FIBROGEN INC - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended March 31, 2018

OR

For the transition period from                to                 

Commission file number: 001-36740

FIBROGEN, INC.

(Exact name of registrant as specified in its charter)

(415) 978-1200

Registrant’s telephone number, including area code:

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 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  ☑    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:

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 Exchange Act Rule 12b-2).    Yes  ☐    No  ☑

The number of shares of common stock outstanding as of April 30, 2018 was 83,522,252.

FIBROGEN, INC.

TABLE OF CONTENTS

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FIBROGEN, INC.

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 LOSS

(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” or the “Company”) was incorporated in 1993 in Delaware and is a research-based biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics agents to treat serious unmet medical needs. The Company’s focus in the areas of fibrosis and hypoxia-inducible factor (“HIF”) biology has generated multiple programs targeting various therapeutic areas. The Company’s 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”) and myelodysplastic syndromes (“MDS”). Pamrevlumab, or FG-3019, is the Company’s monoclonal antibody in Phase 2 clinical development for the treatment of idiopathic pulmonary fibrosis (“IPF”), pancreatic cancer and Duchenne muscular dystrophy (“DMD”). The Company is taking a global approach with respect to the development and future commercialization of its product candidates, and this includes development and commercialization in the People’s Republic of China (“China”). The Company is capitalizing on its extensive experience in fibrosis and HIF biology and clinical development to advance a pipeline of innovative medicines for the treatment of anemia, fibrotic disease cancer, corneal blindness and other serious unmet medical needs.

Basis of Presentation and Principles of Consolidation

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

The unaudited condensed consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) applicable to interim financial reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the United States (“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 financial information included herein should be read in conjunction with the consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2017 (“2017 Form 10-K”).

The accounting policies used by the Company in its presentation of interim financial results are consistent with those presented in Note 2 to the consolidated financial statements included in the 2017 Form 10-K, except for the following:

Revenue Recognition

Substantially all of the Company’s revenues to date have been generated from its collaboration agreements.

The Company’s collaboration agreements include multiple performance obligations comprised of promised services, or bundles of services, that are distinct. Services that are not distinct are combined with other services in the agreement until they form a distinct bundle of services. The Company’s process for identifying performance obligations and an enumeration of each obligation for each agreement is outlined in Note 2 “Collaboration Agreements.” Determining the performance obligations within a collaboration agreement often involves significant judgment and is specific to the facts and circumstances contained in each agreement.

The Company identified the following material promises under its collaboration agreements: (1) license of FibroGen technology, (2) the performance of co-development services, including manufacturing of clinical supplies and other services during the development period, and (3) manufacture of commercial supply. The evaluation as to whether these promises are distinct, and therefore represent separate performance obligations, is described in more details in Note 2 “Collaboration Agreements.”

For revenue recognition purposes, the Company determines that the term of its collaboration agreements begin on the effective date and ends upon the completion of all performance obligations contained in the agreements. In each agreement, the contract term is defined as the period in which parties to the contract have present and enforceable rights and obligations. The Company believes that the existence of what it considers to be substantive termination penalties on the part of the counterparty create sufficient incentive for the counterparty to avoid exercising its right to terminate the agreement unless in exceptionally rare situations.

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The transaction price for each collaboration agreement is determined based on the amount of consideration the Company expects to be entitled for satisfying all performance obligations within the agreement. The Company’s collaboration agreements include payments to the Company of one or more of the following: non-refundable upfront license fees; co-development billings; development, regulatory, and commercial milestone payments; and royalties on net sales of licensed products.

Upfront license fees are non-contingent and non-refundable in nature and are included in the transaction price at the point when the license fees become due to the Company.  The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.

Co-development billings resulting from the Company’s research and development efforts, which are reimbursable under its collaboration agreements, are considered variable consideration. Determining the amount of variable consideration from co-development billings requires the Company to make estimates of future research and development efforts, which involves significant judgment. Co-development billings are allocated entirely to the co-development services performance obligation when amounts are related specifically to research and development efforts necessary to satisfy the performance obligation, and such an allocation is consistent with the allocation objective.

Milestone payments are also considered variable consideration, which requires the Company to make estimates of when achievement of a particular milestone becomes probable. Similar to other forms of variable consideration, milestone payments are included in the transaction price when it becomes probable that such inclusion would not result in a significant revenue reversal. Milestone payments are therefore included in the transaction price when achievement of the milestone becomes probable.

For arrangements that include sales-based royalties and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at 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). To date, the Company has not recognized any royalty revenue resulting from its collaboration arrangements.

The transaction price is allocated to performance obligations based on their relative standalone selling price (“SSP”), with the exception of co-development billings allocated entirely to co-development services performance obligations. The SSP is determined based on observable prices at which the Company separately sells the products and services. If an SSP is not directly observable, then the Company will estimate the SSP considering marketing conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available. The process for determining SSP involves significant judgment 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.  

Significant judgment may be required in determining whether a performance obligation is distinct, determining the amount of variable consideration to be included in the transaction price, and estimating the SSP of each performance obligation. An enumeration of the Company’s significant judgments is outlined in Note 2 “Collaboration Agreements.”

For each performance obligation identified within an arrangement, the Company determines the period over which the promised services are transferred and the performance obligation is satisfied. Service revenue is recognized over time based on progress toward complete satisfaction of the performance obligation. The Company uses an input method to measure progress toward the satisfaction of co-development services and certain other related performance obligations, which is based on costs of labor hours or full time equivalents and out-of-pocket expenses incurred relative to total expected costs to be incurred.  The Company believes this measure of progress provides a faithful depiction of the transfer of services because other measures do not measure as accurately how the Company transfers its performance obligations to its collaboration partners.

Investments

The Company’s investments consist of available-for-sale debt investments and marketable equity investments. Those investments with maturities less than 12 months are considered short-term investments. Those investments with maturities greater than 12 months are considered long-term investments. The Company’s investments classified as available-for-sale are recorded at fair value based upon quoted market prices at period end. Unrealized gains and losses for available-for-sale debt investments that are deemed temporary in nature are recorded in accumulated other comprehensive income (loss) as a separate component of stockholder’ equity. Marketable equity securities are equity securities with readily determinable fair value, and are measured and recorded at fair value. Realized and unrealized gains or losses resulting from changes in value and sale of the Company’s marketable equity investments are recorded in other income (expenses) in the consolidated statement of operations.

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A decline in the fair value of any security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Premiums and discounts are amortized (accreted) over the life of the related security as an adjustment to its yield. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of investments sold.

Use of Estimates

The preparation of the 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. The more significant areas requiring the use of management estimates and assumptions include valuation and recognition of revenue, estimates of accruals related to clinical trial costs, valuation allowances for deferred tax assets, and valuation and recognition of stock-based compensation. On an ongoing basis, management reviews these estimates and assumptions. Changes in facts and circumstances may alter such estimates and actual results could differ from those estimates. In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair statement of its financial position, results of operations and cash flows for the interim periods presented.

Recently Issued and Adopted Accounting Guidance

New Revenue Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in Accounting Standards Codification (“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. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (collectively, the “new revenue standards”).

Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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The Company adopted the new revenue standards as of January 1, 2018 using the full retrospective method, which required the Company to recast the prior reporting period presented in the condensed consolidated financial statements. The primary impact upon adoption of the new revenue standards relates to the manner in which revenue is recognized for co-development billings and milestone payments under the Company’s collaboration arrangements. Under the new revenue standards, both of these elements of consideration are considered variable consideration which requires the Company to make estimates of when co-development billings become due or when achievement of a particular milestone becomes probable. Payments are included in the transaction price when it becomes probable that inclusion would not lead to a significant revenue reversal.

The Company has recast its condensed consolidated statement of operations and condensed balance sheet from amounts previously reported due to the adoption of the new revenue standards. The adoption of the new revenue standards had no impact to the Company’s previously reported condensed consolidated statement of cash flows.

Select line items from the Company’s condensed consolidated statement of operations and condensed balance sheet, which reflect the adoption of the new revenue standards are as follows (in thousands):

The adoption of the new revenue standards resulted in an increase in revenue of $5.3 million and $3.6 million for the years ended December 31, 2017 and 2016, respectively, and an increase in the opening accumulative deficit of $43.7 million as of January 1, 2016.

ASU 2016-01

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10). This guidance requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income, simplifies the impairment assessment of certain equity investments, and updates certain presentation and disclosure requirements. This guidance was effective for the annual reporting period beginning after December 15, 2017 and interim periods within those annual periods. The Company adopted this guidance as of January 1, 2018 using the modified retrospective approach. The impacts to the Company’s accumulated other comprehensive loss and accumulated deficit upon adoption of this guidance are as follows (in thousands):

The adoption of this guidance had no impact to the Company’s condensed consolidated statement of operations or condensed consolidated statement of cash flows for the three months ended March 31, 2018.

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ASU 2017-09

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This guidance provides guidance about which changes to the terms or conditions of a stock-based payment award require an entity to apply modification accounting in Topic 718. This guidance was effective for annual reporting period beginning after December 15, 2017, including interim periods. The Company adopted this guidance as of January 1, 2018, and the adoption of this guidance had no impact to the Company’s condensed consolidated financial statements.

ASU 2016-16

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. This guidance requires companies to recognize the income tax effects of intercompany sales or transfer of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period the sale or transfer occurs. The exception to recognizing the income tax effects of intercompany sales or transfer sales or transfer of assets remains in place for intercompany inventory sales and transfers.  This guidance was effective for annual reporting period beginning after December 15, 2017, including interim periods. The Company adopted this guidance as of January 1, 2018 using the modified retrospective method. The adoption of this guidance did not result in any recognition of previously unrecognized deferred charges using a modified retrospective method, thus had no impact to the Company’s condensed consolidated financial statements.

Recently Issued Accounting Guidance Not Yet Adopted

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax effects from Accumulated Other Comprehensive Income. This guidance allows for the reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects arising from the change in the reduction of the U.S. federal statutory income tax rate from 35% to 21%. This guidance is effective for annual reporting period beginning after December 15, 2018, including interim periods, with early adoption permitted. The Company will adopt this guidance on January 1, 2019 and does not anticipate a material reclassification between its accumulated other comprehensive loss and accumulated deficit upon adoption.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability. This guidance is effective for the annual reporting period beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for the annual reporting period beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company will adopt this guidance as of January 1, 2019 and is currently evaluating the related accounting, transition, disclosure requirements and the impact on its consolidated financial statements upon the adoption of this guidance.

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Astellas Agreements

Japan Agreement

In June 2005, the Company 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). Under the Japan Agreement, the Company is 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 milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $95.0 million in 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. A clinical milestone payment of $12.5 million was received in 2013. During the second quarter of 2016, Astellas initiated the first Phase 3 clinical study in Japan of roxadustat for treatment of anemia associated with chronic kidney disease in patients on dialysis, and the related $10.0 million milestone payment was received in early July 2016. The Company evaluated this milestone based on variable consideration requirements under the new revenue standards and concluded that the milestone was probable of being achieved in the first quarter of 2016. Accordingly, consideration associated with this milestone was included in the transaction price and allocated to performance obligations under the Japan Agreement in the same period.

Europe Agreement

In April 2006, the Company 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). Under the Europe Agreement, the Company is 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 milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $335.0 million in milestone payments upon achievement of specified regulatory milestone events. Clinical milestone payments of $40.0 million and $50.0 million were received in 2010 and 2012, respectively. 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 (“RoW”) Agreement

Effective July 30, 2013, the Company entered into a collaboration agreement with AstraZeneca AB (“AstraZeneca”) for the development and commercialization of roxadustat for the treatment of anemia in the U.S. 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 paid upfront, non-contingent, non-refundable and time-based payments totaling $374.0 million, which were fully received in various amounts through June 2016. Under the U.S./RoW Agreement, the Company is 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 milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $325.0 million in milestone payments upon achievement of specified regulatory milestone events, (iii) up to $160.0 million in milestone payments related to activity by potential competitors and (iv) up to approximately $325.0 million in milestone payments upon the achievement of specified commercial sales events. During 2015, the Company received a $15.0 million development milestone payment as a result of the finalization of its two audited pre-clinical carcinogenicity study reports. The Company evaluated this milestone based on variable consideration requirements under the new revenue standards and concluded that the milestone was probable of being achieved in the first quarter of 2015. Accordingly, consideration associated with this milestone was included in the transaction price and allocated to performance obligations under the Japan Agreement in the same period.

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Under the U.S./RoW Agreement, the Company and AstraZeneca shared equally in the development costs of roxadustat not already paid for by Astellas, up to a total of $233.0 million (i.e. the Company’s share of development costs is $116.5 million, which was reached during the fourth quarter of 2015). Development costs incurred by FibroGen during the development period in excess of the $233.0 million (aggregated spend) are fully reimbursed by AstraZeneca. AstraZeneca will pay the Company tiered royalty payments on AstraZeneca’s future net sales (as defined in the agreement) of roxadustat in the low 20% range. In addition, the Company 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, the Company (through its 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 paid upfront, non-contingent and non-refundable payments totaling $28.2 million, which were fully received in 2014. Under the China Agreement, the Company is also eligible to receive from AstraZeneca an aggregate of approximately $348.5 million in potential milestone payments, comprised of (i) up to $15.0 million in milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $146.0 million in milestone payments upon achievement of specified regulatory milestone events, and (iii) up to approximately $187.5 million in milestone payments upon the achievement of specified commercial sales and other events.  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.

In October 2017, the SDA accepted the Company’s submitted New Drug Application (“NDA”) for registration of roxadustat for anemia in dialysis-dependent CKD and non-dialysis-dependent CKD (“NDD-CKD”) patients. This NDA submission triggered a $15.0 million milestone payment to the Company by AstraZeneca. The Company evaluated this milestone based on variable consideration requirements under the new revenue standards and concluded that the milestone was probable of being achieved in the third quarter of 2017. Accordingly, consideration associated with this milestone was included in the transaction price and allocated to performance obligations under the China Agreement in the same period.

Accounting for the Astellas Agreements

For each of the Astellas agreements, the Company has evaluated the promised services within the respective arrangements and has identified performance obligations representing those services and bundles of services that are distinct.

Promised services that were not distinct have been combined with other promised services to form a distinct bundle of promised services, with revenue being recognized on the bundle of services rather than the individual services. There are no right-of-return provisions for the delivered items in the Astellas agreements.

As of March 31, 2018, the transaction price for the Japan Agreement included $40.1 million of non-contingent upfront payments, $22.5 million of variable consideration related to payments for milestones considered probable of being achieved, and $12.3 million of variable consideration related to co-development billings. The transaction price for the Europe Agreement included $320.0 million of non-contingent upfront payments, $90.0 million of variable consideration related to payments for milestones considered probable of being achieved, and $183.0 million of variable consideration related to co-development billings.

For revenue recognition purposes, the Company determined that the term of each collaboration agreement with Astellas begins on the effective date and ends upon the completion of all performance obligations contained in the agreement. The contract term is defined as the period in which parties to the contract have present and enforceable rights and obligations. The Company believes that the requirement to continue funding development for a substantive period of time and loss of product rights, along with non-refundable upfront payments already remitted by Astellas, create significant disincentive for Astellas to exercise its right to terminate the agreements.

For the Astellas agreements, the Company allocated the transaction price to the various performance obligations based on the relative SSP of each performance obligation, with the exception of co-development billings allocated entirely to co-development services performance obligations.

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For the technology license under the Japan Agreement and Europe Agreement, SSP 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 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%. The Company’s 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. SSP also considered certain future royalty payments associated with commercial performance of the Company’s compounds, transfer prices and expected gross margins.

The promised services that were analyzed, along with their general timing of satisfaction and recognition as revenue, are as follows:

Manufacturing rights. In the case of the Japan Agreement, the Company retained manufacturing rights largely because of the way the parties chose for FibroGen to be compensated under the agreement. At the time the agreement was signed, the Company believed that it was more advantageous upon commercialization to have a transfer price revenue model in place as opposed to a traditional sales-based model. The manufacturing process does not require specialized knowledge or expertise uniquely held by FibroGen, and notwithstanding contractual restrictions, Astellas could employ manufacturing services from readily available third parties in order to benefit from the license. Therefore, along with the foregoing paragraph, the Company determined that the license in Japan is a distinct performance obligation despite the retention of manufacturing rights by the Company.

In summary, the Company concludes that item (1) represents a performance obligation. The portion of the transaction price allocated to this performance obligation based on a relative SSP basis is recognized as revenue in its entirety at the point in time the license transfers to Astellas.

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Items (3)-(5) are bundled into a single performance obligation which is distinct given the fact that all are highly interrelated during the development period (pre-commercial phase of development) such that satisfying them independently is not practicable. Revenue is recognized over time based on progress toward complete satisfaction of the performance obligation. The Company uses an input method to measure progress toward the satisfaction of the performance obligation, which is based on costs of labor hours or full time equivalents and out-of-pocket expenses incurred relative to total expected costs to be incurred. The measure of progress is updated each reporting period.

Accounting for the AstraZeneca Agreements

The Company evaluated whether the U.S./RoW Agreement and China Agreement should be accounted for as a single or separate arrangements 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 should be presumed to be a single arrangement. The key points the Company considered in reaching this conclusion are as follows:

Accordingly, as the agreements are being accounted for as a single arrangement, upfront and other non-contingent consideration received and to be received has been and will be pooled together and allocated to each of the performance obligations in both the U.S./RoW Agreement and China Agreement based on their relative SSPs.

For each of the AstraZeneca agreements, the Company has evaluated the promised services within the respective arrangements and has identified performance obligations representing those services and bundled services that are distinct.

Promised services that were not distinct have been combined with other promised services to form a distinct bundle of promised services, with revenue being recognized on the bundle of services rather than the individual promised services. There are no right-of-return provisions for the delivered items in the AstraZeneca agreements.

As of March 31, 2018, the transaction price for the U.S./RoW Agreement and China Agreement included $402.2 million of non-contingent upfront payments, $30.0 million of variable consideration related to payments for milestones considered probable of being achieved, and $682.2 million of variable consideration related to co-development billings.

For the AstraZeneca agreements, the Company allocated the transaction price to the various performance obligations based on the relative SSP of each performance obligation, with the exception of co-development billings. Co-development billings under the U.S./RoW Agreement were allocated entirely to the U.S./RoW co-development services performance obligation, and co-development billings under the China Agreement were allocated entirely to the combined performance obligation under the China Agreement.

For revenue recognition purposes, the Company determined that the term of its collaboration agreements with AstraZeneca begin on the effective date and ends upon the completion of all performance obligations contained in the agreements. The contract term is defined as the period in which parties to the contract have present and enforceable rights and obligations. The Company believes that the requirement to continue funding development for a substantive period of time and the loss of product rights, along with non-refundable upfront payments already remitted by AstraZeneca, represent substantive termination penalties that create significant disincentive for AstraZeneca to exercise its right to terminate the agreement.

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For the technology license under the AstraZeneca U.S./RoW Agreement, SSP 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 implied royalty rate 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. The Company’s 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 promised services that were analyzed, along with their general timing of satisfaction and recognition as revenue, are as follows:

Items (3)-(4) are bundled into a single performance obligation which is distinct given the fact that all are highly interrelated during the development period (pre-commercial phase of development) such that delivering them independently is not practicable. Revenue is recognized over time based on progress toward complete satisfaction of the performance obligation. The Company uses an input method to measure progress toward the satisfaction of the performance obligation, which is based on costs of labor hours or full time equivalents and out-of-pocket expenses incurred relative to total expected costs to be incurred. The measure of progress is updated each reporting period.

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China Agreement:

The performance obligation that were analyzed, along with their general timing of satisfaction and recognition as revenue, are as follows:

For the China Agreement, the Company 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. Due to certain regulatory restrictions in China, manufacturing services of commercial drug product in China are not readily available to AstraZeneca or any other parties.  Therefore, AstraZeneca cannot benefit from the license on its own or together with other readily available resources.  Accordingly, all the promises identified, including co-development services, under the China Agreement have been bundled into a single performance obligation and amounts of the transaction price allocable to this performance obligation is deferred until control of the manufactured commercial drug product has begun to transfer to AstraZeneca. Upon commencement of the transfer of control to commercial drug product, revenue would be recognized in a pattern consistent with estimated deliveries of the commercial drug product.

Summary of Revenue Recognized Under the Collaboration Agreements

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

The transaction price related to consideration received and accounts receivable has been allocated to each of the following performance obligations under the Japan Agreement, along with any associated deferred revenue as follows (in thousands):

The remainder of the transaction price related to the Japan Agreement includes $2.8 million of variable consideration from estimated future co-development billing and is expected to be recognized over the remaining development service period.

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

The transaction price related to consideration received and accounts receivable has been allocated to each of the following performance obligations under the Europe Agreement, along with any associated deferred revenue as follows (in thousands):

The remainder of the transaction price related to the Europe Agreement includes $27.4 million of variable consideration from estimated future co-development billing and is expected to be recognized over the remaining development service period.

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

The transaction price related to consideration received and accounts receivable has been allocated to each of the following performance obligations under the U.S./RoW Agreement and China Agreement, along with any associated deferred revenue as follows (in thousands):

The remainder of the transaction price related to the U.S./RoW Agreement and China Agreement includes $284.1 million of variable consideration from estimated future co-development billing and is expected to be recognized over the remaining development service period, except for amounts allocated to the China performance obligation, which are expected to be recognized in a pattern consistent with estimated deliveries of the commercial drug product.

Other Revenues

Other revenues consist primarily of collagen material sold for research purposes. Other revenues were immaterial for all periods presented.

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Deferred Revenue

Deferred revenue represents amounts billed to the Company’s 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 performance obligations. 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 performance obligations. 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.

The fair values of the Company’s 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 the Company’s financial liabilities that are carried at historical cost are as follows (in thousands): 

The fair values of the Company’s 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.

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Cash and Cash Equivalents

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

At March 31, 2018 and December 31, 2017, a total of $27.7 million and $32.3 million, respectively, of the Company’s cash and cash equivalents were held outside of the U.S. in its foreign subsidiaries to be used primarily for its China operations.

Investments

The Company’s investments consist of available-for-sale debt investments and marketable equity investments. The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s available-for-sale investments by major investments type are summarized in the tables below (in thousands):

At March 31, 2018, all of the available-for-sale investments had contractual maturities within one year. The Company periodically reviews its available-for-sale investments for other-than-temporary impairment. The Company considers factors such as the duration, severity and the reason for the decline in value, the potential recovery period and its intent to sell. For debt securities, the Company also considers whether (i) it is more likely than not that the Company 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 three months ended March 31, 2018, the Company did not recognize any other-than-temporary impairment loss.

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 as follows (in thousands):

The assumptions used to estimate the fair value of stock options granted and purchases under the Company’s 2014 Employee Share Purchase Plan (“ESPP”) using the Black-Scholes option valuation model were as follows:

The provisions for income taxes for the three months ended March 31, 2018 and 2017 were due to foreign taxes.

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

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Astellas is an equity investor in the Company and considered a related party. The Company recorded revenue related to collaboration agreements with Astellas of $5.2 million and $4.7 million during the three months ended March 31, 2018 and 2017, respectively. The related party revenue was recast for the three months ended March 31, 2017 as a result of adoption of the new revenue standards. See Note 1 for details.

The Company recorded expense related to collaboration agreements with Astellas of $0.6 million and $0.3 million during the three months ended March 31, 2018 and 2017, respectively.

As of March 31, 2018 and December 31, 2017, accounts receivable from Astellas were $4.5 million and $4.0 million, respectively, and amounts due to Astellas were $0.6 million and $0.3 million, respectively.

Julian N. Stern, a director of the Company from November 1996 through June 2017, is currently serving as corporate secretary of the Company and 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 as counsel. The Company retains Goodwin Procter LLP as legal counsel for various matters, primarily consisting of intellectual property matters. There was no payment to Goodwin Procter LLP during the three months ended March 31, 2018. The Company’s payments to Goodwin Procter LLP during the three months ended March 31, 2017 were immaterial. As of March 31, 2018 and December 31, 2017, the balance of the accrued liability for Goodwin Proctor LLP was zero.

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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 Securities and Exchange Commission (“SEC”) filings, including our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 27, 2018.

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 (“Exchange Act”), Section 27A of the Securities Act of 1933, as amended (“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 science-based biopharmaceutical company discovering and developing first-in-class therapeutics. Roxadustat (FG-4592), our most advanced product candidate, is an oral small molecule inhibitor of hypoxia inducible factor (“HIF”) prolyl hydroxylase (“HIF-PH”) activity in Phase 3 clinical development for the treatment of anemia in chronic kidney disease (“CKD”) and myelodysplastic syndromes (“MDS”). Pamrevlumab (FG-3019), a human monoclonal antibody that inhibits the activity of connective tissue growth factor (“CTGF”) is in Phase 2 clinical development for the treatment of idiopathic pulmonary fibrosis (“IPF”), pancreatic cancer, and Duchenne muscular dystrophy (“DMD”). We are taking a global approach to the development and future commercialization of our product candidates, and this includes development and commercialization in the People’s Republic of China (“China”). We are capitalizing on our extensive experience in fibrosis and HIF biology and clinical development to advance a pipeline of innovative medicines for the treatment of anemia, fibrotic disease cancer, corneal blindness and other serious unmet medical needs.

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Financial Highlights

Our revenue for the three months ended March 31, 2018 increased compared to the same period a year ago primarily due to an increase in co-development billings related to the development of roxadustat.

Operating expenses for the three months ended March 31, 2018 increased compared to the same period a year ago primarily due to higher employee-related expenses resulting from higher average compensation level and higher headcount; higher facility related expenses relative to the prior period in which our property taxes were reduced as a result of a final settlement we obtained related to historical property tax payments; and higher stock-based compensation due to cumulative impact of stock option grant activities.

During the three months ended March 31, 2018, we had a net loss of $41.4 million, or net loss per basic and diluted share of $0.50, as compared to a net loss of $30.6 million for the same period a year ago, due to an increase in operating expenses, partially offset by an increase in revenue.

Cash and cash equivalents, investments and accounts receivable totaled $724.2 million at March 31, 2018, a decrease of $30.5 million from December 31, 2017, primarily due to the cash used in operations.

Programs

Roxadustat for the Treatment of Anemia in Chronic Kidney Disease

Roxadustat, the most advanced HIF-PH inhibitor in clinical development, 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 AB (“AstraZeneca”), are advancing roxadustat through a global Phase 3 program to support regulatory approvals in the United States (“U.S.”), Europe, Japan, and China for both dialysis-dependent CKD (“DD-CKD”) patients and non-dialysis-dependent CKD (“NDD-CKD”) patients. These Phase 3 programs are studying multiple patient populations, including incident dialysis patients and stable dialysis patients in which roxadustat is compared to epoetin alfa, as well as non-dialysis patients in which roxadustat is compared to placebo.

For our U.S. CKD anemia program, we have agreed with our partner, AstraZeneca, to complete enrollment of our Phase 3 studies in the second quarter of 2018, have the last patient visit in the third quarter of 2018, report topline individual study results in the fourth quarter of 2018, and report pooled safety data prior to the submission of the New Drug Application (“NDA”) for roxadustat in the first half of 2019.

The China Food and Drug Administration (now reorganized and known as the State Drug Administration (“SDA”)) continues to review our NDA submission for the registration of roxadustat to treat anemia for DD-CKD patients and NDD-CKD patients in China. We currently anticipate a market approval decision for our CKD anemia NDA in China by the end of 2018. We recently passed an inspection of our manufacturing facility in Cangzhou, Hebei, and received a Pharmaceutical Production Permit, a significant step before certification of this facility for commercial manufacturing of the active pharmaceutical ingredient for roxadustat.

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In Japan, Astellas has completed four of its six Phase 3 anemia studies. In 2017, Astellas and FibroGen reported results from Astellas’ multi-center, open-label Phase 3 study of roxadustat in peritoneal dialysis CKD patients with anemia. Astellas recently reported topline results from two open-label Phase 3 hemodialysis studies, a long-term ESA-conversion study and an ESA-naïve correction study.

The long-term ESA-conversion hemodialysis study evaluating roxadustat for the treatment of anemia in CKD randomized 164 patients to starting doses of either 70 mg or 100 mg of roxadustat administered orally three times weekly, followed by dose titration. Roxadustat was well-tolerated and maintained hemoglobin levels within the target hemoglobin range of 10.0 to 12.0 g/dL in 79.1% of patients at weeks 18-24 and in 71.2% of patients at weeks 46-52.

The hemodialysis ESA-naïve correction study evaluating roxadustat for the treatment of anemia in CKD randomized 75 patients to starting doses of either 50 mg or 70 mg of roxadustat administered orally three times weekly, followed by dose titration. Roxadustat was well-tolerated and the hemoglobin response rate from baseline to end of treatment (24 weeks) was 86.5% in patients with a starting dose of 50 mg and 89.2% in patients with a starting dose of 70 mg.  Response rate was defined as the proportion of patients who achieved hemoglobin of 10.0 g/dL or more, and who achieved a hemoglobin increase of 1.0 g/dL or more. The preliminary safety analyses for both trials was consistent with the safety profile of roxadustat in previous clinical trials.

Astellas expects to report topline data from its Phase 3 active-comparator, hemodialysis ESA-conversion study in the second quarter of 2018 and one of its Phase 3 NDD-CKD studies in the fourth quarter of 2018. In addition, Astellas expects to submit an NDA in Japan for anemia associated with DD-CKD in 2018.

Roxadustat for the Treatment of Anemia in Myelodysplastic Syndromes (MDS)

We have initiated a Phase 3 clinical trial to evaluate the safety and efficacy of roxadustat for treatment of anemia in MDS patients in the United States and Europe.

In China, we expect to initiate our Phase 2/3 MDS clinical trial application to evaluate roxadustat for the treatment of anemia in patients with MDS in the first half of 2018. 

Pamrevlumab (FG-3019) – Monoclonal Antibody Against Connective Tissue Growth Factor (CTGF)

Pamrevlumab is our human monoclonal antibody that inhibits the activity of CTGF, a central mediator and critical common element of the progression of fibrotic and fibro-proliferative diseases. We are currently conducting Phase 2 trials in pancreatic cancer and DMD and we have completed our Phase 2 trial in IPF. Pamrevlumab has received orphan drug designation in IPF in the U.S. and recently received Fast Track designation from the U.S. Food and Drug Administration (“FDA”) for the treatment of patients with locally advanced unresectable pancreatic cancer.

In 2017, we reported positive topline results from our randomized, double-blind, placebo-controlled Phase 2 clinical trial designed to evaluate the safety and efficacy of pamrevlumab in patients with mild-to-moderate IPF. We also reported topline results from two sub-studies that were added to this trial to evaluate the safety of combining pamrevlumab with recently approved IPF therapies. We expect to receive feedback from the FDA on our Phase 3 plan in IPF in mid-2018.

In pancreatic cancer, we will report updated results from our ongoing open-label Phase 2 trial of pamrevlumab in locally advanced unresectable pancreatic cancer at the ASCO Annual Meeting in June 2018. Of the 37 patients randomized in this study, a higher percentage of the patients treated with pamrevlumab plus gemcitabine and nab-paclitaxel were eligible for surgery and were resected in comparison to the patients treated with gemcitabine and nab-paclitaxel alone. While patients continue to be monitored in this study for survival and safety, there appears to be a survival benefit for patients who have undergone tumor resection. We expect to reach agreement with the FDA on a pivotal trial design for pancreatic cancer by mid-2018.

In the first quarter of 2018 we completed enrollment of our Phase 2 open-label trial of pamrevlumab in 21 non-ambulatory DMD patients.

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

In June 2005, we entered into a collaboration agreement with Astellas for roxadustat for the treatment of anemia in Japan (“Japan Agreement”). In April 2006, we entered into the Europe Agreement with Astellas for roxadustat for the treatment of anemia in Europe, the Commonwealth of Independent States, the Middle East, and South Africa. Under these agreements, we provide Astellas the right to develop and commercialize roxadustat for anemia indications in these territories.

We share responsibility with Astellas for clinical development activities required for the United States (“U.S.”) and the European Union (“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 March 31, 2018 totals $472.6 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 March 31, 2018, Astellas had separate investments of $80.5 million in the equity of FibroGen, Inc.

AstraZeneca

In July 2013, we entered into the U.S./RoW Agreement, a collaboration agreement with AstraZeneca for roxadustat for the treatment of anemia in the U.S. and all territories not previously licensed to Astellas, except China. In July 2013, through our China subsidiary and related affiliates, we entered into the China Agreement, a collaboration agreement with AstraZeneca for roxadustat for the treatment of anemia in China. Under these agreements we provide AstraZeneca the right to develop and commercialize roxadustat for anemia in these territories. We share responsibility with AstraZeneca for clinical development activities required for U.S. regulatory approval of roxadustat.

Now that we have reached the $116.5 million cap on our initial funding obligations (during which time we shared 50% of the joint initial development costs), all development and commercialization costs for roxadustat for the treatment of anemia in CKD in the U.S., Europe, Japan and all other markets outside of China have been paid by Astellas and AstraZeneca since reaching the cap.

In China, FibroGen (China) Medical Technology Development Co., Ltd. (“FibroGen Beijing”) will conduct the development work for CKD anemia, will hold all of the regulatory licenses issued by China regulatory authorities, and 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.

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Under the AstraZeneca agreements, we will receive upfront and subsequent non-contingent payments totaling $402.2 million. 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. In October 2017, the SDA accepted our recently submitted NDA for registration of roxadustat for anemia in DD-CKD and NDD-CKD patients. This NDA submission triggered a $15.0 million milestone payment to FibroGen by AstraZeneca, which was received and fully recognized under our revenue recognition policy as license revenue in the fourth quarter of 2017. The aggregate amount of such consideration received through March 31, 2018 totals $432.2 million.

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.

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 U.S. commercialization of roxadustat, with FibroGen undertaking specified promotional activities in the end-stage renal disease segment in the U.S. 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 Anemia Holdings, Ltd. (“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 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.

In September 2016, AstraZeneca approved the protocol related to the development of roxadustat for the treatment of anemia in patients with MDS, for which we have received approval from the SDA for our clinical trial application in China for a Phase 2/3 trial and acceptance of our IND from the FDA for a Phase 3 trial in the U.S. As a result, for revenue recognition purposes, during the third quarter of 2016, we extended the estimated joint development service period for the AstraZeneca agreements from the end of 2018 to the end of 2020, to allow for development of MDS.

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 for paying 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 for paying 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.

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Additional Information Related to Collaboration Agreements

Total cash consideration received through March 31, 2018 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:

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

RESULTS OF OPERATIONS

Revenue

Our revenue to date has been generated substantially from our collaboration agreements with Astellas and AstraZeneca.

Under our revenue recognition policy, license revenue includes amounts from upfront, non-refundable license payments and amounts allocated pursuant to the standalone selling price method from other consideration received during the periods. This revenue is generally recognized as deliverables are met and services are performed. There was no license revenue for the three months ended March 31, 2018 and 2017.

Development revenue include co-development and other development related services. Co-development services are recognized as revenue in the period in which they are billed to our partners, excluding China.  For China co-development services, revenue is deferred until the end of the development period once all performance obligations have been satisfied. Other development related services are recognized as revenue over the non-contingent development period, ranging from 36 to 89 months, based on a proportional performance method. Other revenues consist of sales of research and development material and have been included with Development and other revenue in the condensed consolidated statements of operations, as they have not been material for any of the years presented.

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We have not generated any revenues based on the sale of FDA or SDA approved products. In the future, we may generate revenue from product sales and from collaboration agreements in the form of license fees, milestone payments, reimbursements for collaboration services and royalties on product sales. We expect that any revenues we generate will fluctuate from quarter to quarter as a result of the uncertain timing and amount of such payments and sales.

Development and other revenue increased $2.5 million, or 8% for the three months ended March 31, 2018, compared to the same period a year ago for the reasons discussed in the sections below.

*Recast to reflect the adoption of the new revenue standards. See Note 1 to the condensed consolidated financial statements.

Development revenue recognized under our collaboration agreements with AstraZeneca increase $2.0 million, or 8%, and development revenue recognized under our collaboration agreements with Astellas increase $0.5 million, or 10%, primarily due to an increase in co-development billings related to the development of roxadustat.

Operating Expenses

Total operating expenses increased $14.3 million, or 24%, for the three months ended March 31, 2018, compared to the same period a year ago, for the reasons discussed in the sections below.

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, 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.

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The following table summarizes our research and development expenses incurred during the three months ended March 31, 2018 and 2017:

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. We expect our research and development expenses to continue to increase in the future as we advance our product candidates through clinical trials and expand our product candidate portfolio.  

Research and development expenses increased $10.2 million, or 22%, for the three months ended March 31, 2018, compared to the same period a year ago. The increase was primarily due to increases in employee-related costs of $4.1 million, allocated facility related expense of $4.0 million, stock-based compensation expense of $1.5 million and outside services of $0.6 million. Employee-related costs increased due to higher headcount and higher average compensation level. Facility related expenses, as part of the allocated overhead costs, was higher relative to the prior period in which our property taxes were reduced as a result of a final settlement we obtained related to historical property tax payments. Stock-based compensation expense increased due to cumulative impact of stock option grant activities. Outside services costs increased due to higher scientific contract work related to roxadustat and other HIF-PH inhibitors.

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.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates. We also anticipate increased expenses, including exchange listing and SEC requirements, director and officer insurance premiums, legal, audit and tax fees, regulatory compliance programs, and investor relations costs associated with being a public company and ceasing to be an emerging growth company. Additionally, if and when we believe the first regulatory approval of one of our product candidates appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.

General and administrative expenses increased $4.0 million, or 35%, for the three months ended March 31, 2018, compared to the same period a year ago, primarily due to increases in employee-related costs of $1.3 million, facility related expense of $1.3 million and stock-based compensation expense of $1.0 million. Employee-related costs increased due to higher average compensation level, higher headcount, and increased recruiting activities. Stock-based compensation expense increased due to cumulative impact of stock option grant activities. Facility related expenses, as part of the allocated overhead costs, was higher relative to the prior period in which our property taxes were reduced as a result of a final settlement we obtained related to historical property tax payments.

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Interest and Other Income (Expense), Net

Interest Expense

Interest expense 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 Technology Development Center of the Republic of Finland product development obligations. Interest expense increased $0.4 million, or 17%, for the three months ended March 31, 2018, compared to the same period a year ago, primarily due to a reduction in the imputed interest resulting from the government rent subsidy received by FibroGen China in 2017.

Interest Income and Other, Net

Interest income and other, net primarily include interest income earned on our cash, cash equivalents and investments, foreign currency transaction gains (losses), remeasurement of certain monetary assets and liabilities in non-functional currency of our subsidiaries into the functional currency, realized gains (losses) on sales of investments. Interest income and other, net increased $1.4 million, or 221%, for the three months ended March 31, 2018, compared to the same period a year ago primarily due to higher interest earned on our cash, cash equivalents and investments associated with the higher average balances.

Provision for Income Taxes

*Recast to reflect the adoption of the new revenue standards. See Note 1 to the condensed consolidated financial statements.

The provisions for income taxes for the three months ended March 31, 2018 and 2017 were due to foreign taxes.

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

Financial Conditions

We have historically funded our operations principally from the sale of convertible preferred stock and common stock (including our public offering proceeds) and from the execution of certain collaboration agreements involving license payments, milestones and reimbursement for development services.

As of March 31, 2018, we had cash and cash equivalents of $659.0 million. Cash is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Investments, consisting principally of corporate and government debt securities and stated at fair value, are also available as a source of liquidity. As of March 31, 2018, we had short-term and long-term investments of $44.8 million and $10.5 million, respectively. As of March 31, 2018, a total of $27.7 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.

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Operating Capital Requirements

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. To date, we have funded certain portions of our research and development and manufacturing efforts in China and Europe through outside parties. There is no guarantee that sufficient funds will be available to continue to fund these development efforts through commercialization or otherwise. Although our share of expenses for roxadustat will decrease as a result of AstraZeneca funding all non-China collaboration expenses not reimbursed by Astellas, we expect our research and development expenses to continue to increase as we invest in our other programs. 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. We anticipate that we will need substantial additional funding in connection with our continuing operations.

We believe that our existing cash and cash equivalents, short-term and long-term investments and accounts receivable will be sufficient to meet our anticipated cash requirements for at least the next 12 months from the date of this Quarterly Report on Form 10-Q. 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 forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under Part II, 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 Sources and Uses

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods set forth below: