UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One) | | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020March 31, 2021
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-35518
SUPERNUS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter) | | | | | | | | | | | | |
| Delaware | | | | 20-2590184 |
(State or other jurisdiction of
incorporation or organization) | | | | (I.R.S. Employer
Identification No.) |
| | | | |
| 9715 Key West Avenue | 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. ☒ 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 class | | Outstanding at OctoberApril 30, 20202021 | | Trading Symbol | | Name of each exchange on which registered |
| Common Stock, $0.001 par value per share | | 52,685,12153,018,637 | | SUPN | | The Nasdaq Global Market |
SUPERNUS PHARMACEUTICALS, INC.
FORM 10-Q — QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED September 30, 2020March 31, 2021
PART I — FINANCIAL INFORMATION
Supernus Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data) | | | September 30, | | December 31, | | March 31, | | December 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| | (unaudited) | | | | (unaudited) | | |
| Assets | Assets | | Assets | |
| Current assets | Current assets | | Current assets | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 204,293 | | | $ | 181,381 | | Cash and cash equivalents | $ | 255,642 | | | $ | 288,640 | |
| Marketable securities | Marketable securities | 147,657 | | | 165,692 | | Marketable securities | 135,459 | | | 133,893 | |
| Accounts receivable, net | Accounts receivable, net | 133,107 | | | 87,332 | | Accounts receivable, net | 127,065 | | | 140,877 | |
| Inventories, net | Inventories, net | 42,465 | | | 26,628 | | Inventories, net | 50,226 | | | 48,325 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 24,493 | | | 11,611 | | Prepaid expenses and other current assets | 17,631 | | | 18,682 | |
| Total current assets | Total current assets | 552,015 | | | 472,644 | | Total current assets | 586,023 | | | 630,417 | |
| Long term marketable securities | Long term marketable securities | 388,185 | | | 591,773 | | Long term marketable securities | 416,566 | | | 350,359 | |
| Property and equipment, net | Property and equipment, net | 17,395 | | | 17,068 | | Property and equipment, net | 37,950 | | | 37,824 | |
| Operating lease assets | 21,019 | | | 21,279 | | |
| Finance lease asset | 21,676 | | | 0 | | |
| Intangible assets, net | Intangible assets, net | 402,265 | | | 24,840 | | Intangible assets, net | 358,736 | | | 364,342 | |
| Goodwill | Goodwill | 89,143 | | | 0 | | Goodwill | 77,911 | | | 77,911 | |
| Deferred income tax assets | 0 | | | 32,063 | | |
| Other assets | Other assets | 18,324 | | | 615 | | Other assets | 30,257 | | | 43,249 | |
| Total assets | Total assets | $ | 1,510,022 | | | $ | 1,160,282 | | Total assets | $ | 1,507,443 | | | $ | 1,504,102 | |
| | Liabilities and stockholders’ equity | Liabilities and stockholders’ equity | | Liabilities and stockholders’ equity | |
| Current liabilities | Current liabilities | | Current liabilities | |
| Accounts payable | $ | 11,193 | | | $ | 10,141 | | |
| Accounts payable and accrued liabilities | | Accounts payable and accrued liabilities | $ | 70,099 | | | $ | 78,934 | |
| Accrued product returns and rebates | Accrued product returns and rebates | 136,973 | | | 107,629 | | Accrued product returns and rebates | 128,736 | | | 126,192 | |
| Accrued expenses and other current liabilities | 56,289 | | | 34,305 | | |
| Contingent consideration, current portion | Contingent consideration, current portion | 82,900 | | | 0 | | Contingent consideration, current portion | 31,520 | | | 30,900 | |
| Income taxes payable | 0 | | | 2,443 | | |
| Operating lease liabilities, current portion | 3,741 | | | 2,825 | | |
| Finance lease liability, current portion | 3,612 | | | 0 | | |
| Nonrecourse liability related to sale of future royalties, current portion | 4,898 | | | 3,244 | | |
| Other current liabilities | | Other current liabilities | 10,457 | | | 9,082 | |
| Total current liabilities | Total current liabilities | 299,606 | | | 160,587 | | Total current liabilities | 240,812 | | | 245,108 | |
| Convertible notes, net | Convertible notes, net | 357,521 | | | 345,170 | | Convertible notes, net | 366,038 | | | 361,751 | |
| Contingent consideration, long term | Contingent consideration, long term | 33,000 | | | 0 | | Contingent consideration, long term | 46,200 | | | 45,800 | |
| Nonrecourse liability related to sale of future royalties, long term | 14,960 | | | 19,248 | | |
| Operating lease liabilities, long term | Operating lease liabilities, long term | 29,522 | | | 30,440 | | Operating lease liabilities, long term | 28,532 | | | 28,579 | |
| Finance lease liability, long term | 19,289 | | | 0 | | |
| Deferred income tax liabilities | Deferred income tax liabilities | 37,941 | | | 0 | | Deferred income tax liabilities | 31,742 | | | 35,215 | |
| Other liabilities | Other liabilities | 9,304 | | | 9,409 | | Other liabilities | 39,675 | | | 42,791 | |
| Total liabilities | Total liabilities | 801,143 | | | 564,854 | | Total liabilities | 752,999 | | | 759,244 | |
| | Stockholders’ equity | Stockholders’ equity | | Stockholders’ equity | |
| Common stock, $0.001 par value; 130,000,000 shares authorized; 52,670,121 and 52,533,348 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively | 53 | | | 53 | | |
| Common stock, $0.001 par value; 130,000,000 shares authorized; 52,994,137 and 52,868,482 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | | Common stock, $0.001 par value; 130,000,000 shares authorized; 52,994,137 and 52,868,482 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | 53 | | | 53 | |
| Additional paid-in capital | Additional paid-in capital | 403,396 | | | 388,410 | | Additional paid-in capital | 415,950 | | | 409,332 | |
| Accumulated other comprehensive earnings, net of tax | Accumulated other comprehensive earnings, net of tax | 9,700 | | | 7,417 | | Accumulated other comprehensive earnings, net of tax | 6,249 | | | 8,975 | |
| Retained earnings | Retained earnings | 295,730 | | | 199,548 | | Retained earnings | 332,192 | | | 326,498 | |
| Total stockholders’ equity | Total stockholders’ equity | 708,879 | | | 595,428 | | Total stockholders’ equity | 754,444 | | | 744,858 | |
| | Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 1,510,022 | | | $ | 1,160,282 | | Total liabilities and stockholders’ equity | $ | 1,507,443 | | | $ | 1,504,102 | |
See accompanying notes.
Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Earnings
(in thousands, except share and per share data)
| | | Three Months ended
September 30, | | Nine Months ended
September 30, | | Three Months ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 |
| | (unaudited) | | (unaudited) | | (unaudited) |
| Revenues | Revenues | | Revenues | |
| Net product sales | Net product sales | $ | 152,133 | | | $ | 100,034 | | | $ | 368,607 | | | $ | 285,491 | | Net product sales | $ | 128,381 | | | $ | 92,490 | |
| Royalty revenues | Royalty revenues | 3,002 | | | 2,106 | | | 8,233 | | | 6,818 | | Royalty revenues | 2,551 | | | 2,486 | |
| Total revenues | Total revenues | 155,135 | | | 102,140 | | | 376,840 | | | 292,309 | | Total revenues | 130,932 | | | 94,976 | |
| | Costs and expenses | Costs and expenses | | Costs and expenses | |
Cost of goods sold(a) | Cost of goods sold(a) | 21,388 | | | 4,819 | | | 33,926 | | | 12,547 | | Cost of goods sold (a) | 14,954 | | | 4,152 | |
| Research and development | Research and development | 16,839 | | | 16,943 | | | 58,023 | | | 49,307 | | Research and development | 34,280 | | | 18,937 | |
| Selling, general and administrative | Selling, general and administrative | 54,660 | | | 39,343 | | | 144,377 | | | 118,782 | | Selling, general and administrative | 61,457 | | | 41,614 | |
| Amortization of intangible assets | Amortization of intangible assets | 6,108 | | | 1,306 | | | 9,814 | | | 3,918 | | Amortization of intangible assets | 6,007 | | | 1,261 | |
| Contingent consideration expense | | Contingent consideration expense | 1,020 | | | 0 | |
| Total costs and expenses | Total costs and expenses | 98,995 | | | 62,411 | | | 246,140 | | | 184,554 | | Total costs and expenses | 117,718 | | | 65,964 | |
| | Operating earnings | Operating earnings | 56,140 | | | 39,729 | | | 130,700 | | | 107,755 | | Operating earnings | 13,214 | | | 29,012 | |
| | Other income (expense) | Other income (expense) | | Other income (expense) | |
| Interest income | 3,262 | | | 5,559 | | | 12,988 | | | 15,696 | | |
| Interest expense | Interest expense | (6,088) | | | (5,662) | | | (17,658) | | | (16,930) | | Interest expense | (6,097) | | | (5,755) | |
| Other income (expense), net | (603) | | | (36) | | | 2,925 | | | 54 | | |
| Total other expense | (3,429) | | | (139) | | | (1,745) | | | (1,180) | | |
| Interest and other income, net | | Interest and other income, net | 3,812 | | | 5,777 | |
| Total other income (expense) | | Total other income (expense) | (2,285) | | | 22 | |
| | Earnings before income taxes | Earnings before income taxes | 52,711 | | | 39,590 | | | 128,955 | | | 106,575 | | Earnings before income taxes | 10,929 | | | 29,034 | |
| | Income tax expense | Income tax expense | 12,714 | | | 10,730 | | | 32,773 | | | 26,648 | | Income tax expense | 5,235 | | | 7,516 | |
| Net earnings | Net earnings | $ | 39,997 | | | $ | 28,860 | | | $ | 96,182 | | | $ | 79,927 | | Net earnings | $ | 5,694 | | | $ | 21,518 | |
| | Earnings per share | Earnings per share | | Earnings per share | |
| Basic | Basic | $ | 0.76 | | | $ | 0.55 | | | $ | 1.83 | | | $ | 1.53 | | Basic | $ | 0.11 | | | $ | 0.41 | |
| Diluted | Diluted | $ | 0.74 | | | $ | 0.54 | | | $ | 1.79 | | | $ | 1.48 | | Diluted | $ | 0.11 | | | $ | 0.40 | |
| | Weighted-average shares outstanding | Weighted-average shares outstanding | | Weighted-average shares outstanding | |
| Basic | Basic | 52,658,850 | | | 52,453,384 | | | 52,583,891 | | | 52,392,232 | | Basic | 52,927,467 | | | 52,534,787 | |
| Diluted | Diluted | 53,762,642 | | | 53,805,838 | | | 53,663,273 | | | 53,898,486 | | Diluted | 54,196,971 | | | 53,581,051 | |
(a) Excludes amortization of acquired intangible assets
See accompanying notes.
Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Comprehensive Earnings
(in thousands)
| | | Three Months ended
September 30, | | Nine Months ended
September 30, | | Three Months ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 |
| | (unaudited) | | (unaudited) | | (unaudited) |
| Net earnings | Net earnings | $ | 39,997 | | | $ | 28,860 | | | $ | 96,182 | | | $ | 79,927 | | Net earnings | $ | 5,694 | | | $ | 21,518 | |
| Other comprehensive earnings | Other comprehensive earnings | | Other comprehensive earnings | |
| Unrealized gain (loss) on marketable securities, net of tax | (1,659) | | | 1,337 | | | 2,283 | | | 10,419 | | |
| Other comprehensive earnings (loss) | (1,659) | | | 1,337 | | | 2,283 | | | 10,419 | | |
| Unrealized loss on marketable securities, net of tax | | Unrealized loss on marketable securities, net of tax | (2,726) | | | (7,583) | |
| Other comprehensive loss | | Other comprehensive loss | (2,726) | | | (7,583) | |
| | Comprehensive earnings | Comprehensive earnings | $ | 38,338 | | | $ | 30,197 | | | $ | 98,465 | | | $ | 90,346 | | Comprehensive earnings | $ | 2,968 | | | $ | 13,935 | |
See accompanying notes.
Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
NineThree Months ended September 30,March 31, 2021 and 2020 and 2019
(unaudited, in thousands, except share data)
| | j | j | Common Stock | | Additional
Paid-in Capital | | Accumulated Other
Comprehensive
Earnings (Loss) | | Retained
Earnings | | Total
Stockholders’
Equity | j | Common Stock | | Additional
Paid-in Capital | | Accumulated Other
Comprehensive
Earnings (Loss) | | Retained
Earnings | | Total
Stockholders’
Equity |
| | Shares | | Amount | | | Shares | | Amount | |
| Balance, December 31, 2019 | 52,533,348 | | | $ | 53 | | | $ | 388,410 | | | $ | 7,417 | | | $ | 199,548 | | | $ | 595,428 | | |
| Balance, December 31, 2020 | | Balance, December 31, 2020 | 52,868,482 | | | $ | 53 | | | $ | 409,332 | | | $ | 8,975 | | | $ | 326,498 | | | $ | 744,858 | |
| Share-based compensation | Share-based compensation | — | | | — | | | 3,988 | | | — | | | — | | | 3,988 | | Share-based compensation | — | | | — | | | 4,371 | | | — | | | — | | | 4,371 | |
| Issuance of common stock in connection with the Company’s equity award plans | Issuance of common stock in connection with the Company’s equity award plans | 3,811 | | | — | | | 32 | | | — | | | — | | | 32 | | Issuance of common stock in connection with the Company’s equity award plans | 125,655 | | | — | | | 2,247 | | | — | | | — | | | 2,247 | |
| Net earnings | Net earnings | — | | | — | | | — | | | — | | | 21,518 | | | 21,518 | | Net earnings | — | | | — | | | — | | | — | | | 5,694 | | | 5,694 | |
| Unrealized loss on marketable securities, net of tax | Unrealized loss on marketable securities, net of tax | — | | | — | | | — | | | (7,583) | | | — | | | (7,583) | | Unrealized loss on marketable securities, net of tax | — | | | — | | | — | | | (2,726) | | | — | | | (2,726) | |
| Balance, March 31, 2020 | 52,537,159 | | | $ | 53 | | | $ | 392,430 | | | $ | (166) | | | $ | 221,066 | | | $ | 613,383 | | |
| Share-based compensation | — | | | — | | | 4,962 | | | — | | | — | | | 4,962 | | |
| Issuance of common stock in connection with the Company’s equity award plans | 86,925 | | | — | | | 1,437 | | | — | | | — | | | 1,437 | | |
| Net earnings | — | | | — | | | — | | | — | | | 34,667 | | | 34,667 | | |
| Unrealized gain on marketable securities, net of tax | — | | | — | | | — | | | 11,525 | | | — | | | 11,525 | | |
| Balance, June 30, 2020 | 52,624,084 | | | $ | 53 | | | $ | 398,829 | | | $ | 11,359 | | | $ | 255,733 | | | $ | 665,974 | | |
| Share-based compensation | — | | | — | | | 4,490 | | | — | | | — | | | 4,490 | | |
| Issuance of common stock in connection with the Company’s equity award plans | 46,037 | | | — | | | 77 | | | — | | | — | | | 77 | | |
| Net earnings | — | | | — | | | — | | | — | | | 39,997 | | | 39,997 | | |
| Unrealized loss on marketable securities, net of tax | — | | | — | | | �� | | | (1,659) | | | — | | | (1,659) | | |
| Balance, September 30, 2020 | 52,670,121 | | | $ | 53 | | | $ | 403,396 | | | $ | 9,700 | | | $ | 295,730 | | | $ | 708,879 | | |
| Balance, March 31, 2021 | | Balance, March 31, 2021 | 52,994,137 | | | $ | 53 | | | $ | 415,950 | | | $ | 6,249 | | | $ | 332,192 | | | $ | 754,444 | |
See accompanying notes.
Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (continued)
Nine Months ended September 30, 2020 and 2019
(unaudited, in thousands, except share data)
| | | Common Stock | | Additional
Paid-in Capital | | Accumulated Other
Comprehensive
Earnings (Loss) | | Retained
Earnings | | Total
Stockholders’
Equity | | Common Stock | | Additional
Paid-in Capital | | Accumulated Other
Comprehensive
Earnings (Loss) | | Retained
Earnings | | Total
Stockholders’
Equity |
| | Shares | | Amount | | | Shares | | Amount | |
| Balance, December 31, 2018 | 52,316,583 | | | $ | 52 | | | $ | 369,637 | | | $ | (3,158) | | | $ | 86,492 | | | $ | 453,023 | | |
| Balance, December 31, 2019 | | Balance, December 31, 2019 | 52,533,348 | | | $ | 53 | | | $ | 388,410 | | | $ | 7,417 | | | $ | 199,548 | | | $ | 595,428 | |
| Share-based compensation | Share-based compensation | — | | | — | | | 3,287 | | | — | | | — | | | 3,287 | | Share-based compensation | — | | | — | | | 3,988 | | | — | | | — | | | 3,988 | |
| Issuance of common stock in connection with the Company’s equity award plans | Issuance of common stock in connection with the Company’s equity award plans | 57,665 | | | — | | | 783 | | | — | | | — | | | 783 | | Issuance of common stock in connection with the Company’s equity award plans | 3,811 | | | — | | | 32 | | | — | | | — | | | 32 | |
| Net earnings | Net earnings | — | | | — | | | — | | | — | | | 18,340 | | | 18,340 | | Net earnings | — | | | — | | | — | | | — | | | 21,518 | | | 21,518 | |
| Unrealized gain 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 | | |
| Share-based compensation | — | | | — | | | 4,022 | | | — | | | — | | | 4,022 | | |
| Issuance of common stock in connection with the Company’s equity award plans | 74,788 | | | — | | | 1,640 | | | — | | | — | | | 1,640 | | |
| Net earnings | — | | | — | | | — | | | — | | | 32,727 | | | 32,727 | | |
| Unrealized gain on marketable securities, net of tax | — | | | — | | | — | | | 4,497 | | | — | | | 4,497 | | |
| Balance, June 30, 2019 | 52,449,036 | | | $ | 52 | | | $ | 379,369 | | | $ | 5,924 | | | $ | 137,559 | | | $ | 522,904 | | |
| Share-based compensation | — | | | — | | | 3,914 | | | — | | | — | | | 3,914 | | |
| Issuance of common stock in connection with the Company’s equity award plans | 13,900 | | | — | | | 242 | | | — | | | — | | | 242 | | |
| Net earnings | — | | | — | | | — | | | — | | | 28,860 | | | 28,860 | | |
| Unrealized gain on marketable securities, net of tax | — | | | — | | | — | | | 1,337 | | | — | | | 1,337 | | |
| Balance, September 30, 2019 | 52,462,936 | | | $ | 52 | | | $ | 383,525 | | | $ | 7,261 | | | $ | 166,419 | | | $ | 557,257 | | |
| Unrealized loss on marketable securities, net of tax | | Unrealized loss on marketable securities, net of tax | — | | | — | | | — | | | (7,583) | | | — | | | (7,583) | |
| Balance, March 31, 2020 | | Balance, March 31, 2020 | 52,537,159 | | | $ | 53 | | | $ | 392,430 | | | $ | (166) | | | $ | 221,066 | | | $ | 613,383 | |
See accompanying notes.
Supernus Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands) | | | Nine Months ended September 30, | | Three Months ended March 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| | (unaudited) | | (unaudited) |
| Cash flows from operating activities | Cash flows from operating activities | | Cash flows from operating activities | |
| Net earnings | Net earnings | $ | 96,182 | | | $ | 79,927 | | Net earnings | $ | 5,694 | | | $ | 21,518 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | Adjustments to reconcile net earnings to net cash provided by operating activities: | | Adjustments to reconcile net earnings to net cash provided by operating activities: | |
| Share-based compensation expense | 13,440 | | | 11,223 | | |
| Depreciation and amortization | Depreciation and amortization | 12,621 | | | 5,029 | | Depreciation and amortization | 6,592 | | | 1,732 | |
| Amortization of premium/discount on marketable securities | (3,217) | | | (3,058) | | |
| Navitor investment R&D expense | | Navitor investment R&D expense | 15,000 | | | 0 | |
| Amortization of deferred financing costs and debt discount | Amortization of deferred financing costs and debt discount | 12,351 | | | 11,701 | | Amortization of deferred financing costs and debt discount | 4,287 | | | 4,061 | |
| Realized gains from sales of marketable securities | Realized gains from sales of marketable securities | (3,636) | | | (131) | | Realized gains from sales of marketable securities | (216) | | | (202) | |
| Amortization of premium/discount on marketable securities | | Amortization of premium/discount on marketable securities | (1,706) | | | (249) | |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | 200 | | | 0 | | Change in fair value of contingent consideration | 1,020 | | | 0 | |
| Noncash interest expense | 4,515 | | | 4,331 | | |
| Noncash royalty revenue | (6,320) | | | (5,028) | | |
| Noncash operating lease cost | 2,599 | | | 2,600 | | |
| Deferred income tax benefit | (280) | | | (1,689) | | |
| Other noncash adjustments, net | | Other noncash adjustments, net | (1,202) | | | 790 | |
| Share-based compensation expense | | Share-based compensation expense | 4,371 | | | 3,988 | |
| Deferred income tax provision | | Deferred income tax provision | (2,565) | | | 538 | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
| Accounts receivable | Accounts receivable | (26,840) | | | 16,344 | | Accounts receivable | 13,805 | | | (31,823) | |
| Inventories | Inventories | (5,437) | | | 155 | | Inventories | (1,048) | | | 2,210 | |
| Prepaid expenses and other current assets | (9,318) | | | (4,236) | | |
| Other noncurrent assets | (2,416) | | | (141) | | |
| Accounts payable | (1,527) | | | (334) | | |
| Prepaid expenses and other assets | | Prepaid expenses and other assets | (368) | | | (454) | |
| Accrued product returns and rebates | Accrued product returns and rebates | 21,166 | | | (9,013) | | Accrued product returns and rebates | 2,544 | | | 11,824 | |
| Accrued expenses and other current liabilities | 8,410 | | | 1,120 | | |
| Income taxes payable | (2,538) | | | (7,559) | | |
| Other liabilities | (3,489) | | | (1,903) | | |
| Accounts payable and other liabilities | | Accounts payable and other liabilities | (10,008) | | | (5,017) | |
| Net cash provided by operating activities | Net cash provided by operating activities | 106,466 | | | 99,338 | | Net cash provided by operating activities | 36,200 | | | 8,916 | |
| | Cash flows from investing activities | Cash flows from investing activities | | Cash flows from investing activities | |
| Acquisition of USWM, net of cash acquired | (297,200) | | | 0 | | |
| Investment in Navitor Pharmaceuticals, Inc. | (15,000) | | | 0 | | |
| Purchases of marketable securities | Purchases of marketable securities | (87,890) | | | (361,121) | | Purchases of marketable securities | (119,063) | | | (15,382) | |
| Sales and maturities of marketable securities | Sales and maturities of marketable securities | 319,421 | | | 184,467 | | Sales and maturities of marketable securities | 49,579 | | | 53,357 | |
| Purchases of property and equipment | Purchases of property and equipment | (3,234) | | | (707) | | Purchases of property and equipment | (1,508) | | | (2,537) | |
| Deferred legal fees | Deferred legal fees | (141) | | | (1) | | Deferred legal fees | (453) | | | 0 | |
| Net cash used in investing activities | (84,044) | | | (177,362) | | |
| Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | (71,445) | | | 35,438 | |
| | Cash flows from financing activities | Cash flows from financing activities | | Cash flows from financing activities | |
| Payments on finance lease liability | (1,056) | | | 0 | | |
| Proceeds from issuance of common stock | Proceeds from issuance of common stock | 1,546 | | | 2,665 | | Proceeds from issuance of common stock | 2,247 | | | 32 | |
| Net cash provided by financing activities | Net cash provided by financing activities | 490 | | | 2,665 | | Net cash provided by financing activities | 2,247 | | | 32 | |
| | Net change in cash and cash equivalents | Net change in cash and cash equivalents | 22,912 | | | (75,359) | | Net change in cash and cash equivalents | (32,998) | | | 44,386 | |
| Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 181,381 | | | 192,248 | | Cash and cash equivalents at beginning of year | 288,640 | | | 181,381 | |
| Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 204,293 | | | $ | 116,889 | | Cash and cash equivalents at end of period | $ | 255,642 | | | $ | 225,767 | |
| | Supplemental cash flow information | Supplemental cash flow information | | Supplemental cash flow information | |
| Cash paid for interest on convertible notes | Cash paid for interest on convertible notes | $ | 2,516 | | | $ | 2,516 | | Cash paid for interest on convertible notes | $ | 1,258 | | | $ | 1,258 | |
| Cash paid for income taxes | Cash paid for income taxes | 42,284 | | | 35,933 | | Cash paid for income taxes | 301 | | | 324 | |
| Cash paid for operating leases | | Cash paid for operating leases | 1,834 | | | 1,261 | |
| | Noncash investing and financing activities | Noncash investing and financing activities | | Noncash investing and financing activities | |
| Contingent consideration liability accrued in USWM Acquisition | $ | 115,900 | | | $ | 0 | | |
| Lease assets and tenant receivable obtained for new leases | | Lease assets and tenant receivable obtained for new leases | $ | 1,432 | | | $ | 1,715 | |
| Deferred legal fees and fixed assets included in accounts payable and accrued expenses | Deferred legal fees and fixed assets included in accounts payable and accrued expenses | 352 | | | 495 | | Deferred legal fees and fixed assets included in accounts payable and accrued expenses | 160 | | | 708 | |
| Property and equipment additions from utilization of tenant improvement allowance | 0 | | | 387 | | |
| Lease assets and tenant receivable obtained for new leases | 25,225 | | | 31,856 | | |
See accompanying notes.
Supernus Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Business Organization and Business
Supernus Pharmaceuticals, Inc. (the Company) was incorporated in Delaware, commencing operations in 2005. The Company is a pharmaceuticalbiopharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases, marketing 5diseases. The Company's diverse neuroscience portfolio includes approved treatments for epilepsy, migraine, attention-deficit hyperactivity disorder (ADHD), hypomobility in Parkinson’s Disease (PD), cervical dystonia, and chronic sialorrhea. The Company is developing a broad range of novel CNS product candidates including new potential treatments for ADHD, hypomobility in PD, epilepsy, depression, and rare CNS disorders.
The Company has a portfolio of commercial products including: Oxtellarand product candidates.
Commercial Products
•Trokendi XR® (topiramate) is the first once-daily extended release topiramate product indicated for the treatment of epilepsy; Trokendi XRepilepsy in the United States (U.S.) market. It is also indicated for the prophylaxis of migraine headacheheadache.
•Oxtellar XR® (oxcarbazepine) is indicated as therapy for partial onset seizures in adults and children 6 years to 17 years of age and is the treatment of epilepsy; APOKYN and XADAGOfirst once-daily extended-release oxcarbazepine product indicated for the treatment of Parkinson's disease;epilepsy in the U.S.
•QelbreeTM (viloxazine extended-release capsules) is a novel non-stimulant product indicated for the treatment of ADHD in pediatric patients 6 to 17 years of age.
•APOKYN® (apomorphine hydrochloride injection) is a product indicated for the acute, intermittent treatment of hypomobility or "off" episodes ("end-of-dose wearing off" and unpredictable "on-off" episodes) in patients with advanced PD.
•MYOBLOC® (rimabotulinumtoxinB) is a product indicated for the treatment of cervical dystonia and sialorrhea. The Companysialorrhea in adults, and it is also developing multiple proprietary CNS product candidates to address significant unmet medical needs and market opportunities.the only Type B toxin available on the market.
The Company launched Oxtellar XR and Trokendi XR•XADAGO® (safinamide) is a once-daily product indicated as adjunctive treatment to levodopa/carbidopa in patients with PD experiencing "off" episodes.
Product Candidates
•SPN-812 (viloxazine hydrochloride) is a novel non-stimulant product candidate for the treatment of epilepsyADHD in 2013, followed by the launch of Trokendi XRadult patients.
•SPN-830 (Apomorphine Infusion Pump) is a late-stage drug/device combination product candidate for the prophylaxiscontinuous prevention of migraine headache"off" episodes in adolescentsPD.
•SPN-817 is a novel product candidate for the treatment of severe epilepsy.
•SPN-820 is a first-in-class product candidate for treatment resistant depression (TRD). It is an orally active small molecule that directly activates brain mechanistic target of rapamycin complex 1 (mTORC1).
In April 2021, the U.S. Food and adultsDrug Administration (FDA) approved Qelbree for the treatment of ADHD in 2017.pediatric patients 6 to 17 years of age. The Company launched Oxtellar XRplans to make Qelbree available in the U.S. during the second quarter of 2021.
On April 28, 2020, the Company entered into a Sale and Purchase Agreement with an expanded indication, including monotherapy for partial seizures in January 2019. OnUS WorldMeds Partners, LLC to acquire the CNS portfolio of USWM Enterprises, LLC (USWM Enterprises) (USWM Acquisition). With the acquisition, completed on June 9, 2020, the Company completed the acquisition of the CNS portfolio of US WorldMeds Partners, LLC (USWM Acquisition). With the acquisition, the Company acquired the right to further developadded three established commercial products, APOKYN, XADAGO, and commercialize 3 marketed products, as well asMYOBLOC, and a product candidate in late-stage development.development, SPN-830, to its portfolio. Refer to Note 3,USWM Acquisition, for further discussion on the USWM Acquisition.
COVID-19 ImpactOn April 21, 2020, the Company entered into a Development and Option Agreement (Development Agreement) with Navitor Pharmaceuticals, Inc. (Navitor Inc.). Under the terms of the Development Agreement, the Company and Navitor Inc. will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) in TRD. In addition to entering into the Development
Agreement in April 2020, the Company acquired an ownership position in Navitor Inc. In March 2021, Navitor Inc. underwent a legal restructuring whereby Navitor Inc. became a wholly owned subsidiary of a newly formed limited liability company, Navitor Pharmaceuticals, LLC (Navitor LLC). Refer to Note 5, Investments, for further discussion on the Navitor Development Agreement and equity investment.
COVID-19 Impact
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business operations, and has assessed the impact of the COVID-19 pandemic on its condensed consolidated financial statements as of September 30, 2020. Through the first nine months of 2020, the pandemic has had limited effect on the Company's business operations, and no material impact on its condensed consolidated financial statements.
Since the situation surrounding the COVID-19 pandemic remains fluid and the duration uncertain, the long-term nature and extent of the impacts of the pandemic on the Company's business operations and financial position cannot be reasonably estimated at this time.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (SEC) for interim financial information. As permitted under Generally Accepted Accounting Principles in the United States (U.S. GAAP), certain notes and other information have been omitted from the interim unaudited condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these condensed consolidated 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, 2019,2020, 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.)U.S., operates in 1 operating segment.
Reclassifications
Certain prior year amounts in the condensed consolidated statements of earnings have been reclassified to conform to the current year presentation, including a reclassification made to separately present amortization of intangible assets. This was previously included in Selling, general and administrative expenses, and is now is recorded as a component of Amortization of intangible assets on the condensed consolidated statements of earnings. These reclassifications had no effect on operating earnings or on our other condensed consolidated financial statements for the three and nine months ended September 30, 2020March 31, 2021 and 2019.2020.
Consolidation
The Company’s condensed consolidated financial statements include those of the accounts of: Supernus Pharmaceuticals, Inc.; Supernus Europe Ltd.; Biscayne Neurotherapeutics, Inc.Company's wholly-owned subsidiaries and its wholly owned subsidiary; MDD US Enterprises, LLC (formerly USWM Enterprises, LLC); and MDD US Enterprises, LLC's wholly owned subsidiaries. These are collectively referred to herein as “Supernus” or “the Company.”variable interest entities (VIE) where the Company is the primary beneficiary, if any. All significant intercompany transactions and balances have been eliminated in consolidation.
The condensed consolidated financial statements reflect the consolidation of entities in which the Company has a controlling financial interest. In determining whether there is a controlling financial interest, the Company considers if it has a majority of the voting interests of the entity, or if the entity is a variable interest entity (VIE) and if the Company is the primary beneficiary. In determining the primary beneficiary of a VIE, the Company evaluates whether it has both: the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to that VIE. The Company's judgment with respect to its level of influence or control of an entity involves the consideration of various factors, including: the form of ownership interest; representation in the entity’s governance; the size of the investment; estimates of future cash flows; the ability to participate in policy making decisions; and the rights of the other investors to participate in the decision making process, including the right to liquidate the entity, if applicable. If the Company is not the primary beneficiary of the VIE, and an ownership interest is maintained in the entity, the interest is accounted for under the equity or cost methods of accounting, as appropriate.
The Company continuously assesses whether it is the primary beneficiary of a VIE, as changes to existing relationships or future transactions may affect its conclusions.
Use of Estimates
The Company bases its estimates on: historical experience; forecasts; information received from its service providers; information from other sources, including public and proprietary sources; and other assumptions that the Company believes are reasonable under the circumstances. Actual results could differ materially from the Company’s estimates. The Company periodically evaluates the methodologies employed in making its estimates.
Business CombinationsThe extent to which the COVID-19 pandemic may directly or indirectly impact our business, financial condition and Contingent Considerationsresults of operations is highly uncertain and subject to change. As a result, certain of our estimates and assumptions, including the provision for sales deductions, the creditworthiness of customers entering into revenue arrangements, the valuation of the assets and liabilities acquired in the USWM Acquisition, and the fair values of our financial instruments, require increased judgment and carry a higher degree of variability and volatility that could result in material changes to our estimates in future periods.
To determine whether an acquisition should be accounted forAdvertising Expense
Advertising expense includes the cost of promotional materials and activities, such as a business combination or as an asset acquisition, the Company makes certain judgments regarding whether the acquired set of activitiesprinted materials and assets meets the definition of a business. Significant judgment is required in assessing whether the acquired processes or activities, along with their inputs, would be substantive so as to constitute a business, as defined by U.S. GAAP.
If the acquired set of activitiesdigital marketing, marketing programs and assets meets the definition of a business, the Company applies the acquisition method of accounting to that transaction. Otherwise, the transaction is recorded as an asset acquisition rather than a business combination.
In an asset acquisition, any acquired in-process research and development (IPR&D) that does not have an alternative future use is charged to expense asspeaker programs. The cost of the acquisition date, and no goodwill is recorded. Under the acquisition method of accounting, assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, if applicable, is recorded as goodwill.
The operating results of the acquired business are included in the Company’s condensed consolidated statement of earnings, beginning on the effective acquisition date. Acquisition-related expenses are recognized separately from the business combination, andCompany's advertising efforts are expensed as incurred.
The Company incurred approximately $15.3 million and $11.6 million in advertising expense for the three months ended March 31, 2021 and 2020, respectively. These expenses are recorded as a component of Selling, general and administrative expenses in the condensed consolidated statements of earnings.
Significant judgment is involvedRecently Issued Accounting Pronouncements
Accounting Pronouncements Adopted
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes - The new standard, issued in December 2019, simplifies the determinationaccounting for income taxes. The Company adopted the guidance on January 1, 2021, on a prospective basis. The adoption of the new standard did not have a material impact to the financial statements.
ASU 2020-01, Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 - The new standard, issued in January 2020, clarifies the interaction of the equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain contracts and purchased options accounted for under Topic 815. The amendment clarifies that an entity can elect to adopt the measurement alternative, which is if an entity identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer, it should measure the equity security at fair value assigned to assets acquired and liabilities assumed in a business combination, as well as the estimated useful lives of assets. These estimates can materially affect our consolidated results of operations. The fair value of intangible assets, including acquired IPR&D, are determined using information available as of the acquisition date that the observable transaction occurred before applying or upon discontinuing the equity method. The adoption of the new standard as of January 1, 2021 did not have a material impact to the financial statements.
New Accounting Pronouncements Not Yet Adopted
The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
ASU 2020-06, Debt - Debt with Conversion and are basedOther Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity - The new standard, issued in August 2020, simplifies the accounting and disclosures for convertible instruments and contracts. This guidance will be effective on estimates and assumptions that are deemed reasonable by management. Significant estimates and assumptions include,January 1, 2022, on a prospective basis, with early adoption permitted but are not limited to: probabilityearlier than January 1, 2021. The Company is currently evaluating the impact of technical success; revenue growth; and appropriate discount rate. Dependingthe new guidance on the facts and circumstances, the Company may deem it necessary to engage an independent valuation expert to assist in valuing significant assets and liabilities.its consolidated financial statements.
3. USWM Acquisition
WhileOn June 9, 2020 (the Closing Date), the Company usescompleted its best estimates and assumptions to accurately value assets acquired and liabilities assumed asacquisition of all of the acquisition date, estimates are inherently uncertainoutstanding equity of USWM Enterprises, a privately-held biopharmaceutical company, pursuant to a Sale and Purchase Agreement with US WorldMeds Partners, LLC (Seller), dated April 28, 2020 (the Agreement). Under the terms of the Agreement, the Company acquired the right to further develop and commercialize APOKYN, XADAGO, and the Apomorphine Infusion Pump (SPN-830) in the U.S. and MYOBLOC worldwide (the Products) for an upfront cash payment of $297.2 million, subject to refinement. Asworking capital adjustments, and the potential for additional contingent consideration payments of up to $230 million.
The potential $230 million in contingent consideration payments includes up to $130 million for the achievement of certain SPN-830 regulatory and commercial activities (regulatory and developmental contingent consideration payments) and up to $100 million related to future sales performance of the Products (sales-based contingent consideration payments). The regulatory and developmental contingent consideration payments include a result,$25 million milestone due upon the FDA's acceptance of the SPN-830 New Drug Application (NDA) for review. The remaining $105 million of the $130 million contingent consideration payments include payments upon the FDA's regulatory approval and subsequent commercial launch of SPN-830, if approved. One of the regulatory milestones has a time-based mechanism for full or partial achievement. The $100 million sales-based contingent consideration payments include a $35 million milestone due upon achievement of certain U.S. net product sales of APOKYN during 2021. The remaining $65 million of the measurement period,$100 million sales-based contingent consideration payments relate to the achievement of certain net product sales of the Products in 2022 and 2023.
which may be up to one year from theThe Company's accounting for this acquisition date, the Company may record adjustments tois preliminary and fair value estimates for the assets acquired and liabilities assumed withand the corresponding offsetCompany's estimates and assumptions are subject to goodwill.change as the Company obtains additional information for its estimates during the measurement period.
Uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination asThe Company expects to finalize its purchase price allocation within one year of the acquisition date.Closing Date. The Company continues to collectanalyze and assess relevant information necessary to determine, recognize and evaluate theserecord at fair value the assets acquired and liabilities assumed. Examples of areas that rely on preliminary estimates subject to measurement period adjustments include intangibles, lease asset and assumptions on a quarterly basis.liability and deferred income tax assets and liabilities. The Company records any adjustmentsis in the process of obtaining additional market research that may inform the fair value of the acquired intangible assets and additional analysis that may be informative in the determination of the fair value of lease asset and other information. Accordingly, the preliminary recognition and measurement of assets acquired and liabilities assumed as of Closing Date are subject to the Company’s preliminary estimates to goodwill.change.
UponPurchase Price Consideration
| | | | | | | | | | | | | | | | | | | | |
| | As Initially Reported | | Measurement Period Adjustments | | As Adjusted |
| Cash consideration | | $ | 304,194 | | | $ | 1,341 | | | $ | 305,535 | |
| Estimated fair value of contingent consideration | | 115,700 | | | (40,900) | | | 74,800 | |
| Estimated total purchase consideration | | $ | 419,894 | | | $ | (39,559) | | | $ | 380,335 | |
| | | | | | |
Cash consideration to Seller - net of cash acquired (1) | | $ | 297,200 | | | $ | 1,341 | | | $ | 298,541 | |
______________________________(1) Represents total purchase price, less cash and cash equivalents acquired, and contingent consideration liabilities. Measurement period
adjustment reflects additional payments made to Seller following the conclusionClosing date for working capital adjustments on the purchase price
consistent with the Agreement.
The Company paid the Seller $297.2 million in cash at the Closing Date. In the fourth quarter of 2020, the measurement period, any subsequentCompany paid the Seller an additional $1.3 million for working capital adjustments are recordedon the purchase price consistent with the Agreement resulting in an increase to our condensed consolidated statements of earnings in the period that these adjustments are identified.original cash consideration paid to the Seller.
Contingent ConsiderationsConsideration
CertainIn addition to the cash paid to the Seller, contingent payments of up to $230 million are also due to the Company’s business combinations involve the potential for future payments that are contingentSeller upon the achievement of certain milestones related to the development or commercialof SPN-830, the In Process Research and Development (IPR&D) asset, and sale of its products, including product developmentthe Products. The possible outcomes for the contingent consideration range from $0, if no milestone is achieved, to $230 million on an undiscounted basis if all milestones or royalty payments on future product sales. are achieved.
The Company initially recorded a contingent consideration liability of $115.7 million as of the Closing Date to reflect the estimated fair value of thesethe contingent consideration liabilities is determinedbased on information available at that time. Subsequent to the Closing Date, the Company adjusted the contingent consideration fair value based on new information related to the facts and circumstances that existed as of the acquisition date using estimated or forecast inputs. These inputs include:related to the timing of meeting the conditions of the milestone payments that are contingent upon regulatory approval and commercial launch of the acquired IPR&D asset as well as the estimated amount and timing of projected cash flows; volatility of projected cash flows;revenues from the probability of milestone achievement (i.e., achievement ofProducts. As a result, the contingent event); and the estimated discount rates and risk-free rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period prior to resolution of the contingency, the contingent consideration liability is remeasured at current fair value, with changesCompany recorded in earnings in the fourth quarter of 2020, a measurement period adjustment of remeasurement.
Similarly,$40.9 million, which decreased the determination of the initial and subsequentestimated fair value of the contingent consideration liability requires significant judgment by management. Changes in anyas of the inputs may result in a significantly different fair value adjustment, which can impact the results of operations in the period in which the adjustment is made. These changes are reported on the condensed consolidated statement of earnings in Selling, general and administrative expenses.
Additional information regarding the Company's recent business combination and its assessment of contingent consideration is included in Note 3, USWM Acquisition.
Revenuefrom Product Sales
The Company’s customers are primarily pharmaceutical wholesalers, specialty pharmacies, and pharmaceutical distributors. Customers purchase productClosing Date to fulfill orders from retail pharmacy chains and independent pharmacies of varying size and purchasing power. The Company recognizes gross revenue when its products are shipped from a third party fulfillment center and physically received by its customers. The Company's customers take control of its products, including title and ownership, upon physical receipt of its products at their facilities. Customer orders are generally fulfilled within a few days of order receipt, resulting in minimal order backlog. The Company does not adjust revenue for any financing effects as the Company expects the period between the transfer of the goods and collection of payment to be less than one year. There are no minimum product purchase requirements with our customers.
The Company recognizes revenue from product sales in an amount that reflects the consideration the Company expects to ultimately receive in exchange for those goods. Product sales are recorded net of various forms of variable consideration, including: provision for estimated rebates; provision for estimated future product returns; and an estimated provision for discounts. These are collectively considered "sales deductions."
As described below, variability in the net transaction price for the Company’s products arises primarily from the aforementioned sales deductions. Significant judgment is required in estimating certain sales deductions. In making these estimates, the Company considers: historical experience; product price increases; current contractual arrangements under applicable payor programs; unbilled claims; processing time lags for claims; inventory levels in the wholesale, specialty pharmacy, and retail distribution channel; and product life cycle. The Company adjusts its estimates of revenue either when the most likely amount of consideration it expects to receive changes, or when the consideration becomes fixed.
Variable consideration on product sales is only recognized when it is probable that a significant reversal will not occur.
If actual results in the future vary from our estimates, the Company adjusts its estimates in that calendar period. These adjustments could materially affect net product sales and earnings in the period in which the adjustment(s) is recorded.$74.8 million.
Sales Deductions
The Company records product sales netFair Value of the following sales deductions:
•Rebates: Rebates are discounts which the Company pays under either public sector or private sector health care programs. Rebates paid under public sector programs are generally mandated under law, whereas private sector rebates are generally contractually negotiated by the Company with managed care providers. Both types of rebates vary over time.
Public sector rebate programs encompass: various Medicaid drug rebate programs; Medicare gap coverage programs; programs covering public health service institutions; and programs covering government entities. All federal employees and agencies purchase drugs under the Federal Supply Schedule.
Private sector rebate programs include: contractual agreements with managed care providers, under which the Company pays fees to gain access to that provider’s patient drug formulary; and Company-sponsored programs, under which the Company defrays or eliminates patient co-payment charges that the patient would otherwise be obligated to pay to their managed care provider in order to fill their prescription.
Rebates are owed upon dispensing our product to a patient; i.e., filling a prescription. The accrual balance for rebates consists of the following three components. First, because rebates are generally invoiced and paid quarterly in arrears, the accrual balance consists of an estimate of the amount expected to be incurred for prescriptions dispensed in the current quarter. Second, the accrual balance also includes an estimate for known or estimated prior quarters’ unpaid rebates, covering those prescriptions dispensed in past quarters but for which no invoice has yet been received. Third, the accrual balance includes an estimate for rebates that will be prospectively owed for prescriptions filled in future quarters. This estimate pertains to product that has been sold by the Company to wholesalers or distributors, and which resides either as wholesaler/distributor inventory or as inventory held at pharmacies. As of the end of the reporting period, this product has not been dispensed to a patient.Net Assets Acquired
The following table presents the Company’s preliminary estimates of expected rebate claims vary by programthe fair value of the assets acquired and by typeliabilities assumed as of customer because the Closing Date, and subsequent measurement period betweenadjustments recorded (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | As Initially Reported | | Measurement Period Adjustments | | As Adjusted |
| Cash and cash equivalents | | $ | 6,994 | | | $ | — | | | $ | 6,994 | |
| Accounts receivable | | 18,474 | | | — | | | 18,474 | |
Inventories (1) | | 10,400 | | | (700) | | | 9,700 | |
| Prepaid expenses and other current assets | | 3,564 | | | — | | | 3,564 | |
| Property and equipment | | 454 | | | — | | | 454 | |
Finance lease asset (2) | | 22,747 | | | — | | | 22,747 | |
Intangible assets (1) | | 387,000 | | | (32,000) | | | 355,000 | |
| Other assets | | 340 | | | — | | | 340 | |
| Total fair value of assets acquired | | 449,973 | | | (32,700) | | | 417,273 | |
| Accounts payable | | (2,573) | | | — | | | (2,573) | |
| Accrued expenses and other current liabilities | | (23,339) | | | — | | | (23,339) | |
Finance lease liability (2) | | (22,747) | | | — | | | (22,747) | |
Deferred income tax liabilities, net (3) | | (69,515) | | | 3,325 | | | (66,190) | |
| Total fair value of liabilities assumed | | (118,174) | | | 3,325 | | | (114,849) | |
| Total identifiable net assets | | $ | 331,799 | | | $ | (29,375) | | | $ | 302,424 | |
| Goodwill | | 88,095 | | | (10,184) | | | 77,911 | |
Total purchase price (4) | | $ | 419,894 | | | $ | (39,559) | | | $ | 380,335 | |
(1)Measurement period adjustments to intangible assets and inventory are primarily due to updates to inputs and assumptions based on
information related to the date at whichfacts and circumstances that existed as of the prescriptionacquisition date.
(2)Refer to Note 12 for further discussion of the acquired finance lease asset and assumed lease liability.
(3)Includes tax attributes that are subject to tax limitations. Measurement period adjustment is filledprimarily due to the tax impact of the changes
in the initial estimate of the fair value of intangible assets and inventories.
(4)Measurement period adjustments include an adjustment to the date at whichfair value of the Company receives and payscontingent consideration net of the invoice varies substantially. For each of its products,additional cash payment
made to the Company bases its estimates of expected rebate claims on multiple factors, including: historical levels of deductions; contractual terms with managed care providers; actual and anticipated changes in product price; prospective changes in managed care fee for service contracts; prospective changes in co-payment assistance programs; and anticipated changes in program utilization rates; i.e., patient participation rates under each specific program.Seller.
The Company records an estimated liability for rebates at the time the customer takes title to the product (i.e., at the time of sale to wholesalers/distributors). This liability is recorded as a reduction to gross product sales, and an increase in Accrued product returns and rebates. The liability is recorded as a component of current liabilities on the condensed consolidated balance sheets.Acquired Intangible Assets
The sensitivityacquired intangible assets include the acquired IPR&D asset related to the Apomorphine Infusion Pump product candidate and the acquired developed technology and product rights. The Company determined the estimated fair value of the Company’s estimates to subsequent adjustment varies by programacquired intangible assets as of the Closing Date using the income approach. The fair value measurements of the acquired intangible assets were determined based on significant unobservable inputs and by typethus represent a Level 3 fair value measurement. Some of customer. If actual rebates vary from estimated amounts, the Company will adjustmore significant inputs and assumptions used in the balancesintangible assets valuation includes: the timing and probability of such accrued rebates to reflect actual experience. These adjustments could materially affectsuccess of clinical and regulatory approvals for the IPR&D asset, the estimated liability balance, net productfuture cash flows from Product sales, the timing and earnings in the period in which the adjustment(s) is made.projection of costs and expenses, discount rates and tax rates.
•Returns: Sales of the Company’s products are not subject to a general right of return. Product that has been used to fill patient prescriptions is no longer subject to any right of return. However, the Company will accept return of product that is damaged or defective when shipped from its third party fulfillment center.
The Company will also accept returninitially recorded a fair value of expired product six months prior to and up to 12 months subsequentintangible assets of $387 million, which consisted of $150 million related to the product’s expiry date. Expired or defective returned product cannot be re-sold,acquired IPR&D and $237 million related to acquired developed technology and Product rights. The initial estimate of the fair value of intangible assets recorded as of the Closing Date is therefore destroyed.
based on information available at that time. During the year ended December 31, 2020, the Company recorded measurement period adjustments of $32 million, which adjusted the initial estimated fair value of the intangible assets to $355 million as of the Closing Date. The Company records an estimated liability for product returns at the time the customer takes titleupdated assumptions with respect to the product (i.e., at timetiming of sale). The liability is reflected as a reduction to gross product sales,regulatory approval and an increase in Accrued product returns and rebates. This liability is recorded as a componentthe commercialization of current liabilities on the condensed consolidated balance sheets. Theacquired IPR&D asset. In addition, the Company also made refinements of the estimates the liability for returns primarilyof projected cash flows based on review of terms of the actual returns experience for its 5 commercial products.
Becauseassociated with the Company’s products have a shelf life upacquired Products. The revisions were based on updated assumptions and information related to 60 months from datethe facts and circumstances that existed as of manufacture, and because the Company accepts return of product up to 12 months post its expiry date, there is a time lag of several years between the time when the product is sold and the time when the Company issues credit on expired product.acquisition date.
The Company’s returns policy generally permits product returns to be processed at current wholesalerfollowing table summarizes the preliminary purchase price rather than at historical acquisition price; hence,allocation, and the Company’s estimated liabilitypreliminary average remaining useful lives for product returns is affected by price increases taken subsequent to the date of sale and prior to its return.identifiable intangible assets (dollars in thousands):
| | | | | | | | | | | |
| Estimated Fair Value | | Estimated Useful Lives as of Closing Date
(in years) |
| Acquired In-process Research & Development | $ | 123,000 | | | n/a |
| Acquired Developed Technology and Product Rights | 232,000 | | | 10.5 - 12.5 |
| Total intangible assets | $ | 355,000 | | | |
AtAcquired intangible assets, excluding the timeacquired IPR&D assets, are amortized over their estimated useful lives on a straight-line basis. IPR&D assets are considered indefinite-lived, until the Company adjusts its estimates for product returns, such adjustment affects the estimated liability, product sales and earnings in the period of adjustment. Those adjustments may be material to our financial results.
•Sales discounts: Distributors and wholesalerssuccessful completion or abandonment of the Company's pharmaceutical products are generally offered various forms of consideration, including allowances, service feesassociated research and prompt payment discounts, for distributing our products. Distributor and wholesaler allowances and service fees arise from contractual agreements, and are estimateddevelopment efforts.
Goodwill
Goodwill was calculated as a percentagethe excess of the price atconsideration paid consequent to completing the acquisition, compared to the net assets recognized. Goodwill represents the future economic benefits from the other acquired assets, and which could not be individually identified and separately valued. Goodwill is primarily attributable to the Company sells productadditional acquired growth platforms and an expanded revenue base. Goodwill is not expected to them. In addition, distributors and wholesalers are offered a prompt pay discountbe deductible for payment within a specified period. Prompt pay discounts are estimated as a percentage of the price at which the Company sells product.tax purposes.
The Company accounts for these discounts at the time of sale, as a reduction to gross product sales, and records these discounts as a valuation allowance against Accounts receivable on the condensed consolidated balance sheets.
Royalty RevenuesPro forma Information
The Company recognizes noncash royalty revenue for amounts earned pursuant to its royalty agreement with United Therapeutics Corporation (United Therapeutics), basedfollowing table presents the unaudited pro forma combined financial information as if the USWM Acquisition had occurred on estimated product sales of Orenitram by United Therapeutics (see Note 4). This agreement includes the right to use the Company’s intellectual property as a functional license.January 1, 2019 (dollars in thousands):
| | | | | |
| Three Months ended March 31, 2020 |
| Pro forma total revenues | $ | 133,162 | |
| Pro forma net earnings | 21,314 | |
The unaudited pro forma combined financial information is based on historical financial information as well as the Company's preliminary allocation of the purchase price; therefore, it is subject to subsequent adjustment upon finalization of the purchase price allocation. In 2014,order to reflect the Company sold certainoccurrence of these royalty rights to Healthcare Royalty Partners III, L.P. (HC Royalty) (see Note 19). Consequent to this agreement, the Company recorded a nonrecourse liability related to thisacquisition as if it occurred on January 1, 2019, the unaudited pro forma combined financial information reflects the adoption of ASC 842, Leases; the recognition of additional amortization expense on intangible assets, the removal of historical amortization charges and the elimination of non-recurring acquisition-related transaction and amortizes this liability as noncash royalty revenue. Sales of Orenitram by United Therapeutics result in payments from United Therapeutics to HC Royalty, in accordance with this agreement.costs.
The Company also recognizes noncash interest expense related tounaudited pro forma combined financial information should not be considered indicative of the nonrecourse liability and accrues interest expense at an estimated effective interest rate (see Note 18). This interest rate is determined based on projections of HC Royalty’s rate of return.
Royalty revenue also includes cash royalty amounts received from other collaboration partners, including from Takeda Pharmaceutical Company Ltd, based on net product sales of Takeda's product, Mydayis, inresults that would have occurred if the current period. Royalty revenue is only recognized when the underlying product sale by Takeda has occurred. The Takeda arrangement also includes Takeda's right to use the Company’s intellectual property as a functional license.
There are 0 guaranteed minimum amounts owed to the Company related to any of these royalty revenue agreements.
Research and Development Expenses and Related Accrued Research and Development Expenses
Research and development expenditures are expensed as incurred. These expenses include: employee salaries, benefits, and share-based compensation; cost of contract research and development services provided by third parties; costs for conducting preclinical and clinical studies; cost of acquiring or manufacturing clinical trial materials; regulatory costs; research facilities costs; depreciation expense and allocated occupancy expenses; and license fees and milestone payments related to in-licensed products and technologies. Assets that are used for research and development and that have no future alternative use are expensed as incurred in-process research and development.
The Company estimates preclinical and clinical trial expenses based on services performed pursuant to contracts with research institutions, clinical investigators, clinical research organizations (CROs) and other service providers that workacquisition had been consummated on the Company’s behalf. In recording service fees, the Company estimates the costassumed completion date, nor are they indicative of those services which have been performed on behalf of the Company during the current period, and compares those costs with the cumulative expenses recorded and cumulative payments made, for such services. As appropriate, the Company accrues additional expense for services that have been delivered, or defers nonrefundable advance payments until the related services are performed.future results.
IfThe following table summarizes the actual timingdisaggregation of the performance of servicesrevenues by product or the level of effort varies from our estimate, the Company adjusts its accrued expenses or its deferred advance payments, accordingly. If the Company subsequently determines that it no longer expects the services associated with a nonrefundable advance payment to be rendered, the remaining portion of that advance payment is charged to expensesource, (dollars in the period in which such a determination is made.thousands): | | | | | | | | | | | |
| Three Months ended
March 31, |
| 2021 | | 2020 |
| (unaudited) |
| Net product sales | | | |
| Trokendi XR | $ | 71,819 | | | $ | 68,551 | |
| Oxtellar XR | 27,370 | | | 23,939 | |
| APOKYN | 21,730 | | | 0 | |
| MYOBLOC | 4,240 | | | 0 | |
| XADAGO | 3,222 | | | 0 | |
| Total net product sales | $ | 128,381 | | | $ | 92,490 | |
| Royalty revenues | 2,551 | | | 2,486 | |
| Total revenues | $ | 130,932 | | | $ | 94,976 | |
Trokendi XR accounted for 56% and 74% of the Company’s total net product sales for the three months ended March 31, 2021 and 2020, respectively.
Each of our three major customers, AmerisourceBergen Drug Corporation, Cardinal Health, Inc. and McKesson Corporation, individually accounted for more than 25% of our total net product sales and collectively accounted for more than 85% of our total net product sales in both 2021 and 2020.
The Company recognized noncash royalty revenue of $2.2 million and $1.6 million, for the three months ended March 31, 2021 and 2020, respectively. Refer to Note 15, Commitments and Contingencies.
5. Investments
Marketable SecuritiesAdvertising Expense
Advertising expense includes the cost of promotional materials and activities, such as printed materials and digital marketing, marketing programs and speaker programs. The cost of the Company's advertising efforts are expensed as incurred.
Marketable securities consist of investments in: U.S. Treasury bills and notes; bank certificates of deposit; various U.S. governmental agency debt securities; corporate and municipal debt securities; and other fixed income securities. The Company places all investments with governmental, industrial, or financial institutions whose debt is rated as investment grade.
The Company's investmentsincurred approximately $15.3 million and $11.6 million in advertising expense for the three months ended March 31, 2021 and 2020, respectively. These expenses are classified as available-for-sale and are carried at fair value. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets.
Any unrealized holding gains or losses on debt securities are reported, net of any tax effects,recorded as a component of other comprehensive earnings (loss) Selling, general and administrative expenses in the condensed consolidated statement of comprehensive earnings. Realized gains and losses, included in Other income (expense), net in the condensed consolidated statement of earnings, are determined using the specific identification method for determining the cost of securities sold.
The Company adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2020, using the allowance approach. Declines in fair value below amortized cost related to credit losses (i.e., impairment due to credit losses), are included in the condensed consolidated statement of earnings, with a corresponding allowance established. If the estimate of expected credit losses decreases in subsequent periods, the Company will reverse the credit losses through current period earnings, and accordingly adjust the allowance (see Recently Issued Accounting Pronouncements).
Inventories
Inventories, which are recorded at the lower of cost or net realizable value, include materials, labor, direct costs and indirect costs. These are valued using the first-in, first-out method. The Company writes down inventory that has become obsolete, or has a cost basis in excess of its expected net realizable value. Expired inventory is destroyed, and the related costs are recognized as Cost of goods sold in the condensed consolidated statementstatements of earnings.
Inventories ProducedRecently Issued Accounting Pronouncements
Accounting Pronouncements Adopted
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes - The new standard, issued in PreparationDecember 2019, simplifies the accounting for income taxes. The Company adopted the guidance on January 1, 2021, on a prospective basis. The adoption of Product Launchesthe new standard did not have a material impact to the financial statements.
ASU 2020-01, Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 - The new standard, issued in January 2020, clarifies the interaction of the equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain contracts and purchased options accounted for under Topic 815. The amendment clarifies that an entity can elect to adopt the measurement alternative, which is if an entity identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer, it should measure the equity security at fair value as of the date that the observable transaction occurred before applying or upon discontinuing the equity method. The adoption of the new standard as of January 1, 2021 did not have a material impact to the financial statements.
New Accounting Pronouncements Not Yet Adopted
The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity - The new standard, issued in August 2020, simplifies the accounting and disclosures for convertible instruments and contracts. This guidance will be effective on January 1, 2022, on a prospective basis, with early adoption permitted but not earlier than January 1, 2021. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
3. USWM Acquisition
On June 9, 2020 (the Closing Date), the Company completed its acquisition of all of the outstanding equity of USWM Enterprises, a privately-held biopharmaceutical company, pursuant to a Sale and Purchase Agreement with US WorldMeds Partners, LLC (Seller), dated April 28, 2020 (the Agreement). Under the terms of the Agreement, the Company acquired the right to further develop and commercialize APOKYN, XADAGO, and the Apomorphine Infusion Pump (SPN-830) in the U.S. and MYOBLOC worldwide (the Products) for an upfront cash payment of $297.2 million, subject to working capital adjustments, and the potential for additional contingent consideration payments of up to $230 million.
The Company capitalizes inventories producedpotential $230 million in preparationcontingent consideration payments includes up to $130 million for product launches whenthe achievement of certain SPN-830 regulatory and commercial activities (regulatory and developmental contingent consideration payments) and up to $100 million related to future commercializationsales performance of the Products (sales-based contingent consideration payments). The regulatory and developmental contingent consideration payments include a product is probable, and when a future economic benefit is expected to be realized.$25 million milestone due upon the FDA's acceptance of the SPN-830 New Drug Application (NDA) for review. The determination to capitalize is based onremaining $105 million of the particular facts and circumstances relating to$130 million contingent consideration payments include payments upon the product. Capitalization of such inventory begins when the Company determines that (i) positive clinical trial results have been obtained in order to support regulatory approval; (ii) uncertainties regardingFDA's regulatory approval have been significantly reduced; and (iii) it is probable that these capitalized costs will provide future economic benefit, in excesssubsequent commercial launch of capitalized costs.
In evaluating whether these conditions are met, the Company considers the following factors: the product candidate’s current status in the regulatory approval process; results from the related pivotal and supportive clinical trials; results from meetings with relevant regulatory agencies prior to the filing of regulatory applications; completionSPN-830, if approved. One of the regulatory applications; consequent acceptance bymilestones has a time-based mechanism for full or partial achievement. The $100 million sales-based contingent consideration payments include a $35 million milestone due upon achievement of certain U.S. net product sales of APOKYN during 2021. The remaining $65 million of the regulatory agency; potential impediments$100 million sales-based contingent consideration payments relate to the approval process, such asachievement of certain net product safety or efficacy concerns, potential labeling restrictions, and other impediments; historical experience with manufacturing and commercializing similar products as well as manufacturesales of the relevant product candidate;Products in 2022 and the resilience of the Company’s manufacturing environment, and supply chain, in determining logistical constraints that could hamper approval or commercialization.2023.
In assessing the economic benefit that the Company is likely to realize, the Company considers: the shelf life of the product in relation to the expected timeline for approval; patent related or contractual issues that may prevent or delay commercialization; product stability data of all pre-approval production to assess adequacy of expected shelf life; viability of commercialization, taking into account competitive dynamics in the marketplace and market acceptance; anticipated future sales; and anticipated reimbursement strategies that may prevail with respect to the product, to determine product profit margin.
In applyingThe Company's accounting for this acquisition is preliminary and fair value estimates for the lower of cost or net realizable valueassets acquired and liabilities assumed and the Company's estimates and assumptions are subject to pre-launch inventory,change as the Company obtains additional information for its estimates a range of likely commercial prices based on pricing of competitive commercial products, and pre-launch discussions with managed care providers.during the measurement period.
The Company couldexpects to finalize its purchase price allocation within one year of the Closing Date. The Company continues to analyze and assess relevant information necessary to determine, recognize and record at fair value the assets acquired and liabilities assumed. Examples of areas that rely on preliminary estimates subject to measurement period adjustments include intangibles, lease asset and liability and deferred income tax assets and liabilities. The Company is in the process of obtaining additional market research that may inform the fair value of the acquired intangible assets and additional analysis that may be requiredinformative in the determination of the fair value of lease asset and other information. Accordingly, the preliminary recognition and measurement of assets acquired and liabilities assumed as of Closing Date are subject to write down previously capitalized costschange.
Purchase Price Consideration
| | | | | | | | | | | | | | | | | | | | |
| | As Initially Reported | | Measurement Period Adjustments | | As Adjusted |
| Cash consideration | | $ | 304,194 | | | $ | 1,341 | | | $ | 305,535 | |
| Estimated fair value of contingent consideration | | 115,700 | | | (40,900) | | | 74,800 | |
| Estimated total purchase consideration | | $ | 419,894 | | | $ | (39,559) | | | $ | 380,335 | |
| | | | | | |
Cash consideration to Seller - net of cash acquired (1) | | $ | 297,200 | | | $ | 1,341 | | | $ | 298,541 | |
______________________________(1) Represents total purchase price, less cash and cash equivalents acquired, and contingent consideration liabilities. Measurement period
adjustment reflects additional payments made to Seller following the Closing date for working capital adjustments on the purchase price
consistent with the Agreement.
The Company paid the Seller $297.2 million in cash at the Closing Date. In the fourth quarter of 2020, the Company paid the Seller an additional $1.3 million for working capital adjustments on the purchase price consistent with the Agreement resulting in an increase to the original cash consideration paid to the Seller.
Contingent Consideration
In addition to the cash paid to the Seller, contingent payments of up to $230 million are also due to the Seller upon the achievement of certain milestones related to pre-launch inventories uponthe development of SPN-830, the In Process Research and Development (IPR&D) asset, and sale of the Products. The possible outcomes for the contingent consideration range from $0, if no milestone is achieved, to $230 million on an undiscounted basis if all milestones are achieved.
The Company initially recorded a change incontingent consideration liability of $115.7 million as of the Closing Date to reflect the estimated fair value of the contingent consideration based on information available at that time. Subsequent to the Closing Date, the Company adjusted the contingent consideration fair value based on new information related to the facts and circumstances including among other potential factors,that existed as of the acquisition date related to the timing of meeting the conditions of the milestone payments that are contingent upon regulatory approval and commercial launch of the acquired IPR&D asset as well as the estimated timing of projected revenues from the Products. As a denial or significant delayresult, the Company recorded in the fourth quarter of approval by regulatory bodies,2020, a delay in commercialization, or other adverse factors.measurement period adjustment of $40.9 million, which decreased the estimated fair value of the contingent consideration liability as of Closing Date to $74.8 million.
Fair Value of Net Assets Acquired
The following table presents the Company’s preliminary estimates of the fair value of the assets acquired and liabilities assumed as of the Closing Date, and subsequent measurement period adjustments recorded (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | As Initially Reported | | Measurement Period Adjustments | | As Adjusted |
| Cash and cash equivalents | | $ | 6,994 | | | $ | — | | | $ | 6,994 | |
| Accounts receivable | | 18,474 | | | — | | | 18,474 | |
Inventories (1) | | 10,400 | | | (700) | | | 9,700 | |
| Prepaid expenses and other current assets | | 3,564 | | | — | | | 3,564 | |
| Property and equipment | | 454 | | | — | | | 454 | |
Finance lease asset (2) | | 22,747 | | | — | | | 22,747 | |
Intangible assets (1) | | 387,000 | | | (32,000) | | | 355,000 | |
| Other assets | | 340 | | | — | | | 340 | |
| Total fair value of assets acquired | | 449,973 | | | (32,700) | | | 417,273 | |
| Accounts payable | | (2,573) | | | — | | | (2,573) | |
| Accrued expenses and other current liabilities | | (23,339) | | | — | | | (23,339) | |
Finance lease liability (2) | | (22,747) | | | — | | | (22,747) | |
Deferred income tax liabilities, net (3) | | (69,515) | | | 3,325 | | | (66,190) | |
| Total fair value of liabilities assumed | | (118,174) | | | 3,325 | | | (114,849) | |
| Total identifiable net assets | | $ | 331,799 | | | $ | (29,375) | | | $ | 302,424 | |
| Goodwill | | 88,095 | | | (10,184) | | | 77,911 | |
Total purchase price (4) | | $ | 419,894 | | | $ | (39,559) | | | $ | 380,335 | |
(1)Measurement period adjustments to intangible assets and inventory are primarily due to updates to inputs and assumptions based on
information related to the facts and circumstances that existed as of the acquisition date.
(2)Refer to Note 12 for further discussion of the acquired finance lease asset and assumed lease liability.
(3)Includes tax attributes that are subject to tax limitations. Measurement period adjustment is primarily due to the tax impact of the changes
in the initial estimate of the fair value of intangible assets and inventories.
(4)Measurement period adjustments include an adjustment to the fair value of the contingent consideration net of the additional cash payment
made to the Seller.
Acquired Intangible Assets
Intangible assets consist of definite-livedThe acquired intangible assets including:include the acquired IPR&D asset related to the Apomorphine Infusion Pump product candidate and the acquired developed technology;technology and product rights; and patent defense costs. They also consistrights. The Company determined the estimated fair value of indefinite-livedthe acquired intangible assets such as of the Closing Date using the income approach. The fair value measurements of the acquired intangible assets were determined based on significant unobservable inputs and thus represent a Level 3 fair value measurement. Some of the more significant inputs and assumptions used in the intangible assets valuation includes: the timing and probability of success of clinical and regulatory approvals for the IPR&D.&D asset, the estimated future cash flows from Product sales, the timing and projection of costs and expenses, discount rates and tax rates.
Patent defense costs are legal fees that have been incurred in connection with legal proceedingsThe Company initially recorded a fair value of intangible assets of $387 million, which consisted of $150 million related to the defenseacquired IPR&D and $237 million related to acquired developed technology and Product rights. The initial estimate of patents for Oxtellar XRthe fair value of intangible assets recorded as of the Closing Date is based on information available at that time. During the year ended December 31, 2020, the Company recorded measurement period adjustments of $32 million, which adjusted the initial estimated fair value of the intangible assets to $355 million as of the Closing Date. The Company updated assumptions with respect to the timing of regulatory approval and Trokendi XR. Patent defense costs are chargedthe commercialization of the acquired IPR&D asset. In addition, the Company also made refinements of the estimates of projected cash flows based on review of terms of the contractual arrangements
associated with the acquired Products. The revisions were based on updated assumptions and information related to expense in the eventfacts and circumstances that existed as of an unsuccessful litigation outcome.the acquisition date.
Definite-livedThe following table summarizes the preliminary purchase price allocation, and the preliminary average remaining useful lives for identifiable intangible assets (dollars in thousands):
| | | | | | | | | | | |
| Estimated Fair Value | | Estimated Useful Lives as of Closing Date
(in years) |
| Acquired In-process Research & Development | $ | 123,000 | | | n/a |
| Acquired Developed Technology and Product Rights | 232,000 | | | 10.5 - 12.5 |
| Total intangible assets | $ | 355,000 | | | |
Acquired intangible assets, excluding the acquired IPR&D assets, are carried at cost less accumulated amortization, with amortization calculated on a straight line basisamortized over thetheir estimated useful lives of the assets. The Company evaluates the estimated remaining useful life of its intangible assets annually, or when events or changes in circumstances warranton a revision to the remaining periods of amortization.
Indefinite-lived intangiblestraight-line basis. IPR&D assets are not amortized but are tested for impairment annually. Acquired IPR&D in a business combination is considered to be an indefinite-lived, asset until the successful completion or abandonment of the associated research and development efforts. Upon successful completion of the project, the Company will make a determination as to the then-useful life of the intangible asset. This is generally determined by the period over which the substantial majority of the cash flows are expected to be generated. The capitalized amount is then amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. During the period prior to completion or abandonment, the IPR&D asset will not be amortized but will be tested for impairment on an annual basis or when potential indicators of impairment are identified.
Goodwill
Goodwill and Goodwill Impairment Assessment
Goodwill iswas calculated as the excess of the consideration paid consequent to completing anthe acquisition, compared to the net assets recognized in a business combination.recognized. Goodwill represents the future economic benefits arising from the other acquired assets, thatand which could not be individually identified and separately quantified.valued. Goodwill is primarily attributable to the additional acquired growth platforms and an expanded revenue base. Goodwill is not expected to be deductible for tax purposes.
Pro forma Information
The Company evaluates goodwill for possible impairment at least annually (duringfollowing table presents the fourth quarter of each fiscal year), or more often,unaudited pro forma combined financial information as if and when circumstances indicate that goodwill may be impaired. This includes but is not limited to significant adverse changesthe USWM Acquisition had occurred on January 1, 2019 (dollars in the business climate, market conditions, or other events that indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value. In performing its goodwill assessment, the Company first performs a qualitative test. If necessary, the Company then performs a quantitative test. To conduct the quantitative impairment test of goodwill, the Company compares the fair value of a reporting unit to its carrying value.thousands):
| | | | | |
| Three Months ended March 31, 2020 |
| Pro forma total revenues | $ | 133,162 | |
| Pro forma net earnings | 21,314 | |
Evaluating for impairment requires judgment, including estimating future cashflows. The Company estimatesunaudited pro forma combined financial information is based on historical financial information as well as the fair valuesCompany's preliminary allocation of its reporting unit using discounted cash flow models or other valuation models, suchthe purchase price; therefore, it is subject to subsequent adjustment upon finalization of the purchase price allocation. In order to reflect the occurrence of the acquisition as comparative transactions or market multiples. Ifif it occurred on January 1, 2019, the reporting unit’s carrying value exceeds its fair value,unaudited pro forma combined financial information reflects the Company records an impairment loss toadoption of ASC 842, Leases; the extent thatrecognition of additional amortization expense on intangible assets, the carrying valueremoval of goodwill exceeds its implied fair value.historical amortization charges and the elimination of non-recurring acquisition-related transaction costs.
Impairment of Long Lived Assets
Long-lived assets consist primarily of property and equipment, operating lease assets and intangible assets. The carrying value of intangible assets is assessed for impairment annually (during the fourth quarter of each year), or more frequently if impairment indicators exist. Impairment indicators include but are not limited to adverse changes in circumstances, or other events that indicate that the carrying amount of an asset mayunaudited pro forma combined financial information should not be recoverable.
Evaluating for impairment requires judgment, including estimatingconsidered indicative of the results that would have occurred if the acquisition had been consummated on the assumed completion date, nor are they indicative of future cash flows, future growth rates, future profitability, and the expected life over which projected cash flows will occur.
For IPR&D assets,4.Disaggregated Revenues
The following table summarizes the Company also considers various factors and risks for potential impairment, including the current legal and regulatory environment, and the competitive landscape. Adverse clinical trial results, significant trial delays, inability to obtain governmental approval, inability to commercialize adisaggregation of revenues by product candidate, and the introduction or advancement of competitive products and product candidates, could resultsource, (dollars in partial or full impairment of the related intangible asset. In these circumstances, the eventual realized value of the IPR&D asset may vary from its fair value as of the date of acquisition, and impairment charges may be recorded in future periods. Changes in the Company's business strategy or adverse changes in market conditions could likewise adversely affect impairment analyses.thousands): | | | | | | | | | | | |
| Three Months ended
March 31, |
| 2021 | | 2020 |
| (unaudited) |
| Net product sales | | | |
| Trokendi XR | $ | 71,819 | | | $ | 68,551 | |
| Oxtellar XR | 27,370 | | | 23,939 | |
| APOKYN | 21,730 | | | 0 | |
| MYOBLOC | 4,240 | | | 0 | |
| XADAGO | 3,222 | | | 0 | |
| Total net product sales | $ | 128,381 | | | $ | 92,490 | |
| Royalty revenues | 2,551 | | | 2,486 | |
| Total revenues | $ | 130,932 | | | $ | 94,976 | |
If indications of impairment exist, projected future undiscounted cash flows associated with the asset would be compared to the carrying valueTrokendi XR accounted for 56% and 74% of the asset, to determine whetherCompany’s total net product sales for the asset's value is recoverable. If impairment is determined, the Company writes down the asset to its estimated fair value; i.e., the Company recognizes an impairment charge equal to the excess of the carrying value of the long-lived asset over its estimated fair value, as of the time at which such a determination is made.three months ended March 31, 2021 and 2020, respectively.
Share-Based Compensation
Stock Options
The Company recognizes share-based compensation expense over the service period, using the straight-line method. Employee share-based compensation for stock options is determined using the Black-Scholes option-pricing model to compute the fair valueEach of option grants as of their grant date. Forfeitures areour three major customers, AmerisourceBergen Drug Corporation, Cardinal Health, Inc. and McKesson Corporation, individually accounted for as incurred. The Company uses the following assumptionsmore than 25% of our total net product sales and collectively accounted for estimating the fair valuemore than 85% of option grants:our total net product sales in both 2021 and 2020.
Fair ValueThe Company recognized noncash royalty revenue of Common Stock$2.2 million and $1.6 million, for the three months ended March 31, 2021 and 2020, respectively. Refer to Note 15, —The fair value of the common stock underlying the option grants is determined based on observable market prices of the Company’s common stock.Commitments and Contingencies.
Expected Volatility5—Volatility is a measure of the amount by which the Company’s share price has historically fluctuated on a daily basis and is expected to fluctuate (i.e., expected volatility) in the future.. Investments
Dividend Yield—The Company has never declared or paid dividends, and has no plans to do so in the foreseeable future. Dividend yield is therefore 0.
Expected Term—This is the period of time during which options are expected to remain unexercised and is based on historical experience. Options have a maximum contractual term of ten years.
Risk-Free Interest Rate—This is the observed U.S. Treasury Note rate, as of the week each option grant is issued, for a term that most closely resembles the expected term of the option.
Restricted Stock Units (RSUs)
Share-based compensation expense is recorded based on amortizing the fair market value of the RSU as of the date of the grant over the implied service period. RSUs generally vest one year from the date of the grant and are subject to continued service requirements.
Performance Stock Units (PSUs)
Performance-Based Awards
Share-based compensation expense for performance-based awards is recognized based on amortizing the fair market value of the award as of the grant date over the periods during which the achievement of the performance-based award is probable. Performance-based awards require certain performance targets to be achieved in order for the award to vest. Vesting occurs on the date of achievement of the performance target.
Market-Based Awards
Share-based compensation expense for market-based awards is recognized on a straight-line basis over the requisite service period, regardless of whether the market condition has been satisfied. Market-based PSU awards vest upon achievement of the performance target.
The Company estimates the fair value of these awards as of the grant date using a Monte Carlo simulation that incorporates option-pricing inputs. This simulation covers the period from the grant date through the end of the derived requisite service period. Volatility as of the grant date is estimated based on historical daily volatility of the Company's common stock over a period of time which is equivalent to the expected term of the award. The risk-free interest rate is based on the U.S. Treasury Note rate, as of the week the award is issued, with a duration that most closely resembles the expected term of the award.
Advertising Expense
Advertising expense includes the cost of promotional materials and activities, such as printed materials and digital marketing, marketing programs and speaker programs. The cost of the Company's advertising efforts are expensed as incurred.
The Company incurred approximately $15.4$15.3 million and $37.9$11.6 million in advertising expense for the three and nine months ended September 30,March 31, 2021 and 2020, respectively, and approximately $11.3 million and $32.5 million in advertising expense for the three and nine months ended September 30, 2019, respectively. These expenses are recorded as a component of Selling, general and administrative expenses in the condensed consolidated statements of earnings.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and deferred tax liabilities are determined based on differences between their financial reporting and tax reporting bases. These differences are measured using enacted tax rates and laws that are expected to be in effect when these differences are expected to reverse. When appropriate, valuation allowances are established to reduce deferred tax assets to the amounts expected to be ultimately realized.
The Company accounts for uncertain tax positions in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently estimated as the largest amount of the tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities. These estimates are based on full knowledge of the position and relevant facts.
The Company's policy is to recognize any interest and penalties related to income taxes as income tax expense in the relevant period.
Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted
ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) - The new standard, issued in July 2016, requires credit losses on financial assets to be measured as the net amount expected to be collected, rather than based on actual incurred losses. For available-for-sale debt securities, the new standard did not revise the definition of impairment; i.e., the investment is impaired if the fair value of the investment is less than its cost. It also did not revise the requirement under ASC 320 for an entity to recognize, in net income, only the impairment amount related to credit risk, and to recognize, as a component of other comprehensive income, the noncredit impairment amount.
The new standard made certain targeted changes to the impairment assessment of available-for-sale debt securities, to eliminate the concept of "other than temporary" from the impairment model. Changes to the impairment model include recognition of credit losses on available-for-sale debt securities using the allowance method, and limiting the allowance to the amount by which fair value is below amortized cost. The new standard also requires enhanced disclosure of credit risk associated with debt securities.
The Company adopted the new standard effective January 1, 2020, using the modified retrospective approach. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.
ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract - The new standard, issued in August 2018, aligns the requirements for capitalizing implementation costs
incurred under a service contract for a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or to obtain internal-use software. This includes hosting arrangements that include an internal-use software license. This ASU also requires that the implementation costs of a hosting arrangement under a service contract to be expensed over the term of the hosting arrangement, including reasonably certain renewals.
The Company adopted the new standard effective January 1, 2020, using the prospective transition approach. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.
ASU 2018-18, Clarifying the Interaction Between Topic 808 and Topic 606 - The new standard, issued in November 2018, clarifies when transactions between participants in a collaborative arrangement are within the scope of Topic 606.
The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.
ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) - The new standard, issued in August 2018, improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies and adds certain disclosure requirements.
The Company adopted the new standard effective January 1, 2020. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes - The new standard, issued in December 2019, simplifies the accounting for income taxes. ThisThe Company adopted the guidance will be effective on January 1, 2021, on a prospective basis, with earlybasis. The adoption permitted.of the new standard did not have a material impact to the financial statements.
ASU 2020-01, Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 - The new standard, issued in January 2020, clarifies the interaction of the equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain contracts and purchased options accounted for under Topic 815. The amendment clarifies that an entity can elect to adopt the measurement alternative, which is if an entity identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer, it should measure the equity security at fair value as of the date that the observable transaction occurred before applying or upon discontinuing the equity method. The adoption of the new standard as of January 1, 2021 did not have a material impact to the financial statements.
New Accounting Pronouncements Not Yet Adopted
The Company is currently evaluating the impact of the new guidance on its consolidated financial statements. It will adopt the new standard effective January 1, 2021.
ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity - The new standard, issued in August 2020, simplifies the accounting and disclosures for convertible instruments and contracts. This guidance will be effective on January 1, 2022, on a prospective basis, with early adoption permitted but not earlier than January 1, 2021.
The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
3.USWM Acquisition
On June 9, 2020 (the Closing Date), the Company completed its acquisition of all of the outstanding equity of USWM Enterprises, LLC (USWM Enterprises), a privately-held biopharmaceutical company, pursuant to a Sale and Purchase Agreement with US WorldMeds Partners, LLC (Seller), dated April 28, 2020 (the Agreement). Under the terms of the Agreement, the Company acquired the right to further develop and commercialize APOKYN, XADAGO, and the Apomorphine Infusion Pump (SPN-830) in the U.S., and MYOBLOC worldwide (the Products). The Company paid the Seller for an upfront cash payment of $297.2 million, in cash atsubject to working capital adjustments, and the Closing Date. Aspotential for additional contingent consideration payments of September 30, 2020, the Company recorded an additional payableup to the Seller of $1.0 million as a result of the resolution of contingencies that increased the original cash consideration paid to the Seller. For the nine months ended September 30, 2020, the Company incurred transaction costs of $8.3 million in completing the acquisition. These costs were included in $230 million.Selling, general and administrative expense, in the condensed consolidated statements of earnings.
ContingentThe potential $230 million in contingent consideration payments ofincludes up to $230.0$130 million are due to the Seller uponfor the achievement of certain milestonesSPN-830 regulatory and commercial activities (regulatory and developmental contingent consideration payments) and up to $100 million related to the development and salefuture sales performance of the Products. The possible outcomes for theProducts (sales-based contingent consideration range from $0 to $230.0 million on, an undiscounted basis.
In connection therewith, the Company recorded apayments). The regulatory and developmental contingent consideration liability of $115.7payments include a $25 million asmilestone due upon the FDA's acceptance of the date of acquisition, to reflect the estimated fair valueSPN-830 New Drug Application (NDA) for review. The remaining $105 million of the $130 million contingent consideration. The estimated fair valueconsideration payments include payments upon the FDA's regulatory approval and subsequent commercial launch of SPN-830, if approved. One of the regulatory milestones has a time-based mechanism for full or partial achievement. The $100 million sales-based contingent consideration was determined usingpayments include a Monte Carlo simulation for$35 million milestone due upon achievement of certain U.S. net product sales of APOKYN during 2021. The remaining $65 million of the $100 million sales-based milestones, and the income approach for the other milestones. The key assumptions considered in estimating the value of contingent consideration include:payments relate to the estimatedachievement of certain net product sales of the Products in 2022 and 2023.
amountThe Company's accounting for this acquisition is preliminary and timing of projected cash flows; probability of milestone achievement; volatility of prospective cash flows; the discount rates and risk-free interest rate.
In each reporting period after the acquisition, the Company will revalue the contingent consideration liability, and will record increases or decreases in the fair value of the liability in its consolidated statements of earnings. Changes in fair value can result from changes in actual and projected milestone achievement, as well as changes to forecasts. The inputs and assumptions may or may not be observable in the market, and reflect assumptions the Company believes would be made by a market participant. During the three months ended September 30, 2020, the Company recorded an increase to the contingent consideration liabilities of $0.2 million.
The acquisition is being accountedestimates for as a business combination under the acquisition method of accounting, in accordance with ASC 805, Business Combinations. The allocation of the purchase price to the assets acquired and liabilities assumed includingand the residual amount allocated to goodwill, is based upon preliminary information. The allocation of the purchase price isCompany's estimates and assumptions are subject to change as the Company obtains additional information for its estimates during the measurement period (up to one year from the Closing Date), as additional information concerning final asset and liability valuations is obtained. During the measurement period, if the Company obtains new information regarding facts and circumstances that existed as of the Closing Date that, if known, would have resulted in revised estimated values of those assets or liabilities, the Company will accordingly revise the preliminary purchase price allocation. The effect of measurement period adjustments on the estimated fair value elements will be reflected as if the adjustments had been made as of the Closing Date. Residual amounts will be allocated to goodwill. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings.period.
The Company expects to finalize its purchase price allocation within one year of the Closing Date. In addition, The Company continues to analyze and assess relevant information necessary to determine, recognize and record at fair value the assets acquired and liabilities assumed in the following areas: intangible assets;assumed. Examples of areas that rely on preliminary estimates subject to measurement period adjustments include intangibles, lease assetsasset and liabilities;liability and deferred income tax assets and tax liabilities; and certain existing or potential reserves, including those for legal or contract-related matters.
liabilities. The activities the Company is currently undertaking include, but are not limited to, the following: review of acquired contracts and other contract-related and legal matters; review and evaluation of the accounting policies, tax positions, and other tax-related matters. Further, the Company is in the process of obtaining input from third party valuation firms with respect toadditional market research that may inform the fair value of the acquired tangible and intangible assets and additional analysis that may be informative in the determination of the fair value of lease asset and other information necessary to record and measure the assets acquired and liabilities assumed.information. Accordingly, the preliminary recognition and measurement of assets acquired and liabilities assumed as of Closing Date are subject to change.
Purchase Price Consideration
| | | | | | | | | | | | | | | | | | | | |
| | As Initially Reported | | Measurement Period Adjustments | | As Adjusted |
| Cash consideration | | $ | 304,194 | | | $ | 1,341 | | | $ | 305,535 | |
| Estimated fair value of contingent consideration | | 115,700 | | | (40,900) | | | 74,800 | |
| Estimated total purchase consideration | | $ | 419,894 | | | $ | (39,559) | | | $ | 380,335 | |
| | | | | | |
Cash consideration to Seller - net of cash acquired (1) | | $ | 297,200 | | | $ | 1,341 | | | $ | 298,541 | |
______________________________(1) Represents total purchase price, less cash and cash equivalents acquired, and contingent consideration liabilities. Measurement period
adjustment reflects additional payments made to Seller following the Closing date for working capital adjustments on the purchase price
consistent with the Agreement.
The Company paid the Seller $297.2 million in cash at the Closing Date. In the fourth quarter of 2020, the Company paid the Seller an additional $1.3 million for working capital adjustments on the purchase price consistent with the Agreement resulting in an increase to the original cash consideration paid to the Seller.
Contingent Consideration
In addition to the cash paid to the Seller, contingent payments of up to $230 million are also due to the Seller upon the achievement of certain milestones related to the development of SPN-830, the In Process Research and Development (IPR&D) asset, and sale of the Products. The possible outcomes for the contingent consideration range from $0, if no milestone is achieved, to $230 million on an undiscounted basis if all milestones are achieved.
The Company initially recorded a contingent consideration liability of $115.7 million as of the Closing Date to reflect the estimated fair value of the contingent consideration based on information available at that time. Subsequent to the Closing Date, the Company adjusted the contingent consideration fair value based on new information related to the facts and circumstances that existed as of the acquisition date related to the timing of meeting the conditions of the milestone payments that are contingent upon regulatory approval and commercial launch of the acquired IPR&D asset as well as the estimated timing of projected revenues from the Products. As a result, the Company recorded in the fourth quarter of 2020, a measurement period adjustment of $40.9 million, which decreased the estimated fair value of the contingent consideration liability as of Closing Date to $74.8 million.
Fair Value of Net Assets Acquired
The following table presents the Company’s preliminary estimates of the fair value of the assets acquired and liabilities assumed as of the Closing Date, and subsequent measurement period adjustments recorded during the third quarter of 2020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | As Initially Reported | | Measurement Period Adjustments | | As Adjusted |
| Cash and cash equivalents | | $ | 6,994 | | | $ | 0 | | | $ | 6,994 | |
| Accounts receivable | | 18,474 | | | 0 | | | 18,474 | |
| Inventories | | 10,400 | | | 0 | | | 10,400 | |
| Prepaid expenses and other current assets | | 3,564 | | | 0 | | | 3,564 | |
| Property and equipment | | 454 | | | 0 | | | 454 | |
Finance lease asset(1) | | 22,747 | | | 0 | | | 22,747 | |
| Intangible assets | | 387,000 | | | 0 | | | 387,000 | |
| Other assets | | 340 | | | 0 | | | 340 | |
| Total fair value of assets acquired | | 449,973 | | | 0 | | | 449,973 | |
| Accounts payable | | (2,573) | | | 0 | | | (2,573) | |
| Accrued expenses and other current liabilities | | (23,339) | | | 0 | | | (23,339) | |
Finance lease liability(1) | | (22,747) | | | 0 | | | (22,747) | |
Deferred income tax liabilities, net(2) | | (69,515) | | | 0 | | | (69,515) | |
| Total fair value of liabilities assumed | | (118,174) | | | 0 | | | (118,174) | |
| Total identifiable net assets | | $ | 331,799 | | | $ | 0 | | | $ | 331,799 | |
| Goodwill | | 88,095 | | | 1,048 | | | 89,143 | |
| Total purchase price | | $ | 419,894 | | | $ | 1,048 | | | $ | 420,942 | |
| | | | | | |
Cash consideration to Seller(3) | | $ | 297,200 | | | $ | 1,048 | | | $ | 298,248 | |
| | | | | | | | | | | | | | | | | | | | |
| | As Initially Reported | | Measurement Period Adjustments | | As Adjusted |
| Cash and cash equivalents | | $ | 6,994 | | | $ | — | | | $ | 6,994 | |
| Accounts receivable | | 18,474 | | | — | | | 18,474 | |
Inventories (1) | | 10,400 | | | (700) | | | 9,700 | |
| Prepaid expenses and other current assets | | 3,564 | | | — | | | 3,564 | |
| Property and equipment | | 454 | | | — | | | 454 | |
Finance lease asset (2) | | 22,747 | | | — | | | 22,747 | |
Intangible assets (1) | | 387,000 | | | (32,000) | | | 355,000 | |
| Other assets | | 340 | | | — | | | 340 | |
| Total fair value of assets acquired | | 449,973 | | | (32,700) | | | 417,273 | |
| Accounts payable | | (2,573) | | | — | | | (2,573) | |
| Accrued expenses and other current liabilities | | (23,339) | | | — | | | (23,339) | |
Finance lease liability (2) | | (22,747) | | | — | | | (22,747) | |
Deferred income tax liabilities, net (3) | | (69,515) | | | 3,325 | | | (66,190) | |
| Total fair value of liabilities assumed | | (118,174) | | | 3,325 | | | (114,849) | |
| Total identifiable net assets | | $ | 331,799 | | | $ | (29,375) | | | $ | 302,424 | |
| Goodwill | | 88,095 | | | (10,184) | | | 77,911 | |
Total purchase price (4) | | $ | 419,894 | | | $ | (39,559) | | | $ | 380,335 | |
(1) Measurement period adjustments to intangible assets and inventory are primarily due to updates to inputs and assumptions based on
information related to the facts and circumstances that existed as of the acquisition date.
(2)Refer to Note 1012 for further discussion of the acquired finance lease asset and assumed lease liability.
(2)(3) Includes tax attributes that are subject to tax limitations. Measurement period adjustment is primarily due to the tax impact of the changes
(3)in the initial estimate of the fair value of intangible assets and inventories.
(4) Represents total purchase price, less cash and cash equivalents acquired and contingent consideration liabilities, recorded at the Closing Date.
The Company determinedMeasurement period adjustments include an adjustment to the fair value of the inventory using the comparative sales method, which estimated the expected sales pricecontingent consideration net of the product, reduced by all costs expectedadditional cash payment
made to be incurred to complete or to dispose of the inventory, with a profit on sale.Seller.
Acquired Intangible Assets
The acquired intangible assets include an intangiblethe acquired IPR&D asset associated with the IPR&D related to the infusion pumpApomorphine Infusion Pump product candidate as well as intangible assets associated withand the acquired developed technology and product rights. The Company determined the estimated fair value of the acquired intangible assets as of the Closing Date using the income approach. This isThe fair value measurements of the acquired intangible assets were determined based on significant unobservable inputs and thus represent a Level 3 fair value measurement. Some of the more significant inputs and assumptions used in the intangible assets valuation technique thatincludes: the timing and probability of success of clinical and regulatory approvals for the IPR&D asset, the estimated future cash flows from Product sales, the timing and projection of costs and expenses, discount rates and tax rates.
The Company initially recorded a fair value of intangible assets of $387 million, which consisted of $150 million related to the acquired IPR&D and $237 million related to acquired developed technology and Product rights. The initial estimate of the fair value of intangible assets recorded as of the Closing Date is based on information available at that time. During the market participant's expectationsyear ended December 31, 2020, the Company recorded measurement period adjustments of $32 million, which adjusted the cash flows thatinitial estimated fair value of the intangible assets are forecasted to generate.$355 million as of the Closing Date. The projected cash flows from these intangible assets were based on variousCompany updated assumptions including: estimates of revenues, expenses, and operating profit; and risks relatedwith respect to the viabilitytiming of regulatory approval and commercial potential for alternative treatments. The cash flows were discounted at a rate commensurate with the level of risk associated with the projected cash flows. In addition to the aforementioned factors, the Company also considered the following factors specific to the valuationcommercialization of the acquired IPR&D intangible asset:asset. In addition, the stage of development asCompany also made refinements of the Closing Date; the time and resources needed to complete the development and regulatory approvalestimates of projected cash flows based on review of terms of the product candidate; the inherent difficulties and uncertainties in developing a product candidate, such as obtaining marketing approval from the U.S. Food and Drug Administration and other regulatory agencies; the economic life of the potential commercialized product; and associated commercialization risks. The Company believes the assumptions are representative of those a market participant would use in estimating fair value.
Acquired intangible assets, excludingassociated with the acquired IPR&D, will be amortized over their estimated useful livesProducts. The revisions were based on a straight-line basis. IPR&D assets are consideredupdated assumptions and information related to be indefinite-lived, until the successful completion or abandonmentfacts and circumstances that existed as of the associated research and development efforts. acquisition date.
The following table summarizes the preliminary purchase price allocation, and the preliminary average remaining useful lives for identifiable intangible assets (dollars in thousands):
| | | | | | | | | | | |
| Estimated Fair Value | | Estimated Useful Lives as of Closing Date
(in years) |
| Acquired In-process Research & Development | $ | 150,000123,000 | | | n/a |
| Acquired Developed Technology and Product Rights | 237,000232,000 | | | 10.5 - 12.5 |
| Total intangible assets | $ | 387,000355,000 | | | |
Acquired intangible assets, excluding the acquired IPR&D assets, are amortized over their estimated useful lives on a straight-line basis. IPR&D assets are considered indefinite-lived, until the successful completion or abandonment of the associated research and development efforts.
Goodwill
Goodwill was calculated as the excess of the consideration paid consequent to completing the acquisition, compared to the net assets recognized. Goodwill represents the future economic benefits arising from the other acquired assets, and which could not be individually identified and separately valued. Goodwill is primarily attributable to the additional acquired growth platforms and an expanded revenue base. Goodwill is not expected to be deductible for tax purposes.
The operations of MDD US Enterprises, LLC and its subsidiaries have been included in the Company's condensed consolidated statements of earnings for the period subsequent to the Closing Date and through September 30, 2020. Total revenues of $40.9 million and $51.5 million and net earnings of $5.1 million and $6.8 million were recorded for the three and nine months ended September 30, 2020, respectively.Pro forma Information
The following table presents the unaudited pro forma combined financial information for each of the periods presented, as if the USWM Acquisition had occurred on January 1, 2019 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended September 30, | | Nine Months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (unaudited) | | (unaudited) |
| Pro forma total revenues | $ | 155,135 | | | $ | 140,791 | | | $ | 440,100 | | | $ | 401,332 | |
| Pro forma net earnings | 39,984 | | | 31,599 | | | 102,226 | | | 76,540 | |
| | | | | |
| Three Months ended March 31, 2020 |
| Pro forma total revenues | $ | 133,162 | |
| Pro forma net earnings | 21,314 | |
The unaudited pro forma combined financial information is based on historical financial information as well as the Company's preliminary allocation of the purchase price; therefore, it is subject to subsequent adjustment upon finalization of the purchase price allocation. In order to reflect the occurrence of the acquisition as if it occurred on January 1, 2019, the unaudited pro forma combined financial information reflects the adoption of ASC 842, Leases; the recognition of additional amortization expense on intangible assets, the removal of historical amortization charges and the elimination of non-recurring acquisition-related transaction costs. Approximately $10.1 million of acquisition-related transaction costs were incurred from the fourth quarter of 2019 through the second quarter of 2020.
The unaudited pro forma combined financial information should not be considered indicative of the results that would have occurred if the acquisition had been consummated on the assumed completion date, nor are they indicative of future results.
4. Disaggregated Revenues
The following table summarizes the disaggregation of revenues by product or source, (dollars in thousands): | | | Three Months ended
September 30, | | Nine Months ended
September 30, | | Three Months ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 |
| | (unaudited) | | (unaudited) | | (unaudited) |
| Net product sales | Net product sales | | Net product sales | |
| Trokendi XR | Trokendi XR | $ | 82,906 | | | $ | 77,332 | | | $ | 241,131 | | | $ | 219,989 | | Trokendi XR | $ | 71,819 | | | $ | 68,551 | |
| Oxtellar XR | Oxtellar XR | 28,364 | | | 22,702 | | | 75,983 | | | 65,502 | | Oxtellar XR | 27,370 | | | 23,939 | |
| APOKYN | APOKYN | 34,482 | | | 0 | | | 43,082 | | | 0 | | APOKYN | 21,730 | | | 0 | |
| MYOBLOC | | MYOBLOC | 4,240 | | | 0 | |
| XADAGO | XADAGO | 2,331 | | | 0 | | | 3,132 | | | 0 | | XADAGO | 3,222 | | | 0 | |
| MYOBLOC | 4,050 | | | 0 | | | 5,279 | | | 0 | | |
| Total net product sales | Total net product sales | $ | 152,133 | | | $ | 100,034 | | | $ | 368,607 | | | $ | 285,491 | | Total net product sales | $ | 128,381 | | | $ | 92,490 | |
| Royalty revenues | Royalty revenues | 3,002 | | | 2,106 | | | 8,233 | | | 6,818 | | Royalty revenues | 2,551 | | | 2,486 | |
| Total revenues | Total revenues | $ | 155,135 | | | $ | 102,140 | | | $ | 376,840 | | | $ | 292,309 | | Total revenues | $ | 130,932 | | | $ | 94,976 | |
Trokendi XR accounted for 65%56% and 77%74% of the Company’s total net product sales for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively.
Each of our three major customers, AmerisourceBergen Drug Corporation, Cardinal Health, Inc. and McKesson Corporation, individually accounted for more than 25% of our total net product sales and collectively accounted for more than 85% of our total net product sales in both 2021 and 2020.
The Company recognized noncash royalty revenue of $2.4$2.2 million and $6.3$1.6 million, for the three and nine months ended September 30,March 31, 2021 and 2020, respectively. Refer to Note 15, Commitments and Contingencies.
5. Investments
Marketable Securities
Unrestricted available-for-sale marketable securities held by the Company are as follows, (dollars in thousands): | | | | | | | | | | | |
| March 31,
2021 | | December 31, 2020 |
| (unaudited) | | |
| Corporate and U.S. government agency and municipal debt securities | | | |
| Amortized cost | $ | 543,713 | | | $ | 472,306 | |
| Gross unrealized gains | 8,958 | | | 11,987 | |
| Gross unrealized losses | (646) | | | (41) | |
| Total fair value | $ | 552,025 | | | $ | 484,252 | |
The contractual maturities of the unrestricted available-for-sale marketable securities held by the Company are as follows, (dollars in thousands): | | | | | |
| March 31,
2021 |
| (unaudited) |
| Less than 1 year | $ | 135,459 | |
| 1 year to 2 years | 151,713 | |
| 2 years to 3 years | 201,619 | |
| 3 years to 4 years | 63,234 | |
| Greater than 4 years | 0 | |
| Total | $ | 552,025 | |
As of March 31, 2021, there was 0 impairment due to credit loss on any available-for-sale marketable securities.
Investment in Navitor
Development and Option agreement
In April 2020, the Company entered into the Development Agreement with Navitor Inc. The Company recognized noncash royalty revenuecan terminate the Development Agreement upon 30 days’ notice. Under the terms of $1.6 millionthe Development Agreement, the Company and $5.0Navitor Inc. will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) for TRD. The Company will bear all of the Phase I and Phase II development costs incurred by either party, up to a maximum of $50 million. In addition, the Company will incur certain other research and development support costs. There are certain additional payment amounts which could be incurred by the Company. These costs are contingent upon Navitor Inc. achieving defined development milestones. The Company has an option to acquire or license NV-5138 (SPN-820), for which additional payments would be required. In the second quarter of 2020, the Company paid Navitor Inc. a one time, nonrefundable, and non-creditable fee of $10 million for this option to acquire or license NV-5138 (SPN-820).
Equity investment
In addition to entering into the threeDevelopment Agreement in April 2020, the Company acquired Series D Preferred Shares of Navitor Inc. for $15 million, representing an approximately 13% ownership position in Navitor Inc.
In March 2021, Navitor Inc. underwent a legal restructuring. In the restructuring, Navitor Inc. became a wholly owned subsidiary of a newly formed limited liability company, Navitor LLC, and nine months ended September 30, 2019, respectively.the outstanding shares of stock in Navitor Inc. were exchanged for units of membership interest in Navitor LLC having equivalent rights and preferences (Navitor Restructuring). As part of the Navitor Restructuring, the Series D Preferred Shares previously held by the Company were exchanged for Series D Preferred Units in Navitor LLC. In addition, certain assets that did not relate to NV-5138 (SPN-820) were transferred from Navitor Inc. to a newly formed entity that became a separate, wholly owned subsidiary of Navitor LLC.
The Company had determined that Navitor LLC is a VIE. The Company does not consolidate this VIE because the Company lacks the power to direct the activities that most significantly impact the investee’s economic performance.
Prior to the Navitor Restructuring, the investment was accounted for under the practical expedient allowed for equity securities without readily determinable fair value, which is cost minus impairment plus any changes in observable price changes from an orderly transaction of similar investments in Navitor Inc. Following the legal restructuring and exchange of the preferred shares to member equity units of Navitor LLC, the investment was accounted for under the equity method of accounting due to the Company’s ability to exert significant influence, but not control the financial and operating decisions. The majority of the assets and liabilities recorded in Navitor LLC’s financial statements represent working capital items and cash that are being used for research and development purposes and are significantly lower than the Company’s investment in Navitor LLC. This created a significant basis difference for the Company’s investment in the underlying net assets, requiring the Company to account for the investee as if it were a consolidated subsidiary in a manner consistent with the provisions of ASC 805, Business Consolidation, to apply the acquisition method of accounting. The Company has determined that substantially all of the fair value of the investment is attributable to a single IPR&D asset. As a result, the investee is not considered a business as defined in ASC 805. In the first quarter of 2021, the $15 million investment, which was previously recorded in Other assets in the condensed consolidated balance sheets, was expensed and recorded in Research and development expense in the condensed consolidated statements of earnings.
The maximum exposure to losses related to the investee is a maximum of approximately $50 million in expense for Phase I and Phase II development of NV-5138 (SPN-820), and the cost of other development and formulation activities provided by the Company.
We have provided no financing to the investee other than amounts required under the Development Agreement.
5.6. Fair Value of Financial InstrumentsMeasurements
The fair value of an asset or liability represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between unrelated market participants.
The Company reports the fair value of assets and liabilities using a three level measurement hierarchy that prioritizes the inputs used to measure fair value. TheFair value hierarchy consists of the following three levels of inputs used to measure fair value are as follows:levels:
•Level 1—Inputs areValuations based on unadjusted quoted prices in active markets that are accessible at measurement date 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 areValuations based on quoted prices for similar assets andor liabilities in active markets;markets, quoted prices for identical or similar assets andor liabilities in markets that are not active;active and model-based valuations in which all significant inputs other than quoted prices but that are observable forin the assetmarket, either directly or liabilityindirectly (e.g., interest rates; yield curves); and inputs that are derived principally from or corroborated by observable market data, by correlation, or by other means (i.e., market corroborated inputs). Level 2 assets include: investment grade corporate debt securities; U.S. government agency and municipal debt securities; other fixed income securities; and SERP (Supplemental Executive Retirement Plan) assets. The fair value of the restricted marketable securities is recorded in Other assets on the condensed consolidated balance sheets.
•Level 3—UnobservableValuations using significant inputs that are unobservable in the market and inputs that reflect the Company’s own assumptions. These are based on the best information available, including the Company’s own data.
Other assets on the condensed consolidated balance sheets. There were 0 level 3 financial assets as of September 30, 2020March 31, 2021 or December 31, 2019.
Financial Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The Company’s financial assets that are required to be measured at fair value on a recurring basis are as follows (dollars in thousands): | | | Fair Value Measurements at September 30, 2020 (unaudited) | | Fair Value Measurements at March 31, 2021 (unaudited) |
| | Total Fair Value at September 30,
2020 | | Quoted Prices
in Active Markets
for Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Total Fair Value at March 31,
2021 | | Level 1 | | Level 2 | | Level 3 |
| Assets: | Assets: | | | | | | Assets: | | | | | | | |
| Cash and cash equivalents | Cash and cash equivalents | | Cash and cash equivalents | |
| Cash | Cash | $ | 188,974 | | | $ | 188,974 | | | $ | 0 | | Cash | $ | 154,245 | | | $ | 154,245 | | | $ | 0 | | | $ | 0 | |
| Money market funds | Money market funds | 15,319 | | | 15,319 | | | 0 | | Money market funds | 101,397 | | | 101,397 | | | 0 | | | 0 | |
| Marketable securities | Marketable securities | | Marketable securities | |
| Corporate debt securities | Corporate debt securities | 147,657 | | | 0 | | | 147,657 | | Corporate debt securities | 135,459 | | | 255 | | | 135,204 | | | 0 | |
| | Long term marketable securities | Long term marketable securities | | Long term marketable securities | |
| Corporate debt securities | Corporate debt securities | 388,185 | | | 258 | | | 387,927 | | Corporate debt securities | 416,566 | | | 0 | | | 416,566 | | | 0 | |
| | Other noncurrent assets | Other noncurrent assets | | Other noncurrent assets | |
| Marketable securities - restricted (SERP) | Marketable securities - restricted (SERP) | 464 | | | 2 | | | 462 | | Marketable securities - restricted (SERP) | 559 | | | 4 | | | 555 | | | 0 | |
| Total assets at fair value | Total assets at fair value | $ | 740,599 | | | $ | 204,553 | | | $ | 536,046 | | Total assets at fair value | $ | 808,226 | | | $ | 255,901 | | | $ | 552,325 | | | $ | 0 | |
| Liabilities: | | Liabilities: | | | | | | | |
| Contingent consideration | | Contingent consideration | $ | 77,720 | | | $ | 0 | | | $ | 0 | | | $ | 77,720 | |
| Total liabilities at fair value | | Total liabilities at fair value | $ | 77,720 | | | $ | 0 | | | $ | 0 | | | $ | 77,720 | |
| | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2019 |
| Total Fair Value at December 31,
2019 | | Quoted Prices
in Active Markets
for Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) |
| Assets: | | | | | |
| Cash and cash equivalents | | | | | |
| Cash | $ | 78,912 | | | $ | 78,912 | | | $ | 0 | |
| Money market funds | 102,469 | | | 102,469 | | | 0 | |
| Marketable securities | | | | | |
| Corporate debt securities | 165,527 | | | 0 | | | 165,527 | |
| Municipal debt securities | 165 | | | 0 | | | 165 | |
| Long term marketable securities | | | | | |
| Corporate debt securities | 571,828 | | | 254 | | | 571,574 | |
| U.S. government agency and municipal debt securities | 19,945 | | | 0 | | | 19,945 | |
| Other noncurrent assets | | | | | |
| Marketable securities - restricted (SERP) | 418 | | | 3 | | | 415 | |
| Total assets at fair value | $ | 939,264 | | | $ | 181,638 | | | $ | 757,626 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2020 |
| Total Fair Value at December 31,
2020 | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Cash and cash equivalents | | | | | | | |
| Cash | $ | 218,550 | | | $ | 218,550 | | | $ | 0 | | | $ | 0 | |
| Money market funds | 70,090 | | | 70,090 | | | 0 | | | 0 | |
| Marketable securities | | | | | | | |
| Corporate debt securities | 133,893 | | | 0 | | | 133,893 | | | 0 | |
| Long term marketable securities | | | | | | | |
| Corporate debt securities | 350,359 | | | 256 | | | 350,103 | | | 0 | |
| Other noncurrent assets | | | | | | | |
| Marketable securities - restricted (SERP) | 547 | | | 3 | | | 544 | | | 0 | |
| Total assets at fair value | $ | 773,439 | | | $ | 288,899 | | | $ | 484,540 | | | $ | 0 | |
| Liabilities: | | | | | | | |
| Contingent consideration | $ | 76,700 | | | $ | 0 | | | $ | 0 | | | 76,700 | |
| Total liabilities at fair value | $ | 76,700 | | | $ | 0 | | | $ | 0 | | | $ | 76,700 | |
Other Financial Instruments
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): | | | | | | | | | | | |
| September 30,
2020 | | December 31, 2019 |
| (unaudited) | | |
| Corporate and U.S. government agency and municipal debt securities | | | |
| Amortized cost | $ | 522,920 | | | $ | 747,598 | |
| Gross unrealized gains | 13,835 | | | 10,031 | |
| Gross unrealized losses | (913) | | | (164) | |
| Total fair value | $ | 535,842 | | | $ | 757,465 | |
The contractual maturities of the unrestricted available-for-sale marketable securitiesCompany also had an investment in Navitor LLC, a privately held by the Company arecompany, which it classifies as follows, (dollars in thousands): | | | | | |
| September 30,
2020 |
| (unaudited) |
Less than 1 year | $ | 147,657 | |
1 year to 2 years | 142,272 | |
2 years to 3 years | 136,095 | |
3 years to 4 years | 109,818 | |
Greater than 4 years | 0 | |
Total | $ | 535,842 | |
As of September 30, 2020, there was 0 impairment due to credit loss on any available-for-sale marketable securities.
Financial Liabilities Recorded at Fair Value
As of September 30, 2020, the Company had Level 3 liabilities relatedas it does not have a readily determinable fair value. In the first quarter of 2021, the $15 million investment in Navitor LLC was expensed. Refer to the contingent consideration from the USWM Acquisition. Note 5, Investments.
Contingent Consideration
The contingent consideration liabilities are measured at fair value on a recurring basis, using the same methodology as of the acquisition date; i.e., using the Monte Carlo simulation for the sales-based milestones, and the income approach for the other milestones. Refer to Note 3 for further discussion of significant inputs and assumptions used for the valuation of the contingent consideration as of the acquisition date.
The inputs and assumptions may not be observable in the market. These reflect the assumptions the Company believes would be made by a market participant. Changes in any of those inputs together, or in isolation, may result in significantly lower or higher fair value measurement.
The following table provides a reconciliation of the beginning and ending balances related to the contingent consideration fromfor the USWM Acquisition (dollars in thousands):
| | | | | |
| September 30,March 31,
20202021 |
| (unaudited) |
Balance at December 31, 20192020 | $ | 0 | |
Initial estimate of contingent consideration | 115,70076,700 | |
| Change in fair value recognized in earnings | 2001,020 | |
Balance at September 30, 2020March 31, 2021 | $ | 115,90077,720 | |
The change in estimated fair value of contingent consideration related to the USWM Acquisition during the three months ended September 30, 2020 is primarily due to changes in estimates associated with the amount and timing of projected cash flows.
Financial Liabilities Recorded at Carrying Value7. Goodwill and Intangible Assets, Net
The following table sets forth the gross carrying valueamounts and fair valuerelated accumulated amortization of the Company’s financial liabilities that are not carried at fair valueintangibles assets and goodwill (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (unaudited) | | | | |
| Carrying Value | | Fair Value (Level 2) | | Carrying Value | | Fair Value (Level 2) |
| Convertible notes, net | $ | 357,521 | | | $ | 372,816 | | | $ | 345,170 | | | $ | 366,023 | |
| | | | | | | | | | | | | | | | | |
| Remaining Weighted-
Average Life (Years) | | March 31,
2021 | | December 31,
2020 |
| (unaudited) |
| Goodwill | | | $ | 77,911 | | | $ | 77,911 | |
| Intangible assets: | | | | | |
| Acquired IPR&D | | | $ | 123,000 | | | $ | 123,000 | |
| Definite-lived intangible assets | | | | | |
| Acquired developed technology and product rights | 9.75 - 11.75 | | 232,000 | | | 232,000 | |
| Capitalized patent defense costs | 1.75 - 6.00 | | 43,980 | | | 43,579 | |
| Less accumulated amortization | | | (40,244) | | | (34,237) | |
| Total intangible assets, net | | | $ | 358,736 | | | $ | 364,342 | |
Patent defense costs, which are deferred legal fees incurred in conjunction with defending patents for Oxtellar XR and Trokendi XR. U.S. patents covering Oxtellar XR and Trokendi XR will expire no earlier than 2027. As regards Trokendi XR, the Company entered into settlement agreements that allow third parties to enter the market by January 1, 2023, or earlier under certain circumstances.
Amortization expense for intangible assets was approximately $6.0 million and $1.3 million, for the three month periods ended March 31, 2021 and 2020, respectively. The fair value has been estimated based on actual trading information as well as quoted prices, both provided by bond traders.increase in expense is due to amortization of the acquired developed technology and product rights from the USWM Acquisition.
As of March 31, 2021, there were no identified indicators of impairment.
6.8. Convertible Senior Notes Due 2023
The 0.625% Convertible Senior Notes Due 2023 (2023 Notes), which were issued in March 2018, bear interest at an annual rate of 0.625%, payable semi-annually in arrears on April 1 and October 1 of each year. The 2023 Notes will mature on April 1, 2023, unless earlier converted or repurchased by the Company. The Notes are being amortized to interest expense at an effective interest rate of 5.41% over the contractual term of the 2023 Notes. The Company may not redeem the 2023 Notes at its option before maturity. The total principal amount of 2023 Notes is $402.5 million.
The 2023 Notes were issued pursuant to an Indenture between the Company and Wilmington Trust, National Association, as trustee. The Indenture includes customary terms and covenants, including certain events of default upon which the 2023 Notes may be due and payable immediately. The Indenture does not contain any financial or operating covenants, or any restrictions on the payment of dividends, the issuance of other indebtedness, or the issuance or repurchase of securities by the Company.
Noteholders may convert their 2023 Notes at their option only in the following circumstances: (1) during any calendar quarter, if the last reported sale price per share of the Company's common stock for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including the last trading day of the immediately preceding calendar quarter, exceeds 130% of the conversion price, or a price of approximately $77.13 per share on such trading day; (2) during the 5 consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the "measurement period") in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company's common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company's common stock, as specified in the Indenture; and (4) at any time from and including October 1, 2022, until the close of business on the second scheduled trading day immediately before the maturity date.
At its election, the Company will settle conversions by paying or delivering, as applicable, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, based on the applicable conversion rate. The initial conversion rate is 16.8545 shares per $1,000 principal amount of the 2023 Notes, which represents an initial conversion price of approximately $59.33 per share, and is subject to adjustment as specified in the Indenture. In the event
of conversion, if converted in cash, the holders would forgo all future interest payments, any unpaid accrued interest, and the possibility of further stock price appreciation.
If a “make-whole fundamental change,” as defined in the Indenture occurs, then the Company will in certain circumstances increase the conversion rate for a specified period of time. If a “fundamental change,” as defined in the Indenture occurs, then noteholders may require the Company to repurchase their 2023 Notes at a cash repurchase price equal to the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest, if any.
Contemporaneous with the issuance of the 2023 Notes, the Company also entered into separate privately negotiated convertible note hedge transactions (collectively, the Convertible Note Hedge Transactions) with each of the call spread counterparties. The Company issued 402,500 convertible note hedge options. In the event that shares or cash are deliverable to holders of the 2023 Notes upon conversion at limits defined in the Indenture, counterparties to the convertible note hedges will be required to deliver up to approximately 6.8 million shares of the Company’s common stock, or to pay cash to the Company in a similar amount as the value that the Company delivers to the holders of the 2023 Notes, based on a conversion price of $59.33 per share.
Concurrently with entering into the Convertible Note Hedge Transactions, the Company also entered into separate privately negotiated warrant transactions (collectively, the Warrant Transactions) with each of the call spread counterparties. The Company issued a total of 6,783,939 warrants. The warrants entitle the holder to 1 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 were 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): | | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| (unaudited) | | |
| 2023 Notes | $ | 402,500 | | | $ | 402,500 | |
| Unamortized debt discount and deferred financing costs | (44,979) | | | (57,330) | |
| Total carrying value | $ | 357,521 | | | $ | 345,170 | |
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| (unaudited) | | |
| 2023 Notes | $ | 402,500 | | | $ | 402,500 | |
| Unamortized debt discount and deferred financing costs | (36,462) | | | (40,749) | |
| Total carrying value | $ | 366,038 | | | $ | 361,751 | |
| | | |
| Fair value (Level 2) | $ | 389,922 | | | $ | 383,381 | |
NaN 2023 Notes were converted as of September 30, 2020March 31, 2021 or December 31, 2019.2020.
7.9. Share-Based Payments
Share-based compensation expense is as follows (dollars in thousands): | | | Three Months ended
September 30, | | Nine Months ended
September 30, | | Three Months ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 |
| | (unaudited) | | (unaudited) | | (unaudited) |
| Research and development | Research and development | $ | 777 | | | $ | 680 | | | $ | 2,276 | | | $ | 1,954 | | Research and development | $ | 588 | | | $ | 681 | |
| Selling, general and administrative | Selling, general and administrative | 3,713 | | | 3,234 | | | 11,164 | | | 9,269 | | Selling, general and administrative | 3,783 | | | 3,307 | |
| Total | Total | $ | 4,490 | | | $ | 3,914 | | | $ | 13,440 | | | $ | 11,223 | | Total | $ | 4,371 | | | $ | 3,988 | |
Stock Option and Stock Appreciation Rights
The following table summarizes stock option and stock appreciation rights (SAR) activities: | | | Number of
Options | | Weighted-
Average
Exercise Price
(per share) | | Weighted-
Average
Remaining
Contractual
Term (in years) | | Number of
Options | | Weighted-
Average
Exercise Price
(per share) | | Weighted-
Average
Remaining
Contractual
Term (in years) |
| Outstanding, December 31, 2019 | 4,606,559 | | | $ | 23.05 | | | 6.66 | |
| Outstanding, December 31, 2020 | | Outstanding, December 31, 2020 | 5,451,862 | | | $ | 23.26 | | | 6.28 |
| Granted | Granted | 1,210,025 | | | $ | 23.86 | | | Granted | 789,275 | | | $ | 29.61 | | |
| Exercised | Exercised | (56,873) | | | $ | 9.93 | | | Exercised | (99,600) | | | $ | 22.57 | | |
| Forfeited | Forfeited | (50,875) | | | $ | 26.51 | | | Forfeited | (117,313) | | | $ | 32.13 | | |
| Outstanding, September 30, 2020 (unaudited) | 5,708,836 | | | $ | 23.32 | | | 6.67 | |
| Outstanding, March 31, 2021 (unaudited) | | Outstanding, March 31, 2021 (unaudited) | 6,024,224 | | | $ | 23.93 | | | 6.66 |
| | As of December 31, 2019: | | |
| As of December 31, 2020: | | As of December 31, 2020: | |
| Vested and expected to vest | Vested and expected to vest | 4,606,559 | | | $ | 23.05 | | | 6.66 | Vested and expected to vest | 5,451,862 | | | $ | 23.26 | | | 6.28 |
| Exercisable | Exercisable | 2,598,112 | | | $ | 15.68 | | | 5.48 | Exercisable | 3,218,771 | | | $ | 19.36 | | | 4.77 |
| | As of September 30, 2020: | | |
| As of March 31, 2021: | | As of March 31, 2021: | |
| Vested and expected to vest | Vested and expected to vest | 5,708,836 | | | $ | 23.32 | | | 6.86 | Vested and expected to vest | 6,024,224 | | | $ | 23.93 | | | 6.66 |
| Exercisable | Exercisable | 3,347,884 | | | $ | 18.96 | | | 5.31 | Exercisable | 3,806,149 | | | $ | 21.06 | | | 5.29 |
Restricted Stock Units
During the nine months ended September 30, 2020, the Company granted 26,055 RSUs, with a weighted average grant date fair value per share of $23.99. These RSUs generally vest one year from the date of grant. | | | | | | | | | | | |
| Number of
RSUs | | Weighted-Average
Grant Date Fair Value per Share |
| Nonvested, December 31, 2020 | 26,055 | | | $ | 23.99 | |
| Granted | 21,110 | | | $ | 29.61 | |
| Vested | (26,055) | | | $ | 23.99 | |
| Forfeited | 0 | | | $ | 0 | |
| Nonvested, March 31, 2021 | 21,110 | | | $ | 29.61 | |
Performance Share Units
The following table summarizes performance share unit (PSU) activities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performance-Based Units | | Market-Based Units | | Total PSUs |
| Number of PSUs | | Weighted-
Average
Grant Date Fair Value per Share | | Number of PSUs | | Weighted-
Average
Grant Date Fair Value per Share | | Number of PSUs | | Weighted-
Average
Grant Date Fair Value per Share |
| Nonvested, December 31, 2020 | 0 | | | $ | 0 | | | 15,625 | | | $ | 23.41 | | | 15,625 | | | $ | 23.41 | |
| Granted | 80,000 | | | $ | 29.61 | | | 20,000 | | | $ | 28.63 | | | 100,000 | | | $ | 29.41 | |
| Nonvested, March 31, 2021 | 80,000 | | $ | 29.61 | | | 35,625 | | $ | 26.34 | | | 115,625 | | $ | 28.60 | |
There were 0 vested and forfeited PSU awards during the three months ended March 31, 2021.
Performance Stock Units
Performance-Based Awards
During the nine months ended September 30, 2020, the Company granted 31,250 performance-based awards, with a weighted average grant date fair value per share of $21.35. These awards require certain performance targets to be achieved in order to vest. Vesting is also subject to continued service requirements through the date that the achievement of the performance target is certified. As of September 30, 2020, all of the performance-based awards were vested and issued as shares outstanding.
Market-Based Awards
During the nine months ended September 30, 2020, the Company granted 15,625 market-based awards, with a weighted average grant date fair value per share of $23.41. These awards are subject to achievement of market-based performance targets in order to vest.
8.10. Earnings per Share
Basic earnings per share (EPS) is calculated using the weighted-average number of common shares outstanding. Diluted EPS is calculated using the weighted-average number of common shares outstanding, including the dilutive effect of the Company’s stock option grants, SARs, RSUs, warrants, employee stock purchase plan (ESPP) awards, and the 2023 Notes, as determined per the treasury stock method.
Effect of Convertible Notes and Related Convertible Note Hedges and Warrants
In connection with the issuance of the 2023 Notes, the Company entered into Convertible Note Hedge and Warrant Transactions as described further in Note 6,8, Convertible Senior Notes Due 2023. The expected collective impact of the Convertible Note Hedge and Warrant Transactions is to reduce the potential dilution that would occur if the price of the Company's common stock was between the conversion price of $59.33 per share and the strike price of the warrants of $80.9063 per share.
The 2023 Notes and related Convertible Note Hedge and Warrant Transactions are excluded in the calculation of diluted EPS because inclusion would be anti-dilutive. Specifically, the denominator of the diluted EPS calculation excludes the additional shares related to the 2023 Notes and warrants because the average price of the Company's common stock was less than the conversion price of the 2023 Notes, $59.33 per share, as well as less than the strike price of the warrants, $80.9063 per share. Prior to actual conversion, the Convertible Note Hedge Transactions are not considered in calculating diluted earnings per share, as their impact would be anti-dilutive.
In addition to the above described effect of the 2023 Notes and the related Convertible Note Hedge and Warrant Transactions, the Company also excluded the common stock equivalents of the following outstanding stock-based awards in the calculation of diluted EPS, because their inclusion would be anti-dilutive: | | | | | | | | | | | | | | | | | | | | |
| Three Months ended
September 30, | Nine Months ended September 30, |
| 2020 | | 2019 | 2020 | | 2019 |
| (unaudited) | (unaudited) |
| | | | | | |
| | | | | | |
| | | | | | |
| Stock options, RSUs, PSUs | 2,677,770 | | | 1,395,138 | | 2,905,469 | | | 961,605 | |
| | | | | | | | | | | |
| Three Months ended
March 31, |
| 2021 | | 2020 |
| (unaudited) |
| | | |
| | | |
| | | |
| Stock options, RSUs | 1,419,203 | | | 3,034,099 | |
The following table sets forth the computation of basic and diluted net earnings per share for the three and nine months ended September 30,March 31, 2021 and 2020 and 2019 (dollars in thousands, except share and per share amounts): | | | Three Months ended
September 30, | | Nine Months ended
September 30, | | Three Months ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 |
| | (unaudited) | | (unaudited) | | (unaudited) |
| Numerator, dollars in thousands: | | |
| Numerator: | | Numerator: | |
| Net earnings | Net earnings | $ | 39,997 | | | $ | 28,860 | | | $ | 96,182 | | | $ | 79,927 | | Net earnings | $ | 5,694 | | | $ | 21,518 | |
| | Denominator: | Denominator: | | Denominator: | |
| Weighted average shares outstanding, basic | Weighted average shares outstanding, basic | 52,658,850 | | | 52,453,384 | | | 52,583,891 | | | 52,392,232 | | Weighted average shares outstanding, basic | 52,927,467 | | | 52,534,787 | |
| | Effect of dilutive securities: | Effect of dilutive securities: | | Effect of dilutive securities: | |
| Stock options, RSUs and SARs | Stock options, RSUs and SARs | 1,103,792 | | | 1,352,454 | | | 1,079,382 | | | 1,506,254 | | Stock options, RSUs and SARs | 1,269,504 | | | 1,046,264 | |
| Weighted average shares outstanding, diluted | Weighted average shares outstanding, diluted | 53,762,642 | | | 53,805,838 | | | 53,663,273 | | | 53,898,486 | | Weighted average shares outstanding, diluted | 54,196,971 | | | 53,581,051 | |
| | Earnings per share, basic | Earnings per share, basic | $ | 0.76 | | | $ | 0.55 | | | $ | 1.83 | | | $ | 1.53 | | Earnings per share, basic | $ | 0.11 | | | $ | 0.41 | |
| Earnings per share, diluted | Earnings per share, diluted | $ | 0.74 | | | $ | 0.54 | | | $ | 1.79 | | | $ | 1.48 | | Earnings per share, diluted | $ | 0.11 | | | $ | 0.40 | |
11. Income Tax Expense
The following table provides information regarding the Company’s income tax expense for the three and nine months ended September 30,March 31, 2021 and 2020 and 2019 (dollars in thousands): | | | Three Months ended
September 30, | | Nine Months ended
September 30, | | Three Months ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 |
| | (unaudited) | | (unaudited) | | (unaudited) |
| Income tax expense | Income tax expense | $ | 12,714 | | | $ | 10,730 | | | $ | 32,773 | | | $ | 26,648 | | Income tax expense | $ | 5,235 | | | $ | 7,516 | |
| Effective tax rate | Effective tax rate | 24.1 | % | | 27.1 | % | | 25.4 | % | | 25.0 | % | Effective tax rate | 47.9 | % | | 25.9 | % |
Income tax expense for the three and nine months ended September 30, 2020, as compared to same period in the prior year, increased due to higher income before taxes, increased number of states in which the Company owes taxes and an increase in non-deductible expenses consequent to the USWM Acquisition.
Accordingly, the effective income tax rate for the nine months ended September 30, 2020 also increased,March 31, 2021, as compared to the same period in the prior year.year, decreased mainly due to lower earnings before taxes. The effective income tax rate for the three months ended September 30, 2020 decreased due to greater research and development tax credits recognized in the quarter.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act is an emergency economic stimulus package that includes spending and tax incentives to strengthen the U.S. economy and to fund a nationwide effort to curtail the effect of the COVID-19 pandemic. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses, increasing the ability to deduct interest expense, and amending certain provisions of the previously enacted Tax Cuts and Jobs Act.
As of September 30, 2020, the Company expects that these provisions will not have a material impact, as the Company does not have net operating losses that would fall under the provisions of this legislation, nor does it expect interest expense to be limited. The ultimate impact of the CARES Act may differ from this estimateincrease was due to changes in interpretationsthe effective state tax rates as a result of the transfer of workforce between legal entities and assumptions, additional guidance that may be issued, and actions the Company may take in responselower earnings before taxes due to the CARES Act. The CARES Act is highly technical and complex. The Company will continue to assessexpensing of the impact that various provisions may have on its business.Navitor investment in the first quarter of 2021.
10.12. Leases
Operating Leases
The Company has entered into operating leases for its new headquarters office, at 9715 Key West Ave, Rockville, MD,lease and for its fleet vehicles. With respect to the fleet vehicle leases, given the volume of individual leases involved in the overall arrangement, the Company applies a portfolio approach to effectively account for the operating lease assets and liabilities.
Table of Contents The Company also elected to combine the lease and non-lease components for the fleet vehicle and headquarters leases.
The Company's 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.
Finance Lease
Contemporaneous with the USWM Acquisition, USWM Enterprises adopted ASC 842, Leases. USWM Enterprises had an existing contract manufacturing agreement with Merz Pharma GmbH & Co. KGaA (Merz), for the manufacture and supply of MYOBLOC (rimabotulinumtoxinB) and NerBloc® (finished products) (Merz Agreement). Pursuant to the Merz Agreement, Merz agreed to provide a dedicated manufacturing facility that included a stand-alone building, dedicated clean room suites, dedicated manufacturing and purification equipment, and filling and packaging production lines (collectively, the manufacturing facility) to manufacture MYOBLOC.finished products. The Merz Agreement will expire in July 2027, unless the Company and Merz mutually agree to extend the terms. The Merz Agreement may not be terminated for convenience. In addition, the Company's collaboration partner markets the drug in MYOBLOC, rimabotulinumtoxinB, in Japan under the trade name NerBloc.
Under the terms of the agreement, the Company is required to purchase a minimum quantity of MYOBLOCfinished products on an annual basis. This minimum purchase requirement represents the in-substance fixed contract consideration associated with the dedicated manufacturing facility.facility which the Company accounts for as an embedded lease.
The embedded lease is preliminarily classified as a finance lease. The in-substance fixed contract consideration was allocated to the lease component, since the Company has preliminarily elected not to separate lease and non-lease components.
As of the Closing Date, the finance right of use (ROU) lease asset and corresponding ROU lease liability relating to the dedicated manufacturing facility was $22.7 million. The finance ROU lease asset and ROU lease liability represent the present value of estimated future payments; i.e., the minimum purchase obligations as of the Closing Date. The present value was computed by using an incremental borrowing rate of 2.5%. The embedded lease is preliminarily classified as a finance lease.
The Company recognized $0.8 million and $1.1 million of fixed lease costs on the finance lease, respectively, for the three and nine months ended September 30, 2020. Purchases of MYOBLOC in excess of the annual minimum purchase obligations will be recorded as variable lease cost. Refer to Note 3, USWM Acquisition, for further discussiondiscussion.
Operating and finance lease assets and lease liabilities as reported on the USWM Acquisition.condensed consolidated balance sheets are as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Balance Sheet Classification | | March 31, 2021 | | December 31, 2020 |
| | | (unaudited) | | |
| Assets | | | | | |
| Operating lease assets | Other assets | | $ | 20,808 | | | $ | 20,231 | |
| Finance lease asset | Property and equipment, net | | 20,071 | | | 20,874 | |
| Total lease assets | | | $ | 40,879 | | | $ | 41,105 | |
| | | | | |
| Liabilities | | | | | |
| Lease liabilities, current | | | | | |
| Operating lease liabilities, current portion | Accounts payable and accrued liabilities | | $ | 4,242 | | | $ | 3,760 | |
| Finance lease liability, current portion | Other current liabilities | | 4,677 | | | 3,761 | |
| Lease liabilities, long term | | | | | |
| Operating lease liabilities, long term | Operating lease liabilities, long term | | 28,532 | | | 28,579 | |
| Finance lease liability, long term | Other liabilities | | 18,499 | | | 20,235 | |
| Total lease liabilities | | | $ | 55,950 | | | $ | 56,335 | |
11. 13. Composition of Other Balance Sheet Items
The following details the composition of other balance sheet items (dollars in thousands for amounts in tables):
Accounts Receivable
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, the Company recorded allowances ofhas reduced accounts receivable by approximately $11.1$10.9 million and $11.0$11.4 million, respectively, for promptrespectively. Prompt pay discountsdiscount and contractual service fees, which were originally recorded as reduction to revenues, represents estimated amounts not expected to be paid to the Company’sby our customers. The Company's customers are primarily pharmaceutical wholesalers and distributors and specialty pharmacies. Receivables from our three major customers account for more than 90% of our total receivables.
12. Inventories
Inventories consist of the following (dollars in thousands): | | | September 30,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
| | (unaudited) | | | | (unaudited) | | |
| Raw materials | Raw materials | $ | 9,528 | | | $ | 4,582 | | Raw materials | $ | 25,987 | | | $ | 22,208 | |
| Work in process | Work in process | 17,571 | | | 11,428 | | Work in process | 9,330 | | | 8,985 | |
| Finished goods | Finished goods | 15,366 | | | 10,618 | | Finished goods | 14,909 | | | 17,132 | |
| Total | Total | $ | 42,465 | | | $ | 26,628 | | Total | $ | 50,226 | | | $ | 48,325 | |
As of September 30, 2020,In April 2021, the Company capitalized $11.3 millionreceived regulatory approval for SPN-812 (Qelbree) for the treatment of pre-launchADHD in pediatric patients 6 to 17 years of age. Pre-launch inventory costs for SPN-812. AsQelbree was $24.0 million and $19.1 million as of March 31, 2021 and December 31, 2019, the Company had 0t capitalized any pre-launch inventory costs. Refer to Note 2 for discussion of the Company's accounting policy.2020, respectively.
Inventories include acquired inventory from the USWM Acquisition. Refer to Note 3, USWM Acquisition, for further discussion of the USWM Acquisition.
13. Investments in Unconsolidated VIEs
In April 2020, the Company entered into a Development and Option Agreement (Development Agreement) with Navitor Pharmaceuticals, Inc. (Navitor). The Company can terminate the Development Agreement upon 30 days’ notice.
Under the terms of the Development Agreement, the Company and Navitor will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) for treatment-resistant depression. The Company will bear all of the Phase I and Phase II development costs incurred by either party, up to a maximum of $50 million. In addition, the Company will incur certain other research and development support costs.
There are certain additional payment amounts which could be incurred by the Company. These costs are contingent upon Navitor achieving defined development milestones.
The Company has an option to acquire or license NV-5138 (SPN-820), for which additional payments would be required. The Company paid Navitor a one time, nonrefundable, and non-creditable fee of $10 million for the option to acquire or license NV-5138 (SPN-820). This expense is included in Research and development expense in the condensed consolidated statement of earnings for the nine months ended September 30, 2020.
In addition to entering into the Development Agreement, the Company acquired Series D Preferred Shares of Navitor for $15 million, representing an approximately 13% ownership position in Navitor. The Company has determined that Navitor is a VIE. The Company has not consolidated this VIE because the Company lacks the power to direct the activities that most significantly impact Navitor’s economic performance. This investment is accounted for under the practical expedient allowed for equity securities without readily determinable fair value, which is cost minus impairment plus any changes in observable price changes from an orderly transaction of similar investments of Navitor. The investment is recorded in Other assets in the condensed consolidated balance sheets.
As of September 30, 2020, the carrying value of our investment in Navitor was approximately $15 million. The maximum exposure to losses related to Navitor is limited to: the $15 million carrying value of the investment; a maximum of approximately $50 million in expense for Phase I and Phase II development of NV-5138 (SPN-820); and the cost of other development and formulation activities provided by the Company.
We have provided no financing to Navitor other than amounts required under the Development Agreement.
14. Property and Equipment
Property and equipment consists of the following (dollars in thousands): | | | September 30,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
| | (unaudited) | | | | (unaudited) | | |
| Lab equipment and furniture | Lab equipment and furniture | $ | 12,374 | | | $ | 11,053 | | Lab equipment and furniture | $ | 13,322 | | | $ | 12,526 | |
| Leasehold improvements | Leasehold improvements | 15,185 | | | 14,217 | | Leasehold improvements | 12,453 | | | 15,183 | |
| Software | Software | 2,225 | | | 2,225 | | Software | 2,260 | | | 2,295 | |
| Finance lease assets | | Finance lease assets | 22,747 | | | 22,747 | |
| Computer equipment | Computer equipment | 2,089 | | | 1,839 | | Computer equipment | 1,839 | | | 2,113 | |
| Construction-in-progress | 34 | | | 433 | | |
| | 31,907 | | | 29,767 | | | 52,621 | | | 54,864 | |
| Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | (14,512) | | | (12,699) | | Less accumulated depreciation and amortization | (14,671) | | | (17,040) | |
| Total | Total | $ | 17,395 | | | $ | 17,068 | | Total | $ | 37,950 | | | $ | 37,824 | |
Depreciation and amortization expense on property and equipment was approximately $0.7$0.6 million and $1.8$0.5 million for the three and nine months ended September 30,March 31, 2021, and 2020, respectively,respectively. The Company retired certain fully depreciated property and approximately $0.4 million and $1.1 millionequipment for the three and nine months ended September 30, 2019.March 31, 2021.
As of September 30, 2020,March 31, 2021, there were no identified indicators of impairment.
Accrued Payable and Accrued Liabilities
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| (unaudited) | | |
| Accrued compensation | $ | 13,080 | | | $ | 16,008 | |
Accrued royalties (1) | 10,635 | | | 13,890 | |
Accrued clinical trial costs (2) | 10,281 | | | 12,842 | |
| Accounts payable | 5,954 | | | 6,147 | |
| Income taxes payable | 5,744 | | | 0 | |
| Accrued product costs | 4,999 | | | 9,587 | |
| Accrued professional fees | 4,524 | | | 7,730 | |
Operating lease liabilities, current portion (3) | 4,242 | | | 3,760 | |
| Other accrued expenses | 10,640 | | | 8,970 | |
| Total | $ | 70,099 | | | $ | 78,934 | |
(1) Refer to Note 15, Commitments and Contingencies.
(2) Includes preclinical and all clinical trial-related costs.
(3) Refer to Note 12, Leases.
Accrued Product Returns and Rebates
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| (unaudited) | | |
| Accrued product rebates | $ | 96,638 | | | $ | 96,589 | |
| Accrued product returns | 32,098 | | | 29,603 | |
| Total | $ | 128,736 | | | $ | 126,192 | |
15. Goodwill and Intangible Assets, NetOther Liabilities
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| | (unaudited) | | |
| Nonrecourse liability related to sale of future royalties, long term | $ | 11,763 | | | $ | 13,410 | |
Finance lease liability, long term (1) | 18,499 | | | 20,235 | |
| Other liabilities | 9,413 | | | 9,146 | |
| Total | $ | 39,675 | | | $ | 42,791 | |
Goodwill represents the excess of the USWM Acquisition purchase price over the fair value of the tangible and identifiable intangible net assets acquired. In the third quarter of 2020, the Company recorded measurement period adjustments to goodwill of $1.0 million. Refer to Note 3 for further discussion of the USWM Acquisition.
12,
Intangible assets also includes: patent defense costs, which are deferred legal fees incurred in conjunction with defending patents for Oxtellar XR and Trokendi XR; an acquired IPR&D asset associated with the USWM acquisition; and acquired developed technology and product rights associated with the USWM acquisition. The Company amortizes intangible assets over their useful lives, except for the acquired IPR&D asset.
The following table sets forthdetails the gross carrying amounts and related accumulated amortizationcomposition of goodwill and intangible assetsinterest expense (dollars in thousands): | | | | | | | | | | | | | | | | | |
| Weighted-
Average Life
(Years) | | September 30,
2020 | | December 31,
2019 |
| (unaudited) |
| Goodwill | | | $ | 89,143 | | | $ | 0 | |
| | | | | |
| Acquired In-process Research & Development | | | $ | 150,000 | | | $ | 0 | |
| Intangible assets subject to amortization: | | | | | |
| Acquired Developed Technology and Product Rights | 10.26 - 12.26 | | 237,000 | | | 0 | |
| Capitalized patent defense costs | 2.25 - 6.50 | | 43,613 | | | 43,375 | |
| Less accumulated amortization | | | (28,348) | | | (18,535) | |
| Total intangible assets, net | | | $ | 402,265 | | | $ | 24,840 | |
U.S. patents covering Oxtellar XR and Trokendi XR will expire no earlier than 2027. As regards Trokendi XR, the Company entered into settlement agreements that allow third parties to enter the market by January 1, 2023, or earlier under certain circumstances.
Amortization expense for intangible assets was approximately $6.1 million and $9.8 million, for the three and nine month periods ended September 30, 2020, respectively, and approximately $1.3 million and $3.9 million, for the three and nine month periods ended September 30, 2019. The increase in expense is due to amortization of the acquired developed technology and product rights from the USWM Acquisition.
As of September 30, 2020, there were no identified indicators of impairment.
16. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (dollars in thousands): | | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| (unaudited) | | |
Accrued clinical trial costs (1) | $ | 6,264 | | | $ | 13,285 | |
| Accrued compensation | 14,892 | | | 11,223 | |
| Accrued professional fees | 2,627 | | | 3,936 | |
| Accrued royalties | 14,678 | | | 0 | |
| Other accrued expenses | 17,828 | | | 5,861 | |
| Total | $ | 56,289 | | | $ | 34,305 | |
(1)Includes preclinical and all clinical trial costs.
17. Accrued Product Returns and Rebates
Accrued product returns and rebates consist of the following (dollars in thousands): | | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| (unaudited) | | |
| Accrued product rebates | $ | 110,543 | | | $ | 88,811 | |
| Accrued product returns | 26,430 | | | 18,818 | |
| Total | $ | 136,973 | | | $ | 107,629 | |
18. Interest Expense
Interest expense consists of the following (dollars in thousands): | | | Three Months ended
September 30, | | Nine Months ended
September 30, | | Three Months ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 |
| | (unaudited) | | (unaudited) | | (unaudited) |
| Interest expense | Interest expense | $ | (4,945) | | | $ | (4,546) | | | $ | (14,430) | | | $ | (13,518) | | Interest expense | $ | (5,062) | | | $ | (4,693) | |
| Interest expense on nonrecourse liability related to sale of future royalties | Interest expense on nonrecourse liability related to sale of future royalties | (1,143) | | | (1,116) | | | (3,228) | | | (3,412) | | Interest expense on nonrecourse liability related to sale of future royalties | (1,035) | | | (1,062) | |
| Total | Total | $ | (6,088) | | | $ | (5,662) | | | $ | (17,658) | | | $ | (16,930) | | Total | $ | (6,097) | | | $ | (5,755) | |
Interest expense includes noncash interest expense related to amortization of deferred financing costs, and amortization of the debt discount on the 2023 Notes. ExpensesNotes of $4.2$4.3 million and $12.4 million were incurred for the three and nine months ended September 30, 2020, respectively, and $4.0 million and $11.7$4.1 million for the three and nine months ended September 30, 2019,March 31, 2021, and 2020, respectively.
19.15. Commitments and Contingencies
Product Licenses
The Company has obtained exclusive licenses from third parties for proprietary rights to support thecertain products and product candidates in the Company’s neurology and psychiatry portfolio.candidates. Under these license agreements, the Company may be required to pay certain amounts upon the achievement of defined milestones. If these products are ultimately commercialized, the Company is also obligated to pay royalties to third parties, computed as a percentage of net product sales, for each respective product under a license agreement.
Through the USWM Acquisition, the Company acquired licensing agreements with other pharmaceutical companies for APOKYN, XADAGO and MYOBLOC. The Company is obligated to pay royalties to third parties, computed as a percentage of net product sales, for each of the products under the respective license agreements. Royalty expense incurred is recognized as Cost of goods sold in the condensed consolidated statementstatements of earnings.
Royalty Agreement
In the third quarter of 2014, the Company received $30.0$30 million pursuant to a Royalty Interest Acquisition Agreement related to the purchase, by HCHealthCare Royalty Partners III, L.P. (HC Royalty), of certain of the Company’s rights under the Company’s agreement with United Therapeutics.Therapeutics Corporation. These rights are related to the commercialization of Orenitram (treprostinil) Extended-Release Tablets. Per the terms of the agreement, full ownership of the royalty rights will revert to the Company if and when a certain cumulative payment threshold is reached (seereached. Consequent to this agreement, the Company recorded a nonrecourse liability related to this transaction and amortizes this liability as noncash royalty revenue. Refer to Note 2, Note 4, and Note 18).
Disaggregated Revenues, and Note 13, Composition of Other Balance Sheet Items.
USWM Enterprise Commitments Assumed
As part of the USWM Acquisition, the Company assumed the remaining commitments of USWM Enterprises and its subsidiaries, which are discussed below.
In addition to the annual minimum purchase quantity requirements of MYOBLOC, amounting to an estimated €3.0 million annually, under the contract manufacturing agreement with Merz for manufacture and supply, USWM Enterprises had an existing license and distribution agreement for XADAGO. This included an annual minimum promotional spend to support the marketing of XADAGO for the first five years of the agreement. As of September 30, 2020,March 31, 2021, the remaining contractual commitments were $4.1$2.4 million, of which $2.1$0.4 million is for the current period October 2020through June 2021 and the remainder is for the period from July 2021 to June 2021. (See2020. Refer to Note 3,USWM Acquisition, for further discussion on the USWM Acquisition and Note 1012, Leases, for further discussion on the Merz Agreement).
Agreement.
In March 2019, which is prior to the USWM Acquisition Closing Date, MDD US Operations, LLC (formerly US WorldMeds, LLC) and its subsidiary, Solstice Neurosciences, LLC (US) (collectively, the MDD Subsidiaries) entered into a Corporate Integrity Agreement (CIA) with the Office of Inspector General of the U.S. Department of Health and Human Services. Under the CIA, the MDD Subsidiaries agreed to and paid $17.5 million to resolve U.S. Department of Justice allegations that it violated the False Claims Act and committed to the establishment and ongoing maintenance of an effective compliance program. The fine was paid by the MDD Subsidiaries prior to closing of the USWM Acquisition. As part of the USWM Acquisition, the Company assumed the remaining obligations of the CIA and could become liable for payment of certain stipulated monetary penalties in the event of any CIA violations. In addition, the Company will continue to incur significant costs through March 2024 to maintain a broad array of processes, policies and procedures necessary to comply with the CIA.
Claims and Litigation
From time to time, the Company may be involved in various claims, litigation and legal proceedings. These matters may involve patent litigation, product liability and other product-related litigation, commercial and other matters, and government investigations, among others. On a quarterly basis, the Company reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated, the Company will accrue a liability for the estimated loss. Because of uncertainties related to claims, legal proceedings and litigation, accruals will be based on the Company's best estimates based on available information. We do not believe that any of these matters will have a material adverse effect on our financial position. The Company may reassess the potential liability related to these matters and may revise these estimates, which could result in material adverse adjustments to the Company's operating results.
16. Subsequent Events
In April 2021, the Company notified the European Medicine Agency that it will cease the marketing of rimabotulinumtoxinB (NeuroBloc) in European countries.
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 condensed consolidated 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, 20192020 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 February 28, 2020.March 8, 2021.
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,” “forecast,” “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 pharmaceuticalbiopharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases. Our diverse neuroscience portfolio includes approved treatments for epilepsy, migraine, attention-deficit hyperactivity disorder (ADHD), hypomobility in Parkinson’s Disease (PD), cervical dystonia, and chronic sialorrhea.We haveare developing a portfoliobroad range of commercial productsnovel CNS product candidates including new potential treatments for ADHD, hypomobility in PD, epilepsy, depression, and product candidates.rare CNS disorders.
OnIn April 21, 2020,2021, the U.S. Food and Drug Administration (FDA) approved Qelbree for the treatment of ADHD in pediatric patients 6 to 17 years of age. The Company entered into a Development and Option Agreement (Development Agreement) with Navitor Pharmaceuticals, Inc. (Navitor). Under the terms of the Development Agreement, the Company and Navitor will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) in treatment-resistant depression (TRD). Initiation of the Phase II clinical program is targetedplans to make Qelbree available in the fourthU.S. during the second quarter of 2021.
On April 28, 2020, the Company entered into a SalesSale and Purchase Agreement with US WorldMeds Partners, LLC to acquire the CNS portfolio of US WorldMeds Partners,USWM Enterprises, LLC (USWM Enterprises) (USWM Acquisition). With the acquisition, completed on June 9, 2020, the Company added three established commercial products and a product candidate in late-stage development to its portfolio. These commercial products, APOKYN, XADAGO, and MYOBLOC, are primarily for the treatment of Parkinson's disease.PD.
COVID-19 ImpactOn April 21, 2020, the Company entered into a Development and Option Agreement (Development Agreement) with Navitor Pharmaceuticals, Inc. (Navitor Inc.). Under the terms of the Development Agreement, the Company and Navitor Inc. will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) in treatment resistant depression (TRD). In addition to entering into the Development Agreement in April 2020, the Company acquired an ownership position in Navitor Inc. In March 2021, Navitor Inc. underwent a legal restructuring whereby Navitor Inc. became a wholly owned subsidiary of a newly formed limited liability company, Navitor Pharmaceuticals, LLC (Navitor LLC) (Navitor Restructuring).
We are closely monitoring the impacthave a portfolio of the COVID-19 pandemic on all aspects of our business operations,commercial products and have assessed the impact of the COVID-19 pandemic on our condensed consolidated financial statements. Although the COVID-19 pandemic has not significantly impacted our condensed consolidated financial statements as of September 30, 2020 and during the three and nine months ended September 30, 2020, it may have future impact, especially if the severity worsens, the duration lengthens, or the nature of the effects changes.product candidates.
The full impact of the COVID-19 pandemic remains uncertain and subject to change. The effects of the pandemic may vary significantly across different aspects of our business operations. We do not and cannot yet know the full extent of potential impact on our execution of clinical trials, new product launches, including SPN-812, our manufacturing and supply chain, or related impacts on our business or financial condition. These effects could include: adverse impact on research and development activities as a result of disruption in clinical projects; adverse impact on selling and marketing efforts as a result of temporarily halting in-person interactions by our sales force with healthcare providers; adverse impact on net product sales as a result of decreased new prescriptions due to fewer patient visits to physicians to begin treatment; potential changes in payer segment mix; increased use of co-pay programs due to rising unemployment; and potential future disruption to our supply chain and manufacturing operations.Commercial Products
These effects could have a material impact on the Company’s liquidity, cash flows, capital resources and business operations. Financial effects could include impairment of intangible and long-lived assets, increased sales deductions that could adversely impact our net product sales, and cash collections and adjustments for market volatility for items subject to fair value measurement, such as marketable securities. See “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q for additional information on risk factors that could impact our business and our results.
For the three and nine months ended September 30, 2020, with the exception of the effects already cited, there has been no material impact on our operations, liquidity and financial position. We expect to continue to generate positive cash flows and to meet our short-term liquidity needs.
Products and Product Candidates
The table below summarizes our current portfolio of novel products and product candidates:
All trademarks are the property of their respective owners.
We have devoted and continue to devote significant resources to research and development activities. We expect to incur significant expenses as we continue developing each of our product candidates through U.S. Food and Drug Administration (FDA) approval, or until the program terminates; expand product indications for approved products; invest in sales and marketing resources to support our existing and new products; enter into agreements to in-license, purchase products, product candidates or other companies; and invest in the support of our business, technology, regulatory and intellectual property portfolio, including integration of acquisitions.
Our Neurology Portfolio
We market and sell the following commercial products in our neurology portfolio:
•Trokendi XR a® (topiramate) is the first once-daily extended release topiramate product indicated for the treatment of epilepsy in the United States (U.S.) market. It is also indicated for the prophylaxis of migraine headache and for the treatment of epilepsy.headache.
•Oxtellar XR a once-daily extended release oxcarbazepine product approved® (oxcarbazepine) is indicated as therapy for treatment of partial onset seizures in adults and children 6 years to 17 years of epilepsy.age and is the first once-daily extended-release oxcarbazepine product indicated for the treatment of epilepsy in the U.S.
Acquired CNS Portfolio•QelbreeTM (viloxazine extended-release capsules) is a novel non-stimulant product indicated for the treatment of ADHD in pediatric patients 6 to 17 years of age.
On June 9, 2020, the Company completed the USWM Acquisition. With the acquisition, the Company added the following established, commercial products and a product candidate in late-stage development to its neurology portfolio.
•APOKYN® (apomorphine hydrochloride injection) is a product indicated for the acute, intermittent treatment of hypomobility or "off" episodes ("end-of-dose wearing off" and unpredictable "on/off""on-off" episodes) in patients with advanced Parkinson’s disease (PD). APOKYN’s adjustable dose subcutaneous injection pen is designed to quickly and reliably reverse the effects of oral levodopa (L-dopa) wearing off in patients with inadequately controlled PD. Patients taking APOKYN saw 95% of OFF episodes reversed, with improvement beginning as quickly as 10 minutes post-dosing in clinical studies. With the alternative of immobility and inability to function, we believe the rapid and reliable reduction of "off" episode symptoms is of utmost importance to patients.
•XADAGO (safinamide) is a once-daily product indicated as adjunctive treatment to levodopa/carbidopa in patients with Parkinson’s disease who are experiencing “off” episodes. XADAGO is a monoamine oxidase B (MAO-B) inhibitor that works by blocking the catabolism of dopamine, which is believed to result in an increase in dopamine levels, and therefore a subsequent increase in dopaminergic activity in the brain. Well-controlled studies have shown XADAGO® may provide a decrease in "off" time of up to one hour per day when combined with appropriate L-dopa therapy.
•MYOBLOC (rimabotulonumtoxinB)® (rimabotulinumtoxinB) is a product indicated for the treatment of cervical dystonia and sialorrhea in adults, and it is the only Type B toxin available on the market. Based on clinical studies, MYOBLOC injections offer patients struggling with painful cervical dystonia symptoms relief as early as two weeks after injection, with the duration of effect to be between 12-16 weeks. In sialorrhea, patients generally experienced symptom relief for up to three months post-dosing in well-controlled studies. MYOBLOC must be administered by a physician.
The Company will be conducting a clinical program under Special Protocol Assessment from the FDA which will address post-marketing commitments and potentially provide an expanded indication for MYOBLOC.
Overview of Acquired CNS Portfolio
Market Overview •XADAGO® (safinamide) is a once-daily product indicated as adjunctive treatment to levodopa/carbidopa in patients with PD experiencing “off” episodes.
Parkinson’s diseaseProduct Candidates
Parkinson’s disease affects about one million patients in the U.S. per year. Parkinson’s
•SPN-812 (viloxazine hydrochloride) is a progressive neurological disorder that is characterized by a lossnovel non-stimulant product candidate for the treatment of dopamine producing neuronsADHD in certain regions of the brain, causing symptoms like tremor, slowness of movement, stiffness, loss of balance, and lack of coordination. Patients with PD can also be affected with psychological symptoms such as anxiety and depression, as well as problems with cognition and memory. As the disease progresses, some patients may lose the ability to independently perform the tasks of daily living.adult patients.
Parkinson’s patients are frequently prescribed L-dopa to help replace the dopamine no longer produced in the brain. However, motor disabilities as a result of L-dopa wearing off remain a significant problem for over half of PD patients. Patients in an "off" state, including those whose last dose of oral L-dopa has worn off, and whose next oral dose has not yet begun to take effect, can suffer from a lack of coordination or mobility for several hours per day.
In well controlled clinical studies, APOKYN injections are effective in treating "off" periods, as measured by the motor function subset of the Unified Parkinson's Disease Rating Scale (UPDRS). For patients for whom oral L-dopa will not sufficiently control "off" periods, the Company has commercialized APOKYN, delivered via an injection pen. For patients who experience significant "off" time each day, the Company has developed a continuous infusion pump (SPN-830) to deliver apomorphine subcutaneously. The infusion may reduce the variability in motor symptoms of PD, and offer improved tolerability versus the acute injection route. For patients not ready to try a parenteral therapy, oral monoamine oxidase complex B (MAO-B) inhibitors, such as XADAGO, may provide a decrease in "off" time of up to one hour per day when combined with appropriate L-dopa therapy.
Cervical Dystonia
Cervical dystonia, also known as spasmodic torticollis,•SPN-830 (Apomorphine Infusion Pump) is a condition characterized by involuntary muscle contractionslate-stage drug/device combination product candidate for the continuous prevention of “off” episodes in the neck, which cause the head to twist uncontrollably into an abnormal, often painful position. ItPD.
•SPN-817 is a rare disorder, most often presenting in middle age, whose symptoms begin gradually, worsen, and then plateau over a periodnovel product candidate for the treatment of months. Estimates of the prevalence of cervical dystonia vary considerably, from 28 to 4,100 per million individuals. Injections of botulinum toxin into affected neck muscles can create temporary relief from symptoms.severe epilepsy.
In well controlled studies, botulinum toxins like MYOBLOC have been shown to improve symptoms as measured on the Toronto Western Spasmodic Torticollis Rating Scale, including pain.
Sialorrhea•
Sialorrhea can occur in conjunction with several neurologic disorders, such as amyotrophic lateral sclerosis (ALS), cerebral palsy (CP), PD, or as a side effect of some medications. It is characterized by overactive salivary glands. In adults, PD is the most common cause of sialorrhea, with 70%–80% of PD patients experiencing symptoms. In 30%–80% of schizophrenic patients taking clozapine, sialorrhea is evident. In addition to being embarrassing, complications of sialorrhea include aspiration, infection, skin breakdown, and bad odor.
In well controlled studies, injections of MYOBLOC have been shown to reduce the unstimulated salivary flow rate (USFR) by 0.3g/minute, as compared to placebo.
Manufacturing
APOKYN is manufactured by our licensing partner, Britannia Pharmaceuticals Ltd (Britannia) for the U.S. market. Britannia also supplies injectable apomorphine to the European market for Stada Pharmaceuticals, under the brand name Apo-go. MYOBLOC is manufactured and packaged by Merz GmbH & Co. KGaA. XADAGO is provided to us as finished product by Zambon S.p.A.
Sales and Marketing
Consequent to the USWM Acquisition, we acquired an experienced commercial team which included a proven sales force and a medical organization with expertise and focus on serving movement disorder specialists in the U.S that will continue to promote the acquired product portfolio. This sales force calls on movement disorder specialists and other specialized health care providers to support our commercialization and sale of APOKYN, MYOBLOC and XADAGO.
Competition
APOKYN is given as needed as an adjunct to levadopa/carbidopa therapy in PD patients who experience "off" episodes and competes with other PRN therapies such a INBRIJA and recently approved sublingual apomorphine (KYNMOBI).
XADAGO competes with other monoamine oxidase inhibitors (MAO-B) used to treat "off" episodes in PD, including rasagiline (AZILECT) and selegiline (ZELAPAR, EMSAM).
MYOBLOC is the only available botulinum toxin B, whereas other available toxins are type A. MYOBLOC competes with type A toxins such as Botox, Dysport, and Xeomin. MYOBLOC also competes with oral agents used to treat cervical dystonia, including generic baclofen, anticholinergics, benzodiazepines, and tetrabenazine.
MYOBLOC competes with Xeomin (incobotulinumtoxinA) for the treatment of sialorrhea in adults, although the other A toxins, including Botox and Dysport, are also utilized by physicians off label for sialorrhea. Other pharmacologic treatments used to treat sialorrhea include generic glycopyrrolate tablets as well as behavior modification.
Product Candidates
SPN-817 (huperzine A)
SPN-817 represents a novel mechanism of action for an anticonvulsant. Development will initially focus on the drug's anticonvulsant activity, which has been shown in preclinical models for treatment of partial seizures and Dravet Syndrome. SPN-817 is in clinical development, and has received an Orphan Drug designation for Dravet Syndrome and Lennox-Gastaut Syndrome from the FDA. SPN-817 will have new chemical entity status (NCE) in the U.S. market. We expect to develop intellectual property (IP) protecting this product candidate through our own research and development efforts, as well as through in-licensed IP.
SPN-817 Development Program
We plan on initially studying SPN-817 in severe 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. We are studying the safety and pharmacokinetic profile of a new extended release formulation of non-synthetic huperzine A. The Company has initiated preclinical Investigational New Drug (IND) enabling activities in the U.S.
We will focus on completing and optimizing the synthesis process of the synthetic drug as well as developing a novel dosage form. 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 the immediate release formulations of non-synthetic huperzine A have shown serious dose-limiting, side effects.
SPN-830 (Apomorphine Infusion Pump)
SPN-830 is a late-stage drug/device combination product candidate acquired in the USWM Acquisition. SPN-830 is under investigation for the continuous prevention of "off" episodes in PD. If approved, it would be the only continuous infusion of apomorphine available in the U.S., and an important step for PD patients that would have otherwise been candidates for potentially invasive surgical procedures, such as deep brain stimulation. Continuous infusion may also limit some of the side effects of a subcutaneous injection of apomorphine.
SPN-830 Development Program
In September 2020, we submitted the New Drug Application (NDA) for SPN-830. We plan to launch SPN-830 in the fourth quarter of 2021, if approved by the FDA.
Our Psychiatry Portfolio
Our psychiatry portfolio includes two product candidates, SPN-812 and SPN-820, for the treatment of psychiatric disorders.
Product Candidates
SPN-812 (extended release viloxazine hydrochloride)
SPN-812 is a serotonin norepinephrine modulating agent (SNMA), which we are developing as a novel non-stimulant for the treatment of ADHD in children, adolescents, and adults. We believe SPN-812 could be well-differentiated as compared to other non-stimulant treatments, due to its different 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, albeit at much higher dosage levels. Viloxazine hydrochloride is a structurally distinct, bicyclic, SNMA with NCE status in the U.S.
The FDA accepted the review of the NDA for SPN-812 for the treatment of children and adolescents with ADHD in January 2020, and assigned a Prescription Drug User Fee Act (PDUFA) target action date of November 8, 2020. We plan to launch SPN-812, pending FDA approval, in January 2021. We expect SPN-812, if approved, to have five-year market exclusivity due to its NCE status in the U.S.. Furthermore, we are pursuing IP covering the novel synthesis process for the active ingredient in SPN-812, its novel use in ADHD, and its novel extended release product profile.
SPN-812 Development Program
We continue to prepare for the commercial launch of SPN-812 which is expected in January 2021, if approved by the FDA. The Company remains engaged with the FDA regarding the review of the NDA for SPN-812 for the treatment of ADHD.
We initiated a Phase III program for the treatment of ADHD in adults in the third quarter of 2019. In the fourth quarter of 2020, enrollment was completed and we expect topline data to be available in the first quarter of 2021.
SPN-820 (NV-5138)
SPN-820 is a first-in-class product candidate for TRD. It is an orally active small molecule that directly activates brain mTORC1, the gatekeepermechanistic target of cellular metabolism and renewal. This receptor is often suppressed in people suffering from depression. The Phase I trial demonstrated early proof of concept, in which a single dose of SPN-820 showed rapid and sustained improvement in core symptoms of depression, with favorable safety and tolerability in patients with treatment resistant depression (TRD)rapamycin complex 1 (mTORC1). We believe the novel mechanism of action in depression may improve symptoms of depression in patients who have failed other agents.
SPN-820 Development ProgramOperational Highlights
Qelbree Launch Update
•In April 2021, the U.S. Food and Drug Administration (FDA) approved Qelbree for the treatment of attention-deficit hyperactivity disorder (ADHD) in pediatric patients 6 to 17 years of age. We plan to make Qelbree available in the U.S. during the second quarter of 2021.
•We will conduct post-marketing commitment studies, including a new study of Qelbree in preschool aged children with ADHD, 4 to 5 years of age. The completion of these studies responds to a written request from the FDA and should therefore result in the FDA granting an additional 6 months of market exclusivity.
Product Pipeline Update
Qelbree (viloxazine, extended-release capsules) - Novel non-stimulant for the treatment of ADHD in adults
•In December 2020, we entered intoannounced positive results from a DevelopmentPhase III trial in adult patients with ADHD and Option Agreement with Navitorplans to collaborate onsubmit a comprehensive development programsupplemental New Drug Application (sNDA) to the FDA for SPN-820 through Phase II, including formulation development, preclinical toxicology, and clinical pharmacology. Pre-clinical and development activities are ongoing,Qelbree in adults in the third quarter of 2021.
SPN-830 (apomorphine infusion pump) - Continuous treatment of motor fluctuations (“on-off” episodes) in PD
•We recently met with the initiationFDA to discuss the path forward for resubmission of the SPN-830 NDA. The FDA provided additional clarity related to the contents of the November 2020 Refusal to File (RTF) letter and the requirements for resubmission. We now plan to resubmit the SPN-830 NDA in the second half of 2021.
SPN-820 - Novel first-in-class activator of mTORC1
•SPN-820 has advanced to a Phase II clinical program in patients with TRD targetedtreatment-resistant depression following the successful completion of a multiple-ascending dose (MAD) study in healthy volunteers. In the fourth quarterMAD study, SPN-820 exhibited a favorable safety and tolerability profile across a broad range of potentially therapeutic doses.
•We expect to initiate a randomized Phase II clinical study in treatment-resistant depression by the end of 2021. See Part I, Item 1, Financial Statements, Note 13, Investments in Unconsolidated VIEs, in the Notes to the Condensed Consolidated Financial Statements.
Critical Accounting Policies and the Use of Estimates
The significant accounting policies and basis of presentation for our condensed consolidated financial statements are described in Part I, Item 1, Financial Statements, 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 (U.S. GAAP), requiring us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and to disclose material contingent assetsother related disclosures. Some judgments can be subjective and liabilities. Actualcomplex, and therefore, actual results could differ materially from our estimates.
those estimates under different assumptions or conditions. We believe the judgments, estimates, and assumptions associated with the following critical accounting policies and estimates to be critical:
Revenue Recognitionhave the greatest potential impact on our condensed consolidated financial statements:
Revenue from product sales is recognized when physical control of our products is transferred to our customers, who are primarily pharmaceutical wholesalers, specialty pharmacies, and distributors. Product sales are recorded net of various forms of variable consideration, including: estimated rebates; sales discounts; and an estimated liability for future 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 Salesrecognition;
•, in the Notes to Condensed Consolidated Financial Statements. In addition, see ResultsBusiness combination accounting and valuation of Operations, acquired assets, including goodwill and intangible assets;
•Sales deductionsValuation of contingent consideration; and related accruals
• for more information.Income taxes.
Business Combinations and Contingent Consideration
The Company completedThere were no changes to the USWM Acquisitiondisclosures with respect to the above listed critical accounting policies in our Annual Report on June 9,Form 10-K for the year ended December 31, 2020. For a complete descriptionA summary of our significant accounting policy for business combinations and contingent consideration, see Part I, Item 1, Financial Statements, Note 2, Business Combinations and Contingent Considerations,policies appears in the Notesnotes to Condensed Consolidated Financial Statements. In addition, refer to Note 3 for discussion regarding the USWM Acquisition.
Research and Development Expenses and Related Accrued Research and Development Expenses
Research and development expenditures are expensed as incurred. We estimate 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 conduct activities on the Company’s behalf. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust our accrued expenses or our deferred advance payments accordingly. For a complete description of our research and development expense, preclinical trial, and clinical trial accrual policies, see Part I, Item 1, Financial Statements, Note 2, Summary of Significant Accounting Policies—Research and Development Expense and Related Accrued Research and Development Expenses,audited consolidated financial statements included in the Notes to Condensed Consolidated Financial Statements.
Preclinical and clinical trials are inherently complex and often involve multiple service providers. Because billingAnnual Report on Form 10-K for services often lags by a month or several months, we are often required to estimate, and therefore accrue, a significant portion of the incurred expenses. This process involves reviewing open contracts and communicating with our subject matter expert personnel, as well as with the appropriate service provider personnel, to identify services that have been performed on our behalfyear ended December 31, 2020.
but for which no invoice has been received. This includes services provided by CROs, as well as services provided by clinical investigators and other service providers. We accrue the cost for unbilled services performed, whether partially or fully completed.
Payments to service providers can either be based on hourly rates for service, or based on achievement of performance-driven milestones. We work with each service provider to obtain an estimate for services provided but are unbilled as of the end of the calendar quarter, including estimates for payments to site investigators. When accruing clinical trial 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 diligently to minimize, if not eliminate, estimates based solely on Company generated calculations by relying primarily on estimates provided by our vendors. If we and/or the service provider underestimates or overestimates the costs associated with a service at any given point in time, adjustments to research and development expenses would be necessary in the following periods. Historically, our estimated accrued clinical expenses have closely approximated the actual expenses incurred, with minimal adjustments to expense in the subsequent periods.
Inventories Produced in Preparation of Product Launches
The Company capitalizes inventories produced in preparation for product launches when future commercialization of a product is probable and when a future economic benefit is expected to be realized. The determination to capitalize is based on the particular facts and circumstances relating to the product. Capitalization of such inventory begins when the Company determines that (i) positive clinical trial results have been obtained in order to support regulatory approval; (ii) uncertainties regarding regulatory approval have been significantly reduced; and (iii) it is probable that these capitalized costs will provide future economic benefit, in excess of capitalized costs.
As of September 30, 2020, the Company capitalized $11.3 million of pre-launch inventory for SPN-812. To make the determination to capital inventory prior to product launch, we consider a number of factors, including: the product candidate’s current status in the regulatory approval process; results from the related pivotal clinical trial; results from meetings with relevant regulatory agencies prior to the filing of regulatory applications; historical experience; as well as potential impediments to approval; such as product safety or efficacy; commercialization potential; and market trends.
We estimated a range of likely commercial prices based on our comparable commercial products. We considered the product candidate’s stability data for all pre-approval production to date, to determine whether there is adequate expected shelf life for the capitalized pre-launch production costs. We considered the likely selling price, to determine if there is sufficient profit margin to fully recover the cost of the inventory.
For a complete description of our policy, see Part I, Item 1, Financial Statements, Note 2, Inventories Produced in Preparation of Product Launches, in the Notes to Condensed Consolidated Financial Statements.
Results of Operations
Comparison of the Three Months Ended March 31, 2021 and Nine Months ended September 30, 2020 and 2019
Revenues
Revenues consist primarily of net product sales of our commercial products in the U.S., supplemented by royalty revenues from our collaborative licensing arrangements. The following table provides information regarding our revenues during the three and nine months ended September 30, 2020March 31, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended
September 30, | | Change | | Nine Months ended
September 30, | | Change |
| 2020 | | 2019 | | Amount | | Percent | | 2020 | | 2019 | | Dollar | | Percent |
| Net product sales | | | | | | | | | | | | | | | |
| Trokendi XR | $ | 82,906 | | | $ | 77,332 | | | $ | 5,574 | | | 7% | | $ | 241,131 | | | $ | 219,989 | | | $ | 21,142 | | | 10% |
| Oxtellar XR | 28,364 | | | 22,702 | | | 5,662 | | | 25% | | 75,983 | | | 65,502 | | | 10,481 | | | 16% |
| APOKYN | 34,482 | | | — | | | 34,482 | | | NM | | 43,082 | | | — | | | 43,082 | | | NM |
| XADAGO | 2,331 | | | — | | | 2,331 | | | NM | | 3,132 | | | — | | | 3,132 | | | NM |
| MYOBLOC | 4,050 | | | — | | | 4,050 | | | NM | | 5,279 | | | — | | | 5,279 | | | NM |
| Total net product sales | $ | 152,133 | | | $ | 100,034 | | | $ | 52,099 | | | 52% | | $ | 368,607 | | | $ | 285,491 | | | $ | 83,116 | | | 29% |
| Royalty revenues | 3,002 | | | 2,106 | | | 896 | | | 43% | | 8,233 | | | 6,818 | | | 1,415 | | | 21% |
| Total revenues | $ | 155,135 | | | $ | 102,140 | | | $ | 52,995 | | | 52% | | $ | 376,840 | | | $ | 292,309 | | | $ | 84,531 | | | 29% |
____________
NM - Fluctuation in terms of percentage change is not meaningful.
Basis for Net Product Sales
Net product sales are computed as gross revenue generated from our product shipments to our customers, primarily pharmaceutical wholesalers, specialty pharmacies, and pharmaceutical distributors, less various forms of variable consideration, including: estimated liability for rebates; estimated liability for product returns; and estimated allowance for discounts. These are collectively considered "sales deductions."
Total Net Product Sales | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended March 31, | | Change |
| 2021 | | 2020 | | Amount | | Percent |
| Net product sales | | | | | | | |
| Trokendi XR | $ | 71,819 | | | $ | 68,551 | | | $ | 3,268 | | | 5% |
| Oxtellar XR | 27,370 | | | 23,939 | | | 3,431 | | | 14% |
| APOKYN | 21,730 | | | — | | | 21,730 | | | ** |
| MYOBLOC | 4,240 | | | — | | | 4,240 | | | ** |
| XADAGO | 3,222 | | | — | | | 3,222 | | | ** |
| Total net product sales | $ | 128,381 | | | $ | 92,490 | | | $ | 35,891 | | | 39% |
| Royalty revenues | 2,551 | | | 2,486 | | | 65 | | | 3% |
| Total revenues | $ | 130,932 | | | $ | 94,976 | | | $ | 35,956 | | | 38% |
The $52.1$35.9 million and 39% increase in net product sales for the three months ended September 30, 2020,March 31, 2021, as compared to the prior year,same period in 2020, was primarily due to the inclusion of $40.9$29.2 million in net product sales, consequent to the completion of the USWM acquisition on June 9, 2020. Additionally, net product sales were favorably affected by an 8% price increase forThe combined annual growth of Trokendi XR and Oxtellar XR taken in January 2020, favorable unit prescription growth for Oxtellar XR, and favorable changes in sales deductions for Trokendi XR.
For both Trokendi XR and Oxtellar XR, we have observed a shift in prescription mix, from 30-count prescriptions to 90-count prescriptions. The Company believes this has been an effect of the COVID-19 pandemic, primarily driven by patients reducing the frequency of office visits with physicians. The shift towards 90-count prescriptions has resulted in net product sales growth outpacing growth in prescriptions.
The increase in net product sales of $83.1was $6.7 million for the nine months ended September 30, 2020,or 7% as compared to the prior year, is primarily due to the aforementioned favorable impact of the acquisition of USWM as of June 9,same period in 2020. This transaction resulted in a year over year increase in net product sales of $51.5 million. In addition, net product sales were favorably affected by the 8% price increase for Trokendi XR and Oxtellar XR, taken in January 2020, and prescription unit growth for Oxtellar XR. The year over year comparison is positively affected by the impact of a pipeline inventory reduction, which occurred in the first quarter of 2019. In the fourth quarter of 2018, wholesalers, distributors and pharmacies increased their inventory holdings, as compared to the prevailing inventory levels in the preceding quarter. This action was effectively reversed in the first quarter of 2019. As a result, both gross sales and net product sales in the first quarter of 2019 were adversely impacted, reducing net product sales in 2019 by approximately $10 million.
Favorable sales growth factors were partially offset by increased sales deductions for the first nine months of 2020. Patient reimbursement challenges and increased contracting pressure from managed care providers resulted in higher patient program participation rates, increased per patient costs for our co-pay programs, and higher per patient rebate payments to managed care providers. In addition, the provision for product returns increased primarily due to unfavorable actual returns experience in the first quarter of 2020 for discontinued Trokendi XR commercial blister pack configurations. As a result, these factors increased the provision for sales deductions, thereby reducing net product sales for the nine months ended September 30, 2020 as compared to the prior year.
Trokendi XR
Trokendi XR net product sales increased by $5.65% to $71.8 million or 7%, for the three months ended September 30, 2020,March 31, 2021 as compared to the same period in 2019. This increase was driven by the aforementioned favorable impact of an 8% price increase in January 2020, coupled with reduced sales deductions resultant from reduced co-pay program payments. While prescription volume was down sequentially by approximately 17% for the three months ended September 30, 2020 as compared to the same period in 2019, there was only minimal unfavorable impact in the volume as measured in units (i.e., number of capsules). This occurred due to the aforementioned shift to 90-count prescriptions.
For the nine months ended September 30, 2020, Trokendi XR net product sales increased by $21.1 million, or 10%, as compared to the same period in 2019.2020. This increase was attributable to the favorable impact of the aforementioned price increase taken in January 2020,2021, coupled with the impact in the first quarter of 2019 of the aforementioned pipeline inventory reduction.
These favorable effects were partially offset by an increaseimprovements in sales deductions and an increasethat offset a decline in the provision for returns. In the first quarter of 2020, product returns for discontinued Trokendi XR blister pack configurations exceeded our forecast, resulting in an $8 million increase to our returns reserve and an equivalent reduction in net product sales.
Oxtellar XR
unit demand. Oxtellar XR net product sales increased by $5.714% to $27.4 million or 25%, and $10.5 million, or 16%, for the three and nine months ended September 30, 2020, respectively,March 31, 2021 as compared to the same periodsperiod in 2019. The increases were2020. This increase was primarily attributable to growth in prescription unit volume and the favorable impact of the aforementioned January 2020both unit demand and a price increase of 8%.
These favorable impacts were partially offset by increased sales deductions, due to higher per patient payments under both Medicaid and commercial managed care programs, as well as higher co-payment program charges.
Acquired Commercial Products
Collectively, net product sales for APOKYN, XADAGO and MYOBLOC were $40.9 million and $51.5 million, for the three and nine months ended September 30, 2020, respectively. Delays in physician office visits due to the COVID-19 pandemic have adversely impacted demand for these products, and in particular, MYOBLOC. The ultimate effect depends on the currently unknown duration of the COVID-19 pandemic.January 2021.
Sales Deductions and Related Accruals
The Company recordsWe record accrued product rebates and accrued product returns as current liabilities in Accrued product returns and rebates, on our condensed consolidated balance sheets. We record sales discounts as a valuation allowancereduction against Accounts receivable on the condensed consolidated balance sheets. Both amounts are generally affected by changes in gross product sales, changes in the provision for net product sales deductions, and the timing of payments/credits.
The following table provides a summary of activity with respect to sales deductions and related accruals during the periods indicated (dollars in thousands): | | | Accrued Product Returns and Rebates | | | Accrued Product Returns and Rebates | |
| | Product
Rebates | | Product
Returns | | Allowance for
Sales Discounts | | Total | | Product
Rebates | | Product
Returns | | Reduction to Accounts Receivable for
Sales Discounts | | Total |
| Balance at December 31, 2019 | $ | 88,811 | | | $ | 18,818 | | | $ | 11,013 | | | $ | 118,642 | | |
| USWM Acquisition liabilities assumed | 5,112 | | | 3,072 | | | 293 | | | 8,477 | | |
| Balance at December 31, 2020 | | Balance at December 31, 2020 | $ | 96,589 | | | $ | 29,603 | | | $ | 11,404 | | | $ | 137,596 | |
| Provision | Provision | | Provision | |
| Provision for current year sales | Provision for current year sales | 254,338 | | | 8,709 | | | 49,987 | | | 313,034 | | Provision for current year sales | 94,379 | | | 3,267 | | | 16,943 | | | 114,589 | |
| Adjustments relating to prior year sales | Adjustments relating to prior year sales | 3,633 | | | 9,008 | | | 147 | | | 12,788 | | Adjustments relating to prior year sales | 777 | | | (507) | | | 10 | | | 280 | |
| Total provision | Total provision | $ | 257,971 | | | $ | 17,717 | | | $ | 50,134 | | | $ | 325,822 | | Total provision | $ | 95,156 | | | $ | 2,760 | | | $ | 16,953 | | | $ | 114,869 | |
| Less: Actual payments/credits | Less: Actual payments/credits | (241,351) | | | (13,177) | | | (50,342) | | | (304,870) | | Less: Actual payments/credits | (95,107) | | | (265) | | | (17,468) | | | (112,840) | |
| Balance at September 30, 2020 | $ | 110,543 | | | $ | 26,430 | | | $ | 11,098 | | | $ | 148,071 | | |
| Balance at March 31, 2021 | | Balance at March 31, 2021 | $ | 96,638 | | | $ | 32,098 | | | $ | 10,889 | | | $ | 139,625 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2018 | $ | 85,003 | | | $ | 22,060 | | | $ | 11,548 | | | $ | 118,611 | |
| Provision | | | | | | | |
| Provision for current year sales | 221,598 | | | 6,171 | | | 43,693 | | | 271,462 | |
| Adjustments relating to prior year sales | (888) | | | (910) | | | (43) | | | (1,841) | |
| Total provision | $ | 220,710 | | | $ | 5,261 | | | $ | 43,650 | | | $ | 269,621 | |
| Less: Actual payments/credits | (228,955) | | | (6,029) | | | (44,816) | | | (279,800) | |
| Balance at September 30, 2019 | $ | 76,758 | | | $ | 21,292 | | | $ | 10,382 | | | $ | 108,432 | |
From 2019 to 2020, the total provision for sales deductions increased by $56.2 million, from $269.6 million in 2019 to $325.8 million in 2020. Approximately 66% of this increase, or $37.3 million, was attributable to year over year increases in the provision for product rebates, from $220.7 million in 2019 to $258.0 million in 2020. Increased product rebates were primarily attributable to greater utilization of our patient co-payment programs, as well as higher per patient payments under both Medicaid and commercial managed care programs. To a lesser extent, growth in prescriptions, and the impact of the aforementioned 8% price increase taken in January 2020, also contributed to theThe increase in product rebates.
Approximately 22% of the increase in the total provision for sales deductions was attributable to increases in the provision for product returns. Specifically, this provision increased, from $5.3 million to $17.7 million for the nine months ended September 30, 2019 and 2020, respectively. This increase wasreturns balance is primarily attributable to unfavorable actual returns experience in the first quarter of 2020 for discontinued Trokendi XR commercial blister pack configurations. Specifically, 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 the ensuring years. The return rate trend was 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 distributed in 2017 unexpectedly 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 to reflect the most recent experience. This change in estimate resulted in an increasedue to the provision for product returnstiming of $8.0 million, decreased net product sales of $8.0 million.related return activity.
Approximately 12% of the increase in the total provision for sales deductions was due to an increase of $6.5 million in the provision for sales discounts, from $43.7 million to $50.1 million, for the nine months ended September 30, 2019 and 2020, respectively. This increase was driven by prescription volume growth as well as the aforementioned 8% price increase in January 2020.
Royalty Revenues
Royalty revenue for the three month period ended September 30, 2020 and 2019 includes royalties from the following products (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended
September 30, | | Change | | Nine Months ended September 30, | | Change |
| 2020 | | 2019 | | Amount | | Percent | | 2020 | | 2019 | | Amount | | Percent |
Mydayis (1) | $ | 600 | | | $ | 446 | | | $ | 154 | | | 35% | | $ | 1,913 | | | $ | 1,791 | | | $ | 122 | | | 7% |
Orenitram (2) | 2,402 | | | 1,660 | | | 742 | | | 45% | | 6,320 | | | 5,027 | | | 1,293 | | | 26% |
| Total | $ | 3,002 | | | $ | 2,106 | | | $ | 896 | | | 43% | | $ | 8,233 | | | $ | 6,818 | | | $ | 1,415 | | | 21% |
(1)Royaltyrevenues include a royalty from net product sales of Mydayis, a product of Takeda Pharmaceuticals Company Ltd.
(2)Supernus records, and noncash royalty revenue pursuant to our agreement with Healthcare Royalty Partners III, L.P. (HC Royalty). HC Royalty receives royalty payments from United Therapeutics Corporation (United Therapeutics), based on net product sales of United Therapeutics’ product Orenitram.
Royalty revenues increasedwere $2.6 million and $2.5 million for the three month period ended March 31, 2021 and nine months ended September 30, 2020, respectively, compared to the same period in 2019, primarily due to year over year increases in net product sales of Orenitram.respectively.
Cost of Goods Sold
The following table provides information regarding our cost of goods sold during the periods indicated (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended
September 30, | | Change | | Nine Months ended
September 30, | | Change |
| 2020 | | 2019 | | Amount | | Percent | | 2020 | | 2019 | | Amount | | Percent |
| Cost of goods sold | $ | 21,388 | | | $ | 4,819 | | | $ | 16,569 | | | 344% | | $ | 33,926 | | | $ | 12,547 | | | $ | 21,379 | | | 170% |
Cost of goods sold duringwas $15.0 million and $4.2 million for the three months ended September 30,March 31, 2021 and 2020, were $21.4respectively. The $10.8 million $16.6 million higher than the $4.8 million incurred for the same period in 2019. The increase was primarily attributable to inclusion of cost of goods sold of the acquired commercial products from the USWM Acquisition. Additionally, quarter over quarter increases in prescription unit volume contributed toRoyalty payments associated with APOKYN and XADAGO made up the period over period increase in expense.majority of this cost increase.
Research and Development Expenses
The following table provides information regarding our research and development (R&D) expenses during the periods indicated (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended
September 30, | | Change | | Nine Months ended
September 30, | | Change |
| 2020 | | 2019 | | Amount | | Percent | | 2020 | | 2019 | | Amount | | Percent |
| Research and development | $ | 16,839 | | | $ | 16,943 | | | $ | (104) | | | (1)% | | $ | 58,023 | | | $ | 49,307 | | | $ | 8,716 | | | 18% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended March 31, | | Change |
| 2021 | | 2020 | | Amount | | Percent |
Direct Project Costs (1) | | | | | | | |
| SPN-812 | $ | 3,968 | | | $ | 9,062 | | | $ | (5,094) | | | (56)% |
| SPN-830 | 203 | | | — | | | 203 | | | ** |
| SPN-820 | 2,605 | | | — | | | 2,605 | | | ** |
| SPN-810 | 707 | | | 1,366 | | | (659) | | | (48)% |
| Others | 2,837 | | | 2,525 | | | 312 | | | 12% |
| 10,320 | | | 12,953 | | | (2,633) | | | (20)% |
| | | | | | | |
| Other R&D expense | $ | 15,000 | | | $ | — | | | $ | 15,000 | | | ** |
| | | | | | | |
Indirect Project Costs (1) | | | | | | | |
| Share-based compensation | 588 | | | 681 | | | (93) | | | (14)% |
| Other indirect overhead | 8,372 | | | 5,303 | | | 3,069 | | | 58% |
| 8,960 | | | 5,984 | | | 2,976 | | | 50% |
| Research and development expense | $ | 34,280 | | | $ | 18,937 | | | $ | 15,343 | | | 81% |
(1) Direct costs, which include personnel costs and related benefits, are recorded on a project-by-project basis. Many of our R&D costs are not attributable to any individual project because we share resources across several development projects. Indirect costs that support a number of our R&D activities are recorded in the aggregate, including stock-based compensation.
R&D expenses decreased by $0.1was $34.3 million duringand $18.9 million for the three months ended September 30,March 31, 2021 and 2020, as compared to the same period in 2019. Increased cost associated with patient enrollment in the SPN-812 Phase III program for adults during 2020 was offset by decreased manufacturing costs for SPN-812 as a result of the capitalization of pre-launch inventory in 2020.
R&D expenses increased $8.7respectively. The $15 million during the nine months ended September 30, 2020, as compared to the same period in 2019. The increase was primarily due to the $10 million option fee paidwrite-down of the investment in conjunctionNavitor LLC. In addition, increased cost associated with developmental activities related to SPN-820, regulatory activities related to the Navitor collaboration for SPN-820, partiallyacquired products, were generally offset by reduced spending on SPN-810 Phase III trials, and by thea decrease in clinical trial manufacturing coststhe cost of SPN-812 development activities. Refer to Part I, Item 1, Unaudited Condensed Consolidated Financial Statements, Note 5, Investments, in the Notes to the Condensed Consolidated Financial Statements, for SPN-812 as a resultfurther discussion of the capitalizationwrite-down of pre-launch inventory.
Selling, General and Administrative Expenses
The following table provides information regarding our selling, general and administrative (SG&A) expenses during the periods indicated (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended
September 30, | | Change | | Nine Months ended
September 30, | | Change |
| 2020 | | 2019 | | Amount | | Percent | | 2020 | | 2019 | | Amount | | Percent |
| Selling and marketing | $ | 39,171 | | | $ | 29,584 | | | $ | 9,587 | | | 32% | | $ | 98,162 | | | $ | 90,552 | | | $ | 7,610 | | | 8% |
| General and administrative | 15,489 | | | 9,759 | | | 5,730 | | | 59% | | 46,215 | | | 28,230 | | | 17,985 | | | 64% |
| Total | $ | 54,660 | | | $ | 39,343 | | | $ | 15,317 | | | 39% | | $ | 144,377 | | | $ | 118,782 | | | $ | 25,595 | | | 22% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended March 31, | | Change |
| 2021 | | 2020 | | Amount | | Percent |
| Selling and marketing | $ | 38,447 | | | $ | 29,041 | | | $ | 9,406 | | | 32% |
| General and administrative | 23,010 | | | 12,573 | | | $ | 10,437 | | | 83% |
| Total | $ | 61,457 | | | $ | 41,614 | | | $ | 19,843 | | | 48% |
Selling, general and Marketing. Sellingadministrative expenses were $61.5 million and marketing expenses increased by $9.6$41.6 million infor the three months ended September 30,March 31, 2021 and 2020, as compared to the same period in 2019.respectively. The $19.8 million increase in expense of $8.5 million was due to increased marketing expenses and professional consulting spend related to the commercial products, including the acquired commercial products from the USWM Acquisition, and preparations for the launch of SPN-812. In addition, employee compensation expense was higher by $1.1 million primarily due to increased headcount, partially offset by lower employee related expenses due to reduced travel expenses because of the COVID-19 pandemic.
Selling and marketing expenses increased by $7.6 million in the nine months ended September 30, 2020, as compared to the same period in 2019. The increase in expense of $7.4 million was attributable to increased marketing expenses and professional consulting spend related to the commercial products, including the acquired commercial products from the USWM
Acquisition, and preparations for the launch of SPN-812.
General and Administrative. General and administrativeQelbree. In addition, employee-related expenses also increased by $5.7 million for the three months ended September 30, 2020, as compareddue to increased headcount consequent to the same period in 2019. The change was primarily due to $3.1 million integration costs related to the USWM Acquisition, coupled with $1.9 million in higher employee compensation expense.
General and administrative expenses increased by $18.0 million for the nine months ended September 30, 2020, as compared to the same period in 2019. The change was primarily due to a $10.4 million increases in business development expenses, including acquisition-related transaction and post acquisition integration costs, partially offset by a non-recurring a $3.1 million PDFUA fee refund from the FDA. In addition, employee related expenses increased by $4.7 million primarily due to additional headcount resultingacquired employees from the USWM Acquisition.
Amortization of Intangible Assets
The following table provides information regarding the amortization expense for intangible assets during the periods indicated (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended
September 30, | | Change | | Nine Months ended
September 30, | | Change |
| 2020 | | 2019 | | Amount | | Percent | | 2020 | | 2019 | | Amount | | Percent |
| Amortization of intangible assets | $ | 6,108 | | | $ | 1,306 | | | $ | 4,802 | | | 368% | | $ | 9,814 | | | $ | 3,918 | | | $ | 5,896 | | | 150% |
Amortization of intangible assets increasedwas $6.0 million and $1.3 million for the three and nine months ended September 30,March 31, 2021 and 2020, respectively. The $4.7 million increase was primarily due to amortization of the definite-lived intangible assets acquired in the USWM Acquisition.
$1.0 million for the three months ended March 31, 2021 represents the increase in the fair value of the contingent consideration liabilities associated with the USWM Acquisition due to the passage of time.Other Income (Expense)
The following table provides the components of otherOther income (expense) during the periods indicated (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended
September 30, | | Change | | Nine Months ended
September 30, | | Change |
| 2020 | | 2019 | | Amount | | Percent | | 2020 | | 2019 | | Amount | | Percent |
| Interest income | $ | 3,262 | | | $ | 5,559 | | | $ | (2,297) | | | (41)% | | $ | 12,988 | | | $ | 15,696 | | | $ | (2,708) | | | (17)% |
| Interest expense | (4,945) | | | (4,546) | | | (399) | | | 9% | | (14,430) | | | (13,518) | | | (912) | | | 7% |
| Interest expense on nonrecourse liability related to sale of future royalties | (1,143) | | | (1,116) | | | (27) | | | 2% | | (3,228) | | | (3,412) | | | 184 | | | (5)% |
| Other income (expense), net | (603) | | | (36) | | | (567) | | | 1575% | | 2,925 | | | 54 | | | 2,871 | | | 5317% |
| Total | $ | (3,429) | | | $ | (139) | | | $ | (3,290) | | | 2367% | | $ | (1,745) | | | $ | (1,180) | | | $ | (565) | | | 48% |
Interest income decreased bywas an expense of $2.3 million and $2.7 millionincome of $22.0 thousand for the three and nine months ended September 30,March 31, 2021 and 2020, respectively,respectively. The $2.3 million decrease was primarily due to decreasedlower interest income on marketable securities holdings.
Interest expense increases for the three and nine months ended September 30, 2020 were primarily due to increased debt discount amortization expense.
Changes in noncash interest expense related to our nonrecourse royalty liability for the three and nine months ended September 30, 2020 were primarily driven by net product sales of Orenitram.
Other income (expense), net for the three and nine months ended September 30, 2020, decreased by $0.6 million and increased by $2.9 million, respectively, compared to the same periods in 2019. These changes were attributable to gains and losses generated by sales of our marketable securities. Specifically, in the second quarter of 2020, we sold securities at a gain to finance the up-front cash payment of approximately $300 million for the USWM Acquisition.
Income Tax Expense
The following table provides information regarding our income tax expense during the periods indicated (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months ended
September 30, | | Change | | Nine Months ended
September 30, | | Change |
| 2020 | | 2019 | | Amount | | Percent | | 2020 | | 2019 | | Amount | | Percent |
| Income tax expense | $12,714 | | $10,730 | | $1,984 | | 18% | | $32,773 | | $26,648 | | $6,125 | | 23% |
| Effective tax rate | 24.1% | | 27.1% | | | | | | 25.4% | | 25.0% | | | | |
Income tax expense was $5.2 million and $7.5 million for the three and nine months ended September 30,March 31, 2021 and 2020, as compared to same period in prior year, increasedrespectively. The decrease was mainly due to higher incomelower earnings before taxes, increased number of states in which we owes taxes and an increase in non-deductible expenses consequent to the USWM Acquisition.
Accordingly, the effective income tax rate for the nine months ended September 30, 2020 also increased, as compared to the same period in prior year.taxes. The effective income tax rate was 47.9% and 25.9% for the three months ended September 30,March 31, 2021 and 2020, decreasedrespectively. The effective income tax rate increase was due to greater research and development tax credit recognizedchanges in the quarter.
Net Earnings
The following table provides information regarding our neteffective state tax rates as a result of the transfer of workforce between legal entities and lower earnings duringbefore taxes due to the periods indicated (dollars in thousands):
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| Three Months ended September 30, | | Change | | Nine Months ended September 30, | | Change |
| 2020 | | 2019 | | Amount | | Percent | | 2020 | | 2019 | | Amount | | Percent |
| Net earnings | $ | 39,997 | | | $ | 28,860 | | | $ | 11,137 | | | 39% | | $ | 96,182 | | | $ | 79,927 | | | $ | 16,255 | | | 20% |
The increase in net earningsexpensing of the Navitor investment in the three and nine months ended September 30, 2020 was primarily due to increased net product sales generated from our commercial products, offset by period over period increased operating expenses, including transaction costs related to the USWM Acquisition.
Liquidity and Capital Resources
We have financed our operations primarily with cash generated from product sales, supplemented by cash generated by revenue from royalty and licensing arrangements, as well as proceeds from the sale of equity and debt securities. Continued cash generation is highly dependent on the continued commercial success of our five commercial products Trokendi XR, Oxtellar XR, APOKYN, MYOBLOC, and XADAGO, as well as the commercial success of our product candidates, if approved by the U.S. Food and when launched. We were cash flow positive and profitable from operations in 2019 and 2020.Drug Administration (FDA).
While we expect continued profitability in future years, we anticipate there may be significant variability from year to year in the level of our profits, particularly as we move forward with the anticipated commercial launch of SPN-812, assuming FDA approval.Qelbree, and the likely unfavorable impact of the upcoming loss of patent exclusivity for Trokendi XR in January 2023, or sooner under certain conditions.
We believe our existing cash and cash equivalents, marketable securities, and cash received from product sales will be sufficient to finance ongoing operations, develop and launch our new products, and fund label expansions for existing products. To continue to grow our business over the long-term, we plan to commit substantial resources to: product development and clinical trials of product candidates; business development, including acquisition and product in-licensing; and supportive functions such as compliance, finance, management of our intellectual property portfolio, information technology systems, and personnel. In each case, spending would be commensurate with the growth and needs of the business.
We may, from time to time, consider raising additional capital through: new collaborative arrangements; strategic alliances; additional equity and/or debt financings; or financing from other sources, especially in conjunction with opportunistic business development initiatives. We will continue to actively manage our capital structure and to consider all financing opportunities that could strengthen our long-term financial profile. Any such capital raises may or may not be similar to transactions in which we have engaged in the past. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all.
Financial Condition
Cash and cash equivalents, marketable securities, and long term marketable securities working capital, convertible notes and total stockholder’s equity, as of the periods presented below, are as follows (dollars in thousands):
| | | September 30 | | December 31 | | Change | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | Amount | | Percent | | March 31 | | December 31 | | Change |
| | | | | | | | | | 2021 | | 2020 | | Amount | | Percent |
| Cash and cash equivalents | Cash and cash equivalents | $ | 204,293 | | | $ | 181,381 | | | $ | 22,912 | | | 13% | Cash and cash equivalents | $ | 255,642 | | | $ | 288,640 | | | $ | (32,998) | | | (11)% |
| Marketable securities | Marketable securities | 147,657 | | | 165,692 | | | (18,035) | | | (11)% | Marketable securities | 135,459 | | | 133,893 | | | 1,566 | | | 1% |
| Long term marketable securities | Long term marketable securities | 388,185 | | | 591,773 | | | (203,588) | | | (34)% | Long term marketable securities | 416,566 | | | 350,359 | | | 66,207 | | | 19% |
| Total | Total | $ | 740,135 | | | $ | 938,846 | | | $ | (198,711) | | | (21)% | Total | $ | 807,667 | | | $ | 772,892 | | | $ | 34,775 | | | 4% |
| | Working capital | 252,409 | | | 312,057 | | | (59,648) | | | (19)% | |
| | Convertible notes, net (2023 Notes) | 357,521 | | | 345,170 | | | 12,351 | | | 4% | |
| | Total stockholder's equity | 708,879 | | | 595,428 | | | 113,451 | | | 19% | |
Total cash and cash equivalents, marketable securities and long term marketable securities decreasedincreased by $198.7$34.8 million in the first ninethree months of 2020,2021, primarily due to cash outlays related to the USWM Acquisition as well as the investment in Navitor. These uses were partially offset by cash generated from ongoing operations, and increases in the valuation of long term marketable securities.
Working capital at September 30, 2020 was $252.4 million, a decrease of $59.6 million as compared to $312.1 million at December 31, 2019. The decrease was the net of: increased accounts receivable of $45.8 million; increased cash, cash equivalents, and marketable securities of $4.9 million; and increases in current liabilities of $139.0 million.
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, the outstanding principal on our 0.625% Convertible Senior Notes Due 2023 (2023 Notes) was $402.5 million. No 2023 Notes have been converted as of September 30, 2020.March 31, 2021. There arewere no changes to the separate convertible note hedge transactions (collectively, the Convertible Note Hedge Transactions) and separate warrant transactions (the Warrant Transactions). SeeRefer to Part I, Item 1, Unaudited Condensed Financial Statements, Note 6,8, Convertible Senior Notes Due 2023, in the Notes to the Condensed Consolidated Financial Statements, for further discussion of the 2023 Notes and our other indebtedness.
Stockholders’ equity increased by $113.5 million during the nine months ended September 30, 2020, the combined effect of: net earnings of $96.2 million; share-based compensation of $13.4 million; and $2.3 million of unrealized gains on marketable securities, net of tax.
Summary of Cash Flows
The following table summarizes the major sources and uses of cash for the periods set forth below (dollars in thousands): | | | Nine Months ended September 30, | | Change | | Three Months ended March 31, | | Change |
| | 2020 | | 2019 | | Amount | | 2021 | | 2020 | | Amount |
| Net cash provided by (used in): | Net cash provided by (used in): | | | | | | Net cash provided by (used in): | | | | | |
| | Operating activities | Operating activities | | Operating activities | $ | 36,200 | | | $ | 8,916 | | | $ | 27,284 | |
| Operating earnings | $ | 128,455 | | | $ | 104,905 | | | $ | 23,550 | | |
| Working capital | (21,989) | | | (5,567) | | | (16,422) | | |
| Total operating activities | 106,466 | | | 99,338 | | | 7,128 | | |
| | Investing activities | Investing activities | (84,044) | | | (177,362) | | | 93,318 | | Investing activities | (71,445) | | | 35,438 | | | (106,883) | |
| | Financing activities | Financing activities | 490 | | | 2,665 | | | (2,175) | | Financing activities | 2,247 | | | 32 | | | 2,215 | |
| | Net change in cash and cash equivalents | Net change in cash and cash equivalents | $ | 22,912 | | | $ | (75,359) | | | $ | 98,271 | | Net change in cash and cash equivalents | $ | (32,998) | | | $ | 44,386 | | | $ | (77,384) | |
Operating Activities
Net cash provided by operating activities is comprised of two components:was $36.2 million and $8.9 million for the three months ended March 31, 2021, and 2020, respectively. The increase in cash provided by operating earnings; and changes in working capital. The net cashflows provided by operating activities of $106.5 million, wasis primarily driven by increased operating earnings and a decrease in net working capital. Cash provided by operating activities increased by $7.1 million during the nine month period ended September 30, 2020, as compareddue to the prior year period.
Cash utilizedchanges in working capital primarilywhich reflects the timing impacts of: cash collections on receivables; increases in accrued product returns and rebates; and settlement of payables, as described below.
The changes in certain operating assets and liabilities are as follows (dollars in thousands): | | | | | | | | | | | | | | | | | |
| | Nine Months ended September 30, | | |
| | 2020 | | 2019 | | Explanation of Change |
| (Increase) Decrease in: | | | | | |
| Accounts receivable | $ | (26,840) | | | $ | 16,344 | | | Receivables increase in 2020 due to increased prescription unit volume, timing of receivable collections and partly due to receivables acquired consequent to the USWM acquisition.
Receivables decreased in 2019 due to sequential decline in prescription volume, amplified by channel inventory reduction in first quarter 2019. |
| Inventories | (5,437) | | | 155 | | | Inventory increase in 2020 due to capitalization of pre-launch inventory and inventory acquired in the USWM acquisition, offset by timing of manufacturing campaigns.
Inventory decrease in 2019 due to timing of manufacturing campaigns. |
| Prepaid expenses, other current assets and other assets | (11,734) | | | (4,377) | | | The increase in 2020 was primarily due to refund of PDUFA Fees, timing of income tax payments and partly due prepaid and other assets acquired consequent to the USWM acquisition.
The increase in 2019 was due to timing differences related to deposits for equipment purchases and prepaid clinical trial costs. |
| Increase (Decrease) in: | | | | | |
| Accounts payable and accrued expenses and noncurrent liabilities | 6,883 | | | 786 | | | The change in both periods was due to timing of receipt of vendor invoices, vendor payments and liabilities acquired in the USWM acquisition. |
| Accrued product returns and rebates | 21,166 | | | (9,013) | | | The increase in 2020 was due to: increased provision for rebates due to growth in prescription unit volume; growth in Medicaid and managed care rebates; higher expenditures for patient co-pay programs; and higher provision for returns.
The decrease in 2019 was primarily due to impact of channel inventory reduction in first quarter of 2019 and timing of rebate payments. |
| Income taxes payable | (2,538) | | | (7,559) | | | The decrease in both periods is primarily due to timing of income tax payments made. |
| Other | (3,489) | | | (1,903) | | | The decrease in both periods was primarily due to decreased employee-related costs and timing of operating lease payments.
|
| Total | $ | (21,989) | | | $ | (5,567) | | | |
Investing Activities
Net cash used in investing activities was $84.0$71.4 million for the ninethree months ended September 30, 2020,March 31, 2021, as compared to $177.4$35.4 million used innet cash provided by investing activities for the same period in 2019.2020. The change was primarily due to an increase in 2020 reflects sale of marketable securities of $319.4 million in 2020, offset by outlays for the USWM Acquisition of $297.2 million, and the equity investment in Navitor of $15.0 million. Purchasesnet purchases of marketable securities in 2019 resulted2021 resulting from investment of excess cash in long term marketable securities.
securities as compared to the same period in prior year.Financing Activities
Net cash provided by financing activities for the ninethree months ended September 30, 2020 declinedMarch 31, 2021 increased by $2.2 million million, as compared to the same period in 2019.2020, primarily due to higher proceeds from option exercises.
Contractual Obligations and Commitments
Refer to the “Contractual Obligations and Commitments” section in “Part II, Item 7 — Management’s Discussion and Analysis of Liquidity and Capital Resources”, of our Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of our contractual obligations. Refer to2020, and Note 1915, Commitments and Contingencies, in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1,
Unaudited Condensed Financial Statements, of this Quarterly Report on Form 10-Q for athe discussion of commitments assumed in connection with the USWM Acquisition.our contractual obligations.
Off-Balance Sheet Arrangements
Other than the unconsolidated variable interest entities discussed in Part I, Item 1, Unaudited Condensed Financial Statements, of this Quarterly Report on Form 10-Q, we do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purpose entities. These would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.
In addition, we do not engage in trading activities involving non-exchange traded contracts.
Recently Issued Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 2 in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1, Unaudited Condensed Financial Statements, of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to certain risks that may affect our results of operations, cash flows and fair value of assets and liabilities, including market risk, interest rate risk, foreign exchange risk, credit risk and liquidity risk. The primary objective of our investment activities is to preserve our capital so as to be able to fund operations and to facilitate business development activities. We also seek to maximize income from our investments without assuming significant interest rate risk, liquidity risk, or risk of default by investing in investment grade securities with maturities of four years or less. We do not enter into financial instruments for trading or speculative purposes. We hold our investments through maturity.
Our exposure to market risk is confined to investments in cash, cash equivalents, marketable securities, and long term marketable securities. As of September 30, 2020 and DecemberMarch 31, 2019,2021, we had unrestricted cash, cash equivalents, marketable securities, and long term marketable securities of $740.1 million and $938.8 million, respectively. Our cash and cash equivalents consist primarily of cash held at banks, certificates of deposit and money market funds, all of which have short-term maturities. Our marketable securities consist of investments in commercial paper, investment grade corporate debt securities, investment in U.S. government agency and municipal debt securities, all of which are reported at fair value.
The fair value of our marketable securities can be volatile, as a result of changes in market interest rates and/or liquidity conditions in the financial markets. Exogenous events, such as the COVID-19 pandemic, can also create volatility.
In addition, we generally hold our marketable securities to maturity. Because of the relatively short holding period and because we generally hold these securities to maturity, we do not believe that an increase or decrease in interest rates would have a significant impact on the realizable value of our investments.$807.7 million.
In connection with the 2023 Notes, we have separately entered into Convertible Note Hedge Transactions and Warrant Transactions to reduce the potential dilution of the Company’s common stock upon conversion of the 2023 Notes. Warrants were issuedNotes, and to mitigatepartially offset the cost to purchase the Convertible Note Hedge Transactions.Transactions, respectively.
Our cash and cash equivalents consist primarily of cash held at banks and investments in highly liquid financial instruments with an original maturity of three months or less. Our marketable securities as of March 31, 2021, which are reported at fair value, consist of investment grade corporate debt securities. We place all investments with governmental, industrial, or financial institutions whose debt is rated as investment grade. We generally hold these securities to maturities of one to four years. Because of the relatively short period that we hold our investments and because we generally hold these securities to maturity, we do not believe that a change in interest rates would have any significant impact on the realizable value of our investments. We do not have any currency or other derivative financial instruments other than the outstanding warrants to purchase common stock and the convertible note hedges.
Financial investments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, marketable securities and accounts receivable. The counterparties are industrial corporations, governmental institutions and financial institutions, all of high credit standing. Substantially all of the Company's cash, cash equivalents and marketable securities are maintained in U.S. government agency debt, and debt of investment grade corporations. Deposits held
with banks may exceed the amount of governmental insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal default risk.
Credit risk from our accounts receivable arises from our product sales. Three wholesale pharmaceutical wholesalers/distributors, AmerisourceBergen Drug Corporation, Cardinal Health, Inc. and McKesson Corporation, each individually accounted for more than 20% of our total gross product sales and accounts receivable, respectively, for the nine months ended September 30, 2020. They also collectively accounted for more than 90% of our total gross product sales and accounts receivable.
We monitor the financial performance and creditworthiness of our customers so that we can properly assess and respond to changes in their credit profile. Weakness in economic conditions in the U.S., including the impact of the COVID-19 pandemic, can result in extended collection periods. We continue to monitor these conditions, including volatility of the financial markets, and continually assess their possible impact on our business. To date, we have not experienced any significant losses with respect to the collection of our accounts receivable.
We may contract with CROs andclinical research organizations (CROs), investigational sites and contract manufacturing organizations (CMOs) globally. Currently, there are twowe have only one ongoing clinical trials being conductedtrial, for SPN-817, outside the U.S.
We have CMOs outside of the U.S. who manufacture and supply certain of our clinical and commercial products and raw materials. We do not hedge our foreign currency exchange rate risk. Transactions denominated in currencies other than the U.S. dollar are recorded based on exchange rates at the time such transactions arise. As of September 30, 2020March 31, 2021 and December 31, 2019,2020, substantially all of our liabilities were denominated in the U.S. dollar denominated.dollar. We do not believe that changes in foreign currency exchange rates over the quarters ended March 31, 2021 and December 31, 2020 had a significant impact on our consolidated results of operations.
Inflation generally affects us by increasing our cost of labor and the cost of services provided by our vendors. We do not believe that inflation and changing prices over the nine monthsquarters ended September 30,March 31, 2021 and December 31, 2020 and 2019 had a significant impact on our condensed consolidated results of operations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures over financial reporting, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms. Moreover, such information is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
As discussed in Note 3 in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q, the Company completed its acquisition of USWM Enterprises, LLC, a privately-held biopharmaceutical company (USWM Acquisition). Accordingly, pursuant to the Securities and Exchange Commission's general guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the scope of our assessment of the effectiveness of disclosure controls and procedures does not include internal control over financial reporting related to the recent acquisition. Since the date of acquisition, financial results of the acquired business have been included in the Company's condensed consolidated financial statements. The acquired business contributed 37.9% of the total assets as of September 30, 2020 and 13.7% and 7.1% of total revenues and net earnings, respectively, for the nine months ended September 30, 2020.
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures over financial reporting as of September 30, 2020,March 31, 2021, the end of the period covered by this report. Based on that evaluation, under the supervision and with the participation of our management, including our CEO and CFO, we concluded that our disclosure controls and procedures were effective as of September 30, 2020.March 31, 2021.
Changes in Internal Control over Financial Reporting
Other thanOn June 6, 2020, the implementationCompany completed the USWM Acquisition. As of March 31, 2021, the integration of the internal controls relatedrelating to the accounting ofbusiness acquired through the USWM Acquisition into ours has been substantially completed, with the exception of the business combination accounting that will be completed during the second quarter of 2021, and the relatedacquired business will be included in our evaluation of the effectiveness of our internal control over financial statement reporting there has beenfor fiscal 2021. During the three months ended March 31, 2021, no changechanges occurred in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or that isare reasonably likely to materially affect, our internal control over financial reporting.
We are currently in the process of evaluating MDD US Enterprises, LLC’s (formerly USWM Enterprises, LLC) internal control over financial reporting as part of the ongoing integration of the acquired business. Any changes resulting from this
evaluation and ongoing integration activities that materially affect or are reasonably likely to materially affect our internal control over financial reporting will be disclosed as required by applicable law.
In October 2020, the Company announced, effective on or about November 20, 2020, the retirement of the current CFO and appointment of a new CFO.
As a result of the COVID-19 pandemic, certain employees of the Company began working remotely in March 2020. These changes to the working environment have not had a material impact on our internal controls over financial reporting. We are continually monitoring and assessing the COVID-19 situation for possible impact on our internal controls, in order to assess and to minimize the pandemic's impact on their design and operating effectiveness.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time and in the ordinary course of business, we may be subject to various claims, charges and litigation. We may be required to file infringement claims against third parties for the infringement of our patents.
Oxtellar XR®
The Company received a Paragraph IV Notice Letter from generic drug maker RiconPharma, LLC (“Ricon”) dated April 20, 2021 directed to nine of its Oxtellar XR® Orange Book patents. Supernus��s U.S. Patent Nos. 7,722,898; 7,910,131; 8,617,600; 8,821,930; 9,119,791; 9,351,975; 9,370,525; 9,855,278; and 10,220,042 generally cover once-a-day oxcarbazepine formulations and methods of treating seizures using those formulations. The FDA Orange Book lists all nine of the Company’s Oxtellar XR® patents as expiring on April 13, 2027. Supernus is reviewing the details of Ricon’s Notice Letter and intends to vigorously enforce its intellectual property rights relating to Oxtellar XR®.
The Company received a Paragraph IV Notice Letter from generic drug makers Apotex Inc. and Apotex Corp. (collectively “Apotex”) dated May 13, 2020 directed to nine of its Oxtellar XRXR® Orange Book patents. Supernus’s U.S. Patent Nos. 7,722,898, 7,910,131, 8,617,600, 8,821,930, 9,119,791, 9,351,975, 9,370,525, 9,855,278,7,722,898; 7,910,131; 8,617,600; 8,821,930; 9,119,791; 9,351,975; 9,370,525; 9,855,278; and 10,220,042 generally cover once-a-day oxcarbazepine formulations and methods of treating seizures using those formulations. The FDA Orange Book lists all nine of ourthe Company’s Oxtellar XRXR® patents as expiring on April 13, 2027.
On June 26, 2020, the Company filed a lawsuit against Apotex alleging infringement of the Company’s nine patents. The Complaint—filed in the U.S. District Court for the District of New Jersey—alleges, inter alia, that Apotex infringed ourthe Company’s Oxtellar XRXR® patents by submitting to the FDA an Abbreviated New Drug Application (ANDA),(“ANDA”) seeking to market a generic version of Oxtellar XRXR® prior to the expiration of itsthe Company’s patents. Filing its June 26, 2020 Complaint within 45 days of receiving Apotex’s Paragraph IV certification notice entitles Supernus to an automatic stay preventing the FDA from approving Apotex’s ANDA for 30 months from the date of the Company'sCompany’s receipt of the Paragraph IV Notice Letter.
On September 4, 2020, Apotex answered the Complaint and denied the substantive allegations of the Complaint. Apotex also asserted Counterclaims seeking declaratory judgments of non-infringement for the nine Oxtellar XR® Orange Book patents.
The Company's responses to Apotex’s counterclaims were filed On October 30, 2020.2020, the Company filed its Reply, denying the substantive allegations of Apotex’s Counterclaims. Following the initial Rule 16 Scheduling Conference, the Court issued a case schedule that provides for a trial in June or July 2022. Pretrial discovery is ongoing as of the date of this filing.
Trokendi XR®
The Company received a Paragraph IV Notice Letter from generic drug makers Ajanta Pharma Limited and Ajanta Pharma USA Inc. (collectively “Ajanta”) dated February 10, 2021 directed to ten of its Trokendi XR® Orange Book patents. Supernus’s U.S. Patent Nos. 8,298,576; 8,298,580; 8,663,683; 8,877,248; 8,889,191; 8,992,989; 9,549,940; 9,555,004; 9,622,983; and 10,314,790 generally cover once-a-day topiramate formulations and methods of treating or preventing seizures and migraines using those formulations. The FDA Orange Book currently lists U.S. Patent No. 8,298,576 as expiring on April 4, 2028 and U.S. Patent Nos. 8,298,580; 8,663,683; 8,877,248; 8,889,191; 8,992,989; 9,549,940; 9,555,004; 9,622,983; and 10,314,790 as expiring on November 16, 2027. On March 26, 2021, the Company filed a lawsuit against Ajanta alleging infringement of the Company’s Trokendi XR® Orange Book patents. The Complaint—filed in the U.S. District Court for the District of New Jersey—alleges,
inter alia, that Ajanta infringed the Company’s Trokendi XR® patents by submitting to the FDA an ANDA seeking to market a generic version of Trokendi XR® prior to the expiration of the Company’s patents. Filing its March 26, 2021 Complaint within 45 days of receiving Ajanta’s Paragraph IV certification notice entitles Supernus to an automatic stay preventing the FDA from approving Ajanta’s ANDA for 30 months from the date of the Company’s receipt of the Paragraph IV Notice Letter.
XADAGO®
OIn April 29, 2021, Newron Pharmaceuticals S.p.A. (“Newron”) received a Paragraph IV Notice Letter (“Notice Letter”) from Aurobindo Pharma Limited, India and its wholly owned subsidiary Aurobindo Pharma USA Inc. (collectively “Aurobindo”) , advising Newron of the filing by Aurobindo of an Abbreviated New Drug Application to the U.S. Food and Drug Administration (“FDA”) seeking approval for safinamide tablets. The Notice Letter is directed to the three XADAGO patents with U.S. patent numbers 8,076,515, 8,278,485 and 8,283,380, that expire between June 2027 and December 2028 and are listed in the FDA's publication, Approved Drug Products with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book. The Company has a license agreement with Zambon S.p.A., Newron’s partner, related to the XADAGO Patents, and as a new chemical entity, XADAGO is under the 5 year FDA exclusivity period that expires on March 21, 2022. The Company is currently reviewing the details of this Notice Letter with its partners to respond as appropriate to protect the intellectual property rights relating to XADAGO.
Item 1A. Risk Factors
Any investment in our business involves a high degree of risk. Before making an investment decision, you should carefully consider the information we include in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes; the additional information in the other reports we file with the Securities and Exchange Commission; and the risks described in our Annual Report on Form 10-K for the year ended December 31, 2019 and Quarterly Reports on Form 10-Q for the quarters ended June 30, 2020 and March 31, 2020. These risks may result in material harm to our business and our financial condition and results of operations. If a material, adverse event were to occur, the market price of our common stock may decline and you could lose part or all of your investment.
The risks described below reflect substantive changes from, or additions to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2020.
Risks Related to Our Industry and Business
We are dependent on the commercial success of our products in the U.S.
Our financial performance, including our ability to replace revenue and income lost to generic products and other competitors as well as to grow our business, depends heavily on the commercial success of our products. A substantial amount of our resources are focused on generating, maintaining and/or expanding the revenue generated by our approved products in the U.S. If any of our major products, Trokendi XR, Oxtellar XR, Qelbree or APOKYN, were to become subject to problems, such as changes in prescription growth rates, unexpected side effects, loss of intellectual property protection, supply chain or product supply shortages, regulatory proceedings, changes in labeling, publicity adversely affecting doctor or patient confidence in our product, material product liability litigation, pressure from new or existing competitive products, or adverse changes in coverage under managed care programs, the adverse impact on our revenue and profit could be significant. In addition, our revenue and profit could be significantly impacted by the timing and rate of commercial acceptance of key new products.
Our ability to generate significant product revenue from sales of our products in the near term will depend on, among other things, our ability to:
•Defend our patents, intellectual property, and products from the competition, both branded and generic;
•Maintain commercial manufacturing arrangements with third-party manufacturers;
•Produce, through a validated process, sufficiently large quantities of our products to meet demand;
•Continue to maintain a wide variety of internal sales, distribution, and marketing capabilities, sufficient to sustain and grow revenue;
•Continue to maintain and grow widespread acceptance of our products from physicians, health care payors, patients, pharmacists, and the medical community;
•Properly price and obtain adequate reimbursement coverage of these products by governmental authorities, private health insurers, managed care organizations, and other third-party payors;
•Maintain compliance with ongoing FDA labeling, packaging, storage, advertising, promotion, recordkeeping, safety, and other post-market requirements;
•Obtain approval from the FDA to expand the labeling of our approved products for additional indications;
•Adequately protect against and effectively respond to any claims by holders of patents and other IP rights alleging that our products infringe their rights; and
•Adequately protect against and effectively respond to any unanticipated adverse effects or unfavorable publicity that develops with respect to our products, as well as respond to the emergence of new or existing competitive products, which may be proven to be more clinically effective and cost-effective.
There are no guarantees that we will be successful in completing these tasks. We will need to continue investing substantial financial and management resources to maintain our commercial sales and marketing infrastructure and recruit and train qualified marketing, sales, and other personnel.
Sales of our products may slow for a variety of reasons, including competing products or safety issues. Any increase in sales of our products will be dependent on several factors, including our ability to educate physicians, to increase physician awareness, and physician acceptance of the benefits and cost-effectiveness of our products relative to competing products.
Our ability to increase market acceptance of any of our products or to gain market acceptance of approved product candidates among physicians, patients, health care payors, and the medical community will depend on a number of factors, including:
•Acceptable evidence of safety and efficacy;
•Relative convenience and ease of administration;
•Prevalence, nature, and severity of any adverse side effects;
•Availability of alternative treatments, including branded and generic products; and
•Pricing and cost effectiveness.
Further, our products are subject to continual review by the FDA. We cannot provide assurance that newly discovered or reported safety issues would not arise. With the use of any marketed drug by a broader patient population, serious adverse events may occur from time to time that initially does not appear to be related to the drug itself. Any safety issues could cause us to suspend or to cease marketing of our approved products; cause us to modify how we market our approved products; subject us to substantial liabilities; and adversely affect our revenues and financial condition. In the event of a withdrawal of any of our products from the market, our revenues would decline significantly, and our business would be seriously harmed and could fail.
In addition, we have expressed certain long term revenue expectations. If we are not successful in broadening and/or maintaining the current commercial acceptance of our products, such that we cannot achieve those revenue expectations with respect to such products, this could result in a material adverse impact on our anticipated revenue, earnings, and liquidity.
If other versions of extended or controlled release oxcarbazepine or topiramate, or other products including generics containing apomorphine hydrochloride or viloxazine hydrochloride, are approved and successfully commercialized, our business could be materially harmed.
Third parties have, and in the future may, receive approval to manufacture and market their own versions of extended release topiramate in the U.S. For example, Upsher-Smith launched Qudexy XR (extended release topiramate) and a branded generic version of Qudexy XR in 2014. Upsher Smith also entered into a settlement with two generic companies to launch a generic to Qudexy XR in 2020. In February 2021, one of the generic companies, Glenmark, entered the U.S. market with its own therapeutically equivalent generic products to Qudexy XR. The entry of new generic products could adversely impact the sales or prescriptions for Trokendi XR or could result in an earlier than anticipated entry of generics to compete with Trokendi XR. The Company has entered into settlement agreements with third parties permitting the sale of a generic version of Trokendi XR on January 1, 2023, or earlier under certain circumstances. These circumstances include specific thresholds of volume declines for extended unit prescriptions as reported by IQVIA. We have the right to defend our products against third parties who may infringe or are infringing our patents.
Third parties in the future may receive approval to manufacture and market their own versions of extended release oxcarbazepine in the U.S. In addition, we are aware of companies who are marketing modified-release oxcarbazepine products outside of the U.S., such as Apydan, which was developed by Desitin Arzneimittel GmbH and which requires twice-daily administration. If companies with modified-release oxcarbazepine products outside of the U.S. pursue or obtain approval of their products within the U.S., such competing products may limit the potential success of Oxtellar XR in the U.S. Our business and growth prospects could be materially impaired.
Accordingly, if any third party is successful in obtaining approval to manufacture and market its own version of extended release oxcarbazepine or topiramate in the U.S., we may not be able to prospectively realize revenues from Oxtellar XR or Trokendi XR.
In addition, third parties have, and in the future may, receive approval to manufacture and market their own products, including generics containing apomorphine hydrochloride for the treatment of Parkinson’s Disease in the U.S. For example, Acorda Therapeutics, Inc. launched Inbrija, an inhalable form of levodopa in 2019 and Sunovion Pharmaceuticals, Inc.’s (Sunovion, a subsidiary of Sumitomo Dainippon Pharma Co. Ltd) launched KYNMOBI, a sublingual film formulation of apomorphine hydrochloride, in 2020. The success of these products and the entry of new products could adversely impact the sales of prescriptions for APOKYN.
Third parties in the future may receive approval to manufacture and market their own versions of viloxazine hydrochloride. Accordingly, if any third party is successful in obtaining approval to manufacture and market its own version of viloxazine hydrochloride, such competing products may limit the potential success of Qelbree in the U.S. Our business and growth prospects could be materially impaired.
We are subject to uncertainty relating to payment or managed care reimbursement policies, which, if not favorable for our products or product candidates, could hinder or prevent our commercial success.
Our business is operating in an ever more challenging environment, with significant economic pressures exerted by federal and state governments, insurers, and private payors on the pricing of our products, affecting our ability to obtain and/or maintain satisfactory rates of reimbursement for our products. The U.S. federal and state governments and private payors are under intense pressure to control healthcare spending even more tightly than in the past. These pressures are further compounded by consolidation among distributors, retailers, private insurers, managed care organizations, and other private payors, resulting in an increase in their negotiating power, particularly with respect to our products. In addition, these pressures are intensified by intense, adverse publicity about pricing for pharmaceuticals. These prices are sometimes characterized as excessive, leading to government investigations and legal proceedings regarding pharmaceutical pricing practices.
Our ability, or our collaborators' ability, to successfully commercialize our products and product candidates, including SPN-812 for adult ADHD patients and SPN-830, will depend in part on the coverage and reimbursement levels set by governmental authorities, private health insurers, managed care organizations, and other third-party payors.
As a threshold for coverage and reimbursement, third-party payors require that drug products be approved for marketing by the FDA. Third-party payors are increasingly challenging the effectiveness of and prices charged for medical products and services. Government authorities and third-party payors have attempted to control costs, in some instances, by limiting coverage, by limiting the amount of reimbursement for particular medications, or by encouraging the use of lower-cost generic products.
We cannot be sure that reimbursement will be available for any of the products that we develop and, if reimbursement is available, the level of reimbursement. Moreover, that level of reimbursement may change over time as a result of requests from payors for higher levels of fees. Reduced or partial payment, or reduced reimbursement coverage, could make our products or product candidates, including Oxtellar XR, Trokendi XR, Qelbree and APOKYN, less attractive to patients and prescribing physicians. We also may be required to sell our products or product candidates at a significant discount, which would adversely affect our ability to realize an appropriate return on our investment in our products or product candidates or to maintain profitability.
We expect that private insurers and managed care organizations will consider the efficacy, cost effectiveness, and safety of our products or product candidates, including Oxtellar XR, Trokendi XR, Qelbree and APOKYN, in determining whether to approve reimbursement for such products or product candidates and to what extent they will provide reimbursement. Moreover, they will consider the efficacy and cost effectiveness of comparable or competitive products, including generic products, in making reimbursement decisions for our products. Because each third-party payor individually approves payment or reimbursement, obtaining these approvals can be a time consuming and expensive process, requiring us to provide scientific or clinical support for the use of each of our products or product candidates separately to each third-party payor. In some cases, it could take months or years before a particular private insurer or managed care organization reviews a particular product. Prior to that time, reimbursement may be negligible. We may ultimately be unsuccessful in obtaining coverage. In addition, our competitors may have more extensive existing business relationships with third-party payors that could adversely impact the coverage for our products.
Our business would be materially and adversely affected if we do not receive reimbursement for our products or product candidates from private insurers in a timely fashion or on a satisfactory basis. Our products and product candidates may not be considered cost-effective, and coverage and reimbursement may not be available or economically sufficient to allow us to sell our products or product candidates on a profitable basis.
Our business would also be adversely affected if private insurers, managed care organizations, the Medicare program, or other reimbursing bodies or payors limit the indications for which our products or product candidates will be reimbursed.
Moreover, increasing efforts by governmental and third-party payors in the U.S. to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newly approved products. As a result, they may not cover or provide adequate reimbursement for our products or product candidates.
There has been increasing legislative and enforcement interest in the U.S. with respect to specialty drug pricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed federal and state legislative initiatives designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under the Medicare program, to review the relationship between pricing and manufacturer patient programs, and to reform government reimbursement methodologies for drugs. We expect to experience pricing pressures in connection with the sale of any of our products and product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, additional cost containment initiatives, and additional legislative changes.
In some foreign jurisdictions, particularly Canada and Europe, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take 6 to 12 months, or longer, after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought, or to obtain pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our products or product candidates, if approved, to other available therapies. If reimbursement for our products or product candidates is unavailable in any country in which reimbursement is sought or is limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed and unprofitable.
In addition, many managed care organizations negotiate the reimbursement price of products through the use of formularies, which establish reimbursement levels. Exclusion of a product from a formulary can lead to sharply reduced usage in the managed care organization's patient population because reimbursement is limited and/or negligible. If our products or product candidates are not included within an adequate number of managed care formularies or reimbursed at adequate levels, or if those policies increasingly favor generic products, our market share and gross margins could be negatively affected. This would have a material adverse effect on our overall business and financial condition.
We expect these challenges to continue and to potentially intensify in 2021 and following years, as political pressures mount, and healthcare payors, including government-controlled health authorities, insurance companies, and managed care organizations, step up initiatives to reduce the overall cost of healthcare, restrict access to higher-priced new medicines, increase the use of generic products and impose overall price cuts. Such pressures could have a material adverse impact on our business, financial condition, and results of operations, as well as on our reputation.
We depend on wholesalers, distributors, and specialty pharmacies for the retail distribution of our products. If we lose any of our significant wholesaler, distributor, or specialty pharmacy accounts, our business could be harmed.
The majority of the sales of Oxtellar XR, Trokendi XR, XADAGO, and MYOBLOC are made to wholesalers and distributors who, in turn, sell our products to pharmacies, hospitals, and other customers. The majority of sales of APOKYN are made to specialty pharmacies, including Accredo Health Group, Inc. and Caremark LLC. For the year ended December 31, 2020, three wholesale pharmaceutical distributors, AmerisourceBergen Drug Corporation, Cardinal Health, Inc., and McKesson Corporation, each individually accounted for more than 25% of our total revenue from sales of our commercial products and collectively accounted for more than 85% of our total revenue from sales of these products in 2020. For the year ended December 31, 2020, the two specialty pharmacies, Accredo Health Group, Inc. and Caremark LLC, accounted for more than 35% individually and more than 80% collectively of the total revenue from sales of APOKYN.
The loss of any of these wholesale pharmaceutical distributors or wholesale and specialty pharmacy accounts, or a material reduction in their purchases, could have a material adverse effect on our business, results of operations, financial condition, and prospects. In addition, these wholesale customers comprise a significant part of the distribution network for pharmaceutical products in the U.S. This distribution network has undergone and may continue to undergo significant
consolidation marked by mergers and acquisitions. As a result, a small number of large wholesale distributors control a significant share of the market.
Consolidation of drug wholesalers has increased. This may result in increased competition and pricing pressures on pharmaceutical products. We cannot assure you that we can manage these pricing pressures or that wholesaler purchases will not fluctuate unexpectedly from period to period.
Sales of our products can be greatly affected by the inventory levels that our respective wholesalers, specialty pharmacies, and distributors carry. We monitor wholesalers, specialty pharmacies, and distributor inventory of our products using a combination of methods. Pursuant to distribution service agreements with our three largest wholesale customers, we receive product inventory reports. For other wholesalers where we do not receive inventory reports, our estimates of wholesaler inventories may differ significantly from actual inventory levels. Significant differences between actual and estimated inventory levels may result in excessive stocking, resulting in our holding substantial quantities of unsold inventory, or, alternatively, inadequate supplies of product in the distribution channels. This could result in our inability to support sales at the retail level. These changes may cause our revenues to fluctuate significantly from quarter to quarter and, in some cases, may cause our operating results for a particular quarter to be below our expectations, the expectations of securities analysts, and/or the expectations of investors.
At times, wholesalers and distributors may increase inventory levels in response to anticipated price increases, resulting in both greater wholesaler purchases prior to the anticipated price increase and in reduced wholesaler purchases in later quarters. Accordingly, this may cause substantial fluctuations in our results of operations from period to period. If our financial results are below expectations for a particular period, the market price of our common stock may drop significantly.
We may not be able to effectively market and sell our product candidates, if approved, in the U.S.
We plan on building or expanding our sales and marketing capabilities in the U.S. to commercialize our product candidates if approved. This will require investing significant amounts of financial and management resources. If we are unable to establish and maintain adequate sales and marketing capabilities for our product candidates or do so in a timely manner, we may not be able to generate sufficient product revenues from our product candidates to be profitable. The cost of establishing and maintaining such marketing and sales capabilities may not be economically justifiable in light of the revenues generated by any of our product candidates. With the approval of Qelbree, our sales representatives who currently support Trokendi XR and Oxtellar XR will now devote their full efforts to the launch of Qelbree. In turn, these sales representatives will be replaced with a smaller contract field force, which could have a detrimental impact on the future sales performance of Trokendi XR and Oxtellar XR.
Final marketing approval of any of our product candidates or approval of additional indications for existing products by the FDA or other regulatory authorities may be delayed, limited, or denied, any of which would adversely affect our ability to generate operating revenues.
We are dependent on obtaining regulatory approval of our product candidates and approval for additional indications for existing products. Our business depends on successful clinical development; i.e., successful completion of clinical trials and completion of requisite manufacturing information. We are not permitted to market any of our product candidates in the U.S. until we receive approval of an NDA from the FDA or market in any foreign jurisdiction until we receive approval from the requisite authority. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity, and novelty of the product, and requires the expenditure of substantial resources. We cannot predict whether or when we will obtain regulatory approval to commercialize our product candidates. We cannot, therefore, predict the timing of any future revenues from these product candidates.
The FDA has substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate or deny a prior approval supplement(1) for many reasons. For example, the FDA
•Could reject or delay the marketing application for an NCE;
•Could determine that we cannot rely on Section 505(b)(2) for any approval of our product candidates;
•Could determine that the information provided by us was inadequate, contained clinical deficiencies, or otherwise failed to demonstrate the safety and effectiveness of any of our product candidates for a specific indication;
•May not find the data from bioequivalence studies and/or clinical trials sufficient to support the submission of an NDA or to obtain marketing approval in the U.S.;
•May find the clinical and other benefits of our product candidates do not outweigh their safety risks;
•May disagree with our trial design or our interpretation of data from preclinical studies, bioequivalence studies, and/or clinical trials, or may change the requirements for approval even after they have reviewed and commented on the design for our trials; the outcome and measurement scale used in the trials; or the clinical protocols whether with or without a special protocol assessment process;
•May determine that we have identified the wrong reference listed drug or drugs, or that approval of our Section 505(b)(2) application of our product candidate is blocked by patent or non-patent exclusivity of the reference listed drug or drugs;
•May identify deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we enter into agreements for the supply of raw materials, including the active pharmaceutical ingredient (API) or formulated product used in our product candidates, wherein those deficiencies may result in an interruption in the ability to supply product;
•May approve our product candidates for fewer or more limited indications than we request, or may grant approval contingent on the performance of costly post-approval clinical trials;
•May change their approval policies or adopt new regulations;
•May not approve the labeling claims that we believe are necessary or desirable for the successful commercialization of our product candidates or may approve them with warnings and precautions that could limit the acceptance of our product candidates and their commercial success; or
•May not approve the addition of new indications to the label of our existing products.
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(1) Changes that have a substantial potential to have an adverse effect on product quality, identity strength, purity, or potency (i.e., major changes) require submission of a "prior approval supplement" and approval by the FDA prior to distribution of the drug product made using the change.
Notwithstanding the approval of many products by the FDA pursuant to Sections 505(b)(1) and 505(b)(2), over the last few years, some pharmaceutical companies and others have objected to the FDA's interpretation of Section 505(b)(2). If the FDA changes its interpretation of Section 505(b)(2), or if the FDA's interpretation is successfully challenged in court, this could delay or even prevent the FDA from approving any Section 505(b)(2) application that we submit. Any failure to obtain regulatory approval of our product candidates would eliminate our ability to generate revenues for that candidate. Any failure to obtain such approval for all of the indications and labeling claims we deem desirable could reduce our potential revenues.
The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming. We may not be able to obtain these clearances or approvals on a timely basis, if at all. The FDA exercises significant discretion over the regulation of combination products, including drug and device components in a combination product.
The FDA could in the future require additional regulation under the medical device provisions of the FDCA. We must comply with the QSR, which sets forth the FDA’s cGMP, requirements for medical devices, and other applicable government regulations and corresponding foreign standards for drug cGMPs. If we fail to comply with these regulations, it could have a material adverse effect on our business and financial condition.
Following FDA approval of Qelbree in April 2021 for the treatment of ADHD in pediatric patients, additional indications may be submitted using the Section 505(b)(2) regulatory pathway. We plan to submit a filing under Section 505(b)(2) to the FDA for Qelbree in adults in the third quarter of 2021. The FDA may not approve our filing under Section 505(b)(2) for this for other indication(s), and therefore we would be required to submit a full NDA filing. In such a case, the time and financial resources required to obtain approval could also significantly increase.
In addition, we intend to complete the development of an infusion-pump delivery system containing apomorphine (SPN-830) and have submitted the NDA for SPN-830 to the FDA in September 2020. We received a refusal to file letter from the FDA and met with the FDA in March 2021 to clarify the steps required for the resubmission of the NDA for SPN-830. We are investing significant amounts of resources into the continued development of SPN-830. If we are unable to gain FDA approval for SPN-830 or are unable to successfully commercialize it, we may not be able to generate revenue to cover the cost of invested company resources invested in this product candidate. In addition, as discussed further below, failure to gain FDA approval could have an adverse effect on SPN-830’s commercial potential or could require additional costly studies.
If we fail to produce our products and product candidates in the volumes that we require on a timely basis or fail to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of our products and product candidates or be required to withdraw our products from the market.
We do not currently own or operate manufacturing facilities for the commercial production of any of our products or our product candidates, nor do we have plans to develop our own manufacturing operations at a commercial scale in the foreseeable
future. We currently depend on third-party clinical manufacturing organizations (CMOs), who offer a comprehensive range of contract manufacturing and packaging services, in various countries for the supply of API for our products and product candidates, including drug substances for our preclinical research and clinical trials. For Trokendi XR, Oxtellar XR, Qelbree, MYOBLOC, XADAGO, and APOKYN, we currently rely on single source suppliers for raw materials, including API, as well as single source suppliers to produce and package final dosage forms.
There is a risk that supplies of our products or product candidates may be significantly delayed by or may become unavailable as a result of manufacturing, equipment, process, or business-related issues affecting our suppliers. Any future curtailment in the availability of raw materials or finished goods could result in production or other delays, with consequent adverse business effects. In addition, because regulatory authorities must generally approve raw material sources for pharmaceutical products, changes in raw material suppliers may result in production delays or higher raw material costs. We may also encounter similar risks with the other products and product candidates where raw materials or finished goods are purchased from suppliers outside the U.S., such as the case for example for SPN-830 where the supplier for the infusion pump device is based in Italy and for APOKYN, XADAGO and MYOBLOC where the API manufacturer and finished goods supplier, respectively, are in Europe.
The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Pharmaceutical companies often encounter difficulties in manufacturing, particularly in scaling up the production of their products. These problems can adversely affect production costs and yields, quality control, the stability of the product and quality assurance testing, as well as compliance with federal, state, and foreign regulations. If we are unable to demonstrate stability in accordance with commercial requirements, or if our manufacturers were to encounter difficulties or otherwise fail to comply with their obligations to us, our ability to obtain or maintain FDA approval and to market our products and product candidates, respectively, would be jeopardized. In addition, any delay or interruption in producing clinical trial supplies could delay or prohibit the completion of our clinical trials, increase the costs associated with conducting our clinical trials and, depending upon the period of delay, require us to commence new trials at the significant additional expense or to terminate a trial.
Manufacturers of pharmaceutical products need to comply with cGMP requirements and other requirements enforced by the FDA, including electronic tracking and submission. These requirements include quality control, quality assurance, and the maintenance of records and documentation. Manufacturers of our products and product candidates may be unable to comply with these cGMP requirements and other FDA and similar foreign regulatory requirements. Failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any of our products or product candidates is compromised due to failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for such product candidates or to successfully commercialize such products. We may be held liable for any injuries sustained as a result. Any of these factors could cause a delay in clinical development, regulatory submissions, approvals, or commercialization of our product candidates, entail higher costs, or result in our being unable to effectively commercialize our product candidates. Furthermore, if we fail to obtain the required commercial quantities on a timely basis from our suppliers and at commercially reasonable prices, we may be unable to meet the demand for our approved products or may not be able to sell our products profitably.
Our products and our product candidates may be subject to restrictions or withdrawal from the market. We may be subject to penalties if we fail to comply with regulatory requirements.
Even though U.S. regulatory approval has been obtained for our products, the FDA may impose significant restrictions on their indicated uses, or may impose restrictions on marketing, or may impose requirements for costly post-approval studies. For example, both Trokendi XR and Oxtellar XR were approved on the basis of post-approval commitments, including the development of additional age-appropriate formulations of the drugs and the conduct of post-approval clinical studies in accordance with timelines laid out in the approval letters. The post-approval commitments required the creation of new drug product formulations, which we have not been able to accomplish. Despite significant efforts, in certain cases, we have been unable to meet the FDA's timelines. Refer to Part I, Item 1, Business, Post-approval Regulatory Requirements of the Annual Report on Form 10-K filed with the SEC on March 8, 2021, for more information. To date, the only consequence of our failure to meet our PREA commitment deadlines has been a notation on FDA websites, making the status of PREA publicly known.
We are also required to conduct an additional post-approval study with respect to Trokendi XR for the treatment of prophylaxis of migraine. If we do not meet our post-marketing commitments and are unable to show good cause for our inability to adhere to the timetables laid out in the approval letters, the FDA could take enforcement action against us, including withdrawal of approval. While we believe that we can show good cause for our inability to meet the timelines for our post-
approval study requirements, the FDA may disagree. Refer to Part I, Item 1, Business, Post-approval Regulatory Requirements, in the Annual Report on Form 10-K filed with the SEC on March 8, 2021, for more information.
We have post-marketing clinical and manufacturing studies and data commitments for MYOBLOC. We are required to conduct a post-marketing study of MYOBLOC for treatment of sialorrhea and spasticity.
We received approval for Qelbree from the FDA based on certain post-marketing commitments, including the requirement to conduct a clinical efficacy and six month open label safety extension study for ADHD in pediatric patients 4 to 5 years of age, a lactation study and a descriptive study related to the use of Qelbree during pregnancy, and to assess the risks of adverse events and potential complications.
Our products, product candidates, and our collaborators' approved products are subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising, promotion, recordkeeping, and submission of safety and other information. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practice (cGMP) regulations. If we, our collaborators, or a regulatory authority discovers previously unknown problems with a product, including side effects that are unanticipated in severity or frequency, or problems with the facility where the product is manufactured, a regulatory authority may impose restrictions on that product or on the manufacturer, including requiring withdrawal of the product from the market or suspension of manufacturing.
If we or our collaborators, or our products, product candidates, or our collaborators' products, or the manufacturing facilities for our products, product candidates or our collaborators' products fail to comply with applicable regulatory requirements, a regulatory authority may:
•Issue warning letters or untitled letters;
•Impose civil or criminal penalties;
•Suspend regulatory approval;
•Suspend any ongoing bioequivalence and/or clinical trials;
•Refuse to approve pending applications or supplements to applications filed by us;
•Impose restrictions on operations, including costly new manufacturing requirements, or suspend production for a sustained period of time; or
•Seize or detain products or require us to initiate a product recall.
In addition, our product labeling, advertising, and promotion of our approved products are subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA, as reflected in the product's approved labeling. Notwithstanding, physicians may nevertheless prescribe products to their patients in a manner that is inconsistent with the approved label, which is known as "off label use". The FDA and other authorities actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have promoted off-label use may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined companies from engaging in off-label promotion. If we are found to have promoted off-label use, we may be enjoined from such off-label promotion and become subject to significant liability. This could have an adverse effect on our reputation, business, and revenues.
Further, the FDA's policies may prospectively change. Additional government regulations may be enacted that could affect our products or prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or to adopt new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we have obtained, adversely affecting our business, prospects, and ability to achieve or sustain profitability.
Our failure to successfully develop and market our product candidates would impair our ability to grow.
As part of our growth strategy, we intend to develop and market additional product candidates. We may spend substantial resources and several years completing the development of a particular current or future internal product candidate, during which process we can experience failure at any stage, and for many reasons. The product candidates to which we allocate our resources, even if approved, may not be commercially successful. In addition, because our internal research capabilities are limited, we may be dependent upon pharmaceutical companies, academic scientists, and other researchers to sell or license products or technologies to us. The success of this strategy depends partly upon our ability to identify, select, discover and acquire
promising pharmaceutical product candidates and approved products, and to manage our spending as expenses related to undertaking clinical trials can be substantial.
An existing team of experienced Supernus sales representatives who supported Trokendi XR and Oxtellar XR will now devote their full focus to the launch of Qelbree. By removing these resources from the field promotion of Trokendi XR and Oxtellar XR and replacing them with a contract field force of smaller size there could be a detrimental impact on the performance of Trokendi XR and Oxtellar XR.
In September 2020, we submitted the NDA for SPN-830 to the FDA. In November 2020, we received a Refusal to File (RTF) letter from the FDA regarding the NDA in which the FDA determined that the NDA was not sufficiently complete to permit a substantive review. In the letter, the FDA requested certain documents and reports to be submitted in support of the NDA. In March 2021, we met with the FDA to discuss the path forward for resubmission of the SPN-830 NDA. The FDA provided additional clarity related to the contents of the RTF letter and the requirements for resubmission and we are working on responding to the FDA’s requirements to refile the NDA for SPN-830.
We rely on and will continue to rely on outsourcing arrangements for certain of our critical activities, including clinical research of our product candidates, manufacture of our compounds and product candidates beyond Phase II clinical trials, and the manufacture of our commercial products.
We rely on outsourcing arrangements for some of our critical activities, including manufacturing, preclinical and clinical research, data collection and analysis, and electronic submission of regulatory filings. We may have limited control over third parties, and we cannot guarantee that they will perform their obligations in an effective, competent, and timely manner. Our reliance on third parties, including third-party Clinical Research Organizations (CROs) and CMOs, entails risks including, but not limited to:
•Non-compliance by third parties with regulatory and quality control standards;
•Sanctions imposed by regulatory authorities if compounds supplied or manufactured by a third party supplier or manufacturer fail to comply with applicable regulatory standards;
•Possible breach of the agreements by the CROs or CMOs because of factors beyond our control, insolvency or other financial difficulties of any of these third parties; labor unrest; natural disasters; or other factors adversely affecting their ability to conduct their business; and
•Termination or non-renewal of an agreement by a third party at a time that is inconvenient for us and for reasons not entirely under our control.
We do not own or operate manufacturing facilities for the production of any of our products or product candidates beyond Phase II clinical trials, nor do we have plans in the foreseeable future to develop our own manufacturing operations to support Phase III clinical trials or support commercial production. We currently depend on third-party CMOs for all of our required raw materials and drug substances for our preclinical research and clinical trials. For our commercial products, including Oxtellar XR, Trokendi XR, Qelbree and APOKYN, we currently rely on single source suppliers for raw materials, including API, and rely on third-party manufacturers for the production and packaging of final commercial products. In addition, we rely on a single source supplier of API for SPN-812 and API and infusion delivery pump system for SPN-830. If any of these vendors are unable to perform their obligations to us, including due to violations of the FDA's requirements, our ability to meet regulatory requirements, projected timelines, and necessary quality standards for the development or commercialization of products would be adversely affected. Further, if we were required to change vendors, it could result in substantial delays in our regulatory approval efforts, significantly increase our costs, and delay generation of revenues. Accordingly, the loss of any of our current or future third-party manufacturers or suppliers could have a material adverse effect on our business, results of operations, financial condition, and business prospects.
Our products and product candidates may cause undesirable side effects or have other characteristics that limit their commercial potential, delay, or prevent their regulatory approval.
Undesirable side effects caused by any of our product candidates could cause us or regulatory authorities to interrupt, delay or halt development. This could result in the denial of regulatory approval by the FDA or other regulatory authorities and result in potential product liability claims. Undesirable side effects caused by any of our products could cause regulatory authorities to temporarily or permanently halt product sales, which could have a material adverse effect on our business.
Immediate release oxcarbazepine and topiramate products, which use the same APIs as Oxtellar XR and Trokendi XR, are known to cause various side effects, including but not limited to: dizziness; paresthesia; headaches, and cognitive deficiencies
such as memory loss and speech impediment; digestive problems; somnolence; double vision; gingival enlargement; nausea; weight gain; oral malformation birth defects; visual field defects; infants small for gestational age; and fatigue. The use of Oxtellar XR and Trokendi XR may cause similar side effects as compared to their reference products or may cause additional or different side effects.
Apomorphine hydrochloride products, which use the same API as APOKYN, are known to cause various side effects, including but not limited to: yawning; sleepiness; dyskinesias; dizziness; runny nose; nausea and/or vomiting; hallucinations/confusion; and swelling of hands, arms, legs, and feet, somnolence. The use of APOKYN may cause similar side effects compared to these reference products, or may cause additional or different side effects.
Safinamide products, which use the same API as XADAGO, are known to cause various side effects, including but not limited to: dyskinesia, nausea, falls, insomnia. The use of XADAGO may cause similar side effects compared to these reference products or may cause additional or different side effects.
Botulinum toxin products, which use the same API as MYOBLOC, are known to cause various side effects due to the spread of botulinum toxins from the area of injections. These may include: asthenia; generalized muscle weakness; diplopia; blurred vision; ptosis; dysphagia; dysphonia; dysarthria; urinary incontinence; and breathing difficulties. These symptoms have been reported hours to weeks after injection. Swallowing and breathing difficulties can be life threatening. There have been reports of death. The use of MYOBLOC may cause similar side effects compared to its reference products or may cause additional or different side effects.
Qelbree may increase suicidal thoughts and behavior. Patients treated with Qelbree had higher rates of insomnia and irritability. These symptoms, along with other symptoms such as depressed mood, anxiety, agitation, akathisia, mania, hypomania, panic attacks, impulsive behavior, and aggression may represent precursors to emerging suicidal ideation or behavior. Patients treated with Qelbree should be observed for the emergence of these symptoms, especially within the first few months of treatment or when the dose is changed. Qelbree is not indicated in patients that also take monoamine oxidase inhibitors, or MAOIs, or those patients who take medicines metabolized by CYP1A2, such as theophylline.
Products that were or are currently on the market and use the same API as our product candidates, including Qelbree and SPN-817 (dietary supplements), were known to cause various side effects, including but not limited to: drowsiness; depression; hyperactivity; euphoria; extrapyramidal reactions; nausea; headache; diarrhea; vomiting; sleep difficulties; agitation; exacerbation of anxiety; sleepiness; mouth dryness; tachycardia; constipation and urinary difficulties. The labels for those products also included precautions and warnings about, among other things: convulsive events in patients that are treated for or have a prior history of epilepsy; inhibition of hepatic metabolism of certain drugs; risk of suicide before antidepressant clinical improvement; need for monitoring patients with cardiac, hepatic or renal insufficiency; or patients at risk for angle-closure glaucoma. The use of Qelbree and SPN-817 may cause similar side effects as compared to these reference products or may cause additional or different side effects.
If our products cause side effects, or if any of our product candidates receive marketing approval, and we or others later identify undesirable side effects caused by our products or product candidates, a number of potentially significant negative consequences could result, including:
•Regulatory authorities may withdraw approval of the product candidate or otherwise require us to take the approved product off the market;
•Regulatory authorities may require additional warnings or a narrowing of the indication on the product label;
•We may be required to create a medication guide outlining the proper use of the medication and the risks of side effects for distribution to patients;
•We may be required to modify the product in some way;
•Regulatory authorities may require us to conduct additional clinical trials, or costly post-marketing testing and surveillance, to monitor the safety or efficacy of the product;
•Sales of approved products may decrease significantly;
•We could be sued and be held liable for harm caused to patients; or
•Our reputation may suffer.
Any of these events could prevent us from achieving or maintaining the commercial success of our products and product candidates and could substantially increase commercialization costs.
We depend on collaborators to work with us to develop, manufacture and commercialize their and our products and product candidates.
We have a license agreement with United Therapeutics Corporation to use one of our proprietary technologies in an oral formulation of treprostinil diethanolamine, or treprostinil, for the treatment of pulmonary arterial hypertension and for other indications. United Therapeutics Corporation launched Orenitram (treprostinil) in 2014, which triggered payment of a milestone payment to us of $2.0 million. In the third quarter of 2014, we received a cash payment of $30.0 million from HC Royalty for the purchase of certain of our rights under our license agreement with United Therapeutics Corporation related to the commercialization of Orenitram. Ownership of the royalty rights will return to us if/when a certain cumulative threshold payment to HC Royalty is reached.
We are entitled to receive milestones and royalties for the use of this formulation in indications other than arterial hypertension. If we materially breach any of our obligations under the license agreement, we could lose the right to receive any future royalty payments thereunder, which could be financially significant to us.
Under the Britannia Supply Agreement, we have been granted certain intellectual property and product rights in relation to APOKYN, including the right to use and market APOKYN in the United States. Additionally, the Britannia Supply Agreement grants Britannia certain intellectual property and product rights in relation to APOKYN, including the right to use and market APOKYN in the rest of the world, excluding the United States. Per the Agreement, Britannia has an obligation to supply us with APOKYN for our marketing and sale of the product.
Britannia may terminate its obligation to supply APOKYN for cause, or at any time, by giving at least twenty-four months’ written notice. The Britannia Supply Agreement does not provide technology transfer assistance from Britannia to any new suppliers we might engage following termination. In addition, the Britannia Supply Agreement is silent in providing us with an explicit license grant to any intellectual property, or to access know-how necessary or useful for manufacturing APOKYN. If we materially breach the Britannia Supply Agreement, or Britannia chooses to terminate the Britannia Supply Agreement for convenience, we could lose the right and resources necessary for the manufacture of APOKYN or could incur significant costs implementing technology transfer assistance.
For Qelbree, we are negotiating to enter into agreements with leading CMOs including Bachem for the production of API and Catalent Pharma Solutions, for the manufacture of the commercial products. These CMOs offer a comprehensive range of contract manufacturing services.
Refer to Part I, Item 1, Business, Collaborations and Licensing Agreements, of our Annual Report on Form 10-K for discussion on the different collaborations and licensing arrangements.
We intend to rely on third-party collaborators to market and commercialize our products and product candidates outside the U.S. We utilize strategic partners outside the U.S., where appropriate, to assist in the commercialization of our products and product candidates. We currently possess limited resources and may not be successful in establishing collaborations or licensing arrangements on acceptable terms, if at all. We also face competition in our search for collaborators and licensing partners. By entering into strategic collaborations or similar arrangements, we rely on third parties to financially support their local operations, including support required for development, commercialization, sales, marketing, and regulatory activities, as well as expertise in each of those subject areas.
Our future collaboration agreements may limit the areas of research and development that we may pursue, either alone or in collaboration with third parties. Much of the potential revenues from these future collaborations may consist of contingent payments, such as payments for achieving certain development milestones and royalties payable on product sales. The milestones and royalty revenues that we may receive under these collaborations will depend upon our collaborators' ability to successfully develop, introduce, market and sell new products. Future collaboration partners may fail to develop or effectively commercialize products, product candidates, or technologies because they, among other things, may:
•Change the focus of their development and commercialization efforts, or may have insufficient resources to effectively develop our product candidates;
•Pharmaceutical and biotechnology companies historically have re-evaluated their development and commercialization priorities following mergers and consolidations, which have been common in recent years. The ability of some of our product candidates to reach their potential could be limited if our future collaborators fail to apply sufficient development or commercialization efforts related to those product candidates;
•Decide not to devote the necessary resources due to internal constraints, such as limited personnel with the requisite scientific expertise, limited cash resources, or in the belief that other internal drug development programs may have a higher likelihood of obtaining marketing approval, or may potentially generate a greater return on investment;
•Develop and commercialize, either alone or with others, drugs that are similar to or competitive with the product candidates that are the subject of their collaboration with us;
•Not have necessary and sufficient resources to develop the product candidate through clinical development, marketing approval, and commercialization;
•Fail to comply with applicable regulatory requirements;
•Are unable to obtain the necessary marketing approvals; or
•Breach or terminate their arrangement with us.
If collaboration partners fail to develop or fail to effectively commercialize our products for any of these reasons, we may not be able to replace the collaboration partner with another partner to develop and commercialize the product under the terms of the collaboration, if at all. Further, even if we are able to replace the collaboration partner, we may not be able to do so on commercially favorable terms. As a result, the development and commercialization of the affected product or product candidate could be delayed, impaired, or terminated because we may not have sufficient financial resources or capabilities to continue the development and commercialization of the product candidate on our own. Failure of our third-party collaborators to successfully market and commercialize our products or product candidates within and outside the U.S. could materially diminish our revenues and harm our results of operations.
We could be involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming, distracting, and ultimately unsuccessful.
Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. For example, we are involved in several matters related to Paragraph IV Certification Notice Letters that we received in connection with our products and our collaborators' products. In connection with an ANDA, a Paragraph IV Certification Notice Letter notifies the FDA that one or more patents listed in the FDA's Orange Book is alleged to be invalid, unenforceable, or will not be infringed by the competitive ANDA product.
For example, we received a Paragraph IV Notice Letter from generic drug makers Apotex Inc. and Apotex Corp. (collectively “Apotex”) in May 2020, directed to nine of its Oxtellar XR Orange Book patents, which generally cover once-a-day oxcarbazepine formulations and methods of treating seizures using those formulations. The FDA Orange Book lists all nine of our Oxtellar XR patents as expiring on April 13, 2027. In June 2020, we filed a lawsuit against Apotex alleging infringement of all nine patents. In September 2020, Apotex answered the Complaint and denied the substantive allegations of the Complaint. Apotex also asserted Counterclaims seeking declaratory judgments of non-infringement for the nine Oxtellar XR Orange Book patents. Our responses to Apotex’s counterclaims were filed in October 2020.
In April 2021, we received a second Paragraph IV Notice Letter from generic drug maker RiconPharma, LLC (“Ricon”) dated April 20, 2021 directed to nine of its Oxtellar XR Orange Book patents. The Company is currently reviewing the details of Ricon’s Notice Letter and intends to vigorously enforce its intellectual property rights relating to Oxtellar XR.
We also received a Paragraph IV Notice Letter from generic drug maker Ajanta Pharma Limited on February 11, 2021, directed to ten of its Trokendi XR Orange Book patents, which generally cover once-a-day topiramate formulations and methods of treating seizures using those formulations. The FDA Orange Book lists one patent with an expiration date of April 4, 2028 and nine patents with an expiration date of November 16, 2027. The Company is currently reviewing Ajanta’s Notice Letter and intends to vigorously enforce its intellectual property rights relating to Trokendi XR.
For more information, refer to Part II, Item 1—Legal Proceedings contained in this Quarterly Report on Form 10-Q.
In any infringement proceeding, a court may decide that a patent of ours is not valid or enforceable, or the court may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent application at risk of not issuing.
Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to our patents and patent applications or the patents of our collaborators. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if a prevailing party does
not offer us a license on terms that are acceptable to us or offer terms at all. Litigation or interference proceedings may fail. Even if successful, litigation may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our collaborators, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as they are protected in the U.S.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.
In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative or perceive that the presence or continuation of these cases creates a level of uncertainty regarding our ability to increase or sustain product sales, it could have a substantial adverse effect on the price of our common stock.
There can be no assurance that our product candidates will not be subject to the same risks.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities.
During the three months ended September 30, 2020,March 31, 2021, the Company granted options to employees to purchase an aggregate of 83,500789,275 shares of common stock at a weighted-average exercise price of $22.27$29.61 per share. Once vested, the options are exercisable for a period of ten years from the grant date. The Company granted 21,110 restricted stock units to the board of directors at a weighted-average grant date fair value of $29.61 per share. The restricted stock units vest one year from the grant date. In addition, the Company granted 100,000 performance stock units to its employees at a weighted-average grant date fair value of $29.41 per share. These issuances are exempt from registration in reliance on Section 4(a)(2) of the Securities Act as transactions not involving a public offering.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
Item 6. Exhibits
The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q: | | | | | | | | |
| 31.1 | | |
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| 32.1 | | |
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| 32.2 | | |
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| 101 | | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020,March 31, 2021, formatted in Inline XBRL: (i) Cover Page, (ii) Condensed Consolidated Condensed Statements of Income,Earnings, (iii) Condensed Consolidated Condensed Statements of Comprehensive Income,Earnings, (iv) Condensed Consolidated Condensed Balance Sheets, (v) Condensed Consolidated Condensed Statements of Shareholders'Changes in Stockholders' Equity, (vi) Condensed Consolidated Condensed Statements of Cash Flows, and (vii) the Notes to Condensed Consolidated Condensed Financial Statements, tagged in summary and detail. |
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| 104 | | The cover page of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020,March 31, 2021, formatted in Inline XBRL (included with the Exhibit 101 attachments). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | |
| SUPERNUS PHARMACEUTICALS, INC. |
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DATED: November 6, 2020May 7, 2021 | By: | /s/ Jack A. Khattar |
| | Jack A. Khattar
President and Chief Executive Officer |
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DATED: November 6, 2020May 7, 2021 | By: | /s/ Gregory S. PatrickJames P. Kelly |
| | Gregory S. PatrickJames P. Kelly
SeniorExecutive Vice President and Chief Financial Officer |
