Income Taxes
The domestic and foreign components of loss before income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (290,423 | ) | | $ | (179,896 | ) | | $ | (111,057 | ) |
Foreign | (24,247 | ) | | (18,575 | ) | | (6,674 | ) |
Total | $ | (314,670 | ) | | $ | (198,471 | ) | | $ | (117,731 | ) |
We did not have any provision for income taxes for the years ended December 31, 2017, 2016 and 2015.
A reconciliation of the expected income tax benefit (expense) computed using the federal statutory income tax rate to our effective income tax rate is as follows for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income tax benefit computed at federal statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State taxes, net of federal benefit | 4.0 | % | | 2.9 | % | | 4.5 | % |
Change in valuation allowance | (19.4 | )% | | (43.4 | )% | | (44.6 | )% |
General business credits and other credits | 10.4 | % | | 9.5 | % | | 8.4 | % |
Permanent differences and other adjustments | — | % | | (0.3 | )% | | (0.3 | )% |
Incentive stock options | 0.3 | % | | (1.8 | )% | | (1.8 | )% |
Foreign rate differential | (1.6 | )% | | (1.9 | )% | | (1.2 | )% |
Impact of federal rate change | (28.7 | )% | | — | % | | — | % |
Total | — | % | | — | % | | — | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities for the years ended December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 131,165 |
| | $ | 126,077 |
|
Deferred revenue | 41,243 |
| | 8,051 |
|
Tax credit carryforwards | 100,791 |
| | 43,350 |
|
Purchased intangible assets | 3,906 |
| | 4,410 |
|
Stock-based compensation | 20,539 |
| | 22,731 |
|
Deferred rent | 5,042 |
| | 8,516 |
|
Non-deductible accruals and reserves | 3,778 |
| | 3,310 |
|
Total deferred tax assets | 306,464 |
| | 216,445 |
|
Depreciation and amortization | $ | (4,549 | ) | | $ | (8,412 | ) |
Less: valuation allowance | (301,915 | ) | | (208,033 | ) |
Net deferred taxes | $ | — |
| | $ | — |
|
In December 2017, the Tax Cuts and Jobs Act, or TCJA, was signed into law. Among other things, the TCJA permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate federal income tax rate to 21%, U.S. GAAP requires companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. This revaluation resulted in a provision of $90.0 million to income tax expense in continuing operations and a corresponding reduction in the valuation allowance. As a result, there was no impact on our consolidated statements of operations from the reduction in tax rate. The other provisions of the TCJA did not have a material impact on the consolidated financial statements.
Our preliminary estimate of the TCJA and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TJCA may require further adjustments and changes in our estimates.
The final determination of the TCJA and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA.
As of December 31, 2017, we had net operating loss carryforwards, or NOLs, available to reduce federal, state and foreign income taxes of approximately $454.6 million, $456.7 million and $46.2 million, respectively. If not utilized, these NOLs begin to expire in 2033, 2032 and 2022, respectively. At December 31, 2017, we also had available research and development tax credits for federal and state income tax purposes of approximately $18.5 million and $8.5 million, respectively. If not utilized, the credits begin to expire in 2027 and 2020 for federal and state income tax purposes, respectively. We engaged in clinical testing activities and incurred expenses that qualify for the federal orphan drug tax credit. At December 31, 2017, we had available orphan drug tax credits for federal purposes only of approximately $75.6 million. If not utilized, the orphan drug credits begin to expire in 2035.
We adopted ASU 2016-09 during the quarter ended March 31, 2017. As a result of the adoption, the net operating losses deferred tax assets increased by $32.7 million and were offset by a corresponding increase in the valuation allowance. The adoption of ASU 2016-09 had no impact on our consolidated balance sheets or consolidated statements of operations.
As provided by Section 382 of the Internal Revenue Code of 1986, or Section 382, and similar state provisions, utilization of NOLs and tax credit carryforwards may be subject to substantial annual limitations due to ownership change limitations that have previously occurred or that could occur in the future. Ownership changes may limit the amount of NOLs and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions that increase the ownership of five percent stockholders in the stock of a corporation by more than 50 percent in the aggregate over a three year period. During the year ended December 31, 2017, we completed a Section 382 study to determine whether any ownership change has occurred since our formation and determined that transactions have resulted in two ownership changes, as defined by Section 382. The impact of the ownership changes has been reflected in our deferred tax assets in the table above. There could be additional ownership changes after December 31, 2017 that could further limit the amount of NOLs and tax credit carryforwards that we can utilize.
As required by ASC 740, we have evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets. Based on the weight of available evidence, both positive and negative, we recorded a valuation allowance of $301.9 million and $208.0 million as of December 31, 2017 and December 31, 2016, respectively, because we have determined that it is more likely than not that these assets will not be fully realized. The valuation allowance increased by $93.9 million, $86.1 million and $52.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
We apply the accounting guidance in ASC 740 related to accounting for uncertainty in income taxes. Our reserves related to taxes are based on a determination of whether, and how much of, a tax benefit taken by us in our tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit.
The following table presents our unrecognized tax benefits activity for the years ended December 31, 2017 and 2016 (in thousands): |
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Unrecognized tax benefits at 12/31/2016 | $ | — |
| | $ | — |
|
Gross increases - current period tax positions | 11,263 |
| | — |
|
Unrecognized tax benefits at 12/31/2017 | 11,263 |
| | — |
|
The uncertain tax position does not impact our effective income tax rate due to the full valuation allowance.
We are subject to taxation in the United States and Switzerland. The statute of limitations for assessment by the IRS and state tax authorities is open for tax years ending December 31, 2017, 2016, 2015, and 2014, although carryforward attributes that were generated for tax years prior to 2014 may still be adjusted upon examination by the IRS or state tax authorities if they either have been, or will be, used in a future period. The statute of limitations for assessment in Switzerland remains open for tax year ending December 31, 2017, 2016, and 2015. There are currently no federal, state or foreign audits in progress.