).

On November 10, 2014, we effected a 1-for-2.5 reverse split of our common stock. Upon the effectiveness of the reverse stock split, (i) every 2.5 shares of outstanding common stock were combined into one share of common stock, (ii) the number of shares of common stock for which each outstanding option or warrant to purchase common stock is exercisable was proportionally decreased on a 1-for-2.5 basis, (iii) the exercise price of each outstanding option or warrant to purchase common stock was proportionately increased on a 1-for- 2.5 basis, (iv) the exchange ratio for each share of outstanding FibroGen Europe Oy (“FibroGen Europe”) share of stock which is exchangeable into our common stock was proportionately reduced on a 1-for-2.5 basis, and (v) the conversion ratio for each share of outstanding preferred stock which is convertible into our common stock was proportionately reduced on a 1-for-2.5 basis. All of the outstanding common stock share numbers (including shares of common stock which our outstanding preferred stock shares were convertible into), common stock warrants, share prices, exercise prices and per share amounts have been adjusted in these condensed consolidated financial statements, on a retroactive basis, to reflect this 1-for-2.5 reverse stock split for all periods presented. The par value per share and the authorized number of shares of common stock and preferred stock were not adjusted as a result of the reverse stock split.

On November 19, 2014, we closed the initial public offering (“IPO”) of our common stock. In our IPO, we sold 9,315,000 shares of our common stock at a public offering price of $18.00 per share. Net proceeds from our IPO and concurrent private placement were $171.8 million, after deducting underwriting discounts and commissions of $11.7 million and offering expenses of $4.1 million. AstraZeneca AB (“AstraZeneca”), one of our collaboration partners, agreed to purchase from us concurrently with the closing of our IPO in a private placement shares of our common stock with an aggregate purchase price of $20.0 million at a price per share equal to the IPO price. Upon the closing of our IPO, all outstanding shares of our convertible preferred stock automatically converted into 33,919,954 shares of common stock and 958,996 shares of FibroGen Europe convertible preferred stock were converted into shares of our common stock. Our proceeds from the sale of the common stock sold in the concurrent private placement were $20.0 million.

Basis of Presentation

The condensed consolidated financial statements include the accounts of FibroGen, its wholly owned subsidiaries and its majority-owned subsidiaries, FibroGen Europe and FibroGen China Anemia Holdings, Ltd. All inter-company transactions and balances have been eliminated in consolidation. We operate in one segment—the discovery, development and commercialization of novel therapeutics to treat serious unmet medical needs.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and footnote disclosures normally included in the annual consolidated financial statements. The December 31, 2014 condensed consolidated balance sheet data contained within this Form 10-Q was derived from audited consolidated financial statements included in our Form 10-K for the year ended December 31, 2014, but does not include all disclosures required by accounting principles generally accepted in the United States.

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In our opinion, the accompanying unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented.

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Fair Value of Financial Instruments

We define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Our valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. We classify these inputs into the following hierarchy:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3—Unobservable inputs and little, if any, market activity for the assets.

The assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and considers factors specific to the asset or liability. In addition, the categories presented do not suggest how prices may be affected by the size of the purchases or sales, particularly with the largest highly liquid financial issuers who are in markets continuously with non-equity instruments, or how any such financial assets may be impacted by other factors such as U.S. government guarantees. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Carrying amounts of certain of our financial instruments including cash equivalents, investments, receivables, accounts payable and accrued liabilities approximate fair value due to their short maturities.

Revenue Recognition

Substantially all of our revenues to date have been generated from our collaboration agreements.

Our collaboration agreements include multiple deliverables, and we, therefore, follow the guidance in Accounting Standards Codification (“ASC”) Topic 605-25, “Revenue Recognition–Multiple-Element Arrangements” (“ASC 605-25”). ASC 605-25:

We evaluate all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis. Based on this evaluation, the deliverables are separated into units of accounting. The arrangement consideration that is fixed or determinable at the inception of the arrangement is allocated to the separate units of accounting based on their relative selling prices. Significant judgment may be required in determining whether a deliverable provides stand-alone value, determining the amount of arrangement consideration that is fixed or determinable, and estimating the stand-alone selling price of each unit of accounting.

To date, we have determined that the selling price for the deliverables within our collaboration agreements should be determined using BESP, as neither VSOE nor TPE is available. The process for determining BESP involves significant judgment on our part and includes consideration of multiple factors, including assumptions related to the market opportunity and the time needed to commercialize a product candidate pursuant to the relevant license, estimated direct expenses and other costs, which include the rates normally charged by contract research and contract manufacturing organizations for development and manufacturing obligations, and rates that would be charged by qualified outsiders for committee services.

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For each unit of accounting identified within an arrangement, we determine the period over which the deliverables are provided and the performance obligation is satisfied. Service revenue is recognized using a proportional performance method. Direct labor hours or full time equivalents are typically used as the measurement of performance. Revenue may be recognized using a straight line method when performance is expected to occur roughly consistently over a period of time.

Payments or reimbursements resulting from our research and development efforts for those arrangements where such efforts are considered as deliverables are recognized as the services are performed and are presented on a gross basis. To the extent payments are required to be made to the collaboration partners pursuant to research and development efforts, those costs are charged to research and development using the guidance pursuant to ASC Topic 605-250, “Customer Payments and Incentives”, which states that cash consideration given by a vendor to a customer is presumed to be a reduction of the selling prices unless the vendor receives an identifiable benefit in exchange for the consideration that is sufficiently separable from the recipient’s purchase of the vendor’s products, and the vendor can reasonably estimate the fair value of the benefit.

Each of our collaboration agreements includes milestones for which we follow ASC Topic 605-28, “Revenue Recognition—Milestone Method” (“ASC 605-28”). ASC 605-28 establishes the milestone method as an acceptable method of revenue recognition for certain contingent event-based payments under research and development arrangements. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us. Determining whether a milestone is substantive is a matter of judgment and that assessment must be made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either our performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. Payments for achieving milestones which are not considered substantive are treated as additional arrangement consideration and are allocated following the relative selling price method previously described.

Net Income per Share

Immediately prior to the IPO, the Company had authorized 125,000,000 shares of Preferred Stock with a par value of $0.01 per share. The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Royalty Acquisition Preferred Stock and Series G-1 Preferred Stock are collectively referred to as the “Junior Preferred Stock”. The Series E Redeemable Convertible Preferred Stock and Series F Redeemable Convertible Preferred Stock are collectively referred to as the “Senior Preferred Stock”. As of December 31, 2014, there was no outstanding convertible preferred stock as all issued and outstanding preferred stock were converted to common stock at the closing of the Company’s IPO in November 2014.

Prior to the IPO, we applied the two-class method to calculate basic and diluted net income per share of common stock. The two-class method is an earnings allocation method under which earnings per share is calculated for common stock considering a participating security’s rights to undistributed earnings as if all such earnings had been distributed during the period. The Junior Preferred Stock were participating securities due to their dividend rights and the Senior Preferred Stock had stated dividend rates. During periods of net income, the calculation of basic net income per share was reclassified to exclude the income attributable to all participating securities from the numerator and exclude the dilutive impact of those shares from the denominator. During periods of net loss, all participating securities were not included in the calculation of net loss per share because the preferred stockholders had no contractual obligation to participate in losses.

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The following is a reconciliation of the basic and diluted net income per share calculation for the periods presented (in thousands, except per share data):

Diluted net income per share does not include the effect of 3.8 million and 18.6 million securities for the quarters ended June 30, 2015 and 2014 and 1.8 million and 33.9 million securities for the six months ended June 30, 2015 and 2014.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date for ASU 2014-09was initially for fiscal years beginning after December 15, 2016. In July 2015, the FASB approved a one year deferral of this standard with a new effective date for fiscal years beginning after December 15, 2017. The new guidelines can be implemented using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption. We are currently evaluating the impact of this guidance on our consolidated financial statements.

Astellas Agreements

Japan Agreement

In June 2005, we entered into a collaboration agreement with Astellas Pharma Inc. (“Astellas”) for the development and commercialization (but not manufacture) of roxadustat for the treatment of anemia in Japan (“Japan Agreement”). Under this agreement, Astellas paid license fees and other consideration totaling $40.1 million (such amounts were fully received as of February 2009). The Japan Agreement also provides for additional development and regulatory approval milestone payments up to $117.5 million, a commercial sales related milestone of $15.0 million and additional consideration based on net sales (as defined) in the low 20% range after commercial launch. A clinical milestone payment of $12.5 million was received in 2013. We evaluated the criteria under ASC 605-28 (as disclosed in Note 1) and concluded that the aforementioned milestone was substantive.

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Europe Agreement

In April 2006, we entered into a separate collaboration agreement with Astellas for the development and commercialization of roxadustat for the treatment of anemia in Europe, the Middle East, the Commonwealth of Independent States and South Africa (“Europe Agreement”). Under the terms of the Europe Agreement, Astellas paid license fees and other upfront consideration totaling $320.0 million (such amounts were fully received as of February 2009). The Europe Agreement also provides for additional development and regulatory approval milestone payments up to $425.0 million. Clinical milestone payments of $40.0 million and $50.0 million were received in 2010 and 2012. We evaluated the criteria under ASC 605-28 (as disclosed in Note 1) and concluded that each of those milestones was substantive. Under the Europe Agreement, Astellas committed to fund 50% of joint development costs for Europe and North America, and all territory-specific costs. The Europe Agreement also provides for tiered payments based on net sales of product (as defined) in the low 20% range.

AstraZeneca Agreements

U.S./Rest of World Agreement

Effective July 30, 2013, we entered into a collaboration agreement with AstraZeneca for the development and commercialization of roxadustat for the treatment of anemia in the United States and all other countries in the world, other than China, not previously licensed under the Astellas Europe and Astellas Japan Agreements (“U.S./RoW Agreement”). It also excludes China, which is covered by a separate agreement with AstraZeneca described below. Under the terms of the U.S./RoW Agreement, AstraZeneca has agreed to pay upfront, non-contingent and time-based payments totaling $374.0 million, which we expect to receive in various amounts through June 2016, of which $312.0 million was received as of June 30, 2015. In addition, the U.S./RoW Agreement also provides for development and regulatory approval based milestone payments of up to $550.0 million, which include potential future indications which the companies choose to pursue, and commercial related milestone payments of up to $325.0 million. During the second quarter of 2015, we received a $15.0 million development milestone payment as a result of the finalization of our two audited pre-clinical carcinogenicity study reports. We evaluated the criteria under ASC 605-28 (as disclosed in Note 1) and concluded that each of those milestones was substantive.

Under the U.S./RoW Agreement, we and AstraZeneca will share equally in the development costs of roxadustat not already paid for by Astellas, up to a total of $233.0 million. Any additional development costs incurred by us during the development period in excess of the $233.0 million (aggregated spend) will be fully reimbursed by AstraZeneca. AstraZeneca will pay us tiered royalty payments on AstraZeneca’s future net sales (as defined in the agreement) of roxadustat in the low 20% range. In addition we will receive a transfer price for delivery of commercial product based on a percentage of AstraZeneca’s net sales (as defined in the agreement) in the low- to mid-single digit range.

China Agreement

Effective July 30, 2013, we (through our subsidiaries affiliated with China) entered into a collaboration agreement with AstraZeneca for the development and commercialization (but not manufacture) of roxadustat for the treatment of anemia in China (“China Agreement”). Under the terms of the China Agreement, AstraZeneca agreed to pay upfront consideration totaling $28.2 million (such amounts were fully received as of March 31, 2014). In addition, the China Agreement provides for AstraZeneca to pay regulatory approval and other approval related milestones of up to $161.0 million. The China Agreement also provides for sales related milestone payments of up to $167.5 million and contingent payments of $20.0 million related to possible future compounds. The China Agreement is structured as a 50/50 profit or loss share (as defined) and provides for joint development costs (including capital and equipment costs for construction of the manufacturing plant in China), to be shared equally during the development.

Accounting for the Astellas Agreements

For each of the Astellas agreements, we evaluated the deliverables within the respective arrangements and separated them into various units of accounting.

Deliverables that did not provide standalone value have been combined with other deliverables to form a unit of accounting that collectively has standalone value, with revenue being recognized on the combined unit of accounting, rather than the individual deliverables. There are no right-of-return provisions for the delivered items in the Astellas agreements.

For the Astellas agreements, we allocated arrangement consideration to various units of accounting based on BESP of each deliverable within each unit of accounting using the relative selling price method as we did not have VSOE or TPE of selling price for such deliverables. Arrangement consideration includes non-contingent upfront payments of $360.1 million and cumulative co-development billings of $114.5 million (for the Europe Agreement) as of June 30, 2015.

For the technology license under the Japan Agreement and Europe Agreement, BESP was determined primarily by using the discounted cash flow (“DCF”) method, which aggregates the present value of future cash flows to determine the valuation as of the

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effective date of each of the agreements. The DCF method involves the following key steps: 1) the determination of cash flow forecasts and 2) the selection of a range of comparative risk-adjusted discount rates to apply against the cash flow forecasts. The discount rates selected were based on expectations of the total rate of return, the rate at which capital would be attracted to the Company and the level of risk inherent within the Company. The discounts applied in the DCF analysis ranged from 17.5% to 20.0%. Our cash flow forecasts were derived from probability-adjusted revenue and expense projections by territory. Such projections included consideration of taxes and cash flow adjustments. The probability adjustments were made after considering the likelihood of technical success at various stages of clinical trials and regulatory approval phases. BESP also considered certain future royalty payments associated with commercial performance of our compounds, transfer prices and expected gross margins.

The units of accounting that were analyzed, along with their general timing of delivery or performance of service and general timing of revenue recognition, are as follows:

Any consideration received for each Astellas agreement after the initial proceeds on the agreement signing date were also (and will be also) allocated to the various units of accounting above per agreement using the relative selling price method under ASC 605-25-30-2 and 30-5.

Under the Japan Agreement, we are also eligible to receive from Astellas an aggregate of approximately $132.5 million in potential milestone payments, comprised of (i) up to $22.5 million in substantive milestone payments upon achievement of specified

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clinical and development milestone events, (ii) up to $95.0 million in substantive milestone payments upon achievement of specified regulatory milestone events, and (iii) up to approximately $15.0 million in milestone payments upon the achievement of specified commercial sales milestone.

Under the Europe Agreement, we are also eligible to receive from Astellas an aggregate of approximately $425.0 million in potential milestone payments, comprised of (i) up to $90.0 million in substantive milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $335.0 million in substantive milestone payments upon achievement of specified regulatory milestone events, including up to $25.0 million in milestone payments in connection with receipt of marketing approval in Russia.

Accounting for the AstraZeneca Agreements

We evaluated whether or not the U.S./RoW and China Agreements should be accounted for as a single arrangement and concluded that the agreements should be accounted for as a single arrangement with the presumption that two or more agreements executed with a single customer at or around the same time are a single arrangement. Accordingly, upfront and other non-contingent arrangement consideration received and to be received has been and will be pooled together and allocated to each of the units of accounting in both the U.S./RoW and China Agreements based on their relative fair values.

We evaluated the deliverables within the arrangement and separated them into various units of accounting. Deliverables that did not provide stand-alone value have been combined with other deliverables to form a unit of accounting that collectively has stand-alone value, with revenue being recognized on the combined unit of accounting, rather than the individual deliverables. There are no right-of-return provisions for the delivered items in the agreements.

For the technology license under the AstraZeneca U.S./RoW Agreement, BESP was determined based on a two-step process. The first step involved determining an implied royalty rate that would result in the net present value of future cash flows to equal to zero (i.e. where the IRR on the transaction would equal the target return for the investment). This results in an upper bound estimation of the magnitude of royalties that a hypothetical acquirer would reasonably pay for the forecasted cash flow stream. Our cash flow forecasts were derived from probability-adjusted revenue and expense projections. Such projections included consideration of taxes and cash flow adjustments. The probability adjustments were made after considering the likelihood of technical success at various stages of clinical trials and regulatory approval phases. The second step involved applying the implied royalty rate, which was determined to be 40%, against the probability-adjusted projected net revenues by territory and determining the value of the license as the net present value of future cash flows after adjusting for taxes. The discount rate utilized was 17.5%.

U.S./RoW Agreement:

The units of accounting that were analyzed, along with their general timing of delivery or performance of service and general timing of revenue recognition, are as follows:

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Under the terms of the U.S./RoW Agreement, AstraZeneca has agreed to pay upfront, non-contingent and time-based payments totaling $374.0 million, which we expect to receive in various amounts through June 2016, of which $82.0 million was received as of December 31, 2013 and was determined to be fixed and determinable upon the execution of the collaboration agreement. Out of the remaining payments of $292.0 million, which are contractually due, $230.0 million have extended payment terms and, accordingly, were not considered to be fixed or determinable upon the execution of the agreement. As such, for these remaining payments, the amount of revenue recognized is limited to the amount of cash consideration received; additionally, for each of the amounts received, the amount of revenue recognized is determined on the basis of applying the relative selling price method to each of the units of accounting underlying the agreement. Further, $62.0 million of the remaining payment is contingent upon the occurrence of a specified event and accordingly is also not considered fixed or determinable.

Under the U.S./RoW Agreement, we are also eligible to receive from AstraZeneca an aggregate of approximately $875.0 million in potential milestone payments, comprised of (i) up to $65.0 million in substantive milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $325.0 million in substantive milestone payments upon achievement of specified regulatory milestone events, (iii) up to $160.0 million in a non-substantive deferred approval milestone, which would be paid if certain competitors do not launch a HIF compound in the U.S. on or before January 1, 2023, and (iv) up to approximately $325.0 million in milestone payments upon the achievement of specified commercial sales events.

China Agreement:

The units of accounting that were analyzed, along with their general timing of delivery or performance of service and general timing of revenue recognition, are as follows:

For the China Agreement, we retained manufacturing rights as an essential part of a strategy to pursue domestic regulatory pathway for product approval which requires the regulatory licensure of the manufacturing facility in order to commence commercial shipment. The prospects for the collaboration as a whole would have been substantially different had manufacturing rights been provided to AstraZeneca. Because the retention of manufacturing rights by us was a significant factor in the collaboration strategy, rather than simply a mechanism to properly compensate us, we concluded that the license and development services do not have stand-alone value apart from the manufacturing rights. Accordingly, all the deliverables identified, including co-development services, under the China Agreement have been treated as a single unit of account and all revenue allocable to this unit of account is deferred until delivery of commercial drug product has begun. Upon commencement of delivery of commercial drug product, revenue would be recognized in a pattern consistent with estimated deliveries of the commercial drug product.

Under the terms of the China Agreement, AstraZeneca agreed to pay upfront consideration totaling $28.2 million, of which $16.2 million was received as of December 31, 2013 and was determined to be fixed and determinable upon the execution of the collaboration agreement. The remainder of the upfront payments of $12.0 million had extended payment terms and, accordingly, is not considered to be fixed or determinable upon the execution of the agreement. This payment of $12.0 million was received as of March 31, 2014.

Under the China Agreement, we are also eligible to receive from AstraZeneca an aggregate of approximately $328.5 million in potential milestone payments, comprised of (i) up to $15.0 million in substantive milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $146.0 million in substantive milestone payments upon achievement of specified regulatory milestone events, and (iii) up to approximately $167.5 million in milestone payments upon the achievement of specified commercial sales events.

As we are accounting for both the U.S./RoW and China Agreements as one arrangement, any consideration received after the initial proceeds on the agreement signing date were also (and will be also) allocated to the various units of accounting above using the relative selling price method under ASC 605-25-30-2 and 30-5.

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Summary of revenue recognized under the collaboration agreements

The table below summarizes the accounting treatment for the various deliverables pursuant to each of the Astellas and AstraZeneca agreements. License amounts identified below are included in the “License and milestone revenue” line item in the condensed consolidated statements of operations. All other elements identified below are included in the “Collaboration services and other revenue” line item in the condensed consolidated statements of operations.

Amounts recognized as revenue under the Japan Agreement were as follows (in thousands):

As of June 30, 2015, the total arrangement consideration has been allocated to each of the following deliverables under the Japan Agreement, along with any associated deferred revenue as follows (in thousands):

Amounts recognized as revenue under the Europe Agreement were as follows (in thousands):

As of June 30, 2015, the total arrangement consideration has been allocated to each of the following deliverables under the Europe Agreement, along with any associated deferred revenue as follows (in thousands):

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Amounts recognized as revenue under the U.S./RoW Agreement were as follows (in thousands):

As of June 30, 2015, the total arrangement consideration has been allocated to each of the following deliverables under the U.S./RoW Agreement, along with any associated deferred revenue as follows (in thousands):

Other Revenues

Other revenues consist of royalty payments received, which are recorded on a monthly basis as they are reported to us, and collagen feasibility sales. Other revenues were immaterial for all periods presented.

Deferred Revenue

Deferred revenue represents amounts billed to our collaboration partners for which the related revenues have not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of deferred revenue represents the amount to be recognized within one year from the balance sheet date based on the estimated performance period of the underlying deliverables. The long term portion of deferred revenue represents amounts to be recognized after one year through the end of the non-contingent performance period of the underlying deliverables. The long term portion of deferred revenue also includes amounts allocated to the China unit of accounting under the AstraZeneca arrangement as revenue recognition associated with this unit of accounting is tied to the commercial launch of the products within China, which is not expected to occur within the next year.

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The fair values of our financial assets that are measured on a recurring basis are as follows (in thousands):

Our Level 2 investments are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar investments, issuer credit spreads, benchmark investments, prepayment/default projections based on historical data and other observable inputs.

The fair values of our financial liabilities that are carried at historical cost are as follows (in thousands):

The fair values of our financial liabilities were derived by using an income approach, which required Level 3 inputs such as discounted estimated future cash flows.

There were no transfers of assets or liabilities between levels for any of the periods presented.

Cash and Cash Equivalents

Cash and cash equivalents consisted of the following (in thousands):

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Investments

All investments are classified as available-for-sale. The amortized cost, gross unrealized holding gains or losses, and fair value of our available-for-sale investments by major investments type are summarized in the tables below (in thousands):

At June 30, 2015 all of the available-for-sale investments had contractual maturities within four years. We periodically review our available-for-sale investments for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. For debt securities, we also consider whether (i) it is more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. During the quarters and six months ended June 30, 2015 and 2014, we did not recognize any other-than-temporary impairment loss.

At June 30, 2015, a total of $30.9 million of our cash and cash equivalents were held outside of the U.S. in our foreign subsidiaries to be used primarily for our China operations.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

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Stock-based compensation expense was allocated to research and development and general and administrative expense for the periods presented as follows (in thousands):

The weighted-average assumptions used to estimate the fair value of stock options using the Black-Scholes option valuation model and the resulting weighted average fair value of stock options granted during the periods presented were as follows:

We recorded a provision for income taxes for the quarter ended June 30, 2015 due to the discrete tax effect arising from a change in the valuation of our available-for-sale securities portfolio. We recorded a benefit for income taxes for the six months ended June 30, 2015 due to the discrete tax effect arising from other comprehensive income related to available-for-sale securities. We did not record a provision for income taxes for the quarter and six months ended June 30, 2014 as we generated a net operating loss for the year ended December 31, 2014.

Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception and expected continuing net loss, we have established and continue to maintain a full valuation allowance against our deferred tax assets as we do not currently believe that realization of those assets is more likely than not.

Astellas is an equity investor of ours and, therefore, considered a related party. We recorded revenue related to collaboration agreements with Astellas of $5.6 million and $4.6 million during the quarter ended June 30, 2015 and 2014 and $10.9 million and $8.1 million during the six months ended June 30, 2015 and 2014. We recorded expense related to collaboration agreements with Astellas of $1.3 million and $2.4 million during the quarter ended June 30, 2015 and 2014 and $4.4 million and $4.5 million during the six months ended June 30, 2015 and 2014.

As of June 30, 2015 and December 31, 2014, accounts receivable from Astellas were $10.3 million and $5.0 million and amounts due to Astellas were $5.8 million and $4.3 million.

Julian N. Stern, a director of ours since November 1996, is of counsel to the law firm of Goodwin Procter LLP, which he joined in 2008. He has received, and continues to receive, no compensation from Goodwin Procter LLP since joining it as of counsel. We retain Goodwin Procter LLP as legal counsel for various matters, primarily consisting of intellectual property. During the quarter and six months ended June 30, 2015 and 2014, the payments made by us to Goodwin Procter LLP were not material. As of June 30, 2015 and December 31, 2014, amounts due to Goodwin Proctor LLP were not material.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 26, 2015.

Special Note Regarding Forward-Looking Statements

The following discussion and information contained elsewhere in this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. New risks emerge from time to time, and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q and are cautioned not to place undue reliance on such forward-looking statements.

Business Overview

We were incorporated in 1993 in Delaware and are a research-based, biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics to treat serious unmet medical needs. We have capitalized on our extensive experience in fibrosis and hypoxia-inducible factor (“HIF”) biology to generate multiple programs targeting various therapeutic areas. Roxadustat, or FG-4592, is an oral small molecule inhibitor of HIF prolyl hydroxylases (“HIF-PHs”) in Phase 3 clinical development for the treatment of anemia in chronic kidney disease (“CKD”). FG-3019 is our monoclonal antibody in Phase 2 clinical development for the treatment of idiopathic pulmonary fibrosis (“IPF”), pancreatic cancer and liver fibrosis. We have taken a global approach with respect to our product candidates, and this includes development and commercialization of product candidates in the People’s Republic of China (“China”).

On November 10, 2014, we effected a 1-for-2.5 reverse split of our common stock. Upon the effectiveness of the reverse stock split, (i) every 2.5 shares of outstanding common stock were combined into one share of common stock, (ii) the number of shares of common stock for which each outstanding option or warrant to purchase common stock is exercisable was proportionally decreased on a 1-for-2.5 basis, (iii) the exercise price of each outstanding option or warrant to purchase common stock was proportionately increased on a 1-for- 2.5 basis, (iv) the exchange ratio for each share of outstanding FibroGen Europe Oy (“FibroGen Europe”) share of stock which is exchangeable into our common stock was proportionately reduced on a 1-for-2.5 basis, and (v) the conversion ratio for each share of outstanding preferred stock which is convertible into our common stock was proportionately reduced on a 1-for-2.5 basis. All of the outstanding common stock share numbers (including shares of common stock which our outstanding preferred stock shares were convertible into), common stock warrants, share prices, exercise prices and per share amounts have been adjusted in these condensed consolidated financial statements, on a retroactive basis, to reflect this 1-for-2.5 reverse stock split for all periods presented. The par value per share and the authorized number of shares of common stock and preferred stock were not adjusted as a result of the reverse stock split.

On November 19, 2014, we closed the initial public offering (“IPO”) of our common stock. In our IPO, we sold 9,315,000 shares of our common stock at a public offering price of $18.00 per share. Net proceeds from our IPO and concurrent private placement were $171.8 million, after deducting underwriting discounts and commissions of $11.7 million and offering expenses of $4.1 million. AstraZeneca AB (“AstraZeneca”), one of our collaboration partners, agreed to purchase from us concurrently with the closing of our IPO in a private placement shares of our common stock with an aggregate purchase price of $20.0 million at a price per share equal to the IPO price. Upon the closing of our IPO, all outstanding shares of our convertible preferred stock automatically

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converted into 33,919,954 shares of common stock and 958,996 shares of FibroGen Europe convertible preferred stock were converted into shares of our common stock. Our proceeds from the sale of the common stock sold in the concurrent private placement were $20.0 million.

Financial Highlights

During the quarter and six months ended June 30, 2015, we had net income of $57.1 million and $10.7 million, or net income per diluted share of $0.83 and $0.15. The increase in net income and net income per diluted share for the quarter ended June 30, 2015 compared to the same period a year ago is primarily due to an increase in revenue, partially offset by an increase in operating expenses. The decrease in net income and net income per diluted share for the six months ended June 30, 2015 is primarily due to an increase in operating expenses, partially offset by an increase in revenue. The increase in revenue is primarily due to an upfront payment of $120.0 million and a development milestone payment of $15.0 million received in the second quarter of 2015 under the collaboration agreements with AstraZeneca. The increase in operating expenses resulted primarily from the progression of our clinical trials and expenses to support our new requirements as a public company.

Cash, cash equivalents, investments and receivables, excluding restricted cash, totaled $399.2 million at June 30, 2015, an increase of $61.6 million from December 31, 2014, primarily due to payments received from AstraZeneca, partially offset by cash used in operations.

Programs

During the first half of 2015, we continued to make progress in the development of our major programs.

Roxadustat is the first HIF-PH inhibitor to enter Phase 3 clinical development and acts by stimulating the body’s natural pathway of erythropoiesis, or red blood cell production. We, along with our collaboration partners Astellas Pharma Inc. (“Astellas”) and AstraZeneca, continue to advance roxadustat through our global Phase 3 program to support regulatory approval of roxadustat in both dialysis-dependent CKD (“DD-CKD”) patients and CKD patients who are not dialysis-dependent (“NDD-CKD”) in multiple geographies. For the three FibroGen roxadustat Phase 3 studies we have reached approximately two-thirds of our cumulative target enrollment. Our base plan is to meet target enrollment for these studies in March to April 2016, and we believe the third study could reach target enrollment by year end 2015. We currently anticipate submitting a New Drug Application (“NDA”) for roxadustat in the United States in 2018 and in China in 2016. In China, we completed manufacture of our NDA registration campaign for drug substance and finished drug product for roxadustat at our Beijing manufacturing facility in the second quarter of 2015. We have been informed that technical review of our Phase 3 clinical trial application has been completed by the CDE, and we believe the remaining steps in the Clinical Trial Application approval are largely perfunctory. We plan to begin opening study sites and enrolling patients in two Phase 3 studies in China in the fourth quarter of 2015.

FG-3019 is our fully-human monoclonal antibody that inhibits the activity of connective tissue growth factor (“CTGF”), a critical common element in the progression of fibrosis and associated serious diseases. We continue to conduct an open-label Phase 2 extension study in IPF and continue to enroll patients in a randomized, double-blind placebo-controlled Phase 2 trial in patients with IPF. The presence of approved therapies in IPF, such as Roche’s pirfenidone, which is approved for marketing in Europe, Canada, Japan and the United States, and Boehringer Ingelheim’s nintedanib, which has been approved in the United States and EU, has made enrollment in our placebo-controlled Phase 2 IPF trial more challenging. Our ability to complete enrollment of this IPF trial in the expected timeframe is dependent on opening additional clinical sites outside of the United States in the third quarter of 2015. In addition, we are evaluating expanding this IPF trial to include one or more comparator arms with approved therapy, which may increase the patient number in our trial to approximately 250 subjects.

We also continue to enroll an open-label Phase 2 trial in pancreatic cancer to determine whether the FG-3019, in combination with gemcitabine and nab-paclitaxel, can convert inoperable pancreatic cancer to operable cancer. Patients with inoperable Stage 3 pancreatic cancer have survival similar to patients with metastatic cancer with studies showing only half of these patients survive approximately 8 to 12 months after diagnosis and few studies even report 5 year survival. Outlook for patients with resectable pancreatic cancer is considerably better with studies showing half survive between 17 to 27 months after diagnosis and 20% alive at 5 years. We expect to review the preliminary data from this pancreatic cancer study when we have sufficient data to detect substantial differences in the context of assessing whether to expand the program, or continue or stop the study. We plan to submit an abstract of the initial study results for presentation at the American Society of Clinical Oncology Gastrointestinal meeting, which will be held in January of 2016. We plan to open a trial, for which we recently received Food and Drug Administration (“FDA”) clearance for our Investigational New Drug (“IND”) application, to study FG-3019 in Duchenne Muscular Dystrophy (“DMD”) in the second half of 2015. In addition, in the second quarter of 2015 we closed a trial in subjects with liver fibrosis due to the hepatitis B virus. To date, we have retained exclusive worldwide rights for FG-3019.

We are also currently pursuing our corneal implant FG-5200 for treatment of corneal blindness resulting from partial thickness corneal damage in China.

Collaboration Partnerships for Roxadustat

Our current and future research, development, manufacturing and commercialization efforts with respect to roxadustat and our other product candidates currently in development depend on funds from our collaboration agreements with Astellas and AstraZeneca as described below.

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Astellas

We have two agreements with Astellas for the development and commercialization of roxadustat, one for Japan, and one for Europe, the Commonwealth of Independent States, the Middle East and South Africa. Under these agreements, we provided Astellas the right to develop and commercialize roxadustat for anemia in these territories.

We share responsibility with Astellas for clinical development activities required for United States and EU regulatory approval of roxadustat, and share equally those development costs under the agreed development plan for such activities. Astellas will be responsible for clinical development activities and all associated costs required for regulatory approval in all other countries in the Astellas territories. Astellas will own and have responsibility for regulatory filings in its territories. We are responsible, either directly or through our contract manufacturers, for the manufacture and supply of all quantities of roxadustat to be used in development and commercialization under the agreements.

The Astellas agreements will continue in effect until terminated. Either party may terminate the agreements for certain material breaches by the other party. In addition, Astellas will have the right to terminate the agreements for certain specified technical product failures, upon generic sales reaching a particular threshold, upon certain regulatory actions, or upon our entering into a settlement admitting the invalidity or unenforceability of our licensed patents. Astellas may also terminate the agreements for convenience upon advance written notice to us. In the event of any termination of the agreements, Astellas will transfer and assign to us the regulatory filings for roxadustat and will assign or license to us the relevant trademarks used with the products in the Astellas territories. Under certain terminations, Astellas is also obligated to pay us a termination fee.

Consideration under these agreements includes a total of $360.1 million in upfront and non-contingent payments, and milestone payments totaling $557.5 million, of which $542.5 million are development and regulatory milestones, and $15.0 million are commercial-based milestones. Total consideration, excluding development cost reimbursement and product sales-related payments, could reach $917.6 million. The aggregate amount of such consideration received through June 30, 2015 totals $462.6 million.

Additionally, under these agreements, Astellas pays 100% of the commercialization costs in its territories. Astellas will pay us a transfer price, based on net sales, in the low 20% range for our manufacture and delivery of roxadustat.

In addition, as of June 30, 2015 Astellas has separately invested $80.5 million in the equity of FibroGen, Inc.

AstraZeneca

We also have two agreements with AstraZeneca for the development and commercialization of roxadustat for anemia, one for China (“China Agreement”) and one for the United States and all other countries (“RoW”) not previously licensed to Astellas (“U.S./RoW Agreement”). Under these agreements we provided AstraZeneca the right to develop and commercialize roxadustat for anemia in these territories.

We will share responsibility with AstraZeneca for clinical development activities required for United States regulatory approval of roxadustat. AstraZeneca will be responsible for all of our development costs incurred under the agreed development plan for roxadustat in the United States and EU, to the extent those costs are not covered by Astellas, after an initial 50% development cost sharing period in which our funding obligations are limited to a total of $116.5 million. Thereafter, AstraZeneca will be solely responsible for additional development costs. In China, FibroGen China Anemia Holdings, Ltd. (“FibroGen China”) will conduct the development work for CKD anemia and its subsidiary, FibroGen (China) Medical Technology Development Co., Ltd. (“FibroGen Beijing”), will hold all of the regulatory licenses issued by China regulatory authorities and FibroGen China will be primarily responsible for regulatory, clinical and manufacturing. China development costs are shared 50/50. AstraZeneca is also responsible for 100% of development expenses in all other licensed territories outside of China. We are responsible, through our contract manufacturers, for the manufacture and supply of all quantities of roxadustat to be used in development and commercialization under the AstraZeneca agreements.

Under the AstraZeneca agreements, we will receive upfront and subsequent non-contingent payments totaling $402.2 million, a portion of which we have received and the remainder of which we expect to receive in various amounts through 2016, including a $62.0 million time based development milestone, which became non-contingent as of July 30, 2014. Potential milestone payments under the agreements total $1.2 billion, of which $571.0 million are development and regulatory milestones, and $652.5 million are commercial-based milestones. Total consideration under the agreements, excluding development cost reimbursement, transfer price payments, royalties and profit share, could reach $1.6 billion. The aggregate amount of such consideration received through June 30, 2015 totals $355.2 million.

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During the second quarter of 2015, we received an upfront payment of $120.0 million and a development milestone payment of $15.0 million under the under the U.S./RoW Agreement. The development milestone payment resulted from the finalization of our two audited pre-clinical carcinogenicity study reports.

Payments under these agreements include over $500.0 million in upfront, non-contingent and other payments received or expected to be received prior to the first U.S. approval, excluding development expense reimbursement.

AstraZeneca purchased 1,111,111 shares of our common stock at the IPO price for an aggregate purchase price of $20.0 million in a private placement concurrent with our IPO.

Under the U.S./RoW Agreement, AstraZeneca will pay for all commercialization costs in the U.S. and RoW and AstraZeneca will be responsible for the United States commercialization of roxadustat, with FibroGen undertaking specified promotional activities in the end stage renal disease (“ESRD”) segment in the United States. In addition, we will receive a transfer price for delivery of commercial product based on a percentage of net sales in the low- to mid-single digit range and AstraZeneca will pay us a tiered royalty on net sales of roxadustat in the low 20% range.

Under the China Agreement, which is conducted through FibroGen China, the commercial collaboration is structured as a 50/50 profit share. AstraZeneca will conduct commercialization activities in China as well as serve as the master distributor for roxadustat and will fund roxadustat launch costs in China until FibroGen Beijing has achieved profitability. At that time, AstraZeneca will recoup 50% of their historical launch costs out of initial roxadustat profits in China.

AstraZeneca may terminate the U.S./RoW Agreement upon specified events, including our bankruptcy or insolvency, our uncured material breach, technical product failure, or upon 180 days prior written notice at will. If AstraZeneca terminates the U.S./RoW Agreement at will, in addition to any unpaid non-contingent payments, it will be responsible to pay for a substantial portion of the post-termination development costs under the agreed development plan until regulatory approval.

AstraZeneca may terminate the China Agreement upon specified events, including our bankruptcy or insolvency, our uncured material breach, technical product failure, or upon advance prior written notice at will. If AstraZeneca terminates our China Agreement at will, it will be responsible to pay for transition costs as well as make a specified payment to FibroGen China.

In the event of any termination of the agreements, but subject to modification upon termination for technical product failure, AstraZeneca will transfer and assign to us any regulatory filings and approvals for roxadustat in the affected territories that they may hold under our agreements, grant us licenses and conduct certain transition activities.

Results of Operations

Revenue

Our revenue to date has been generated primarily from our collaboration agreements with Astellas and AstraZeneca. The sources of our revenue for the periods presented were as follows:

Under our revenue recognition policy, license revenue includes amounts from upfront, non-refundable license payments and amounts allocated pursuant to the relative selling price method from other consideration received (other than substantive milestone payments) during the periods. This revenue is generally recognized as deliverables are met and services are performed. Milestone revenue includes payments from milestones which are deemed to be substantive in nature and is recognized in its entirety in the period in which the milestone is achieved. License and milestone revenues represented 89% and 92% of total revenue for the quarter ended June 30, 2015 and 2014 and 87% and 90% of total revenue for the six months ended June 30, 2015 and 2014.

Collaboration services include co-development services, manufacturing of clinical supplies, committee services and information sharing. Collaboration services revenues are recognized over the non-contingent performance period, ranging from 36 to

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65 months. Other revenues consist of royalty payments received, which are recorded on a monthly basis as they are reported to us, and have been included with collaboration services and other revenue in the condensed consolidated statements of operations, as they have not been material for any of the periods presented. Collaboration services and other revenues represented 11% and 8% of total revenue for the quarter ended June 30, 2015 and 2014 and 13% and 10% of total revenue for the six months ended June 30, 2015 and 2014.

The increase in total revenue for the quarter and six months ended June 30, 2015 compared to the same periods a year ago is more fully discussed in the sections below.

Total cash consideration received through June 30, 2015 and potential cash consideration, other than development cost reimbursement, transfer price payments, royalties and profit share, pursuant to our existing collaboration agreements are as follows (in thousands):

These collaboration agreements also provide for reimbursement of certain fully burdened research and development costs as well as direct out of pocket expenses.

License and Milestone Revenue

License and milestone revenue recognized under our collaboration agreements with AstraZeneca increased primarily due to an upfront payment of $120.0 million and a development milestone payment of $15.0 million received during the second quarter of 2015 compared to an upfront payment of $110.0 million received during the second quarter of 2014. A portion of each of the upfront payments received under the collaboration agreements with AstraZeneca were deferred as a result of applying the relative selling price method and assessing the timing of the provision of various deliverables. The milestone payment was recognized in its entirety upon receipt. In addition, license and milestone revenue recognized under our collaboration agreements with both Astellas and Astra Zeneca increased due to an increase in reimbursable co-development costs allocated to license and milestone revenue.

Collaboration Services and Other Revenue

Collaboration services revenue increased $6.2 million and $7.8 million for the quarter and six months ended June 30, 2015 compared to the same periods a year ago primarily due to the allocation of the upfront payment of $120.0 million received during the second quarter of 2015 and an increase in reimbursable co-development costs under our collaboration agreements with AstraZeneca and Astellas.

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Operating Expenses

Research and Development Expenses

Research and development expenses consist of third party research and development costs and the fully-burdened amount of costs associated with work performed under collaboration agreements. Research and development costs include employee-related expenses for research and development functions, expenses incurred under agreements with clinical research organizations (“CROs”), other clinical and preclinical costs and allocated direct and indirect overhead costs, such as facilities costs, information technology costs and other overhead. Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

Research and development expenses incurred by program for the periods presented were as follows (in thousands):

The program-specific expenses summarized in the table above include costs we directly attribute to our product candidates. We allocate research and development salaries, benefits, stock-based compensation and other indirect costs to our product candidates on a program-specific basis, and we include these costs in the program-specific expenses.

Research and development expenses increased for the quarter and six months ended June 30, 2015 compared to the same periods a year ago. The increase for the quarter ended June 30, 2015 was primarily due to an increase in clinical trial, outside services and drug development related costs of $12.2 million, stock-based compensation expense of $4.0 million and employee-related costs of $1.9 million. The increase for the six months ended June 30, 2015 was primarily due to an increase in clinical trial, outside services and drug development related costs of $29.7 million, stock-based compensation expense of $7.8 million and employee-related costs of $4.6 million. Clinical trial, outside services and drug development related costs increased as a result of the progression of the Phase 3 trials for FG-4592 and the ongoing Phase 2 trials for FG-3019. Stock-based compensation expense increased primarily due to a higher valuation for stock option grants and expense related to the Employee Share Purchase Program (“ESPP”), which we implemented in November 2014. Employee-related costs increased as a result of additional headcount to support our clinical trials.

General and Administrative Expenses

General and administrative expenses consist primarily of employee-related expenses for executive, operational, finance, legal, compliance and human resource functions. Other general and administrative expenses include facility-related costs and professional fees, accounting and legal services, other outside services, recruiting fees and expenses associated with obtaining and maintaining patents.

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General and administrative expenses increased for the quarter and six months ended June 30, 2015 compared to the same periods a year ago. The increase for the quarter ended June 30, 2015 was primarily due to an increase in stock-based compensation expense of $2.2 million. The increase for the six months ended June 30, 2015 was primarily due to an increase in stock-based compensation expense of $4.2 million, legal fees of $1.2 million and employee-related costs of $1.0 million. Stock-based compensation expenses increased primarily due to a higher valuation of stock option grants and expense related to the ESPP. Legal fees increased for the six months ended June 30, 2015 compared to the same period a year ago primarily as a result of incremental maintenance costs associated with our intellectual property portfolio. Employee-related costs increased primarily as a result of additional headcount to support being a public company.

Operating Expenses for Roxadustat Covered Under Collaboration Agreements

We share responsibility with AstraZeneca for clinical development activities required for United States regulatory approval of roxadustat. AstraZeneca is responsible for all of our development costs incurred under the agreed development plan for roxadustat in the United States, Europe, Japan and all other markets outside of China, to the extent those costs are not covered by Astellas, after an initial 50% development cost sharing period in which our funding obligations are limited to a total of $116.5 million, of which $83.4 million has been incurred as of June 30, 2015. We expect to reach this $116.5 million cap in late 2015. After we have reached the $116.5 million cap, AstraZeneca will be solely responsible for all future development costs. In China, our subsidiary FibroGen China will conduct the development work for CKD anemia and its subsidiary, FibroGen Beijing, will hold all of the regulatory licenses issued by China regulatory authorities and FibroGen China will be primarily responsible for regulatory, clinical and manufacturing. All development and commercialization costs for roxadustat in China will be shared equally with AstraZeneca.

Interest and Other Income (Expense), Net

Interest expense approximated the same periods a year ago and includes payments made for imputed interest related to the facility lease financing obligations for our leased facilities in San Francisco and China as well as interest related to the TEKES product development obligations.

Interest and other income, net increased primarily due to higher average balances of cash equivalents and investments.

Provision (Benefit) from Income Taxes

We recorded a provision for income taxes for the quarter ended June 30, 2015 due to the discrete tax effect arising from a change in the valuation of our available-for-sale securities portfolio. We recorded a benefit for income taxes for the six months ended June 30, 2015 primarily due to the discrete tax effect arising from other comprehensive income related to available-for-sale securities. We did not record a provision for income taxes for the quarter and six months ended June 30, 2014 as we generated a net operating loss for the year ended December 31, 2014.

Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception and expected continuing net loss, we have established and continue to maintain a full valuation allowance against our deferred tax assets as we do not currently believe that realization of those assets is more likely than not.

Liquidity and Capital Resources

We have historically funded our operations principally from the sale of convertible preferred stock and common stock and from the execution of certain collaboration agreements involving license payments, milestones and reimbursement for development services. On November 19, 2014, we closed our IPO and concurrent private placement in which we issued and sold a total of 10,426,111 shares of common stock, resulting in net proceeds of $171.8 million, after deducting underwriting discounts and commissions of $11.7 million and offering expenses of $4.1 million for our IPO. Upon the closing of our IPO, all of our outstanding convertible preferred stock automatically converted into 33,919,954 shares of common stock, based on the shares of convertible preferred stock outstanding as of November 18, 2014.

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During the second quarter of 2015, we received a $120.0 million upfront payment and a $15.0 million development milestone payment under the U.S./RoW Agreement. The development milestone payment was related to the finalization of our two audited pre-clinical carcinogenicity study reports.

To date, we have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize one or more of our current or future product candidates. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. We are subject to all the risks related to the development and commercialization of novel therapeutics, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. As a newly public company, we expect to incur additional costs associated with operating as a public company. We anticipate that we will need substantial additional funding in connection with our continuing operations.

As of June 30, 2015, we had cash and cash equivalents of $236.5 million. Cash is invested in accordance with our investment policy, primarily to provide liquidity and preserve capital. Investments, consisting principally of corporate debt securities stated at fair value, are also available as a source of liquidity. As of June 30, 2015, we had short- and long-term investments of $12.1 million and $138.3 million. As of June 30, 2015, a total of $30.9 million of our cash and cash equivalents was held outside of the U.S. in our foreign subsidiaries to be used primarily for our China operations.

We believe our existing cash and cash equivalents, investments and payments due under our license and collaboration agreements will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. However, our liquidity assumptions may change over time, and we could utilize our available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under Part I, Item 1A: “Risk Factors” in this Quarterly Report on Form 10-Q. We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain needed additional funds, we will have to reduce our operating expenses, which would impair our growth prospects and could otherwise negatively impact our business.

Cash Flows

The following table sets forth the primary sources and uses of cash (in thousands):

Operating Activities

Net cash provided by operating activities was $58.9 million for the six months ended June 30, 2015 and consisted primarily of net income of $10.7 million adjusted for non-cash items of $17.8 million, which includes stock-based compensation expense of $13.4 million, depreciation expense of $2.8 million, amortization of the premium on investments of $1.5 million, and a net increase in operating assets and liabilities of $30.4 million. The significant items in the change in operating assets and liabilities include an increase in deferred revenue of $30.4 million, an increase in prepaid expenses and other current assets of $2.2 million, an increase in accounts receivable of $1.3 million, a decrease in accrued liabilities of $3.1 million and a decrease in accounts payable of $0.6 million. The change in deferred revenue relate to the timing of the receipt of upfront payments and recognition of revenues under our collaboration agreements with Astellas and AstraZeneca. The change in accounts receivable and prepaid expenses and other current assets relates to the timing of payments. The changes in accounts payable and accrued liabilities is driven by clinical trial activity related to upcoming Phase 3 trials for roxadustat and the timing of payments.

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Net cash provided by operating activities was $77.2 million for the six months ended June 30, 2014, and consisted primarily of net income of $30.6 million adjusted for non-cash items including stock-based compensation expense of $1.5 million, depreciation expense of $1.8 million, amortization of bond premium/discount of $0.3 million and a net increase in operating assets and liabilities of $43.0 million. The significant items in the change in operating assets and liabilities include an increase in deferred revenue of $36.3 million and an increase in accounts payable and accrued expenses of $5.0 million. The increase in deferred revenue relates to the timing of upfront payments and recognition of revenues under our collaboration agreements with Astellas and AstraZeneca. The increase in accrued expenses is driven by the increase in clinical trial activity related to upcoming Phase 3 trials for roxadustat.

Investing Activities

Investing activities consist primarily of purchases of property and equipment and proceeds from the maturities of investments.

Financing Activities

Financing activities primarily reflect proceeds from the issuance of our common stock, repayments of our lease liability and payments of equity issuance costs associated with the planned public offering of our securities.

Off-Balance Sheet Arrangements

During the quarter and six months ended June 30, 2015, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements.

Contractual Obligations and Commitments

There have been no material changes in our contractual obligations compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes in our critical accounting policies, estimates and judgments during the quarter ended June 30, 2015 compared with the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

Substantially all of our revenues to date have been generated from our collaboration agreements.

Our collaboration agreements include multiple deliverables, and we follow the guidance in Accounting Standards Codification (“ASC”) Topic 605-25, “Revenue Recognition—Multiple-Element Arrangements,” (“ASC 605-25”). ASC 605-25:

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We evaluate all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis. Based on this evaluation, the deliverables are separated into units of accounting. The arrangement consideration that is fixed or determinable at the inception of the arrangement is allocated to the separate units of accounting based on their relative selling prices. Significant judgment may be required in determining whether a deliverable provides stand-alone value, determining the amount of arrangement consideration that is fixed or determinable, and estimating the stand-alone selling price of each unit of accounting.

To date, we have determined that the selling price for the deliverables within our collaboration agreements should be determined using BESP, as neither VSOE nor TPE is available. The process for determining BESP involves significant judgment on our part and includes consideration of multiple factors, including assumptions related to the market opportunity and the time needed to commercialize a product candidate pursuant to the relevant license, estimated direct expenses and other costs, which include the rates normally charged by contract research and contract manufacturing organizations for development and manufacturing obligations, and rates that would be charged by qualified outsiders for committee services.

For each unit of accounting identified within an arrangement, we determine the period over which the deliverables are provided and the performance obligation is satisfied. Service revenue is recognized using a proportional performance method. Direct labor hours or full time equivalents are used as the measurement of performance. Revenue may be recognized using a straight line method when performance is expected to occur consistently over a period of time.

Payments or reimbursements resulting from our research and development efforts for those arrangements where such efforts are considered as deliverables are recognized as the services are performed and are presented on a gross basis. To the extent payments are required to be made to our collaboration partners pursuant to research and development efforts, those costs are charged to research and development using the guidance pursuant to ASC Topic 605-250, “Customer Payments and Incentives”, which states that cash consideration given by a vendor to a customer is presumed to be a reduction of the selling prices unless the vendor receives an identifiable benefit in exchange for the consideration that is sufficiently separable from the recipient’s purchase of the vendor’s products, and the vendor can reasonably estimate the fair value of the benefit.

Each of our collaboration agreements includes milestones for which we follow ASC Topic 605-28, “Revenue Recognition—Milestone Method” (“ASC 605-28”). ASC 605-28 establishes the milestone method as an acceptable method of revenue recognition for certain contingent event-based payments under research and development arrangements. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us. Determining whether a milestone is substantive is a matter of judgment and that assessment must be made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone (i) is commensurate with either our performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. Payments for achieving milestones which are not considered substantive are treated as additional arrangement consideration and are allocated following the relative selling price method previously described.

Recently Issued and Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date for ASU 2014-09was initially for fiscal years beginning after December 15, 2016. In July 2015, the FASB approved a one year deferral of this standard with a new effective date for fiscal years beginning after December 15, 2017. The new guidelines can be implemented using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption. We are currently evaluating the impact of this guidance on our consolidated financial statements.

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We believe there has been no material change in our exposure to market risks as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.