Total income (loss) before income taxes summarized by region were as follows (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
United States | | $ | 160,938 |
| | $ | 6,384 |
| | $ | 11,724 |
|
Foreign | | (99,328 | ) | | (108,245 | ) | | (43,955 | ) |
Net income (loss) before income taxes | | $ | 61,610 |
| | $ | (101,861 | ) | | $ | (32,231 | ) |
Significant components of our net deferred tax assets/(liabilities) were as follows (in thousands).
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Net operating loss carryforwards | | $ | 32,630 |
| | $ | 103,296 |
|
Deferred revenue | | 8,815 |
| | 15,354 |
|
Research and development and orphan drug credits | | 75,224 |
| | 73,701 |
|
Share-based compensation | | 7,423 |
| | 8,844 |
|
Alternative minimum tax credit | | 5,532 |
| | 1,494 |
|
Other, net | | 2,270 |
| | 1,021 |
|
| | 131,894 |
| | 203,710 |
|
Valuation allowance for deferred tax assets | | (126,189 | ) | | (203,370 | ) |
Deferred tax assets, net of valuation | | 5,705 |
| | 340 |
|
Deferred tax liabilities: | | | | |
Depreciation | | (173 | ) | | (340 | ) |
Total deferred tax liabilities | | (173 | ) | | (340 | ) |
Net deferred tax asset (liability) | | $ | 5,532 |
| | $ | — |
|
A valuation allowance of $126.2 million and $203.4 million has been established to offset the net deferred tax assets as of December 31, 2017 and 2016, respectively, as realization of such assets is uncertain. Under the Act, the AMT credit carryovers can be used to offset regular tax liability for taxable years beginning after 2017. If not utilized before 2022, any remaining AMT credit carryover will be fully refundable. Accordingly, the recognized deferred tax asset, on a provisional basis, as of December 31, 2017 is the AMT credit carryover that will either be utilized or refunded.
Income tax expense was comprised of the following components (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current - federal | | $ | 4,051 |
| | $ | 1,145 |
| | $ | — |
|
Current - state | | 120 |
| | 17 |
| | — |
|
Deferred - federal | | (5,532 | ) | | — |
| | — |
|
Deferred - state | | — |
| | — |
| | — |
|
| | $ | (1,361 | ) | | $ | 1,162 |
| | $ | — |
|
The provision for income taxes on earnings subject to income taxes differs from the statutory federal income tax rate due to the following (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Federal income tax expense (benefit) at 34% | | $ | 20,947 |
| | $ | (34,633 | ) | | $ | (10,959 | ) |
State income tax benefit, net of federal income tax impact | | 930 |
| | (653 | ) | | 5,524 |
|
(Decrease) increase in valuation allowance | | (77,181 | ) | | 11,252 |
| | 4,045 |
|
Enactment of the Tax Cuts and Jobs Act | | 17,132 |
| | — |
| | — |
|
Foreign income subject to tax at other than federal statutory rate | | 33,674 |
| | 36,803 |
| | 14,945 |
|
Shared-based compensation | | 525 |
| | 3,735 |
| | (4,990 | ) |
Non-deductible expenses and other | | 5,779 |
| | 698 |
| | 6,457 |
|
Research and development credits, net | | 4,162 |
| | (1,084 | ) | | (3,861 | ) |
Orphan drug credits, net of federal add back | | (7,329 | ) | | (14,956 | ) | | (11,161 | ) |
| | $ | (1,361 | ) | | $ | 1,162 |
| | $ | — |
|
At December 31, 2017, our unrecognized tax benefit and uncertain tax positions were $14.4 million. None of this amount would affect the effective tax rate and $14.4 million would affect the effective tax rate in the event the valuation allowance was removed. Of the unrecognized tax benefits, we do not expect any significant changes to occur in the next 12 months. Interest and/or penalties related to uncertain income tax positions are recognized by us as a component of income tax expense. For the years ended December 31, 2017, 2016 and 2015, we recognized no interest or penalties.
The following table summarizes the activity related to our unrecognized tax benefits (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Gross unrecognized tax benefits at beginning of period | | $ | 12,799 |
| | $ | 4,898 |
| | $ | — |
|
Increases in tax positions for prior years | | — |
| | 5,615 |
| | — |
|
Decreases in tax positions for prior years | | (2,518 | ) | | (4,898 | ) | | — |
|
Increases in tax positions for current year | | 4,147 |
| | 7,184 |
| | 4,898 |
|
Gross unrecognized tax benefits at end of period | | $ | 14,428 |
| | $ | 12,799 |
| | $ | 4,898 |
|
At December 31, 2017, we had federal, California and other state tax net operating loss carryforwards of approximately $88.5 million, $243.1 million and $13.9 million, respectively.
The following table shows key expiration dates of the federal and California net operating loss carryforwards (in thousands):
|
| | | | | | | | | | | | | | | |
| | | | Expires in: |
| | Net Operating Loss | | 2018 | | 2021 and beyond | | 2028 and beyond |
Federal | | $ | 88,516 |
| | — |
| | $ | 88,516 |
| | — |
|
California | | $ | 243,080 |
| | — |
| | — |
| | $ | 243,080 |
|
At December 31, 2017, we had federal and California research and development tax credit carryforwards of approximately $19.1 million and $11.7 million, respectively. The federal research and development tax credits will begin to expire in 2024 unless previously utilized. The California research and development tax credits will carryforward indefinitely until utilized. Additionally, we had Orphan Drug Credit carryforwards of $57.3 million which will begin to expire in 2035.
Pursuant to Internal Revenue Code Section 382, the annual use of the net operating loss carryforwards and research and development tax credits could be limited by any greater than 50% ownership change during any three year testing period. As a result of any such ownership change, portions of our net operating loss carryforwards and research and development tax credits are subject to annual limitations. A Section 382 analysis regarding the limitation of the net operating losses and research and development credits was completed as of November 1, 2017. Based upon the analysis, we do not believe an ownership change occurred during 2017. Based upon previous analysis it was determined that ownership changes occurred in prior years; however, the annual limitations on net operating loss and research and development tax credit carryforwards will not have a material impact on the future utilization of such carryforwards.
We do not provide for U.S. income taxes on the undistributed earnings of our foreign subsidiaries as it is our intention to utilize those earnings in the foreign operations for an indefinite period of time. At December 31, 2017 and 2016, there were no undistributed earnings in foreign subsidiaries.
We are subject to taxation in the U.S. and in various state and foreign jurisdictions. Our tax years for 1998 and forward are subject to examination by the U.S. and California tax authorities due to the carryforward of unutilized net operating losses and research and development credits.
A new Swiss subsidiary, Halozyme Switzerland GmbH, was formed during the fourth quarter of 2016 and obtained a tax ruling from Canton of Basel Stadt for its operations in Switzerland. The tax ruling is dated December 21, 2016, and will continue for a period of ten years, not to extend beyond December 31, 2026. The combined income tax burden at the federal, cantonal and communal level will not exceed 10% during the period covered by the ruling. As a result of foreign losses and a full valuation allowance, no net tax benefit was derived for the year ended December 31, 2017 as a result of the tax ruling.