Supernus Pharmaceuticals, Inc.
SUPERNUS PHARMACEUTICALS INC (Form: 10-Q, Received: 05/09/2017 17:20:36)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

OR

 

o          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: 001-35518

 

SUPERNUS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-2590184

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

1550 East Gude Drive, Rockville, MD

 

20850

(Address of principal executive offices)

 

(Zip Code)

 

(301) 838-2500

(Registrant’s telephone number, including area code)

 

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.    x  Yes   o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    x  Yes   o  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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  x

 

Accelerated filer o

 

 

 

Non-accelerated filer  o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Emerging growth company o

 

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. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes   x  No

 

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of the close of business on May 2, 2017 was 50,282,397.

 

 

 



Table of Contents

 

SUPERNUS PHARMACEUTICALS, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

TABLE OF CONTENTS

 

 

Page No.

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016

1

Consolidated Statements of Operations for the three month periods ended March 31, 2017 and 2016 (Unaudited)

2

Consolidated Statements of Comprehensive Income for the three month periods ended March 31, 2017 and 2016 (Unaudited)

3

Consolidated Statements of Cash Flows for the three month periods ended March 31, 2017 and 2016 (Unaudited)

4

Notes to Consolidated Financial Statements (Unaudited)

5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3. Quantitative and Qualitative Disclosures about Market Risk

27

Item 4. Controls and Procedures

27

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

28

Item 1A. Risk Factors

31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3. Defaults Upon Senior Securities

31

Item 4. Mine Safety Disclosures

31

Item 5. Other Information

31

Item 6. Exhibits

31

SIGNATURES

32

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Supernus Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

59,599

 

$

66,398

 

Marketable securities

 

27,533

 

23,723

 

Accounts receivable, net

 

38,885

 

41,527

 

Inventories, net

 

19,167

 

16,801

 

Prepaid expenses and other current assets

 

4,573

 

2,955

 

Total current assets

 

149,757

 

151,404

 

Long term marketable securities

 

89,163

 

75,410

 

Property and equipment, net

 

4,342

 

4,344

 

Deferred legal fees

 

11,331

 

19,860

 

Intangible assets, net

 

29,450

 

16,490

 

Other non-current assets

 

350

 

331

 

Deferred income taxes

 

37,863

 

41,729

 

 

 

 

 

 

 

Total assets

 

$

322,256

 

$

309,568

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,056

 

$

8,055

 

Accrued sales deductions

 

43,450

 

41,943

 

Accrued expenses

 

26,890

 

27,427

 

Accrued income taxes payable

 

1,675

 

7

 

Non-recourse liability related to sale of future royalties, current portion   

 

4,645

 

3,101

 

Deferred licensing revenue

 

287

 

209

 

Total current liabilities

 

82,003

 

80,742

 

Deferred licensing revenue, net of current portion

 

1,365

 

1,501

 

Convertible notes, net

 

3,310

 

4,165

 

Non-recourse liability related to sale of future royalties, long term

 

25,555

 

27,289

 

Other non-current liabilities

 

3,936

 

4,002

 

Derivative liabilities

 

23

 

114

 

Total liabilities

 

116,192

 

117,813

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.001 par value, 130,000,000 shares authorized at March 31, 2017 and December 31, 2016; 50,226,397 and 49,971,267 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

 

50

 

50

 

Additional paid-in capital

 

279,792

 

276,127

 

Accumulated other comprehensive income (loss), net of tax

 

32

 

(134

)

Accumulated deficit

 

(73,810

)

(84,288

)

Total stockholders’ equity

 

206,064

 

191,755

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

322,256

 

$

309,568

 

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months ended March 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

Revenue

 

 

 

 

 

Net product sales

 

$

56,369

 

$

43,025

 

Royalty revenue

 

1,149

 

1,119

 

Licensing revenue

 

58

 

50

 

 

 

 

 

 

 

Total revenue

 

57,576

 

44,194

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Cost of product sales

 

2,949

 

2,035

 

Research and development

 

9,601

 

10,562

 

Selling, general and administrative

 

28,238

 

25,160

 

 

 

 

 

 

 

Total costs and expenses

 

40,788

 

37,757

 

 

 

 

 

 

 

Operating income

 

16,788

 

6,437

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest income

 

531

 

327

 

Interest expense

 

(90

)

(179

)

Interest expense-nonrecourse liability related to sale of future royalties

 

(959

)

(1,279

)

Changes in fair value of derivative liabilities

 

54

 

101

 

Loss on extinguishment of debt

 

(101

)

(382

)

 

 

 

 

 

 

Total other expense

 

(565

)

(1,412

)

 

 

 

 

 

 

Earnings before income taxes

 

16,223

 

5,025

 

 

 

 

 

 

 

Income tax expense

 

5,926

 

200

 

 

 

 

 

 

 

Net income

 

$

10,297

 

$

4,825

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.21

 

$

0.10

 

Diluted

 

$

0.19

 

$

0.08

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

Basic

 

50,158,634

 

49,240,099

 

Diluted

 

52,764,442

 

51,152,072

 

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

Three Months ended March 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net income

 

$

10,297

 

$

4,825

 

Other comprehensive income:

 

 

 

 

 

Unrealized net gain on marketable securities, net of tax

 

166

 

656

 

Other comprehensive income:

 

166

 

656

 

 

 

 

 

 

 

Comprehensive income

 

$

10,463

 

$

5,481

 

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

 

Three Months ended March 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

10,297

 

$

4,825

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Loss on extinguishment of debt

 

101

 

382

 

Change in fair value of derivative liability

 

(54

)

(101

)

Depreciation and amortization

 

741

 

429

 

Non-cash interest expense, net/interest (income), net

 

(313

)

155

 

Non-cash interest expense on non-recourse liability related to sale of future royalties

 

959

 

1,279

 

Non-cash royalty revenue

 

(1,149

)

(1,119

)

Share-based compensation expense

 

1,827

 

1,359

 

Deferred income tax benefit

 

4,258

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

2,642

 

(4,744

)

Inventories

 

(2,366

)

(457

)

Prepaid expenses and other assets

 

(1,618

)

260

 

Accounts payable

 

(3,133

)

(1,691

)

Accrued sales deductions

 

1,507

 

1,903

 

Accrued expenses

 

(1,865

)

(6,017

)

Accrued income taxes payable

 

1,668

 

22

 

Deferred licensing revenue

 

(58

)

300

 

Other non-current liabilities

 

(86

)

73

 

Net cash provided by (used in) operating activities

 

13,358

 

(3,142

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of marketable securities

 

(22,193

)

(17,335

)

Sales and maturities of marketable securities

 

5,140

 

7,400

 

Purchases of property, plant and equipment

 

(300

)

(279

)

Deferred legal fees

 

(3,408

)

(436

)

Net cash used in investing activities

 

(20,761

)

(10,650

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock

 

604

 

124

 

Net cash provided by financing activities

 

604

 

124

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(6,799

)

(13,668

)

Cash and cash equivalents at beginning of period

 

66,398

 

33,498

 

Cash and cash equivalents at end of period

 

$

59,599

 

$

19,830

 

 

 

 

 

 

 

Noncash financial activity:

 

 

 

 

 

Conversion of convertible notes and interest make-whole

 

$

1,023

 

$

2,138

 

Deferred legal fees included in accounts payable and accrued expenses

 

$

6,584

 

$

3,779

 

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

For the Three Months ended March 31, 2017 and 2016

(unaudited)

 

1.  Organization and Business

 

Supernus Pharmaceuticals, Inc. (the Company) was incorporated in Delaware and commenced operations in 2005. The Company is a specialty pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases, including neurological and psychiatric disorders. The Company markets two products, Oxtellar XR for the treatment of epilepsy and Trokendi XR for the treatment of migraine and epilepsy, and has several proprietary product candidates in clinical development that address the psychiatry market.

 

The Company commercialized Oxtellar XR and Trokendi XR in 2013. The Company launched Trokendi XR for the treatment of migraine in April 2017.

 

2.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Company’s consolidated financial statements include the accounts of Supernus Pharmaceuticals, Inc. and Supernus Europe Ltd., collectively referred to herein as “Supernus” or “the Company.” All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s unaudited consolidated financial statements have been prepared in accordance with t he requirements of the U.S. Securities and Exchange Commission (SEC) for interim financial information.

 

As permitted under Generally Accepted Accounting Principles in the United States (U.S. GAAP), certain notes and other information have been omitted from the interim unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.

 

In the opinion of management, the consolidated financial statements reflect all adjustments necessary to fairly present the Company’s financial position, results of operations, and cash flows for the periods presented. These adjustments are of a normal recurring nature.   The Company currently operates in one business segment.

 

The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the Company’s future financial results.

 

Marketable Securities

 

Marketable securities consist of investments in U.S. Treasuries, certificates of deposit, various U.S. governmental agency debt securities, corporate and municipal bonds and other fixed income securities. The Company places all investments with government, industrial, or financial institutions whose debt is rated as investment grade. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets.

 

The Company’s investments are classified as available-for-sale. Such securities are carried at estimated fair value. Any unrealized holding gains or losses are reported, net of any tax effects reported, as accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity.

 

Realized gains and losses, and declines in value judged to be other-than-temporary, if any, are included in consolidated results of operations. A decline in the market value of any available for sale security below cost that is deemed to be other-than-temporary results in a reduction in fair value, which is charged to earnings in that period, and a new cost basis for the security is established. Dividend and interest income is recognized when earned. The cost of securities sold is calculated using the specific identification method.

 

The Company established the Supernus Supplemental Executive Retirement Plan (SERP) for the sole purpose of receiving funds for executives from a previous SERP and providing a continuing deferral program under the Supernus SERP. As of March 31, 2017 and December 31, 2016, the fair value of the SERP was $294,000 and $275,000, respectively. The fair value of these assets is included within other non-current assets on the consolidated balance sheets. A corresponding non-current liability is also included in the

 

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consolidated balance sheets to reflect the Company’s obligation for the SERP. The Company has not made, and has no plans to make, contributions to the SERP. The securities are restricted in nature and can only be used for purposes of paying benefits under the SERP.

 

Accounts Receivable, net

 

Accounts receivable are reported on the consolidated balance sheets at outstanding amounts, less an allowance for doubtful accounts and discounts. The Company extends credit without requiring collateral. The Company writes off uncollectible receivables when the likelihood of collection is remote. The Company evaluates the collectability of accounts receivable on a regular basis. An allowance, when needed, is based upon various factors including the financial condition and payment history of customers, an overall review of collections experience on other accounts, and economic factors or events expected to affect future collections experience.

 

The Company recorded an allowance for expected sales discounts of approximately $5.3 million and $5.6 million as of March 31, 2017 and December 31, 2016, respectively.

 

Inventory

 

Inventories, which are recorded at the lower of cost or market, include materials, labor, and other direct and indirect costs and are valued using the first-in, first-out method. The Company capitalizes inventories produced in preparation for commercial launches when it becomes probable that the related product candidates will receive regulatory approval and that the related costs will be recoverable through the commercial sale of the product.

 

Property and Equipment

 

Property and equipment are stated at cost. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the following average useful lives:

 

Computer equipment

3 years

Software

3 years

Lab equipment and furniture

5 - 10 years

Leasehold improvements

Shorter of lease term or useful life

 

Deferred Legal Fees

 

Legal fees have been incurred in connection with legal proceedings related to the defense of patents for Oxtellar XR and Trokendi XR (see Note 6). Amortization of the deferred legal fees will begin upon successful outcome of the ongoing litigation. Deferred legal fees will be charged to expense in the event of an unsuccessful outcome of the ongoing litigation.

 

Intangible Assets

 

Intangible assets consist of deferred legal fees related to patents. Patents are carried at cost less accumulated amortization, which is calculated on a straight-line basis over the estimated useful lives of the patents. The carrying value of the patents and deferred legal fees are assessed for impairment annually during the fourth quarter of each year, or more frequently if impairment indicators exist. There were no indicators of impairment identified at March 31, 2017 or December 31, 2016.

 

Impairment of Long-Lived Assets

 

Long-lived assets consist primarily of patents defense costs, deferred legal fees, and property and equipment. The Company assesses the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. Evaluating for impairment requires judgment, including the estimation of future cash flows, future growth rates and profitability and the expected life over which cash flows will occur. Changes in the Company’s business strategy or adverse changes in market conditions could impact impairment analyses and could require the recognition of an impairment charge equal to the excess of the carrying value of the long-lived assets over its estimated fair value.

 

For the three months ended March 31, 2017 or year ended December 31, 2016, the Company determined that there was no impairment of the Company’s long-lived assets.

 

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Deferred Financing Costs

 

Deferred financing costs consist of financing costs incurred by the Company in connection with the closing of the Company’s 7.50% Convertible Senior Secured Notes due 2019 (the Notes) and Secured Notes Payable (see Note 8). The Company amortizes deferred financing costs over the term of the related debt using the effective interest method. When extinguishing debt, the related deferred financing costs are written off.

 

Preclinical Study and Clinical Trial Accruals

 

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, investigators, and clinical research organizations (CROs) that conduct these activities on our behalf. In recording service fees, the Company estimates the time period over which the related services will be performed and compares the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services. As appropriate, we accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the advance payment will be charged to expense in the period that such determination is made.

 

Revenue from Product Sales

 

Revenue from product sales is recognized when persuasive evidence of an arrangement exists; delivery has occurred and title to the product and associated risk of loss has passed to the customer; the price is fixed or determinable; collection from the customer has been reasonably assured; all performance obligations have been met; and returns and allowances can be reasonably estimated. Product sales are recorded net of estimated rebates, chargebacks, allowances, discounts, co-pay assistance and other deductions as well as estimated product returns (collectively, “sales deductions”).

 

Our products are distributed through wholesalers and pharmaceutical distributors. Each of these wholesalers and distributors will take title and ownership to the product upon physical receipt of the product and then distribute our products to pharmacies.

 

Sales Deductions

 

Allowances for estimated sales deductions are provided for the following:

 

·                   Rebates.  Rebates include mandated discounts under the Medicaid Drug Rebate Program, the Medicare coverage gap program, as well as negotiated discounts with commercial healthcare providers. Rebates are amounts owed after the final dispensing of product to a benefit plan participant and are based upon contractual agreements or legal requirements with the public sector (e.g. Medicaid) and with private sector benefit providers (e.g., Commercial managed care). The allowance for rebates is based on statutory and contractual discount rates and expected claimed rebates paid based on a plan provider’s utilization. Rebates are generally invoiced and paid quarterly in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known or estimated prior quarters’ unpaid rebates. If actual rebates vary from estimates, we may need to adjust balances of such rebates to reflect the actual expenditures of the Company with respect to these programs, which would affect revenue in the period of adjustment.

 

·                   Co-pay assistance.  Patients who pay in cash or have commercial insurance and meet certain eligibility requirements may receive co-pay assistance from the Company. The intent of this program is to reduce the patient’s out of pocket costs when filling a prescription. Liabilities for co-pay assistance are based on actual program participation and estimates of program redemption using data provided by third-party administrators.

 

·                   Distributor/Wholesaler deductions and discounts.  U.S. specialty distributors and wholesalers are offered various forms of consideration including allowances, service fees and prompt payment discounts as consideration for distributing our products. Distributor allowances and service fees arise from contractual agreements with distributors and are generally a percentage of the purchase price paid by the distributors and wholesalers. Wholesale customers are offered a prompt pay discount for payment within a specified period.

 

·                   Returns.  Sales of our products are not subject to a general right of return; however, the Company will accept product that is damaged or defective when shipped directly from our warehouse. The Company will accept expired product six months prior to and up to 12 months subsequent to its expiry date. Product that has been used to fill patient prescriptions is no longer subject to any right of return.

 

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·                   Chargebacks.  Chargebacks are discounts that occur when contracted customers purchase directly from an intermediary distributor or wholesaler. Contracted customers, which currently consist primarily of Public Health Service institutions and federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The distributor or wholesaler, in turn, charges back the difference between the price initially paid by the distributor or wholesaler and the discounted price paid to the distributor or wholesaler by the customer. The allowance for distributor/wholesaler chargebacks is based on known sales to contracted customers.

 

Revenue Recognition of License Revenue

 

License and Collaboration Agreements

 

We have entered into collaboration agreements to commercialize both Oxtellar XR and Trokendi XR outside of the U.S. These agreements generally include an up-front license fee and ongoing milestone payments upon the achievement of specific events. We believe that when milestones meet all of the necessary criteria to be considered substantive, these should be recognized as revenue when achieved. For up-front license fees, we have estimated the service period of the contract and are recognizing revenue on a straight-line basis over the respective service period.

 

Milestone Payments

 

Milestone payments on licensing agreements are recognized as revenue when the collaborative partner acknowledges completion of the milestone and substantive effort was necessary to achieve the milestone. Management may recognize milestone revenue in the period in which the milestone is achieved only if the milestone meets all the criteria to be considered substantive. Substantive milestone payments are recognized upon achievement only if all of the following conditions are met:

 

·                   the milestone payments are non-refundable;

 

·                   achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement;

 

·                   substantive effort on the partner’s part is involved in achieving the milestone; and

 

·                   the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone.

 

Determination as to whether a payment meets the aforementioned conditions involves management’s judgment. If any of these conditions are not met, the resulting payment would not be considered a substantive milestone. Therefore, the resulting payment would be considered part of the consideration for the single unit of accounting and amortized over the appropriate period.

 

There was no milestone revenue during the three months ended March 31, 2017 or 2016.

 

Royalty Revenue

 

We recognize non-cash royalty revenue for royalty amounts earned pursuant to a royalty agreement with United Therapeutics. In 2014, the Company sold certain of these royalty rights to Healthcare Royalty Partners III, L.P. (HC Royalty) (see Note 14). Accordingly, the Company records non-cash royalty revenue when payments are made from United Therapeutics to HC Royalty in connection with these agreements.

 

Cost of Product Sales

 

The cost of product sales consists primarily of materials, third-party manufacturing costs, freight and distribution costs, allocation of labor, quality control and assurance, and other manufacturing overhead costs.

 

Research and Development Costs

 

Research and development costs are expensed as incurred. Research and development costs primarily consist of employee-related expenses, including salaries and benefits; share-based compensation expense; expenses incurred under agreements with CROs, payments to investigators and consultants that conduct the Company’s clinical trials; the cost of acquiring and manufacturing clinical trial materials; the cost of manufacturing materials used in process validation, to the extent that those materials are manufactured prior to receiving regulatory approval for those products and are not expected to be sold commercially; facilities costs that do not have an

 

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alternative future use; related depreciation and other allocated expenses; license fees for, and milestone payments related to, in-licensed products and technologies; and costs associated with animal testing activities and regulatory approvals.

 

Advertising Expense

 

The costs of the Company’s advertising efforts are expensed as incurred. The Company incurred approximately $6.7 million and $6.4 million in advertising costs for the three months ended March 31, 2017 and 2016, respectively, which are recorded in the selling, general and administrative expense line of the Statement of Operations.

 

Share-Based Compensation

 

Employee share-based compensation is measured based on the estimated fair value on the grant date. The grant date fair value is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. The Company recognizes expense using the straight-line method.

 

The Company records the expense for stock option grants to non-employees based on the estimated fair value of the stock option using the Black-Scholes option-pricing model. The fair value of non-employee awards is re-measured at each reporting period. As a result, stock compensation expense for non-employee awards with vesting is affected by subsequent changes in the fair value of the Company’s common stock.

 

Income Taxes

 

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. When appropriate, valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.

 

The Company accounts for uncertain tax positions in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and relevant facts. The Company’s policy is to recognize any interest and penalties related to income taxes as income tax expense.

 

Recently Issued Accounting Pronouncements

 

In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” The standard eliminates diversity in the practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company adopted ASU 2016-09 on January 1, 2017 using the modified retrospective approach . As a result, the Company recorded a cumulative effect adjustment of $211,000 to increase the 2017 beginning of period additional paid-in capital balance, with an offset to accumulated deficit for historical forfeitures assumptions. Additionally, the Company recorded an opening balance sheet adjustment of $392,000 to increase our deferred tax asset, with an offset to accumulated deficit, primarily to recognize excess tax benefits (i.e. windfalls) from stock option exercises in prior years combined with the impact of the $211,000 adjustment to historical forfeiture expense.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We expect the ASU to have a material impact on our assets and liabilities due to the addition of previously classified operating leases, but we do not expect it to have a material impact on our cash flows or results of operations.

 

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Table of Contents

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 will eliminate transaction-and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principles-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, with early adoption being permitted for periods ending after December 15, 2016. Entities can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. We are in the process of evaluating the potential revenue implications of the standard change, which may result in changes to our revenue recognition practices around license and collaboration agreements.

 

3.  Fair Value of Financial Instruments

 

The fair value of an asset or liability should represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Such transactions to sell an asset or transfer a liability are assumed to occur in the principal or most advantageous market for the asset or liability. Accordingly, fair value is determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant rather than from a reporting entity’s perspective.

 

The Company reports assets and liabilities that are measured at fair value using a three level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

·                   Level 1—Inputs are unadjusted quoted prices in active markets for identical assets that the Company has the ability to access at the measurement date.

 

·                   Level 2—Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

·                   Level 3—Unobservable inputs that reflect the Company’s own assumptions, based on the best information available, including the Company’s own data.

 

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Table of Contents

 

In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value, in thousands:

 

 

 

Fair Value Measurements at

 

 

 

March 31, 2017

 

 

 

(unaudited)

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Total Carrying

 

Quoted Prices

 

Other

 

Significant

 

 

 

Value at

 

in Active

 

Observable

 

Unobservable

 

 

 

March 31,

 

Markets

 

Inputs

 

Inputs

 

 

 

2017

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

59,599

 

$

59,599

 

$

 

$

 

Marketable securities

 

27,533

 

656

 

26,877

 

 

Long term marketable securities

 

89,163

 

 

89,163

 

 

Marketable securities - restricted (SERP)

 

294

 

 

294

 

 

Total assets at fair value

 

$

176,589

 

$

60,255

 

$

116,334

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

23

 

$

 

$

 

$

23

 

 

 

 

Fair Value Measurements at

 

 

 

December 31, 2016

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Total Carrying

 

Quoted Prices

 

Other

 

Significant

 

 

 

Value at

 

in Active

 

Observable

 

Unobservable

 

 

 

December 31,

 

Markets

 

Inputs

 

Inputs

 

 

 

2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

66,398

 

$

66,398

 

$

 

$

 

Marketable securities

 

23,723

 

656

 

23,067

 

 

Long term marketable securities

 

75,410

 

 

75,410

 

 

Marketable securities - restricted (SERP)

 

275

 

 

275

 

 

Total assets at fair value

 

$

165,806

 

$

67,054

 

$

98,752

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

114

 

$

 

$

 

$

114

 

 

The fair value of the restricted marketable securities is included within other non-current assets in the consolidated balance sheets.

 

The Company’s Level 1 assets include cash held with banks, certificate of deposits, and money market funds.

 

Level 2 assets include the SERP assets, commercial paper and investment grade corporate bonds and other fixed income securities. Level 2 securities are valued using third-party pricing sources that apply applicable inputs and other relevant data into their models to estimate fair value.

 

Level 3 liabilities include the estimated fair value of the interest make-whole liability associated with the Notes, which are recorded as derivative liabilities.

 

The fair value of the interest make-whole liability of the Notes was calculated using a binomial-lattice model with the following key assumptions as of March 31, 2017, unaudited:

 

Volatility

 

45%

 

Stock Price as of March 31, 2017

 

$31.30 per share

 

Credit Spread

 

900 bps

 

Term

 

1 month

 

Dividend Yield

 

0.0%

 

 

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Table of Contents

 

Changes in the fair value of the interest make-whole liability are recognized as a component of other income (expense) in the Consolidated Statements of Operations. The following table presents information about the Company’s Level 3 liabilities as of March 31, 2017 and December 31, 2016 that are included in the non-current liabilities section of the Consolidated Balance Sheets, in thousands:

 

 

 

Three Months ended

 

 

 

March 31, 2017

 

 

 

(unaudited)

 

 

 

 

 

Balance at December 31, 2016

 

114

 

 

 

 

 

Changes in fair value of derivative liabilities included in earnings

 

(54

)

Reduction due to conversion of debt to equity

 

(37

)

 

 

 

 

Balance at March 31, 2017

 

$

23

 

 

The carrying value, face value and estimated fair value of the Notes was approximately $3.3 million, $3.6 million and $21.2 million, respectively, as of March 31, 2017. The fair value was estimated based on actual trade information as well as quoted prices provided by bond traders, which would be characterized within Level 2 of the fair value hierarchy. This fair value amount gives recognition to the value of the interest make-whole liability and the value of the conversion option. Upon issuance these were accounted for as derivative liabilities and additional paid-in-capital, respectively.

 

The carrying amounts of other financial instruments, including accounts receivable, accounts payable and accrued expenses approximate fair value due to their short-term maturities.

 

 

Unrestricted marketable securities held by the Company were as follows, in thousands:

 

At March 31, 2017 (unaudited):

 

Available for Sale

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Corporate debt securities

 

$

116,883

 

135

 

(322

)

$

116,696

 

 

At December 31, 2016:

 

Available for Sale

 

Amortized

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Corporate debt securities

 

$

99,487

 

86

 

(440

)

$

99,133

 

 

The contractual maturities of the unrestricted available for sale marketable securities held by the Company were as follows, in thousands:

 

 

 

March 31,

 

 

 

2017

 

 

 

(unaudited)

 

Less Than 1 Year

 

$

27,533

 

1 year to 2 years

 

24,722

 

3 years to 4 years

 

64,441

 

Greater Than 4 Years

 

 

Total

 

$

116,696

 

 

The Company has not experienced any other-than-temporary losses on its marketable securities and restricted marketable securities. The cost of securities sold is calculated using the specific identification method.

 

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Table of Contents

 

4. Inventories

 

Inventories consist of the following, in thousands:

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

Raw materials

 

$

4,307

 

$

2,091

 

Work in process

 

9,399

 

8,874

 

Finished goods

 

5,461

 

5,836

 

 

 

$

19,167

 

$

16,801

 

 

5.  Property and Equipment

 

Property and equipment consist of the following, in thousands:

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

Computer equipment

 

$

1,206

 

$

1,206

 

Software

 

1,876

 

1,807

 

Lab equipment and furniture

 

6,892

 

6,758

 

Leasehold improvements

 

2,722

 

2,642

 

Construction in progress

 

45

 

28

 

 

 

12,741

 

12,441

 

Less accumulated depreciation and amortization

 

(8,399

)

(8,097

)

 

 

$

4,342

 

$

4,344

 

 

Depreciation and amortization expense on property and equipment was approximately $302,000 and $287,000 for the three months ended March 31, 2017 and 2016, respectively.

 

6.  Deferred Legal Fees and Intangible Assets

 

Deferred legal fees have been incurred in connection with patents for Oxtellar XR and Trokendi XR. As of March 31, 2017 and December 31, 2016, the Company had deferred legal fees of $11.3 million and $19.9 million, respectively.

 

The following sets forth the gross carrying amount and related accumulated amortization of the intangible asset, in thousands:

 

 

 

Weighted-

 

March 31,

 

December 31,

 

 

 

Average Life

 

2017

 

2016

 

 

 

(unaudited)

 

Capitalized patent defense costs

 

5.9 - 11 years

 

$

31,172

 

$

17,773

 

 

 

 

 

 

 

 

 

Less accumulated amortization

 

 

 

(1,722

)

(1,283

)

 

 

 

 

$

29,450

 

$

16,490

 

 

In March 2017, the Company entered into two settlements with various companies related to Trokendi XR patent litigation, at which time the Company reduced deferred legal fees by $12.6 million and transferred these amounts to intangible assets. The Company subsequently began amortizing the cost of litigation, and will continue to do so through the settlement date of January 1, 2023.

 

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Table of Contents

 

The net book value of intangible assets was $29.5 million as of March 31, 2017 and $16.5 million as of December 31, 2016. The

increase in intangible assets reflects the settlement of lawsuits related to Trokendi XR during the first quarter of 2017.

 

Amortization expense on intangible assets was approximately $439,000 and $142,000 for the three months ended March 31, 2017 and 2016, respectively.

 

There were no indicators of impairment identified at March 31, 2017 or March 31, 2016.

 

7.  Accrued Expenses

 

Accrued expenses are comprised of the following, in thousands:

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Accrued compensation

 

$

7,950

 

$

9,145

 

Accrued professional fees

 

6,409

 

4,350

 

Accrued clinical trial and clinical supply costs

 

5,509

 

5,919

 

Accrued product costs

 

1,398

 

1,794

 

Accrued sales and marketing expenses

 

605

 

528

 

Accrued interest expense

 

120

 

61

 

Other accrued expenses

 

4,899

 

5,630

 

 

 

$

26,890

 

$

27,427

 

 

8.   Convertible Senior Secured Notes

 

The table below summarizes activity related to the Notes from issuance on May 3, 2013 through March 31, 2017, in thousands:

 

Gross proceeds

 

$

90,000

 

Initial value of interest make-whole derivative reported as debt discount

 

(9,270

)

Conversion option reported as debt discount and APIC

 

(22,336

)

Conversion of debt to equity - principal

 

(85,425

)

Conversion of debt to equity - accretion of debt discount and deferred financing costs

 

25,767

 

Accretion of debt discount and deferred financing costs

 

5,429

 

December 31, 2016 carrying value

 

4,165

 

 

 

 

 

Conversion of debt to equity - principal

 

(1,000

)

Conversion of debt to equity - accretion of debt discount and deferred financing costs

 

114

 

Accretion of debt discount and deferred financing costs

 

31

 

March 31, 2017 carrying value, unaudited

 

$

3,310

 

 

During the three month period ended March 31, 2017, approximately $1.0 million of the Notes were presented to the Company for conversion. Accordingly, the Company issued approximately 0.2 million shares of common stock in conversion of the principal amount of the Notes. The Company issued an additional 2,000 shares of common stock in settlement of the interest make-whole provision related to the converted Notes. As a result of the conversions, the Company incurred a loss of approximately $0.1 million on extinguishment of debt during the three months ended March 31, 2017, which is included as a separate component of other income (expense) on the Consolidated Statement of Operations. During the three month period ended March 31, 2016, as a result of approximately $2.0 million in note conversions, the Company incurred a loss of approximately $0.4 million on extinguishment of debt.

 

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Table of Contents

 

9. Summary Stockholders’ Equity

 

The following summary table provides details related to the activity in certain captions within Stockholders’ Equity for the three month period ended March 31, 2017, in thousands.

 

 

 

Common Stock

 

Additional Paid-in
Capital

 

Accumulated
Deficit

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

$

50

 

$

276,127

 

$

(84,288

)

Cumulative-effect adjustment 

 

 

211

 

181

 

Balance at January 1, 2017

 

50

 

276,338

 

(84,107

)

Share-based compensation

 

 

1,827

 

 

Exercise of stock options

 

 

604

 

 

Equity issued on note conversion

 

 

1,023

 

 

Net income

 

 

 

10,297

 

Balance, March 31, 2017

 

$

50

 

$

279,792

 

$

(73,810

)

 

During the three months ended March 31, 2017, the Company adopted ASU No. 2016-09, which simplifies several aspects of the accounting for share-based payments, including the Company’s election to eliminate the requirement to estimate the number of awards that are expected to be forfeit and, instead, account for forfeitures when they occur. The new standard requires the change to be adopted using the modified retrospective approach. As such, the Company recorded a cumulative effect adjustment of $211,000 to increase the 2017 beginning of period additional paid-in capital balances, with an offset to accumulated deficit for historical forfeitures assumptions. Additionally, the Company recorded an opening balance sheet adjustment of $392,000 to increase our deferred tax asset, with an offset to accumulated deficit, primarily to recognize excess tax benefits (i.e. windfalls) from stock option exercises in prior years combined with the impact of the $211,000 adjustment to historical forfeiture expense.

 

10. Share-Based Payments

 

The Company has adopted the Supernus Pharmaceuticals, Inc. 2012 Equity Incentive Plan (the 2012 Plan), which is stockholder approved, and provides for the grant of stock options and certain other awards, including stock appreciation rights (SAR), restricted and unrestricted stock, stock units, performance awards, cash awards and other awards that are convertible into or otherwise based on the Company’s common stock, to the Company’s key employees, directors, and consultants and advisors. The 2012 Plan is administered by the Company’s Board of Directors and provides for the issuance of up to 8,000,000 shares of the Company’s Common Stock. Option awards are granted with an exercise price equal to the estimated fair value of the Company’s Common Stock at the grant date. Option awards granted to employees, consultants and advisors generally vest in four annual installments, starting on the first anniversary of the date of grant and have ten-year contractual terms. Option awards granted to the directors generally vest over a one-year term.

 

Share-based compensation recognized related to the grant of employee and non-employee stock options, SAR, Employee Stock Purchase Plan (ESPP) awards and non-vested stock was as follows, in thousands:

 

 

 

March 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

Research and development

 

$

317

 

$

288

 

Selling, general and administrative

 

1,510

 

1,071

 

Total

 

$

1,827

 

$

1,359

 

 

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Table of Contents

 

The following table summarizes stock option and SAR activity:

 

 

 

Number of
Options

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual
Term (in years)

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2016

 

3,644,088

 

$

10.25

 

7.59

 

Granted (unaudited)

 

1,028,525

 

$

25.30

 

 

 

Exercised (unaudited)

 

(64,901

)

$

9.31

 

 

 

Forfeited or expired (unaudited)

 

(4,575

)

$

17.38

 

 

 

Outstanding, March 31, 2017

 

4,603,137

 

$

13.62

 

7.92

 

 

 

 

 

 

 

 

 

As of December 31, 2016:

 

 

 

 

 

 

 

Vested and expected to vest

 

3,591,528

 

$

10.22

 

7.57

 

Exercisable

 

1,503,004

 

$

8.62

 

6.49

 

 

 

 

 

 

 

 

 

As of March 31, 2017:

 

 

 

 

 

 

 

Vested and expected to vest (unaudited)

 

4,603,137

 

$

13.62

 

7.92

 

Exercisable (unaudited)

 

2,238,770

 

$

9.23

 

6.73

 

 

11.  Earnings per Share

 

Basic income per common share is determined by dividing income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted income per share is computed by dividing the income attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company’s stock option grants, SAR, and potential ESPP awards, and the if-converted method is used to determine the dilutive effect of the Company’s Notes.

 

The following common stock equivalents were excluded in the calculation of diluted income per share because their effect would be anti-dilutive as applied to the income from continuing operations applicable to common stockholders for the three months ended

March 31, 2017 and 2016:

 

 

 

Three Months ended March 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

Shares underlying Convertible Senior Secured Notes

 

 

 

Stock options, stock appreciation rights, and ESPP awards

 

223,273

 

179,162

 

 

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Table of Contents

 

The following table sets forth the computation of basic and diluted net income per share for the three months ended March 31, 2017 and 2016, in thousands, except share and per share amounts:

 

 

 

Three Months ended March 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

Numerator, in thousands:

 

 

 

 

 

Net income used for calculation of basic EPS

 

$

10,297

 

$

4,825

 

 

 

 

 

 

 

Interest expense on convertible debt

 

90

 

179

 

Changes in fair value of derivative liabilities

 

(54

)

(101

)

Loss on extinguishment of debt

 

101

 

382

 

Loss on extinguishment of outstanding debt,

 

 

 

 

 

as if converted

 

(320

)

(1,229

)

Total adjustments

 

(183

)

(769

)

Net income used for calculation of diluted EPS

 

$

10,114

 

$

4,056

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average shares outstanding, basic

 

50,158,634

 

49,240,099

 

 

 

 

 

 

 

Effect of dilutive potential common shares:

 

 

 

 

 

Shares underlying Convertible Senior Secured Notes

 

683,743

 

1,383,472

 

Shares issuable to settle interest make-whole derivatives

 

7,012

 

71,537

 

Stock options and stock appreciation rights

 

1,915,053

 

456,964

 

Total potential dilutive common shares

 

2,605,808

 

1,911,973

 

Weighted average shares outstanding, diluted

 

52,764,442

 

51,152,072

 

 

 

 

 

 

 

Net income per share, basic

 

$

0.21

 

$

0.10

 

Net income per share, diluted

 

$

0.19

 

$

0.08

 

 

12. Income Taxes

 

The following table provides a comparative summary of our income tax expense and effective tax rate for the three months ended March 31, 2017 and 2016, in thousands:

 

 

 

Three Months ended March 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

Income tax expense

 

$

5,926

 

$

200

 

Effective tax rate

 

36.5

%

4

%

 

The tax provision for the three months ended March 31, 2017, is attributed to the U.S. federal and state income. The increase in the income tax expense and the effective tax rate for the three months ended March 31, 2017 as compared to the same period in the prior year is primarily attributable to the release of the valuation allowance on the deferred tax asset during the third quarter of 2016.

 

13. Commitments and Contingencies

 

The Company has concurrent leases for office and lab space that extend through April 2020. The Company may elect to extend the term of the leases for an additional five-year term. The leases provide for a tenant improvement allowance of approximately $2.1 million in aggregate. During the three months ended March 31, 2017, $50,000 of the allowance was utilized. During the three months ended March 31, 2016, none of the allowance was utilized. As of March 31, 2017, $470,000 remains available for tenant improvements. Rent expense for the leased facilities and leased vehicles for the three months ended March 31, 2017 and March 31, 2016 was approximately $0.7 million in each period.

 

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Table of Contents

 

Future minimum lease payments under non-cancelable operating leases as of March 31, 2017 are as follows, in thousands, unaudited:

 

Year ending December 31:

2017 (remaining)

 

2,091

 

2018

 

1,436

 

2019

 

1,341

 

Thereafter

 

454

 

 

 

$

5,322

 

 

The Company has obtained exclusive licenses from third parties for proprietary rights to support the product candidates in the Company’s psychiatry portfolio. Under license agreements with Afecta Pharmaceuticals, Inc. (Afecta), the Company has exclusive worldwide rights to selected product candidates, including an exclusive license to SPN-810. The Company does not owe any future milestone payments for SPN-810. The Company is obligated to pay royalties to Afecta as a low single digit percentage of worldwide net product sales.

 

The Company has also entered into a purchase and sale agreement with Rune HealthCare Limited (Rune), where the Company obtained the exclusive worldwide rights to a product concept from Rune. There are no future milestone payments due to Rune under this agreement. If the Company receives approval to market and sell any products based on the Rune product concept for SPN-809, the Company is obligated to pay royalties to Rune as a low single digit percentage of worldwide net product sales.

 

14. Collaboration Agreement

 

Royalty Revenue

 

In the third quarter of 2014, the Company received a $30.0 million payment pursuant to a Royalty Interest Acquisition Agreement related to the purchase by HC Royalty of certain of the Company’s rights under the agreement with United Therapeutics Corporation related to the commercialization of Orenitram (treprostinil) Extended-Release Tablets. We will retain full ownership of the royalty rights if and when a certain threshold is reached per the terms of the Agreement. We have recorded a non-recourse liability related to this transaction and have begun to amortize this amount to recognize non-cash royalty revenue as royalties are received by HC Royalty from United Therapeutics. We also recognized non-cash interest expense related to this liability that accrues at an effective interest rate, which is determined based on projections of HC Royalty’s rate of return. We recognized royalty revenue of $1.1 million and $1.1 million for the three months ended March 31, 2017 and 2016, respectively. We recognized non-cash interest expense of $1.0 million and $1.3 million for the three months ended March 31, 2017 and 2016, respectively.

 

15. Subsequent Events

 

Subsequent to March 31, 2017, holders of the Notes converted approximately $2.0 million of the Notes. We issued a total of approximately 377,411 shares of common stock in conversion of the principal amount of the Notes and accrued interest thereon resulting in a remaining outstanding balance of $1.6 million.

 

On April 5, 2017, the United States Food and Drug Administration granted final approval to the Company’s Supplemental New Drug Applications requesting a label expansion for Trokendi XR® to include prophylaxis of migraine headache in adults and adolescents.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and the financial condition of the Company. The interim financial statements included in this report and this Management’s Discussion and Analysis of our Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form  10-K filed with the Securities and Exchange Commission on March 16, 2017.

 

In addition to historical information, this Quarterly Report on Form 10-Q  contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. These forward-looking statements may include declarations regarding the Company’s belief or current expectations of management, such as statements including the words “budgeted,” “anticipate,” “project,” “estimate,” “expect,” “may,” “believe,” “potential,” and similar statements or expressions, which are intended to be among the statements that are forward-looking statements, as such statements reflect the reality of risk and uncertainty that is inherent in the Company’s business. Actual results may differ materially from those expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of the date this report was filed with the Securities and Exchange Commission. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under the “Risk Factors” section of our Annual Report on Form 10-K and elsewhere in this report as well as in other reports and documents we file with the Securities and Exchange Commission from time to time. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

 

Solely for convenience, in this Quarterly Report on Form 10-Q the trade names are referred to without the TM symbols and the trademark registrations are referred to without the circled R, but such references should not be construed as any indicator that the Company will not assert, to the fullest extent under applicable law, our rights thereto.

 

Overview

 

We are a specialty pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases.

 

Oxtellar XR and Trokendi XR are the first once-daily extended release oxcarbazepine and topiramate products, indicated for patients with epilepsy in the U.S. market. On April 5, 2017, Trokendi XR received final approval from the United States Food and Drug Administration (FDA) for the additional indication of treatment of prophylaxis of migraine headache in adults and adolescents. These products differ from immediate release products by offering once-daily dosing and unique pharmacokinetic profiles which we believe can have positive clinical effects for many patients. We believe a once-daily dosing regimen improves adherence, making it more probable that patients maintain sufficient levels of medication in their bloodstream to protect against seizures and migraines. In addition, we believe that the unique smooth and steady pharmacokinetic profiles of our once-daily formulations reduce the peak to trough blood level fluctuations that are typically associated with immediate release products and may result in increased adverse events (AEs), more side effects and decreased efficacy.

 

In addition, we are developing multiple product candidates in psychiatry to address large unmet medical needs and market opportunities. We are developing SPN-810 (molindone hydrochloride) initially to treat impulsive aggression (IA) in patients who have attention deficit hyperactivity disorder (ADHD). We plan to subsequently develop SPN-810 for treatment of IA in other CNS diseases, such as autism, post traumatic stress disorder (PTSD), bipolar disorder, schizophrenia, and some forms of dementia. There are currently no approved products indicated for the treatment of IA. We are developing SPN-812 (viloxazine hydrochloride) as a novel, non-stimulant candidate to treat patients who have ADHD.

 

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The table below summarizes our current pipeline of novel products and product candidates.

 

Product

 

Indication

 

Status

Oxtellar XR

 

Epilepsy

 

Launched in 2013

Trokendi XR

 

Epilepsy

 

Launched in 2013

 

 

Migraine*

 

Launched in 2017

SPN-810

 

IA**

 

Phase III

SPN-812

 

ADHD

 

Phase IIb

SPN-809

 

Depression

 

Phase II ready

 


*              Prophylaxis of migraine headache in adults and adolescents.

 

**           Initial program is in patients with ADHD, with plans to add other indications, such as IA in patients with autism, PTSD, bipolar disorder, schizophrenia, and some forms of dementia.

 

We are continuing to expand our intellectual property portfolio to provide additional protection for our technologies, products, and product candidates. We currently have seven U.S. patents issued covering Oxtellar XR and nine U.S. patents issued covering Trokendi XR, providing patent protection expiring no earlier than 2027 for each product.

 

Commercial Products

 

Trokendi XR

 

Trokendi XR, the first once-daily extended release topiramate product indicated for patients with epilepsy in the U.S. market, is designed to improve patient adherence over the current immediate release products, which must be taken multiple times per day.

 

In April 2017, we launched Trokendi XR for the treatment of prophylaxis of migraine headache after receiving final FDA approval.

 

Oxtellar XR

 

Oxtellar XR is the only once-daily extended release oxcarbazepine product indicated for the treatment of patients with epilepsy in the U.S. as adjunctive therapy.

 

We expect the number of prescriptions filled for Oxtellar XR and Trokendi XR to continue to increase through 2017 and in subsequent years. Data from Intercontinental Marketing Services (IMS) shows 134,855 prescriptions filled for both drugs during the three months ended March 31, 2017, which is 17.1% higher than the prescriptions reported for the three months ended March 31, 2016.

 

We received several Paragraph IV Notice Letters concerning Oxtellar XR and Trokendi XR from various third-parties, asserting that our patents are invalid, or that our patents are not infringed by their formulations, or both. In response to these Paragraph IV notice letters, we initiated litigation against these third parties alleging infringement of our intellectual property rights. In October 2015, we reached a settlement agreement with one of these generic drug makers, Par Pharmaceutical Companies, Inc., concerning our Trokendi XR patents. In 2016, the U.S. District Court and Federal Court of Appeals ruled in our favor against Actavis concerning Oxtellar XR patents. In March 2017, we signed settlement agreements with two other generic drug makers, Actavis and Zydus, concerning our Trokendi XR patents.  In April 2017, a bench trial was held in U.S. District Court against TWi concerning our Oxtellar XR patents. A decision on this matter has not been rendered by the Court. We filed a second lawsuit against TWi concerning our Oxtellar XR patents in March 2017. We intend to vigorously defend our intellectual property rights. We anticipate continuing to incur substantial amounts of legal fees and related expenses for these cases as they progress. (See Part II, Item 1—Legal Proceedings for additional information.)

 

Product Candidates

 

SPN-810

 

We are developing SPN-810 as a novel treatment for IA in patients who have ADHD. Our Phase III clinical trial (P301) is being conducted under a Special Protocol Assessment (SPA). SPN-810 has been granted fast-track designation by the FDA. The phase III trials for SPN-810 are being conducted using an agreed upon novel scale to measure IA that was developed by us. We initiated two Phase III clinical trials in 2015 (P301 and P302) and expect patient enrollment to continue through 2017.

 

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SPN-812

 

SPN-812 is being developed as a novel non-stimulant treatment for ADHD. During 2016, we completed a Phase IIb dose ranging trial and announced topline results. Subsequent to holding an end of Phase II meeting in the second quarter of 2017, with the FDA, we plan to initiate Phase III clinical trials for SPN-812 during the second half of 2017.

 

We expect to incur significant research and development expenses related to the continued development of each of our product candidates, with a total cost of approximately $85 million to $90 million for each of the two programs, from 2017 through FDA approval or until the program terminates.

 

SHP465 was originally developed by Shire Laboratories, the former division of Shire which subsequently became Supernus Pharmaceuticals. On January 19, 2017, Shire announced that the FDA acknowledged receipt of the Class 2 resubmission of a New Drug Application for SHP465, for the treatment of ADHD. The FDA is expected to provide a decision on or around June 20, 2017. If approved by the FDA, SHP465 is expected to be launched by Shire in the second half of 2017. Based on the agreement between Supernus and Shire, Shire will pay to Supernus a single digit percentage royalty on net sales of the product.

 

Critical Accounting Policies and the Use of Estimates

 

The significant accounting policies and bases of presentation for our consolidated financial statements are described in Note 2 “Summary of Significant Accounting Policies.” The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and to disclose contingent assets and liabilities. Actual results could differ from those estimates.

 

We believe the following accounting policies and estimates to be critical:

 

Revenue Recognition

 

Revenue from product sales is recognized when: persuasive evidence of an arrangement exists; delivery has occurred and title to the product and associated risk of loss has passed to the customer; the price is fixed or determinable; collection from the customer has been reasonably assured; all performance obligations have been met; and returns and allowances can be reasonably estimated. Product sales are recorded net of estimated rebates, chargebacks, discounts, allowances, co-pay assistance payments and other deductions as well as estimated product returns (collectively, “sales deductions”).

 

We derive our estimated sales deductions from an analysis of historical levels of deductions specific to each product. In addition, we also consider the impact of anticipated changes in product price, sales trends and changes in managed care coverage and co-pay assistance programs.

 

Deferred Legal Fees

 

Deferred legal fees are comprised of costs incurred in connection with defense of patents for Oxtellar XR and Trokendi XR. Amortization commences upon successful outcome of the ongoing litigation. Deferred legal fees will be charged to expense in the event of an unsuccessful outcome of the on-going litigation.

 

Research and Development Expenses

 

Research and development expenditures are expensed as incurred. Research and development costs consist primarily of employee-related expenses, including salaries and benefits; share-based compensation expense; expenses incurred under agreements with clinical research organizations (CROs), fees paid to investigators who are participating in our clinical sites, consultants and other vendors that conduct the Company’s clinical trials; the cost of acquiring and manufacturing clinical trial materials; the cost of manufacturing materials used in process validation, to the extent that those materials are manufactured prior to receiving regulatory approval for those products and are not expected to be sold commercially; facilities costs that do not have an alternative future use; related depreciation and other allocated expenses; license fees for and milestone payments related to in-licensed products and technologies; and costs associated with animal testing activities and regulatory approvals.

 

Accrued Clinical Expenses

 

Clinical trials are inherently complex, often involve multiple service providers, and can include payments made to investigator physicians at study sites. Because billing for services often lags by a substantial amount of time, we often are required to estimate a significant portion of our accrued clinical expenses. This process involves reviewing open contracts and communicating with our

 

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subject matter expert personnel and the appropriate service provider personnel to identify services that have been performed on our behalf. We accrue for the estimated but unbilled service performed and the associated cost incurred.

 

Payments to service providers can either be based on hourly rates for service or based on performance driven milestones. When accruing clinical expenses, we estimate the time period over which services will be performed during the life of the entire clinical program, the total cost of the program, and the level of effort to be expended in each intervening period. To the maximum extent possible, we work with each service provider to provide an estimate for incurred but unbilled services as of the end of the calendar quarter. This includes estimates for payments to site investigators.

 

We work diligently to minimize, if not eliminate, estimates based solely on company generated calculations. If the service provider underestimates or overestimates the cost associated with a trial or service at any given point in time, adjustments to research and  development expenses may be necessary in future periods. Historically, our estimated accrued clinical expenses have closely approximated actual expense incurred.

 

Results of Operations

 

Comparison of the three months ended March 31, 2017 and March 31, 2016

 

 

 

Three Months ended March 31,

 

 

 

 

 

2017

 

2016

 

Increase/
(decrease)

 

 

 

(unaudited, in thousands)

 

Revenues:

 

 

 

 

 

 

 

Net product sales

 

$

56,369

 

$

43,025

 

13,344

 

Royalty revenue

 

1,149

 

1,119

 

30

 

Licensing revenue

 

58

 

50

 

8

 

Total revenues

 

57,576

 

44,194

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of product sales

 

2,949

 

2,035

 

914

 

Research and development

 

9,601

 

10,562

 

(961

)

Selling, general and administrative

 

28,238

 

25,160

 

3,078

 

Total costs and expenses

 

40,788

 

37,757

 

 

 

Operating income

 

16,788

 

6,437

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

531

 

327

 

204

 

Interest expense

 

(90

)

(179

)

89

 

Interest expense-nonrecourse liability related to sale

 

 

 

 

 

 

 

of future royalties

 

(959

)

(1,279

)

320

 

Changes in fair value of derivative liabilities

 

54

 

101

 

(47

)

Loss on extinguishment of debt

 

(101

)

(382

)

281

 

Total other expenses

 

(565

)

(1,412

)

 

 

Earnings before income taxes

 

16,223

 

5,025

 

 

 

Income tax expense

 

5,926

 

200

 

5,726

 

Net income

 

$

10,297

 

$

4,825

 

 

 

 

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Net Product Sales.   The increase in net product sales from 2016 to 2017 is primarily driven by increased prescription volume. Net product sales are based on gross revenue from shipments to distributors, less estimates for discounts, rebates, allowances, other sales deductions and returns. The table below lists our net product sales by product, in thousands.

 

 

 

Net Product Sales

 

 

 

 

 

Q1 2017

 

Q1 2016

 

Change in Net Product
Sales (%)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Trokendi XR

 

$

42,009

 

$

32,320

 

30.0

%

Oxtellar XR

 

14,360

 

10,705

 

34.1

%

 

 

 

 

 

 

 

 

Total

 

$

56,369

 

$

43,025

 

31.0

%

 

Royalty Revenue. Non-cash royalty revenue for the three months ended March 31, 2017 and 2016 was $1.1 million in each period, based on sales of Orenitram (treprostinil) Extended-Release Tablets as reported to Healthcare Royalty Partners III, L.P. (HC Royalty).

 

Licensing Revenue. Total licensing revenue for the three months ended March 31, 2017 and 2016 was $58,000 and $50,000 respectively.

 

Cost of Product Sales. Cost of product sales during the three months ended March 31, 2017 was $2.9 million, an increase of $0.9 million, or 45.0%, as compared to $2.0 million for the three months ended March 31, 2016. The quarter over quarter increase is attributable primarily to increased number of units sold.

 

Research and Development Expense.   Research and development (R&D) expenses during the three months ended March 31, 2017 were $9.6 million as compared to $10.6 million for the three months ended March 31, 2016, a decrease of $1.0 million or 9.4%. This decrease is primarily due to reduction in spending for SPN-812, as the phase 11b trial which was ongoing in 2016 has since been completed.

 

Selling, General and Administrative Expenses.   Our selling, general and administrative (SG&A) expenses were $28.2 million during the three months ended March 31, 2017 as compared to $25.2 million for the three months ended March 31, 2016, an increase of $3.0 million or 11.9%. The increase in SG&A expenses is primarily due to the development of promotional material and preparation for the launch of the migraine indication for Trokendi XR in April 2017.

 

Interest Income. During the three months ended March 31, 2017 and 2016, we recognized $0.5 million and $0.3 million, respectively, of interest income earned on our cash and marketable securities.

 

Interest Expense.  Interest expense was $90,000 during the three months ended March 31, 2017 as compared to $179,000 for the three months ended March 31, 2016. The decrease of $89,000 was primarily due to a decrease in the principal amount of our outstanding 7.5% Convertible Senior Secured Notes due in 2019 (the Notes) from $6.6 million at March 31, 2016 to $3.6 million at March 31, 2017. During the three months ended March 31, 2017, a total of $1.0 million of Notes and related accrued interest converted into 0.2 million shares of common stock.

 

Interest Expense—Non-recourse Liability Related to Sale of Future Royalties. Non-cash interest expense related to our royalty liability was $1.0 million during the three months ended March 31, 2017 as compared to $1.3 million for the three months ended March 31, 2016. The decrease of $0.3 million for this non-cash expense item was primarily due to a decrease in our projection of future royalties related to Orenitram.

 

Changes in Fair Value of Derivative Liability.   During the three months ended March 31, 2017, we recognized a non-cash gain of $54,000 related to a change in estimated fair value of the interest make-whole derivative liability related to our Notes. This gain is primarily due to the passage of time. During the three months ended March 31, 2016, we recognized a non-cash gain of $0.1 million related to a change in estimated fair value of the interest make-whole derivative liability related to our Notes. This gain is primarily attributable due to the passage of time.

 

Loss on Extinguishment of Debt.  During the three months ended March 31, 2017, we recognized a non-cash loss on extinguishment of debt of $0.1 million related to the conversion of $1.0 million of our Notes. During the three months ended March 31, 2016, we recognized a non-cash loss on extinguishment of debt of $0.4 million related to the conversion of $2.0 million of our Notes.

 

Income Tax.   During the three months ended March 31, 2017, we recorded $5.9 million of tax expense as compared to $0.2 million for the three months ended March 31, 2016, an increase of $5.7 million. During the third quarter of 2016, we released the full amount

 

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Table of Contents

 

of the valuation allowance recorded against our deferred taxes. The 2017 tax expense is at a rate consistent with our expectations going forward.

 

Net Income.   We realized net income of $10.3 million during the three months ended March 31, 2017, as compared to net income of $4.8 million during the three months ended March 31, 2016, an increase of $5.5 million. This change was primarily due to the revenue generated from our two commercial products, Oxtellar XR and Trokendi XR, increased SG&A spending, and the increased tax rate.

 

Liquidity and Capital Resources

 

We believe our increasing levels of net product sales will be sufficient to finance our operations in 2017 and subsequent years, including the increased R&D expenses for our clinical trials. We expect to incur significantly increased R&D expenses in 2017 and in subsequent years to support the development of SPN-810 and SPN-812, including their respective Phase III trials.

 

Our working capital at March 31, 2017 was $67.8 million, a decrease of $2.9 million compared to our working capital of $70.7 million at December 31, 2016. Our long term marketable securities at March 31, 2017 were $89.2 million, an increase of $13.8 million compared to our long term marketable securities of $75.4 million at December 31, 2016.

 

Our stockholders’ equity increased by $13.9 million during the three month period ended March 31, 2017, primarily as a result of net income, the issuance of shares related to the conversion of our Notes and share-based compensation.

 

As of March 31, 2017, holders of the Notes have converted a total of approximately $86.4 million of the Notes. Cumulatively, through March 31, 2017, we issued a total of approximately 16.3 million shares of common stock in conversion of the principal amount of the Notes and issued an additional 2.2 million shares of common stock. We also paid approximately $1.7 million cash in settlement of the interest make-whole provision related to the converted Notes.

 

Subsequent to March 31, 2017, holders of the Notes converted approximately $2.0 million of the Notes. We issued a total of approximately 377,411 shares of common stock in conversion of the principal amount of the Notes and accrued interest thereon.

 

We believe our current working capital and long term marketable securities, along with increased revenues from increasing product sales, will be sufficient to finance the Company. We achieved positive cash flow and profitability from operations in each quarter of 2016 in and the first quarter of 2017. While we expect to maintain profitability in 2017 as we continue to increase sales. We anticipate there may be significant variability from quarter to quarter in our level of profitability due to increasing spending to advance our clinical product candidates.

 

Cash Flows

 

The following table sets forth the major sources and uses of cash and equivalents for the periods set forth below, in thousands:

 

 

 

Three Months ended March 31,

 

 

 

2017

 

2016

 

Increase/
(decrease)

 

 

 

(unaudited)

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

13,358

 

$

(3,142

)

16,500

 

 

 

 

 

 

 

 

 

Investing activities

 

(20,761

)

(10,650

)

(10,111

)

 

 

 

 

 

 

 

 

Financing activities

 

604

 

124

 

480

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

$

(6,799

)

$

(13,668

)

 

 

 

Operating Activities

 

Net cash provided by/used in operating activities is comprised of two components: cash provided by operating income/loss and cash provided by/used in changes in working capital.

 

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Table of Contents

 

Results for the three months ended March 31, 2017 and March 31, 2016 are summarized below, in thousands:

 

 

 

Three Months ended March 31,

 

 

 

 

 

2017

 

2016

 

Increase/
(decrease)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operating income

 

$

16,667

 

$

7,209

 

9,458

 

 

 

 

 

 

 

 

 

Cash used in working capital

 

(3,309

)

(10,351

)

7,042

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

13,358

 

$

(3,142

)

 

 

 

The increase in net cash provided by operating activities is primarily driven by increased revenue generated from the sale of Trokendi XR and Oxtellar XR. The decrease in cash used in changes in working capital is primarily driven by increased net sales deductions associated with our increased revenue.

 

The changes in certain operating assets and liabilities are, in thousands:

 

 

 

Three Months ended March 31,

 

 

 

 

 

2017

 

2016

 

Explanation of Change

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

$

2,642

 

$

(4,744

)

Better accounts receivable turnover ratio.

 

Increase in inventory

 

(2,366

)

(457

)

Building inventory for future sales growth.

 

(Increase) decrease in prepaid expenses and other assets

 

(1,618

)

260

 

Primarily attributed to insurance paid in the first quarter.

 

Decrease in accounts payable, accrued sales

 

 

 

 

 

 

 

deduction, accrued expenses, and accrued income taxes payable

 

(1,823

)

(5,783

)

Timing of accruals, including compensation and increased sales deductions.

 

Other

 

(144

)

373

 

 

 

 

 

$

(3,309

)

$

(10,351

)

 

 

 

Investing Activities

 

We invest excess cash in accordance with our investment policy. Marketable securities consist of investments which mature in four years or less, including U.S. Treasury and various government agency debt securities, as well as investment grade securities in industrial and financial institutions. Fluctuations in investing activities between periods relate exclusively to the timing of marketable security purchases and the related maturities of these securities.

 

Net cash used in investing activities for the three months ended March 31, 2017 of $20.8 million related to net purchase of marketable securities of $17.1 million, deferred legal fees of $3.4 million, and property and equipment purchases of $0.3 million. Net cash used in investing activities for the three months ended March 31, 2016 of $10.7 million related to net purchase of marketable securities of $9.9 million, deferred legal fees of $0.4 million, and property and equipment purchases of $0.3 million.

 

Financing Activities

 

Net cash provided by financing activities was $0.6 million and $0.1 million for three months ended March 31, 2017 and 2016, respectively, resulting from proceeds received from stock option exercises.

 

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Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations and commitments as of March 31, 2017 (except as noted below), in thousands, unaudited:

 

 

 

Less than

 

1 - 3

 

3 - 5

 

Greater than

 

 

 

Contractual Obligations

 

1 Year

 

Years

 

Years

 

5 Years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Senior Secured Notes

 

$

 

$

3,575

 

$

 

$

 

$

3,575

 

Interest on Convertible Notes

 

268

 

291

 

 

 

559

 

Operating leases (1)

 

2,540

 

2,668

 

114

 

 

5,322

 

Purchase obligations (2)

 

108,940

 

19,147

 

 

 

128,087

 

Total (3)

 

$

111,748

 

$

25,681

 

$

114

 

$

 

$

137,543

 

 


(1)                                  Our commitments for operating leases relate to our lease of office equipment, fleet vehicles and office and laboratory space as of March 31, 2017.

 

(2)                                  Relates primarily to agreements and purchase orders with contractors.

 

(3)                                  This table does not include (a) any milestone payments which may become payable to third parties under license agreements or contractual agreements regarding our clinical trials as the timing and likelihood of such payments are not known, (b) any royalty payments to third parties as the amounts, timing and likelihood of such payments are not known and (c) contracts that are entered into in the ordinary course of business which are not material in the aggregate in any period presented above.

 

In addition to the above table, we are contractually obligated to pay to HC Royalty all royalty payments earned under a licensing agreement with United Therapeutics Corporation. Although we have recorded a liability of $30.2 million at March 31, 2017 related to this obligation, it is a non-recourse liability for which we have no obligation to make any payments to HC Royalty. Accordingly, this obligation will have no impact on our liquidity at any time. Therefore the non-recourse liability has not been included in the table above.

 

We have obtained exclusive licenses from third parties for proprietary rights to support the product candidates in our psychiatry portfolio. We have two license agreements with Afecta Pharmaceuticals, Inc. (Afecta) pursuant to which we obtained exclusive worldwide rights to selected product candidates, including an exclusive license to SPN-810. We may pay up to $300,000 upon the achievement of certain milestones. If a product candidate is successfully developed and commercialized, we will be obligated to pay royalties to Afecta as a low single digit percentage rate of worldwide net product sales.

 

We have also entered into a purchase and sale agreement with Rune HealthCare Limited (Rune), where we obtained the exclusive worldwide rights to a product concept from Rune. There are no future milestone payments owing to Rune under this agreement. If we receive approval to market and sell any products based on the Rune product concept for SPN-809, we will be obligated to pay royalties as a low single digit percentage rate of worldwide net sales.

 

Off-Balance Sheet Arrangements

 

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.

 

Recently Issued Accounting Pronouncements

 

For a discussion of new accounting pronouncements, see Note 2 in the notes to the consolidated financial statements in Part I, Item 1 of this report.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. Our exposure to market risk is confined to our cash, cash equivalents, marketable securities and long term marketable securities. As of March 31, 2017, we had unrestricted cash, cash equivalents, marketable securities and long term marketable securities of $176.3 million. We do not engage in any hedging activities against changes in interest rates. Because of the short-term maturities of our cash, cash equivalents, marketable securities and long term marketable securities and because we hold these securities to maturity, we do not believe that an increase in market rates would have any significant impact on the realizable value of our investments. We do not have any currency or other derivative financial instruments other than the interest make-whole payment associated with our Notes.

 

We may contract with CROs and investigational sites globally. Currently, we do not have ongoing trials outside of the U.S. We do not hedge our foreign currency exchange rate risk. A hypothetical 10% appreciation in Euro exchange rates against the U.S. dollar from prevailing market rates would have decreased our net income by approximately $7,000 for the three months ended March 31, 2017. Conversely, a hypothetical 10% depreciation in Euro exchange rates against the U.S. dollar from prevailing market rates would have increased our net income by approximately $7,000 for the three months ended March 31, 2017. We do not believe that inflation and changing prices over the three months ended March 31, 2017 and March 31, 2016 had a significant impact on our consolidated results of operations.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

 

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on that evaluation, under the supervision and with the participation of our management, including our CEO and CFO, we concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2017 because of continued material weaknesses in our internal control over financial reporting as described in our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed on March 16, 2017.

 

Specifically, Company personnel did not have a sufficient understanding of the Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO 2013 Framework, and its application to internal controls over financial reporting, and their responsibilities for effective internal control. Also, the Company did not have an effective risk assessment process that identified necessary changes in financial reporting and internal controls impacted by changes in information technology systems.  As a consequence, the Company did not have effective control activities over the completeness and accuracy of key assumptions and data analyzed by a third party consultant and ultimately used by management to determine the returns portion of accrued sales deductions. The Company did not have effective general information technology controls (“GITCs”) over the Microsoft Dynamics AX information technology system and the employee expense reimbursement system.

 

Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

 

Management’s Remediation Plan

 

The Company is in the process of executing the following steps in 2017 to remediate the aforementioned material weaknesses in its internal control over financial reporting as described in our Annual Report:

 

·                                           The Company is actively looking to recruit personnel that have the requisite experience working with the implementation of financial accounting and internal controls policies and procedures.

 

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·                                           The Company will sponsor ongoing training related to the COSO 2013 Framework best practices for personnel that are accountable for internal control over financial reporting.

 

·                                           The Company has taken certain actions and plans to take further action to strengthen our control procedures surrounding GITCs, IT user access review and program change controls including the logging of changes to the IT applications and the database.

 

While the audit committee of our board of directors and senior management are closely monitoring this remediation, until the remediation efforts discussed in this section, including any additional remediation efforts that our senior management identifies as necessary, are complete, tested and determined effective, we will not be able to conclude that the material weaknesses have been remediated. In addition, we may need to incur incremental costs associated with this remediation, primarily due to the hiring and training of finance and accounting personnel, and the implementation of improved training procedures.

 

Changes in Internal Control over Financial Reporting

 

Our management, including our CEO and CFO, has evaluated any changes in our internal control over financial reporting that occurred during the quarterly period ended March 31, 2017, and has concluded that there was no change that occurred during the quarterly period ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time and in the ordinary course of business, we are subject to various claims, charges and litigation. We may be required to file infringement claims against third parties for the infringement of our patents. We have filed such claims for infringement of the Orange Book patents listed for our products Oxtellar XR and Trokendi XR.

 

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., C.A. Nos. 13-4740; 14-1981 (RMB)(JS) (D.N.J.) Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., Appeal No. 2016-1619 (Fed. Cir.)

 

We received a Paragraph IV Notice Letter against two of our Oxtellar XR Orange Book patents (United States Patent Nos. 7,722,898 and 7,910,131) from generic drug maker Watson Laboratories, Inc.—Florida (WLF) n/k/a Actavis Laboratories FL, Inc. (Actavis Labs FL) on June 26, 2013. On August 7, 2013, we filed a lawsuit against Actavis, Inc., Actavis Labs FL, Actavis Pharma, Inc., Watson Laboratories, Inc., and ANDA, Inc. (collectively Actavis) alleging infringement of United States Patent Nos. 7,722,898 and 7,910,131. We received a second Paragraph IV Notice Letter against a later-issued Oxtellar XR Orange Book Patent (United States Patent No. 8,617,600) on February 20, 2014. On March 28, 2014, we filed a second lawsuit against Actavis alleging infringement of United States Patent No. 8,617,600. We have since listed four additional Orange Book patents: United States Patent Nos. 8,821,930, 9,119,791, 9,351,975, and 9,370,525. Our United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, 8,821,930, 9,119,791, 9,351,975, and 9,370,525 generally cover once-a-day oxcarbazepine formulations and methods of treating seizures using those formulations. The FDA Orange Book lists all seven of our Oxtellar XR patents as expiring on April 13, 2027.

 

Both Complaints—filed in the U.S. District Court for the District of New Jersey—alleged, inter alia, that Actavis infringed our Oxtellar XR patents by submitting to the FDA an Abbreviated New Drug Application (ANDA) seeking to market a generic version of Oxtellar XR prior to the expiration of our patents. The two cases were consolidated for all purposes on October 8, 2015.

 

A seven-day bench trial for the consolidated action involving United States Patent Nos. 7,722,898, 7,910,131, and 8,617,600 was held between November 18 and December 4, 2015. On February 5, 2016, the Court issued an opinion and order finding that: (i) Actavis’s ANDA products infringe United States Patent Nos. 7,722,898 and 7,910,131; (ii) Actavis’s ANDA products do not infringe U.S. Patent No. 8,617,600; and (iii) United States Patent Nos. 7,722,898, 7,910,131, and 8,617,600 are not invalid.  The Court entered a final judgment on February 18, 2016: (i) enjoining the FDA from approving Actavis’s ANDA before the expiration date of United States Patent Nos. 7,722,898 and 7,910,131; and (ii) enjoining Actavis from commercially manufacturing, using, offering to sell, or selling within the United States, or importing into the United States, Actavis’s ANDA products until the expiration of United States Patent Nos. 7,722,898 and 7,910,131.  On February 19, 2016, Actavis filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit.  The parties executed a Partial Settlement Agreement in May 2016 that provided for the dismissal of all appeals, cross-appeals, claims, and counterclaims concerning U.S. Patent Nos. 8,617,600, 8,821,930 , and 9,119,791. The appeal with respect to United States Patent Nos. 7,722,898 and 7,910,131 (docketed on February 24, 2016) was argued on December 8, 2016.  On December 12, 2016, the United States Court of Appeals for the Federal Circuit affirmed the District Court’s February 18, 2016 Final Judgment.

 

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., C.A. No. 15-2499 (RMB)(JS) (D.N.J.)

 

We received a Paragraph IV Notice Letter against United States Patent No. 8,821,930 from Actavis Labs FL on February 21, 2015. On April 7, 2015, we filed a third lawsuit against Actavis alleging infringement of United States Patent No. 8,821,930.

 

The Complaint—filed in the U.S. District Court for the District of New Jersey—alleged, inter alia, that Actavis infringed United States Patent No. 8,821,930 by submitting to the FDA an ANDA seeking to market a generic version of Oxtellar XR prior to the expiration of United States Patent No. 8,821,930.

 

The parties executed a Partial Settlement Agreement in May 2016 that provided for the dismissal of both parties’ claims and counterclaims concerning U.S. Patent No. 8,821,930 .

 

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Supernus Pharmaceuticals, Inc. v. TWi Pharmaceuticals, Inc., et al., C.A. No. 15-369 (RMB)(JS) (D.N.J.)

 

We received a Paragraph IV Notice Letter against United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, and 8,821,930 from generic drug maker TWi Pharmaceuticals, Inc. on December 9, 2014. On January 16, 2015, we filed a lawsuit against TWi Pharmaceuticals, Inc. and TWi International LLC (d/b/a TWi Pharmaceuticals USA) (collectively TWi) alleging infringement of United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, and 8,821,930.

 

The Complaint—filed in the U.S. District Court for the District of New Jersey—alleged, inter alia, that TWi infringed our Oxtellar XR patents by submitting to the FDA an ANDA seeking to market a generic version of Oxtellar XR prior to the expiration of our patents. Filing the Complaint within 45 days of receiving TWi’s Paragraph IV certification notice entitles Supernus to an automatic stay preventing the FDA from approving TWi’s ANDA for 30 months from the date of our receipt of the first Paragraph IV certification notice. On February 13, 2015, TWi answered the Complaint and denied the substantive allegations of the Complaint.  TWi also asserted Counterclaims seeking declaratory judgments of non-infringement and invalidity of United States Patent Nos. 7,722,898 and 7,910,131. On March 20, 2015, we filed our Reply, denying the substantive allegations of those Counterclaims.  A four-day bench trial was held between April 3 and April 6, 2017.  Post-trial briefing will be completed on May 15, 2017, after which the Court will issue its decision.

 

We received a second Paragraph IV Notice Letter against United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, 8,821,930, 9,119,791, 9,351,975, and 9,370,525 from generic drug maker TWi Pharmaceuticals, Inc. on February 16, 2017.  On March 31, 2017, we filed a lawsuit against TWi Pharmaceuticals, Inc. and TWi International LLC alleging infringement of United States Patent Nos. 7,722,898, 7,910,131, 8,617,600, 8,821,930, 9,119,791, 9,351,975, and 9,370,525.  TWi’s Answer to Supernus’s March 31, 2017 Complaint is due on May 10, 2017.

 

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., et al., C.A. No. 15-8342 (RMB)(JS) (D.N.J.)

 

We received a Paragraph IV Notice Letter against United States Patent No. 9,119,791 from Actavis Labs FL on October 15, 2015. On November 25, 2015, we filed a fourth lawsuit against Actavis alleging infringement of United States Patent No. 9,119,791.

 

The Complaint—filed in the U.S. District Court for the District of New Jersey—alleged, inter alia, that Actavis infringed United States Patent No. 9,119,791 by submitting to the FDA an ANDA seeking to market a generic version of Oxtellar XR prior to the expiration of United States Patent No. 9,119,791. On January 29, 2016, Actavis answered the Complaint, denying the substantive allegations of that Complaint. Actavis Labs FL also asserted Counterclaims seeking declaratory judgments of non-infringement and invalidity of United States Patent No. 9,119,791.  On March 4, 2016, we filed our Reply, denying the substantive allegations of those Counterclaims.

 

The parties executed a Partial Settlement Agreement in May 2016 that provided for the dismissal of both parties’ claims and counterclaims concerning U.S. Patent No. 9,119,791 .

 

Supernus Pharmaceuticals, Inc. v. Actavis, Inc., C.A. No. 14-6102 (SDW)(LDW) (D.N.J.)

 

We received three Paragraph IV Notice Letters against six Trokendi XR Orange Book patents, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 from generic drug maker Actavis Laboratories FL, Inc. These patents cover once-a-day topiramate formulations and methods of treating seizures using those formulations. On October 1, 2014, we initiated a lawsuit against Actavis; the lawsuit alleges infringement of the Trokendi XR Orange Book patents. The FDA Orange Book currently lists United States Patent No. 8,298,576 as expiring on April 4, 2028 and United States Patent Nos. 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 as expiring on November 16, 2027.

 

This action for patent infringement—filed in the U.S. District Court for the District of New Jersey—alleges that Actavis infringed the Trokendi XR patents by, inter alia, submitting to the FDA an ANDA seeking to market a generic version of Trokendi XR prior to the expiration of these patents. Actavis answered these allegations with affirmative defenses and counterclaims of noninfringement and invalidity of the patents in suit. Filing its October 1,

 

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2014 Complaint within 45 days of receiving the first of three Actavis Laboratories FL, Inc. Paragraph IV Notice Letters entitles Supernus to an automatic stay preventing the FDA from approving Actavis’s ANDA for 30 months from the date of our receipt of such Notice Letter.

 

The Company announced on March 7, 2017 that it has entered into a binding term sheet with Actavis regarding the settlement of this case. The binding term sheet permits Actavis to begin selling a generic version of Trokendi XR on January 1, 2023, or earlier under certain circumstances. On March 13, 2017, the Company entered into a settlement agreement with Actavis. A consent judgment and stipulation of dismissal with prejudice, and a stipulation and order of dismissal were entered by the U.S. District Court for the District of New Jersey. The agreement has been submitted to the applicable governmental agencies.

 

Supernus Pharmaceuticals, Inc. v. Zydus Pharmaceuticals (USA) Inc., C.A. No. 14-7272 (SDW)(LDW) (D.N.J.)

 

We received three Paragraph IV Notice Letters against six Trokendi XR Orange Book patents, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 from generic drug maker Zydus Pharmaceuticals (USA) Inc. These patents cover once-a-day topiramate formulations and methods of treating seizures using those formulations. On November 21, 2014, we initiated a lawsuit against Zydus Pharmaceuticals (USA) Inc. and Cadila Healthcare Limited (collectively Zydus); the lawsuit alleges infringement of the Trokendi XR Orange Book patents. The FDA Orange Book currently lists United States Patent No. 8,298,576 as expiring on April 4, 2028 and United States Patent Nos. 8,298,580, 8,663,683, 8,877,248, 8,889,191 and 8,992,989 as expiring on November 16, 2027.

 

This action for patent infringement—filed in the U.S. District Court for the District of New Jersey—alleges that Zydus infringed the Trokendi XR patents by, inter alia, submitting to the FDA an ANDA seeking to market a generic version of Trokendi XR prior to the expiration of these patents. Zydus answered these allegations with affirmative defenses and counterclaims of noninfringement and invalidity of the patents in suit. Filing its November 21, 2014 Complaint within 45 days of receiving the first of three Paragraph IV Notice Letters from Zydus Pharmaceuticals (USA) Inc. entitles Supernus to an automatic stay preventing the FDA from approving Zydus’s ANDA for 30 months from the date of our receipt of such Notice Letter.

 

The Company announced on March 6, 2017 that it has entered into a settlement agreement with Zydus regarding this case. The settlement permits Zydus to begin selling a generic version of Trokendi XR on January 1, 2023, or earlier under certain circumstances. A stipulation and order of dismissal without prejudice was entered by the U.S. District Court for the District of New Jersey. The agreement has been submitted to the applicable governmental agencies.

 

Supernus Pharmaceuticals, Inc. v. Par Pharmaceutical Companies, Inc., C.A. No. 15-326 (SDW)(LDW) (D.N.J.)

 

We received three Paragraph IV Notice Letters against six Trokendi XR Orange Book patents, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 from generic drug maker Par Pharmaceutical, Inc. These patents cover once-a-day topiramate formulations and methods of treating seizures using those formulations. On January 16, 2015, we initiated a lawsuit against Par; the lawsuit alleges infringement of the Trokendi XR Orange Book patents. The FDA Orange Book currently lists United States Patent No. 8,298,576 as expiring on April 4, 2028 and United States Patent Nos. 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989 as expiring on November 16, 2027.

 

This action for patent infringement—filed in the U.S. District Court for the District of New Jersey—alleges that Par infringed the Trokendi XR patents by, inter alia, submitting to the FDA an ANDA seeking to market a generic version of Trokendi XR prior to the expiration of these patents. Par answered these allegations with affirmative defenses and counterclaims of noninfringement and invalidity of the patents in suit. Filing its January 16, 2015 Complaint within 45 days of receiving the first of three Paragraph IV Notice Letters from Par Pharmaceutical, Inc. entitles Supernus to an automatic stay preventing the FDA from approving Par’s ANDA for 30 months from the date of our receipt of such Notice Letter.

 

The Company announced on October 15, 2015 that it has entered into a settlement agreement with Par regarding this case. The settlement permits Par to begin selling a generic version of Trokendi XR on April 1, 2025, or earlier under certain circumstances. The agreement is subject to a consent judgment that was entered by the U.S. District Court for the District of New Jersey. In the consent judgment, Par acknowledges that the Orange Book-listed patents for Trokendi XR owned by Supernus, namely United States Patent Nos. 8,298,576, 8,298,580, 8,663,683, 8,877,248, 8,889,191, and 8,992,989, are valid and enforceable with respect to Par’s ANDA product, and would be infringed by Par’s ANDA product. The agreement has been submitted to the applicable governmental agencies.

 

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Item 1A. Risk Factors

 

Any investment in our business involves a high degree of risk. Before making an investment decision, you should carefully consider the information we include in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes, and the additional information in the other reports we file with the Securities and Exchange Commission along with the risks described in our Annual Report on Form 10-K for the year ended December 31, 2016. These risks may result in material harm to our business and our financial condition and results of operations. In this event, the market price of our common stock may decline and you could lose part or all of your investment.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)                                  Sales of Unregistered Securities.

 

During the three months ended March 31, 2017, the Company granted options to employees to purchase an aggregate of 1,028,525 shares of common stock at an exercise price of $25.30 per share. The options are exercisable for a period of ten years from the grant date. These issuances were exempt from registration in reliance on Section 4(a)(2) of the Securities Act as transactions not involving any public offering.

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q:

 

10.1†  Settlement Agreement, dated March 6, 2017, by and between Supernus Pharmaceuticals, Inc., Zydus Pharmaceutical (USA) Inc., and Cadila Healthcare Limited.

 

10.2†  Term Sheet Agreement, dated March 6, 2017, by and between Supernus Pharmaceuticals, Inc., Actavis Laboratories, FL, Inc., Actavis Pharma, Inc., and Watson Laboratories, Inc.

 

10.3†  Settlement Agreement, dated March 13, 2017, by and between Supernus Pharmaceuticals, Inc., Actavis Laboratories, FL, Inc., Actavis Pharma, Inc., and Watson Laboratories, Inc.

 

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).

 

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).

 

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

101.INS XBRL Instance Document

 

101.SCH XBRL Taxonomy Extension Schema Document

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 


                                         Confidential treatment requested under 17 C.F.R. §§200.80(b)(4) and 230.406. The confidential portions of this exhibit have been omitted and are marked accordingly. The confidential portions have been filed separately with the Securities and Exchange Commission pursuant to the Confidential Treatment Request.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

SUPERNUS PHARMACEUTICALS, INC.

 

 

 

DATED: May 9, 2017

 

By:

/s/ Jack A. Khattar

 

 

Jack A. Khattar

 

 

President, Secretary and Chief Executive Officer

 

 

 

 

 

 

 

DATED: May 9, 2017

 

By:

/s/ Gregory S. Patrick

 

 

Gregory S. Patrick

 

 

Vice President and Chief Financial Officer

 

 

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EXHIBIT INDEX

 

Number

 

Description

 

 

 

10.1†

 

Settlement Agreement, dated March 6, 2017, by and between Supernus Pharmaceuticals, Inc., Zydus Pharmaceutical (USA) Inc., and Cadila Healthcare Limited.

 

 

 

10.2†

 

Term Sheet Agreement, dated March 6, 2017, by and between Supernus Pharmaceuticals, Inc., Actavis Laboratories, FL, Inc., Actavis Pharma, Inc., and Watson Laboratories, Inc.

 

 

 

10.3†

 

Settlement Agreement, dated March 13, 2017, by and between Supernus Pharmaceuticals, Inc., Actavis Laboratories, FL, Inc., Actavis Pharma, Inc., and Watson Laboratories, Inc.

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a).

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


                                         Confidential treatment requested under 17 C.F.R. §§200.80(b)(4) and 230.406. The confidential portions of this exhibit have been omitted and are marked accordingly. The confidential portions have been filed separately with the Securities and Exchange Commission pursuant to the Confidential Treatment Request.

 


Exhibit 10.1

 

CONFIDENTIAL MATERIALS OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE OMISSIONS.

 

EXECUTION COPY

 

SETTLEMENT AGREEMENT

 

BY AND BETWEEN

 

SUPERNUS PHARMACEUTICALS, INC.

 

 

AND

 

 

ZYDUS PHARMACEUTICAL (USA) INC.

 

CADILA HEALTHCARE LIMITED

 

 

DATED AS OF MARCH 6, 2017

 



 

THIS SETTLEMENT AGREEMENT , (this “ Settlement Agreement ”) is entered into as of March 6, 2017 (the “ Effective Date ”) by and between, Supernus Pharmaceuticals, Inc., a corporation organized and existing under the laws of Delaware, having offices located at 1550 East Gude Drive, Rockville, Maryland 20850 (“ Supernus ”), on the one hand, and Zydus Pharmaceutical (USA) Inc., a corporation organized and existing under the laws of New Jersey having offices located at 73 Route 31 N., Pennington, New Jersey 08534 (“ Zydus USA ”) and Cadila Healthcare Limited, a corporation organized and existing under the laws of India, having offices located at Zydus Tower, Satellite Cross Roads, Ahmedabad-380015 Gujarat, India (“ Cadila ” and together with Zydus USA, “ Zydus ”), on the other hand. Supernus and Zydus are collectively referred to herein as the “ Parties ,” or each individually as a “ Party .”

 

R E C I T A L S:

 

WHEREAS , Supernus is the owner of New Drug Application No. 201635, which was approved by the Food and Drug Administration for the manufacture and sale of an extended release topiramate oral capsule product, which Supernus sells under the trade name Trokendi XR ® ;

 

WHEREAS , Zydus USA submitted Abbreviated New Drug Application No. 207382 (as defined in the License Agreement, the “ Zydus ANDA ”) to the FDA under Section 505(j) of the Federal Food, Drug, and Cosmetic Act (codified at 21 U.S.C. §355(j)) seeking approval to engage in the manufacture, use, sale, offer for sale, or importation of an extended release topiramate oral capsule product that is the subject of the Zydus ANDA (as defined in the License Agreement, the “ Zydus Product ”);

 

WHEREAS , the filing of the Zydus ANDA included a “paragraph IV certification” seeking approval to engage in the manufacture, use and sale of the Zydus Product prior to the expiration of United States Patent Nos. 8,298,576 (the “ ’576 Patent ”), 8,298,580 (the “ ’580 Patent ”), 8,663,683 (the “ ’683 Patent ”), 8,877,248 (the “ ’248 patent ”), 8,889,191 (the “ ’191 Patent ”), and 8,992,989 (the “ ’989 Patent ,” and together with the ’576 Patent, the ’580 Patent, the ’683 Patent, the ’248 Patent, and the ’191 Patent, the “ Litigated Patents ”);

 

WHEREAS , Supernus has prosecuted, and Zydus has defended, an action for patent infringement in the United States District Court for the District of New Jersey (the “Court”) regarding the Zydus ANDA and the Zydus Product, which action is captioned Supernus Pharmaceuticals, Inc. v. Zydus Pharmaceutical (USA) Inc., et. al. , (Civil Action No. 2:14-cv-07272-SDW-SCM) (the “Pending Litigation”);

 

WHEREAS , Supernus and Zydus wish to settle the Pending Litigation and have reached an agreement, encompassing the terms and conditions set forth in this Settlement Agreement together with a License Agreement (the “ License Agreement ,” attached hereto as Exhibit A) and an agreed Stipulation of Dismissal with regard to the Pending Litigation (the “ Dismissal ,” attached hereto as Exhibit B) (with the Settlement Agreement, the License Agreement, and the Dismissal being collectively referred to as the “ Settlement Documents ”);

 

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WHEREAS , neither Supernus nor Zydus have received any consideration from the other for their entry into this Settlement Agreement other than that which is set forth in the Settlement Documents; and

 

WHEREAS , the Settlement Documents constitute Zydus’s and Supernus’ best independent judgment as to the most convenient, effective and expeditious way to mutually settle all disputes that have arisen associated with the Zydus ANDA.

 

NOW, THEREFORE , in consideration of the mutual covenants and agreements described herein, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

1.                                       Capitalized terms used, but not defined herein, shall have the meanings ascribed to them in the License Agreement.

 

2.                                       The Parties consent to the jurisdiction of the Court for the purposes of the settlement of the Pending Litigation.

 

3.                                       The Parties agree that the Court has jurisdiction over the Pending Litigation and over Supernus and Zydus, and that venue is proper in the District of New Jersey.

 

4.                                       Zydus admits, solely with respect to the Zydus ANDA and the Zydus Product, that the Litigated Patents, and all the claims contained therein, are valid and enforceable.

 

5.                                       Zydus admits, solely with respect to the Zydus ANDA and the Zydus Product, that the claims of the Litigated Patents asserted as of the Effective Date in the Pending Litigation, were infringed by the filing of the Zydus ANDA and, absent a license from Supernus, would be infringed by the manufacture, use, sale, offer for sale, or importation of the Zydus Product in the Territory.

 

6.                                       Notwithstanding the foregoing, the parties agree that nothing prohibits Zydus from asserting any and all counterclaims or defenses of invalidity, non-infringement or unenforceability in view of the Litigated Patents in any proceeding the subject matter of which is not the Zydus Product or a Generic Equivalent Product (and may file a petition for ex parte reexamination, Inter Partes Review (IPR), and Post Grant Review (PGR) of a Litigated Patent, if such Litigated Patent is asserted against Zydus or its Affiliates in any proceeding the subject matter of which is not the Zydus Product or a Generic Equivalent Product).

 

7.                                       Supernus represents, warrants, and covenants that Supernus is the sole owner of the Litigated Patents, and Supernus possesses the sole right to enforce the Litigated Patents.

 

8.                                       Zydus represents, warrants, and covenants that it has not granted or assigned to any Third Party, directly or indirectly, any right or license under or to the Zydus ANDA or the Zydus Product, and that it will not, except in accordance with the License Agreement, do any of the foregoing (including, selling, assigning, transferring, or divesting the Zydus ANDA to a Third Party).

 

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9.                                       In consideration of the mutual execution of the Settlement Documents and the mutual agreement to be legally bound by the terms hereof, each of Supernus and Zydus, with the intention of binding itself and its Affiliates and its and their respective predecessors, successors, heirs and assigns, directors, officers, employees and representatives, hereby fully, finally and irrevocably release and discharge the other Party, and its Affiliates and its and their respective directors, officers, employees, customers, importers, manufacturers, distributors, suppliers, insurers, attorneys, representatives and agents, or any heirs, administrators, executors, predecessors, successors, or assigns of the foregoing, from any and all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, liabilities, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, counterclaims, demands, costs, expenses, losses, liens and obligations, whatsoever, in law or equity, whether known or unknown, pending or future, certain or contingent, occurring before or as of the Effective Date related to the Litigated Patents, including (i) in connection with the Pending Litigation, (ii) associated with the Zydus ANDA and Zydus Product, and including Supernus’ assertion of the Litigated Patents against Zydus, or (iii) all other claims that were asserted or could have been asserted in the Pending Litigation (collectively, the “ Released Claims ”). For purposes of clarity, nothing herein shall inhibit any Party’s ability to enforce the terms of the Settlement Documents, or Supernus’ ability to enforce any patent, including the Litigated Patents against Third Parties, or Zydus’s ability to assert counterclaims or defenses of non-infringement, invalidity, or unenforceability of the Litigated Patents in any proceeding the subject matter of which is not the Zydus Product. EACH PARTY ACKNOWLEDGES THAT IT MAY HEREAFTER DISCOVER CLAIMS OR FACTS IN ADDITION TO OR DIFFERENT FROM THOSE WHICH IT NOW KNOWS OR BELIEVES TO EXIST WITH RESPECT TO THE RELEASED CLAIMS, THE FACTS AND CIRCUMSTANCES ALLEGED IN THE ACTION, AND/OR THE SUBJECT MATTER OF THIS SETTLEMENT AGREEMENT, WHICH, IF KNOWN OR SUSPECTED AT THE TIME OF EXECUTING THIS SETTLEMENT AGREEMENT, MAY HAVE MATERIALLY AFFECTED THIS SETTLEMENT AGREEMENT. NEVERTHELESS, UPON THE EFFECTIVENESS OF THE RELEASE OF THE RELEASED CLAIMS AS SET FORTH IN THIS SECTION, EACH PARTY HEREBY ACKNOWLEDGES THAT THE RELEASED CLAIMS INCLUDE WAIVERS OF ANY RIGHTS, CLAIMS, OR CAUSES OF ACTION THAT MIGHT ARISE AS A RESULT OF SUCH DIFFERENT OR ADDITIONAL CLAIMS OR FACTS. EACH PARTY ACKNOWLEDGES THAT IT UNDERSTANDS THE SIGNIFICANCE AND POTENTIAL CONSEQUENCES OF SUCH A RELEASE OF UNKNOWN UNITED STATES JURISDICTION CLAIMS AND OF SUCH A SPECIFIC WAIVER OF RIGHTS. EACH PARTY INTENDS THAT THE CLAIMS RELEASED BY IT UNDER THIS RELEASE BE CONSTRUED AS BROADLY AS POSSIBLE TO THE EXTENT THEY RELATE TO UNITED STATES JURISDICTION CLAIMS. ZYDUS IS AWARE OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:

 

“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her, must have materially affected his or her settlement with the debtor.”

 

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