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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
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)
Delaware20-2590184
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
9715 Key West Avenue
Rockville MD20850
(Address of principal executive offices)(Zip Code)
(301838-2500
(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.   Yes   No
Indicate by check mark whether the registrant has submitted electronically pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes 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
Accelerated filer 
Non-accelerated filer Smaller reporting company 
Emerging growth 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).   Yes   No
Securities registered pursuant to Section 12(b) of the Exchange Act
Title of each classOutstanding at October 30, 2020Trading SymbolName of each exchange on which registered
Common Stock, $0.001 par value per share52,685,121SUPNThe Nasdaq Global Market



Table of Contents
SUPERNUS PHARMACEUTICALS, INC.
FORM 10-Q — QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED September 30, 2020
Page No.


2

Table of Contents
PART I — FINANCIAL INFORMATION

Supernus Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
September 30,December 31,
20202019
(unaudited)
Assets
Current assets
Cash and cash equivalents$204,293 $181,381 
Marketable securities147,657 165,692 
Accounts receivable, net133,107 87,332 
Inventories, net42,465 26,628 
Prepaid expenses and other current assets24,493 11,611 
Total current assets552,015 472,644 
Long term marketable securities388,185 591,773 
Property and equipment, net17,395 17,068 
Operating lease assets21,019 21,279 
Finance lease asset21,676  
Intangible assets, net402,265 24,840 
Goodwill89,143  
Deferred income tax assets 32,063 
Other assets18,324 615 
Total assets$1,510,022 $1,160,282 
Liabilities and stockholders’ equity
Current liabilities
Accounts payable$11,193 $10,141 
Accrued product returns and rebates136,973 107,629 
Accrued expenses and other current liabilities56,289 34,305 
Contingent consideration, current portion82,900  
Income taxes payable 2,443 
Operating lease liabilities, current portion3,741 2,825 
Finance lease liability, current portion3,612  
Nonrecourse liability related to sale of future royalties, current portion4,898 3,244 
Total current liabilities299,606 160,587 
Convertible notes, net357,521 345,170 
Contingent consideration, long term33,000  
Nonrecourse liability related to sale of future royalties, long term14,960 19,248 
Operating lease liabilities, long term29,522 30,440 
Finance lease liability, long term19,289  
Deferred income tax liabilities37,941  
Other liabilities9,304 9,409 
Total liabilities801,143 564,854 
Stockholders’ equity
Common stock, $0.001 par value; 130,000,000 shares authorized; 52,670,121 and 52,533,348 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
53 53 
Additional paid-in capital403,396 388,410 
Accumulated other comprehensive earnings, net of tax9,700 7,417 
Retained earnings295,730 199,548 
Total stockholders’ equity708,879 595,428 
Total liabilities and stockholders’ equity$1,510,022 $1,160,282 
See accompanying notes.
3

Table of Contents
Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Earnings
(in thousands, except share and per share data)
Three Months ended
September 30,
Nine Months ended
September 30,
2020201920202019
(unaudited)(unaudited)
Revenues
Net product sales$152,133 $100,034 $368,607 $285,491 
Royalty revenues3,002 2,106 8,233 6,818 
Total revenues155,135 102,140 376,840 292,309 
Costs and expenses
Cost of goods sold(a)
21,388 4,819 33,926 12,547 
Research and development16,839 16,943 58,023 49,307 
Selling, general and administrative54,660 39,343 144,377 118,782 
Amortization of intangible assets6,108 1,306 9,814 3,918 
Total costs and expenses98,995 62,411 246,140 184,554 
Operating earnings56,140 39,729 130,700 107,755 
Other income (expense)
Interest income3,262 5,559 12,988 15,696 
Interest expense(6,088)(5,662)(17,658)(16,930)
Other income (expense), net(603)(36)2,925 54 
Total other expense(3,429)(139)(1,745)(1,180)
Earnings before income taxes52,711 39,590 128,955 106,575 
Income tax expense12,714 10,730 32,773 26,648 
Net earnings$39,997 $28,860 $96,182 $79,927 
Earnings per share
Basic$0.76 $0.55 $1.83 $1.53 
Diluted$0.74 $0.54 $1.79 $1.48 
Weighted-average shares outstanding
Basic52,658,850 52,453,384 52,583,891 52,392,232 
Diluted53,762,642 53,805,838 53,663,273 53,898,486 
___________________________________________
(a) Excludes amortization of acquired intangible assets




See accompanying notes.
4

Table of Contents
Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Comprehensive Earnings
(in thousands)
Three Months ended
September 30,
Nine Months ended
September 30,
2020201920202019
(unaudited)(unaudited)
Net earnings$39,997 $28,860 $96,182 $79,927 
Other comprehensive earnings
Unrealized gain (loss) on marketable securities, net of tax(1,659)1,337 2,283 10,419 
Other comprehensive earnings (loss)(1,659)1,337 2,283 10,419 
Comprehensive earnings$38,338 $30,197 $98,465 $90,346 







































See accompanying notes.
5

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Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Nine Months ended September 30, 2020 and 2019
(unaudited, in thousands, except share data)
jCommon StockAdditional 
Paid-in Capital
Accumulated Other
Comprehensive
Earnings (Loss)
Retained
Earnings
Total
Stockholders’
Equity
SharesAmount
Balance, December 31, 201952,533,348 $53 $388,410 $7,417 $199,548 $595,428 
Share-based compensation— — 3,988 — — 3,988 
Issuance of common stock in connection with the Company’s equity award plans3,811 — 32 — — 32 
Net earnings— — — — 21,518 21,518 
Unrealized loss on marketable securities, net of tax— — — (7,583)— (7,583)
Balance, March 31, 202052,537,159 $53 $392,430 $(166)$221,066 $613,383 
Share-based compensation— — 4,962 — — 4,962 
Issuance of common stock in connection with the Company’s equity award plans86,925 — 1,437 — — 1,437 
Net earnings— — — — 34,667 34,667 
Unrealized gain on marketable securities, net of tax— — — 11,525 — 11,525 
Balance, June 30, 202052,624,084 $53 $398,829 $11,359 $255,733 $665,974 
Share-based compensation— — 4,490 — — 4,490 
Issuance of common stock in connection with the Company’s equity award plans46,037 — 77 — — 77 
Net earnings— — — — 39,997 39,997 
Unrealized loss on marketable securities, net of tax — — — (1,659)— (1,659)
Balance, September 30, 202052,670,121 $53 $403,396 $9,700 $295,730 $708,879 










See accompanying notes.
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Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (continued)
Nine Months ended September 30, 2020 and 2019
(unaudited, in thousands, except share data)
Common StockAdditional 
Paid-in Capital
Accumulated Other
Comprehensive
Earnings (Loss)
Retained
Earnings
Total
Stockholders’
Equity
SharesAmount
Balance, December 31, 201852,316,583 $52 $369,637 $(3,158)$86,492 $453,023 
Share-based compensation— — 3,287 — — 3,287 
Issuance of common stock in connection with the Company’s equity award plans57,665 — 783 — — 783 
Net earnings— — — — 18,340 18,340 
Unrealized gain on marketable securities, net of tax— — — 4,585 — 4,585 
Balance, March 31, 201952,374,248 $52 $373,707 $1,427 $104,832 $480,018 
Share-based compensation— — 4,022 — — 4,022 
Issuance of common stock in connection with the Company’s equity award plans74,788 — 1,640 — — 1,640 
Net earnings— — — — 32,727 32,727 
Unrealized gain on marketable securities, net of tax— — — 4,497 — 4,497 
Balance, June 30, 201952,449,036 $52 $379,369 $5,924 $137,559 $522,904 
Share-based compensation— — 3,914 — — 3,914 
Issuance of common stock in connection with the Company’s equity award plans13,900 — 242 — — 242 
Net earnings— — — — 28,860 28,860 
Unrealized gain on marketable securities, net of tax— — — 1,337 — 1,337 
Balance, September 30, 201952,462,936 $52 $383,525 $7,261 $166,419 $557,257 












See accompanying notes.
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Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine Months ended September 30,
20202019
(unaudited)
Cash flows from operating activities
Net earnings$96,182 $79,927 
Adjustments to reconcile net earnings to net cash provided by operating activities:
Share-based compensation expense13,440 11,223 
Depreciation and amortization12,621 5,029 
Amortization of premium/discount on marketable securities(3,217)(3,058)
Amortization of deferred financing costs and debt discount12,351 11,701 
Realized gains from sales of marketable securities(3,636)(131)
Change in fair value of contingent consideration200  
Noncash interest expense4,515 4,331 
Noncash royalty revenue(6,320)(5,028)
Noncash operating lease cost2,599 2,600 
Deferred income tax benefit(280)(1,689)
Changes in operating assets and liabilities:
Accounts receivable(26,840)16,344 
Inventories(5,437)155 
Prepaid expenses and other current assets(9,318)(4,236)
Other noncurrent assets(2,416)(141)
Accounts payable(1,527)(334)
Accrued product returns and rebates21,166 (9,013)
Accrued expenses and other current liabilities8,410 1,120 
Income taxes payable(2,538)(7,559)
Other liabilities(3,489)(1,903)
Net cash provided by operating activities106,466 99,338 
Cash flows from investing activities
Acquisition of USWM, net of cash acquired(297,200) 
Investment in Navitor Pharmaceuticals, Inc.(15,000) 
Purchases of marketable securities(87,890)(361,121)
Sales and maturities of marketable securities319,421 184,467 
Purchases of property and equipment(3,234)(707)
Deferred legal fees(141)(1)
Net cash used in investing activities(84,044)(177,362)
Cash flows from financing activities
Payments on finance lease liability(1,056) 
Proceeds from issuance of common stock1,546 2,665 
Net cash provided by financing activities490 2,665 
Net change in cash and cash equivalents22,912 (75,359)
Cash and cash equivalents at beginning of year181,381 192,248 
Cash and cash equivalents at end of period$204,293 $116,889 
Supplemental cash flow information
Cash paid for interest on convertible notes$2,516 $2,516 
Cash paid for income taxes42,284 35,933 
Noncash investing and financing activities
Contingent consideration liability accrued in USWM Acquisition$115,900 $ 
Deferred legal fees and fixed assets included in accounts payable and accrued expenses352 495 
Property and equipment additions from utilization of tenant improvement allowance 387 
Lease assets and tenant receivable obtained for new leases25,225 31,856 
See accompanying notes.
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Supernus Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1.    Organization and Business

Supernus Pharmaceuticals, Inc. (the Company) was incorporated in Delaware, commencing operations in 2005. The Company is a pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases, marketing five products, including: Oxtellar XR for the treatment of epilepsy; Trokendi XR for the prophylaxis of migraine headache and the treatment of epilepsy; APOKYN and XADAGO for the treatment of Parkinson's disease; and MYOBLOC for the treatment of cervical dystonia and sialorrhea. The Company is also developing multiple proprietary CNS product candidates to address significant unmet medical needs and market opportunities.

The Company launched Oxtellar XR and Trokendi XR for the treatment of epilepsy in 2013, followed by the launch of Trokendi XR for the prophylaxis of migraine headache in adolescents and adults in 2017. The Company launched Oxtellar XR with an expanded indication, including monotherapy for partial seizures in January 2019. On June 9, 2020, the Company completed the acquisition of the CNS portfolio of US WorldMeds Partners, LLC (USWM Acquisition). With the acquisition, the Company acquired the right to further develop and commercialize three marketed products, as well as a product candidate in late-stage development. Refer to Note 3 for further discussion on the USWM Acquisition.

COVID-19 Impact

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business operations, and has assessed the impact of the COVID-19 pandemic on its condensed consolidated financial statements as of September 30, 2020. Through the first nine months of 2020, the pandemic has had limited effect on the Company's business operations, and no material impact on its condensed consolidated financial statements.

Since the situation surrounding the COVID-19 pandemic remains fluid and the duration uncertain, the long-term nature and extent of the impacts of the pandemic on the Company's business operations and financial position cannot be reasonably estimated at this time.
2.    Summary of Significant Accounting Policies
Basis of Presentation

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with the 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 condensed 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 most recent Annual Report on
Form 10-K, for the year ended December 31, 2019, filed with the SEC.

In management’s opinion, the condensed consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows. The results of operations for any interim period are not necessarily indicative of the Company’s future quarterly or annual results.

The Company, which is primarily located in the United States (U.S.), operates in one operating segment.

Reclassifications

Certain prior year amounts in the condensed consolidated statements of earnings have been reclassified to conform to the current year presentation, including a reclassification made to separately present amortization of intangible assets. This was previously included in Selling, general and administrative expenses, and now is recorded as a component of Amortization of intangible assets on the condensed consolidated statements of earnings. These reclassifications had no effect on operating earnings or on our other condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019.
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Consolidation
The Company’s condensed consolidated financial statements include the accounts of: Supernus Pharmaceuticals, Inc.; Supernus Europe Ltd.; Biscayne Neurotherapeutics, Inc. and its wholly owned subsidiary; MDD US Enterprises, LLC (formerly USWM Enterprises, LLC); and MDD US Enterprises, LLC's wholly owned subsidiaries. These are collectively referred to herein as “Supernus” or “the Company.” All significant intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements reflect the consolidation of entities in which the Company has a controlling financial interest. In determining whether there is a controlling financial interest, the Company considers if it has a majority of the voting interests of the entity, or if the entity is a variable interest entity (VIE) and if the Company is the primary beneficiary. In determining the primary beneficiary of a VIE, the Company evaluates whether it has both: the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to that VIE. The Company's judgment with respect to its level of influence or control of an entity involves the consideration of various factors, including: the form of ownership interest; representation in the entity’s governance; the size of the investment; estimates of future cash flows; the ability to participate in policy making decisions; and the rights of the other investors to participate in the decision making process, including the right to liquidate the entity, if applicable. If the Company is not the primary beneficiary of the VIE, and an ownership interest is maintained in the entity, the interest is accounted for under the equity or cost methods of accounting, as appropriate.

The Company continuously assesses whether it is the primary beneficiary of a VIE, as changes to existing relationships or future transactions may affect its conclusions.
Use of Estimates

The Company bases its estimates on: historical experience; forecasts; information received from its service providers; information from other sources, including public and proprietary sources; and other assumptions that the Company believes are reasonable under the circumstances. Actual results could differ materially from the Company’s estimates. The Company periodically evaluates the methodologies employed in making its estimates.

Business Combinations and Contingent Considerations

To determine whether an acquisition should be accounted for as a business combination or as an asset acquisition, the Company makes certain judgments regarding whether the acquired set of activities and assets meets the definition of a business. Significant judgment is required in assessing whether the acquired processes or activities, along with their inputs, would be substantive so as to constitute a business, as defined by U.S. GAAP.

If the acquired set of activities and assets meets the definition of a business, the Company applies the acquisition method of accounting to that transaction. Otherwise, the transaction is recorded as an asset acquisition rather than a business combination.

In an asset acquisition, any acquired in-process research and development (IPR&D) that does not have an alternative future use is charged to expense as of the acquisition date, and no goodwill is recorded. Under the acquisition method of accounting, assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, if applicable, is recorded as goodwill.

The operating results of the acquired business are included in the Company’s condensed consolidated statement of earnings, beginning on the effective acquisition date. Acquisition-related expenses are recognized separately from the business combination, and are expensed as incurred.

Significant judgment is involved in the determination of the fair value assigned to assets acquired and liabilities assumed in a business combination, as well as the estimated useful lives of assets. These estimates can materially affect our consolidated results of operations. The fair value of intangible assets, including acquired IPR&D, are determined using information available as of the acquisition date, and are based on estimates and assumptions that are deemed reasonable by management. Significant estimates and assumptions include, but are not limited to: probability of technical success; revenue growth; and appropriate discount rate. Depending on the facts and circumstances, the Company may deem it necessary to engage an independent valuation expert to assist in valuing significant assets and liabilities.

While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed as of the acquisition date, estimates are inherently uncertain and subject to refinement. As a result, during the measurement period,
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which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

Uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and evaluate these estimates and assumptions on a quarterly basis. The Company records any adjustments to the Company’s preliminary estimates to goodwill.

Upon the conclusion of the measurement period, any subsequent adjustments are recorded to our condensed consolidated statements of earnings in the period that these adjustments are identified.

Contingent Considerations

Certain of the Company’s business combinations involve the potential for future payments that are contingent upon the achievement of certain milestones related to the development or commercial sale of its products, including product development milestones or royalty payments on future product sales. The fair value of these contingent consideration liabilities is determined as of the acquisition date using estimated or forecast inputs. These inputs include: the estimated amount and timing of projected cash flows; volatility of projected cash flows; the probability of milestone achievement (i.e., achievement of the contingent event); and the estimated discount rates and risk-free rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period prior to resolution of the contingency, the contingent consideration liability is remeasured at current fair value, with changes recorded in earnings in the period of remeasurement.

Similarly, the determination of the initial and subsequent fair value of the contingent consideration liability requires significant judgment by management. Changes in any of the inputs may result in a significantly different fair value adjustment, which can impact the results of operations in the period in which the adjustment is made. These changes are reported on the condensed consolidated statement of earnings in Selling, general and administrative expenses.

Additional information regarding the Company's recent business combination and its assessment of contingent consideration is included in Note 3, USWM Acquisition.

Revenue from Product Sales

The Company’s customers are primarily pharmaceutical wholesalers, specialty pharmacies, and pharmaceutical distributors. Customers purchase product to fulfill orders from retail pharmacy chains and independent pharmacies of varying size and purchasing power. The Company recognizes gross revenue when its products are shipped from a third party fulfillment center and physically received by its customers. The Company's customers take control of its products, including title and ownership, upon physical receipt of its products at their facilities. Customer orders are generally fulfilled within a few days of order receipt, resulting in minimal order backlog. The Company does not adjust revenue for any financing effects as the Company expects the period between the transfer of the goods and collection of payment to be less than one year. There are no minimum product purchase requirements with our customers.

The Company recognizes revenue from product sales in an amount that reflects the consideration the Company expects to ultimately receive in exchange for those goods. Product sales are recorded net of various forms of variable consideration, including: provision for estimated rebates; provision for estimated future product returns; and an estimated provision for discounts. These are collectively considered "sales deductions."

As described below, variability in the net transaction price for the Company’s products arises primarily from the aforementioned sales deductions. Significant judgment is required in estimating certain sales deductions. In making these estimates, the Company considers: historical experience; product price increases; current contractual arrangements under applicable payor programs; unbilled claims; processing time lags for claims; inventory levels in the wholesale, specialty pharmacy, and retail distribution channel; and product life cycle. The Company adjusts its estimates of revenue either when the most likely amount of consideration it expects to receive changes, or when the consideration becomes fixed.

Variable consideration on product sales is only recognized when it is probable that a significant reversal will not occur.

If actual results in the future vary from our estimates, the Company adjusts its estimates in that calendar period. These adjustments could materially affect net product sales and earnings in the period in which the adjustment(s) is recorded.

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Sales Deductions
The Company records product sales net of the following sales deductions:
Rebates:  Rebates are discounts which the Company pays under either public sector or private sector health care programs. Rebates paid under public sector programs are generally mandated under law, whereas private sector rebates are generally contractually negotiated by the Company with managed care providers. Both types of rebates vary over time.
Public sector rebate programs encompass: various Medicaid drug rebate programs; Medicare gap coverage programs; programs covering public health service institutions; and programs covering government entities. All federal employees and agencies purchase drugs under the Federal Supply Schedule.
Private sector rebate programs include: contractual agreements with managed care providers, under which the Company pays fees to gain access to that provider’s patient drug formulary; and Company-sponsored programs, under which the Company defrays or eliminates patient co-payment charges that the patient would otherwise be obligated to pay to their managed care provider in order to fill their prescription.
Rebates are owed upon dispensing our product to a patient; i.e., filling a prescription. The accrual balance for rebates consists of the following three components. First, because rebates are generally invoiced and paid quarterly in arrears, the accrual balance consists of an estimate of the amount expected to be incurred for prescriptions dispensed in the current quarter. Second, the accrual balance also includes an estimate for known or estimated prior quarters’ unpaid rebates, covering those prescriptions dispensed in past quarters but for which no invoice has yet been received. Third, the accrual balance includes an estimate for rebates that will be prospectively owed for prescriptions filled in future quarters. This estimate pertains to product that has been sold by the Company to wholesalers or distributors, and which resides either as wholesaler/distributor inventory or as inventory held at pharmacies. As of the end of the reporting period, this product has not been dispensed to a patient.

The Company’s estimates of expected rebate claims vary by program and by type of customer because the period between the date at which the prescription is filled and the date at which the Company receives and pays the invoice varies substantially. For each of its products, the Company bases its estimates of expected rebate claims on multiple factors, including: historical levels of deductions; contractual terms with managed care providers; actual and anticipated changes in product price; prospective changes in managed care fee for service contracts; prospective changes in co-payment assistance programs; and anticipated changes in program utilization rates; i.e., patient participation rates under each specific program.

The Company records an estimated liability for rebates at the time the customer takes title to the product (i.e., at the time of sale to wholesalers/distributors). This liability is recorded as a reduction to gross product sales, and an increase in Accrued product returns and rebates. The liability is recorded as a component of current liabilities on the condensed consolidated balance sheets.

The sensitivity of the Company’s estimates to subsequent adjustment varies by program and by type of customer. If actual rebates vary from estimated amounts, the Company will adjust the balances of such accrued rebates to reflect actual experience. These adjustments could materially affect the estimated liability balance, net product sales, and earnings in the period in which the adjustment(s) is made.
Returns:  Sales of the Company’s products are not subject to a general right of return. Product that has been used to fill patient prescriptions is no longer subject to any right of return. However, the Company will accept return of product that is damaged or defective when shipped from its third party fulfillment center.
The Company will also accept return of expired product six months prior to and up to 12 months subsequent to the product’s expiry date. Expired or defective returned product cannot be re-sold, and is therefore destroyed.

The Company records an estimated liability for product returns at the time the customer takes title to the product (i.e., at time of sale). The liability is reflected as a reduction to gross product sales, and an increase in Accrued product returns and rebates. This liability is recorded as a component of current liabilities on the condensed consolidated balance sheets. The Company estimates the liability for returns primarily based on the actual returns experience for its five commercial products.

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Because the Company’s products have a shelf life up to 60 months from date of manufacture, and because the Company accepts return of product up to 12 months post its expiry date, there is a time lag of several years between the time when the product is sold and the time when the Company issues credit on expired product.

The Company’s returns policy generally permits product returns to be processed at current wholesaler price rather than at historical acquisition price; hence, the Company’s estimated liability for product returns is affected by price increases taken subsequent to the date of sale and prior to its return.

At the time the Company adjusts its estimates for product returns, such adjustment affects the estimated liability, product sales and earnings in the period of adjustment. Those adjustments may be material to our financial results.
Sales discounts:  Distributors and wholesalers of the Company's pharmaceutical products are generally offered various forms of consideration, including allowances, service fees and prompt payment discounts, for distributing our products. Distributor and wholesaler allowances and service fees arise from contractual agreements, and are estimated as a percentage of the price at which the Company sells product to them. In addition, distributors and wholesalers are offered a prompt pay discount for payment within a specified period. Prompt pay discounts are estimated as a percentage of the price at which the Company sells product.
The Company accounts for these discounts at the time of sale, as a reduction to gross product sales, and records these discounts as a valuation allowance against Accounts receivable on the condensed consolidated balance sheets.
Royalty Revenues

The Company recognizes noncash royalty revenue for amounts earned pursuant to its royalty agreement with United Therapeutics Corporation (United Therapeutics), based on estimated product sales of Orenitram by United Therapeutics (see Note 4). This agreement includes the right to use the Company’s intellectual property as a functional license.

In 2014, the Company sold certain of these royalty rights to Healthcare Royalty Partners III, L.P. (HC Royalty) (see Note 19). Consequent to this agreement, the Company recorded a nonrecourse liability related to this transaction, and amortizes this liability as noncash royalty revenue. Sales of Orenitram by United Therapeutics result in payments from United Therapeutics to HC Royalty, in accordance with this agreement.

The Company also recognizes noncash interest expense related to the nonrecourse liability and accrues interest expense at an estimated effective interest rate (see Note 18). This interest rate is determined based on projections of HC Royalty’s rate of return.

Royalty revenue also includes cash royalty amounts received from other collaboration partners, including from Takeda Pharmaceutical Company Ltd, based on net product sales of Takeda's product, Mydayis, in the current period. Royalty revenue is only recognized when the underlying product sale by Takeda has occurred. The Takeda arrangement also includes Takeda's right to use the Company’s intellectual property as a functional license.

There are no guaranteed minimum amounts owed to the Company related to any of these royalty revenue agreements.

Research and Development Expenses and Related Accrued Research and Development Expenses

Research and development expenditures are expensed as incurred. These expenses include: employee salaries, benefits, and share-based compensation; cost of contract research and development services provided by third parties; costs for conducting preclinical and clinical studies; cost of acquiring or manufacturing clinical trial materials; regulatory costs; research facilities costs; depreciation expense and allocated occupancy expenses; and license fees and milestone payments related to in-licensed products and technologies. Assets that are used for research and development and that have no future alternative use are expensed as incurred in-process research and development.

The Company estimates preclinical and clinical trial expenses based on services performed pursuant to contracts with research institutions, clinical investigators, clinical research organizations (CROs) and other service providers that work on the Company’s behalf. In recording service fees, the Company estimates the cost of those services which have been performed on behalf of the Company during the current period, and compares those costs with the cumulative expenses recorded and cumulative payments made, for such services. As appropriate, the Company accrues additional expense for services that have been delivered, or defers nonrefundable advance payments until the related services are performed.
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If the actual timing of the performance of services or the level of effort varies from our estimate, the Company adjusts its accrued expenses or its deferred advance payments, accordingly. If the Company subsequently determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the remaining portion of that advance payment is charged to expense in the period in which such a determination is made.

Marketable Securities

Marketable securities consist of investments in: U.S. Treasury bills and notes; bank certificates of deposit; various U.S. governmental agency debt securities; corporate and municipal debt securities; and other fixed income securities. The Company places all investments with governmental, industrial, or financial institutions whose debt is rated as investment grade.

The Company's investments are classified as available-for-sale and are carried at fair value. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets.

Any unrealized holding gains or losses on debt securities are reported, net of any tax effects, as a component of other comprehensive earnings (loss) in the condensed consolidated statement of comprehensive earnings. Realized gains and losses, included in Other income (expense), net in the condensed consolidated statement of earnings, are determined using the specific identification method for determining the cost of securities sold.

The Company adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2020, using the allowance approach. Declines in fair value below amortized cost related to credit losses (i.e., impairment due to credit losses), are included in the condensed consolidated statement of earnings, with a corresponding allowance established. If the estimate of expected credit losses decreases in subsequent periods, the Company will reverse the credit losses through current period earnings, and accordingly adjust the allowance (see Recently Issued Accounting Pronouncements).

Inventories

Inventories, which are recorded at the lower of cost or net realizable value, include materials, labor, direct costs and indirect costs. These are valued using the first-in, first-out method. The Company writes down inventory that has become obsolete, or has a cost basis in excess of its expected net realizable value. Expired inventory is destroyed, and the related costs are recognized as Cost of goods sold in the condensed consolidated statement of earnings.

Inventories Produced in Preparation of Product Launches

The Company capitalizes inventories produced in preparation for product launches when future commercialization of a product is probable, and when a future economic benefit is expected to be realized. The determination to capitalize is based on the particular facts and circumstances relating to the product. Capitalization of such inventory begins when the Company determines that (i) positive clinical trial results have been obtained in order to support regulatory approval; (ii) uncertainties regarding regulatory approval have been significantly reduced; and (iii) it is probable that these capitalized costs will provide future economic benefit, in excess of capitalized costs.

In evaluating whether these conditions are met, the Company considers the following factors: the product candidate’s current status in the regulatory approval process; results from the related pivotal and supportive clinical trials; results from meetings with relevant regulatory agencies prior to the filing of regulatory applications; completion of the regulatory applications; consequent acceptance by the regulatory agency; potential impediments to the approval process, such as product safety or efficacy concerns, potential labeling restrictions, and other impediments; historical experience with manufacturing and commercializing similar products as well as manufacture of the relevant product candidate; and the resilience of the Company’s manufacturing environment, and supply chain, in determining logistical constraints that could hamper approval or commercialization.

In assessing the economic benefit that the Company is likely to realize, the Company considers: the shelf life of the product in relation to the expected timeline for approval; patent related or contractual issues that may prevent or delay commercialization; product stability data of all pre-approval production to assess adequacy of expected shelf life; viability of commercialization, taking into account competitive dynamics in the marketplace and market acceptance; anticipated future sales; and anticipated reimbursement strategies that may prevail with respect to the product, to determine product profit margin.

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In applying the lower of cost or net realizable value to pre-launch inventory, the Company estimates a range of likely commercial prices based on pricing of competitive commercial products, and pre-launch discussions with managed care providers.

The Company could be required to write down previously capitalized costs related to pre-launch inventories upon a change in facts and circumstances, including among other potential factors, a denial or significant delay of approval by regulatory bodies, a delay in commercialization, or other adverse factors.

Intangible Assets

Intangible assets consist of definite-lived intangible assets, including: acquired developed technology; product rights; and patent defense costs. They also consist of indefinite-lived intangible assets, such as acquired IPR&D.

Patent defense costs are 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 are charged to expense in the event of an unsuccessful litigation outcome.

Definite-lived intangible assets are carried at cost less accumulated amortization, with amortization calculated on a straight line basis over the estimated useful lives of the assets. The Company evaluates the estimated remaining useful life of its intangible assets annually, or when events or changes in circumstances warrant a revision to the remaining periods of amortization.

Indefinite-lived intangible assets are not amortized but are tested for impairment annually. Acquired IPR&D in a business combination is considered to be an indefinite-lived asset until the completion or abandonment of the associated research and development efforts. Upon successful completion of the project, the Company will make a determination as to the then-useful life of the intangible asset. This is generally determined by the period over which the substantial majority of the cash flows are expected to be generated. The capitalized amount is then amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. During the period prior to completion or abandonment, the IPR&D asset will not be amortized but will be tested for impairment on an annual basis or when potential indicators of impairment are identified.

Goodwill and Goodwill Impairment Assessment

Goodwill is calculated as the excess of the consideration paid consequent to completing an acquisition compared to the net assets recognized in a business combination. Goodwill represents the future economic benefits arising from the other acquired assets that could not be individually identified and separately quantified.

The Company evaluates goodwill for possible impairment at least annually (during the fourth quarter of each fiscal year), or more often, if and when circumstances indicate that goodwill may be impaired. This includes but is not limited to significant adverse changes in the business climate, market conditions, or other events that indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value. In performing its goodwill assessment, the Company first performs a qualitative test. If necessary, the Company then performs a quantitative test. To conduct the quantitative impairment test of goodwill, the Company compares the fair value of a reporting unit to its carrying value.

Evaluating for impairment requires judgment, including estimating future cashflows. The Company estimates the fair values of its reporting unit using discounted cash flow models or other valuation models, such as comparative transactions or market multiples. If the reporting unit’s carrying value exceeds its fair value, the Company records an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value.

Impairment of Long Lived Assets

Long-lived assets consist primarily of property and equipment, operating lease assets and intangible assets. The carrying value of intangible assets is assessed for impairment annually (during the fourth quarter of each year), or more frequently if impairment indicators exist. Impairment indicators include but are not limited to adverse changes in circumstances, or other events that indicate that the carrying amount of an asset may not be recoverable.

Evaluating for impairment requires judgment, including estimating future cash flows, future growth rates, future profitability, and the expected life over which projected cash flows will occur.

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For IPR&D assets, the Company also considers various factors and risks for potential impairment, including the current legal and regulatory environment, and the competitive landscape. Adverse clinical trial results, significant trial delays, inability to obtain governmental approval, inability to commercialize a product candidate, and the introduction or advancement of competitive products and product candidates, could result in partial or full impairment of the related intangible asset. In these circumstances, the eventual realized value of the IPR&D asset may vary from its fair value as of the date of acquisition, and impairment charges may be recorded in future periods. Changes in the Company's business strategy or adverse changes in market conditions could likewise adversely affect impairment analyses.

If indications of impairment exist, projected future undiscounted cash flows associated with the asset would be compared to the carrying value of the asset, to determine whether the asset's value is recoverable. If impairment is determined, the Company writes down the asset to its estimated fair value; i.e., the Company recognizes an impairment charge equal to the excess of the carrying value of the long-lived asset over its estimated fair value, as of the time at which such a determination is made.

Share-Based Compensation

Stock Options

The Company recognizes share-based compensation expense over the service period, using the straight-line method. Employee share-based compensation for stock options is determined using the Black-Scholes option-pricing model to compute the fair value of option grants as of their grant date. Forfeitures are accounted for as incurred. The Company uses the following assumptions for estimating the fair value of option grants:

Fair Value of Common Stock—The fair value of the common stock underlying the option grants is determined based on observable market prices of the Company’s common stock.

Expected Volatility—Volatility is a measure of the amount by which the Company’s share price has historically fluctuated on a daily basis and is expected to fluctuate (i.e., expected volatility) in the future.

Dividend Yield—The Company has never declared or paid dividends, and has no plans to do so in the foreseeable future. Dividend yield is therefore zero.

Expected Term—This is the period of time during which options are expected to remain unexercised and is based on historical experience. Options have a maximum contractual term of ten years.

Risk-Free Interest Rate—This is the observed U.S. Treasury Note rate, as of the week each option grant is issued, for a term that most closely resembles the expected term of the option.

Restricted Stock Units (RSUs)

Share-based compensation expense is recorded based on amortizing the fair market value of the RSU as of the date of the grant over the implied service period. RSUs generally vest one year from the date of the grant and are subject to continued service requirements.

Performance Stock Units (PSUs)

Performance-Based Awards

Share-based compensation expense for performance-based awards is recognized based on amortizing the fair market value of the award as of the grant date over the periods during which the achievement of the performance-based award is probable. Performance-based awards require certain performance targets to be achieved in order for the award to vest. Vesting occurs on the date of achievement of the performance target.

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Market-Based Awards

Share-based compensation expense for market-based awards is recognized on a straight-line basis over the requisite service period, regardless of whether the market condition has been satisfied. Market-based PSU awards vest upon achievement of the performance target.

The Company estimates the fair value of these awards as of the grant date using a Monte Carlo simulation that incorporates option-pricing inputs. This simulation covers the period from the grant date through the end of the derived requisite service period. Volatility as of the grant date is estimated based on historical daily volatility of the Company's common stock over a period of time which is equivalent to the expected term of the award. The risk-free interest rate is based on the U.S. Treasury Note rate, as of the week the award is issued, with a duration that most closely resembles the expected term of the award.

Advertising Expense

Advertising expense includes the cost of promotional materials and activities, such as printed materials and digital marketing, marketing programs and speaker programs. The cost of the Company's advertising efforts are expensed as incurred.
The Company incurred approximately $15.4 million and $37.9 million in advertising expense for the three and nine months ended September 30, 2020, respectively, and approximately $11.3 million and $32.5 million in advertising expense for the three and nine months ended September 30, 2019, respectively. These expenses are recorded as a component of Selling, general and administrative expenses in the condensed consolidated statements of earnings.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and deferred tax liabilities are determined based on differences between their financial reporting and tax reporting bases. These differences are measured using enacted tax rates and laws that are expected to be in effect when these differences are expected to reverse. When appropriate, valuation allowances are established to reduce deferred tax assets to the amounts expected to be ultimately 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 are initially and subsequently estimated as the largest amount of the tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities. These estimates are based on 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 in the relevant period.

Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) - The new standard, issued in July 2016, requires credit losses on financial assets to be measured as the net amount expected to be collected, rather than based on actual incurred losses. For available-for-sale debt securities, the new standard did not revise the definition of impairment; i.e., the investment is impaired if the fair value of the investment is less than its cost. It also did not revise the requirement under ASC 320 for an entity to recognize, in net income, only the impairment amount related to credit risk, and to recognize, as a component of other comprehensive income, the noncredit impairment amount.

The new standard made certain targeted changes to the impairment assessment of available-for-sale debt securities, to eliminate the concept of "other than temporary" from the impairment model. Changes to the impairment model include recognition of credit losses on available-for-sale debt securities using the allowance method, and limiting the allowance to the amount by which fair value is below amortized cost. The new standard also requires enhanced disclosure of credit risk associated with debt securities.

The Company adopted the new standard effective January 1, 2020, using the modified retrospective approach. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.

ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract - The new standard, issued in August 2018, aligns the requirements for capitalizing implementation costs
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incurred under a service contract for a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or to obtain internal-use software. This includes hosting arrangements that include an internal-use software license. This ASU also requires that the implementation costs of a hosting arrangement under a service contract to be expensed over the term of the hosting arrangement, including reasonably certain renewals.

The Company adopted the new standard effective January 1, 2020, using the prospective transition approach. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.

ASU 2018-18, Clarifying the Interaction Between Topic 808 and Topic 606 - The new standard, issued in November 2018, clarifies when transactions between participants in a collaborative arrangement are within the scope of Topic 606.

The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.

ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) - The new standard, issued in August 2018, improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies and adds certain disclosure requirements.

The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes - The new standard, issued in December 2019, simplifies the accounting for income taxes. This guidance will be effective on January 1, 2021 on a prospective basis, with early adoption permitted.
The Company is currently evaluating the impact of the new guidance on its consolidated financial statements. It will adopt the new standard effective January 1, 2021.
ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity - The new standard, issued in August 2020, simplifies the accounting and disclosures for convertible instruments and contracts. This guidance will be effective on January 1, 2022, on a prospective basis, with early adoption permitted but not earlier than January 1, 2021.

The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
3. USWM Acquisition

On June 9, 2020 (the Closing Date), the Company completed its acquisition of all of the outstanding equity of USWM Enterprises, LLC (USWM Enterprises), a privately-held biopharmaceutical company, pursuant to a Sale and Purchase Agreement with US WorldMeds Partners, LLC (Seller), dated April 28, 2020 (the Agreement). Under the terms of the Agreement, the Company acquired the right to further develop and commercialize APOKYN, XADAGO and the Apomorphine Infusion Pump in the U.S., and MYOBLOC worldwide (the Products). The Company paid the Seller $297.2 million in cash at the Closing Date. As of September 30, 2020, the Company recorded an additional payable to the Seller of $1.0 million as a result of the resolution of contingencies that increased the original cash consideration paid to the Seller. For the nine months ended September 30, 2020, the Company incurred transaction costs of $8.3 million in completing the acquisition. These costs were included in Selling, general and administrative expense, in the condensed consolidated statements of earnings.

Contingent payments of up to $230.0 million are due to the Seller upon the achievement of certain milestones related to the development and sale of the Products. The possible outcomes for the contingent consideration range from $0 to $230.0 million on, an undiscounted basis.

In connection therewith, the Company recorded a contingent consideration liability of $115.7 million, as of the date of acquisition, to reflect the estimated fair value of the contingent consideration. The estimated fair value of the contingent consideration was determined using a Monte Carlo simulation for the sales-based milestones, and the income approach for the other milestones. The key assumptions considered in estimating the value of contingent consideration include: the estimated
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amount and timing of projected cash flows; probability of milestone achievement; volatility of prospective cash flows; the discount rates and risk-free interest rate.

In each reporting period after the acquisition, the Company will revalue the contingent consideration liability, and will record increases or decreases in the fair value of the liability in its consolidated statements of earnings. Changes in fair value can result from changes in actual and projected milestone achievement, as well as changes to forecasts. The inputs and assumptions may or may not be observable in the market, and reflect assumptions the Company believes would be made by a market participant. During the three months ended September 30, 2020, the Company recorded an increase to the contingent consideration liabilities of $0.2 million.

The acquisition is being accounted for as a business combination under the acquisition method of accounting, in accordance with ASC 805, Business Combinations. The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, is based upon preliminary information. The allocation of the purchase price is subject to change during the measurement period (up to one year from the Closing Date), as additional information concerning final asset and liability valuations is obtained. During the measurement period, if the Company obtains new information regarding facts and circumstances that existed as of the Closing Date that, if known, would have resulted in revised estimated values of those assets or liabilities, the Company will accordingly revise the preliminary purchase price allocation. The effect of measurement period adjustments on the estimated fair value elements will be reflected as if the adjustments had been made as of the Closing Date. Residual amounts will be allocated to goodwill. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings.

The Company expects to finalize its purchase price allocation within one year of the Closing Date. In addition, The Company continues to analyze and assess relevant information necessary to determine, recognize and record at fair value the assets acquired and liabilities assumed in the following areas: intangible assets; lease assets and liabilities; tax assets and tax liabilities; and certain existing or potential reserves, including those for legal or contract-related matters.

The activities the Company is currently undertaking include, but are not limited to, the following: review of acquired contracts and other contract-related and legal matters; review and evaluation of the accounting policies, tax positions, and other tax-related matters. Further, the Company is in the process of obtaining input from third party valuation firms with respect to the fair value of the acquired tangible and intangible assets, and other information necessary to record and measure the assets acquired and liabilities assumed. Accordingly, the preliminary recognition and measurement of assets acquired and liabilities assumed as of Closing Date are subject to change.

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The following table presents the Company’s preliminary estimates of the fair value of the assets acquired and liabilities assumed as of the Closing Date, and subsequent measurement period adjustments recorded during the third quarter of 2020 (dollars in thousands):
As Initially ReportedMeasurement Period AdjustmentsAs Adjusted
Cash and cash equivalents$6,994 $ $6,994 
Accounts receivable18,474  18,474 
Inventories10,400  10,400 
Prepaid expenses and other current assets3,564  3,564 
Property and equipment454  454 
Finance lease asset(1)
22,747  22,747 
Intangible assets387,000  387,000 
Other assets340  340 
Total fair value of assets acquired449,973  449,973 
Accounts payable(2,573) (2,573)
Accrued expenses and other current liabilities(23,339) (23,339)
Finance lease liability(1)
(22,747) (22,747)
Deferred income tax liabilities, net(2)
(69,515) (69,515)
Total fair value of liabilities assumed(118,174) (118,174)
Total identifiable net assets$331,799 $ $331,799 
Goodwill88,095 1,048 89,143 
Total purchase price $419,894 $1,048 $420,942 
Cash consideration to Seller(3)
$297,200 $1,048 $298,248 

______________________________________________________________
(1) Refer to Note 10 for further discussion of the acquired finance lease asset and assumed lease liability.
(2) Includes tax attributes that are subject to tax limitations.
(3) Represents total purchase price, less cash and cash equivalents acquired and contingent consideration liabilities, recorded at the Closing Date.

The Company determined the fair value of the inventory using the comparative sales method, which estimated the expected sales price of the product, reduced by all costs expected to be incurred to complete or to dispose of the inventory, with a profit on sale.

The acquired intangible assets include an intangible asset associated with the IPR&D related to the infusion pump product candidate, as well as intangible assets associated with the acquired developed technology and product rights. The Company determined the estimated fair value of the acquired intangible assets as of the Closing Date using the income approach. This is a valuation technique that is based on the market participant's expectations of the cash flows that the intangible assets are forecasted to generate. The projected cash flows from these intangible assets were based on various assumptions, including: estimates of revenues, expenses, and operating profit; and risks related to the viability of and commercial potential for alternative treatments. The cash flows were discounted at a rate commensurate with the level of risk associated with the projected cash flows. In addition to the aforementioned factors, the Company also considered the following factors specific to the valuation of the acquired IPR&D intangible asset: the stage of development as of the Closing Date; the time and resources needed to complete the development and regulatory approval of the product candidate; the inherent difficulties and uncertainties in developing a product candidate, such as obtaining marketing approval from the U.S. Food and Drug Administration and other regulatory agencies; the economic life of the potential commercialized product; and associated commercialization risks. The Company believes the assumptions are representative of those a market participant would use in estimating fair value.

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Acquired intangible assets, excluding the acquired IPR&D, will be amortized over their estimated useful lives on a straight-line basis. IPR&D assets are considered to be indefinite-lived, until the successful completion or abandonment of the associated research and development efforts. The following table summarizes the preliminary purchase price allocation, and the preliminary average remaining useful lives for identifiable intangible assets (dollars in thousands):
Estimated Fair ValueEstimated Useful Lives as of Closing Date
(in years)
Acquired In-process Research & Development$150,000 n/a
Acquired Developed Technology and Product Rights237,000 
10.5 - 12.5
Total intangible assets$387,000 

Goodwill was calculated as the excess of the consideration paid consequent to completing the acquisition, compared to the net assets recognized. Goodwill represents the future economic benefits arising from the other acquired assets, and which could not be individually identified and separately valued. Goodwill is primarily attributable to the additional acquired growth platforms and an expanded revenue base. Goodwill is not expected to be deductible for tax purposes.

The operations of MDD US Enterprises, LLC and its subsidiaries have been included in the Company's condensed consolidated statements of earnings for the period subsequent to the Closing Date and through September 30, 2020. Total revenues of $40.9 million and $51.5 million and net earnings of $5.1 million and $6.8 million were recorded for the three and nine months ended September 30, 2020, respectively.

The following table presents the unaudited pro forma combined financial information for each of the periods presented, as if the USWM Acquisition had occurred on January 1, 2019 (dollars in thousands):
Three Months ended September 30,Nine Months ended September 30,
2020201920202019
(unaudited)(unaudited)
Pro forma total revenues$155,135 $140,791 $440,100 $401,332 
Pro forma net earnings39,984 31,599 102,226 76,540 

The unaudited pro forma combined financial information is based on historical financial information as well as the Company's preliminary allocation of purchase price; therefore, it is subject to subsequent adjustment upon finalization of the purchase price allocation. In order to reflect the occurrence of the acquisition as if it occurred on January 1, 2019, the unaudited pro forma combined financial information reflects the adoption of ASC 842, Leases; the recognition of additional amortization expense on intangible assets, the removal of historical amortization charges and the elimination of non-recurring acquisition-related transaction costs. Approximately $10.1 million of acquisition-related transaction costs were incurred from the fourth quarter of 2019 through the second quarter of 2020.

The unaudited pro forma combined financial information should not be considered indicative of the results that would have occurred if the acquisition had been consummated on the assumed completion date, nor are they indicative of future results.
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4. Disaggregated Revenues
The following table summarizes the disaggregation of revenues by product or source, (dollars in thousands):
Three Months ended
September 30,
Nine Months ended
September 30,
2020201920202019
(unaudited)(unaudited)
Net product sales
Trokendi XR$82,906 $77,332 $241,131 $219,989 
Oxtellar XR28,364 22,702 75,983 65,502 
APOKYN34,482  43,082  
XADAGO2,331  3,132  
MYOBLOC4,050  5,279  
Total net product sales$152,133 $100,034 $368,607 $285,491 
Royalty revenues3,002 2,106 8,233 6,818 
Total revenues$155,135 $102,140 $376,840 $292,309 

Trokendi XR accounted for 65% and 77% of the Company’s total net product sales for the nine months ended September 30, 2020 and 2019, respectively.

The Company recognized noncash royalty revenue of $2.4 million and $6.3 million, for the three and nine months ended September 30, 2020, respectively. The Company recognized noncash royalty revenue of $1.6 million and $5.0 million, for the three and nine months ended September 30, 2019, respectively.
5.    Fair Value of Financial Instruments

The fair value of an asset or liability represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between unrelated market participants.

The Company reports the fair value of assets and liabilities using a three level measurement hierarchy that prioritizes the inputs used to measure fair value. 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. The Company has the ability to access these prices as of the measurement date. Level 1 assets include: cash held at banks; certificates of deposit; money market funds; investment grade corporate debt securities; and U.S. government agency and municipal debt securities.

Level 2—Level 2 securities are valued using third-party pricing sources that apply relevant inputs and data in their models to estimate fair value. Inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; inputs other than quoted prices but that are observable for the asset or liability (e.g., interest rates; yield curves); and inputs that are derived principally from or corroborated by observable market data, by correlation, or by other means (i.e., market corroborated inputs). Level 2 assets include: investment grade corporate debt securities; U.S. government agency and municipal debt securities; other fixed income securities; and SERP (Supplemental Executive Retirement Plan) assets. The fair value of the restricted marketable securities is recorded in Other assets on the condensed consolidated balance sheets.

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

There were no level 3 assets as of September 30, 2020 or December 31, 2019.
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Financial Assets Recorded at Fair Value
The Company’s financial assets that are required to be measured at fair value on a recurring basis are as follows (dollars in thousands):
Fair Value Measurements at September 30, 2020 (unaudited)
Total Fair Value at September 30,
2020
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Assets:
Cash and cash equivalents
Cash$188,974 $188,974 $ 
Money market funds15,319 15,319  
Marketable securities
Corporate debt securities147,657  147,657 
Long term marketable securities
Corporate debt securities388,185 258 387,927 
Other noncurrent assets
Marketable securities - restricted (SERP)464 2 462 
Total assets at fair value$740,599 $204,553 $536,046 
Fair Value Measurements at December 31, 2019
Total Fair Value at December 31,
2019
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Assets:
Cash and cash equivalents
Cash$78,912 $78,912 $ 
Money market funds102,469 102,469  
Marketable securities
Corporate debt securities165,527  165,527 
Municipal debt securities165  165 
Long term marketable securities
Corporate debt securities571,828 254 571,574 
U.S. government agency and municipal debt securities19,945  19,945 
Other noncurrent assets
Marketable securities - restricted (SERP)418 3 415 
Total assets at fair value$939,264 $181,638 $757,626 

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 available-for-sale marketable securities held by the Company are as follows, (dollars in thousands):
September 30,
2020
December 31, 2019
(unaudited)
Corporate and U.S. government agency and municipal debt securities
Amortized cost$522,920 $747,598 
Gross unrealized gains13,835 10,031 
Gross unrealized losses(913)(164)
Total fair value$535,842 $757,465 
The contractual maturities of the unrestricted available-for-sale marketable securities held by the Company are as follows, (dollars in thousands):
September 30,
2020
(unaudited)
Less than 1 year$147,657 
1 year to 2 years142,272 
2 years to 3 years136,095 
3 years to 4 years109,818 
Greater than 4 years 
Total$535,842 
As of September 30, 2020, there was no impairment due to credit loss on any available-for-sale marketable securities.
Financial Liabilities Recorded at Fair Value
As of September 30, 2020, the Company had Level 3 liabilities related to the contingent consideration from the USWM Acquisition. The contingent consideration liabilities are measured at fair value on a recurring basis, using the same methodology as of the acquisition date; i.e., using the Monte Carlo simulation for the sales-based milestones, and the income approach for the other milestones. Refer to Note 3 for further discussion of significant inputs and assumptions used for the valuation of the contingent consideration as of the acquisition date.
The inputs and assumptions may not be observable in the market. These reflect the assumptions the Company believes would be made by a market participant. Changes in any of those inputs together, or in isolation, may result in significantly lower or higher fair value measurement.
The following table provides a reconciliation of the beginning and ending balances related to the contingent consideration from the USWM Acquisition (dollars in thousands):
September 30,
2020
(unaudited)
Balance at December 31, 2019$ 
Initial estimate of contingent consideration115,700 
Change in fair value recognized in earnings200 
Balance at September 30, 2020$115,900 
The change in estimated fair value of contingent consideration related to the USWM Acquisition during the three months ended September 30, 2020 is primarily due to changes in estimates associated with the amount and timing of projected cash flows.
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Financial Liabilities Recorded at Carrying Value
The following table sets forth the carrying value and fair value of the Company’s financial liabilities that are not carried at fair value (dollars in thousands):
September 30, 2020December 31, 2019
(unaudited)
Carrying ValueFair Value (Level 2)Carrying ValueFair Value (Level 2)
Convertible notes, net$357,521 $372,816 $345,170 $366,023 

The fair value has been estimated based on actual trading information as well as quoted prices, both provided by bond traders.
6.    Convertible Senior Notes Due 2023
The 0.625% Convertible Senior Notes Due 2023 (2023 Notes), which were issued in March 2018, bear interest at an annual rate of 0.625%, payable semi-annually in arrears on April 1 and October 1 of each year. The 2023 Notes will mature on April 1, 2023, unless earlier converted or repurchased by the Company. The Notes are being amortized to interest expense at an effective interest rate of 5.41% over the contractual term of the 2023 Notes. The Company may not redeem the 2023 Notes at its option before maturity. The total principal amount of 2023 Notes is $402.5 million.
The 2023 Notes were issued pursuant to an Indenture between the Company and Wilmington Trust, National Association, as trustee. The Indenture includes customary terms and covenants, including certain events of default upon which the 2023 Notes may be due and payable immediately. The Indenture does not contain any financial or operating covenants, or any restrictions on the payment of dividends, the issuance of other indebtedness, or the issuance or repurchase of securities by the Company.
At its election the Company will settle conversions by paying or delivering, as applicable, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, based on the applicable conversion rate. The initial conversion rate is 16.8545 shares per $1,000 principal amount of the 2023 Notes, which represents an initial conversion price of approximately $59.33 per share, and is subject to adjustment as specified in the Indenture. In the event of conversion, if converted in cash, the holders would forgo all future interest payments, any unpaid accrued interest, and the possibility of further stock price appreciation.
If a “make-whole fundamental change,” as defined in the Indenture occurs, then the Company will in certain circumstances increase the conversion rate for a specified period of time. If a “fundamental change,” as defined in the Indenture occurs, then noteholders may require the Company to repurchase their 2023 Notes at a cash repurchase price equal to the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest, if any.
Contemporaneous with the issuance of the 2023 Notes, the Company also entered into separate privately negotiated convertible note hedge transactions (collectively, the Convertible Note Hedge Transactions) with each of the call spread counterparties. The Company issued 402,500 convertible note hedge options. In the event that shares or cash are deliverable to holders of the 2023 Notes upon conversion at limits defined in the Indenture, counterparties to the convertible note hedges will be required to deliver up to approximately 6.8 million shares of the Company’s common stock, or to pay cash to the Company in a similar amount as the value that the Company delivers to the holders of the 2023 Notes, based on a conversion price of $59.33 per share.
Concurrently with entering into the Convertible Note Hedge Transactions, the Company also entered into separate privately negotiated warrant transactions (collectively, the Warrant Transactions) with each of the call spread counterparties. The Company issued a total of