Company Quick10K Filing
Quick10K
Supernus Pharmaceuticals
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$36.50 52 $1,910
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-11 Shareholder Vote
8-K 2019-05-29 Other Events, Exhibits
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-04-24 Earnings, Exhibits
8-K 2019-04-01 Other Events, Exhibits
8-K 2019-02-12 Earnings, Exhibits
8-K 2019-01-31 Enter Agreement, Exhibits
8-K 2018-12-20 Other Events, Exhibits
8-K 2018-12-13 Leave Agreement, Other Events, Exhibits
8-K 2018-12-05 Other Events, Exhibits
8-K 2018-11-07 Other Events, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-09-20 Other Events, Exhibits
8-K 2018-09-12 Enter Agreement, Other Events, Exhibits
8-K 2018-09-06 Other Events, Exhibits
8-K 2018-08-29 Regulation FD, Other Events, Exhibits
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-06-27 Officers, Other Events, Exhibits
8-K 2018-06-12 Shareholder Vote
8-K 2018-05-30 Other Events, Exhibits
8-K 2018-05-15 Officers
8-K 2018-05-08 Officers, Exhibits
8-K 2018-04-24 Earnings
8-K 2018-03-14 Enter Agreement, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2018-03-13 Regulation FD, Other Events, Exhibits
8-K 2018-03-06 Other Events, Exhibits
8-K 2018-02-27 Enter Agreement, Exhibits
8-K 2018-02-14 Officers
8-K 2018-02-12 Earnings, Exhibits
8-K 2018-01-11 Officers, Other Events, Exhibits
8-K 2018-01-02 Other Events, Exhibits
NXST Nexstar Media Group 5,090
IIVI II-VI 2,370
FPF Futures Portfolio Fund 1,340
SSLJ sslj. Com 151
INFI Infinity Pharmaceuticals 84
DDMX Dynamex 72
CMSS CM Seven Star Acquisition 0
VKIN Viking Energy 0
ALES I-On Communications 0
VTL Vital Therapies 0
SUPN 2019-03-31
Part I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 a19-7744_1ex31d1.htm
EX-31.2 a19-7744_1ex31d2.htm
EX-32.1 a19-7744_1ex32d1.htm
EX-32.2 a19-7744_1ex32d2.htm

Supernus Pharmaceuticals Earnings 2019-03-31

SUPN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-7744_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2019

 

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 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). x Yes No o

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Exchange Act

 

Title of each class

 

Outstanding at May 1, 2019

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, $0.001 par value per share

 

52,384,248

 

SUPN

 

The Nasdaq Global Market

 

 

 


Table of Contents

 

SUPERNUS PHARMACEUTICALS, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

 

 

Page No.

PART I — FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

3

Condensed Consolidated Statements of Earnings for the three month periods ended March 31, 2019 and 2018 

4

Condensed Consolidated Statements of Comprehensive Earnings for the three month periods ended March 31, 2019 and 2018

5

Condensed Consolidated Statements of Changes in Stockholder’s Equity for the three month periods ended March 31, 2019 and 2018

6

Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2019 and 2018

7

Notes to Condensed Consolidated Financial Statements

8

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

24

Item 3. Quantitative and Qualitative Disclosures about Market Risk

34

Item 4. Controls and Procedures

34

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

35

Item 1A. Risk Factors

35

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

35

Item 3. Defaults Upon Senior Securities

35

Item 4. Mine Safety Disclosures

35

Item 5. Other Information

35

Item 6. Exhibits

35

SIGNATURES

38

 

2


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Supernus Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

122,778

 

$

192,248

 

Marketable securities

 

170,165

 

163,770

 

Accounts receivable, net

 

79,950

 

102,922

 

Inventories, net

 

26,518

 

25,659

 

Prepaid expenses and other current assets

 

20,556

 

8,888

 

Total current assets

 

419,967

 

493,487

 

Long term marketable securities

 

522,551

 

418,798

 

Property and equipment, net

 

4,226

 

4,095

 

Intangible assets, net

 

30,063

 

31,368

 

Lease assets

 

20,049

 

 

Deferred income taxes

 

27,967

 

29,683

 

Other assets

 

625

 

380

 

 

 

 

 

 

 

Total assets

 

$

1,025,448

 

$

977,811

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

7,240

 

$

3,195

 

Accrued product returns and rebates

 

88,200

 

107,063

 

Accrued expenses and other current liabilities

 

36,607

 

36,535

 

Income taxes payable

 

17,233

 

12,377

 

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

 

2,426

 

2,183

 

Total current liabilities

 

151,706

 

161,353

 

Convertible notes, net

 

333,310

 

329,462

 

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

 

21,957

 

22,575

 

Lease liabilities, long term

 

27,824

 

 

Other non-current liabilities

 

10,633

 

11,398

 

Total liabilities

 

545,430

 

524,788

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value, 130,000,000 shares authorized 52,374,248 and 52,316,583 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

 

52

 

52

 

Additional paid-in capital

 

373,707

 

369,637

 

Accumulated other comprehensive earnings (loss), net of tax

 

1,427

 

(3,158

)

Retained earnings

 

104,832

 

86,492

 

Total stockholders’ equity

 

480,018

 

453,023

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,025,448

 

$

977,811

 

 

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 March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

Net product sales

 

$

83,099

 

$

89,120

 

Royalty revenues

 

2,375

 

1,309

 

Total revenues

 

85,474

 

90,429

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Cost of product sales

 

3,684

 

3,278

 

Research and development

 

15,394

 

18,908

 

Selling, general and administrative

 

40,968

 

36,849

 

 

 

 

 

 

 

Total costs and expenses

 

60,046

 

59,035

 

 

 

 

 

 

 

Operating earnings

 

25,428

 

31,394

 

 

 

 

 

 

 

Other expenses, net

 

(1,189

)

(212

)

 

 

 

 

 

 

Earnings before income taxes

 

24,239

 

31,182

 

 

 

 

 

 

 

Income tax expense

 

5,899

 

4,830

 

Net earnings

 

$

18,340

 

$

26,352

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

Basic

 

$

0.35

 

$

0.51

 

Diluted

 

$

0.34

 

$

0.49

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

 

 

 

Basic

 

52,336,443

 

51,536,474

 

Diluted

 

53,985,385

 

53,788,346

 

 

See accompanying notes.

 

4


Table of Contents

 

Supernus Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Earnings

(in thousands)

 

 

 

Three Months ended March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net earnings

 

$

18,340

 

$

26,352

 

Other comprehensive earnings (loss)

 

 

 

 

 

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

 

4,585

 

(1,544

)

Other comprehensive earnings (loss)

 

4,585

 

(1,544

)

 

 

 

 

 

 

Comprehensive earnings

 

$

22,925

 

$

24,808

 

 

See accompanying notes.

 

5


Table of Contents

 

Supernus Pharmaceuticals, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended March 31, 2019 and 2018

(unaudited, in thousands, except share data)

 

 

 

Common Stock

 

Additional 

 

Accumulated Other
Comprehensive

 

Retained

 

Total
Stockholders’

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Earnings (Loss)

 

Earnings

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

52,316,583

 

$

52

 

$

369,637

 

$

(3,158

)

$

86,492

 

$

453,023

 

Share-based compensation

 

 

 

3,287

 

 

 

3,287

 

Exercise of stock options

 

57,665

 

 

783

 

 

 

783

 

Net earnings

 

 

 

 

 

18,340

 

18,340

 

Unrealized gains on marketable securities, net of tax

 

 

 

 

4,585

 

 

4,585

 

Balance, March 31, 2019

 

52,374,248

 

$

52

 

$

373,707

 

$

1,427

 

$

104,832

 

$

480,018

 

 

 

 

Common Stock

 

Additional 

 

Accumulated Other
Comprehensive

 

Retained
Earnings
(Accumulated

 

Total
Stockholders’

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Loss

 

Deficit)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

51,314,850

 

$

51

 

$

294,999

 

$

(747

)

$

(26,823

)

$

267,480

 

Cumulative-effect of adoption of ASC 606

 

 

 

 

 

2,322

 

2,322

 

Balance, January 1, 2018

 

51,314,850

 

51

 

294,999

 

(747

)

(24,501

)

269,802

 

Share-based compensation

 

 

 

2,635

 

 

 

2,635

 

Exercise of stock options

 

319,141

 

1

 

2,857

 

 

 

2,858

 

Equity component of convertible notes, net of tax

 

 

 

56,215

 

 

 

56,215

 

Purchase of convertible note hedges, net of tax

 

 

 

(70,137

)

 

 

(70,137

)

Issuance of warrants

 

 

 

65,688

 

 

 

65,688

 

Net earnings

 

 

 

 

 

26,352

 

26,352

 

Unrealized loss on marketable securities, net of tax

 

 

 

 

(1,544

)

 

(1,544

)

Balance, March 31, 2018

 

51,633,991

 

$

52

 

$

352,257

 

$

(2,291

)

$

1,851

 

$

351,869

 

 

See accompanying notes.

 

6


Table of Contents

 

Supernus Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months ended March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

18,340

 

$

26,352

 

 

 

 

 

 

 

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

 

 

 

 

 

Realized loss on sales of securities

 

(8

)

 

Depreciation and amortization

 

1,679

 

1,707

 

Amortization of operating lease assets

 

879

 

 

Amortization of deferred financing costs and debt discount

 

3,848

 

612

 

Amortization of premium/discount on marketable securities

 

(1,094

)

89

 

Non-cash interest expense

 

1,437

 

701

 

Non-cash royalty revenue

 

(1,576

)

(1,300

)

Share-based compensation expense

 

3,287

 

2,635

 

Deferred income tax (benefit) provision

 

279

 

(1,120

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

23,013

 

(798

)

Inventories

 

(859

)

(2,771

)

Prepaid expenses and other current assets

 

(1,799

)

(62

)

Other non-current assets

 

(196

)

(342

)

Accounts payable

 

4,045

 

(3,440

)

Accrued product returns and rebates

 

(18,863

)

4,691

 

Accrued expenses and other current liabilities

 

(3,177

)

(1,132

)

Income taxes payable

 

4,856

 

327

 

Other non-current liabilities

 

(1,098

)

984

 

Net cash provided by operating activities

 

32,993

 

27,133

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of marketable securities

 

(150,167

)

(57,757

)

Sales and maturities of marketable securities

 

47,143

 

7,343

 

Purchases of property and equipment

 

(221

)

(253

)

Deferred legal fees

 

(1

)

(343

)

Net cash used in investing activities

 

(103,246

)

(51,010

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of convertible notes

 

 

402,500

 

Convertible notes issuance financing costs

 

 

(10,435

)

Proceeds from issuance of warrants

 

 

65,688

 

Purchases of convertible note hedges

 

 

(92,897

)

Proceeds from issuance of common stock

 

783

 

2,857

 

Net cash provided by financing activities

 

783

 

367,713

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(69,470

)

343,836

 

Cash and cash equivalents at beginning of year

 

192,248

 

100,304

 

Cash and cash equivalents at end of period

 

$

122,778

 

$

444,140

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Cash paid for interest on convertible notes

 

$

1,258

 

$

 

Income taxes paid

 

$

800

 

$

5,623

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

Operating cash flows from operating leases

 

$

1,313

 

$

1,385

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Deferred legal fees included in accounts payable and accrued expenses

 

$

250

 

$

304

 

Lease assets and tenant receivable obtained for new operating leases

 

$

17,136

 

$

 

 

See accompanying notes.

 

7


Table of Contents

 

Supernus Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

1.  Organization and Business

 

Supernus Pharmaceuticals, Inc. (the Company) was incorporated in Delaware and commenced operations in 2005. The Company is a 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 prophylaxis of migraine headache and treatment of epilepsy. The Company has several proprietary product candidates in clinical development that address the CNS market.

 

The Company launched Oxtellar XR and Trokendi XR for the treatment of epilepsy in 2013, launched Trokendi XR for the prophylaxis of migraine headache in adolescents and adults in April 2017 and launched Oxtellar XR with an expanded indication to include monotherapy for partial seizures in January 2019.

 

2.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

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, Biscayne Neurotherapeutics Australia Pty 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 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, 2018, 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.

 

Use of Estimates

 

The Company bases its estimates on: historical experience; various forecasts; information received from its service providers; and other assumptions that the Company believes are reasonable under the circumstances. Actual results could differ materially from the Company’s estimates. The Company evaluates the methodology employed in its estimates on an ongoing basis.

 

Revenue Recognition

 

The Company recognizes revenue when control of goods or provision of services are transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The Company does not adjust revenue for any financing effects for transactions where the Company expects the period between the transfer of the goods or services and collection to be less than one year.

 

There were no contract assets or liabilities recorded as of March 31, 2019.

 

Revenue from Product Sales

 

The Company’s products are distributed through a third party fulfillment center. The Company’s customers, who are primarily pharmaceutical wholesalers and distributors, purchase product to fulfill orders from retail pharmacy chains and independent pharmacies of varying size and buying power. The Company recognizes gross revenue when its products are shipped from its fulfillment center to its customers and the customers take control of the products. The Company’s customers take control of the products, including title and ownership, upon physical receipt of the products at their facilities.

 

8


Table of Contents

 

Product sales are recorded net of various forms of variable consideration, including estimated rebates, discounts, allowances, and an estimated liability for future product returns (collectively, “sales deductions”).

 

Variability in the net transaction price for the Company’s products primarily arises from sales deductions, as described below. Significant judgment is required in estimating sales deductions. In estimating sales deductions the Company considers: historical experience; current contract prices under applicable programs; unbilled claims; processing time lags; and inventory levels in the distribution channel. 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.

 

If actual results in the future vary from estimates, the Company adjusts these estimates. These adjustments could materially affect net product sales and earnings in the period that such adjustments become known.

 

Sales Deductions

 

Sales deductions are primarily comprised of rebates, product returns and sales discounts. The Company records product sales net of the following sales deductions:

 

·                  Rebates:  Rebates are discounts which the Company pays under either private sector or public sector health care programs. Public sector rebate programs encompass: various Medicaid Drug Rebate Programs; Medicare Coverage Gap Programs; and programs covering public health service institutions and 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; Company sponsored programs, under which the Company defrays or eliminates patient co-payment charges that the patient would otherwise pay to their managed care provider. 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.

 

Rebates are owed upon dispensing product to a patient (i.e., filling a prescription. The accrual balance consists of 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, to cover prescriptions dispensed in past quarters. Third, the accrual balance includes an estimate for rebates that will be prospectively owed, for prescriptions filled in future quarters (i.e., for product which has been sold to wholesalers or distributors, and which resides either as wholesaler/distributor inventory, or is held as inventory at pharmacies).

 

Because the period from the date on which the prescription is filled to the date the Company receives and pays the invoice varies, the Company’s estimates of expected rebate claims vary by program and by type of customer. 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 contractual agreements; prospective changes in co-pay assistance programs; and anticipated changes in program utilization rates (i.e., patient participation rates).

 

The sensitivity of the Company’s estimates can vary by program and by type of customer. If actual rebates vary from estimated amounts, the Company may need to adjust the balances of such accrued rebates to reflect actual expenditures with respect to these programs. These changes could materially affect net product sales and earnings in the period of adjustment. 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), and records this liability as a reduction to gross product sales and an increase in Accrued product returns and rebates in current liabilities.

 

·                  Returns:  Sale 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 warehouse. In addition, the Company will 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 estimates the liability for returns based on the actual returns experience for its two commercial products, in conjunction with industry experience for return of similar products (i.e., ambient temperature storage for oral formulations). Because the Company’s products have not reached maturity, the return rate of its products has and is expected to continue to vary. 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) as a reduction to gross product sales and an increase in Accrued product returns and rebates in current liabilities.

 

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The Company’s estimated liability for product returns is also affected by price increases taken subsequent to the date of sale. The Company’s products have a shelf life of 36 to 48 months from date of manufacture. Because of the extended shelf life coupled with its return policy, there typically is a significant time lag between the time at which the product is sold and when the Company issues credit on expired product. The Company’s policy generally permits product returns to be processed at current wholesaler price rather than historical price. Therefore, price increase(s) taken during the current period increase(s) the provision for product returns because it affects the estimated liability for product returns for both sales made in the current period as well as sales made in prior periods. When the Company adjusts its estimates for product returns, either favorably or unfavorably, this affects product sales and earnings in the period of adjustment.

 

·                  Sales discounts:  Distributors and wholesalers of pharmaceutical products are generally offered various forms of consideration, including allowances, service fees and prompt payment discounts, for distributing 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, they are offered a prompt pay discount for payment within a specified period.

 

The Company accounts for these discounts at the time of sale as a reduction to gross product sales, and records these amounts as an Accounts receivable valuation allowance.

 

Customer orders are generally fulfilled within a few days of receipt, resulting in minimal order backlog. Open purchase orders for products from customers are expected to be fulfilled within the next 12 months. There are no minimum product purchase requirements.

 

License Revenues

 

License and Collaboration Agreements

 

The Company has entered into collaboration agreements to commercialize both Oxtellar XR and Trokendi XR outside of the U.S., which involve the right to use the Company’s intellectual property as a functional license. These agreements generally include an up-front license fee and ongoing milestone payments upon the achievement of specific events. These agreements may also require minimum royalty payments based on sales of products developed from the applicable intellectual property.

 

Up-front license fees are recognized once the license has been delivered to the customer.

 

Milestones are a form of variable consideration that are recognized when either the underlying events have been achieved (i.e., event-based milestone) or the sales-based targets have been met by the collaborative partner (i.e., sales-based milestone). Both types of milestone payments are non-refundable. The Company evaluates whether achieving the milestones is considered probable and estimates the amount to be included in the transaction price using the most likely amount method. This can involve management’s judgment that includes assessing factors that are outside of the Company’s influence, such as: likelihood of regulatory success; availability of third party information; and expected duration of time until achievement of event. These factors are evaluated based on the specific facts and circumstances. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone is included in the transaction price.

 

Event-based milestones are recognized in the period that the related event, such as regulatory approval, occurs. Milestone payments that are not within the control of the Company, such as approval from regulatory authorities, or where attainment of the specified event is dependent on the success of a third-party, are not considered probable of being achieved until the specified event occurs. Sales-based milestones are recognized as revenue when the sales-based target is achieved. Revenue is recognized from the satisfaction of performance obligations in the amount billable to the customer.

 

Revenue associated with future milestones will be recognized when the related event occurs or sales-based target is achieved. There are no guaranteed minimum amounts owed to the Company related to license and collaboration agreements.

 

Royalty Revenues

 

The Company recognizes non-cash royalty revenue for amounts earned pursuant to a royalty agreement with United Therapeutics Corporation (United Therapeutics) that involves 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 17, Commitments and Contingencies). Accordingly, the Company records non-cash royalty revenue based on estimated product sales by United Therapeutics, in which those product sales result in payments made from United Therapeutics to HC Royalty in connection with these agreements.

 

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Royalty revenue also includes royalty amounts received from collaboration partners, including from Shire Plc (Shire) (now a subsidiary of Takeda Pharmaceutical Company Ltd), based on net product sales of Shire’s product, Mydayis, in the current period. Royalty revenue is only recognized when the underlying product sale by Shire occurs. The Shire arrangement also involves the 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 royalty revenue agreement.

 

Preclinical Study and Clinical Trial Accruals

 

The Company estimates preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, clinical investigators, clinical research organizations (CROs) and other service providers that conduct activities on the Company’s behalf. In recording service fees, the Company estimates the time period over which the related services are performed and compares the level of effort expended through the end of each period with the cumulative expenses recorded and payments made for such services. As appropriate, the Company accrues additional service fees or defers 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 adjusts its accrued expenses or its deferred advance payments accordingly. If the Company later 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 determination is made.

 

Share-Based Compensation

 

The Company recognizes share-based compensation expense over the service period using the straight-line method. Employee share-based compensation is measured based on estimated fair value as of the grant date. The Company uses the Black-Scholes option-pricing model in calculating the fair value of option grants as of the grant date. The Company uses the following assumptions for estimating 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 fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. Beginning in the first quarter of 2019, the Company uses the historical volatility of its common stock to measure expected volatility for future option grants. Prior to 2019, the Company used the volatility of the common stock of several public entities of similar size, complexity, and stage of development. Prior to the first quarter of 2019, volatility was estimated using the volatility of the stock of these companies, as well as taking into consideration the Company’s actual volatility since the Company’s IPO in 2012.

 

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

 

Expected Term—This is the period of time during which options are expected to remain unexercised. Options have a maximum contractual term of ten years. Beginning in the first quarter of 2019, the Company determines the average expected life of stock options using its historical experience. Prior to the first quarter of 2019, the Company determined the average expected life of stock options according to the “simplified method”, as described in Staff Accounting Bulletin 110, which is the mid-point between the vesting date and the end of the contractual term.

 

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

 

Expected Forfeiture Rate—Forfeitures are accounted for as they occur.

 

Self-insurance Liabilities

 

As of January 1, 2019, the Company self-insures its employee medical insurance liability. The self-insurance liability is undiscounted and determined actuarially. It is based on claims filed, historical and industry claims experience, and an estimate of claims incurred but not yet paid. The Company has established stop-loss amounts that limit the Company’s further exposure after a claim reaches the designated stop-loss threshold. The stop-loss limit for self-insured employee medical claims is $150,000 per employee per year.

 

The Company recorded self-insurance liability of approximately $515,000 as of March 31, 2019 in Accrued expenses and other current liabilities in the condensed consolidated balance sheets.

 

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Advertising Expense

 

Advertising expense includes costs of promotional materials and activities, such as marketing materials, marketing programs and speaker programs. The costs of the Company’s advertising efforts are expensed as incurred.

 

The Company incurred approximately $9.9 million and $7.9 million in advertising costs for the three month periods ended March 31, 2019 and 2018, respectively. These expenses are recorded in Selling, general and administrative expenses in the condensed consolidated statements of earnings.

 

Recently Issued Accounting Pronouncements

 

Accounting Pronouncements Adopted

 

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842)” and its related amendments (New Lease Standard). The New Lease Standard requires a lessee to recognize a right-of-use (ROU) lease asset and a corresponding lease liability on the balance sheet. The Company adopted the New Lease Standard on January 1, 2019 using the modified retrospective method, which applies the provision of the New Lease Standard at the effective date without adjusting comparative periods presented. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the New Lease Standard which, among other things, allowed the Company to carry forward the historical lease classification.

 

The adoption of the New Lease Standard resulted in the recognition of lease assets and lease liabilities for operating leases as of January 1, 2019 of approximately $4.0 million. Financial reporting for periods on or after January 1, 2019 are presented under the new guidance. Prior period amounts are not adjusted and continue to be reported in accordance with previous guidance. The standard did not materially impact the Company’s condensed consolidated net earnings and had no impact on cash flows (see Note 14, Leases).

 

New Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires credit losses on financial assets measured on an amortized cost basis to be presented at the net amount expected to be collected, rather than based on incurred losses. Further, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses, limited to the amount by which fair value is below amortized cost. The new standard also requires enhanced disclosure of credit risk associated with respective assets.

 

The standard is effective for fiscal years beginning after December 15, 2019, for interim and annual periods within those years, with early adoption permitted. The Company is currently assessing the impact of this new standard. The Company does not expect it to have a material impact.

 

3.  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 market participants.

 

The Company reports assets and liabilities measured at fair value using a three level fair value 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 that the Company has the ability to access as of 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 (e.g., interest rates, yield curves, etc.); and inputs that are derived principally from or corroborated by observable market data by correlation or other means (i.e., 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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The Company’s financial assets that are required to be measured at fair value on a recurring basis are as follows, in thousands of dollars:

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

March 31, 2019

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Total Fair

 

Quoted Prices

 

Other

 

Significant

 

 

 

Value at

 

in Active Markets

 

Observable

 

Unobservable

 

 

 

March 31,

 

for Identical Assests

 

Inputs

 

Inputs

 

 

 

2019

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

122,778

 

$

122,778

 

$

 

$

 

Marketable securities

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

170,165

 

246

 

169,919

 

 

Long term marketable securities

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

521,398

 

450

 

520,948

 

 

Government debt securities

 

1,153

 

 

1,153

 

 

Other non-current assets

 

 

 

 

 

 

 

 

 

Marketable securities - restricted (SERP)

 

375

 

1

 

374

 

 

Total assets at fair value

 

$

815,869

 

$

123,475

 

$

692,394

 

$

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Total Fair

 

Quoted Prices

 

Other

 

Significant

 

 

 

Value at

 

in Active Markets

 

Observable

 

Unobservable

 

 

 

December 31,

 

for Identical Assests

 

Inputs

 

Inputs

 

 

 

2018

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

192,248

 

$

192,248

 

$

 

$

 

Marketable securities

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

163,770

 

245

 

163,525

 

 

Long term marketable securities

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

415,650

 

445

 

415,205

 

 

Government debt securities

 

3,148

 

 

3,148

 

 

Other non-current assets

 

 

 

 

 

 

 

 

 

Marketable securities - restricted (SERP)

 

326

 

1

 

325

 

 

Total assets at fair value

 

$

775,142

 

$

192,939

 

$

582,203

 

$

 

 

Level 1 assets include cash held at banks, certificates of deposit, money market funds, and investment grade corporate and government debt securities.

 

Level 2 assets include the SERP (Supplemental Executive Retirement Plan) assets, commercial paper and investment grade corporate and government debt securities and other fixed income securities. Level 2 securities are valued using third-party pricing sources that apply applicable inputs and other relevant data in their models to estimate fair value. The fair value of the restricted marketable securities is recorded in Other Assets in the condensed consolidated balance sheets.

 

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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The following table sets forth the Company’s financial liabilities that are not carried at fair value, in thousands of dollars:

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

2023 Notes

 

$

333,310

 

$

388,664

 

$

329,462

 

$

375,834

 

 

The fair value is estimated based on actual trade information as well as quoted prices provided by bond traders and is characterized within Level 2 of the fair value hierarchy.

 

Unrestricted available-for-sale marketable securities held by the Company are as follows, in thousands of dollars:

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

(unaudited)

 

 

 

Corporate and government debt securities

 

 

 

 

 

Amortized cost

 

$

690,853

 

$

586,726

 

Gross unrealized gains

 

2,905

 

55

 

Gross unrealized losses

 

(1,042

)

(4,213

)

Total fair value

 

$

692,716

 

$

582,568

 

 

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

 

 

 

March 31,

 

 

 

2019

 

 

 

(unaudited)

 

 

 

 

 

Less than 1 year

 

$

170,165

 

1 year to 2 years

 

170,246

 

2 years to 3 years

 

181,872

 

3 years to 4 years

 

170,433

 

Greater than 4 years

 

 

Total

 

$

692,716

 

 

The Company has not experienced any other-than-temporary losses on its marketable securities.

 

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4. Inventories

 

Inventories consist of the following, in thousands of dollars:

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Raw materials

 

$

5,377

 

$

5,742

 

Work in process

 

5,661

 

7,275

 

Finished goods

 

15,480

 

12,642

 

Total

 

$

26,518

 

$

25,659

 

 

5.  Property and Equipment

 

Property and equipment consists of the following, in thousands of dollars:

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Lab equipment and furniture

 

$

9,056

 

$

8,995

 

Leasehold improvements

 

3,014

 

2,731

 

Software

 

2,197

 

2,181

 

Computer equipment

 

1,313

 

1,313

 

Construction-in-progress

 

238

 

94

 

 

 

15,818

 

15,314

 

Less accumulated depreciation and amortization

 

(11,592

)

(11,219

)

Total

 

$

4,226

 

$

4,095

 

 

Depreciation and amortization expense on property and equipment was approximately $0.4 million for both three month periods ended March 31, 2019 and 2018.

 

The Company performs its annual impairment assessment in the fourth quarter, or earlier if impairment indicators exist. As of March 31, 2019, there were no identified indicators of impairment.

 

6.  Intangible Assets

 

Intangible assets consist of patent defense costs, which are legal fees incurred in conjunction with defending patents for Oxtellar XR and Trokendi XR. The Company amortizes those costs over the useful life of the respective patents.

 

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

 

 

 

Weighted-

 

March 31,

 

December 31,

 

 

 

Average Life

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Capitalized patent defense costs

 

3.75 - 8.00 years

 

$

44,725

 

$

44,724

 

Less accumulated amortization

 

 

 

(14,662

)

(13,356

)

Total

 

 

 

$

30,063

 

$

31,368

 

 

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Amortization expense on intangible assets was approximately $1.3 million for both three month periods ended March 31, 2019 and 2018.

 

The Company performs its annual impairment assessment in the fourth quarter, or earlier, if impairment indicators exist. As of March 31, 2019, there were no identified indicators of impairment.

 

7.  Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consist of the following, in thousands of dollars:

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Accrued clinical trial and clinical supply costs

 

$

15,420

 

$

14,034

 

Accrued compensation

 

11,545

 

13,546

 

Accrued professional fees

 

3,336

 

3,706

 

Accrued interest expense

 

 

650

 

Accrued product costs

 

751

 

38

 

Lease liabilities, current

 

3,250

 

 

Other accrued expenses

 

2,305

 

4,561

 

Total

 

$

36,607

 

$

36,535

 

 

8.  Accrued Product Returns and Rebates

 

Accrued product returns and rebates consist of the following, in thousands of dollars:

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Accrued rebates

 

$

66,090

 

$

85,003

 

Accrued product returns

 

22,110

 

22,060

 

Total

 

$

88,200

 

$

107,063

 

 

9. 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 Company may not redeem the 2023 Notes at its option before maturity.

 

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 restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company.

 

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, at its election, 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

 

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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 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 6,783,939 warrants. The warrants entitle the holder to one share per warrant at the strike price through 2023. The strike price of the Warrant Transactions will initially be $80.9063 per share of the Company’s common stock (subject to adjustment).

 

The Convertible Note Hedge Transactions are expected to generally reduce the potential dilution with respect to the Company’s common stock upon conversion of the 2023 Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted 2023 Notes, as the case may be. The Warrant Transactions are intended to partially offset the cost to the Company of the purchased Convertible Note Hedge Transactions; however, the Warrant Transactions could have a dilutive effect with respect to the Company’s common stock to the extent that the market price per share of the Company’s common stock, as measured under the terms of the Warrant Transactions, exceeds the strike price of the warrants.

 

The liability component of the 2023 Notes consists of the following, in thousands of dollars:

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

Principal amount of the 2023 Notes

 

$

402,500

 

$

402,500

 

Debt discount

 

(76,434

)

(76,434

)

Deferred financing costs

 

(8,452

)

(8,452

)

Accretion of debt discount and deferred financing costs

 

15,696

 

11,848

 

Total carrying value

 

$

333,310

 

$

329,462

 

 

No 2023 Notes were converted as of March 31, 2019.

 

10. Other Expenses

 

Other expenses consist of the following, in thousands of dollars:

 

 

 

Three Months ended March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

Interest income

 

$

4,681

 

$

1,206

 

Interest expense

 

(4,710

)

(717

)

Interest expense-nonrecourse liability related to sale of future royalties

 

(1,160

)

(701

)

 

 

 

 

 

 

Total

 

$

(1,189

)

$

(212

)

 

Interest expense includes non-cash interest expense relates to amortization of deferred financing costs and debt discount in the amount of $3.8 million and $0.6 million for the three month periods ended March 31, 2019 and 2018, respectively.

 

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11.  Share-Based Payments

 

Share-based compensation expense is as follows, in thousands of dollars:

 

 

 

Three Months ended March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

Research and development

 

$

574

 

$

418

 

Selling, general and administrative

 

2,713

 

2,217

 

Total

 

$

3,287

 

$

2,635

 

 

The following table summarizes stock options and SAR activities:

 

 

 

Number of
Options

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual
Term (in years)

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2018

 

3,916,963

 

$

19.98

 

7.10

 

Granted (unaudited)

 

831,835

 

$

36.75

 

 

 

Exercised (unaudited)

 

(57,665

)

$

13.57

 

 

 

Forfeited (unaudited)

 

(10,437

)

$

30.69

 

 

 

Outstanding, March 31, 2019 (unaudited)

 

4,680,696

 

$

23.01

 

7.40

 

 

 

 

 

 

 

 

 

As of December 31, 2018:

 

 

 

 

 

 

 

Vested and expected to vest

 

3,916,963

 

$

19.98

 

7.10

 

Exercisable

 

1,889,947

 

$

12.47

 

5.96

 

 

 

 

 

 

 

 

 

As of March 31, 2019:

 

 

 

 

 

 

 

Vested and expected to vest (unaudited)

 

4,680,696

 

$

23.01

 

7.40

 

Exercisable (unaudited)

 

2,605,591

 

$

15.33

 

6.22

 

 

12.  Earnings per Share

 

Basic earnings per share (EPS) is calculated using the weighted-average number of common shares outstanding. Diluted earnings per share is calculated using the weighted-average number of common shares outstanding including the dilutive effect of the Company’s stock option grants, stock appreciation rights (SAR), warrants, employee stock purchase plan (ESPP) awards and the 2023 Notes, as determined per the treasury stock method.

 

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The following common stock equivalents are excluded in the calculation of diluted earnings per share because their inclusion would be anti-dilutive, as applied to the earnings from continuing operations, and as applicable to common stockholders, for the three month periods ended March 31, 2019 and 2018:

 

 

 

Three Months ended March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

Warrants to purchase common stock

 

7,966,488

 

1,752,793

 

Convertible notes

 

239,272

 

22,634

 

Convertible notes hedges

 

240

 

23

 

Stock options, SAR and ESPP awards

 

608,948

 

208,661

 

 

The following table sets forth the computation of basic and diluted earnings per share for the three month periods ended March 31, 2019 and 2018, in thousands of dollars, except share and per share amounts:

 

 

 

Three Months ended March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

Numerator, in thousands:

 

 

 

 

 

Net earnings used for calculation of basic and diluted EPS

 

$

18,340

 

$

26,352

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average shares outstanding, basic

 

52,336,443

 

51,536,474

 

 

 

 

 

 

 

Effect of dilutive potential common shares:

 

 

 

 

 

Stock options and SAR

 

1,648,942

 

2,251,872

 

Total dilutive potential common shares

 

1,648,942

 

2,251,872

 

Weighted average shares outstanding, diluted

 

53,985,385

 

53,788,346

 

 

 

 

 

 

 

Earnings per share, basic

 

$

0.35

 

$

0.51

 

Earnings per share, diluted

 

$

0.34

 

$

0.49

 

 

13.  Income Taxes

 

The following table provides a comparative summary of the Company’s income tax expense and effective tax rate for the three month periods ended March 31, 2019 and 2018, in thousands of dollars:

 

 

 

Three Months ended March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

Income tax expense

 

$

5,899

 

$

4,830

 

Effective tax rate

 

24.34

%

15.49

%

 

The income tax expense for the three month period ended March 31, 2019 was attributable to U.S. federal and state income taxes.

 

For the three month period ended March 31, 2019, the Company recorded $5.9 million of income tax expense, an increase from $4.8 million as compared to the same period of 2018. The increase in income tax expense and in the effective tax rate for the three month period ended March 31, 2019, as compared to the same period in 2018, was primarily attributable to the larger excess tax benefits realized in 2018 related to exercises of employee stock options.

 

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The Company recorded income tax benefits related to exercises of employee stock options of approximately $0.3 million and $2.0 million for the three month periods ended March 31, 2019 and 2018, respectively.

 

14.  Leases

 

The Company determines if an arrangement is a lease at inception. Some leases include options to terminate or to extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.

 

The Company has lease arrangements that contain lease components (e.g., minimum rent payments) and non-lease components (e.g., maintenance, labor charges, etc.) and accounts for these components as a single lease component. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

Operating leases are included in Lease assets, Accrued expenses and other current liabilities, and Lease liabilities, long term on the condensed consolidated balance sheets. Operating lease assets and lease liabilities are recognized at the commencement date, based on the present value of the future minimum lease payments over the lease term. Lease expense for operating leases is recognized as an operating cost. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company uses its incremental borrowing rate based on the information available at commencement date of the lease in determining the present value of future payments.

 

The Company has operating leases for its current headquarters office and lab space and for the fleet vehicles. The Company’s existing leases for its current headquarters office and lab space run through April 2020. The Company applies a portfolio approach for the fleet vehicle leases to effectively account for the operating lease assets and liabilities, given the volume of individual leases involved in the overall arrangement.

 

New Headquarters Lease

 

The Company entered into a new lease agreement, effective January 31, 2019, with Advent Key West, LLC (Landlord), for its new headquarters in Rockville, MD (Premises). The term of the new headquarters lease commenced on February 1, 2019 (the Commencement Date) and will continue until April 30, 2034, unless earlier terminated in accordance with the terms of the lease. The lease includes options to extend the lease for up to 10 years. Fixed rent with respect to the Premises begins on the Commencement Date; however, the Landlord agreed to a rent abatement from the Commencement Date through April 30, 2020. The initial fixed rental rate is approximately $195,000 per month for the first 12 months. The rate will automatically increase by 2% on each anniversary of the Commencement Date. Under the terms of the Lease, the Company provided a security deposit of approximately $195,000 and will be required to pay all utility charges for the Premises and its pro rata share of any operating expenses and real estate taxes.

 

The lease also provides for a tenant improvement allowance of approximately $10.2 million in aggregate. Any unspent tenant improvement allowance as of January 31, 2020 will be forfeited. The full amount of tenant improvement allowance was initially recorded in Prepaid expenses and other current assets in the condensed consolidated balance sheets.

 

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Lease assets, lease-related assets and lease liabilities are as follows, in thousands of dollars:

 

 

 

 

 

March 31,

 

 

 

 

 

2019

 

 

 

 

 

(unaudited)

 

Assets

 

Balance Sheet Classification

 

 

 

Operating leases

 

Lease assets

 

$

20,049

 

Tenant receivable

 

Prepaid expenses and other current assets

 

10,151

 

Total lease and lease-related assets

 

 

 

$

30,200

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current

 

 

 

 

 

Operating leases

 

Accrued expenses and other current liabilities

 

$

3,250

 

Non-current

 

 

 

 

 

Operating leases

 

Lease liabilities, long term

 

27,824

 

Total lease liabilities

 

 

 

$

31,074

 

 

Lease costs for the three month period ended March 31, 2019 is as follows, in thousands of dollars:

 

 

 

Three Months ended

 

 

 

March 31, 2019

 

 

 

(unaudited)

 

 

 

 

 

Operating leases cost

 

 

 

Fixed lease cost

 

$

1,032

 

Variable lease cost

 

465

 

Total operating leases cost

 

$

1,497

 

 

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Weighted average lease term and discount rate for the three month period ended March 31, 2019 are as follows:

 

 

 

Three Months ended

 

 

 

March 31, 2019

 

 

 

(unaudited)

 

Weighted-average remaining lease term (years)

 

 

 

Operating leases

 

13.53

 

 

 

 

 

Weighted-average discount rate

 

 

 

Operating leases

 

4.37

%

 

Future minimum lease payments under non-cancellable leases as of March 31, 2019 are as follows, in thousands of dollars:

 

 

 

Operating leases

 

Year ending December 31:

 

 

 

2019 (remaining)

 

$

2,512

 

2020

 

2,938

 

2021

 

2,527

 

2022

 

2,486

 

2023

 

2,536

 

Thereafter

 

29,371

 

Total future minimum lease payments

 

$

42,370

 

Less: Imputed interest (1)

 

11,296

 

Present value of lease liabilities

 

$

31,074

 

 


(1) Calculated using the interest rate for each lease.

 

Dislcosure Related to Periods Prior to Adoption of the New Lease Standard

 

Rent expense for the leased facilities and leased vehicles for the years ended December 31, 2018, 2017 and 2016 was approximately $3.6 million, $2.7 million and $2.7 million, respectively.

 

Future minimum lease payments under non-cancelable operating leases as of December 31, 2018 are as follows, in thousands of dollars:

 

Year ending December 31:

 

 

 

2019

 

$

3,400

 

2020

 

2,287

 

Thereafter

 

1,840

 

Total

 

$

7,527

 

 

15.  Accounts Receivable

 

The Company recorded an allowance of approximately $7.8 million and $11.5 million for expected sales discounts and allowances related to prompt pay discounts and contractual fees for service arrangements with the Company’s customers, who are primarily pharmaceutical wholesalers and distributors, as of March 31, 2019 and December 31, 2018, respectively.

 

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16. Disaggregated Revenues

 

The following table summarizes the disaggregation of revenues by nature, in thousands of dollars:

 

 

 

Three Months ended March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

Net product sales

 

 

 

 

 

Trokendi XR

 

$

63,693

 

$

70,555

 

Oxtellar XR

 

19,406

 

18,565

 

Total net product sales

 

83,099

 

89,120

 

Royalty revenues

 

2,375

 

1,309

 

Total revenues

 

$

85,474

 

$

90,429

 

 

The majority of the Company’s product sales are with pharmaceutical wholesalers and distributors who, in turn, sell the products to chain and independent pharmacies, hospitals and other customers. Three pharmaceutical wholesalers/distributors collectively accounted for more than 90% of the Company’s total net product sales and accounts receivables as of and for the three month periods ended March 31, 2019 and 2018.

 

The Company recognized non-cash royalty revenue of $1.6 million and $1.3 for the three month periods ended March 31, 2019 and 2018, respectively.

 

No milestone revenue was recorded for the three month periods ended March 31, 2019 and 2018, respectively.

 

For the three month period ended March 31, 2019, revenues recognized from performance obligations related to prior periods (e.g., due to changes in transaction price) were not material in the aggregate to Net Product Sales and Royalty Revenues.

 

17. Commitments and Contingencies

 

Product Licenses

 

The Company has obtained exclusive licenses from third parties for proprietary rights to support the product candidates in the Company’s neurology and psychiatry portfolio. Under these license agreements, the Company may be required to pay certain amounts upon the achievement of certain milestones. The Company is also obligated to pay royalties to third parties, as percentage of net product sales, for each respective product under license agreement, if these products are ultimately commercialized.

 

Royalty Agreement

 

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 Company’s agreement with United Therapeutics related to the commercialization of Orenitram (treprostinil) Extended-Release Tablets. The Company will retain full ownership of the royalty rights if and when a certain cumulative payment threshold is reached per the terms of the agreement. The Company recorded a non-recourse liability related to this transaction, and amortizes this amount as non-cash royalty revenue. The Company also recognizes non-cash interest expense related to this liability and accrues at an effective interest rate. That rate is determined based on projections of HC Royalty’s rate of return (see Notes 10 and 16).

 

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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 Supernus Pharmaceuticals, Inc. (the Company, we, us, or our). The interim financial statements included in this report and this Management’s Discussion and Analysis of 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, 2018 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 1, 2019.

 

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 our 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 pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases in neurology and psychiatry.

 

We market two products, Oxtellar XR and Trokendi XR, in the United States (U.S.). We market our products through our own sales force and seek strategic collaborations with other pharmaceutical companies to commercialize our products outside of the U.S. via license agreements.

 

In addition, we are developing multiple proprietary product candidates in the CNS market to address significant unmet medical needs and market opportunities.

 

The table below summarizes our current portfolio of novel products and product candidates:

 

GRAPHIC

 

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*                                         Prophylaxis of migraine headache in adults and adolescents.

 

**                                  Initial program is for Impulsive Aggression (IA) in patients with ADHD, with plans to add other indications, such as IA in patients with autism, PTSD, bipolar disorder, Alzheimer’s and other forms of dementia.

 

We expect to incur significant expenses as we: invest in research and development related to the continued development of each of our product candidates through FDA approval or until the program terminates; expand product indications for approved products; invest in sales and marketing resources for existing and new products; enter into agreements to purchase products or other companies and invest in support for our business, technology, regulatory and legal matters.

 

Our Neurology Portfolio

 

Our neurology portfolio includes the following two commercial products and one product candidate for the treatment of neurological diseases.

 

Commercial Products

 

Trokendi XR is a once-daily extended release topiramate product for the prophylaxis of migraine headache and for the treatment of epilepsy.

 

Oxtellar XR is a once-daily extended release oxcarbazepine product that was initially approved for the adjunctive treatment of partial onset seizures of epilepsy. During the first quarter of 2019, we launched Oxtellar XR for the recently approved monotherapy treatment of partial onset seizures of epilepsy in adults and in children 6 to 17 years of age.

 

These two commercial products differ from immediate release formulations by offering once-daily dosing and unique pharmacokinetic profiles, which we believe can have very 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 bloodstreams 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, which are typically associated with immediate release products and which may result in increased adverse events (AEs), more side effects and decreased efficacy.

 

Product Prescriptions

 

We expect the number of prescriptions filled for Oxtellar XR and Trokendi XR to continue to increase through 2019 and in subsequent years. Data from IQVIA shows that 199,520 total prescriptions were filled for both of these drugs during the three month periods ended March 31, 2019, which is 11% higher than the 179,711 prescriptions reported for the same period in 2018.

 

Total prescriptions for Trokendi XR increased by 15,945 or 11% in the first quarter of 2019 as compared to the same quarter period in 2018. Total prescriptions for Oxtellar XR increased by 3,864 or 11% in the first quarter of 2019 as compared to the same quarter in 2018.

 

Product Candidate

 

SPN-817 (huperzine A)

 

SPN-817 will utilize a novel synthetic form of huperzine A, whose mechanism of action (MOA) includes potent acetyl cholinesterase inhibition with pharmacological activities in CNS conditions such as epilepsy.

 

SPN-817 Development Program

 

We plan on studying SPN-817 initially in severe pediatric epilepsy disorders. A Phase I proof-of-concept trial is currently underway outside of the U.S in adult patients with refractory complex partial seizures to study the efficacy, safety, and pharmacokinetic profile of a new extended release formulation of non-synthetic huperzine A. We will focus on completing and optimizing the synthesis process of the synthetic drug and developing a novel dosage form prior to conducting additional clinical trials. Given the potency of huperzine A, a novel extended release oral dosage form is critical to the success of this program because initial studies with immediate release formulations of nonsynthetic huperzine A have shown dose-limiting serious side effects.

 

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Table of Contents

 

Our Psychiatry Portfolio

 

Our psychiatry portfolio includes the following four product candidates for the treatment of psychiatric disorders.

 

Product Candidates

 

SPN-812 (extended release viloxazine hydrochloride)

 

SPN-812 is a structurally distinct, bicyclic, serotonin norepinephrine modulating agent with New Chemical Entity (NCE) status in the U.S. We are developing SPN-812 as a novel non-stimulant treatment for ADHD in pediatric and adolescent patients. We believe that SPN-812 could be a better alternative than other non-stimulant and stimulant therapies due to its unique pharmacological and pharmacokinetic profile. The active ingredient in SPN-812, viloxazine hydrochloride, has an extensive safety record in Europe, where it was previously marketed for many years as an antidepressant.

 

SPN-812 Development Program

 

Our Phase III program consists of four three-arm, placebo-controlled trials: P301 and P303 trials in patients 6 to 11 years old and P302 and P304 trials in patients 12-17 years old. The Phase III program for SPN-812 is complete. In December 2018, we announced positive topline results from the pediatric trials (P301 and P303) and the first adolescent trial (P302).  In March 2019, we announced topline results from the second adolescent trial (P304), confirming the positive results seen in the previous three Phase III trials.

 

The P304 study is a randomized, double-blind, placebo controlled, multicenter, parallel group clinical trial in adolescents 12 to 17 years of age diagnosed with ADHD. Each treatment was administered orally once a day over seven weeks, including one week of titration for 400 mg dosing and two weeks of titration for 600 mg dosing. SPN-812 400 mg dose reached statistical significance compared to placebo, consistent with our previous Phase III studies. While SPN-812 600 mg dose narrowly missed statistical significance, it is not needed for the submission of the NDA for children and adolescents. The 600 mg dose was included to check for a potentially higher level of efficacy, to help in identifying the maximum effective dose, and to help in designing our trials for the adult population.

 

The Company continues to be focused on compiling the New Drug Application (NDA) for submission to the U.S. Food and Drug Administration (FDA) in the second half of this year. We expect to launch SPN-812, assuming FDA approval, in the second half of 2020.

 

Patients completing the Phase III trials were permitted to continue treatment under our open label extension trial. That trial is expected to continue through 2020.

 

Further, we are continuing to develop and expand our intellectual property (IP) portfolio covering the novel synthesis process for the active ingredient in SPN-812, its novel use in treatment of ADHD and its novel extended release delivery.

 

SPN-810 (molindone hydrochloride)

 

We are developing SPN-810 as a novel treatment for IA in patients who have ADHD, with the potential to be the first product available to address this serious, unmet medical need. Molindone hydrochloride was previously marketed in the United States for the treatment of schizophrenia under the trade name Moban at much higher strengths and different dosage forms than we are using in our development program. If we are successful in developing SPN-810 as a novel treatment for IA in patients who have ADHD, we may then develop the product as a candidate for treating other indications, e.g., patients with IA in autism, PTSD, bipolar disorder, Alzheimer’s and other forms of dementia.

 

SPN-810 Development Program

 

Our Phase III program consists of two clinical studies in patients 6 to 11 years old (P301 and P302) and one in patients 12 to 17 years old (P503). Data from the first Phase III trial (P301) and second trial (P302) are expected in second half of 2019. We expect patient enrollment in the adolescent trial (P503) to continue through 2020.

 

We expect to submit the NDA for SPN-810 in the second half of 2020, and to launch it, assuming FDA approval, in the second half of 2021.

 

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Patients completing the Phase III trials can continue treatment under our open label extension trial. Enrollment from the P301 and P302 trials into the open label extension trial continues at 90% or higher. On average, a patient in the open label extension study stays on SPN-810 for approximately 10 months, which we believe is an encouraging sign of both tolerability and efficacy.

 

We continue to develop and expand our IP portfolio covering the novel synthesis process for the active ingredient in SPN-810, its novel use in IA and its novel extended release delivery.

 

SPN-809 (viloxazine hydrochloride)

 

SPN-809 is a novel once-daily product candidate for the treatment of depression. SPN-809 incorporates the same active ingredient as SPN-812.

 

Because SPN-809 contains the same active ingredient as SPN-812, we expect that many of our activities related to the development of SPN-812 will also benefit the development of SPN-809.

 

SPN-604 (extended release oxcarbazepine for treatment of bipolar disorder)

 

We continue to progress our plans to initiate pivotal Phase III studies for the treatment of bipolar disorder in the second half of 2019. If approved, this would represent the first approval for treatment of bipolar patients with oxcarbazepine in the U.S.

 

Patents

 

Our extended release oxcarbazepine patent portfolio currently includes twelve U.S. patents, nine of which cover Oxtellar XR. We own all of the issued patents and the pending patent applications. We have also obtained two patents each for extended release oxcarbazepine in Europe and Australia, and one patent each in Canada, Japan, China and Mexico. In addition, we have a pending U.S. patent application that covers various extended release formulations containing oxcarbazepine. The nine issued U.S. patents covering Oxtellar XR will expire no earlier than 2027.

 

We currently have nine U.S. patents that cover Trokendi XR. We own all of the issued patents and pending patent applications. We have one patent issued each in Mexico, Australia, Japan and Canada for extended release topiramate. We also have two patents issued in Europe for extended release topiramate. The nine issued U.S. patents covering Trokendi XR will expire no earlier than 2027. The Company has entered into settlement agreements with third parties permitting sale of a generic version of Trokendi XR on January 1, 2023 or earlier under certain circumstances.

 

Our patent portfolio also contains patent applications relating to our pipeline products. We continue to build our intellectual property portfolio to provide additional protection for our technologies, measurement scales, products and product candidates.

 

To protect our competitive position, it may be necessary to enforce our patent rights through litigation against infringing third parties. See Part II, Item 1Legal Proceedings for additional information.

 

Critical Accounting Policies and the Use of Estimates

 

The significant accounting policies and bases of presentation for our condensed consolidated financial statements are described in Note 2, Summary of Significant Accounting Policies, in the Notes to the Condensed Consolidated Financial Statements. Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP), requiring 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 materially from those estimates.

 

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

 

Revenue Recognition

 

Revenue from product sales is recognized when control of our products is transferred to our customers, who are pharmaceutical wholesalers and distributors. Product sales are recorded net of various forms of variable consideration, including estimated rebates, discounts, and allowances, and an estimated liability for product returns (collectively, “sales deductions”). We adjust our estimates at the earlier of when the most likely amount of consideration we expect to receive changes, or when the consideration becomes fixed. For a complete description of our revenue recognition policy, see Part I, Item 1, Financial Statements, Note 2, Revenue from Product Sales in the Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

Research and Development Expenses and Related Accrued Clinical Expenses

 

Research and development expenditures are expensed as incurred. Research and development costs primarily consist of: employee-related expenses, including salaries and benefits; share-based compensation expense; expenses incurred under agreements with clinical research organizations (CROs); fees paid to investigators who are participating in our clinical trials; consultants and other vendors that assist in the conduct of the Company’s clinical trials; the cost of acquiring and manufacturing clinical trial materials, including materials used in process validation (i.e., 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. Assets acquired that are used for research and development and that have no future alternative use are expensed as in-process research and development.

 

Clinical trials are inherently complex and often involve multiple service providers. Because billing for services often lags by a substantial period of time, we often are required to estimate and accrue a significant portion of our clinical expenses. This process involves reviewing open contracts and communicating with our subject matter expert personnel as well as the appropriate service provider personnel to identify services that have been performed on our behalf but for which no invoice has been received. We accrue for unbilled services performed, both partially and fully completed, and the associated cost incurred.

 

Payments to service providers can either be based on hourly rates for service or based on achievement of 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. We work with each service provider to obtain 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 the following periods. Historically, our estimated accrued clinical expenses have closely approximated the actual expenses incurred.

 

Results of Operations

 

Comparison of the three month periods ended March 31, 2019 and 2018

 

Revenues

 

Revenues consist of net product sales of Trokendi XR and Oxtellar XR in the U.S., and royalty and licensing revenues from our collaborative licensing arrangements.

 

The following table provides information regarding our revenues during the periods indicated, including percent changes (dollar amount in thousands):

 

 

 

Three Months ended March 31,

 

Increase

 

Percent

 

 

 

2019

 

2018

 

(Decrease)

 

Change (%)

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

 

 

 

 

 

 

 

 

Trokendi XR

 

$

63,693

 

$

70,555

 

$

(6,862

)

-10

%

Oxtellar XR

 

19,406

 

18,565

 

841

 

5

%

Total net product sales

 

83,099

 

89,120

 

(6,021

)

-7

%

Royalty revenues

 

2,375

 

1,309

 

1,066

 

81

%

Total revenues

 

$

85,474

 

$

90,429

 

$

(4,955

)

-5

%

 

Net product sales

 

Net product sales are based on gross revenue from product shipments to pharmaceutical wholesalers and distributors, less estimates for rebates, product returns and sales discounts.

 

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In the fourth quarter of 2018 wholesalers, distributors, and pharmacies increased their inventory holdings, as compared to the prevailing inventory levels in the third quarter of 2018. We estimate that this caused net product sales to be approximately $10 million higher in the fourth quarter of 2018 than it would have been otherwise, had channel inventory levels remained consistent, quarter to quarter.

 

This process was effectively reversed in the first quarter of 2019. Specifically, based on analysis of sales and inventory data, inventory levels at wholesalers, distributors, and pharmacies declined to the prevailing levels of the third quarter of 2018. As a result, both gross sales and net product sales decreased in the first quarter of 2019, as compared both to the prior year as well as the prior quarter. The adverse impact on net product sales due to the reduction in channel inventory is estimated at approximately $10 million.

 

Partially offsetting the reduction in channel inventory was year over year growth in prescriptions of 11%, coupled with price increases. For the three month period ended March 31, net product sales decreased by $6.0 million, from 2018 to 2019.

 

Trokendi XR net product sales decreased $6.9 million, or 10% for the three month period ended March 31, 2019 versus 2018. The primary driver was the aforementioned channel inventory reduction, which was partially offset by growth in prescriptions and the net impact of an 8% price increase. Oxtellar XR net product sales grew by $0.8 million, or 5%, for the three month period ended March 31, 2019 as compared to 2018. Growth in prescription volumes and the net impact of an 8% price increase were modestly offset by the channel inventory reduction.

 

The Company records accrued rebates and accrued product returns in Accrued product returns and rebates as current liabilities and records sales discounts as an Accounts receivable valuation allowance.

 

The following table provides a summary of activities with respect to sales deductions and related accruals for the three month periods ended March 31, 2019 and 2018, in thousands of dollars:

 

 

 

Accrued Liabilities

 

 

 

 

 

 

 

 

 

Product

 

Allowance for

 

 

 

 

 

Rebates

 

Returns

 

Sales Discounts

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

$

85,003

 

$

22,060

 

$

11,548

 

$

118,611

 

Provision

 

 

 

 

 

 

 

 

 

Provision for sales in current year

 

63,941

 

1,724

 

11,214

 

76,879

 

Adjustments relating to prior year sales

 

(844

)

(42

)

(43

)

(929

)

Total provision

 

$

63,097

 

$

1,682

 

$

11,171

 

$

75,950

 

Less: Actual payments/credits

 

(82,010

)

(1,632

)

(14,909

)

(98,551

)

Balance at March 31, 2019

 

$

66,090

 

$

22,110

 

$

7,810

 

$

96,010

 

 

 

 

Accrued Liabilities

 

 

 

 

 

 

 

 

 

Product

 

Allowance for

 

 

 

 

 

Rebates

 

Returns

 

Sales Discounts

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

$

49,460

 

$

18,883

 

$

8,892

 

$

77,235

 

Provision

 

 

 

 

 

 

 

 

 

Provision for sales in current year

 

53,837

 

2,354

 

12,208

 

68,399

 

Adjustments relating to prior year sales

 

(1,681

)

29

 

(3

)

(1,655

)

Total provision

 

$

52,156

 

$

2,383

 

$

12,205

 

$

66,744

 

Less: Actual payments/credits

 

(49,086

)

(762

)

(11,739

)

(61,587

)

Balance at March 31, 2018

 

$

52,530

 

$

20,504

 

$

9,358

 

$

82,392

 

 

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The total provision for sales deductions from gross product sales was $76.0 million and $66.7 million for the three month periods ended March 31, 2019 and 2018, respectively. The overall increase in the provision was directly related to growth in prescriptions, the growth in Medicaid rebates consequent to taking price increases, and higher levels of patient co-pay assistance in response to the growth in high deductible health care plans. Adjustments related to prior year sales due to changes in estimate had a de minimis impact on product sales for the periods ended March 31, 2019 and 2018.

 

Royalty Revenues

 

Royalty revenues includes royalty revenue from net product sales of Mydayis, a product of Shire Plc (now a subsidiary of Takeda Pharmaceuticals Company Ltd.), and non-cash royalty revenue consequent to the Healthcare Royalty Partners III, L.P. (HC Royalty) arrangement. HC Royalty receives royalty payments from United Therapeutics Corporation, (United Therapeutics), based on net product sales of Orenitram.

 

Royalty revenues grew 81% in the three month period ended March 31, 2019, compared to the same period in 2018, primarily due to increased sales of Mydayis and Orenitram. Non-cash royalty revenue for the three month period ended March 31, 2019 was $1.6 million, compared to $1.3 million for same period in 2018.

 

Cost of Product Sales

 

The following table provides information regarding our cost of product sales during the periods indicated, including percent changes (dollar amounts in thousands):

 

 

 

Three Months ended March 31,

 

 

 

Percent

 

 

 

2019

 

2018

 

Increase

 

Change (%)

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

$

3,684

 

$

3,278

 

$

406

 

12

%

 

Cost of product sales during the three month period ended March 31, 2019 was $3.7 million, slightly higher than $3.3 million for the same period in 2018. The increase is primarily attributable to higher unit volume, partially offset by manufacturing efficiencies.

 

Research and Development Expenses

 

The following table provides information regarding our research and development expenses (R&D) during the periods indicated, including percent changes (dollar amounts in thousands):

 

 

 

Three Months ended March 31,

 

 

 

Percent

 

 

 

2019

 

2018

 

Decrease

 

Change (%)

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

15,394

 

$

18,908

 

$

(3,514

)

-19

%

 

R&D expenses decreased by $3.5 million, or 19%, in the three month period ended March 31, 2019 as compared to the same period in 2018. This decrease is primarily driven by the completion of the four Phase III clinical trials for SPN-812 in late 2018/early 2019, partially offset by the manufacture of validation and registration lots for SPN-812 to support our upcoming NDA filing.

 

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Selling, General and Administrative Expenses

 

The following table provides information regarding our selling, general and administrative expenses (SG&A) during the periods indicated, including percent changes (dollar amounts in thousands):

 

 

 

Three Months ended March 31,

 

 

 

Percent

 

 

 

2019

 

2018

 

Increase

 

Change (%)