Coherus BioSciences Inc

Comparison of Three and Six Months Ended June 30, 2024 and 2023

Revenue

The increase in net revenue for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was primarily due to an increase in UDENYCA net revenue of $19.2 million due to additional presentations launched and overall higher demand, partially offset by a decline in UDENYCA’s average net selling price per unit. Additionally, our launches of YUSIMRY in July 2023 and LOQTORZI in December 2023 each contributed $3.8 million of net revenue during the three months ended June 30, 2024, and the sale ofrights to commercialize toripalimab within Canada on June 27, 2024 contributed $6.3 million. These positive factors were partially offset by no longer receiving product revenue for CIMERLI after the CIMERLI Sale, which contributed $26.7 million of net revenue in the second quarter of 2023.

The increase in net revenue for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily driven by an increase in UDENYCA net revenue of $35.7 million due to additional presentations and overall higher demand, partially offset by a decline in UDENYCA’s average net selling price per unit. Additionally, our launches of YUSIMRY in July 2023 and LOQTORZI in December 2023 contributed $7.7 million and $5.8 million of net revenue during the six months ended June 30, 2024, respectively, and the sale ofrights to commercialize toripalimab within Canada on June 27, 2024 contributed $6.3 million. These positive factors were partially offset by no longer receiving product revenue for CIMERLI after the CIMERLI Sale, which contributed $4.8 million of additional net revenue in the first half of 2023. Our net revenue and market penetration may continue to be adversely impacted by pricing trends and competitive dynamics in the overall pegfilgrastim market.

We expect our net revenue in 2024 to be higher than in 2023 driven by growth in UDENYCA and LOQTORZI sales, partially offset by the divestiture of CIMERLI which occurred on March 1, 2024 and YUSIMRY which occurred on June 26, 2024.

Cost of Goods Sold

The increase in cost of goods sold for the three months ended June 30, 2024 compared to the same period in the prior year was primarily due to a $7.4 million increase in product costs driven primarily by increased volume and the launch of new products and $4.5 million in connection with a CMO contract change. These increases were partially offset by a $9.7 million reduction in royalty costs, primarily from no CIMERLI sales in the second quarter of 2024.

The increase in cost of goods sold for the six months ended June 30, 2024 compared to the same period in the prior year was primarily due to a $20.8 million increase in product costs driven primarily by increased volume and the launch of new products and $4.5 million in connection with a CMO contract change. These increases were partially offset by the sale of certain UDENYCA units having no carrying value following our third quarter of 2022 write-down and a total original cost of $2.6 million, as well as $3.0 million in contract modification fees in the first quarter of 2023 with one of our manufacturers for reducing the number of UDENYCA batches to be produced.

We expect our gross margin in 2024 to be greater than 2023, primarily because the 2023 results included a $47.0 million charge for the write-down of slow moving YUSIMRY inventory, and cost of goods sold ceased being incurred for profit share expenditures following the CIMERLI Sale, royalties following the YUSIMRY Sale and the mid-single digit royalty on UDENYCA net product revenue due to Amgen, which expired on July 1, 2024.

Research and Development Expense

The decrease in research and development expense in the three months ended June 30, 2024 compared to the prior period was primarily due to the following:

The decrease was partially offset by the following:

The decrease in research and development expense in the six months ended June 30, 2024 compared to the prior period was primarily due to the following:

The decrease was partially offset by the following:

We expect our research and development expense in 2024 to be lower than 2023 due to the estimated impacts of our cost containment initiatives and the termination of the TIGIT Program in January 2024. We expect these decreases to be partially offset by expenditures on our pipeline.

Selling, General and Administrative Expense

The decrease in selling, general and administrative expense in the three months ended June 30, 2024 was primarily due to a lower average headcount, including reductions of $5.2 million in employee and consultant costs and $1.8 million in stock-based compensation, and a reduction of $1.9 million related to the non-recurring acquisition costs incurred in the second quarter of 2023.

The decrease in selling, general and administrative expense in the six months ended June 30, 2024 was primarily driven by an $8.2 million decrease in employee and consultant costs and $3.6 million decrease in stock-based compensation due to a lower average headcount. These increases were partially offset by the $6.8 million net impairment charge relating to the write-off of the net carrying value of the intangible asset of $10.6 million and the final remeasurement of the CVR liability of $3.8 million related to NZV930 to its fair value of zero and an increase of $3.8 million in professional service fees.

Excluding the potential impact of any acquisitions or business development transactions that have not been consummated, we expect our selling, general and administrative expense for 2024 to be lower than 2023 primarily as a result of the Sale Transactions, reduced headcount and decreased commercial costs.

Interest Expense

The decrease in interest expense in the three and six months ended June 30, 2024 was primarily due to prepaying $175.0 million of the principal amount due under the 2027 Term Loans on April 1, 2024 and prepaying the remaining $75.0 million principal amount on May 8, 2024, partially offset by interest on the $38.7 million 2029 Term Loan and the Revenue Purchase and Sale Agreement, both commencing May 8, 2024, as well as an average higher variable rate in the first half of 2024 than first half of 2023.

Primarily, as a result of decreasing our total indebtedness by fully repaying the $250.0 million principal amount due under the 2027 Term Loans during the second quarter of 2024, we expect interest expense to be lower in 2024 compared to 2023.

Gain on Sale Transactions, net

The Gain on Sale Transactions, net for the three months ended June 30, 2024 primarily relates to the YUSIMRY Sale to HKF on June 26, 2024, which includes cash receipts of $40.0 million less assets transferred to HKF, assets and liabilities derecognized, and transaction costs of $0.9 million. The Gain on Sale Transactions, net for the six months ended June 30, 2024 includes the second quarter gain of $22.9 million related to the YUSIMRY Sale and first quarter CIMERLI Sale, which includes the cash receipts of $187.8 million less assets transferred to Sandoz, assets derecognized, transaction costs of $7.2 million, and other related employee transition expenses.

Loss on Debt Extinguishment

The$12.6 million loss on debt extinguishment in the three and six months ended June 30, 2024 resulted from the payoff of the 2027 Term Loans in May 2024, and the charge includedthe write-off of theremaining debt discount and debt issuance costs, theprepayment premium fee, themake-whole interest payment, and lender fees.

Other Income (Expense), Net

Other income (expense), net in the three months ended June 30, 2024 was comparable to the three months ended June 30, 2023. Other income (expense), net in the six months ended June 30, 2024 changed favorably compared to the same period in the prior year primarily due to foreign exchange gains and TSA income.

Liquidity and Capital Resources

Certain relevant measures of our liquidity and capital resources are summarized as follows:

On June 27, 2024, we entered into the Canada License Agreement pursuant to which, we granted to Apotex an exclusive license under our rights to toripalimab to commercialize toripalimab within Canada. Pursuant to the Canada License Agreement, Apotex paid us $6.3 million USD. In addition, Apotex agreed to pay us the USD equivalent of up to

an aggregate of $51.5 million CAD in milestone payments in connection with the achievement of certain regulatory and sales milestones with respect to toripalimab in Canada. Finally, Apotex agreed to pay us a low double-digit percentage of any future net sales of toripalimab in Canada that we will subsequently pay to Junshi Biosciences pursuant to the Collaboration Agreement.

On June 26, 2024, we entered into the YUSIMRY Purchase Agreement by and between us and HKF. Pursuant to the terms and subject to the conditions set forth in the YUSIMRY Purchase Agreement, we sold our YUSIMRY immunology franchise through the sale of certain assets, including YUSIMRY, intellectual property exclusively related to YUSIMRY, certain contracts related to YUSIMRY, YUSIMRY inventory, and all activities related to research and development of YUSIMRY to HKF for upfront, cash consideration of $40.0 million and the assumption of $17.0 million of inventory purchase commitments by HKF. We retained the rights to certain patents that were licensed to Pfizer under the Pfizer License Agreement.

On May 8, 2024, we entered into the 2029 Term Loan providing for a secured loan facility in the principal amount of $38.7 million, with proceeds of $37.5 million after the original issue discount which were used as part of the full repayment of all outstanding indebtedness and terminated all commitments under the 2027 Term Loans.

On May 8, 2024, we entered into the Revenue Purchase and Sale Agreement. We received proceeds of $37.5 million by selling to the Purchaser Group a right to receive payment in full of a mid-single digit percentage of U.S. net sales of UDENYCA and LOQTORZI commencing May 8, 2024. The proceeds were used by us as part of the full repayment of all outstanding indebtedness and terminated all commitments under the 2027 Term Loans.

On April 1, 2024, $175.0 million of the cash and cash equivalents was used to repay $175.0 million of the total principal balance of $250.0 million of the 2027 Term Loans, as further described below.

In the six months ended June 30, 2024, we generated net income primarily due to the Sale Transactions and we were profitable in 2020 and 2019. Otherwise, we have generated significant operating losses in all other years since our inception, including in 2021 through 2023, primarily due to our research and development expenditures and a shortfall in revenue beginning in 2021. We have funded our operations primarily through sales of our common stock, issuance and incurrence of convertible and term debt, and sales of our products.

On January 19, 2024, we entered into the CIMERLI Purchase Agreement by and between us and Sandoz. Pursuant to the terms and subject to the conditions set forth in the CIMERLI Purchase Agreement, on March 1, 2024, we completed the CIMERLI Sale for our CIMERLI ophthalmology franchise through the sale of our subsidiary, Coherus Ophthalmology, to Sandoz for upfront, all-cash consideration of $170.0 million plus an additional $17.8 million for CIMERLI product inventory and prepaid manufacturing assets.

On February 5, 2024, we entered into the Consent and Amendment, that among other things: (1) provided consent to consummation of the transactions contemplated by the CIMERLI Purchase Agreement, and released certain of our subsidiary from our obligation and certain assets subject to the transactions contemplated thereby, (2) required us to make a partial prepayment of $175.0 million of the principal of the 2027 Term Loans outstanding upon consummation of the transactions contemplated by the CIMERLI Purchase Agreement, subject to certain conditions and (3) adjusted the minimum net sales covenant level under the 2027 Term Loans. Upon the closing of the CIMERLI Sale, we became obligated to repay $175.0 million of the total principal balance of $250.0 million of the loans outstanding as well as $6.8 million in prepayment premium and make-whole payments under the 2027 Term Loans, of which we paid on April 1, 2024.

On September 8, 2023, we obtained $28.8 million of cash, cash equivalents and marketable securities as part of the Surface Acquisition.

On May 16, 2023, we entered into the Underwriting Agreement with the Underwriters, pursuant to which we sold an aggregate of 11,764,706 Firm Shares to the Underwriters. Additionally, under the terms of the Underwriting Agreement, we granted the Underwriters an option, for 30 days from the date of the Underwriting Agreement, to purchase up to an additional 1,764,705 Option Shares, which the Underwriters elected to exercise in full. The price to the public in the Public Offering was $4.25 per share. The Underwriters agreed to purchase the shares from us pursuant to the Underwriting Agreement at a price of $3.995 per share.

On May 18, 2023, we completed the sale and issuance of an aggregate of 13,529,411 Shares in the Public Offering, including the exercise in full of the Underwriters’ option to purchase the Option Shares. We received net proceeds of approximately $53.6 million, after deducting the Underwriters’ discounts and commissions and offering expenses payable by us.

On November 8, 2022, we entered into the Sales Agreement related to the ATM Offering pursuant to which we may issue and sell from time to time up to $150.0 million of our common stock. On May 15, 2023, pursuant to an Amendment No. 1 to Sales Agreement and in connection with the Public Offering, we reduced the amount of shares that could be issued and sold pursuant to its ATM Offering with TD Cowen by $86.2 million, lowering the aggregate offering price under the Agreement from $150.0 million to $63.8 million. On September 11, 2023, pursuant to an Amendment No. 2 to Sales Agreement, we increased the amount of shares that could be issued and sold pursuant to its ATM Offering with TD Cowen by $28.7 million, increasing the aggregate offering price under the Sales Agreement from $63.8 million to $92.5 million. No shares were sold during the three months ended June 30, 2024. During the six months ended June 30, 2024, we sold 650,005 shares of common stock pursuant to the ATM Offering, at a weighted-average price per share of $2.44 for gross proceeds of $1.6 million and received net proceeds of $1.5 million, net of $0.1 million of commissions and fees. For the ATM Offering program to date as of June 30, 2024, we sold 5,126,650 shares of common stock at a weighted-average price per share of $5.39 for gross proceeds of $27.6 million and received net proceeds of $26.9 million, net of $0.7 million of commissions and fees. As of June 30, 2024, we had approximately $64.9 million of our common stock remaining available for sales under the ATM Offering. The ability to elect to sell shares of our common stock in the ATM Offering from time to time adds to our financial flexibility.

As of June 30, 2024, we had an accumulated deficit of $1.5 billion and cash and cash equivalents of $159.2 million. We believe that our available cash and cash equivalents, cash collected from product sales, divestitures, ATM Offering and Public Offering proceeds received to date will be sufficient to fund our planned expenditures and meet our obligations for at least the twelve months following our financial statement issuance date.

We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional agreements with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated research and development activities, and on-going and future licensing and collaboration obligations. We may need to raise additional funds in the future; however, there can be no assurance that such efforts will be successful or that, if they are successful, the terms and conditions of such financing will be favorable. Our future funding requirements will depend on many factors, including the following:

For further discussion of risks related to our financial condition and capital requirements, please see “Risk Factors— Risks Related to Our Financial Condition and Capital Requirements.”

Financing arrangements

2027 Term Loans

During the second quarter of 2024, we fully repaid and terminated all commitments under the 2027 Term Loans. Proceeds from the divestiture of our CIMERLI ophthalmology franchise received in March 2024 were used to pay down $175.0 million of outstanding principal, and a prepayment premium and make-whole amount totaling $6.8 million on April 1, 2024. On May 8, 2024, we used the proceeds from the 2029 Term Loan and Revenue Purchase and Sale Agreement to repay the remaining $75.0 million principal balance outstanding on the 2027 Term Loans and a prepayment premium and make-whole amount totaling $3.5 million.

2029 Term Loan

Concurrent with the payoff of the 2027 Term Loans, on May 8, 2024, we entered into the 2029 Term Loan providing for a secured loan facility in the principal amount of $38.7 million, with proceeds of $37.5 million after the original issue discount. The 2029 Term Loan will mature on May 8, 2029, accrues interest equal to 8.0% per annum, plus a three-month SOFR rate and provides for interest-only payments on a quarterly basis until maturity.

The 2029 Term Loan is secured by a lien on substantially all of our assets, including intellectual property, subject to customary exclusions and exceptions. The 2029 Loan Agreement contains customary representations and warranties, covenants and events of default, including a financial covenant commencing on the 2029 Term Loan Effective Date, which requires us to maintain certain levels of cash and cash equivalents. The 2029 Loan Agreement also contains other customary provisions, such as expense reimbursement, as well as indemnification rights for the benefit of the Agent and the 2029 Lenders. For further details, see Note 8. Financial Liabilities in the Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Revenue Purchase and Sale Agreement

On May 8, 2024, we entered into the Revenue Purchase and Sale Agreement. Under the terms of the Revenue Purchase and Sale Agreement, in exchange for the Purchaser Group’s payment to us of $37.5 million, we sold to the Purchaser Group a right to receive payment in full of a mid-single digit percentage of U.S. net sales of UDENYCA and LOQTORZI for each calendar quarter commencing on May 8, 2024. The Purchaser Group’s right to receive the Revenue Payment terminates and we no longer have the obligation to pay the Purchaser Group Revenue Payments once the Purchaser Group receives the amount equal to 2.25 times the Purchase Price. We may also buy-out the Purchaser Group’s rights to receive the Revenue Payments by triggering certain conditions and paying the Purchaser Group the unpaid portion of the 2.25 multiple on the Purchase Price. The proceeds from the Purchase Price were used by us as part of the full repayment of the 2027 Term Loans.

The Revenue Purchase and Sale Agreement contains various representations and warranties, including with respect to organization, authorization, and certain other matters, certain covenants with respect to payment, reporting, intellectual property, in-licenses, out-licenses, and certain other actions, indemnification obligations and other provisions customary for transactions of this nature.

2026 Convertible Notes

As of June 30, 2024, the carrying amount of our $230.0 million aggregate principal amount convertible senior subordinated notes due 2026 was $227.6 million. The 2026 Convertible Notes accrue interest at a rate of 1.5% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, and will mature on April 15, 2026, unless earlier repurchased or converted at the option of holders. Since inception, the conversion price has been 51.9224 shares of common stock per $1,000 principal amount of the 2026 Convertible Notes, which represents a conversion price of approximately $19.26 per share of common stock. The initial conversion price represents a premium of approximately 30.0% over the last reported sale of $14.82 per share of our common stock on the Nasdaq Global Market on April 14, 2020, the date the 2026 Convertible Notes were issued. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. The 2026 Convertible Notes are not redeemable at our election before maturity. If the 2026 Convertible Notes were converted on June 30, 2024, the holders of the 2026 Convertible Notes would have received common shares with an aggregate value of $20.7 million based on our closing stock price of $1.73 as of June 28, 2024.

In connection with the pricing of the 2026 Convertible Notes, we entered into privately negotiated capped call transactions with certain of the initial purchasers of the 2026 Convertible Notes and other financial institutions. Since inception, the cap price has been $25.93 per share, which represents a premium of approximately 75.0% over the last reported sale price of our common stock of $14.82 per share on April 14, 2020, and is subject to certain adjustments under the terms of the capped call transactions.

Contingent Milestones

We have obligations to make future payments to third parties that become due and payable upon the achievement of certain development, regulatory and commercial milestones (such as clinical trial achievements, the filing of a BLA, approval by the FDA or product launch). These milestone payments and other similar fees are contingent upon future events and therefore are only recorded when it becomes probable that a milestone will be achieved or other applicable criteria will be met. Because the achievement of these milestones had not reached the threshold for recognition as of June 30, 2024, such contingencies were not recorded in our financial statements.

The following presents a summary of our active partnerships and collaborations that have contingent regulatory and sales milestones as of June 30, 2024:

Contingent Value Rights

We have recorded a contingent consideration liability for the fair value of the potential payments under the CVR Agreement in connection with the Surface Acquisition. These potential payments during the 10-year period following September 8, 2023 are only due if wefirst receive milestone- or royalty-based payments under certain license agreements or upfront payments pursuant to ex-U.S. licensing agreements. Payments can be in the form of cash, stock or a combination of cash and stock. The exclusive license of NZV930 to Novartis Institutes was terminated by Novartis Institutes with an effective date of October 2, 2024. As a result, we recognized a net impairment charge of $6.8 million in selling, general and administrative expenses in the condensed consolidated statements of operations relating to the write-off of the net carrying value of the Novartis Institutes out-license intangible asset of $10.6 million and the final remeasurement of the CVR liability related to NZV930 of $3.8 million to its fair value of zero. The remaining CVR liability associated with GSK and contingent consideration are recorded in other liabilities, non-current on the condensed consolidated balance sheets at June 30, 2024. For further details, see Note 6. Acquisition and Dispositions in the Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Other Commitments

We enter into contracts in the normal course of business with CROs for preclinical research studies and clinical trials, research supplies and other services and products for operating purposes. We have also entered into agreements with several CMOs for the manufacture and clinical drug supply of our commercial and product candidates. Our non-cancelable purchase commitments as of June 30, 2024 were $53.6 million, as outlined in Note 9. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. In connection with the YUSIMRY Sale, HKF assumed $17.0 million in YUSIMRY inventory purchase commitments. If HKF were to default on its obligations under the YUSIMRY Purchase Agreement, we could become liable to pay any unpaid portion of these purchase commitments.

There have been no significant changes to our leases during the six months ended June 30, 2024, as compared to the discussion in the 2023 Form 10-K.

Summary Statement of Cash Flows

The following table summarizes our cash flows for the periods presented**:**

Net cash provided by (used in) operating activities

Cash provided by operating activities of $13.0 million for the six months ended June 30, 2024 was primarily due to net income of $90.0 million adjusted for changes in our operating assets and liabilities of $62.9 million, non-cash items including stock-based compensation expense of $14.6 million, loss on debt extinguishment of $12.6 million, impairment of out-license asset net of CVR liability remeasurement of $6.8 million, and other non-cash adjustments of $3.9 million, partially offset by the net gain on Sale Transactions of $177.7 million.

Cash used in operating activities of $107.6 million for the six months ended June 30, 2023 was primarily due to the net loss of $118.6 million adjusted for non-cash items including stock-based compensation expense of $22.4 million and other non-cash adjustments of $4.2 million, partially offset by the changes in our operating assets and liabilities of $15.6 million. Accounts receivable, net as of June 30, 2023 included invoices totaling $20.1 million with due dates falling after the second quarter of 2023 due to extended payment terms offered to certain customers with the majority related to the launch of CIMERLI.

Net cash provided by investing activities

Cash provided by investing activities of $230.4 million for the six months ended June 30, 2024 was primarily due to cash proceeds of $187.8 million from the CIMERLI Sale, cash proceeds of $40.0 million from the YUSIMRY Sale, proceeds from sale of investments in marketable securities of $8.7 million, and proceeds from maturities of investments in marketable securities of $6.2 million, partially offset by a $12.5 million milestone payment in connection with the 2 nd Amendment with Junshi Biosciences.

Cash provided by investing activities of $58.9 million for the six months ended June 30, 2023 was primarily due to proceeds from maturities of investments in marketable securities of $64.8 million and proceeds from sale of investments in marketable securities of $13.3 million, partially offset by purchases of investments in marketable securities of $19.5 million.

Net cash provided by (used in) financing activities

Cash used in financing activities of $187.0 million for the six months ended June 30, 2024 was primarily due to $260.4 million in payments to fully repay the 2027 Term Loans (excluding interest which is presented as an operating activity) and $2.5 million in tax payments related to net share settlement of RSUs. These payments were partially offset by $37.1 million of proceeds on the 2029 Term Loan, net of debt discount and issuance costs, $36.5 million of proceeds from the Revenue Purchase and Sale Agreement, net of issuance costs, and $1.5 million in proceeds from the ATM Offering, net of issuance costs.

Cash provided by financing activities of $58.1 million for the six months ended June 30, 2023 was primarily due to proceeds of $53.6 million from the Public Offering, net of issuance costs, $6.8 million proceeds from the ATM Offering, net of issuance costs, and $1.3 million proceeds from purchase under the ESPP. These proceeds were partially offset by $3.1 million in tax payments related to net share settlement of RSUs.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenue generated and expense incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

There have been no significant changes to our critical accounting estimates during the six months ended June 30, 2024, as compared to the critical accounting estimates described in our 2023 Form 10-K, except for the Revenue Purchase and Sale Agreement described below. We believe that the critical accounting estimates discussed in the 2023 Form 10-K are meaningful to understanding our historical and future performance, as these estimates relate to the more significant areas involving management’s judgments and assumptions.

Revenue Purchase and Sale Agreement

The Revenue Purchase and Sale Agreement contains an embedded derivative that meets the criteria to be bifurcated and accounted for separately from the Revenue Purchase and Sale Agreement. The Royalty Fee Derivative Liability was recorded at fair value upon entering into the Revenue Purchase and Sale Agreement and is subsequently remeasured to fair value at each reporting period with the corresponding change in fair value recognized in other income (expense), net in the condensed consolidated statements of operations. The Revenue Purchase and Sale Agreement was initially valued and is remeasured using a “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument on an as-is basis with the embedded derivative and then valuing the Revenue Purchase and Sale Agreement without the embedded derivative. The difference between the entire instrument with the embedded derivative compared to the instrument without the embedded derivative is the fair value of the Royalty Fee Derivative. We use Monte Carlo simulation models that require the use of Level 3 unobservable inputs, primarily the amount and timing of our expected future revenue, the estimated volatility of these revenues, the discount rate corresponding to the risk of revenue, and the probability of certain events.

Recent Accounting Pronouncements

For a description of the impact of recent accounting pronouncements, see Note 1. Organization and Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.