You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K, or Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. We caution you that forward-looking statements are not guarantees of future performance, and that our actual results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate, may differ materially from the results discussed or projected in the forward-looking statements contained in this Annual Report. We discuss risks and other factors that we believe could cause or contribute to these potential differences elsewhere in this report, including under Part I, Item 1A, "Risk Factors" and under "Cautionary Note Regarding Forward-Looking Statements" in this Annual Report. In addition, even if our results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate are consistent with the forward-looking statements contained in this Annual Report, they may not be predictive of results or developments in future periods. We caution readers not to place undue reliance on any forward-looking statements made by us, as such statements speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of theSecurities and Exchange Commission , orSEC , to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. Information pertaining to fiscal year 2019 was included in the Company's Annual Report on Form 10-K for the year-endedDecember 31, 2020 , on pages 82 through 100, under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," which was filed with theSEC onFebruary 24, 2021 . Overview We are a biopharmaceutical company committed to developing and commercializing novel medicines with the potential to transform the lives of people with debilitating disorders of the brain. Our first product, ZULRESSO® (brexanolone) CIV injection, is approved in theU.S. for the treatment of postpartum depression, or PPD, in adults. We have a portfolio of other product candidates with a current focus on modulating two critical central nervous system, or CNS, receptor systems, GABA and NMDA. The GABA receptor family, which is recognized as the major inhibitory neurotransmitter in the CNS, mediates downstream neurologic and bodily function via activation of GABAA receptors. The NMDA-type receptors of the glutamate receptor system are a major excitatory receptor system in the CNS. Dysfunction in these systems is implicated in a broad range of CNS disorders. We are currently targeting diseases and disorders of the brain with three key focus areas: depression, neurology and neuropsychiatry. Our first product, ZULRESSO, is a proprietary intravenous formulation of brexanolone, approved in theU.S. as a treatment for PPD in adults. Brexanolone is chemically identical to allopregnanolone, a naturally occurring neuroactive steroid that acts as a positive allosteric modulator of GABAA receptors. We launched ZULRESSO commercially in theU.S. for the treatment of PPD inJune 2019 . Currently, ZULRESSO may only be administered in qualified, medically-supervised healthcare settings. We have initiated an open-label clinical trial designed to assess the potential for safe-use administration of ZULRESSO in a patient's home for the treatment of PPD, known as the SUNBIRD Study, which is anticipated to be completed in late 2022. Our next most advanced product candidate is zuranolone (SAGE-217), a novel oral compound being developed for certain affective disorders, including major depressive disorder, or MDD, and PPD. Zuranolone is a neuroactive steroid that, like brexanolone, is a positive allosteric modulator of GABAA receptors, targeting both synaptic and extrasynaptic GABAA receptors. We plan to submit a new drug application, or NDA, to theU.S. Food and Drug Administration , or FDA, in the second half of 2022 seeking approval of zuranolone for the treatment of MDD. An associated NDA filing seeking approval of zuranolone for PPD is anticipated in the first half of 2023, pending the completion and results of the ongoing SKYLARK Study in PPD. The FDA granted Fast Track designation to zuranolone in PPD in early 2022, and previously granted zuranolone Breakthrough Therapy designation and Fast Track designation to zuranolone for the treatment of MDD. 89
-------------------------------------------------------------------------------- To date, we have completed five pivotal clinical trials of zuranolone, four in MDD and one in PPD. The completed pivotal trial evaluating zuranolone for the treatment of PPD and three of the four completed pivotal trials evaluating zuranolone for the treatment of MDD met their primary endpoints. We announced results from the following pivotal clinical trials of zuranolone in either 2021 or early 2022: • CORAL Study (completed) OnFebruary 16, 2022 , we announced results from the CORAL Study, a placebo-controlled Phase 3 clinical trial evaluating a two-week course of zuranolone 50 mg, when co-initiated with a newly administered open-label standard antidepressant therapy, or ADT, compared with open-label standard of care ADT co-initiated with placebo, as an acute rapid response treatment in patients with MDD. Patients in the clinical trial received zuranolone 50 mg co-initiated with an open-label standard of care ADT or open-label standard of care ADT co-initiated with placebo once nightly for 14 days followed by continuation of the ADT for an additional short-term follow-up period. In the CORAL Study, zuranolone 50 mg co-initiated with an ADT met the primary endpoint of statistically significant reduction in depressive symptoms at Day 3 and met the key secondary endpoint of a statistically significant improvement in depressive symptoms over the two-week treatment period, in each case as compared to ADT co-initiated with placebo.
• WATERFALL Study (completed)
In
• SHORELINE Study (ongoing)
In 2021, we reported positive topline 12-month data from both the 30 mg cohort and the 50 mg cohort of the SHORELINE Study, an open-label Phase 3 clinical trial of zuranolone in MDD, which is designed to evaluate the safety, tolerability, and need for repeat dosing of zuranolone in adults for up to one year. Enrollment in the 50 mg cohort of the study is ongoing.
The SKYLARK Study, a Phase 3 placebo-controlled clinical trial evaluating a two-week course of zuranolone 50 mg in women with PPD, with additional short-term follow-up, is ongoing, and we expect to report topline results in mid-2022.
We are jointly developing zuranolone and another of our late-stage compounds, SAGE-324, in theU.S. withBiogen MA Inc. , orBIMA , andBiogen International GmbH , or, together withBIMA , Biogen, under a collaboration and license agreement, or the Biogen Collaboration Agreement, that became effective inDecember 2020 . Under the Biogen Collaboration Agreement, we will also jointly commercialize products containing zuranolone, which we refer to as Licensed 217 Products, and products containing SAGE-324, which we refer to as Licensed 324 Products, with Biogen in theU.S. if our development efforts are successful. We refer to the Licensed 217 Products and Licensed 324 Products collectively as the Licensed Products. In addition, we have granted Biogen sole rights to develop and commercialize the Licensed Products outside theU.S. , other than inJapan ,Taiwan andSouth Korea , or the Shionogi Territory, with respect to zuranolone, where we have granted such rights to Shionogi & Co., Ltd., or Shionogi. We refer to the territories outside theU.S. to which Biogen has rights under the Biogen Collaboration Agreement with respect to the applicable Licensed Product as the Biogen Territory. Shionogi recently reported completion of a Phase 2 clinical trial of zuranolone for the treatment of patients with moderate to severe MDD inJapan , which Shionogi reported achieved its primary endpoints. In addition to zuranolone, we have a portfolio of other novel compounds that target GABAA receptors, including SAGE-324. SAGE-324 is a novel GABAA receptor positive allosteric modulator intended for chronic oral dosing. InApril 2021 , we announced that our placebo-controlled Phase 2 KINETIC Study evaluating SAGE-324 for the treatment of adults with essential tremor had achieved its primary endpoint. We initiated a Phase 2b dose-ranging clinical trial of SAGE-324 in patients with essential tremor in late 2021, known as the KINETIC 2 Study. Additional development plans for SAGE-324 will be determined as part of our strategic collaboration with Biogen. We plan to initiate a Phase 2 clinical 90 -------------------------------------------------------------------------------- trial evaluating the safety of SAGE-324 in patients with essential tremor in mid-2022. We believe SAGE-324 also has potential for the treatment of a number of other neurological conditions, including epilepsy and Parkinson's disease. Our second area of focus for development is novel compounds that target the NMDA receptor. Our lead product candidate selected in this area is SAGE-718, an oxysterol-based positive allosteric modulator of the NMDA receptor, which we are exploring in certain cognition-related disorders associated with NMDA receptor dysfunction, including cognition dysfunction associated with diseases such as Huntington's disease, Parkinson's disease and Alzheimer's disease. We achieved development milestones in 2021 evaluating SAGE-718 for the treatment of cognitive issues associated with Huntington's disease, Parkinson's disease and Alzheimer's disease. SAGE-718 is currently being studied in a double-blind placebo-controlled Phase 2 clinical trial of SAGE-718 in patients with Huntington's disease cognitive impairment, known as the DIMENSION Study. The DIMENSION Study is designed to evaluate the efficacy of once-daily dosed SAGE-718 over three months. Dosing in the DIMENSION Study commenced in early 2022. We plan to initiate, in mid-2022, a second placebo-controlled Phase 2 clinical trial of SAGE-718 in patients with Huntington's disease cognitive impairment, with a healthy volunteer component, known as the SURVEYOR Study, with the goal of generating evidence linking efficacy signals on cognitive performance to domains of real-world functioning. We also plan to initiate a Phase 3 open-label study of SAGE-718 in patients with Huntington's disease cognitive impairment in late 2022. The FDA has granted SAGE-718 Fast Track designation as a potential treatment for patients with Huntington's disease. We also achieved development milestones in 2021 evaluating SAGE-718 for the treatment of cognitive issues associated with Parkinson's disease and Alzheimer's disease. InMay 2021 , we announced results from the first part of a Phase 2a open-label study of SAGE-718 evaluating patients with mild cognitive impairment due to Parkinson's disease, known as the PARADIGM Study. Data from the PARADIGM Study showed that SAGE-718 had a positive impact on multiple domains of cognition, including executive function and learning and memory, while leaving domains altering simple attention or reaction time unaffected. A four-week dosing cohort in the PARADIGM Study is ongoing to gather additional data in the Parkinson's disease patient population. We plan to initiate a placebo-controlled Phase 2 clinical trial of SAGE-718 in patients with mild cognitive impairment due to Parkinson's disease in mid-2022. InDecember 2021 , we reported topline data from a Phase 2a open-label clinical trial of SAGE-718 in patients with mild cognitive impairment and mild dementia due to Alzheimer's disease, known as the LUMINARY Study. Data from the LUMINARY Study showed treatment with SAGE-718 resulted in consistent improvement across multiple tests of executive performance, as well as improvement on key tests of learning and memory. In addition, SAGE-718 has been well-tolerated in studies to date. We also plan to initiate a randomized placebo-controlled Phase 2 clinical trial of SAGE-718 in patients with mild cognitive impairment and mild dementia due to Alzheimer's disease in late 2022. We have other programs at earlier stages of development with a focus on both acute and chronic brain health disorders. We expect to continue our work on allosteric modulation of the GABAA and NMDA receptor systems in the brain. The GABAA and NMDA receptor systems are broadly accepted as impacting many psychiatric and neurological disorders, spanning disorders of mood, seizure, cognition, anxiety, sleep, pain, and movement, among others. We believe that we may have the opportunity to develop molecules from our internal portfolio with the goal of addressing a number of these disorders in the future. We also believe that we may have the opportunity to use our scientific approach to explore targets beyond the GABAA and NMDA receptor systems and to develop compounds in areas of unmet need outside of brain health. We began to generate revenue from product sales in the second quarter of 2019 in conjunction with the launch of our first product, ZULRESSO, inJune 2019 . In the fourth quarter of 2020, we recorded revenue from the strategic collaboration with and stock purchase by Biogen. We have incurred net losses in each year since our inception, except for net income of$606.1 million for the year endedDecember 31, 2020 , reflecting revenue recognized under the Biogen Collaboration Agreement, and we had an accumulated deficit of$1.5 billion as ofDecember 31, 2021 . Our net losses were$457.9 million and$680.2 million for the years endedDecember 31, 2021 and 2019, respectively. These losses have resulted principally from costs incurred in connection with research and development activities and selling, general and administrative costs associated with our operations and our commercial build. We expect to incur significant expenses and increasing operating losses for the foreseeable future. 91
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We expect that our expenses will increase significantly in the foreseeable future in connection with our ongoing activities, if and as we:
• complete ongoing Phase 3 clinical trials of zuranolone in MDD and PPD;
advance our regulatory, permitted pre-launch and launch-readiness
activities with respect to zuranolone, including activities focused on the
planned filing of an NDA for zuranolone in MDD in the
half of 2022, and the planned associated NDA filing for zuranolone in PPD
in theU.S. in the first half of 2023; and potentially advance the development of zuranolone in additional indications as part of our strategic collaboration with Biogen;
• continue our commercialization efforts with respect to ZULRESSO for the
treatment of PPD in theU.S. , with a primary focus on geographies that have existing, active ZULRESSO treating sites; • complete the ongoing KINETIC 2 Study of SAGE-324 in patients with
essential tremor, and initiate additional development activities with
SAGE-324, including potential future development in epilepsy, Parkinson's
disease, and other neurological conditions, as part of our strategic
collaboration with Biogen;
• complete the ongoing Phase 2 clinical trials evaluating SAGE-718 in the
treatment of Huntington's disease and in patients with mild cognitive
impairment due to Parkinson's disease, and initiate the planned Phase 2
clinical trials evaluating SAGE-718 in the treatment of Huntingon's
disease cognitive impairment, in patients with mild cognitive impairment
due to Parkinson's disease, and in patients with mild cognitive impairment
and mild dementia due to Alzheimer's disease, and the planned open-label
Phase 3 clinical trial of SAGE-718 in patients with Huntington's disease
cognitive impairment;
• support our collaboration with Biogen with respect to zuranolone and
SAGE-324 in the
SAGE-324 in Biogen's licensed territories outside the
development of zuranolone in the Shionogi Territory; • advance our earlier-stage compounds;
• continue our research and development efforts to evaluate the potential
for our existing product candidates for the treatment of additional indications or in new formulations;
• identify new targets, and generate and test new compounds and product
candidates, with a focus on indications where we believe we can make
well-informed, rapid go/no-go decisions, with the goal of developing a
diversified portfolio of assets with differentiated features;
• prepare and file new drug applications with theU.S. Food and Drug Administration , or FDA, and conduct permitted pre-launch activities with respect to any of our other product candidates that we believe have been successfully developed;
• commercialize any product candidates for which we obtain regulatory
approval, including the manufacture of commercial supplies;
• as our development efforts progress, add personnel, including personnel to
support product development and ongoing and future commercialization
efforts;
• evaluate the market potential and regulatory pathways for our product
candidates beyond zuranolone and SAGE-324 in theEuropean Union and other countries outside theU.S. , and determine how best to move forward where and when it may make business and strategic sense;
• continue to build, maintain, defend, leverage, and expand our intellectual
property portfolio, including by utilizing the strengths of our
proprietary chemistry platform and scientific know-how to expand our
portfolio of new chemical entities to lessen our long-term reliance on the
success of any one program and to facilitate long-term growth; and
• continue to explore opportunities to establish agreements or alliances
with other pharmaceutical companies, at the appropriate time, where we believe a collaboration will add significant value to our efforts, including through capabilities, infrastructure, speed or financial
contributions, or to acquire new compounds, product candidates or products
if we believe such opportunities will help us achieve our goals or meet other strategic objectives. Until such time that we can generate significant revenue from product sales, if ever, we expect to finance our operations primarily through a combination of revenue, equity or debt financings and other sources, including our 92 -------------------------------------------------------------------------------- collaborations with Biogen and Shionogi and potential future collaborations. We may not be successful in our commercialization of ZULRESSO or any other product, and may not generate meaningful revenue or revenue at the levels or on the timing necessary to support our investment and goals. We may never successfully complete development of any of our current or future product candidates, file for or obtain necessary regulatory approval for such product candidates, or achieve commercial viability for any resulting approved product. We may not obtain or maintain adequate patent protection or other exclusivity for our products or product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital if and when needed would have a negative impact on our financial condition and on our ability to pursue our business strategy. Arrangements with our existing collaborators have required us to relinquish rights to certain of our technologies or product candidates, and any future collaborations may require us to relinquish additional rights. We will need to generate significant revenue to achieve profitability, and we may never do so. We expect that our existing cash, cash equivalents and marketable securities as ofDecember 31, 2021 , in addition to ongoing collaboration funding, will enable us to fund our operating expenses and capital expenditure requirements, based on our current operating plans, for at least the next 24 months from the filing date of this Annual Report. See "-Liquidity and Capital Resources". 93 -------------------------------------------------------------------------------- Financial Operations Overview
Revenue
We began to generate revenue from product sales in the second quarter of 2019 in
conjunction with the launch of our first product, ZULRESSO, in
Our revenue from sales of ZULRESSO has been negatively impacted by significant barriers arising from the complex requirements for treatment, and, more recently, by the spread of COVID-19 in theU.S. ZULRESSO is administered as a continuous infusion given over two and a half days. Because of the risk of serious harm resulting from excessive sedation or sudden loss of consciousness during the ZULRESSO infusion, ZULRESSO must be administered only in a medically-supervised healthcare setting that has been certified under a Risk Evaluation and Mitigation Strategies, or REMS, program and meets the other requirements of the REMS program, including requirements related to monitoring of the patient during the infusion. The actions required for a healthcare setting to be ready and willing to treat women with PPD are complex and time-consuming. These actions include: becoming REMS-certified; achieving formulary approvals; establishing protocols for administering ZULRESSO; and securing satisfactory reimbursement. Sites must often negotiate reimbursement on a payor-by-payor basis under commercial coverage. These requirements have created significant barriers to treatment, and are expected to continue to limit future revenue growth. These barriers have been compounded by the COVID-19 pandemic. The spread of COVID-19 in theU.S. resulted in a significant number of sites of care pausing, limiting or delaying treatment of new patients with ZULRESSO and potential new sites of care pausing site activation activities for a period of time. We believe concerns about exposure to the virus or its variants as well as the disruption to the healthcare system in theU.S. caused by the pandemic have also caused a significant reduction in the number of women with PPD seeking treatment with ZULRESSO and in the number of physicians willing to prescribe it. Given continuing concerns about the COVID-19 pandemic across the country, including as a result of the spread of variants and "breakthrough" cases among fully-vaccinated people, and the resulting disruption in many locations to healthcare resources, we expect the significant adverse impact of the pandemic on ZULRESSO revenues, and our results of operations from sales of ZULRESSO, to continue for the foreseeable future. The scope and timing of the expected negative impact will depend on, among other factors, the scope and duration of the pandemic and the timing of any return to normal business operations across theU.S. ; the effectiveness of vaccination campaigns, vaccine mandates, and other efforts to control the pandemic; the duration of the vaccines' efficacy against COVID-19 and its variants; the extent to which variants of the virus that causes COVID-19 negatively impact vaccination and other efforts to control the pandemic; the duration and severity of any restrictive measures taken to curb the spread of COVID-19; the extent of healthcare staffing shortages due to COVID-19; and the impact of the pandemic on our customers and vendors. Given the continued fluidity of the COVID-19 pandemic, we cannot predict its course or for how long and to what extent it will have an adverse impact on ZULRESSO sales. InApril 2020 , we implemented a workforce reduction that primarily affected the ZULRESSO commercial operation and related support functions, including eliminating the entirety of our salesforce at that time. While we remain committed to working with healthcare providers and women with PPD seeking access to ZULRESSO and plan to continue to evaluate opportunities to raise awareness and help reduce hurdles to appropriate treatment, our ongoing commercial efforts, including our account management field-based team and sales representatives now in place, are primarily focused on geographies that have existing, active ZULRESSO treating sites. We expect that this approach to our commercial efforts may continue to substantially limit the revenue opportunity for ZULRESSO. We expect that ZULRESSO revenues are likely to fluctuate quarter to quarter. We will not generate revenue from other products unless and until we or any of our collaborators successfully develop, obtain regulatory approval of, and commercialize one of our current or future product candidates. If we enter into additional collaboration agreements with third parties for our product candidates, we may generate revenue from those collaborations. We expect that revenue, if any, that we may generate under our existing or future collaboration agreements will fluctuate from quarter to quarter as a result of the timing and amount of license fees, payments for clinical materials or manufacturing services, milestone payments, royalties paid to us and our share of collaboration profits or losses resulting from sales of any commercialized products, and other payments. InJune 2018 , we entered into a strategic collaboration with Shionogi for the clinical development and commercialization of zuranolone for the treatment of MDD and other potential indications in the Shionogi Territory. Under the terms of the agreement, Shionogi is responsible for all clinical development, regulatory filings and commercialization and manufacturing of zuranolone for MDD, and potentially other indications, in the Shionogi 94 -------------------------------------------------------------------------------- Territory. InOctober 2018 , we also entered into a supply agreement with Shionogi for zuranolone clinical material. To date, revenue from our collaboration with Shionogi has come from an initial, upfront license fee upon execution of the collaboration agreement of$90.0 million , which was recorded as collaboration revenue in the year endedDecember 31, 2018 , and for the supply of active pharmaceutical agreement, or API, for Shionogi's clinical trials. InNovember 2020 , we entered into the Biogen Collaboration Agreement with Biogen for the development, manufacture and commercialization of the Licensed Products. In connection with the execution of the Biogen Collaboration Agreement, we also entered into a stock purchase agreement for the sale and issuance toBIMA of 6,241,473 shares of our common stock. The Biogen Collaboration Agreement became effective inDecember 2020 , and the sale of the common stock under the stock purchase agreement closed onDecember 31, 2020 . As a result of the purchase of common stock byBIMA , Biogen has become a related party of ours. Under the terms of the Biogen Collaboration Agreement, we will jointly develop and, if successful, commercialize the Licensed Products in theU.S. , and Biogen solely will develop and commercialize the Licensed Products in the Biogen Territory. We and Biogen have agreed to share equally all costs for activities under the Biogen Collaboration Agreement solely for theU.S. Biogen is solely responsible for all costs for activities under the Biogen Collaboration Agreement in the Biogen Territory. In the year endedDecember 31, 2020 , we recorded collaboration revenue - related party of$1.1 billion , consisting of an upfront payment of$875.0 million plus$232.5 million in excess proceeds from the equity investment under the stock purchase agreement, when measured at fair value. For further discussion regarding the accounting for the Biogen Collaboration Agreement, please refer to Note 6, Collaboration Agreements, in the accompanying Notes to Consolidated Financial Statements appearing elsewhere in this Annual Report.
Collaborative Arrangements
We analyze our collaboration arrangements to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities and therefore within the scope of Accounting Standards Codification, or ASC, Topic 808, Collaborative Arrangements, or Topic 808. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of Topic 808 that contain multiple elements, we first determine which elements of the collaboration are deemed to be within the scope of Topic 808 and which elements of the collaboration are more reflective of a vendor-customer relationship and therefore within the scope of ASC Topic 606, Revenue from Contracts with Customers, or Topic 606. For elements of collaboration arrangements that are accounted for pursuant to Topic 808, an appropriate recognition method is determined and applied consistently, either by analogy to authoritative accounting literature or by applying a reasonable and rational policy election. For those elements of the arrangement that are accounted for pursuant to Topic 606, we apply the five-step revenue recognition model and present the arrangement as collaboration revenue in the consolidated statements of operations and comprehensive income (loss). For further discussion regarding the accounting for the Biogen Collaboration Agreement, please refer to Note 6, Collaboration Agreements, in the accompanying Notes to Consolidated Financial Statements appearing elsewhere in this Annual Report. For collaboration arrangements that are within the scope of Topic 808, we evaluate the income statement classification for presentation of amounts due from or owed to other participants associated with multiple activities in a collaboration arrangement based on the nature of each separate activity. Payments or reimbursements that are the result of a collaborative relationship, instead of a customer relationship, such as co-development and co-commercialization activities, are recorded as research and development expense or selling, general and administrative expense in the event of a payment to the collaborative partner in a period, or a reduction to these expense line items in the event of a reimbursement from the collaboration partner in a period, as appropriate.
Cost of Goods Sold
Cost of goods sold includes direct and indirect costs related to the manufacturing and distribution of ZULRESSO, including third-party manufacturing costs, packaging services, freight, third-party royalties payable on our net product revenues and amortization of intangible assets associated with ZULRESSO. We estimate that our cost of goods sold as a percentage of net product revenue will remain in the mid-single digit percentage range for the foreseeable future. We expect to utilize zero-cost inventory with respect to ZULRESSO for an extended period of time. 95 --------------------------------------------------------------------------------
Operating Expenses
Our operating expenses since inception have consisted primarily of costs associated with research and development activities and selling, general and administrative activities.
Research and Development Expenses
Research and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed as incurred. Research and development expenses consist primarily of:
• personnel costs, including salaries, benefits, stock-based compensation
and travel expenses, for employees engaged in research and development
functions;
• expenses incurred under agreements with contract research organizations,
or CROs, and sites that conduct our non-clinical studies and clinical
trials;
• expenses associated with manufacturing materials for use in non-clinical
studies and clinical trials and developing external manufacturing capabilities; • costs of outside consultants engaged in research and development activities, including their fees and travel expenses;
• other expenses related to our non-clinical studies and clinical trials and
expenses related to our regulatory activities, including the planned
submission of NDAs to the FDA for zuranolone in 2022 and 2023; • payments made under our third-party license agreements; and
• a portion of our information technology, facilities and other related
expenses, including rent, depreciation, maintenance of facilities, insurance and supplies. We consider the collaborative activities associated with the co-development, co-commercialization, and co-manufacturing of SAGE-217 products and SAGE-324 products in theU.S. to be separate units of account within the scope of Topic 808 as we and Biogen are both active participants in the development and commercialization activities and are exposed to significant risks and rewards that are dependent on the development and commercial success of the activities in the arrangement. Payments to or reimbursements from Biogen related to the co-development and co-manufacturing activities are accounted for as an increase to or reduction of research and development expense. During the year endedDecember 31, 2021 , we recorded net reimbursement of$79.8 million from Biogen that was deducted from our research and development expenses because we incurred a greater amount of these expenses than Biogen. There were no comparable costs or reimbursements in the year endedDecember 31, 2020 .
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.
We have been developing our product candidates and focusing on other research and development programs, including exploratory efforts to identify new compounds, target validation for identified compounds and lead optimization for our earlier-validated programs. Our direct research and development expenses are tracked on a program-by-program basis, and consist primarily of external costs, such as fees paid to investigators, central laboratories, CROs and contract manufacturing organizations, in connection with our non-clinical studies and clinical trials; third-party license fees related to our product candidates; and fees paid to outside consultants who perform work on our programs. We do not allocate employee-related costs and other indirect costs to specific research and development programs because these costs are deployed across multiple product programs under research and development and, as such, are separately classified as unallocated or stock-based compensation in research and development expenses. Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we continue or initiate clinical trials and non-clinical studies for certain product candidates and pursue later stages of clinical development of our product candidates. 96
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We cannot determine with certainty the duration and costs of the current or future clinical trials of our product candidates. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:
• the scope, size, rate of progress, and expense of our ongoing as well as
any additional clinical trials, non-clinical studies, and other research
and development activities; • future results of ongoing, planned or future clinical trials and non-clinical studies;
• decisions by regulatory authorities related to our product candidates;
• uncertainties in clinical trial enrollment rate or design; • significant and changing government regulation; and • the receipt and timing of regulatory approvals, if any. In addition, the ongoing COVID-19 pandemic may also negatively impact our ongoing and planned development activities and increase our research and development costs. Concerns, precautions and restrictions arising from the COVID-19 pandemic may substantially slow clinical site recruitment and initiation and enrollment in our clinical trials, may impair the conduct, auditing, monitoring, or completion of our trials, may impair or impede the timeliness and completion of our data collection and analysis efforts or the integrity of our data, or may cause us to pause trials, in each case which may significantly impact our ability to meet our expected timelines or cause us to change our plans and may significantly increase our research and development costs. For example, we have seen some slower recruitment in certain of our clinical trials, especially with respect to older patients and in our SKYLARK Study in patients with PPD, which caused us to revise our expected timeline for reporting topline data from that study. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or for regulatory approval, or if we experience significant delays in enrollment in any of our clinical trials or need to enroll additional patients, we could be required to expend significant additional financial resources and time on the completion of clinical development. Any failure to complete any stage of the development of any potential product candidates in a timely manner could have a material adverse effect on our operations, financial position and liquidity. A discussion of some of the risks and uncertainties associated with not completing our programs on schedule, or at all, and the potential consequences of failing to do so, are set forth in Part I, Item 1A, "Risk Factors".
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel costs, including salaries, benefits and travel expenses for our executive, finance, business, commercial, corporate development and other administrative functions, and stock-based compensation expense. Selling, general and administrative expenses also include professional fees for expenses incurred under agreements with third parties relating to the commercialization of ZULRESSO; permitted pre-launch and launch-readiness activities related to zuranolone; public relations, audit, tax and legal services, including legal expenses to pursue patent protection of our intellectual property; and a portion of our information technology, facilities and other related expenses, including rent, depreciation, maintenance of facilities, insurance and supplies. InApril 2020 , we implemented a workforce reduction that primarily affected the ZULRESSO commercial operation and related support functions, including eliminating the entirety of our salesforce at that time. While we remain committed to working with healthcare providers and women with PPD seeking access to ZULRESSO and plan to continue to evaluate opportunities to raise awareness and help reduce hurdles to appropriate treatment, our ongoing commercial efforts, including our account management field-based team and sales representatives now in place, are primarily focused on geographies that have existing, active ZULRESSO treating sites. We expect to continue to incur significant commercialization expenses, including payroll and related expenses, to support our ongoing commercial activities associated with ZULRESSO. We expect that selling, general and administrative expenses will increase in the future as we 97 -------------------------------------------------------------------------------- progress development efforts and prepare for potential commercialization of zuranolone, if approved, and our other current or future product candidates, if successfully developed and approved. We expect to continue to incur significant expenses associated with general operations, including costs related to accounting and legal services, director and officer insurance premiums, facilities and other corporate infrastructure and office-related costs, such as information technology costs. We consider the collaborative activities associated with the co-development, co-commercialization, and co-manufacturing of SAGE-217 products and SAGE-324 products in theU.S. to be separate units of account within the scope of Topic 808 as we and Biogen are both active participants in the development and commercialization activities and are exposed to significant risks and rewards that are dependent on the development and commercial success of the activities in the arrangement. Payments to or reimbursements from Biogen related to the co-commercialization activities are accounted for as an increase to or reduction of selling, general and administrative expense. During the year endedDecember 31, 2021 , we recorded net reimbursement of$11.3 million from Biogen that was deducted from our selling, general and administrative expenses because we incurred a greater amount of these expenses than Biogen. There were no comparable costs or reimbursements in the year endedDecember 31, 2020 . Critical Accounting Policies and Significant Judgments and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in theU.S. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described below may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition We generate revenue from the sale of ZULRESSO and from collaboration and supply agreements with our collaborators. To date, revenue from collaboration agreements has come from initial, upfront payments allocated to licenses of intellectual property delivered to our collaborators, from the sale of shares of our common stock to Biogen in connection with the Biogen Collaboration Agreement, or the Biogen Equity Purchase, and from the supply of material for clinical trials under a supply agreement. Under ASC Topic 606, Revenue from Contracts with Customers, or Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity 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, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Arrangements that include rights to additional goods or services that are exercisable at a customer's discretion are generally considered options. We assess if these options provide a material right to the customer and if so, they are considered performance obligations. The exercise of a material right may be accounted for as a contract modification or as a continuation of the contract for accounting purposes. For contracts determined to be within the scope of Topic 606, we assess whether the goods or services promised within each contract are distinct to identify those that are performance obligations. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other 98
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resources that are readily available to the customer and (ii) the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
We allocate the transaction price (the amount of consideration we expect to be entitled to from a customer in exchange for the promised goods or services) to each performance obligation and recognize the associated revenue when (or as) each performance obligation is satisfied. Our estimate of the transaction price for each contract includes all variable consideration to which we expect to be entitled.
Collaboration and License Revenue
In assessing whether a promised good or service is distinct in the evaluation of a collaboration or license arrangement subject to Topic 606, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner, and the availability of the associated expertise in the general marketplace. We also consider the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, we are required to combine that good or service with other promised goods or services until we identify a bundle of goods or services that is distinct. The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices, or SSP, on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. In certain circumstances, we may apply the residual method to determine the SSP of a good or service if the standalone selling price is considered highly variable or uncertain. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations. If the consideration promised in a contract includes a variable amount, we estimate the amount of consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. We determine the amount of variable consideration by using the expected value method or the most likely amount method. We include the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment. If an arrangement includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee's control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do 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 licensees and the transfer of the promised goods or services to the licensees will be one year or less. We assessed our arrangements with Shionogi and Biogen and concluded that a significant financing component does not exist for either arrangement. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output or input method. Revenue from our collaboration agreement with Shionogi has come from initial, upfront consideration upon execution of the agreement and for the supply of drug product for Shionogi clinical 99
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trials. Revenue from our collaboration agreement with Biogen has come from initial, upfront consideration related to the execution of the Biogen Collaboration Agreement and from the Biogen Equity Purchase. For additional information, refer to Note 6, Collaboration Agreements, to our consolidated financial statements appearing elsewhere in this Annual Report.
Product Revenue, Net
We recognize product revenues, net of variable consideration related to certain allowances and accruals that are determined using the expected value method, in our consolidated financial statements at the point in time when control transfers to the customer, which is typically when the product has been delivered to the customer's location. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. Our only performance obligation identified for ZULRESSO is to deliver the product to the location specified by the customer's order. We record shipping and handling costs associated with delivery of product to our customers within selling, general and administrative expenses on our consolidated statements of operations and comprehensive income (loss). We expense incremental costs of obtaining a contract as incurred if the expected amortization period of the asset would be less than one year. If we were to incur incremental costs with an amortization period greater than a year, such costs would be capitalized as contract assets, as they are expected to be recovered, and would be expensed by amortizing on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. We did not have any contract assets (unbilled receivables) atDecember 31, 2021 , as customer invoicing generally occurs before or at the time of revenue recognition. We did not have any contract liabilities atDecember 31, 2021 , as we did not receive any payments in advance of satisfying our performance obligations to our customers. Amounts billed or invoiced that are considered trade accounts receivable are included in prepaid expenses and other current assets on the consolidated balance sheets. As ofDecember 31, 2021 and 2020, the Company had not provided any allowance for bad debts against the trade accounts receivable, and the amount of trade accounts receivable was not significant. We record reserves, based on contractual terms, for the following components of variable consideration related to product sold during the reporting period, as well as our estimate of product that remains in the distribution channel inventory of our customers at the end of the reporting period. On a quarterly basis, we update our estimates, if necessary, and record any material adjustments in the period they are identified. Chargebacks: We estimate chargebacks from our customers who directly purchase the product from us for discounts resulting from contractual commitments to sell products to eligible healthcare settings at prices lower than the list prices charged to our customers. Customers charge us for the difference between what they pay to us for the product and the selling price to the eligible healthcare settings. Reserves for chargebacks consist of credits that we expect to issue for units that remain in the distribution channel inventories at the end of each reporting period that we expect will be sold to eligible healthcare settings, and chargebacks that customers have claimed, but for which we have not yet issued a credit. Government Rebates: We are subject to discount obligations under government programs, including Medicaid. We record reserves for rebates in the same period the related product revenue is recognized, resulting in a reduction of ZULRESSO product revenues and a current liability that is included in accrued expenses on our consolidated balance sheets. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimates of future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel at the end of each reporting period. Trade Discounts and Allowances: We generally provide customary invoice discounts on ZULRESSO sales to our customers for prompt payment and we pay fees for sales order management, data, and distribution services. We estimate our customers will earn these discounts and fees and deduct these discounts and fees in full from gross ZULRESSO revenues and accounts receivable at the time we recognize the related revenues. Financial Assistance: We provide voluntary financial assistance programs to patients with commercial insurance that have coverage and reside in states that allow financial assistance. We estimate the financial assistance amounts for ZULRESSO and record any such amounts within accrued expenses on the consolidated balance sheets. The calculation of the accrual for financial assistance is based on an estimate of claims and the cost per claim that we expect to receive using demographics for patients who have registered and been approved for assistance. Any adjustments are recorded in the same period the related revenue is recognized, resulting in a 100
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reduction of product revenue and the establishment of a current liability, which is included as a component of accrued expenses on the consolidated balance sheets.
Product Returns: Consistent with industry practice, we offer product return rights to customers for damaged, defective or expiring product, provided it is within a specified period around the product expiration date as set forth in our return goods policy. We estimate the amount of our product sales that may be returned by our customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as a reserve within accrued expenses on our consolidated balance sheets. Product returns have been immaterial to date and are expected to remain immaterial in the future. Collaborative Arrangements We analyze our collaboration arrangements to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities and therefore within the scope of ASC Topic 808, Collaborative Arrangements, or Topic 808. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of Topic 808 that contain multiple elements, we first determine which elements of the collaboration are deemed to be within the scope of Topic 808 and which elements of the collaboration are more reflective of a vendor-customer relationship and therefore within the scope of Topic 606. For elements of collaboration arrangements that are accounted for pursuant to Topic 808, an appropriate recognition method is determined and applied consistently, either by analogy to authoritative accounting literature or by applying a reasonable and rational policy election. For those elements of the arrangement that are accounted for pursuant to Topic 606, we apply the five-step revenue recognition model described above and presents the arrangement as collaboration revenue in the consolidated statements of operations and comprehensive income (loss). For collaboration arrangements that are within the scope of Topic 808, we evaluate the income statement classification for presentation of amounts due from or owed to other participants associated with multiple activities in a collaboration arrangement based on the nature of each separate activity. Payments or reimbursements that are the result of a collaborative relationship instead of a customer relationship, such as co-development and co-commercialization activities, are recorded as research and development expense or selling, general and administrative expense, in the event of a payment to the collaborative partner in a period, or a reduction to these expense line items in the event of a reimbursement from the collaboration partner in a period, as appropriate.
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel and vendors to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:
• CROs in connection with performing research and development services on
our behalf; • other providers in connection with clinical trials; • vendors in connection with non-clinical development activities; and
• vendors related to product manufacturing, development and distribution of
clinical supplies.
We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the 101 -------------------------------------------------------------------------------- completion of clinical trial milestones. When determining accruals, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting expenses that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.
Stock-Based Compensation
We recognize compensation expense for stock-based awards, including grants of stock options and restricted stock units, made to employees, non-employee directors and non-employee consultants based on the estimated fair value on the date of grant, over the requisite service period. We recognize stock-based compensation expense for only the portion of awards that are expected to vest. For awards that vest upon achievement of a performance condition, we recognize compensation expense when achievement of the performance condition is met or during the period from which meeting the condition is deemed probable until the expected date of meeting the performance condition, using management's best estimates, which consider the inherent risk and uncertainty regarding the future outcomes of the milestones. The fair value of each stock option grant is estimated using the Black-Scholes option-pricing model. Through the year endedDecember 31, 2019 , we estimated our expected volatility using a weighted average of the historical volatility of publicly-traded peer companies and the volatility of our common stock. EffectiveJanuary 1, 2020 , we began using the historical volatility of only our common stock, as there is adequate historical data for the duration of the expected term. The expected term of the stock options granted to employees, non-employee directors and non-employee consultants by us has been determined utilizing the "simplified" method for awards that qualify as "plain-vanilla" stock options. The risk-free interest rate is determined by reference to theU.S. Treasury yield curve in effect at the date of grant for time periods approximately equal to the expected term of the award. The expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.
We also apply a forfeiture rate in order to calculate stock-based compensation expense. Expected forfeitures are based on our historical experience and management's expectations of future forfeitures. To the extent actual forfeitures differ from the estimates, the difference is recorded as a cumulative adjustment in the period in which the estimates are revised.
The fair value of each stock option granted under our equity plans has been calculated on the date of grant using the following weighted average assumptions: Year Ended December 31, 2021 2020 2019 Expected dividend yield 0 % 0 % 0 % Expected volatility 75.92 % 77.86 % 71.34 % Risk-free interest rate 0.63 % 0.97 % 2.21 % Expected term 5.92 years 5.98 years 6.05 years These assumptions represented our best estimates, but the estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use significantly different assumptions or estimates when valuing our stock options, our stock-based compensation expense could be materially different. In developing a forfeiture rate estimate for pre-vesting forfeitures, we have considered our historical experience of actual forfeitures. In the future, if our actual forfeiture rate is materially different from our estimate, then our stock-based compensation expense could be significantly different from what we have recognized in the current period. As ofDecember 31, 2021 , we had unrecognized stock-based compensation expense related to our unvested time-based stock option awards of$86.0 million , which is expected to be recognized over the remaining weighted average vesting period of 2.62 years. 102 -------------------------------------------------------------------------------- As ofDecember 31, 2021 , 684,010 performance-based stock options were both outstanding and unvested, the total unrecognized stock-based compensation expense related to those awards was$10.8 million and the timing of recognition of this stock-based compensation expense is subject to our judgment as to when the performance conditions are considered probable of being achieved. As ofDecember 31, 2021 , 1,256,098 time-based restricted stock units and performance restricted stock units were both outstanding and unvested, and the total unrecognized stock-based compensation expense related to those awards was$59.2 million .
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is set forth in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements appearing elsewhere in this Annual Report.
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years endedDecember 31, 2021 and 2020: Year Ended December 31, Increase 2021 2020 (Decrease) (in thousands) Product revenue, net$ 6,308 $ 6,700 $ (392 ) Collaboration revenue - related party - 1,107,500 (1,107,500 ) Total revenue 6,308 1,114,200 (1,107,892 ) Operating costs and expenses: Cost of goods sold 553 565 (12 ) Research and development 283,166 292,714 (9,548 ) Selling, general and administrative 183,498 196,952 (13,454 ) Restructuring - 27,743 (27,743 ) Total operating costs and expenses 467,217 517,974 (50,757 ) Income (loss) from operations (460,909 ) 596,226 (1,057,135 ) Interest income, net 2,883 9,597 (6,714 ) Other income, net 134 250 (116 ) Net income (loss)$ (457,892 ) $ 606,073 $ (1,063,965 ) Product Revenue, Net During the years endedDecember 31, 2021 and 2020, we recognized$6.3 million and$6.7 million , respectively, of net product revenues related to sales of ZULRESSO. Sales allowances and accruals consisted of chargebacks, discounts, distribution fees and patient financial assistance, and were not significant during either year. Collaboration Revenue During the year endedDecember 31, 2021 , we recognized no collaboration revenue - related party from our agreement with Biogen. During the year endedDecember 31, 2020 , we recognized collaboration revenue - related party of$1.1 billion related to the execution of the Biogen Collaboration Agreement and the Biogen Equity Purchase. The revenue consisted of an upfront payment of$875.0 million plus$232.5 million in excess proceeds from the Biogen Equity Purchase, when measured at fair value.
During the years ended
103 -------------------------------------------------------------------------------- We expect that revenue, if any, that we may generate under our collaboration agreements will fluctuate from quarter to quarter as a result of the timing and amount of license fees, payments for clinical materials or manufacturing services, milestone payments, royalties paid to us and our share of collaboration profits or losses resulting from sales of any commercialized products, and other payments. For further discussion regarding our collaboration agreements with Shionogi and Biogen and the accounting for revenue from collaboration agreements, please refer to Note 2, Summary of Significant Accounting Policies; and Note 6, Collaboration Agreements in the Notes to Consolidated Financial Statements, appearing elsewhere in this Annual Report. Cost of Goods Sold During the years endedDecember 31, 2021 and 2020, cost of goods sold was$0.6 million and$0.6 million , respectively, and is made up of a low-single digit royalty paid toCyDex Pharmaceuticals, Inc. , a wholly owned subsidiary of Ligand Pharmaceuticals Incorporated, or CyDex and The Regents of theUniversity of California , or the Regents, on net product revenue from sales of ZULRESSO, the amortization of intangible assets associated with ZULRESSO and third-party manufacturing and distribution costs associated with labeling, packaging, and shipping of ZULRESSO. Prior to receiving initial FDA approval for ZULRESSO inMarch 2019 , we manufactured ZULRESSO inventory to be sold upon commercialization and recorded$8.9 million related to this inventory build-up as research and development expense. As a result, the manufacturing costs related to the ZULRESSO inventory build-up incurred before FDA approval were already expensed in a prior period and are therefore excluded from the cost of goods sold for the years endedDecember 31, 2021 and 2020. We estimate that our cost of goods sold as a percentage of net product revenue will remain in the mid-single digit percentage range for the foreseeable future. We expect to utilize zero-cost inventory with respect to ZULRESSO for an extended period of time.
Research and Development Expenses
Year Ended December 31, Increase 2021 2020 (Decrease) (in thousands) zuranolone (SAGE-217)$ 122,256 $ 116,614 $ 5,642 SAGE-324 18,771 19,482 (711 ) SAGE-718 25,440 6,388 19,052
Other research and development programs 59,633 38,222
21,411 Unallocated expenses 87,168 69,638 17,530 Stock-based compensation 49,746 42,370 7,376 Net reimbursement from Biogen (79,848 ) -
(79,848 )
Total research and development expenses
Research and development expenses for the year ended
• an increase of
increase in expenses was primarily due to spending on
manufacturing-related activities, including process validation and
production of zuranolone for clinical and commercial use, if approved for
commercial sale; offset by a decrease in spending on the WATERFALL Study;
• an increase of
increase in expenses was primarily due to the initiation of a Phase 2
clinical trial and clinical pharmacology studies that were initiated
during 2021; • an increase of$21.4 million in expenses for other research and
development programs. The increase in expenses was primarily due to Phase 1 clinical trials of SAGE-689 and SAGE-904 and increased work on early-stage research programs; 104
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• an increase of
increase in expenses was primarily due to an increase in the hiring of employees and corporate infrastructure costs, such as information technology costs; • an increase of$7.4 million in expenses for non-cash stock-based
compensation expense. The increase in expenses was primarily due to the
achievement of milestones for certain outstanding performance restricted
stock units, resulting in the recognition of
during the year ended
stock options held by former employees. During the year ended
2020, no non-cash stock-based compensation expense was recognized related
to the achievement of performance-based vesting criteria; and
• during the year ended
net reimbursement from Biogen pursuant to the Biogen Collaboration Agreement was$79.8 million . The amount of net reimbursement was$61.1 million for zuranolone,$9.4 million for SAGE-324 and$9.3 million for costs that are reimbursable and included in unallocated expenses.
Selling, General and Administrative Expenses
Year Ended December 31, Increase 2021 2020 (Decrease) (in thousands) Personnel-related$ 52,100 $ 58,403 $ (6,303 ) Stock-based compensation 54,883 51,836 3,047 Professional fees 43,428 50,533 (7,105 ) Other 44,369 36,180 8,189 Net reimbursement from Biogen (11,282 ) - (11,282 ) Total selling, general and administrative expenses$ 183,498 $ 196,952 $ (13,454 )
Selling, general and administrative expenses for the year ended
• a decrease of
decrease in expenses was primarily due to the termination of employees in
theApril 2020 restructuring; • an increase of$3.0 million of expenses for non-cash stock-based
compensation expense. The increase in expenses was primarily due to the
achievement of milestones for certain outstanding performance restricted
stock units, resulting in the recognition of
during the year ended
stock options held by former employees. During the year ended
2020, no non-cash stock-based compensation expense was recognized related
to the achievement of performance-based vesting criteria;
• a decrease of
in expenses was primarily due to transaction-related expenses for the
Biogen Collaboration Agreement that were incurred in the year ended
31, 2021; the decrease was offset by an increase in activities focused on
commercialization, including disease awareness and increased launch-readiness activities for a potential product launch, if our zuranolone development and regulatory efforts are successful;
• an increase of
expenses was primarily due to corporate infrastructure costs, such as information technology costs; and
• during the year ended
net reimbursement from Biogen pursuant to the Biogen Collaboration Agreement was$11.3 million . The amount of net reimbursement was$9.3 million for external costs and$2.0 million for personnel-related costs. 105
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Restructuring
In the year endedDecember 31, 2021 , we recorded no expense for restructuring. InApril 2020 , we announced a restructuring plan to enable us to advance our corporate strategy and pipeline that included the elimination of approximately 53% of our workforce. The workforce reduction primarily affected the ZULRESSO commercial operation and related selling, general and administrative support functions. In the year endedDecember 31, 2020 , we recorded$27.7 million of expense for restructuring, primarily for one-time termination benefits to the affected employees, primarily for cash payments of severance, healthcare benefits and outplacement assistance.
Interest Income, Net and Other income, Net
Interest income, net, and other income, net, for the years ended
Liquidity and Capital Resources
We began to generate revenue from product sales in the second quarter of 2019 in conjunction with the launch of our first product, ZULRESSO, inJune 2019 . To date, we have incurred recurring net losses, except for net income of$606.1 million for the year endedDecember 31, 2020 , reflecting revenue recognized under the Biogen Collaboration Agreement. As ofDecember 31, 2021 , we had an accumulated deficit of$1.5 billion . OnDecember 31, 2020 , we completed the sale of 6,241,473 shares of our common stock in a private placement toBIMA at a price of approximately$104.14 per share, resulting in aggregate gross proceeds of$650.0 million . From our inception throughDecember 31, 2021 , we have received aggregate net proceeds of$2.8 billion from the sales of redeemable convertible preferred stock prior to our initial public offering, the issuance of convertible notes, and the sales of common stock in our initial public offering inJuly 2014 , follow-on offerings and in the Biogen Equity Purchase. We also received$1.0 billion in upfront payments under our collaborations with Biogen and Shionogi. As ofDecember 31, 2021 , our primary sources of liquidity were our cash, cash equivalents and marketable securities, which totaled$1.7 billion . We invest our cash in money market funds,U.S. government securities, corporate bonds and commercial paper, and our primary objectives are to preserve principal, provide liquidity and maximize income without significantly increasing risk.
The following table summarizes the primary sources and uses of cash for the
years ended
Year Ended December 31, 2021 2020 (in thousands) Net cash provided by (used in): Operating activities$ (378,182 ) $ 664,280 Investing activities (1,002,448 ) 442,684 Financing activities 13,334 426,762 Total$ (1,367,296 ) $ 1,533,726 Operating Activities During the year endedDecember 31, 2021 , net cash used in operating activities primarily resulted from our net loss of$457.9 million , which was primarily attributable to our research and development activities and our selling, general and administrative expenses, along with changes in our operating assets and liabilities of$18.5 million , partially offset by$98.2 million of non-cash items.
During the year ended
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expenses; and
Investing Activities
During the years endedDecember 31, 2021 and 2020, net cash used by investing activities was$1.0 billion and net cash provided by investing activities was$442.7 million , respectively. During the years endedDecember 31, 2021 and 2020, we purchased marketable securities and had sales and maturities of our marketable securities as part of managing our cash and investments portfolio. Additionally, during the year endedDecember 31, 2021 , we invested the majority of the cash that we received from Biogen under the Biogen Collaboration Agreement and the Biogen Equity Purchase in marketable securities.
Financing Activities
During the years endedDecember 31, 2021 and 2020, net cash provided by financing activities was$13.3 million and$426.8 million , respectively. During the year endedDecember 31, 2021 , the amounts were mainly from proceeds from the exercises of stock options. During the year endedDecember 31, 2020 , we received$650.0 million of proceeds from our sale of 6,241,473 shares of our common stock to Biogen under the stock purchase agreement, of which$417.5 million was recorded as equity and the remainder was recorded as revenue.
Operating Capital Requirements
We began to generate revenue from product sales in the second quarter of 2019 in conjunction with the launch of our first product, ZULRESSO. 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 our current and future product candidates, and seek regulatory approvals for zuranolone and those other product candidates that are successfully developed; prepare for potential future commercialization of zuranolone and other product candidates beyond ZULRESSO that are successfully developed and approved, including pre-launch and launch-readiness activities; begin to commercialize any such products, if approved; and continue our efforts to identify and develop new product candidates beyond our current portfolio. We also expect to incur significant costs associated with general operations. In addition, we expect to incur significant commercialization expenses for product sales, marketing and outsourced manufacturing with respect to ZULRESSO, zuranolone, if approved and any other future products that are successfully developed and approved. Accordingly, we anticipate that we will need substantial additional funding in connection with our continuing operations. Based on our current operating plans, we expect that our existing cash, cash equivalents and marketable securities as ofDecember 31, 2021 , in addition to ongoing collaboration funding, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 24 months from the filing date of this Annual Report. During that time, we expect to incur significant expenses as we continue to commercialize ZULRESSO; complete ongoing clinical trials of zuranolone and advance regulatory, permitted pre-launch and launch-planning activities; advance development of our other product candidates; expand our research activities; and pursue our strategic plan. Our current operating plan does not contemplate other activities that we may pursue or that all of our currently planned activities will proceed at the same pace, or that all of these activities will be fully initiated or completed during that time. We have based our estimates on assumptions that could change, and we may use our available capital resources sooner than we currently expect. We may also choose to change or increase our development, commercialization or other efforts. Because of the numerous risks and uncertainties associated with the development and commercialization of any product or product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete development of our current or future product candidates or to commercialize any approved product.
Our future capital requirements will depend on many factors, including:
• the amount and timing of revenues from sales of ZULRESSO, which we expect
will continue to be impacted by a number of factors, including: the rate,
degree and level of market acceptance for ZULRESSO for the treatment of
PPD in theU.S. ; our decision to focus our efforts primarily on geographies that have existing, active ZULRESSO treating sites; the continued availability of healthcare settings in those geographies to
administer ZULRESSO and the ability and willingness of such healthcare
settings to make sufficient capacity
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available; the level of reimbursement for both ZULRESSO and the infusion
in the healthcare setting both by commercial and government payors, and the nature of limitations on coverage and reimbursement; the number of
healthcare professionals willing to prescribe ZULRESSO and women with PPD
who agree to be treated with ZULRESSO; and the scope, duration and timing
of the impact of the COVID-19 pandemic;
• the timing and amount of costs associated with our commercialization of
ZULRESSO;
• the costs of regulatory, permitted pre-launch and launch-readiness
activities associated with zuranolone and, if zuranolone is approved for
one or more indications, the costs associated with its commercial launch; • the initiation, progress, completion, timing, costs, and results of
ongoing, planned and future non-clinical studies and clinical trials for
our existing and future product candidates; the number and length of
clinical trials required by regulatory authorities to support regulatory
approval; and the costs of preparing, submitting and supporting regulatory
filings for our product candidates;
• the length, severity and costs of disruptions, if any, associated with the
COVID-19 pandemic on initiation and conduct of our clinical trials or on our supply chain; • the ability of zuranolone, SAGE-324 and SAGE-718 and our other
clinical-stage product candidates to progress through clinical development
successfully; the outcome of discussions with regulatory authorities on
regulatory pathways with respect to our product candidates; the timing,
scope and outcome of regulatory filings and reviews and approvals of such
product candidates, if we are successful in our development efforts; the
scope and cost of any clinical trials or other commitments required
post-approval for any approved products resulting from such development
efforts, if successful; and the level, timing and amount of costs
associated with permitted prelaunch activities and preparing for a
potential future commercial launch of any such product candidate that is
successfully developed and approved;
• the amounts we are entitled to receive, if any, from Biogen and Shionogi
under our collaborations for cost-sharing, development, regulatory, and sales milestones, and royalty payments;
• the size of the PPD market and the portion of the population for which
ZULRESSO may be prescribed; the size of the markets for which zuranolone
and our other product candidates may be approved in the future, if
successfully developed; the portion of the population in the approved
indications for which our future products are actually prescribed; the
rate and degree of market acceptance for our products, and the pricing,
availability and level of reimbursement for our products;
• the number and characteristics of the product candidates we pursue in
development and the nature and scope of our discovery and development
programs;
• the costs of preparing, filing and prosecuting patent applications,
maintaining and enforcing our intellectual property rights and defending
intellectual property-related claims; • the extent to which we acquire or in-license other products and technologies; and • our ability to establish any future collaboration arrangements on favorable terms, if at all. Until such time, if ever, as we can generate substantial product revenue and achieve profitability, we expect to also finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other sources of funding. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or in light of other strategic considerations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute the ownership interest of our stockholders. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or research programs or to grant licenses on terms that may not be favorable to us. Raising funds may present challenges. Markets may experience volatility or become disrupted in the future for any number of reasons, 108 -------------------------------------------------------------------------------- including if current efforts to control the COVID-19 pandemic are not successful. If we are unable to raise additional funds through equity or debt financings or other means when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations atDecember 31, 2021 and the effect such obligations are expected to have on our liquidity and cash flow in future periods: Payments Due by Period Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years (in thousands) Operating lease commitments(1)$ 20,427 $ 7,468 $ 12,959 $ - $ - Total(1)(2)(3)$ 20,427 $ 7,468 $ 12,959 $ $ - Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain milestones. These contingent milestones may not be achieved. We have not included any of these amounts in the table as we cannot estimate or predict when, or if, these amounts will become due. We do not include amounts related to milestones for indications that we are no longer pursuing.
(1) We lease office space in two multi-tenant buildings in
the first building under an operating lease, as amended, that will expire on
operating lease, as amended, that will expire on
office space in a multi-tenant building in
consisting of 15,525 square feet under an operating lease that will expire on
our leases to meet the needs of the business. The minimum lease payments in
the table do not include related common area maintenance costs or real estate
taxes, because those costs are variable.
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(2) We have acquired exclusive and non-exclusive rights to use, research, develop
and offer for sale certain products and patents under license agreements. The
license agreements obligate us to make payments to the licensors for license
fees, milestones, license maintenance fees and royalties. We are obligated to
make future remaining milestone payments under these agreements of up to an
aggregate of
clinical development, regulatory approvals and sales. During the year ended
these license agreements.
(3) We enter into contracts in the normal course of business with CROs for
clinical trials, non-clinical research studies and testing, manufacturing and
other services and products as part of general operations. These contracts
generally provide for termination upon notice, and we believe that our
non-cancelable obligations under these agreements are not material.
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