Supernus Pharmaceuticals, Inc.
SUPERNUS PHARMACEUTICALS INC (Form: 10-Q, Received: 11/09/2017 06:05:26)

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 September 30, 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

 

Smaller reporting company o

 

Emerging growth company o

(Do not check if a smaller reporting company)

 

 

 

 

 

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 October 31, 2017 was 51,262,132.

 

 

 



Table of Contents

 

SUPERNUS PHARMACEUTICALS, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

 

 

Page No.

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016

1

Consolidated Statements of Operations for the three and nine months periods ended September 30, 2017 and 2016 (Unaudited)

2

Consolidated Statements of Comprehensive Income for the three and nine months periods ended September 30, 2017 and 2016 (Unaudited)

3

Consolidated Statements of Cash Flows for the nine months periods ended September 30, 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

20

Item 3. Quantitative and Qualitative Disclosures about Market Risk

31

Item 4. Controls and Procedures

32

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

33

Item 1A. Risk Factors

36

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

36

Item 3. Defaults Upon Senior Securities

36

Item 4. Mine Safety Disclosures

36

Item 5. Other Information

36

Item 6. Exhibits

36

SIGNATURES

39

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Supernus Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

81,924

 

$

66,398

 

Marketable securities

 

32,626

 

23,723

 

Accounts receivable, net

 

56,166

 

41,527

 

Inventories, net

 

14,947

 

16,801

 

Prepaid expenses and other current assets

 

5,667

 

2,955

 

Total current assets

 

191,330

 

151,404

 

Long term marketable securities

 

123,123

 

75,410

 

Property and equipment, net

 

4,688

 

4,344

 

Intangible assets, net

 

37,162

 

36,350

 

Other non-current assets

 

368

 

331

 

Deferred income taxes

 

28,807

 

41,729

 

 

 

 

 

 

 

Total assets

 

$

385,478

 

$

309,568

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

6,262

 

$

8,055

 

Accrued sales deductions

 

59,772

 

41,943

 

Accrued expenses

 

26,892

 

27,427

 

Income taxes payable

 

6,489

 

7

 

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

 

5,254

 

3,101

 

Deferred licensing revenue

 

287

 

209

 

Total current liabilities

 

104,956

 

80,742

 

Deferred licensing revenue, net of current portion

 

1,221

 

1,501

 

Convertible notes, net

 

 

4,165

 

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

 

22,702

 

27,289

 

Other non-current liabilities

 

4,936

 

4,002

 

Derivative liabilities

 

 

114

 

Total liabilities

 

133,815

 

117,813

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.001 par value, 130,000,000 shares authorized at September 30, 2017 and December 31, 2016; 51,262,007 and 49,971,267 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

51

 

50

 

Additional paid-in capital

 

291,841

 

276,127

 

Accumulated other comprehensive income (loss), net of tax

 

252

 

(134

)

Accumulated deficit

 

(40,481

)

(84,288

)

Total stockholders’ equity

 

251,663

 

191,755

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

385,478

 

$

309,568

 

 

See accompanying notes.

 

1



Table of Contents

 

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Revenue

 

 

 

 

 

 

 

 

 

Net product sales

 

$

78,066

 

$

55,618

 

$

207,763

 

$

148,978

 

Royalty revenue

 

2,010

 

1,140

 

4,338

 

3,464

 

Licensing revenue

 

322

 

52

 

1,702

 

187

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

80,398

 

56,810

 

213,803

 

152,629

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

Cost of product sales

 

4,251

 

3,428

 

11,060

 

8,214

 

Research and development

 

12,980

 

7,868

 

33,405

 

29,539

 

Selling, general and administrative

 

40,825

 

25,675

 

104,141

 

76,956

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

58,056

 

36,971

 

148,606

 

114,709

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

22,342

 

19,839

 

65,197

 

37,920

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

814

 

378

 

2,002

 

1,071

 

Interest expense

 

 

(202

)

(148

)

(577

)

Interest expense-nonrecourse liability related to sale of future royalties

 

(155

)

(1,004

)

(1,274

)

(3,564

)

Changes in fair value of derivative liabilities

 

 

125

 

76

 

349

 

Loss on extinguishment of debt

 

(91

)

 

(295

)

(382

)

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

568

 

(703

)

361

 

(3,103

)

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

22,910

 

19,136

 

65,558

 

34,817

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

6,949

 

(42,690

)

21,932

 

(42,085

)

Net income

 

$

15,961

 

$

61,826

 

$

43,626

 

$

76,902

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.31

 

$

1.25

 

$

0.86

 

$

1.56

 

Diluted

 

$

0.29

 

$

1.18

 

$

0.82

 

$

1.48

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

51,046,375

 

49,516,595

 

50,583,726

 

49,395,284

 

Diluted

 

53,628,389

 

51,974,435

 

53,227,433

 

51,615,334

 

 

See accompanying notes.

 

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Table of Contents

 

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,961

 

$

61,826

 

$

43,626

 

$

76,902

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized net gain (loss) on marketable securities, net of tax

 

36

 

(422

)

386

 

615

 

Other comprehensive income (loss):

 

36

 

(422

)

386

 

615

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

15,997

 

$

61,404

 

$

44,012

 

$

77,517

 

 

See accompanying notes.

 

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Table of Contents

 

Supernus Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

Nine Months ended September 30,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

43,626

 

$

76,902

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Loss on extinguishment of debt

 

295

 

382

 

Change in fair value of derivative liability

 

(76

)

(349

)

Depreciation and amortization

 

6,462

 

1,728

 

Amortization of deferred financing costs and debt discount

 

50

 

226

 

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

 

(342

)

286

 

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

 

1,274

 

3,564

 

Non-cash royalty revenue

 

(3,708

)

(3,464

)

Share-based compensation expense

 

6,447

 

4,454

 

Deferred income tax provision

 

13,314

 

(42,377

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(14,639

)

(10,312

)

Inventories

 

1,854

 

(4,866

)

Prepaid expenses and other current assets

 

(2,712

)

1,060

 

Accounts payable

 

(1,312

)

(1,629

)

Accrued sales deductions

 

17,829

 

12,900

 

Accrued expenses

 

2,769

 

2,503

 

Income taxes payable

 

6,482

 

811

 

Deferred licensing revenue

 

(202

)

195

 

Other non-current liabilities

 

894

 

(140

)

Net cash provided by operating activities

 

78,305

 

41,874

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of marketable securities

 

(78,938

)

(31,194

)

Sales and maturities of marketable securities

 

23,052

 

22,398

 

Purchases of property, plant and equipment

 

(1,273

)

(1,302

)

Deferred legal fees

 

(10,130

)

(12,224

)

Net cash used in investing activities

 

(67,289

)

(22,322

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock

 

4,510

 

1,255

 

Net cash provided by financing activities

 

4,510

 

1,255

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

15,526

 

20,807

 

Cash and cash equivalents at beginning of period

 

66,398

 

33,498

 

Cash and cash equivalents at end of period

 

$

81,924

 

$

54,305

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

134

 

$

247

 

 

 

 

 

 

 

Noncash financial activity:

 

 

 

 

 

Conversion of convertible notes and interest make-whole

 

$

4,546

 

$

2,138

 

Deferred legal fees included in accounts payable and accrued expenses

 

$

1,337

 

$

7,920

 

 

See accompanying notes.

 

4



Table of Contents

 

Supernus Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

For the Nine Months ended September 30, 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. 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 launched Oxtellar XR and Trokendi XR in 2013 for the treatment of epilepsy and launched Trokendi XR for the prophylaxis of migraine in adolescents and adults 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 and nine months ended September 30, 2017 are not necessarily indicative of the Company’s future financial results.

 

Marketable Securities

 

Marketable securities consist of investments in U.S. Treasury bills and notes, 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 and 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 September 30, 2017 and December 31, 2016, the fair value of the SERP was $313,000 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 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.

 

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Table of Contents

 

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 $8.1 million and $5.6 million as of September 30, 2017 and December 31, 2016, respectively.

 

Inventories

 

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 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

 

Intangible Assets

 

Intangible assets consist of patent defense costs, which are deferred legal fees that have been incurred in connection with legal proceedings related to the defense of patents for Oxtellar XR and Trokendi XR. Patent defense costs will be charged to expense in the event of an unsuccessful outcome of the ongoing litigation. Patents are carried at cost less accumulated amortization, which is calculated on a straight-line basis over the estimated useful lives of the patents. Amortization commences in the quarter after the costs are incurred. This amortization period is based initially upon the remaining patent life and is adjusted, if necessary, for any settlements or other changes to the expected useful life of the patent. The carrying value of the patents 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 as of September 30, 2017.

 

Impairment of Long-Lived Assets

 

Long-lived assets consist primarily of property and equipment and patent defense costs. 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. Evaluation of 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.

 

There were no indicators of impairment identified for the Company’s long-lived assets as of September 30, 2017.

 

Deferred Financing Costs

 

Deferred financing costs consist of financing costs incurred by the Company in connection with the issuance of the Company’s 7.50% Convertible Senior Secured Notes due 2019 (the Notes). 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.

 

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Table of Contents

 

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, clinical 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, patient 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 takes title and ownership to the product upon physical receipt of the product and then distributes 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 has occurred 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 providers). The allowance for rebates is based on statutory and contractual discount rates and expected claimed rebates 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 healthcare 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 as well as estimates of program activity 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 price at which the Company sells product to 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.

 

·                   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 our 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 sales to contracted customers.

 

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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. As regards to 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 its entirety 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.

 

The Company recorded $0.3 million and $1.5 million of milestone revenue during the three and nine month periods ended September 30, 2017, respectively. No milestone revenue was recorded during the three and nine months ended September 30, 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. Royalty revenue also includes royalty amounts received from collaboration partners, including from Shire Pharmaceuticals based on net product sales of Mydayis.

 

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 consist primarily of: employee-related expenses, including salaries and benefits; share-based compensation expense; expenses incurred under agreements with CROs; fees paid to clinical investigators who are participating in our clinical trials; fees paid to 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.

 

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Advertising Expense

 

The costs of the Company’s advertising efforts are expensed as incurred. The Company incurred approximately $9.6 million and $26.1 million in advertising costs for the three and nine months ended September 30, 2017 and approximately $4.9 million and $16.2 million in advertising costs for the three and nine months ended September 30, 2016, respectively. These expenses 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

 

Accounting Pronouncements Adopted in 2017

 

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 forfeiture assumptions. Additionally, the Company recorded an opening balance sheet adjustment of $392,000 to increase its 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.

 

New Accounting Pronouncements Not Yet Adopted

 

In August 2017, the FASB issued ASU 2017-12, “ Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 provides new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (OCI) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. This standard will be effective for the first annual period beginning after December 15, 2018, including interim periods within those periods.  Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements, but does not expect it to have a material impact.

 

In July 2017, the FASB issued ASU 2017-11, “ Earnings per share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ” The amendments in Part I change the classification analysis of certain equity-linked financial instruments (embedded features) with down round features. When determining whether

 

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certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments in Part II recharacterize the indefinite deferral of certain provisions of Topic 480 with a scope exception and do not have an accounting effect. The amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The amendments in Part II of ASU 2017-11 do not require any transition guidance because those amendments do not have an accounting effect. The Company is currently assessing the impact that this standard will have on its consolidated financial statements, but does not expect it to have a material impact.

 

In May 2017, the FASB issued ASU 2017-09, “ Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, ” which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but does not expect it to have a material impact.

 

In March 2017, the FASB issued ASU 2017-08, “ Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.   The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, as the discount continues to be amortized to maturity. ASU 2017-08 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment recorded directly to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

 

In August 2016, the FASB issued 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 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.

 

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. The guidance permits two methods of adoption: full retrospective method (retrospective application to each prior reporting period presented) or modified retrospective method (retrospective application with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures). The Company has not selected an adoption methodology.

 

Since ASU No. 2014-09 supersedes substantially all existing revenue recognition guidance affecting us under the current standard, it could impact revenue and cost recognition across our business processes. The Company’s project plan includes a three-phase approach to implementing this standard update. The Company is currently finalizing phase one, the assessment phase, of the project.  In the assessment phase, we held revenue recognition workshops with our commercial and finance groups and reviewed a sample of revenue arrangements across the business to initially identify a set of applicable qualitative revenue recognition changes related to the new standard. Phase two will include (a) establishing and documenting key accounting positions, (b) assessing the new disclosure requirements, business processes, and control impacts, and (c) beginning to assess the initial quantitative impacts resulting from the initial standard.  Phase three will include (a) finalizing any changes to accounting policies, (b) preparing new disclosures and implementing new business processes and controls as needed, and (c) quantifying the effect of adoption on opening retained earnings.

 

The Company continues to evaluate the impact of the new standard on the consolidated financial statements and related disclosures and additional differences may be identified as contracts with customers that will impact future periods are executed. The majority of

 

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the Company’s revenue consists of sales of products that represent a single performance obligation where control transfers at the point in time title and risk of loss pass to the customer. The adoption of the new ASU will most likely impact our revenue recognition practices on our product sales with regards to the accounting for variable considerations such as incentives and sales deductions and the related financial statement presentation.

 

In addition, the Company also has licensing and collaboration arrangements, where it receives milestone and royalty payments. The provisions of the new standard may impact the timing of revenue associated with these arrangements; i.e., may result in acceleration of revenue recognition based on the transfer of control. We expect that disclosures in the notes to the consolidated financial statements related to revenue recognition will be expanded in line with the requirements of the new standard to further describe the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company is in the process of assessing its accounting and forecasting considerations to ensure its ability to record, report, forecast, and analyze results under the new standard.

 

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 that would be paid to transfer a liability in an orderly transaction between market participants. Such transactions 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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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

 

 

 

September 30, 2017

 

 

 

(unaudited)

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Total Carrying

 

Quoted Prices

 

Other

 

Significant

 

 

 

Value at

 

in Active

 

Observable

 

Unobservable

 

 

 

September 30,

 

Markets

 

Inputs

 

Inputs

 

 

 

2017

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

81,924

 

$

81,924

 

$

 

$

 

Marketable securities

 

32,626

 

1,871

 

30,755

 

 

Long term marketable securities

 

123,123

 

698

 

122,425

 

 

Marketable securities - restricted (SERP)

 

313

 

 

313

 

 

Total assets at fair value

 

$

237,986

 

$

84,493

 

$

153,493

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

 

$

 

$

 

 

 

 

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, certificates of deposit, 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 “make-whole fundamental change” provision (as defined in the Indenture governing the Notes) expired on May 1, 2017.

 

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

 

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

 

At September 30, 2017 (unaudited):

 

Available for Sale

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Corporate debt securities

 

$

155,713

 

286

 

(250

)

$

155,749

 

 

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:

 

 

 

September 30,

 

 

 

2017

 

 

 

(unaudited)

 

Less Than 1 Year

 

$

32,626

 

1 year to 2 years

 

38,121

 

3 years to 4 years

 

85,002

 

Greater Than 4 Years

 

 

Total

 

$

155,749

 

 

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.

 

4. Inventories

 

Inventories consist of the following, in thousands:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

Raw materials

 

$

2,178

 

$

2,091

 

Work in process

 

4,690

 

8,874

 

Finished goods

 

8,079

 

5,836

 

 

 

$

14,947

 

$

16,801

 

 

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5.  Property and Equipment

 

Property and equipment consist of the following, in thousands:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

Computer equipment

 

$

1,214

 

$

1,206

 

Software

 

1,966

 

1,807

 

Lab equipment and furniture

 

7,805

 

6,758

 

Leasehold improvements

 

2,729

 

2,642

 

Construction in progress

 

 

28

 

 

 

13,714

 

12,441

 

Less accumulated depreciation and amortization

 

(9,026

)

(8,097

)

 

 

$

4,688

 

$

4,344

 

 

Depreciation and amortization expense on property and equipment was approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2017, and approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2016, respectively.

 

6.  Intangible Assets

 

Intangible assets consist of patent defense costs, which are deferred legal fees incurred in conjunction with defending patents for Oxtellar XR and Trokendi XR.

 

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

 

 

 

Weighted-

 

September 30,

 

December 31,

 

 

 

Average Life

 

2017

 

2016

 

 

 

(unaudited)

 

Capitalized patent defense costs

 

5.9 - 10 years

 

$

43,978

 

$

37,633

 

 

 

 

 

 

 

 

 

Less accumulated amortization

 

 

 

(6,816

)

(1,283

)

 

 

 

 

$

37,162

 

$

36,350

 

 

In March 2017, the Company entered into two settlements with various companies related to Trokendi XR patent litigation. The remaining unamortized capitalized patent defense cost for Trokendi XR is amortized through the settlement date of January 1, 2023.

 

Amortization expense related to intangible assets was approximately $4.1 million and $5.5 million for the three and nine months ended September 30, 2017, and approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2016, respectively.

 

There were no indicators of impairment identified.

 

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7.  Accrued Expenses

 

Accrued expenses are comprised of the following, in thousands:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

Accrued compensation

 

$

13,870

 

$

9,145

 

Accrued professional fees

 

2,212

 

6,447

 

Accrued clinical trial and clinical supply costs

 

4,251

 

4,350

 

Accrued product costs

 

807

 

1,794

 

Accrued interest expense

 

 

61

 

Other accrued expenses

 

5,752

 

5,630

 

 

 

$

26,892

 

$

27,427

 

 

8.   Convertible Senior Secured Notes

 

The table below summarizes activity related to the Notes from their issuance on May 3, 2013 through September 30, 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

 

(4,575

)

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

 

360

 

Accretion of debt discount and deferred financing costs

 

50

 

September 30, 2017 carrying value, unaudited

 

$

 

 

During the nine months ended September 30, 2017, approximately $4.6 million of the Notes were presented to the Company for conversion. Accordingly, the Company issued approximately 0.9 million shares of common stock in conversion of the principal amount of the Notes. As a result of the conversions, the Company incurred a loss of approximately $0.3 million on extinguishment of debt during the nine months ended September 30, 2017, which is included as a separate component of other income (expense) on the Consolidated Statement of Operations. During the nine months ended September 30, 2016, consequent to 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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9. Summary Stockholders’ Equity

 

The following summary table provides details related to the activity in certain captions within Stockholders’ Equity for the nine months ended September 30, 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

 

 

6,447

 

 

Issuance of ESPP shares

 

 

908

 

 

 

Exercise of stock options

 

 

3,602

 

 

Equity issued on note conversion

 

1

 

4,546

 

 

Net income

 

 

 

43,626

 

Balance, September 30, 2017

 

$

51

 

$

291,841

 

$

(40,481

)

 

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:

 

 

 

Three Months ended

 

Nine Months ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Research and development

 

$

356

 

$

253

 

$

1,071

 

$

882

 

Selling, general and administrative

 

2,004

 

1,230

 

5,376

 

3,572

 

Total

 

$

2,360

 

$

1,483

 

$

6,447

 

$

4,454

 

 

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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

 

1,074,955

 

$

25.88

 

 

 

Exercised

 

(383,588

)

$

9.39

 

 

 

Forfeited or expired

 

(66,797

)

$

17.07

 

 

 

Outstanding, September 30, 2017

 

4,268,658

 

$

14.15

 

7.59

 

 

 

 

 

 

 

 

 

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 September 30, 2017:

 

 

 

 

 

 

 

Vested and expected to vest

 

4,268,658

 

$

14.15

 

7.59

 

Exercisable

 

1,961,784

 

$

9.30

 

6.40

 

 

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 and nine months ended September 30, 2017 and 2016:

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Stock options, stock appreciation rights, and ESPP awards

 

15,170

 

12,097

 

105,699

 

67,030

 

 

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

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Numerator, in thousands:

 

 

 

 

 

 

 

 

 

Net income used for calculation of basic EPS

 

$

15,961

 

$

61,826

 

$

43,626

 

$

76,902

 

 

 

 

 

 

 

 

 

 

 

Interest expense on convertible debt

 

(14

)

202

 

134

 

577

 

Changes in fair value of derivative liabilities

 

 

(124

)

(76

)

(349

)

Loss on extinguishment of debt

 

91

 

 

295

 

382

 

Loss on extinguishment of outstanding debt, as if converted

 

(273

)

(705

)

(321

)

(1,183

)

Total adjustments

 

(196

)

(627

)

32

 

(573

)

Net income used for calculation of diluted EPS

 

$

15,765

 

$

61,199

 

$

43,658

 

$

76,329

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

51,046,375

 

49,516,595

 

50,583,726

 

49,395,284

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive potential common shares:

 

 

 

 

 

 

 

 

 

Shares underlying Convertible Senior Secured Notes

 

56,484

 

1,240,814

 

382,230

 

1,274,491

 

Shares issuable to settle interest make-whole derivatives

 

 

27,296

 

7,013

 

71,537

 

Stock options and stock appreciation rights

 

2,525,530

 

1,189,730

 

2,254,464

 

874,022

 

Total potential dilutive common shares

 

2,582,014

 

2,457,840

 

2,643,707

 

2,220,050

 

Weighted average shares outstanding, diluted

 

53,628,389

 

51,974,435

 

53,227,433

 

51,615,334

 

 

 

 

 

 

 

 

 

 

 

Net income per share, basic

 

$

0.31

 

$

1.25

 

$

0.86

 

$

1.56

 

Net income per share, diluted

 

$

0.29

 

$

1.18

 

$

0.82

 

$

1.48

 

 

12. Income Taxes

 

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

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Income tax expense

 

$

6,949

 

$

(42,690

)

$

21,932

 

$

(42,085

)

Effective tax rate

 

30.3

%

-223

%

33.5

%

-120.9

%

 

The income tax expense for the three and nine months ended September 30, 2017 is attributable to U.S. federal and state income tax. The increase in the income tax expense and the effective tax rate for the three and nine months ended September 30, 2017 as compared to the same periods in 2016 is primarily attributable to the release of the valuation allowance on the deferred tax assets, which resulted in an income tax benefit in the third quarter of 2016.

 

During the third quarter, we recorded an income tax benefit of approximately $2.9 million as a result of the Company recognizing excess tax benefits related to the employee exercise of stock options. This benefit causes the effective tax rate to be significantly less than our historical annual effective tax rate.

 

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 the aggregate. During the three months ended September 30, 2017, none of the allowance was utilized. During the nine months ended September 30, 2017, $79,000 of the allowance was utilized. During the three and nine months ended September 30, 2016, none of the allowance was utilized. As of September 30, 2017, $0.4 million remains available for tenant improvements.

 

Rent expense for the leased facilities and leased vehicles for the three and nine months ended September 30, 2017 was $0.8 million and $1.9 million, respectively. Rent expense for the leased facilities and leased vehicles for the

 

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three and nine months ended September 30, 2016 was approximately $0.7 million and $2.0 million, respectively.

 

Future minimum lease payments under non-cancelable operating leases as of September 30, 2017 are as follows, in thousands, unaudited:

 

Year ending December 31:

 

2017 (remaining)

 

739

 

2018

 

1,487

 

2019

 

1,344

 

Thereafter

 

454

 

 

 

$

4,024

 

 

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 non-cash royalty revenue of $1.4 million for the three months ended September 30, 2017 as compared to $1.1 million for the three months ended September 30, 2016, respectively. We recognized non-cash royalty revenue of $3.7 million for the nine months ended September 30, 2017 as compared to $3.5 million for the nine months ended September 30, 2016, respectively. We recognized non-cash interest expense of $0.2 million for the three months ended September 30, 2017 as compared to $1.0 million for the three months ended September 30, 2016, respectively. We recognized non-cash interest expense of $1.3 million for the nine months ended September 30, 2017 as compared to $3.6 million for the nine months ended September 30, 2016, respectively.

 

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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, launched in 2013 for the treatment of 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 which 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 children and adolescents 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 children and adolescents who have ADHD.

 

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The table below summarizes our current portfolio 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 III

 

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 in adults and adolescents 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.

 

IMS Prescriptions

 

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 474,460 prescriptions filled for both drugs during the nine months ended September 30, 2017, which is 28.1% higher than the 370,397 prescriptions reported for the nine months ended September 30, 2016.

 

Since the migraine launch, Trokendi XR has shown robust acceleration in prescription growth. For the third quarter of 2017, total prescriptions for Trokendi XR increased by 21,509, or 17.3%, from the second quarter of 2017. This compares to an increase of 5,955 prescriptions, or 6.4%, in the third quarter of 2016 over the second quarter of 2016. Similarly, for the same sequential quarter-to-quarter time periods, new prescriptions for Trokendi XR increased by 7,284, or 10.6%, in 2017, compared to 1,165, or 2.7%, in 2016.

 

Patents

 

We received several Paragraph IV Notice Letters concerning Oxtellar XR and Trokendi XR from various third-parties. (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. SPN-810 has been granted fast-track designation by the FDA. Our Phase III clinical trial (P301) is being conducted under a Special Protocol Assessment (SPA), using an agreed-upon novel scale, developed by us with the FDA, to measure IA. We initiated two Phase III clinical trials in 2015 (P301 and P302), using the same trial design except that under the SPA, an interim analysis was conducted in the first trial when one-half of the patients (146 patients) reached randomization. The purpose of the interim analysis was to assess the efficacy of the doses being tested and allow for optimization of the trial design of both trials.

 

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The interim analysis has been completed and both trials will continue through completion. The results of the interim analysis led to our discontinuing the 18 mg dose arm. Moving forward, all patients in each of the two trials will be randomized to either the 36 mg dose arm or placebo until the predetermined total number of patients are enrolled in each of the two trials. We expect patient enrollment to continue through mid-2018.

 

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 positive topline results. Subsequent to the end of Phase II meeting with the FDA in June 2017, we have initiated Phase III clinical trials for SPN-812 in September of 2017.

 

We expect to incur significant research and development expenses related to the continued development of each of our product candidates from 2017 through FDA approval or until the program terminates.

 

Collaboration

 

Mydayis (mixed salts of a single-entity amphetamine product) was originally developed by Shire Laboratories, the former division of Shire that subsequently became Supernus Pharmaceuticals. On June 20, 2017, Shire announced that the FDA approved Mydayis, a once-daily treatment comprised of three different types of drug-releasing beads, for patients 13 years and older with ADHD. Based on the agreement between the Company and Shire, Shire will pay to the Company 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, patient 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, as well as contractual terms with our customers. 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.

 

Intangible Assets

 

Intangible assets consist of patent defense costs, which are deferred legal fees that have been incurred in connection with legal proceedings related to the defense of patents for Oxtellar XR and Trokendi XR. Amortization commences in the quarter after the costs are incurred. This amortization period is based initially upon the remaining patent life and is adjusted, if necessary, for any settlements or other changes to the expected useful life of the patent.  Patent defense costs 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 clinical investigators who are participating in our clinical trials; fees paid to 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.

 

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Table of Contents

 

Accrued Clinical Expenses

 

Clinical trials are inherently complex and often involve multiple service providers. 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 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 services 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, including 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 September 30, 2017 and 2016

 

 

 

Three Months ended September 30,

 

Increase/

 

 

 

2017

 

2016

 

(decrease)

 

 

 

(unaudited, in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

Net product sales

 

$

78,066

 

$

55,618

 

$

22,448

 

Royalty revenue

 

2,010

 

1,140

 

870

 

Licensing revenue

 

322

 

52

 

270

 

Total revenues

 

80,398

 

56,810

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of product sales

 

4,251

 

3,428

 

823

 

Research and development

 

12,980

 

7,868

 

5,112

 

Selling, general and administrative

 

40,825

 

25,675

 

15,150

 

Total costs and expenses

 

58,056

 

36,971

 

 

 

Operating income

 

22,342

 

19,839

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

814

 

378

 

436

 

Interest expense

 

 

(202

)

(202

)

Interest expense-nonrecourse liability related to sale of future royalties

 

(155

)

(1,004

)

(849

)

Changes in fair value of derivative liabilities

 

 

125

 

(125

)

Loss on extinguishment of debt

 

(91

)

 

91

 

Total other expenses

 

568

 

(703

)

 

 

Earnings before income taxes

 

22,910

 

19,136

 

 

 

Income tax expense (benefit)

 

6,949

 

(42,690

)

49,639

 

Net income

 

$

15,961

 

$

61,826

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

 

Net Product Sales.   The increase in net product sales for the three months ended September 30, 2017 as compared to the same period in 2016 is primarily driven by increased prescription volume from the launch of the migraine indication for Trokendi XR in April 2017. Price increases in 2016 and 2017 also contributed to the increase in net product sales. 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
Three Months ended September 30,

 

 

 

 

 

 

Change in Net Product

 

 

 

2017

 

2016

 

Sales (%)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Trokendi XR

 

$

59,339

 

$

41,690

 

42.3

%

Oxtellar XR

 

18,727

 

13,928

 

34.5

%

 

 

 

 

 

 

 

 

Total

 

$

78,066

 

$

55,618

 

40.4

%

 

Royalty Revenue. Royalty revenue was $2.0 million during the three months ended September 30, 2017 as compared to $1.1 million for the three months ended September 30, 2016. Royalty revenue includes non-cash royalty from the Healthcare Royalty Partners III, L.P. (HC Royalty) agreement and royalty from collaboration partners. The increase is primarily due to royalty earned from collaboration partners.

 

Licensing Revenue. Total licensing revenue for the three months ended September 30, 2017 and 2016 was $0.3 million and $52,000 respectively. The increase of $248,000 is primarily due to milestone revenue received during the quarter.

 

Cost of Product Sales. Cost of product sales during the three months ended September 30, 2017 was $4.3 million, an increase of $0.9 million, or 24.0%, as compared to $3.4 million for the three months ended September 30, 2016. The quarter over quarter increase is attributable primarily to an increase in the number of units sold.

 

Research and Development Expense.   Research and development (R&D) expenses during the three months ended September 30, 2017 were $13.0 million as compared to $7.9 million for the three months ended September 30, 2016, an increase of $5.1 million or 65.0%. This increase is primarily due to increased costs associated with ongoing patient recruitment for Phase III trials for SPN-810 and costs incurred in preparation for Phase III clinical trials for SPN-812, which were initiated in September 2017.

 

Selling and Marketing.   The increase in selling and marketing expenses of approximately $10.9 million for the three months ended September 30, 2017, as compared to the same period in 2016, is primarily the result of an increase in workforce headcount and headcount related support for our commercial products, coupled with development, production, and execution of promotional and marketing programs for the launch of the migraine indication for Trokendi XR in 2017. Of this total, approximately $2.9 million is due to increased compensation, benefits, travel, and other employee-related expenses associated with increased headcount in our field sales force; increased sample production costs of approximately $1.7 million; and approximately $5.5 million is due to increased expenses for marketing programs, speaker programs, and consulting services to support our commercial products, including the launch of the migraine indication for Trokendi XR in 2017.

 

General and Administrative .   General and administrative expenses increased by $4.2 million for the three months ended September 30, 2017 as compared to the same period in 2016, primarily due to approximately $3.7 million in increased patent amortization expense.

 

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Table of Contents

 

The table below shows the c omparison of Selling and Marketing and General and Administrative expenses for the three months ended September 30, 2017 and 2016:

 

 

 

Selling, General and Administrative

 

 

 

 

 

Three Months ended September 30,

 

 

 

 

 

2017

 

2016

 

Change (%)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Selling and Marketing

 

$

29,301

 

$

18,389

 

59.3

%

General and Administrative

 

11,524

 

7,286

 

58.2

%

 

 

 

 

 

 

 

 

Total

 

$

40,825

 

$

25,675

 

59.0

%

 

Interest Income. During the three months ended September 30, 2017 and 2016, we recognized $0.8 million and $0.4 million, respectively, of interest income earned on our cash, cash equivalents and marketable securities investments. The increase is primarily attributable to increased in cash, cash equivalents, and marketable securities holdings year over year.

 

Interest Expense.  Interest expense was zero during the three months ended September 30, 2017 as compared to $0.2 million for the three months ended September 30, 2016. The decrease was primarily due to the decrease in the principal amount of our outstanding 7.5% Convertible Senior Secured Notes (Notes). As of July 2017, all Notes were converted. During the three months ended September 30, 2017, a total of $1.6 million of Notes and related accrued interest were converted into 0.3 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 $0.2 million during the three months ended September 30, 2017 as compared to $1.1 million for the three months ended September 30, 2016. The decrease of $0.9 million for this non-cash expense item was primarily due to reduced projections of future royalties related to Orenitram.

 

Changes in Fair Value of Derivative Liability.   During the three months ended September 30, 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. There was no gain recognized for the three months ended September 30, 2017 as the “make-whole fundamental change” provision (as defined in the Indenture governing the Notes) expired in May 2017. As of July 2017, all Notes were converted.

 

Loss on Extinguishment of Debt.  During the three months ended September 30, 2017, we recognized a non-cash loss on extinguishment of debt of $91,000 related to the conversion of $1.6 million of our Notes. There was no loss on extinguishment of debt for the same periods in 2016 as no Notes were converted during the three months ended September 30, 2016.

 

Income Tax.   During the three months ended September 30, 2017, we recorded $6.9 million of tax expense as compared to a $42.7 million tax benefit for the three months ended September 30, 2016, an increase of $49.6 million. The increase is primarily attributable to the release of the valuation allowance on the deferred tax assets in 2016, which resulted in an income tax benefit in the third quarter of 2016.

 

Net Income.   We realized net income of $16.0 million during the three months ended September 30, 2017, as compared to net income of $61.8 million during the three months ended September 30, 2016, a decrease of $45.8 million. This change was primarily due to the release of the valuation allowance against deferred tax assets in 2016, which resulted in an income tax benefit as described above.

 

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Comparison of the nine months ended September 30, 2017 and September 30, 2016

 

 

 

Nine Months ended September 30,

 

Increase/

 

 

 

2017

 

2016

 

(decrease)

 

 

 

(unaudited, in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

Net product sales

 

$

207,763

 

$

148,978

 

$

58,785

 

Royalty revenue

 

4,338

 

3,464

 

874

 

Licensing revenue

 

1,702

 

187

 

1,515

 

Total revenues

 

213,803

 

152,629

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of product sales

 

11,060

 

8,214

 

2,846

 

Research and development

 

33,405

 

29,539

 

3,866

 

Selling, general and administrative

 

104,141

 

76,956

 

27,185

 

Total costs and expenses

 

148,606

 

114,709

 

 

 

Operating income

 

65,197

 

37,920

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

2,002

 

1,071

 

931

 

Interest expense

 

(148

)

(577

)

(429

)

Interest expense-nonrecourse liability related to sale of future royalties

 

(1,274

)

(3,564

)

(2,290

)

Changes in fair value of derivative liabilities

 

76

 

349

 

273

 

Loss on extinguishment of debt

 

(295

)

(382

)

(87

)

Total other expenses

 

361

 

(3,103

)

 

 

Earnings before income taxes

 

65,558

 

34,817

 

 

 

Income tax expense (benefit)

 

21,932

 

(42,085

)

64,017

 

Net income

 

$

43,626

 

$

76,902

 

 

 

 

Net Product Sales.   The increase in net product sales for the nine months ended September 30, 2017 as compared to the same period 2016, was primarily driven by increased prescription volume from the launch of the migraine indication for Trokendi XR in April 2017. Price increases in 2016 and 2017 also contributed to the increase in net product sales. 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
Nine Months ended September 30,

 

Change in Net Product

 

 

 

2017

 

2016

 

Sales (%)

 

 

 

(unaudited)

 

 

 

Trokendi XR

 

$

157,337

 

$

111,673

 

40.9

%

Oxtellar XR

 

50,426

 

37,305

 

35.2

%

 

 

 

 

 

 

 

 

Total

 

$

207,763

 

$

148,978

 

39.5

%

 

Royalty Revenue. Royalty revenue was $4.3 million during the nine months ended September 30, 2017 as compared to $3.5 million for the nine months ended September 30, 2016. Royalty revenue includes non-cash royalty from the HC Royalty agreement and royalty from collaboration partners. The increase in 2017 is primarily due to royalty earned from collaboration partners.

 

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Licensing Revenue. Total licensing revenue for the nine months ended September 30, 2017 and 2016 was $1.7 million and $0.2 million respectively. The increase of $1.5 million is primarily due to milestone payments received during the period.

 

Cost of Product Sales. Cost of product sales during the nine months ended September 30, 2017 was $11.1 million, an increase of $3.0 million, or 34.6 %, as compared to $8.1 million for the nine months ended September 30, 2016. The quarter over quarter increase is attributable primarily to an increase in the number of units sold.

 

Research and Development Expense.   R&D expenses during the nine months ended September 30, 2017 were $33.4 million as compared to $29.5 million for the nine months ended September 30, 2016, an increase of $3.9 million or 13.1%. This increase is primarily due to increased costs associated with ongoing patient recruitment for Phase III trials for SPN-810 and costs incurred in 2017 in preparation for Phase III clinical trials for SPN-812.  These trials were initiated during the second half of 2017.

 

Selling and Marketing.   The increase in selling and marketing expenses of approximately $21.2 million for the nine months ended September 30, 2017, as compared to the same period in 2016, is primarily the result of an increase in workforce headcount and headcount related support for our commercial products, coupled with development, production, and execution of promotional and marketing programs for the launch of the migraine indication for Trokendi XR in 2017. Of this total, approximately $6.6 million is due to increased compensation, benefits, travel, and other employee-related expenses associated with increased headcount in our field sales force; approximately $2.4 million is due to increased sample production; and approximately $10.8 million is due to increased expenses for marketing programs, speaker programs, and consulting services to support our commercial products, including the launch the migraine indication for Trokendi XR in 2017.

 

General and Administrative .   General and administrative expenses increased by $5.9 million for the nine months ended September 30, 2017, as compared to the same period in 2016. Of this total, approximately $2.3 million is due to increased compensation, benefits and other employee-related expenses as a result of increased executive compensation, headcount and share-based compensation; approximately $5.2 million is due to increased patent amortization and depreciation expense; and are offset by approximately $1.9 million in decreased regulatory affairs expenses for Trokendi XR.

 

The table below shows the c omparison of Selling and Marketing and General and Administrative expenses for the nine months ended September 30, 2017 and 2016:

 

 

 

Selling, General and Administrative
Nine Months ended September 30,

 

 

 

 

 

2017

 

2016

 

Change (%)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Selling and Marketing

 

$

78,977

 

$

57,741

 

36.8

%

General and Administrative

 

25,164

 

19,215

 

31.0

%

 

 

 

 

 

 

 

 

Total

 

$

104,141

 

$

76,956

 

35.3

%

 

Interest Income. During the nine months ended September 30, 2017 and 2016, we recognized $2.0 million and $1.1 million, respectively, of interest income earned on our cash, cash equivalents and marketable securities investments. The increase is primarily attributable to increased cash, cash equivalents, and marketable securities holdings year over year.

 

Interest Expense.  Interest expense was $0.1 million during the nine months ended September 30, 2017 as compared to $0.6 million for the nine months ended September 30, 2016. The decrease of $0.5 million was primarily due to a decrease in the principal amount of our Notes. As of July 2017, all Notes were converted. During the nine months ended September 30, 2017, a total of $4.6 million of Notes and related accrued interest were converted into 0.9 million shares of common stock.

 

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Interest Expense—Non-recourse Liability Related to Sale of Future Royalties. Non-cash interest expense related to our royalty liability was $1.3 million during the nine months ended September 30, 2017 as compared to $3.6 million for the nine months ended September 30, 2016. The decrease of $2.3 million for this non-cash expense item was primarily due to reduced projections of future royalties related to Orenitram.

 

Changes in Fair Value of Derivative Liability.   During the nine months ended September 30, 2017 and 2016, we recognized a non-cash gain of $76,000 and $0.4 million, respectively, related to a change in estimated fair value of the interest make-whole derivative liability related to our Notes. The “make-whole fundamental change” provision (as defined in the Indenture governing the Notes) expired in May 2017. As of July 2017, all Notes were converted.

 

Loss on Extinguishment of Debt.  During the nine months ended September 30, 2017, we recognized a non-cash loss on extinguishment of debt of $0.3 million related to the conversion of $4.6 million of our Notes. During the nine months ended September 30, 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 nine months ended September 30, 2017, we recorded $21.9 million of tax expense as compared to a $42.1 million tax benefit for the nine months ended September 30, 2016, an increase of $64.0 million. The increase is primarily attributable to the release of the valuation allowance in 2016 on the deferred tax assets, which resulted in an income tax benefit in the third quarter of 2016.

 

Net Income.   We realized net income of $43.6 million during the nine months ended September 30, 2017, as compared to net income of $76.9 million during the nine months ended September 30, 2016, a decrease of $33.3 million. This change was primarily due to the release of the valuation allowance against deferred tax assets in 2016, which resulted in an income tax benefit as described above.

 

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 and including expenses in anticipation of launching our product candidates. We expect to incur significantly increased R&D expenses for the remainder of 2017 and in subsequent years to support the development of SPN-810 and SPN-812, including their respective Phase III trials. We expect our selling, general and administrative expenses to continue to increase in the foreseeable future, as we continue to invest in the commercialization of Trokendi XR and Oxtellar XR, and in areas such as compliance, finance, management of our intellectual property portfolio, information technology systems and personnel, in each case, commensurate with the growth of our business.

 

Our working capital at September 30, 2017 was $86.4 million, an increase of $15.7 million compared to our working capital of $70.7 million at December 31, 2016. Our long term marketable securities at September 30, 2017 were $123.1 million, an increase of $47.7 million, as compared to $75.4 million at December 31, 2016.

 

Our stockholders’ equity increased by $59.9 million during the nine months ended September 30, 2017, primarily as a result of net income, the issuance of shares related to the conversion of our Notes, option exercises, and share-based compensation.

 

As of September 30, 2017, all $90.0 million of our Notes have converted. Cumulatively, we issued a total of approximately 17.0 million shares of common stock in the conversion of the principal amount of the Notes. We issued an additional 2.2 million shares of common stock and also paid approximately $1.7 million in cash in settlement of the interest make-whole provision related to the converted Notes. Our obligations under the Indenture governing the Notes were satisfied and discharged.

 

We achieved positive cash flow and profitability from operations in each quarter of 2016 and in all three quarters 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.

 

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Cash Flows

 

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

 

 

 

Nine Months ended September 30,

 

Increase/

 

 

 

2017

 

2016

 

(decrease)

 

 

 

(unaudited)

 

 

 

Net cash provided by (used in):