Company Quick10K Filing
Supernus Pharmaceuticals
Price28.47 EPS2
Shares54 P/E15
MCap1,534 P/FCF15
Net Debt-117 EBIT146
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-15
10-K 2019-12-31 Filed 2020-02-28
10-Q 2019-09-30 Filed 2019-11-08
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-01
10-Q 2018-09-30 Filed 2018-11-09
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-01
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-03
10-Q 2017-03-31 Filed 2017-05-09
10-K 2016-12-31 Filed 2017-03-16
10-Q 2016-09-30 Filed 2017-01-20
10-Q 2016-06-30 Filed 2016-08-05
10-Q 2016-03-31 Filed 2016-05-10
10-K 2015-12-31 Filed 2016-03-09
10-Q 2015-09-30 Filed 2015-11-09
10-Q 2015-06-30 Filed 2015-08-07
10-Q 2015-03-31 Filed 2015-05-06
10-K 2014-12-31 Filed 2015-03-12
10-Q 2014-09-30 Filed 2014-11-12
10-Q 2014-06-30 Filed 2014-08-12
10-Q 2014-03-31 Filed 2014-05-13
10-K 2013-12-31 Filed 2014-03-21
10-Q 2013-09-30 Filed 2013-11-13
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-15
10-K 2012-12-31 Filed 2013-03-15
10-Q 2012-09-30 Filed 2012-11-02
10-Q 2012-06-30 Filed 2012-08-13
10-Q 2012-03-31 Filed 2012-06-08
8-K 2020-06-15
8-K 2020-06-09
8-K 2020-05-27
8-K 2020-05-15
8-K 2020-05-05
8-K 2020-04-28
8-K 2020-04-24
8-K 2020-04-21
8-K 2020-03-30
8-K 2020-02-21
8-K 2020-02-11
8-K 2020-01-21
8-K 2020-01-08
8-K 2019-12-09
8-K 2019-11-11
8-K 2019-11-05
8-K 2019-10-24
8-K 2019-09-25
8-K 2019-08-26
8-K 2019-08-06
8-K 2019-07-23
8-K 2019-06-11
8-K 2019-05-29
8-K 2019-05-07
8-K 2019-04-24
8-K 2019-04-01
8-K 2019-03-27
8-K 2019-03-06
8-K 2019-02-22
8-K 2019-02-12
8-K 2019-01-31
8-K 2018-12-20
8-K 2018-12-13
8-K 2018-12-05
8-K 2018-11-07
8-K 2018-11-06
8-K 2018-10-24
8-K 2018-09-20
8-K 2018-09-12
8-K 2018-09-06
8-K 2018-08-29
8-K 2018-08-07
8-K 2018-07-25
8-K 2018-06-27
8-K 2018-06-12
8-K 2018-05-30
8-K 2018-05-15
8-K 2018-05-08
8-K 2018-05-08
8-K 2018-04-24
8-K 2018-03-14
8-K 2018-03-13
8-K 2018-03-06
8-K 2018-02-27
8-K 2018-02-27
8-K 2018-02-14
8-K 2018-02-12
8-K 2018-01-11
8-K 2018-01-02

SUPN 10Q Quarterly Report

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 supn-20200331x10qxex311.htm
EX-31.2 supn-20200331x10qxex312.htm
EX-32.1 supn-20200331x10qxex321.htm
EX-32.2 supn-20200331x10qxex322.htm

Supernus Pharmaceuticals Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
Assets, Equity
Rev, G Profit, Net Income
Ops, Inv, Fin

Table of Contents

(Mark One)
For the quarterly period ended March 31, 2020
For the transition period from                 to              
Commission File Number: 001-35518
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
9715 Key West Avenue
Rockville MD20850
(Address of principal executive offices)(Zip Code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   No
Indicate by check mark whether the registrant has submitted electronically pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer 
Non-accelerated filer Smaller reporting company 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   No
Securities registered pursuant to Section 12(b) of the Exchange Act
Title of each classOutstanding at April 29, 2020Trading SymbolName of each exchange on which registered
Common Stock, $0.001 par value per share52,538,659SUPNThe Nasdaq Global Market

Table of Contents

Page No.


Table of Contents


Supernus Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
March 31,December 31,
Current assets
Cash and cash equivalents$225,767  $181,381  
Marketable securities175,104  165,692  
Accounts receivable, net119,195  87,332  
Inventories, net24,418  26,628  
Prepaid expenses and other current assets12,564  11,611  
Total current assets557,048  472,644  
Long term marketable securities534,712  591,773  
Property and equipment, net18,011  17,068  
Intangible assets, net23,579  24,840  
Lease assets21,911  21,279  
Deferred income taxes34,067  32,063  
Other assets538  615  
Total assets$1,189,866  $1,160,282  
Liabilities and stockholders’ equity
Current liabilities
Accounts payable$3,124  $10,141  
Accrued product returns and rebates119,453  107,629  
Accrued expenses and other current liabilities33,003  37,130  
Income taxes payable9,097  2,443  
Nonrecourse liability related to sale of future royalties, current portion3,658  3,244  
Total current liabilities168,335  160,587  
Convertible notes, net349,232  345,170  
Nonrecourse liability related to sale of future royalties, long term18,369  19,248  
Lease liabilities, long term30,804  30,440  
Other liabilities9,743  9,409  
Total liabilities576,483  564,854  
Stockholders’ equity
Common stock, $0.001 par value; 130,000,000 shares authorized; 52,537,159 and 52,533,348 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
53  53  
Additional paid-in capital392,430  388,410  
Accumulated other comprehensive earnings (loss), net of tax(166) 7,417  
Retained earnings221,066  199,548  
Total stockholders’ equity613,383  595,428  
Total liabilities and stockholders’ equity$1,189,866  $1,160,282  

See accompanying notes.

Table of Contents
Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Earnings
(in thousands, except share and per share data)
Three Months ended March 31,
Net product sales$92,490  $83,099  
Royalty revenues2,486  2,375  
Total revenues94,976  85,474  
Costs and expenses
Cost of goods sold4,152  3,684  
Research and development18,937  15,394  
Selling, general and administrative42,875  40,968  
Total costs and expenses65,964  60,046  
Operating earnings29,012  25,428  
Other income (expense)
Interest expense(5,755) (5,870) 
Interest income, net5,777  4,681  
Total other income (expense)22  (1,189) 
Earnings before income taxes29,034  24,239  
Income tax expense7,516  5,899  
Net earnings$21,518  $18,340  
Earnings per share
Basic$0.41  $0.35  
Diluted$0.40  $0.34  
Weighted-average shares outstanding
Basic52,534,787  52,336,443  
Diluted53,581,051  53,985,385  

See accompanying notes.

Table of Contents
Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Comprehensive Earnings
(in thousands)
Three Months ended March 31,
Net earnings$21,518  $18,340  
Other comprehensive (loss) earnings
Unrealized (loss) gain on marketable securities, net of tax(7,583) 4,585  
Other comprehensive (loss) earnings(7,583) 4,585  
Comprehensive earnings$13,935  $22,925  

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three Months ended March 31, 2020 and 2019
(unaudited, in thousands, except share data)
jCommon StockAdditional 
Paid-in Capital
Accumulated Other
Earnings (Loss)
Balance, December 31, 201952,533,348  $53  $388,410  $7,417  $199,548  $595,428  
Share-based compensation—  —  3,988  —  —  3,988  
Exercise of stock options3,811  —  32  —  —  32  
Net earnings—  —  —  —  21,518  21,518  
Unrealized loss on marketable securities, net of tax—  —  —  (7,583) —  (7,583) 
Balance, March 31, 202052,537,159  $53  $392,430  $(166) $221,066  $613,383  

Common StockAdditional 
Paid-in Capital
Accumulated Other
Earnings (Loss)
Balance, December 31, 201852,316,583  $52  $369,637  $(3,158) $86,492  $453,023  
Share-based compensation—  —  3,287  —  —  3,287  
Exercise of stock options57,665  —  783  —  —  783  
Net earnings—  —  —  —  18,340  18,340  
Unrealized gain on marketable securities, net of tax  —  —  —  4,585  —  4,585  
Balance, March 31, 201952,374,248  $52  $373,707  $1,427  $104,832  $480,018  

See accompanying notes.

Table of Contents

Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
Three Months ended March 31,
Cash flows from operating activities
Net earnings$21,518  $18,340  
Adjustments to reconcile net earnings to net cash provided by operating activities:
Share-based compensation expense3,988  3,287  
Depreciation and amortization1,732  1,679  
Amortization of premium/discount on marketable securities(451) (1,102) 
Amortization of deferred financing costs and debt discount4,061  3,848  
Noncash interest expense1,366  1,437  
Noncash royalty revenue(1,567) (1,576) 
Noncash operating lease cost991  879  
Deferred income tax benefit538  279  
Changes in operating assets and liabilities:
Accounts receivable(31,823) 23,013  
Inventories2,210  (859) 
Prepaid expenses and other current assets(454) (1,799) 
Other noncurrent assets  (196) 
Accounts payable(7,017) 4,045  
Accrued product returns and rebates11,824  (18,863) 
Accrued expenses and other current liabilities(3,634) (3,177) 
Income taxes payable6,654  4,856  
Other liabilities(1,020) (1,098) 
Net cash provided by operating activities8,916  32,993  
Cash flows from investing activities
Purchases of marketable securities(15,382) (150,167) 
Sales and maturities of marketable securities53,357  47,143  
Purchases of property and equipment(2,537) (221) 
Deferred legal fees  (1) 
Net cash provided by (used in) investing activities35,438  (103,246) 
Cash flows from financing activities
Proceeds from issuance of common stock32  783  
Net cash provided by financing activities32  783  
Net change in cash and cash equivalents44,386  (69,470) 
Cash and cash equivalents at beginning of year181,381  192,248  
Cash and cash equivalents at end of period$225,767  $122,778  
Supplemental cash flow information
Cash paid for interest on convertible notes$1,258  $1,258  
Income taxes paid$324  $800  
Noncash investing and financing activities
Deferred legal fees and fixed assets included in accounts payable and accrued expenses$708  $250  
Property and equipment additions from utilization of tenant improvement allowance$  $282  

See accompanying notes.

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 the treatment of epilepsy. The Company is also developing multiple proprietary CNS product candidates to address significant unmet medical needs and market opportunities.

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

COVID-19 Impact

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business operations, and has assessed the impact of the COVID-19 pandemic on its condensed consolidated financial statements as of March 31, 2020. Since the situation surrounding the COVID-19 pandemic remains fluid, the long term duration, nature, and extent of the effects cannot be reasonably estimated at this time.
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 Biscayne Neurotherapeutics Australia Pty Ltd. These are 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, 2019, filed with the SEC.
In management’s opinion, the condensed consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for any interim period are not necessarily indicative of the Company’s future quarterly or annual results.
The Company, which is primarily located in the United States (U.S.), operates in one operating segment.
Use of Estimates

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


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

Inventories Produced in Preparation of Product Launches


Table of Contents

The Company capitalizes inventories produced in preparation for product launches when future commercialization of a product is probable and when future economic benefit is expected to be realized. The determination to capitalize is based on the particular facts and circumstances relating to the product. Capitalization of such inventory begins when the Company determines that (i) positive results have been obtained for the clinical trials that are necessary to support regulatory approval; (ii) uncertainties regarding regulatory approval have been significantly reduced; and (iii) it is probable that these capitalized costs will provide future economic benefit in excess of capitalized costs.
In evaluating whether these conditions are met, the Company considers the following factors: the product candidate’s current status in the regulatory approval process; results from the related pivotal clinical trials; results from meetings with relevant regulatory agencies prior to the filing of regulatory applications; compilation of the regulatory applications; consequent acceptance by the regulatory body; potential impediments to the approval process, such as product safety or efficacy concerns, potential labeling restrictions, and other impediments; historical experience with manufacturing and commercializing similar products as well as the relevant product candidate; and the resilience of the Company’s manufacturing environment, including its supply chain, in determining logistical constraints that could hamper approval or commercialization. In assessing the economic benefit that the Company is likely to realize, the Company considers: the shelf life of the product in relation to the expected timeline for approval; patent related or contract issues that may prevent or delay commercialization; product stability data of all pre-approval production to determine whether there is adequate expected shelf life; viability of commercialization, taking into account competitive dynamics in the marketplace and market acceptance; anticipated future sales; and anticipated reimbursement strategies that may prevail with respect to the product, if approved.

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

The Company could be required to write down previously capitalized costs related to pre-launch inventories upon a change in such judgment(s), due to, among other potential factors, a denial or significant delay of approval by regulatory bodies, a delay in commercialization, or other adverse factors.

Revenue from Product Sales

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 purchasing power. The Company recognizes gross revenue when its products are physically received by its customers, upon shipment from a third party fulfillment center. Customers take control of our products, including title and ownership, upon physical receipt of our products at the customers' facilities. Customer orders are generally fulfilled within a few days of receipt, resulting in minimal order backlog. The Company does not adjust revenue for any financing effects, in transactions where the Company expects the period between the transfer of the goods or services and collection to be less than one year. There are no minimum product purchase requirements with customers.

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

As described below, variability in the net transaction price for the Company’s products arises primarily from the aforementioned sales deductions. Variable consideration on product sales is only recognized when it is probable that a significant reversal will not occur. Significant judgment is required in estimating certain sales deductions. In making these estimates, the Company considers: historical experience; product price increases; current contractual arrangements under applicable payor programs; unbilled claims; processing time lags; and inventory levels in the wholesale and retail 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 our estimates, the Company adjusts these estimates. These adjustments could materially affect net product sales and earnings in the period that such adjustments are recorded.
Sales Deductions
The Company records product sales net of the following sales deductions:
Rebates:  Rebates are discounts which the Company pays under either public sector or private sector health care programs. Public sector rebate programs encompass: various Medicaid drug rebate programs; Medicare gap coverage

Table of Contents

programs; 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; and Company sponsored programs, under which the Company defrays or eliminates patient co-payment charges that the patient would otherwise be obligated to pay to their managed care provider in order to fill their prescription.
Rebates paid under public sector programs are generally mandated under law, whereas private sector rebates are generally contractually negotiated by the Company with managed care providers. Both types of rebates vary over time.

Rebates are owed upon dispensing our product to a patient; i.e., filling a prescription. The accrual balance for rebates consists of the following three components. First, because rebates are generally invoiced and paid quarterly in arrears, the accrual balance consists of an estimate of the amount expected to be incurred for prescriptions dispensed in the current quarter. Second, the accrual balance also includes an estimate for known or estimated prior quarters’ unpaid rebates, to cover prescriptions dispensed in past quarters, but for which no invoice has yet been received. Third, the accrual balance includes an estimate for rebates that will be prospectively owed, for prescriptions filled in future quarters. This pertains to product that has been sold by the Company to wholesalers or distributors, and which resides either as wholesaler/distributor inventory or as inventory held at pharmacies, but as of the end of the reporting period, this product has not been dispensed to a patient.

The Company’s estimates of expected rebate claims vary by program and by type of customer, because the period from the date at which the prescription is filled and the date at which the Company receives and pays the invoice varies substantially. For each of its products, the Company bases its estimates of expected rebate claims on multiple factors, including: historical levels of deductions; contractual terms with managed care providers; actual and anticipated changes in product price; prospective changes in managed care fee for service contracts; prospective changes in co-pay assistance programs; and anticipated changes in program utilization rates i.e., patient participation rates under each specific program. The Company records an estimated liability for rebates at the time the customer takes title to the product (i.e., at the time of sale to wholesalers/distributors), and records this liability as a reduction to gross product sales. This liability is recorded as an increase in Accrued product returns and rebates, in current liabilities on our condensed consolidated balance sheets.

The sensitivity of the Company’s estimates varies by program and by type of customer. If actual rebates vary from estimated amounts, the Company will adjust the balances of such accrued rebates to reflect actual experience with respect to these programs. These adjustments could materially affect the estimated liability balance, net product sales and earnings in the period in which the adjustment(s) is made.

Returns:  Sales of the Company’s products are not subject to a general right of return. Product that has been used to fill patient prescriptions is no longer subject to any right of return. However, the Company will accept return of product that is damaged or defective when shipped from its third party fulfillment center.
The Company will accept return of expired product six months prior to and up to 12 months subsequent to the product’s expiry date. Expired or defective returned product cannot be re-sold and is therefore destroyed.

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

Because the Company’s products have a shelf life of 48 months from date of manufacture, and because the Company accepts return of product up to 12 months post expiry, there is a significant time lag of several years between the time when the product is sold and the time when the Company issues credit on expired product. The Company’s returns policy generally permits product returns to be processed at current wholesaler price rather than at historical acquisition price. Hence, the Company’s estimated liability for product returns is affected by price increases taken subsequent to the date of sale.

When the Company adjusts its estimates for product returns, the adjustment affects the estimated liability, product sales and earnings in the period of adjustment. Those adjustments may be material to our financial results.


Table of Contents

Sales discounts:  Distributors and wholesalers of the Company's pharmaceutical products are generally offered various forms of consideration, including allowances, service fees and prompt payment discounts for distributing our products. Distributor and wholesaler allowances and service fees arise from contractual agreements, and are estimated as a percentage of the price at which the Company sells product to them. In addition, distributors and wholesalers are offered a prompt pay discount for payment within a specified period. The Company accounts for these discounts at the time of sale, as a reduction to gross product sales, and records these discounts as a valuation allowance against Accounts receivable on the condensed consolidated balance sheets.
License Revenues
License and Collaboration Agreements

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

Up-front license fees are recognized once the license has been executed between the Company and its licensee.

Milestones are a form of variable consideration that are recognized when either the underlying events have transpired (i.e., event-based milestone) or when the sales-based targets have been met by the collaborative partner (i.e., sales-based milestone). Both types of milestone payments are nonrefundable. The Company estimates the amount of the milestone to be included in the transaction price by using the most likely amount method. The Company includes in the transaction price some or all of the amount of variable consideration (i.e., the value of the associated milestone), but includes this only to the extent that it is probable that a significant revenue reversal will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Assessing whether it is probable that a significant revenue reversal will not occur once the uncertainty related to the variable consideration is subsequently resolved requires management judgment, and may require assessing factors that are outside of the Company’s influence, such as: likelihood of regulatory success; availability of third party information; and expected time period until achievement of the event. These factors are evaluated based on the specific facts and circumstances.

Event-based milestones are recognized in the period that the related event, such as regulatory approval, occurs. Sales-based milestones are recognized as revenue only when the 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 noncash royalty revenue for amounts earned pursuant to its royalty agreement with United Therapeutics Corporation (United Therapeutics), based on estimated product sales by United Therapeutics (see Note 3). This agreement includes the right to use the Company’s intellectual property as a functional license. In 2014, the Company sold certain of these royalty rights to Healthcare Royalty Partners III, L.P. (HC Royalty) (see Note 17, Commitments and Contingencies). Sales of Orenitram by United Therapeutics result in payments made by United Therapeutics to HC Royalty, in accordance with these agreements. Consequent to this agreement, the Company recorded a nonrecourse liability related to this transaction, and amortizes this amount as noncash royalty revenue.

The Company also recognizes noncash interest expense related to this liability, and accrues interest expense at an effective interest rate (see Note 16). The interest rate is determined based on projections of HC Royalty’s rate of return.

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

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

Research and Development Expense and Related Accrued Research and Development Expenses


Table of Contents

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

The Company estimates preclinical and clinical trial expenses based on services performed pursuant to contracts with research institutions, clinical investigators, clinical research organizations (CROs) and other service providers that provide services on the Company’s behalf. In recording service fees, the Company estimates the cost of those services which have been performed on behalf of the Company during the current period, and compares those costs with the cumulative expenses recorded and cumulative payments made for such services. As appropriate, the Company accrues additional service fees, or defers nonrefundable 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 subsequently determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the remaining portion of that advance payment is charged to expense in the period in which such a determination is made.

Marketable Securities

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

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

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

The Company adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2020, using the allowance approach. Declines in fair value below amortized cost related to credit losses (i.e., impairment due to credit losses), if any, are included in the condensed consolidated statement of earnings. A corresponding allowance is established. If the estimate of expected credit losses decreases in subsequent periods, the Company will reverse the credit losses through current period earnings, and adjust accordingly the allowance (see Note 2 - Recently Issued Accounting Pronouncements).

Share-Based Compensation

Stock Options

The Company recognizes share-based compensation expense over the service period using the straight-line method. Employee share-based compensation for stock options is measured based on estimated fair value as of the grant date, using 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 common stock underlying the option grants is determined based on observable market prices of the Company’s common stock.

Expected Volatility—Volatility is a measure of the amount by which the Company’s share price has historically fluctuated or is expected to fluctuate (i.e., expected volatility) during a period. Beginning in the first quarter of 2019, the Company began using the historical volatility of its common stock to measure expected volatility. Prior to the first quarter of 2019, volatility was estimated using the observed volatility of the common stock of several public entities of similar size, complexity, and stage of development, as well as taking into consideration the Company’s actual volatility since the Company’s IPO in 2012.


Table of Contents

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 began estimating 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 observed 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.

Restricted Stock Units (RSUs)

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

Performance Stock Units (PSUs)

Performance-Based Awards

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

Market-Based Awards

Compensation expense for market-based awards is recognized on a straight-line basis over the requisite service period, regardless of whether the market condition is satisfied. Market-based PSU awards subject to market-based performance targets require achievement of the performance target in order for these units to vest. The Company estimates fair value as of the grant date and expected term using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the derived requisite service period. The expected volatility as of grant date is estimated based historical daily volatility of the Company's common stock over the expected term of the award. The risk-free interest rate is based on the U.S. Treasury Note rate, as of the week the award is issued, with a term that most closely resembles the expected term of the award.

Advertising Expense

Advertising expense includes the cost of promotional materials and activities, such as printed marketing materials, marketing programs and speaker programs. The cost of the Company's advertising efforts are expensed as incurred.
The Company incurred approximately $11.6 million and $9.9 million in advertising costs for the three months ended March 31, 2020 and 2019, respectively. These expenses are recorded as a component of Selling, general and administrative expenses in the condensed consolidated statements of earnings.

Table of Contents

Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases for assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. When appropriate, valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.
The Company accounts for uncertain tax positions in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be estimated as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities, based on full knowledge of the position and relevant facts. The Company's policy is to recognize any interest and penalties related to income taxes as income tax expense in the relevant period.

Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) - The new standard, issued in July 2016, requires credit losses on financial assets to be measured as the net amount expected to be collected, rather than based on incurred losses. For available-for-sale debt securities, the new standard did not revise the definition of impairment; i.e., the investment is impaired if the fair value of the investment is less than its cost. It also did not revise the requirement under ASC 320, for an entity to recognize in net income only the impairment amount related to credit risk, and to recognize, in other comprehensive income, the noncredit impairment amount. The new standard made certain targeted changes to the impairment of available-for-sale debt securities, to eliminate the concept of "other than temporary" from the impairment model. Targeted changes to the impairment model included recognition of credit losses on available-for-sale debt securities using the allowance method, and limiting the allowance to the amount by which fair value is below amortized cost. The new standard also requires enhanced disclosure of credit risk associated with respective assets.

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

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

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

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

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

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

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

New Accounting Pronouncements Not Yet Adopted
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes - The new standard, issued in December 2019, simplifies the accounting for income taxes. This guidance will be effective on January 1, 2021 on a prospective basis, with early adoption permitted.

Table of Contents

The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and will adopt the new standard effective January 1, 2021.
3. Disaggregated Revenues
The following table summarizes the disaggregation of revenues by nature, (dollars in thousands):
Three Months ended March 31,
Net product sales
Trokendi XR$68,551  $63,693  
Oxtellar XR23,939  19,406  
Total net product sales$92,490  $83,099  
Royalty revenues2,486  2,375  
Total revenues$94,976  $85,474  

Trokendi XR accounted for 74% and 77% of the Company’s total net product sales for the three months ended March 31, 2020 and 2019, respectively.

The Company recognized noncash royalty revenue of $1.6 million for the three months ended March 31, 2020 and 2019, respectively, consequent to the Company's agreement with HC Royalty (see Note 2).

The Company ceased production and distribution of all blister pack configurations for Trokendi XR in 2017. Subsequent to ceasing blister pack production and distribution in 2017, the observed rate of product return for all blister pack configurations of Trokendi XR steadily declined over time. This return rate trend was firmly established over a multi-year period. However, in the first quarter of 2020, the return rate for the final blister pack lots of Trokendi XR produced in 2017 exhibited a return rate significantly higher than had been experienced with all previous lots. The lots for which a higher return rate was observed are the last lots which were produced and distributed.

As a result, the Company changed its estimate of the provision for product returns, based on the most recent experience. This change in estimate resulted in an increase to the provision for product returns of $8.0 million, decreased net product sales of $8.0 million and decreased net earnings of $5.9 million, or $0.11 per basic and per diluted share, for the three months ended March 31, 2020.
4. 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 hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets. The Company has the ability to access these prices as of the measurement date.

Level 1 assets include: cash held at banks; certificates of deposit; money market funds; investment grade corporate debt securities and U.S. government agency and municipal debt securities.

Level 2—Level 2 securities are valued using third-party pricing sources that apply relevant inputs and data in their models to estimate fair value. Inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; inputs other than quoted prices but that are observable for the asset or liability (e.g., interest rates; yield curves); and inputs that are derived principally from or corroborated by observable market data, by correlation, or by other means (i.e., market corroborated inputs).

Level 2 assets include: investment grade corporate debt securities, U.S. government agency and municipal debt securities; other fixed income securities; and SERP (Supplemental Executive Retirement Plan) assets. The fair

Table of Contents

value of the restricted marketable securities is recorded in Other assets on the condensed consolidated balance sheets.

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

There were no level 3 assets as of March 31, 2020 or December 31, 2019.
Financial Assets
The Company’s financial assets that are required to be measured at fair value on a recurring basis are as follows (dollars in thousands):
Fair Value Measurements at March 31, 2020 (unaudited)
Total Fair Value at March 31,
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
(Level 2)
Cash and cash equivalents
Cash$19,911  $19,911  $  
Money market funds205,856  205,856  
Marketable securities
Corporate debt securities174,939    174,939  
Municipal debt securities165    165  
Long term marketable securities
Corporate debt securities524,683  255  524,428  
U.S. government agency debt securities10,029    10,029  
Other noncurrent assets
Marketable securities - restricted (SERP)342  8  334  
Total assets at fair value$935,925  $226,030  $709,895  

Fair Value Measurements at December 31, 2019 (unaudited)
Total Fair Value at December 31,
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
(Level 2)
Cash and cash equivalents
Cash$78,912  $78,912  $  
Money market funds102,469  102,469    
Marketable securities
Corporate debt securities165,527    165,527  
Municipal debt securities165    165  
Long term marketable securities
Corporate debt securities571,828  254  571,574  
U.S. government agency and municipal debt securities19,945    19,945  
Other noncurrent assets
Marketable securities - restricted (SERP)418  3  415  
Total assets at fair value$939,264  $181,638  $757,626  


Table of Contents

The carrying amounts of other financial instruments, including accounts receivable, accounts payable and accrued expenses approximate fair value due to their short-term maturities.
        Unrestricted available-for-sale marketable securities held by the Company are as follows, (dollars in thousands):
March 31,
December 31, 2019
Corporate and U.S. government agency and municipal debt securities
Amortized cost$710,072  $747,598  
Gross unrealized gains5,362  10,031  
Gross unrealized losses(5,618) (164) 
Total fair value$709,816  $757,465  
The contractual maturities of the unrestricted available-for-sale marketable securities held by the Company are as follows, (dollars in thousands):
March 31,
Less than 1 year$175,104  
1 year to 2 years181,141  
2 years to 3 years199,207  
3 years to 4 years154,364  
Greater than 4 years  
As of March 31, 2020, there was no impairment due to credit loss on any available-for-sale marketable securities.
Financial Liabilities
The following table sets forth the Company’s financial liabilities that are not carried at fair value, (dollars in thousands):
March 31, 2020December 31, 2019
Carrying ValueFair Value (Level 2)Carrying ValueFair Value (Level 2)
2023 Notes$349,232  $328,038  $345,170  $366,023  
The fair value is estimated based on actual trading information, as well as quoted prices provided by bond traders.
5. Convertible Senior Notes Due 2023
The 0.625% Convertible Senior Notes Due 2023 (2023 Notes), which were issued in March 2018, bear interest at an annual rate of 0.625%, payable semi-annually in arrears on April 1 and October 1 of each year. The 2023 Notes will mature on April 1, 2023, unless earlier converted or repurchased by the Company. The Notes are being amortized to interest expense at an effective interest rate of 5.41% over the contractual term of the 2023 Notes. The Company may not redeem the 2023 Notes at its option before maturity. The total principal amount of 2023 Notes is $402.5 million.
The 2023 Notes were issued pursuant to an Indenture between the Company and Wilmington Trust, National Association, as trustee. The Indenture includes customary terms and covenants, including certain events of default upon which the 2023 Notes may be due and payable immediately. The Indenture does not contain any financial or operating covenants or 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.

Table of Contents

If a “make-whole fundamental change,” as defined in the Indenture, occurs, then the Company will in certain circumstances increase the conversion rate for a specified period of time. If a “fundamental change,” as defined in the Indenture occurs, then noteholders may require the Company to repurchase their 2023 Notes at a cash repurchase price equal to the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest, if any.
Contemporaneous with the issuance of the 2023 Notes, the Company also entered into separate privately negotiated convertible note hedge transactions (collectively, the Convertible Note Hedge Transactions) with each of the call spread counterparties. The Company issued 402,500 convertible note hedge options. In the event that shares or cash are deliverable to holders of the 2023 Notes upon conversion at limits defined in the Indenture, counterparties to the convertible note hedges will be required to deliver up to approximately 6.8 million shares of the Company’s common stock, or to pay cash to the Company in a similar amount as the value that the Company delivers to the holders of the 2023 Notes, based on a conversion price of $59.33 per share.
Concurrently with entering into the Convertible Note Hedge Transactions, the Company also entered into separate privately negotiated warrant transactions (collectively, the Warrant Transactions) with each of the call spread counterparties. The Company issued a total of 6,783,939 warrants. The warrants entitle the holder to one share per warrant. The strike price of the Warrant Transactions will initially be $80.9063 per share of the Company’s common stock, and is subject to adjustment.
The Convertible Note Hedge Transactions are expected to reduce the potential dilution of 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, (dollars in thousands):
March 31,
December 31,
2023 Notes$402,500  $402,500  
Unamortized debt discount and deferred financing costs(53,268) (57,330) 
Total carrying value$349,232  $345,170  
No 2023 Notes were converted as of March 31, 2020 or December 31, 2019.
6. Share-Based Payments
Share-based compensation expense is as follows (dollars in thousands):
Three Months ended
March 31,
Research and development$681  $574  
Selling, general and administrative3,307  2,713  
Total$3,988  $3,287  

Table of Contents

Stock Option and Stock Appreciation Rights
The following table summarizes stock option and stock appreciation rights (SAR) activities:
Number of
Exercise Price
(per share)
Term (in years)
Outstanding, December 31, 20194,606,559  $23.05  6.66
Granted 1,105,925  $23.99  
Exercised (3,811) $8.33  
Forfeited (25,275) $28.12  
Outstanding, March 31, 2020 (unaudited)5,683,398  $23.22  7.08
As of December 31, 2019:
Vested and expected to vest4,606,559  $23.05  6.66
Exercisable2,598,112  $15.68  5.48