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Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-32405 
 
SEATTLE GENETICS, INC.
(Exact name of registrant as specified in its charter) 
 
 
Delaware
 
91-1874389
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
21823 30th Drive SE
Bothell, Washington 98021
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code): (425527-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001
SGEN
The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
☐ 
  
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
 
  
 
 
 

1

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  
    No  
As of July 11, 2019, there were 161,720,181 shares of the registrant’s common stock outstanding.
 

2

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Seattle Genetics, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2019
INDEX
 
 
Page
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 6.
 
 
 
 

 

3

Table of Contents


PART I. FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements
Seattle Genetics, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
64,112

 
$
78,186

Short-term investments
312,017

 
332,486

Accounts receivable, net
182,264

 
146,281

Inventories
73,150

 
53,239

Prepaid expenses and other current assets
40,398

 
43,403

Total current assets
671,941

 
653,595

Property and equipment, net
130,900

 
103,820

Operating lease right-of-use assets
69,056

 

Long-term investments

 
49,194

In-process research and development
300,000

 
300,000

Goodwill
274,671

 
274,671

Other non-current assets
120,997

 
122,049

Total assets
$
1,567,565

 
$
1,503,329

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
36,877

 
$
44,179

Accrued liabilities and other
168,073

 
147,293

Current portion of deferred revenue
17,002

 
33,600

Total current liabilities
221,952

 
225,072

Long-term liabilities:
 
 
 
Operating lease liabilities, long-term
71,430

 

Other long-term liabilities
2,357

 
4,314

Total long-term liabilities
73,787

 
4,314

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value, 5,000 shares authorized; none issued

 

Common stock, $0.001 par value, 250,000 shares authorized; 161,638 shares issued and outstanding at June 30, 2019 and 160,262 shares issued and outstanding at December 31, 2018
162

 
160

Additional paid-in capital
2,688,333

 
2,598,411

Accumulated other comprehensive income (loss)
486

 
(40
)
Accumulated deficit
(1,417,155
)
 
(1,324,588
)
Total stockholders’ equity
1,271,826

 
1,273,943

Total liabilities and stockholders’ equity
$
1,567,565

 
$
1,503,329

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


4

Table of Contents


Seattle Genetics, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands, except per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Net product sales
$
158,980

 
$
122,443

 
$
293,981

 
$
217,800

Collaboration and license agreement revenues
36,130

 
27,179

 
80,708

 
56,738

Royalty revenues
23,337

 
20,551

 
38,957

 
36,225

Total revenues
218,447

 
170,173

 
413,646

 
310,763

Costs and expenses:
 
 
 
 

 

Cost of sales
8,609

 
13,157

 
16,520

 
23,515

Cost of royalty revenues
2,288

 
6,148

 
4,677

 
11,525

Research and development
163,929

 
122,860

 
322,194

 
275,362

Selling, general and administrative
82,331

 
58,292

 
162,602

 
124,474

Total costs and expenses
257,157

 
200,457

 
505,993

 
434,876

Loss from operations
(38,710
)
 
(30,284
)
 
(92,347
)
 
(124,113
)
Investment and other income (loss), net
(40,528
)
 
106,557

 
(220
)
 
88,671

Net income (loss)
$
(79,238
)
 
$
76,273

 
$
(92,567
)
 
$
(35,442
)
Net income (loss) per share - basic
$
(0.49
)
 
$
0.48

 
$
(0.57
)
 
$
(0.23
)
Net income (loss) per share - diluted
$
(0.49
)
 
$
0.47

 
$
(0.57
)
 
$
(0.23
)
Shares used in computation of per share amounts - basic
161,436

 
158,381

 
161,049

 
155,525

Shares used in computation of per share amounts - diluted
161,436

 
163,382

 
161,049

 
155,525

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
(79,238
)
 
$
76,273

 
$
(92,567
)
 
$
(35,442
)
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain on securities available-for-sale, net of tax
252

 
105

 
474

 
132

Foreign currency translation gain (loss)
18

 
(15
)
 
52

 
(23
)
Total other comprehensive income
270

 
90

 
526

 
109

Comprehensive income (loss)
$
(78,968
)
 
$
76,363

 
$
(92,041
)
 
$
(35,333
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


5

Table of Contents


Seattle Genetics, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In thousands)
 
 
Common stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
paid-in capital
 
Accumulated other comprehensive income (loss)
 
Accumulated deficit
 
Total stockholders' equity
Balances as of December 31, 2017
 
144,395

 
$
144

 
$
1,806,159

 
$
63,836

 
$
(1,192,570
)
 
$
677,569

Net loss
 

 

 

 

 
(111,715
)
 
(111,715
)
Other comprehensive income
 

 

 

 
19

 

 
19

Cumulative effects of accounting changes
 

 

 

 
(64,119
)
 
90,675

 
26,556

Issuance of common stock for employee stock purchase plan
 
106

 

 
4,424

 

 

 
4,424

Stock option exercises
 
375

 
1

 
7,403

 

 

 
7,404

Restricted stock vested during the period, net
 
24

 

 

 

 

 

Issuance of common stock
 
13,269

 
13

 
658,229

 

 

 
658,242

Share-based compensation
 

 

 
16,838

 

 

 
16,838

Balances as of March 31, 2018
 
158,169

 
158

 
2,493,053

 
(264
)
 
(1,213,610
)
 
1,279,337

Net income
 

 

 

 

 
76,273

 
76,273

Other comprehensive income
 

 

 

 
90

 

 
90

Stock option exercises
 
418

 
1

 
11,221

 

 

 
11,222

Restricted stock vested during the period, net
 
59

 

 

 

 

 

Share-based compensation
 

 

 
15,517

 

 

 
15,517

Balances as of June 30, 2018
 
158,646

 
$
159

 
$
2,519,791

 
$
(174
)
 
$
(1,137,337
)
 
$
1,382,439

 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2018
 
160,262

 
$
160

 
$
2,598,411

 
$
(40
)
 
$
(1,324,588
)
 
$
1,273,943

Net loss
 

 

 

 

 
(13,329
)
 
(13,329
)
Other comprehensive income
 

 

 

 
256

 

 
256

Issuance of common stock for employee stock purchase plan
 
104

 

 
6,147

 

 

 
6,147

Stock option exercises
 
719

 
1

 
20,678

 

 

 
20,679

Restricted stock vested during the period, net
 
56

 

 

 

 

 

Share-based compensation
 

 

 
25,715

 

 

 
25,715

Balances as of March 31, 2019
 
161,141

 
161

 
2,650,951

 
216

 
(1,337,917
)
 
1,313,411

Net loss
 

 

 

 

 
(79,238
)
 
(79,238
)
Other comprehensive income
 

 

 

 
270

 

 
270

Stock option exercises
 
393

 
1

 
11,225

 

 

 
11,226

Restricted stock vested during the period, net
 
104

 

 

 

 

 

Share-based compensation
 

 

 
26,157

 

 

 
26,157

Balances as of June 30, 2019
 
161,638

 
$
162

 
$
2,688,333

 
$
486

 
$
(1,417,155
)
 
$
1,271,826

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

6

Table of Contents


Seattle Genetics, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Operating activities:
 
 
 
Net loss
$
(92,567
)
 
$
(35,442
)
Adjustments to reconcile net loss to net cash used by operating activities
 
 
 
Share-based compensation
51,872

 
32,355

Depreciation and amortization
9,905

 
13,322

Amortization of right-of-use assets
4,833

 

(Gains) losses on equity securities
4,568

 
(86,647
)
Changes in operating assets and liabilities

 
 
Accounts receivable, net
(35,983
)
 
(48,928
)
Inventories
(19,911
)
 
(10,955
)
Prepaid expenses and other assets
6,275

 
(4,992
)
Lease liability
(2,955
)
 

Deferred revenue
(16,598
)
 
(17,279
)
Other liabilities
(679
)
 
(9,569
)
Net cash used by operating activities
(91,240
)
 
(168,135
)
Investing activities:
 
 
 
Purchases of securities
(147,555
)
 
(242,679
)
Proceeds from maturities of securities
220,000

 
210,022

Proceeds from sales of securities

 
125,483

Purchases of property and equipment
(33,331
)
 
(9,490
)
Acquisition of Cascadian Therapeutics, Inc., net of cash acquired

 
(598,151
)
Net cash provided (used) by investing activities
39,114

 
(514,815
)
Financing activities:
 
 
 
Net proceeds from issuance of common stock

 
658,242

Proceeds from exercise of stock options and employee stock purchase plan
38,052

 
23,050

Net cash provided by financing activities
38,052

 
681,292

Net decrease in cash and cash equivalents
(14,074
)
 
(1,658
)
Cash and cash equivalents at beginning of period
78,186

 
160,945

Cash and cash equivalents at end of period
$
64,112

 
$
159,287

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


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Seattle Genetics, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of significant accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements reflect the accounts of Seattle Genetics, Inc. and its wholly-owned subsidiaries (collectively “Seattle Genetics,” “we,” “our,” or “us”). All intercompany transactions and balances have been eliminated. We acquired Cascadian Therapeutics, Inc., or Cascadian, in March 2018, as further described in Note 4. Management has determined that we operate in one segment: the development and sale of pharmaceutical products on our own behalf or in collaboration with others. Substantially all of our assets and revenues are related to operations in the U.S.; however, we have multiple subsidiaries in foreign jurisdictions, including several subsidiaries in Europe.
The condensed consolidated balance sheet data as of December 31, 2018 were derived from audited financial statements not included in this quarterly report on Form 10-Q. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC, and generally accepted accounting principles in the United States of America, or GAAP, for unaudited condensed consolidated financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments that, in the opinion of management, are necessary for a fair statement of our financial position and results of our operations as of and for the periods presented.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC.
The preparation of financial statements in accordance with GAAP requires us to make estimates, assumptions, and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of our operations for the three and six month periods ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year or any other interim period.
Non-cash financing and investing activities
We had $10.6 million and $4.6 million of accrued capital expenditures as of June 30, 2019 and December 31, 2018, respectively. Accrued capital expenditures have been treated as a non-cash investing activity and, accordingly, have not been included in the statement of cash flows until such amounts have been paid in cash. During the six months ended June 30, 2019, we recorded $39.2 million right-of-use assets in exchange for lease liabilities. Refer to Note 3.
Investments
We hold certain equity securities that we acquired in connection with strategic agreements, which are reported at estimated fair value. Changes in the fair value of equity securities are recorded in income or loss. The cost of equity securities for purposes of computing gains and losses is based on the specific identification method.
We invest our available cash primarily in debt securities. These debt securities are classified as available-for-sale, which are reported at estimated fair value with unrealized gains and losses included in accumulated other comprehensive income and loss in stockholders’ equity. Realized gains, realized losses and declines in the value of debt securities judged to be other-than-temporary are included in investment and other income (loss), net. The cost of debt securities for purposes of computing realized and unrealized gains and losses is based on the specific identification method. Amortization of premiums and accretion of discounts on debt securities are included in investment and other income (loss), net. Interest and dividends earned are included in investment and other income (loss), net. We classify investments in debt securities maturing within one year of the reporting date, or where management’s intent is to use the investments to fund current operations or to make them available for current operations, as short-term investments.
If the estimated fair value of a debt security is below its carrying value, we evaluate whether it is more likely than not that we will sell the security before its anticipated recovery in market value and whether evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. We also evaluate whether or not we intend to sell the investment. If the impairment is considered to be other-than-temporary, the security is written down to its estimated fair value. In addition, we consider whether credit losses exist for any securities. A credit loss exists if the present value of cash flows expected to be collected is less than the amortized cost basis of the security. Other-than-temporary declines in estimated fair value and credit losses are included in investment and other income (loss), net.

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Leases
We adopted Accounting Standards Update, or "ASU 2016-02, Leases" on January 1, 2019. As a result of this standard, we recorded a liability to make lease payments and a right-of-use asset representing our right to use the underlying asset for the applicable lease term in our condensed consolidated balance sheet. We elected the modified retrospective method transition option, which permitted us not to restate the comparative period presented.
We elected the "package of practical expedients", which permitted us not to reassess under the standard our prior conclusion about lease identification, lease classification and initial direct cost. We also elected the practical expedient to not separate lease and non-lease components for our real estate leases, and elected the short-term lease recognition exemption for our short-term leases, which allows us not to recognize lease liabilities and right-of-use assets on our condensed consolidated balance sheet for leases with an original term of twelve months or less.
The standard had a material impact on our condensed consolidated balance sheet, did not have an impact on our condensed consolidated statement of comprehensive loss, and there was no cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Refer to Note 3 for additional information.
We determine if an arrangement is a lease at inception date. All of our leases are classified as operating leases. Operating lease liabilities and the corresponding right-of-use assets are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease right-of-use asset also excludes lease incentives and initial direct costs incurred. As our existing leases do not contain an implicit interest rate, we estimate our incremental borrowing rate based on information available at commencement date in determining the present value of future payments. We include options to extend the lease in our lease liability and right-of-use asset when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For our short-term leases, we recognize lease payments as an expense on a straight-line base over the lease term.
Business combinations, including acquired in-process research and development and goodwill
We account for business combinations using the acquisition method, recording the acquisition-date fair value of total consideration over the acquisition-date fair value of net assets acquired as goodwill.
Fair value is typically estimated using an income approach based on the present value of future discounted cash flows. The significant estimates in the discounted cash flow model primarily include the discount rate, and rates of future revenue and expense growth and/or profitability of the acquired business. The discount rate considers the relevant risk associated with business-specific characteristics and the uncertainty related to the ability to achieve the projected cash flows. We may record adjustments to the fair values of assets acquired and liabilities assumed within the measurement period (up to one year from the acquisition date).
In-process research and development assets are accounted for as indefinite-lived intangible assets and maintained on the balance sheet until either the underlying project is completed or the asset becomes impaired. If the project is completed, the carrying value of the related intangible asset is amortized to cost of sales over the remaining estimated life of the asset beginning in the period in which the project is completed. If the asset becomes impaired or is abandoned, the carrying value of the related intangible asset is written down to its fair value and an impairment charge is recorded in the period in which the impairment occurs.
We evaluate indefinite-lived intangible assets and goodwill for impairment annually, as of October 1, or more frequently when events or circumstances indicate that impairment may have occurred. As part of the impairment evaluation, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the indefinite-lived intangible asset or the reporting unit (for goodwill) is less than its carrying value, we then would proceed with the quantitative impairment test to compare the fair value to the carrying value and record an impairment charge if the carrying value exceeds the fair value.
Acquisition-related costs, including banking, legal, accounting, valuation, and other similar costs, are expensed in the periods in which the costs are incurred and included in loss from operations in the consolidated financial statements. The results of operations of the acquired business are included in the consolidated financial statements from the acquisition date.

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Long-term incentive plans
We have established Long-Term Incentive Plans, or LTIPs. The LTIPs provide eligible employees with the opportunity to receive performance-based incentive compensation, which may be comprised of cash, stock options, and/or RSUs. The payment of cash and the grant and/or vesting of equity are contingent upon the achievement of pre-determined regulatory milestones. We record compensation expense over the estimated service period for each milestone subject to the achievement of the milestone being considered probable in accordance with the provisions of Accounting Standards Codification Topic 450, Contingencies. At each reporting date, we assess whether achievement of a milestone is considered probable and, if so, record compensation expense based on the portion of the service period elapsed to date with respect to that milestone, with a cumulative catch-up, net of estimated forfeitures. We recognize compensation expense with respect to a milestone over the remaining estimated service period. As of June 30, 2019, the estimated unrecognized compensation expense related to all LTIPs was $51.2 million.
The total estimate of unrecognized compensation expense could change in the future for several reasons, including the addition or termination of employees, the recognition of LTIP compensation expense, or the addition, termination, or modification of an LTIP.
Revenue recognition
Our revenues are comprised of ADCETRIS net product sales, amounts earned under our collaboration and licensing agreements, and royalties. Revenue recognition occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. The period between when we transfer control of promised goods or services and when we receive payment is expected to be one year or less, and that expectation is consistent with our historical experience. As such, we do not adjust our revenues for the effects of a significant financing component.
Net product sales
We sell ADCETRIS through a limited number of pharmaceutical distributors in the U.S. and Canada. Customers order ADCETRIS through these distributors, and we typically ship product directly to the customer. The delivery of ADCETRIS to the end-user site represents a single performance obligation for these transactions. We record product sales at the point in time when title and risk of loss pass, which generally occurs upon delivery of the product to the customer. The transaction price for product sales represents the amount we expect to receive, which is net of estimated government-mandated rebates and chargebacks, distribution fees, estimated product returns and other deductions. Accruals are established for these deductions, and actual amounts incurred are offset against applicable accruals. We reflect these accruals as either a reduction in the related account receivable from the distributor or as an accrued liability, depending on the nature of the sales deduction. Sales deductions are based on management’s estimates that consider payor mix in target markets and experience to-date. These estimates involve a substantial degree of judgment. We have applied a portfolio approach as a practical expedient for estimating net product sales from ADCETRIS.
Government-mandated rebates and chargebacks: We have entered into a Medicaid Drug Rebate Agreement, or MDRA, with the Centers for Medicare & Medicaid Services. This agreement provides for a rebate based on covered purchases of ADCETRIS. Medicaid rebates are invoiced to us by the various state Medicaid programs. We estimate Medicaid rebates using the expected value approach, based on a variety of factors, including our experience to-date.
We have also completed a Federal Supply Schedule, or FSS, agreement under which certain U.S. government purchasers receive a discount on eligible purchases of ADCETRIS. In addition, we have entered into a Pharmaceutical Pricing Agreement with the Secretary of Health and Human Services, which enables certain entities that qualify for government pricing under the Public Health Services Act, or PHS, to receive discounts on their qualified purchases of ADCETRIS. Under these agreements, distributors process a chargeback to us for the difference between wholesale acquisition cost and the applicable discounted price. As a result of our direct-ship distribution model, we can identify the entities purchasing ADCETRIS and this information enables us to estimate expected chargebacks for FSS and PHS purchases based on the expected value of each entity’s eligibility for the FSS and PHS programs. We also review historical rebate and chargeback information to further refine these estimates.
Distribution fees, product returns and other deductions: Our distributors charge a volume-based fee for distribution services that they perform for us. We allow for the return of product that is within 30 days of its expiration date or that is damaged. We estimate product returns based on our experience to-date using the expected value approach. In addition, we consider our direct-ship distribution model, our belief that product is not typically held in the distribution channel, and the expected rapid use of the product by healthcare providers. We provide financial assistance to qualifying patients that are underinsured or cannot cover the cost of commercial coinsurance amounts through SeaGen Secure. SeaGen Secure is available to patients in the U.S. and its territories who meet various financial and treatment need criteria. Estimated contributions for commercial coinsurance under SeaGen Secure are deducted from gross sales and are based on an analysis of expected plan utilization. These estimates are adjusted as necessary to reflect our actual experience.

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Collaboration and license agreement revenues
We have collaboration and license agreements with a number of biotechnology and pharmaceutical companies. Our proprietary technology for linking cytotoxic agents to monoclonal antibodies called antibody-drug conjugates, or ADCs, is the basis for many of these collaboration and license agreements, including the ADC collaborations that we have entered into in the ordinary course of business, under which we granted our collaborators research and commercial licenses to our technology and typically provide technology transfer services, technical advice, supplies and services for a period of time.
Our collaboration and license agreements include contractual milestones. Generally, the milestone events coincide with the progression of the collaborators’ product candidates. These consist of development milestones (such as designation of a product candidate or initiation of preclinical studies and the initiation of phase 1, phase 2, or phase 3 clinical trials), regulatory milestones (such as the filing of regulatory applications for marketing approval), and commercialization milestones (such as first commercial sale in a particular market and product sales in excess of a pre-specified threshold). Our ADC collaborators are solely responsible for the development of their product candidates, and the achievement of milestones in any of the categories identified above is based solely on the collaborators’ efforts. Since we do not take a substantive role or control the research, development or commercialization of any products generated by our ADC collaborators, we are not able to reasonably estimate when, if at all, any potential future milestone payments or royalties may be payable to us by our ADC collaborators. As such, the potential future milestone payments associated with our ADC collaborations involve a substantial degree of uncertainty and risk that they may never be received. In the case of our ADCETRIS collaboration with Takeda Pharmaceutical Company Limited, or Takeda, we may be involved in certain development activities; however, the achievement of milestone events under the agreement is primarily based on activities undertaken by Takeda.
ADC collaborations are initially evaluated as to whether the intellectual property licenses granted by us represent distinct performance obligations. If they are determined to be distinct, the value of the intellectual property licenses would be recognized up-front while the research and development service fees would be recognized as the performance obligations are satisfied. Variable consideration is assessed at each reporting period as to whether it is not subject to significant future reversal and, therefore, should be included in the transaction price at the inception of the contract. Assessing the recognition of variable consideration requires significant judgment. If a contract includes a fixed or minimum amount of research and development support, this also would be included in the transaction price. Changes to ADC collaborations, such as the extensions of the research term or increasing the number of targets or technology covered under an existing agreement, are assessed for whether they represent a modification or should be accounted for as a new contract.
We have concluded that the license of intellectual property in our current ADC collaborations is not distinct from the perspective of our customers at the time of initial transfer, since we do not license intellectual property without related technology transfer and research and development support services. Such evaluation requires significant judgment since it is made from the customer's perspective. Our performance obligations under our collaborations include such things as providing intellectual property licenses, performing technology transfer, performing research and development consulting services, providing reagents, ADCs, and other materials, and notifying the customer of any enhancements to licensed technology or new technology that we discover, among others. We determined our performance obligations under our current ADC collaborations as evaluated at contract inception were not distinct and represented a single performance obligation. Revenue is recognized using a proportional performance model, representing the transfer of goods or services as activities are performed over the term of the agreement. Upfront payments are also amortized to revenue over the performance period. Upfront payment contract liabilities resulting from our collaborations do not represent a financing component as the payment is not financing the transfer of goods or services, and the technology underlying the licenses granted reflects research and development expenses already incurred by us.
When no performance obligations are required of us, or following the completion of the performance obligation period, such amounts are recognized as revenue upon transfer of control of the goods or services to the customer. Generally, all amounts received or due other than sales-based milestones and royalties are classified as collaboration and license agreement revenues. Sales-based milestones and royalties are recognized as royalty revenue in the period the related sale occurred.
We generally invoice our collaborators and licensees on a monthly or quarterly basis, or upon the completion of the effort or achievement of a milestone, based on the terms of each agreement. Deferred revenue arises from amounts received in advance of the culmination of the earnings process and is recognized as revenue in future periods as performance obligations are satisfied. Deferred revenue expected to be recognized within the next twelve months is classified as a current liability.

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Royalty revenues and cost of royalty revenues
Royalty revenues primarily reflect amounts earned under the ADCETRIS collaboration with Takeda. These royalties include commercial sales-based milestones and sales royalties that relate predominantly to the license of intellectual property. Sales royalties are based on a percentage of Takeda’s net sales of ADCETRIS, with rates that range from the mid-teens to the mid-twenties based on sales volume. Takeda bears a portion of third-party royalty costs owed on its sales of ADCETRIS. This amount is included in royalty revenues. Cost of royalty revenues reflects amounts owed to our third-party licensors related to Takeda’s sales of ADCETRIS. These amounts are recognized in the period in which the related sales by Takeda occur.
Recent accounting pronouncements not yet adopted
In June 2016, Financial Accounting Standards Board, or FASB, issued “ASU 2016-13, Financial Instruments: Credit Losses”, as clarified in ASU 2019-04 and ASU 2019-05. The objective of the standard is to provide information about expected credit losses on financial instruments at each reporting date and to change how other-than-temporary impairments on investment securities are recorded. The standard will become effective for us beginning on January 1, 2020, with early adoption permitted. We are currently evaluating the guidance to determine the potential impact on our financial condition, results of operations, cash flows, and financial statement disclosures.
In August 2018, FASB issued “ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The objective of the standard is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard will become effective for us beginning on January 1, 2020, with early adoption permitted. We are currently evaluating the guidance to determine the potential impact on our financial condition, results of operations, cash flows, and financial statement disclosures.
In November 2018, FASB issued “ASU 2018-18, Clarifying the Interaction between Topic 808 and Topic 606.” The objective of the standard is to clarify the interaction between Topic 808, Collaborative Arrangements, and Topic 606, Revenue from Contracts with Customers. Currently, Topic 808 does not provide comprehensive recognition or measurement guidance for collaborative arrangements, and the accounting for those arrangements is often based on an analogy to other accounting literature or an accounting policy election. Similarly, aspects of Topic 606 have resulted in uncertainty in practice about the effect of the revenue standard on the accounting for collaborative arrangements. The standard will become effective for us beginning on January 1, 2020, with early adoption permitted. We are currently evaluating the guidance to determine the potential impact on our financial condition, results of operations, cash flows, and financial statement disclosures.
2. Revenue from contracts with customers
We have one marketed product, ADCETRIS. Substantially all of our product revenues are recorded in the U.S. Substantially all of our royalty revenues are from our collaboration with Takeda. Collaboration and license agreement revenues by collaborator are summarized as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Takeda
 
$
28,760

 
$
8,745

 
$
72,139

 
$
22,317

AbbVie
 
600

 
4,700

 
925

 
12,700

Genentech
 
6,670

 
583

 
6,873

 
1,299

Genmab
 

 
7,000

 

 
7,000

GSK
 

 
6,000

 

 
6,000

Other
 
100

 
151

 
771

 
7,422

Collaboration and license agreement revenues
 
$
36,130

 
$
27,179

 
$
80,708

 
$
56,738


Contract liabilities consist of deferred revenue primarily related to our remaining performance obligations under the Takeda ADCETRIS collaboration and are presented on the condensed consolidated balance sheets. Deferred revenue will be recognized as the remaining performance obligations are satisfied through November 2019.
We recognized collaboration and license agreement revenues of $18.5 million during the six months ended June 30, 2019 that were included in the deferred revenue balance as of December 31, 2018. For the six months ended June 30, 2019, collaboration and license agreement revenues from Takeda also included substantially all of $37.5 million for two regulatory milestones achieved, which were related to additional approvals of ADCETRIS in frontline Hodgkin lymphoma received by Takeda.

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3. Operating leases
We have operating leases for our office and laboratory facilities with terms that expire from 2021 through 2029. Upon adoption of Topic 842 on January 1, 2019, we recognized $35.2 million of operating lease liabilities and $34.7 million of operating lease right-of-use assets for our existing leases on our condensed consolidated balance sheet. As of June 30, 2019, our operating lease liabilities and operating lease right-of-use assets were $79.4 million and $69.1 million, respectively. The increases in operating lease liabilities and operating lease right-of-use assets during the six months ended June 30, 2019 reflected new facilities leases that commenced during the period. All of our significant leases include options for us to extend the lease term. None of our options to extend the rental term of any existing leases were considered reasonably certain as of June 30, 2019.
Supplemental operating lease information were as follows:
(dollars in thousands)
 
Three months ended June 30, 2019
 
Six months ended June 30, 2019
Operating lease cost
 
$
3,401

 
$
6,587

Variable lease cost
 
751

 
1,429


As of June 30, 2019, the weighted average remaining lease term for our operating leases was 7.4 years, and the weighted average discount rate for our operating leases was 5.4%.
Future minimum lease payments under the lease agreements as of June 30, 2019 were as follows:
Years ending December 31,
 
(dollars in thousands)
2019 (remaining six months)
 
$
5,463

2020
 
13,086

2021
 
14,028

2022
 
13,585

2023
 
13,478

Thereafter
 
38,701

      Total future minimum lease payments
 
$
98,341

Less: imputed interest
 
(18,962
)
Total
 
$
79,379


Operating lease liabilities were recorded in the following captions of our condensed consolidated balance sheet were as follows:
(dollars in thousands)
 
June 30, 2019
Accrued liabilities and other
 
$
7,949

Operating lease liabilities, long-term
 
71,430

Total
 
$
79,379


As of December 31, 2018, our future obligations related to building leases were as follows:
Years ending December 31,
 
(dollars in thousands)
2019
 
$
10,332

2020
 
11,863

2021
 
12,770

2022
 
12,288

2023
 
12,142

Thereafter
 
30,517

      Total future minimum lease payments
 
$
89,912



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4. Acquisition of Cascadian
In March 2018, we acquired all issued and outstanding shares of Cascadian Therapeutics, Inc., a clinical-stage biopharmaceutical company based in Seattle, Washington, for $10.00 per share in cash, or approximately $614.1 million, which was funded by an underwritten public offering as further described in Note 6. The acquisition of Cascadian expanded our late-stage pipeline, providing global rights to tucatinib, an investigational oral tyrosine kinase inhibitor, or TKI, that was being evaluated in a phase 2 trial called HER2CLIMB for patients with HER2 positive metastatic breast cancer who have been previously treated with HER2-targeted agents, including patients with or without brain metastases.
The acquisition of Cascadian was accounted for as a business combination. During the six months ended June 30, 2018, we incurred $8.5 million in acquisition-related costs, which were recorded in selling, general and administrative expenses.
The purchase price allocation of the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date was as follows:
(dollars in thousands)
 
Cash and cash equivalents
$
15,919

Short-term and long-term investments
66,491

Prepaid expenses and other assets
2,215

Property and equipment
566

In-process research and development
300,000

Goodwill
274,671

Accounts payable and accrued liabilities
(22,139
)
Deferred tax liability
(23,653
)
Total purchase price
$
614,070


The amount allocated to in-process research and development was based on the present value of future discounted cash flows, which was based on significant estimates. These estimates included the number of potential patients and market price of a future tucatinib-based regimen, costs required to conduct clinical trials and potentially commercialize tucatinib, as well as estimates for probability of success and the discount rate. Goodwill primarily was attributed to tucatinib’s potential application in other treatment settings, intangible assets that do not qualify for separate recognition, and synergies with our existing pipeline and capabilities. Goodwill is not expected to be deductible for tax purposes.
The financial information in the table below summarizes the combined results of operations of Seattle Genetics and Cascadian on a pro forma basis for the 2018 comparative period:
(dollars in thousands)
 
Three months ended June 30, 2018
 
Six months ended June 30, 2018
Revenues
 
$
170,173

 
$
310,763

Net income (loss)
 
76,273

 
(64,376
)

5. Net income (loss) per share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares include incremental common shares issuable upon the vesting of unvested restricted stock units and the exercise of outstanding stock options, calculated using the treasury stock method.
For the three and six months ended June 30, 2019, and the six months ended June 30, 2018, we excluded all restricted stock units and stock options from the per share calculations as such securities were anti-dilutive. For the three months ended June 30, 2018, we excluded stock options with an exercise price greater than the average price from the per share calculations. The weighted average number of restricted stock units and stock options that were excluded totaled approximately 12,464,000 and 1,674,000 for the three months ended June 30, 2019 and 2018, respectively, and approximately 12,831,000 and 13,379,000 for the six months ended June 30, 2019 and 2018, respectively.

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The following table presents the computations of basic and diluted net income (loss) per share (in thousands, except per share amounts):
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
(79,238
)
 
$
76,273

 
$
(92,567
)
 
$
(35,442
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
161,436

 
158,381

 
161,049

 
155,525

Dilutive potential common shares

 
5,001

 

 

Weighted average common shares outstanding - diluted
161,436

 
163,382

 
161,049

 
155,525

 
 
 
 
 
 
 
 
Net income (loss) per share - basic
$
(0.49
)
 
$
0.48

 
$
(0.57
)
 
$
(0.23
)
Net income (loss) per share - diluted
$
(0.49
)
 
$
0.47

 
$
(0.57
)
 
$
(0.23
)


6. Common stock
In February 2018, we completed an underwritten public offering of 13,269,230 shares of our common stock at a public offering price of $52.00 per share. The offering resulted in net proceeds to us of $658.2 million, after deducting underwriting discounts, commissions, and other offering expenses. The primary use of the net proceeds was to fund the acquisition of Cascadian.
7. Fair value
We have certain assets that are measured at fair value on a recurring basis according to a fair value hierarchy that prioritizes the inputs, assumptions and valuation techniques used to measure fair value. The three levels of the fair value hierarchy are:
Level 1:
  
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2:
  
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3:
  
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The determination of a financial instrument’s level within the fair value hierarchy is based on an assessment of the lowest level of any input that is significant to the fair value measurement. We consider observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The fair value hierarchy of assets carried at fair value and measured on a recurring basis was as follows: 
 
 
Fair value measurement using:
(dollars in thousands)
 
Quoted prices
in active
markets for
identical assets
(Level 1)
 
Other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
June 30, 2019
 
 
 
 
 
 
 
 
Short-term investments—U.S. Treasury securities
 
$
312,017

 
$

 
$

 
$
312,017

Other non-current assets—equity securities
 
109,244

 

 

 
109,244

Total
 
$
421,261

 
$

 
$

 
$
421,261

December 31, 2018
 
 
 
 
 
 
 
 
Short-term investments—U.S. Treasury securities
 
$
332,486

 
$

 
$

 
$
332,486

Long-term investments—U.S. Treasury securities
 
49,194

 

 

 
49,194

Other non-current assets—equity securities
 
113,812

 

 

 
113,812

Total
 
$
495,492

 
$

 
$

 
$
495,492



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Our equity securities primarily consisted of holdings in common stock of Immunomedics, Inc., purchased in connection with a strategic collaboration with the company in 2017. The collaboration agreement with Immunomedics was subsequently terminated in 2017.
Our debt securities consisted of the following:
(dollars in thousands)
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
June 30, 2019
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
311,536

 
$
481

 
$

 
$
312,017

Contractual maturities (at date of purchase):
 
 
 
 
 
 
 
 
Due in one year or less
 
$
195,367

 
 
 
 
 
$
195,505

Due in one to two years
 
116,169

 
 
 
 
 
116,512

Total
 
$
311,536

 
 
 
 
 
$
312,017

December 31, 2018
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
381,673

 
$
133

 
$
(126
)
 
$
381,680

Contractual maturities (at date of purchase):
 
 
 
 
 
 
 
 
Due in one year or less
 
$
246,440

 
 
 
 
 
$
246,402

Due in one to two years
 
135,233

 
 
 
 
 
135,278

Total
 
$
381,673

 
 
 
 
 
$
381,680


8. Investment and other income (loss), net
Investment and other income (loss), net consisted of the following:
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Gain (loss) on equity securities
 
$
(42,693
)
 
$
105,472

 
$
(4,568
)
 
$
86,647

Investment income, net
 
2,165

 
1,085

 
4,348

 
2,024

Total investment and other income (loss), net
 
$
(40,528
)
 
$
106,557

 
$
(220
)
 
$
88,671


Gain (loss) on equity securities includes the realized and unrealized holding gains and losses on our equity securities. Our equity securities are described in more detail in Note 7.
9. Inventories
The following table presents our inventories of ADCETRIS:
(dollars in thousands)
 
June 30, 2019
 
December 31, 2018
Raw materials
 
$
64,828

 
$
43,986

Finished goods
 
8,322

 
9,253

Total
 
$
73,150

 
$
53,239


We capitalize ADCETRIS inventory costs. ADCETRIS inventory that is deployed into clinical, research or development use is charged to research and development expense when it is no longer available for use in commercial sales. We do not capitalize manufacturing costs for any of our product candidates.

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10. Legal matters
On March 8, 2018, three purported stockholders of Cascadian filed a Verified Complaint to Compel Inspection of Books and Records under 8 Del. C. §220 in the Delaware Court of Chancery against Cascadian, seeking to inspect books and records in order to determine whether wrongdoing or mismanagement has taken place such that it would be appropriate to file claims for breach of fiduciary duty, and to investigate the independence and disinterestedness of the former Cascadian directors with respect to our acquisition of Cascadian. We filed our answer to this complaint on March 28, 2018. On February 20, 2019, we entered into an agreement regarding production and confidentiality of books and records with plaintiffs, pursuant to which we produced relevant books and records on April 22, 2019. As a result of this lawsuit, we may incur litigation and indemnification expenses.
In addition, from time to time in the ordinary course of business we become involved in various lawsuits, claims and proceedings relating to the conduct of our business, including those pertaining to the defense and enforcement of our patent or other intellectual property rights and our contractual rights. These proceedings are costly and time consuming. Additionally, successful challenges to our patent or other intellectual property rights through these proceedings could result in a loss of rights in the relevant jurisdiction and may allow third parties to use our proprietary technologies without a license from us or our collaborators.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q, including the following discussion of our financial condition and results of operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including those relating to future events or our future financial performance and financial guidance. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “project,” “believe,” “estimate,” “predict,” “potential,” “intend” or “continue,” the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are only predictions. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements except as required by law. Any or all of our forward-looking statements in this document may turn out to be wrong. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and other factors. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Part II. Item 1A—Risk Factors.” We caution investors that our business and financial performance are subject to substantial risks and uncertainties.
Overview
Seattle Genetics is a biotechnology company that develops and commercializes therapies targeting cancer. We are commercializing ADCETRIS®, or brentuximab vedotin, for the treatment of several types of lymphoma. We are also advancing a pipeline of novel therapies for solid tumors and blood-related cancers designed to address unmet medical needs and improve treatment outcomes for patients. Many of our programs, including ADCETRIS, are based on our antibody-drug conjugate, or ADC, technology that utilizes the targeting ability of monoclonal antibodies to deliver cell-killing agents directly to cancer cells.
Our marketed product ADCETRIS is commercially available in more than 70 countries worldwide. We commercialize ADCETRIS in the U.S. and its territories and in Canada, and we are collaborating with Takeda Pharmaceutical Company Limited, or Takeda, to develop and commercialize ADCETRIS on a global basis. Under this collaboration, Takeda has commercial rights in the rest of the world and pays us a royalty. ADCETRIS is approved by the U.S. Food and Drug Administration, or FDA, in six indications. In Hodgkin lymphoma, ADCETRIS is approved as monotherapy for patients whose disease has relapsed and as consolidation therapy following prior treatment, and in combination with chemotherapy for the treatment of patients with previously untreated disease. In T-cell lymphomas, ADCETRIS is approved as monotherapy for patients with relapsed or refractory systemic anaplastic large cell lymphoma, or sALCL, or certain types of cutaneous T-cell lymphoma, or CTCL, or in combination with chemotherapy for patients with previously untreated CD30-expressing peripheral T-cell lymphoma, or PTCL.
Beyond our current labeled indications, we are evaluating ADCETRIS in several clinical trials. These include ADCETRIS in combination with nivolumab (Opdivo®) for Hodgkin and non-Hodgkin lymphoma under a clinical collaboration with Bristol-Myers Squibb Company, or BMS. Nivolumab is a programmed death-1, or PD-1, immune checkpoint inhibitor. In addition, we plan to initiate registrational trials evaluating retreatment with ADCETRIS in Hodgkin and T-cell lymphoma patients who progress after a prior response and in Hodgkin lymphoma and PTCL patients who are unfit for combination chemotherapy due to older age or comorbidities.
Our late-stage pipeline includes two ADCs and an oral tyrosine kinase inhibitor, or TKI, for solid tumors that are in clinical trials designed to support applications for potential regulatory approvals.
In collaboration with Astellas Pharma, Inc., or Astellas, we are developing enfortumab vedotin, which is an ADC targeting Nectin-4. We and Astellas are conducting a pivotal phase 2 trial, called EV-201, evaluating single-agent enfortumab vedotin for patients with locally advanced or metastatic urothelial cancer. The trial includes two cohorts of patients. The first cohort includes patients who were previously treated with a PD-1 inhibitor or a programmed death-ligand 1, or PD-L1, inhibitor, including those who have also been treated with a platinum-containing chemotherapy, and the second cohort includes patients who were previously treated with a PD-1 or PD-L1 inhibitor but have not received a platinum-containing chemotherapy and who are ineligible for cisplatin. In March 2018, the FDA granted Breakthrough Therapy designation to enfortumab vedotin for patients with locally advanced or metastatic urothelial cancer who were previously treated with a checkpoint inhibitor.

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In March 2019, we and Astellas announced positive top-line results from the first cohort of EV-201 that enrolled 128 patients who previously received both platinum-containing chemotherapy and a PD-1 or PD-L1 inhibitor. In June 2019, additional data were reported at the American Society of Clinical Oncology annual meeting. Results from the first cohort showed the primary endpoint of confirmed objective response rate, or ORR, was 44 percent per blinded independent central review. Complete responses were observed in 12 percent of patients. Responses were observed across all pre-specified patient subgroups irrespective of lines of therapy, response to prior PD-1 or PD-L1 inhibitor, or presence of liver metastases which is a factor that is associated with poor prognosis. The median duration of tumor response was 7.6 months. Median overall survival, or OS, was 11.7 months and the median progression-free survival, or PFS, was 5.8 months. Target lesions were reduced in 84 percent of evaluable patients. The most common treatment-related adverse events were fatigue (50 percent), alopecia (49 percent), rash (48 percent), decreased appetite (44 percent), taste distortion (40 percent) and peripheral neuropathy (50 percent). The most common Grade 3 or higher adverse events were neutropenia (8 percent), anemia (7 percent), and fatigue (6 percent). One death due to interstitial lung disease occurred outside the safety-reporting period of the trial and was confounded by prolonged high-dose steroid use and suspected pneumonia. Based on these results, we and Astellas submitted a Biologics License Application, or BLA, to the FDA in July 2019 under the FDA's accelerated approval pathway for the treatment of patients with locally advanced or metastatic urothelial cancer who have received a PD-1 or PD-L1 inhibitor and who have received a platinum-containing chemotherapy in the neoadjuvant/adjuvant, locally advanced or metastatic setting. The second cohort of the EV-201 trial continues to enroll patients.
We and Astellas are also conducting a global, randomized phase 3 trial, called EV-301, for patients with metastatic urothelial cancer who previously received both platinum chemotherapy and a PD-1 or PD-L1 inhibitor. EV-301 is intended to support global regulatory applications for potential approvals in regions where EV-201 does not support approval and to potentially serve as a confirmatory trial in the U.S. if we are able to obtain accelerated approval based on the July 2019 enfortumab vedotin BLA submission. Additionally, we and Astellas are conducting a phase 1b trial of enfortumab vedotin, called EV-103, in earlier lines of treatment for patients with locally advanced or metastatic urothelial cancer, including in combination with pembrolizumab and/or platinum chemotherapy in newly diagnosed patients as well as patients whose cancer progressed from earlier-stage disease. We expect to report initial data from the EV-103 trial in 2019.
We are also developing tucatinib, an oral TKI targeting HER2, a growth factor receptor overexpressed in many cancers. Tucatinib is currently being evaluated as part of a combination regimen in a global randomized (2:1) pivotal trial, called HER2CLIMB, comparing tucatinib vs. placebo, each in combination with capecitabine and trastuzumab (Herceptin®). The trial is evaluating patients with HER2-positive metastatic breast cancer who have been previously treated with trastuzumab, pertuzumab (Perjeta®) and ado-trastuzumab emtansine, or T-DM1 (Kadcyla®), including patients with or without brain metastases. In January 2019, we announced that we achieved enrollment of 480 patients in the trial to enable analysis of the primary endpoint of PFS with top-line data expected to be reported in 2019. In April 2019, we reached the target enrollment of 600 patients in the HER2CLIMB trial to support the analyses of key secondary endpoints, including OS as well as PFS in patients with brain metastases. Additionally, we plan to initiate a phase 3 randomized trial comparing tucatinib vs. placebo, each in combination with T-DM1 in patients with HER2-positive metastatic breast cancer who have been previously treated with a taxane and trastuzumab. The primary endpoint of the planned trial will be PFS.    
In collaboration with Genmab A/S, or Genmab, we are developing tisotumab vedotin, which is an ADC targeting tissue factor. We and Genmab are conducting a pivotal phase 2 trial, called the innovaTV 204 trial, evaluating single-agent tisotumab vedotin for patients with recurrent and/or metastatic cervical cancer who have relapsed or progressed after standard of care treatment. The trial is intended to support potential regulatory submission under the FDA's accelerated approval pathway. In March 2019, we completed enrollment in the innovaTV 204 trial and we anticipate reporting top-line data from the trial in the first half of 2020. We are also conducting a phase 2 clinical trial called innovaTV 207 for patients with other solid tumors that is intended to inform a potential future broad development program. In addition, we are conducting a phase 2 clinical trial, called innovaTV 208, for patients with platinum-resistant ovarian cancer.
We are developing ladiratuzumab vedotin, an ADC targeting LIV-1, which is currently being evaluated in phase 1 and phase 2 clinical trials both as monotherapy and in combination with other agents for patients with metastatic triple-negative breast cancer.
We are advancing a pipeline of early-stage clinical candidates as well as multiple preclinical and research-stage programs that employ our proprietary technologies. We plan to submit several investigational new drug applications to the FDA in 2019 and 2020.

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We have collaborations for our ADC technology with a number of biotechnology and pharmaceutical companies, including AbbVie Biotechnology Ltd., or AbbVie; Astellas; Genentech, Inc., a member of the Roche Group, or Genentech; Genmab; GlaxoSmithKline LLC, or GSK; and Progenics Pharmaceuticals Inc. Of these collaborators, Genentech and GSK have ADCs using our technology in late-stage clinical trials. In June 2019, Genentech received accelerated approval from the FDA for polatuzumab vedotin-piiq (Polivy™), an ADC that uses our technology, to treat patients with relapsed or refractory diffuse large B-cell lymphoma. Under our ADC collaboration with Genentech, the accelerated approval of Polivy triggered a milestone payment to us and we are entitled to receive royalties on net sales of Polivy worldwide. In addition, we have a collaboration with Unum Therapeutics, Inc., or Unum, to develop and commercialize novel antibody-coupled T-cell receptor, or ACTR, therapies incorporating our antibodies for the treatment of cancer. Unum is conducting a phase 1 trial evaluating Unum's ACTR087 drug candidate in combination with SEA-BCMA in patients with relapsed/refractory multiple myeloma.
Outlook
Our ongoing research, development, manufacturing and commercial activities will require substantial amounts of capital and may not ultimately be successful. We expect that we will incur substantial expenses, primarily as a result of activities related to the commercialization and continued development of ADCETRIS, as well as the continued development and potential commercialization of enfortumab vedotin, tucatinib and tisotumab vedotin. We will require significant financial resources and additional personnel in order to continue to advance the development of, to pursue, obtain and maintain regulatory approvals for, and to potentially commercialize, enfortumab vedotin, tucatinib and tisotumab vedotin, if we are able to do so at all. Our other product candidates are in early or relatively early stages of development. In addition, we may pursue new operations or continue the expansion of our existing operations, including with respect to our plans to build a commercial infrastructure in Europe and to otherwise continue to expand our operations internationally. Our commitment of resources to the continuing development, regulatory and commercialization activities for ADCETRIS, the research, continued development and manufacturing of our product candidates, launch and commercialization activities for potential new products, and the anticipated expansion of our pipeline and operations will likely require us to raise substantial amounts of additional capital, and our operating expenses may fluctuate as a result of such activities. We may also incur significant milestone payment obligations to certain of our licensors as our product candidates progress through clinical trials towards potential commercialization.
We recognize revenue from ADCETRIS product sales in the U.S. and Canada. Our future ADCETRIS product sales are difficult to accurately predict from period to period and are dependent on, among other things, the incidence flow of patients eligible for treatment with ADCETRIS. In this regard, our product sales have varied, and may continue to vary, significantly from period to period and may be affected by a variety of factors. Such factors include the approval of ADCETRIS in additional indications, the extent to which coverage and reimbursement for ADCETRIS is available from government and other third-party payors, competition, the incidence rate of new patients in ADCETRIS’ approved indications, customer ordering patterns, physicians’ perception and adoption of ADCETRIS, the overall level of demand for ADCETRIS, and the duration of therapy for patients receiving ADCETRIS. In particular: 
Obtaining and maintaining appropriate coverage and reimbursement for ADCETRIS is increasingly challenging due to, among other things, the attention being paid to healthcare cost containment and other austerity measures in the U.S. and worldwide, as well as increasing legislative and enforcement interest in the U.S. with respect to pharmaceutical drug pricing practices. We anticipate that healthcare reform measures that may be adopted in the future may result in more rigorous coverage criteria and an additional downward pressure on the price that we receive for ADCETRIS. We also anticipate that Congress, state legislatures, and third-party payors may continue to review and assess alternative healthcare delivery and payment systems and may in the future propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the healthcare delivery system, any of which could negatively affect our revenue or sales of ADCETRIS or any future approved products.
The competition ADCETRIS faces from competing therapies is intensifying, and we anticipate that we will continue to face increasing competition in the future as new companies enter our market and scientific developments surrounding biosimilars and other cancer therapies continue to accelerate.

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The FDA approved ADCETRIS in combination with chemotherapy for patients with newly-diagnosed, previously untreated Stage III and IV classical Hodgkin lymphoma, or the frontline Hodgkin lymphoma indication, in March 2018 based on the results of the phase 3 ECHELON-1 clinical trial. The FDA approved ADCETRIS in combination with chemotherapy for patients with newly diagnosed, previously untreated sALCL or other CD30-expressing PTCL, including angioimmunoblastic T-cell lymphoma and PTCL not otherwise specified, or the frontline PTCL indication, in November 2018 based on the results of the phase 3 ECHELON-2 clinical trial. While we expect continued growth in ADCETRIS sales in 2019 as compared to 2018, we expect that our ability to continue to grow ADCETRIS sales, if at all, will depend primarily on our ability to establish or demonstrate to the medical community the value of ADCETRIS and its potential advantages compared to existing and future therapeutics in the frontline Hodgkin lymphoma indication and frontline PTCL indication, and the extent to which physicians make prescribing decisions with respect to ADCETRIS in these indications. Further, our ability to continue to grow ADCETRIS sales, if at all, will be affected by our ability to continue to expand ADCETRIS’ utilization across key labeled indications of use. In addition, Takeda may be unable to obtain regulatory approvals of ADCETRIS in the ECHELON-2 treatment setting in its territories, which also would limit their sales of, and the commercial potential of, ADCETRIS.
We expect that amounts earned from our collaboration agreements, including royalties, will continue to be an important source of our revenues and cash flows. These revenues will be impacted by future development funding and the achievement of development, clinical and commercial success by our collaborators under our existing collaboration and license agreements, including our ADCETRIS collaboration with Takeda, as well as by entering into potential new collaboration and license agreements. Our results of operations may vary substantially from year to year and from quarter to quarter and, as a result, we believe that period to period comparisons of our operating results may not be meaningful and should not be relied upon as being indicative of our future performance.
Financial summary
For the six months ended June 30, 2019, total revenues increased to $413.6 million, compared to $310.8 million for the same period in 2018. This increase was driven primarily by 35% higher ADCETRIS net product sales. Net product sales of ADCETRIS were $294.0 million for the six months ended June 30, 2019, compared to $217.8 million for the same period in 2018, which increased primarily driven by ADCETRIS label expansions.
For the six months ended June 30, 2019, total costs and expenses increased to $506.0 million, compared to $434.9 million for the same period in 2018. This primarily reflected higher research and development expenses from continued investment in our late-stage pipeline, as well as higher sales, general and administrative costs related to our late-stage product candidates and ADCETRIS commercialization efforts related to the frontline Hodgkin lymphoma and frontline PTCL indications. For the six months ended June 30, 2018, net loss was favorably impacted by a net gain of $86.6 million from the change in the fair value of our equity securities.
As of June 30, 2019, we had $376.1 million in cash, cash equivalents and investments and $1.3 billion in total stockholders’ equity.
Results of operations
Net product sales
We sell ADCETRIS in the U.S. and Canada.
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Net product sales
 
$
158,980

 
$
122,443

 
30
%
 
$
293,981

 
$
217,800

 
35
%
The increase in net product sales for the three and six months ended June 30, 2019 from the comparable periods in 2018 primarily resulted from higher sales volume during 2019 and, to a lesser extent, from the effect of price increases. Higher sales volume during the 2019 period was driven by label expansions of ADCETRIS; in particular, for the frontline Hodgkin lymphoma indication in March 2018, and for the frontline PTCL indication in November 2018.
We sell ADCETRIS through a limited number of pharmaceutical distributors in the U.S. and Canada. Customers order ADCETRIS through these distributors, and we typically ship product directly to the customer. The delivery of ADCETRIS to the end-user site represents a single performance obligation for these transactions. We record product sales at the point in time when title and risk of loss pass, which generally occurs upon delivery of the product to the customer. The transaction price for product sales represents the amount we expect to receive, which is net of estimated government-mandated rebates and chargebacks, distribution fees, estimated product returns and other deductions. Accruals are established for these deductions, and actual amounts incurred are offset against applicable accruals. We reflect these accruals as either a reduction in the related account receivable from the distributor or as an accrued liability depending on the nature of the sales deduction. Sales deductions are based on management’s estimates that consider payor mix in target markets and experience to date. These

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estimates involve a substantial degree of judgment. We have applied a portfolio approach as a practical expedient for estimating net product sales from ADCETRIS.
Gross-to-net deductions, net of related payments and credits, were as follows:
(in thousands)
 
Rebates and
chargebacks
 
Distribution fees,
product returns
and other
 
Total
Balance as of December 31, 2018
 
$
26,968

 
$
5,604

 
$
32,572

Provision related to current period sales
 
119,505

 
7,111

 
126,616

Adjustment for prior period sales
 
215

 
(188
)
 
27

Payments/credits for current period sales
 
(90,845
)
 
(3,955
)
 
(94,800
)
Payments/credits for prior period sales
 
(18,519
)
 
(1,520
)
 
(20,039
)
Balance as of June 30, 2019
 
$
37,324

 
$
7,052

 
$
44,376

Mandatory government discounts are the most significant component of our total gross-to-net deductions and the discount percentage has been increasing. These discount percentages increased during the six months ended June 30, 2019 as a result of price increases we instituted that exceeded the rate of inflation. Generally, the change in government prices is limited to the rate of inflation. We expect future gross-to-net deductions to fluctuate based on the volume of purchases eligible for government mandated discounts and rebates, as well as changes in the discount percentage which is impacted by potential future price increases, the rate of inflation, and other factors. We expect gross-to-net deductions to increase in 2019 as compared to 2018, driven by growth in ADCETRIS gross sales.
Collaboration and license agreement revenues
We have collaboration and license agreements with a number of biotechnology and pharmaceutical companies. Our proprietary ADC technology is the basis of many of these collaboration and license agreements, including the ADC collaborations that we have entered into in the ordinary course of our business, under which we grant our collaborators research and commercial licenses to our technology and typically provide technology transfer services, technical advice, supplies and services for a period of time. Our collaboration and license agreements include contractual milestones. Generally, the milestone events coincide with the progression of the collaborators’ product candidates. These consist of development milestones (such as designation of a product candidate or initiation of preclinical studies and the initiation of phase 1, phase 2, or phase 3 clinical trials), regulatory milestones (such as the filing of regulatory applications for marketing approval or marketing approval), and commercialization milestones (such as first commercial sale in a particular market and product sales in excess of a pre-specified threshold).
Collaboration and license agreement revenues by collaborator were as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Takeda
 
$
28,760

 
$
8,745

 
229
 %
 
$
72,139

 
$
22,317

 
223
 %
AbbVie
 
600

 
4,700

 
(87
)%
 
925

 
12,700

 
(93
)%
Genentech
 
6,670

 
583

 
1,044
 %
 
6,873

 
1,299

 
429
 %
Genmab
 

 
7,000

 
(100
)%
 

 
7,000

 
(100
)%
GSK
 

 
6,000

 
(100
)%
 

 
6,000

 
(100
)%
Other
 
100

 
151

 
(34
)%
 
771

 
7,422

 
(90
)%
Total collaboration and license agreement revenues
 
$
36,130

 
$
27,179

 
33
 %
 
$
80,708

 
$
56,738

 
42
 %
Collaboration revenues from Takeda fluctuate based on changes in the recognized portion of reimbursement funding under the ADCETRIS collaboration, which are impacted by the activities each party is performing under the collaboration agreement at a given time. For example, when Takeda’s level of spending on clinical collaboration activities increases above our own, our earned portion of reimbursement funding generally decreases. Additionally, we receive reimbursement for the cost of drug product supplied to Takeda for its use, the timing of which fluctuates based on Takeda’s product supply needs. Collaboration revenues from Takeda can also fluctuate based on the achievement of milestones by Takeda. The increase in collaboration revenues from Takeda for the three months ended June 30, 2019 compared to the comparable period in 2018 was driven by substantially all of a $7.5 million regulatory milestone achieved in the second quarter 2019, as well as reimbursement for drug product supplied. The increase in collaboration revenues from Takeda for the six months ended June 30, 2019 reflected substantially all of two regulatory milestones achieved totaling $37.5 million, which were related to additional approvals of

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ADCETRIS in frontline Hodgkin lymphoma. As of June 30, 2019, $16.9 million of deferred revenue was related to our collaboration with Takeda, which we will recognize as the remaining performance obligations are satisfied through November 2019.
Collaboration revenues from AbbVie decreased for the three and six months ended June 30, 2019 from the comparable periods in 2018 due to the recognition of development milestones from our ADC collaboration in 2018.
Collaboration revenues from Genentech increased for the three and six months ended June 30, 2019 from the comparable periods in 2018 due to the recognition of a development milestone in the second quarter of 2019.
Collaboration revenues from Genmab decreased for the three and six months ended June 30, 2019 from the comparable periods in 2018 due to the recognition of a development milestone from our ADC collaboration in 2018.
Collaboration revenues from GSK decreased for the three and six months ended June 30, 2019 from the comparable periods in 2018 due to the recognition of a development milestone from our ADC collaboration in 2018.
Other collaboration revenues during the three months ended June 30, 2019 were consistent with the comparable period in 2018. Other collaboration revenues decreased for the six months ended June 30, 2019 from the comparable period in 2018, primarily due to clinical manufacturing services performed for BMS during the three months ended March 31, 2018, under a transitional services agreement related to our acquisition of a manufacturing facility. These activities concluded as of March 31, 2018.
Our collaboration and license agreement revenues are impacted by the term and duration of those agreements and by progress-dependent milestones, annual maintenance fees, and reimbursement of materials and support services. Collaboration and license agreement revenues may vary substantially from year to year and quarter to quarter depending on the progress made by our collaborators with their product candidates, the level of support we provide to our collaborators, specifically to Takeda under our ADCETRIS collaboration, the timing of milestones achieved and our ability to enter into potential additional collaboration and license agreements. We expect our collaboration and license agreement revenues in 2019 to be higher than 2018, driven by the timing of milestones.
Collaboration agreements
Takeda
Our ADCETRIS collaboration with Takeda provides for the global co-development of ADCETRIS and the commercialization of ADCETRIS by Takeda in its territory. We received an upfront payment and have received and are entitled to receive progress- and sales-dependent milestone payments based on Takeda’s achievement of significant events under the collaboration, in addition to tiered royalties with percentages ranging from the mid-teens to the mid-twenties based on net sales of ADCETRIS within Takeda’s licensed territories. Additionally, we and Takeda equally co-fund the cost of selected development activities conducted under the collaboration. We recognize as collaboration revenue the upfront payment, progress-dependent development and regulatory milestone payments, and net development cost reimbursement payments from Takeda over the ten-year development period of the collaboration, which ends in November 2019. When the performance of development activities under the collaboration results in us making a reimbursement payment to Takeda, the effect is to reduce the amount of collaboration revenue that we record. We also receive reimbursement for the cost of drug product supplied to Takeda for its use and, in some cases, pay Takeda for drug product they supply to us. The earned portion of net collaboration payments is reflected in collaboration and license agreement revenues.
As of June 30, 2019, total future potential milestone payments to us under the ADCETRIS collaboration could total $117.0 million. Of that amount, up to $7.0 million relates to the achievement of development milestones, up to $70.0 million relates to the achievement of regulatory milestones and up to $40.0 million relates to the achievement of commercial milestones. As of June 30, 2019, $117.5 million in milestones had been achieved as a result of regulatory and commercial progress by Takeda.
Astellas
We have a collaboration agreement with Agensys, Inc., which subsequently became an affiliate of Astellas, to jointly research, develop and commercialize ADCs for the treatment of several types of cancer. The collaboration encompasses combinations of our ADC technology with fully-human antibodies developed by Astellas to proprietary cancer targets. Under this collaboration, we and Astellas are co-funding all development costs for enfortumab vedotin. Costs associated with co-development activities are included in research and development expense.

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In 2018, we and Astellas entered into a joint commercialization agreement to govern the global commercialization of enfortumab vedotin, if approved for commercial sale:
In the U.S., we and Astellas will jointly promote enfortumab vedotin. We will record sales of enfortumab vedotin in the U.S. and be responsible for all U.S. distribution activities. The companies will share the costs associated with commercializing enfortumab vedotin in the U.S. and will share equally in any profits realized in the U.S.
Outside the U.S., we have commercialization rights in all countries in North and South America, and Astellas has commercialization rights in rest of the world, including Europe, Asia, Australia and Africa. The agreement is intended to provide that we and Astellas will effectively share equally in costs incurred and any profits realized in all of these markets. Cost and profit sharing in Canada, the United Kingdom, Germany, France, Spain and Italy will be based on product sales and costs of commercialization. In the remaining markets, the commercializing party will bear costs and will pay the other party a royalty rate applied to net sales of the product based on a rate intended to approximate an equal profit share for both parties.
Either party may terminate the collaboration agreement if the other party becomes insolvent or the other party materially breaches the agreement and such breach remains uncured. Subject to certain restrictions, either party may terminate the collaboration agreement for any reason upon prior written notice to the other party. The collaboration agreement can also be terminated by mutual written consent of the parties. If neither party exercises its option to terminate the collaboration agreement, then the agreement will automatically terminate on the later of the expiration of all payment obligations pursuant to the collaboration agreement, or the day upon which we and Astellas cease to develop and commercialize products under the agreement. However, the collaboration agreement may not be terminated with respect to enfortumab vedotin for so long as the joint commercialization agreement continues to survive.
Either party may terminate the joint commercialization agreement if the other party becomes insolvent. The joint commercialization agreement expires on a country-by-country basis upon complete cessation of the commercialization, launch and selling of enfortumab vedotin in that country.
Either party may also opt out of co-development and profit-sharing under the collaboration agreement in return for receiving milestones and royalties from the continuing party. In addition, either party may opt out of co-development and profit-sharing for enfortumab vedotin on a country-by-country basis, in return for receiving royalties pursuant to the collaboration agreement from the continuing party with respect to that country.
Genmab
We have an agreement with Genmab to develop and commercialize ADCs for the treatment of several types of cancer, under which we previously exercised a co-development option for tisotumab vedotin. We and Genmab will share all future costs and profits for development and commercialization of tisotumab vedotin on an equal basis. Costs associated with co-development activities are included in research and development expense. We will be responsible for tisotumab vedotin commercialization activities in the U.S., Canada, and Mexico, while Genmab will be responsible for commercialization activities in all other territories.
Unum
We have an agreement with Unum to develop and commercialize novel ACTR therapies for cancer. We and Unum are developing two ACTR product candidates that combine Unum’s ACTR technology with our antibodies. Unum is conducting preclinical research and clinical development activities through phase 1 clinical trials, and we are providing funding for these activities. The agreement calls for us to work together to co-develop and jointly fund programs after phase 1 clinical trials unless either company opts out. Costs associated with co-development activities are included in research and development expense.
We and Unum would co-commercialize any successfully developed product candidates and share any profits equally on any co-developed programs in the U.S. We retain exclusive commercial rights outside of the U.S., paying Unum a royalty that is a high single digit to mid-teens percentage of ex-U.S. sales. The potential future licensing and progress-dependent milestone payments to Unum under the collaboration may total up to $400.0 million between the two ACTR programs, payment of which is triggered by the achievement of development, regulatory and commercial milestones.
ADC Collaboration Agreements
We have other active collaborations with a number of companies to allow them to use our proprietary ADC technology. Under these ADC collaborations, which we have entered into in the ordinary course of business, we typically receive or are entitled to receive upfront cash payments, progress- and sales-dependent milestones and royalties on net sales of products incorporating our ADC technology, as well as annual maintenance fees and support fees for research and development services and materials provided under the agreements. These amounts are recognized as revenue over the performance obligation period or, if there is no performance obligation, upon transfer of control of the goods or services to the customer. Our ADC

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collaborators are solely responsible for research, product development, manufacturing and commercialization of any product candidates under these collaborations, which includes achievement of the potential milestones.
As of June 30, 2019, our ADC collaborations had generated approximately $425 million, primarily in the form of upfront and milestone payments. Remaining milestone payments to us under our current ADC collaborations could total approximately $2.2 billion if all potential product candidates achieved all of their milestone events. Of this amount, approximately $0.3 billion relates to the achievement of development milestones, approximately $0.9 billion relates to the achievement of regulatory milestones and approximately $1.0 billion relates to the achievement of commercial milestones. Since we do not control the research, development or commercialization of any of the products that would generate these milestones, we are not able to reasonably estimate when, if at all, any potential future milestone payments or royalties may be payable by our collaborators. Successfully developing a product candidate, obtaining regulatory approval and ultimately commercializing it is a significantly lengthy and highly uncertain process which entails a significant risk of failure. In addition, business combinations, changes in a collaborator’s business strategy and financial difficulties or other factors could result and have resulted in a collaborator abandoning or delaying development of its product candidates. As such, the potential future milestone payments associated with our ADC collaboration agreements involve a substantial degree of risk and may never be received. Accordingly, we do not expect, and investors should not assume, that we will receive all of the potential milestone payments described above, and it is possible that we may never receive any additional significant milestone payments under these agreements in the future.
Royalty revenues and cost of royalty revenues
Royalty revenues primarily reflect royalties earned under the ADCETRIS collaboration with Takeda. These royalties include commercial sales-based milestones and sales royalties. Sales royalties are based on a percentage of Takeda’s net sales of ADCETRIS, with rates that range from the mid-teens to the mid-twenties based on sales volume. Takeda bears third-party royalty costs owed on its sales of ADCETRIS. This amount is included in royalty revenues. Cost of royalty revenues reflects amounts owed to our third-party licensors related to Takeda's sales of ADCETRIS.
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Royalty revenues
 
$
23,337

 
$
20,551

 
14
 %
 
$
38,957

 
$
36,225

 
8
 %
Cost of royalty revenues
 
$
2,288

 
$
6,148

 
(63
)%
 
$
4,677

 
$
11,525

 
(59
)%
Royalty revenues increased for the three and six months ended June 30, 2019 from the comparable periods in 2018. Takeda net sales of ADCETRIS in its territories increased during the 2019 periods. Royalty revenue for the comparable periods in 2018 included additional royalty revenue attributable to Takeda's portion of certain third-party royalty obligations which expired during 2018. We expect that royalty revenues will increase in 2019 as compared to 2018, primarily due to anticipated increases in sales volume by Takeda.
Cost of royalty revenues fluctuates based on the amount of net sales of ADCETRIS by Takeda in its territories. Cost of royalty revenues decreased for the three and six months ended June 30, 2019 from the comparable periods in 2018 due to lower amounts owed to certain third-party licensors.
Cost of sales
ADCETRIS cost of sales includes manufacturing costs of product sold, third-party royalty costs, amortization of technology license costs, and distribution and other costs.
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Cost of sales
 
$
8,609

 
$
13,157

 
(35
)%
 
$
16,520

 
$
23,515

 
(30
)%
Cost of sales decreased for the three and six months ended June 30, 2019 from the comparable periods in 2018 primarily due to a reduction in amounts owed to certain third-party licensors, offset in part by increased ADCETRIS sales volumes. We expect cost of sales to decrease in 2019 as compared to 2018, primarily due to a reduction in royalties owed under technology license agreements.

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Research and development
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2019