Hyperion Therapeutics (HPTX) 10-Q 2014 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2014

or

¨ TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from            to            

Commission File Number: 001-35614

HYPERION THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

Delaware	61-1512713
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

2000 Sierra Point Parkway, Suite 400

Brisbane, California 94005

(650) 745-7802

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)    Yes  ¨    No  x

As of August 5, 2014, the number of outstanding shares of the registrant’s common stock was 20,597,919.

TABLE OF CONTENTS

		Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			i
PART I. FINANCIAL INFORMATION			1
Item 1.	Condensed Consolidated Financial Statements (Unaudited)		1
	Condensed Consolidated Balance Sheets		1
	Condensed Consolidated Statements of Operations		2
	Condensed Consolidated Statements of Comprehensive Income		3
	Condensed Consolidated Statements of Cash Flows		4
	Notes to Condensed Consolidated Financial Statements		5-23
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		37
Item 4.	Controls and Procedures		37
PART II. OTHER INFORMATION			38
Item 1.	Legal Proceedings		38
Item 1A.	Risk Factors		38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3.	Defaults Upon Senior Securities		44
Item 4.	Mine Safety Disclosures		44
Item 5.	Other Information		44
Item 6.	Exhibits		44

In this report, unless otherwise stated or the context otherwise indicates, references to “Hyperion,” “we,” “us,” “our” and similar references refer to Hyperion Therapeutics, Inc. and our wholly owned subsidiaries, including Andromeda Biotech Ltd. The names Hyperion Therapeutics, Inc. TM , RAVICTI^®, BUPHENYL^®, AMMONAPS^® and DiaPep277^® are our trademarks. All other trademarks, trade names and service marks appearing in this report are the property of their respective owners.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

• future sales of RAVICTI, BUPHENYL and AMMONAPS or any other future products or product candidates;

• our expectations regarding the commercial supply of our urea cycle disorders (“UCD”) products;

• our expectations regarding the level of competitive protection afforded by our intellectual property portfolio and orphan drug designation;

• the cost, timing or estimated completion of our post-marketing clinical studies;

• third-party payor reimbursement for RAVICTI and BUPHENYL;

• our estimates regarding anticipated capital requirements and our needs for additional financing;

• the UCD patient market size and market adoption of RAVICTI by physicians and patients;

• the HE patient market size and FDA approval and market adoption of glycerol phenylbutyrate (“GPB”) by physicians and patients;

• the timing or cost of a Phase III trial in hepatic encephalopathy (“HE”);

• the development and approval of the use of GPB for additional indications or in combination therapy;

• the timing, cost and likelihood regarding development, approval and commercialization of DiaPep277 for treatment of Type 1 diabetes;

• our expectations regarding licensing, acquisitions and strategic relationships;

• impact of accounting standards;

• repayment of notes payable; and

• our estimates of attaining sustained profitability

These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this report in greater detail under the heading “Risk Factors” and elsewhere in this report. You should not rely upon forward-looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this report.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Hyperion Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(unaudited)

	June 30, 2014			December 31, 2013
Assets
Current assets
Cash and cash equivalents	$	80,637		$	74,232
Short-term investments		42,278			28,045
Accounts receivable, net		19,437			4,419
Inventories		2,907			3,513
Prepaid expenses and other current assets		971			1,403
Total current assets		146,230			111,612
Long-term investments		2,632			15,780
Property and equipment, net		1,056			936
Intangible assets, net		147,126			13,442
Goodwill		3,789			—
Other non-current assets		1,343			749
Total assets	$	302,176		$	142,519
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	6,821		$	2,292
Accrued liabilities and other		31,335			12,187
Notes payable, current portion		5,086			5,652
Total current liabilities		43,242			20,131
Notes payable, net of current portion		685			2,621
Deferred rent		361			81
Acquisition-related contingent consideration (Note 4)		69,456			—
Acquisition-related contingent liability (Note 4)		34,497			—
Deferred tax liability, net		3,167			—
Total liabilities		151,408			22,833
Commitments and contingencies (Note 13)
Stockholders’ equity
Preferred stock, par value $0.0001 — 10,000,000 shares authorized; none issued and outstanding		—			—
Common stock, par value $0.0001 — 100,000,000 shares authorized at June 30, 2014 and December 31, 2013; 20,597,919 and 20,137,145 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively		2			2
Additional paid-in capital		254,403			242,109
Accumulated other comprehensive loss		(2	)		(55	)
Accumulated deficit		(103,635	)		(122,370	)
Total stockholders’ equity		150,768			119,686
Total liabilities and stockholders’ equity	$	302,176		$	142,519

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Hyperion Therapeutics, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net product revenue	$	37,095		$	7,305		$	56,577		$	8,088
Costs and expenses:
Cost of sales		4,473			875			6,856			943
Research and development		4,046			2,562			7,264			4,401
Selling, general and administrative		11,365			9,220			22,536			17,164
Amortization of intangible asset		1,014			329			2,028			329
Change in acquisition-related contingencies (Notes 4 and 6)		704			—			704			—
Total costs and expenses		21,602			12,986			39,388			22,837
Income (loss) from operations		15,493			(5,681	)		17,189			(14,749	)
Interest income		140			11			278			12
Interest expense		(269	)		(387	)		(569	)		(795	)
Gain from settlement of retention option (Note 3)		—			31,079			—			31,079
Other income (expense), net		(4	)		—			(194	)		500
Income before income taxes		15,360			25,022			16,704			16,047
Income tax benefit		(2,119	)		—			(2,031	)		—
Net income	$	17,479		$	25,022		$	18,735		$	16,047
Net income per share
Basic	$	0.86		$	1.25		$	0.92		$	0.86
Diluted	$	0.81		$	1.17		$	0.87		$	0.80
Weighted average number of shares used to compute net income per share of common stock:
Basic		20,335,618			20,050,987			20,263,803			18,716,332
Diluted		21,613,996			21,358,275			21,572,716			19,978,089

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Hyperion Therapeutics, Inc.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Net income	$	17,479	$	25,022	$	18,735	$	16,047
Other comprehensive income:
Unrealized gain on investments arising during the period		8		—		53		—
Other comprehensive income		8		—		53		—
Comprehensive income	$	17,487	$	25,022	$	18,788	$	16,047

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Hyperion Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands, unaudited)

	Six Months Ended June 30,
	2014			2013
Cash flows from operating activities
Net income	$	18,735		$	16,047
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation		193			51
Amortization of debt discount and debt issuance cost		278			278
Stock-based compensation expense		3,220			1,756
Amortization of intangible asset		2,028			329
Gain from foreign currency translation adjustment		(17	)		—
Provision for inventory obsolescence		145			—
Amortization of discount on available-for-sale investments		208			—
Excess tax benefit from stock-based compensation		(47	)		—
Gain from settlement of retention option (Note 3)		—			(31,079	)
Change in acquisition-related contingent consideration and contingent liability (Note 6)		704			—
Changes in assets and liabilities, net of impact of acquisition of Andromeda Biotech Ltd. (“Andromeda”)
Accounts receivable		(15,001	)		(1,723	)
Inventories		479			(1,065	)
Prepaid expenses and other assets		495			345
Accounts payable		295			(120	)
Deferred rent		286			—
Deferred taxes		(2,885	)		—
Accrued liabilities and other		14,343			2,182
Net cash provided by (used in) operating activities		23,459			(12,999	)
Cash flows from investing activities
Acquisition of property and equipment		(291	)		(433	)
Purchase of available-for-sale investments		(5,280	)		—
Maturity of available-for-sale investments		4,040			—
Acquisition of Andromeda, net of cash acquired		(14,039	)		—
Acquisition of rights to BUPHENYL, net of AMMONUL option (Note 3)		—			10,962
Net cash provided by (used in) investing activities		(15,570	)		10,529
Cash flows from financing activities
Proceeds from issuance of common stock in follow-on offering, net of underwriting discounts		—			64,488
Proceeds from issuance of common stock from stock option exercises		1,232			337
Excess tax benefit from stock-based compensation		47			—
Payments of offering costs		—			(776	)
Principal payments under notes payable		(2,763	)		(1,705	)
Net cash provided by (used in) financing activities		(1,484	)		62,344
Net increase in cash and cash equivalents		6,405			59,874
Cash and cash equivalents, beginning of period		74,232			49,853
Cash and cash equivalents, end of period	$	80,637		$	109,727
Supplemental cash flow information
Cash paid for interest	$	313		$	532
Stock-based compensation capitalized into inventories		18			26
Supplemental disclosure of noncash investing and financing activities
Option to purchase rights to BUPHENYL and AMMONUL (Note 3)		—			283
Unrealized gain on available-for-sale investments		53			—
Acquisition of Andromeda (Note 4)
Cash paid for acquisition	$	14,345			—
Cash acquired in acquisition		(306	)		—
Net cash paid for acquisition	$	14,039			—
Fair value of common stock issued in connection with the acquisition	$	7,778			—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Hyperion Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Formation and Business of the Company

Hyperion Therapeutics, Inc. (the “Company”) was incorporated in the state of Delaware on November 1, 2006. The Company was in the development stage from inception through March 31, 2013. During this period, the Company’s activities consisted primarily of raising capital, negotiating a promotion and drug development collaboration agreement, establishing a management team and performing drug development activities. The Company launched RAVICTI^® (glycerol phenylbutyrate) Oral Liquid during the quarter ended March 31, 2013.

On May 31, 2013, the Company acquired BUPHENYL, an FDA-approved therapy for treatment of three of the most prevalent UCD subtypes, from Ucyclyd Pharma Inc. (“Ucyclyd”), a subsidiary of Valeant Pharmaceuticals International, Inc. (“Valeant”). Subsequent to the acquisition on May 31, 2013, the Company started selling BUPHENYL Tablets and Powder within and outside the United States.

As discussed in Note 4, on June 12, 2014, the Company completed the acquisition of Andromeda Biotech Ltd. (“Andromeda”), an Israeli company. This acquisition broadens the Company’s pipeline to include DiaPep277^®, a potentially first-in-class immunotherapy for Type 1 diabetes in patients with residual beta cell function. DiaPep277 is currently being evaluated in a fully enrolled Phase 3 clinical study in adult patients and holds Orphan Drug designation in the U.S.

The Company is a commercial stage biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat disorders in the area of orphan diseases. The Company has developed RAVICTI to treat seven of the eight most prevalent subtypes of urea cycle disorders (“UCD”) and is developing glycerol phenylbutyrate (“GPB”) for the potential treatment of hepatic encephalopathy (“HE”). UCD and HE are generally characterized by elevated levels of ammonia in the bloodstream. Elevated levels of ammonia are potentially toxic and can lead to severe medical complications which may include death. The Company’s product, RAVICTI, is designed to lower ammonia in the blood. UCD are inherited rare genetic diseases caused by a deficiency of one or more enzymes or transporters that constitute the urea cycle, which in a healthy individual removes ammonia through conversion of ammonia to urea. HE is a serious but potentially reversible neurological disorder that can occur in patients with liver scarring, known as cirrhosis, or acute liver failure. On February 1, 2013, the U.S. Food and Drug Administration (“FDA”), granted approval of RAVICTI for the use as a nitrogen-binding agent for chronic management of adult and pediatric UCD patients greater than two years of age who cannot be managed by dietary protein restriction and/or amino acid supplementation alone. In addition, the Company is developing DiaPep277, a first-in-class immune intervention therapy for the potential treatment of Type 1 diabetes for patients with residual beta cell function. Type 1 (or insulin dependent) diabetes is an auto immune disease that results in the destruction of beta cells, the insulin secreting cells in the pancreas, resulting in loss of glycemic (glucose or blood sugar) control.

On August 14, 2013, the Company filed a shelf registration statement on Form S-3, which was declared effective by the Securities and Exchange Commission (“SEC”) on September 13, 2013. The shelf registration statement permits: (a) the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $150.0 million of its common stock, preferred stock, debt securities, warrants and/or units; (b) the sale of up to 8,727,000 shares of common stock by certain selling stockholders; and (c) the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $50.0 million of its common stock that may be issued and sold under a sales agreement with Cantor Fitzgerald & Co. As of June 30, 2014, there were no sales of any securities registered pursuant to the shelf registration statement.

At June 30, 2014, the Company had an accumulated deficit of $103.6 million. The Company expects to incur increased research and development expenses when the Company initiates a Phase 3 trial of GPB for the treatment of patients with episodic HE and as it continues the development of DiaPep277. In addition, the Company expects to incur increased sales and marketing expenses with the continued commercialization of RAVICTI and marketing of BUPHENYL in UCD. Management’s plans with respect to these matters include utilizing a substantial portion of the Company’s capital resources and efforts in completing the development and obtaining regulatory approval for DiaPep277 and for GPB in HE, expanding the Company’s organization, and commercialization of RAVICTI and marketing of BUPHENYL.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and on a basis consistent with the annual consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the periods presented. These interim financial results are not

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necessarily indicative of the results to be expected for the year ending December 31, 2014, or for any other future annual or interim period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Principles of Consolidation

The consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries: Hyperion Therapeutics Ltd., Hyperion Therapeutics Ireland Holding Ltd., Hyperion Therapeutics Ireland Operating Ltd., Hyperion Therapeutics Israel Holding Corp. Ltd., and Andromeda Biotech Ltd. All intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of the interim condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to fair value of assets and liabilities, goodwill and intangible assets valuation, acquisition-related contingent consideration, acquisition related contingent liability, stock-based compensation expense, income taxes, revenue recognition and product sales allowances. Management bases its estimates on historical experience or on various other assumptions, including information received from its service providers, which it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Concentration of Credit Risk and Significant Customers

The Company’s cash and cash equivalents and investments are maintained with financial institutions located in and outside the United States. Deposits in these institutions may exceed the amount of insurance provided on such deposits. The Company has not recognized any losses from credit risks during the periods presented and management does not believe that the Company is exposed to significant credit risk from its cash and cash equivalents or investments.

The Company is also subject to credit risk from its accounts receivables related to its product sales. The Company monitors its exposure within accounts receivable and records a reserve against uncollectible accounts receivable as necessary. The Company extends credit to a specialty distributor in the United States and to international distributors, pharmacies and hospitals outside the United States. Customer creditworthiness is monitored and collateral is not required. As of June 30, 2014, there were no credit losses on the Company’s accounts receivable. As of June 30, 2014, the specialty distributor in the United States accounted for 90% of accounts receivable balance and one international distributor accounted for 5% of the accounts receivable balance.

The specialty distributor accounted for 92% of net product revenue for the three and six months ended June 30, 2014. One international distributor accounted for 5.2% and 3.9% of net product revenue for the three and six months ended June 30, 2014.

Fair Value of Financial Instruments

The Company measures certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid for to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The carrying amounts of the Company’s financial instruments, including cash equivalents, short-term investments, accounts payable, and accrued liabilities, approximate fair value due to their short maturities. The carrying amounts of long-term investments, the acquisition-related contingent consideration represent their estimated fair values. The Company’s debt obligations are carried at historical cost, which approximates fair value.

Business Combinations

The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. Acquired in-process research and development (“IPR&D”) is recognized at fair value and initially characterized as an indefinite-lived intangible asset, irrespective of whether the acquired IPR&D has an alternative future use. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred.

Accounts Receivable

Trade accounts receivable are recorded net of product sales allowances for prompt-payment discounts, chargebacks, and doubtful accounts. Estimates for chargebacks and prompt-payment discounts are based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs.

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Inventories

Inventories are stated at the lower of cost or market value with cost determined under the first-in-first-out (FIFO) cost method and consists of raw materials, work-in-progress and finished goods. Costs to be capitalized as inventories include third party manufacturing costs, associated compensation related costs of personnel indirectly involved in the manufacturing process and other overhead costs such as ancillary supplies. Subsequent to FDA approval of RAVICTI on February 1, 2013, the Company began capitalizing RAVICTI inventories as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to the FDA approval of RAVICTI have been recorded as research and development expense in the condensed consolidated statements of operations. If information becomes available that suggest that inventories may not be realizable, the Company may be required to expense a portion or all of the previously capitalized inventories.

Products that have been approved by the FDA or other regulatory authorities, such as RAVICTI, are also used in clinical programs, to assess the safety and efficacy of the products for usage in diseases that have not been approved by the FDA or other regulatory authorities. The form of RAVICTI utilized for both commercial and clinical programs is identical and, as a result, the inventory has an “alternative future use” as defined in authoritative guidance. Raw materials and purchased drug product associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes and, therefore, does not have an “alternative future use”.

On May 31, 2013, the Company acquired BUPHENYL from Ucyclyd. The Company recorded the acquired BUPHENYL inventories at fair value in the amount of $3.9 million on the acquisition date. As of March 31, 2014, the entire fair value of acquired BUPHENYL inventory has been charged to expenses, primarily cost of sales.

Intangible Assets

Intangible assets are recorded at acquisition cost less accumulated amortization and impairment. Intangible asset with finite lives are amortized over their estimated useful life using the economic use method, which reflects the pattern that the economic benefits of the intangible asset are consumed as revenue is generated. The pattern of consumption of the economic benefits is estimated using the future projected cash flows of the intangible asset.

IPR&D

The fair value of IPR&D acquired through a business combination is capitalized as an indefinite-lived intangible asset until the completion or abandonment of the related research and development activities. When the related research and development is completed, the asset will be assigned a useful life and amortized.

The fair value of an IPR&D intangible asset is determined using an income approach. This approach starts with a forecast of the net cash flows expected to be generated by the asset over its estimated useful life. The net cash flows reflect the asset’s stage of completion, the probability of technical success, the projected costs to complete, expected market competition, and an assessment of the asset’s life-cycle. The net cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.

Goodwill

Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired. A reporting unit is the same as, or one level below, an operating segment.

Impairment of Long-lived Assets

The Company reviews its property and equipment, intangible assets subject to amortization and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset class may not be recoverable. Indicators of potential impairment include: an adverse change in legal factors or in the business climate that could affect the value of the asset; an adverse change in the extent or manner in which the asset is used or is expected to be used, or in its physical condition; and current or forecasted operating or cash flow losses that demonstrate continuing losses associated with the use of the asset. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset. If the expected cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted future cash flows.

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Indefinite-lived intangible assets, including acquired IPR&D, are tested for impairment annually or more frequently if events or changes in circumstances between annual tests indicate that the asset may be impaired. Impairment losses on indefinite-lived intangible assets are recognized based solely on a comparison of the fair value of the asset to its carrying value, without consideration of any recoverability

Acquisition-Related Contingent Consideration

Acquisition-related contingent consideration, which consists primarily of potential milestone payments and royalty obligations, is recorded in the consolidated balance sheets at its acquisition date estimated fair value, in accordance with the acquisition method of accounting. The fair value of the acquisition-related contingent consideration is remeasured each reporting period, with changes in fair value recorded in the consolidated statements of operations. Changes in the fair value of the acquisition-related contingent consideration obligations result from several factors including changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability assumptions with respect to the likelihood of achieving specified milestone criteria. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting

Acquisition-Related Contingent Liability

Acquisition-related contingent liability, which consists primarily of potential milestone payments and royalty obligations, and potential payments to certain employees of Andromeda is recorded in the condensed consolidated balance sheets at its acquisition date estimated fair value. The Company reassesses the probability and estimates associated with the contingent liability at each reporting period. For liability payable to third parties, any increase in the liability is recorded in the condensed consolidated statements of operations. For liabilities payable to employees, the Company accounts for the liability in accordance with Financial Accounting Stands Board (“FASB”) Accounting Stand Codification (“ASC”) 450Contingencies.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 605,Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. The Company determines that persuasive evidence of an arrangement exists based on written contracts that defined the terms of the arrangements. In addition, the Company determines that services have been delivered in accordance with the arrangement. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company assesses collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.

Product Revenue, net: The Company’s product revenue represents sales of RAVICTI and BUPHENYL which are recognized once all four revenue recognition criteria described above are met. The Company recognizes revenue net of product sales allowances. Product shipping and handling costs are included in cost of sales. Prior to June 2014, revenue from the sale of RAVICTI was recognized based on the amount of product sold through to the end user consumer. Starting June 2014, the Company could reasonably estimate and determine sales allowances, therefore the Company began recognizing RAVICTI revenue at the point of sale to the specialty distributor, which resulted in the one-time non-recurring recognition of an additional $8.6 million in net revenues.

Product Sales Allowances: The Company establishes reserves for prompt-payment discounts, government and commercial rebates, product returns and chargebacks. Allowances relate to prompt-payment discounts and are recorded at the time of revenue recognition, resulting in a reduction in product sales revenue and a decrease in trade accounts receivables. Accruals related to government rebates, product returns and other applicable allowances such as distributor fees are recognized at the time of revenue recognition, resulting in a reduction in product sales and an increase in accrued expenses or a reduction in the related accounts receivable.

• Prompt-payment discounts: The specialty distributor and specialty pharmacies are offered prompt payment discounts. The Company expects the specialty distributor and specialty pharmacies will earn prompt payment discounts and, therefore deduct the full amount of these discounts from total product sales when revenues are recognized. The Company records prompt-payment discounts as allowances against accounts receivable on the condensed consolidated balance sheet.

• Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program. Rebate amounts are based upon contractual agreements or legal requirements with public sector (e.g. Medicaid) benefit providers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The allowance for rebates is based on statutory discount rates and expected utilization. The Company estimates for expected utilization of rebates based on historical data and data received from the specialty pharmacies. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarter’s unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment. Allowance for rebates are recorded in accrued liabilities on the condensed consolidated balance sheet.

• Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty distributor. Contracted customers, which primarily consist of Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty distributor, in turn, charges back to the Company the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by the customer. The allowance for chargebacks is based on historical sales data and known sales to contracted customers.

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• Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. The Company estimates for the expected Medicare Part D coverage gap are based on historical invoices received and in part from data received from the specialty pharmacies. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment. Estimates of the Medicare Part D coverage gap are recorded in accrued liabilities on the condensed consolidated balance sheet.

• Distribution Service Fees:The Company has a written contract with the specialty distributor that includes terms for distribution-related fees. Distributor fees are calculated at percentage of gross sales based upon agreed contracted rate. The Company accrues distributor fees at the time of the revenue recognition, resulting in reduction of product sales revenue and the recording of accrued liabilities on the condensed consolidated balance sheets. The Company records distribution and other fees paid to its customers as a reduction of revenue, unless it receives an identifiable and separate benefit for the consideration and it can reasonably estimate the fair value of the benefit received. If both conditions are met, the Company records the consideration paid to the customer as an operating expense. These costs are typically known at the time of sale.

• Product Returns: Consistent with industry practice, the Company generally offers customers a limited right to return. The Company accepts returns of products from patients resulting from breakage as defined within the Company’s returns policy. Additionally, the Company considers several other factors in the estimation process including the expiration dates of product shipped, third party data in monitoring channel inventory levels, shelf life of the product, prescription trends and other relevant factors. Provisions for estimated product returns are recorded as accrued liabilities on the condensed consolidated balance sheet.

Co-payment assistance: The Company provides a cash donation to a non-profit third party organization which supports patients, who have commercial insurance and meet certain financial eligibility requirements, with co-payment assistance and travel costs. The amount of co-payment assistance is accounted for by the Company as a reduction of revenues.

Cost of sales

Cost of sales includes third-party manufacturing cost of products sold, royalty fees, and other indirect costs related to personnel compensation, shipping and supplies. Costs incurred prior to FDA approval of RAVICTI have been recorded as research and development expense in the Company’s condensed consolidated statement of operations. The Company expects that cost of RAVICTI sales as a percentage of revenue will increase in future periods as product manufactured prior to FDA approval, and therefore fully expensed, is utilized.

Cost of BUPHENYL sales as a percentage of revenue was higher and not indicative of cost of sales in future periods due to the recording of the step-up value on BUPHENYL inventories acquired from Ucyclyd which is expensed to cost of sales as that inventory is sold. As of March 31, 2014, the entire fair value of acquired BUPHENYL inventory has been charged to expense, primarily cost of sales.

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with provisions of ASC 718,Compensation — Stock Compensation. ASC 718 requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company calculates the fair value of stock options using the Black-Scholes method and expenses using the straight-line attribution approach.

Income Taxes

The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Company accounts for uncertain tax positions in accordance with ASC 740-10,Accounting for Uncertainty in Income Taxes. The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the

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amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

Foreign Currency Translations

Operations in non-U.S. entities are recorded in the functional currency of each entity. For financial reporting purposes, the functional currency of an entity is determined by a review of the source of an entity’s most predominant cash flows. The reporting and functional current of the Company and its subsidiaries is the U.S. dollar.

Gains and losses resulting from foreign currency transactions are translated at the weighted average rate of exchange prevailing during the period. Any monetary asset or liability denominated in foreign currency and is translated at the rate of exchange in effect on the balance sheet date. Any gains and losses resulting from foreign currency translations are included in other income (expense)-net in the condensed consolidated statements of operations. The Company does not currently utilize and has not in the past utilized any foreign currency hedging strategies to mitigate the effect of its foreign currency exposure.

Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes changes in stockholders’ equity that are excluded from net income, specifically changes in unrealized gains and losses on the Company’s available-for-sale securities.

Net Income per Share of Common Stock

Basic earnings per share is computed by dividing the net income by the weighted average number of shares of common stock outstanding during the periods presented. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other potentially dilutive securities using the treasury stock method unless the effect is antidilutive.

Recent Accounting Pronouncements

In July 2013, FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under the amendments of this update an entity is required to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefits being settled. The provisions of this update was effective prospectively for the Company in fiscal years beginning after December 15, 2013 with early adoption and retrospective application permitted. The Company adopted this guidance on January 1, 2014. The implementation did not have an impact on the Company’s condensed consolidated financial statements.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09),Revenue from Contracts with Customers. ASU 2014-09 will supersede the revenue recognition requirements inRevenue Recognition (Topic 605) and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, which for the Company is January 1, 2017. Early adoption is not permitted. The Company is currently evaluating the potential impact the adoption of ASU 2014-09 will have on its consolidated financial statements.

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3. Collaboration Agreement with Ucyclyd Pharma, Inc.

In March 2012, the Company entered into the purchase agreement with Ucyclyd under which the Company purchased the worldwide rights to RAVICTI and into an amended and restated collaboration agreement (the “restated collaboration agreement”) under which Ucyclyd granted the Company an option to purchase all of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL at a fixed price at a future defined date, plus subsequent milestone and royalty payments, subject to Ucyclyd’s right to retain AMMONUL for a predefined price. The restated collaboration agreement superseded the collaboration agreement with Ucyclyd, dated August 23, 2007, as amended. The entry into the purchase agreement and the restated collaboration agreement resolved a dispute that the two parties had with respect to their rights under the prior collaboration agreement.

Under the purchase agreement, the Company made a payment of $6.0 million of which (i) $5.7 million was allocated to the worldwide rights to RAVICTI and (ii) $0.3 million was allocated to the option to purchase rights to BUPHENYL and AMMONUL, based on their relative fair values. The allocated amount to the rights to RAVICTI of $5.7 million was recorded to research and development expense in the consolidated statements of operations for the period ended March 31, 2012 due to the uncertainty of an alternative future use. The allocated amount for the option to purchase rights to BUPHENYL and AMMONUL in the amount of $0.3 million was included within other current assets and was subsequently offset against the gain recognized from the settlement of retention option.

The Company will also pay tiered mid to high single digit royalties on global net sales of RAVICTI and may owe regulatory milestones of up to $15.8 million related to approval of GPB in HE, regulatory milestones of up to $7.3 million per indication for approval of GPB in indications other than UCD or HE, and net sales milestones of up to $38.8 million if GPB is approved for use in indications other than UCD (such as HE) and all annual sales targets are reached.

In addition, the intellectual property license agreements executed between Ucyclyd and Dr. Marshall L. Summar, (“Summar”) and Ucyclyd and Brusilow Enterprises, LLC, (“Brusilow”) were assigned to the Company, and the Company has assumed the royalty and milestone obligations under the Brusilow agreement for sales of RAVICTI in any indication and the royalty obligations under the Summar agreement on sales of GPB to treat HE. The Brusilow and Summar agreements provide that royalty obligations will continue, without adjustment, even if generic versions of the licensed products are introduced and sold in the relevant country.

Under the terms of the restated collaboration agreement, the Company had an option to purchase all of Ucyclyd’s worldwide rights in BUPHENYL and AMMONUL, subject to Ucyclyd’s option to retain rights to AMMONUL. The Company was permitted to exercise this option for 90 days beginning on the earlier of the date of the approval of RAVICTI for the treatment of UCD and June 30, 2013, but in no event earlier than January 1, 2013. The upfront purchase price for AMMONUL and BUPHENYL was $22.0 million. If the RAVICTI New Drug Application (“NDA”) for UCD was not approved by January 1, 2013, then Ucyclyd was obligated to make monthly payments of $0.5 million to the Company until the earliest of (1) FDA approval of the RAVICTI NDA for UCD, (2) June 30, 2013 and (3) the Company’s written notification of the decision not to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL.

On February 1, 2013, the FDA approved RAVICTI for the treatment of UCD in adult and pediatric patients two years of age and older. In accordance with the restated collaboration agreement, Ucyclyd made a payment of $0.5 million during the quarter ended March 31, 2013.

On April 29, 2013, the Company exercised its option to purchase BUPHENYL and AMMONUL. Ucyclyd subsequently exercised its time-limited right to elect to retain all rights to AMMONUL (“retention option”) for a contractual purchase price of $32.0 million (“retention amount”). Upon closing of the transaction, Ucyclyd paid the Company a net payment of $11.0 million, which reflects the Company’s contractual purchase price for Ucyclyd’s worldwide rights to BUPHENYL in the amount of $19.0 million being off-set against Ucyclyd’s retention amount for AMMONUL and a $2.0 million payment due to Ucyclyd for inventory that the Company purchased from Ucyclyd. The Company has retained a right of first negotiation should Ucyclyd later decide to sell, exclusively license, or otherwise transfer the AMMONUL assets to a third party.

On May 31, 2013, the Company completed the acquisition of BUPHENYL. Upon Ucyclyd’s exercise of its retention option, the Company recorded a gain of approximately $31.1 million in its consolidated statement of operaations. The amount of gain is comprised of (i) fair value of BUPHENYL of $20.4 million and (ii) net cash received from Ucyclyd of $10.9 million off-set by (iii) the $0.3 million carrying value of the option to purchase the rights to BUPHENYL and AMMONUL.

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4. Acquisitions

Acquisition of Andromeda

Description of the Transaction

On April 23, 2014, Hyperion Therapeutics Israel Holding Corp. Ltd. (“Hyperion Israel”), a wholly-owned subsidiary of the Company entered into a share purchase agreement with Clal Biotechnology Industries Ltd. to purchase all outstanding shares of Andromeda Biotech Ltd. (“Andromeda”), an Israeli company. On June 12, 2014 (the “Acquisition Date”), Hyperion Israel completed the purchase of all of the outstanding ordinary shares of Andromeda. The Andromeda acquisition is accounted for as a business combination. The results of operations of Andromeda have been included in the Company’s condensed consolidated statements of operations starting from June 12, 2014, the date on which the Company obtained effective control of Andromeda. The net loss from operations of Andromeda for the period from June 12, the acquisition date to June 30, 2014 was $1.4 million.

Andromeda was incorporated in Israel in 2007 and is primarily focused on the development of DiaPep277, a potentially first-in-class immunotherapy for Type 1 diabetes in patients with residual beta cell function. DiaPep277 is designed to preserve endogenous insulin secretion by selectively impeding beta cell destruction without impacting other essential immunological functions or causing systemic immune suppression. DiaPep277 is currently being evaluated in a fully enrolled Phase 3 clinical study in adult patients and holds an Orphan Drug designation in the U.S.

Fair Value of Consideration Transferred

The Company accounted for the acquisition of Andromeda as a business combination under the acquisition method of accounting. The Acquisition Date fair value of the total consideration transferred to acquire Andromeda was as follows:

	(in thousands)
Cash paid	$	14,345
Fair value of Company’s common stock issued (312,869 shares)		7,778	*
Acquisition-related contingent consideration		68,961
Total fair value of consideration transferred	$	91,084

* The fair value of the common stock was measured using the Company’s closing stock price on June 12, 2014.

The Company estimated the fair value of the acquisition-related contingent consideration on the acquisition date using a probability-weighted income approach, which reflects the probability and timing of future payments. This fair value measurement on the acquisition date is based on key assumptions such as the anticipated timelines and probability of achieving development, regulatory approval or sales-based milestone events and projected revenues. The resulting probability-weighted cash flows are discounted using estimated discount rate that commensurate with the risks of the expected cash flows attributable to the various milestones. The material factors that may impact the fair value are the probabilities of achieving the related milestones and the discount rate. Significant increases or decreases in any of the probabilities of success would result in a significantly higher or lower fair value, respectively, and commensurate changes to this liability. The fair value relating to the acquisition-related contingent consideration at each reporting date, will be updated with the changes in fair value reflected in the company’s consolidated statements of operations.

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Assets Acquired and Liabilities Assumed

The following table summarizes the provisional allocation of purchase price to the fair values of the assets acquired and liabilities assumed as of the acquisition date:

	(in thousands)
Assets acquired
IPR&D	$	135,712
Cash and cash equivalents		306
Prepaid expenses		95
Property and equipment, net		22
Other assets		578
Liabilities assumed
Current liabilities		(9,079	)
Deferred tax liability		(6,051	)
Acquisition related contingent liability		(34,288	)
Total identifiable net assets		87,295
Goodwill		3,789
Total consideration transferred	$	91,084

The amounts above are considered preliminary and are subject to change once the Company finalizes the determination of the fair value of assets acquired and liabilities assumed. Thus, these amounts are subject to refinement and final determination of the fair values of net assets acquired and may result in certain adjustments to the amounts presented above.

The contingent liabilities amounting to $34.3 million relate to potential royalties and milestone payments and potential payments to certain employees of Andromeda that is contingent upon their continued employment with the Company. The Company reassesses the probability and estimates associated with the contingent liability at each reporting period. For liability payable to third parties, any increase in the liability is recorded in the condensed consolidated statements of operations. For liabilities payable to employees, the Company accounts for the liability in accordance with ASC 450Contingencies. The Company recorded $0.2 million of the change in value in the Company’s consolidated statements of operations for the three and six months ended June 30, 2014.

Goodwill recorded as a result of the acquisition of Andromeda is not deductible for tax purposes. The goodwill primarily represents the tax impact of the IPR&D and acquisition related contingencies as well as acquiring Andromeda’s assembled workforce.

Acquisition of BUPHENYL from Ucyclyd Pharma, Inc.

As discussed in Note 3, under the terms of the restated collaboration agreement, on April 29, 2013, the Company exercised its option to purchase all of Ucyclyd’s worldwide rights in BUPHENYL and AMMONUL. On May 17, 2013 Ucyclyd exercised it’s time-limited right to elect to retain all rights to AMMONUL. On May 31, 2013 (the “Acquisition Date”), the Company completed the acquisition of BUPHENYL. Accordingly, BUPHENYL results are included in Hyperion’s consolidated financial statements from the date of the acquisition. For the period from June 1, 2013 to June 30, 2013, BUPHENYL net revenue was $1.1 million and net income was not material.

The Company acquired BUPHENYL to enhance its commercial product portfolio and to allow the Company an opportunity to serve the entire UCD patient population, including those less than two years of age or for those patients who may prefer BUPHENYL.

Pro forma Impact of Business Combination

The following consolidated pro forma information is based on the assumption that the Andromeda acquisition occurred on January 1, 2013 and BUPHENYL acquisitions occurred on January 1, 2012. The unaudited pro forma information is presented for comparative purposes only and is not necessarily indicative of the financial position or results of operations which would have been reported had the Company completed the acquisitions during these periods or which might be reported in the future. The unaudited pro forma information reflects primarily the application of the following adjustments:

• the elimination of the historical research and development expenses and general and administration expenses related to options granted to employees which were cancelled as part of the Andromeda acquisition;

• the elimination of the historical interest expenses related to loans provided by former shareholders which were cancelled as part of the Andromeda acquisition

• the exclusion of acquisition-related costs incurred for the acquisitions;

• the inclusion of amortization expense related to the fair value of the intangible asset acquired relating to BUPHENYL;

• the inclusion of the step-up value related to inventory sold that was acquired as part of the BUPHENYL acquisition. Such amounts are included in the applicable comparative period for purposes of pro forma financial information

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• as noted above, the Company issued 312,869 shares of its common stock as part of the Andromeda acquisition. The common shares were included in the pro-forma earnings per share calculation.

The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisition of Andromeda been completed on January 1, 2013 and acquisition of BUPHENYL been completed on January 1, 2012. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company.

	For the three months ended June 30,				For the six months ended June 30,
	(in thousands except per share data, unaudited)
	2014		2013		2014		2013
Total revenues	$	37,095	$	9,152	$	56,577	$	18,784
Net income		15,202		25,767		13,001		18,330
Net income per common share:
Basic		0.74		1.27		0.63		0.96
Diluted		0.70		1.19		0.59		0.90

Acquisition-related Costs

Acquisition-related expenses consist of transaction costs which represent external costs directly related to the acquisition of Andromeda and primarily include expenditures for professional fees such as legal, accounting and other directly related incremental costs incurred to close the acquisition. Acquisition-related expenses for the three and six month periods ended June 30, 2014 were $1.3 million for both periods. Acquisition-related expenses for the three and six months ended June 30, 2013 were $0.3 million and $0.4 million, respectively. These expenses were recorded to selling and general administrative expense in the condensed consolidated statements of operations.

5. Investments

All investments were classified as available-for-sale at June 30, 2014 and December 31, 2013, respectively. The principal amounts of investments by contractual maturity at June 30, 2014 and December 31, 2013 are summarized in the tables below:

	Contractual Maturity Date for the Period Ended June 30,				Total Book Value at June 30, 2014		Unrealized Gain (loss)			Aggregate Fair Value at June 30, 2014
	2015		2016
Certificates of deposit	$	11,970	$	2,640	$	14,610	$	(16	)	$	14,594
Corporate notes		18,804		—		18,804		12			18,816
U.S. Government agency securities		8,001		—		8,001		1			8,002
Commercial paper		3,497		—		3,497		1			3,498
Total	$	42,272	$	2,640	$	44,912	$	(2	)	$	44,910
	Contractual Maturity Date for the Years Ended December 31,				Total Book Value at December 31, 2013		Unrealized Loss			Aggregate Fair Value at December 31, 2013
	2014		2015
Certificates of deposit	$	10,525	$	2,845	$	13,370	$	(27	)	$	13,343
Corporate notes		6,047		12,960		19,007		(24	)		18,983
U.S. government agency securities		8,011		—		8,011		(3	)		8,008
Commercial paper		3,492		—		3,492		(1	)		3,491
Total	$	28,075	$	15,805	$	43,880	$	(55	)	$	43,825

The Company evaluated its investments and determined that there were no other-than-temporary impairments as of June 30, 2014.

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The aggregate amounts of unrealized losses and related fair value of investments with unrealized losses as of June 30, 2014 and December 31, 2013 were as follows:

	Less Than 12 Months to Maturity					12 Months or More to Maturity					Total at June 30, 2014
	Aggregate Fair Value		Unrealized Gain (loss)			Aggregate Fair Value		Unrealized Loss			Aggregate Fair Value		Unrealized Gain (loss)
Certificates of deposit	$	11,962	$	(8	)	$	2,632	$	(8	)	$	14,594	$	(16	)
Corporate notes		18,816		12			—		—			18,816		12
U.S. government agency securities		8,002		1			—		—			8,002		1
Commercial paper		3,498		1			—		—			3,498		1
Total	$	42,278	$	6		$	2,632	$	(8	)	$	44,910	$	(2	)
	Less Than 12 Months to Maturity					12 Months or More to Maturity					Total at December 31, 2013
	Aggregate Fair Value		Unrealized Loss			Aggregate Fair Value		Unrealized Loss			Aggregate Fair Value		Unrealized Loss
Certificates of deposit	$	10,507	$	(18	)	$	2,836	$	(9	)	$	13,343	$	(27	)
Corporate notes		6,039		(8	)		12,944		(16	)		18,983		(24	)
U.S. government agency securities		8,008		(3	)		—		—			8,008		(3	)
Commercial paper		3,491		(1	)		—		—			3,491		(1	)
Total	$	28,045	$	(30	)	$	15,780	$	(25	)	$	43,825	$	(55	)

6. Fair Value Measurements

The Company follows ASC 820-10, “Fair Value Measurements and Disclosures,” which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

• Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

• Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

• Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 (in thousands):

	Fair Value Measurements at June 30, 2014
	Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash equivalents:
Money market funds	$	38,013	$	—	$	—	$	38,013
Total cash equivalents	$	38,013	$	—	$	—	$	38,013
Available-for-sale securities:
Short-term:
Certificates of deposit	$	—	$	11,962	$	—	$	11,962
Commercial paper		—		3,498		—		3,498
Corporate notes		—		18,816		—		18,816
U.S. Government agency securities		—		8,002		—		8,002
Total short-term investments		—		42,278		—		42,278
Long-term:
Certificates of deposit		—		2,632		—		2,632
Total long-term investments		—		2,632		—		2,632
Total available-for-sale securities	$	—	$	44,910	$	—	$	44,910
Liabilities:
Acquisition-related contingent consideration	$	—	$	—	$	69,456	$	69,456
Total acquisition-related contingent consideration	$	—	$	—	$	69,456	$	69,456

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	Fair Value Measurements at December 31, 2013
	Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash equivalents:
Money market funds	$	38,506	$	—	$	—	$	38,506
Certificates of deposit		—		480		—		480
Total cash equivalents	$	38,506	$	480	$	—	$	38,986
Available-for-sale securities:
Short-term:
Certificates of deposit	$	—	$	10,507	$	—	$	10,507
Commercial paper		—		3,491		—		3,491
Corporate notes		—		6,039		—		6,039
U.S. Government agency securities		—		8,008		—		8,008
Total short-term investments		—		28,045		—		28,045
Long-term:
Certificates of deposit		—		2,836		—		2,836
Corporate notes		—		12,944		—		12,944
Total long-term investments		—		15,780		—		15,780
Total available-for-sale securities	$	—	$	43,825	$	—	$	43,825

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The following table presents the carrying value and estimated fair value of the Company’s notes payable as of June 30, 2014 and December 31, 2013 (in thousands):

	June 30, 2014
	Carrying Value		Estimated Fair Value
April and September 2012 Notes	$	5,771	$	6,145

	December 31, 2013
	Carrying Value		Estimated Fair Value
April and September 2012 Notes	$	8,273	$	8,860

Valuation Techniques

Level 1 Inputs

The Company classifies money market funds, which are valued based on quoted market prices in active markets with no valuation adjustment, as Level 1 assets within the fair value hierarchy.

Level 2 Inputs

Items classified as Level 2 within the valuation hierarchy consist of commercial paper, corporate notes, U.S. government agency securities and certificates of deposit. The Company estimates the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs. The Company validates the prices provided by our third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.

Level 3 Inputs

Notes Payable

The Company has determined that its notes payable would be classified as a Level 3 item in the fair value hierarchy. The fair value of these notes is based on the present value of expected future cash flows and assumptions about current interest rates and the credit worthiness of the Company.

Acquisition-related Contingent Consideration and Liabilities

In connection with the acquisition of Andromeda, the Company may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approval or sales-based milestone events. The Company estimates the fair value of the contingent consideration liabilities on the acquisition date and each reporting period thereafter using a probability-weighted income approach, which reflects the probability and timing of future payments. This fair value measurement is based on significant Level 3 inputs such as the anticipated timelines and probability of achieving development, regulatory approval or sales-based milestone events and projected revenues. The resulting probability-weighted cash flows are discounted using estimated discount rate that commensurate with the risks of the expected cash flows attributable to the various milestones.

Each reporting period thereafter, the Company revalues these obligations by performing a review of the assumptions listed above and record increases or decreases in the fair value of these contingent consideration obligations in changes in fair value of contingent consideration expenses within the condensed consolidated statements of operations until such time that the related product candidate receives marketing approval. In the absence of any significant changes in key assumptions, the quarterly determination of fair values of these contingent consideration obligations would primarily reflect the passage of time.

Updates to assumptions could have a significant impact on our results of operations in any given period and actual results may differ from estimates. For example, significant increases in the probability of achieving a milestone or projected revenues would result in a significantly higher fair value measurement while significant decreases in the estimated probability of achieving a milestone or projected revenues would result in a significantly lower fair value measurement. Significant increases in the discount rate or in the anticipated timelines would result in a significantly lower fair value measurement while significant decreases in the discount rate or anticipated timelines would result in a significantly higher fair value measurement.

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The following table provides a rollforward of acquisition-related contingent consideration, which is recorded in our condensed consolidated balance sheets (in thousands):

	Amount
Beginning balance as of January 1, 2014	$	—
Fair value on date of acquisition		68,961
Net changes in valuation		495
Fair value as of June 30, 2014	$	69,456

7. Inventories

The following table represents the components of net inventories (in thousands):

	June 30, 2014		December 31, 2013
Raw Materials	$	1,416	$	697
Work-in-process		46		—
Finished goods		1,445		2,816
Total	$	2,907	$	3,513

On May 31, 2013, the Company acquired BUPHENYL from Ucyclyd. As part of the acquisition, the Company purchased inventories from Ucyclyd and the Company recorded these inventories at fair value in the amount of $3.9 million on the Acquisition Date. As of March 31, 2014, the entire fair value of acquired BUPHENYL inventory has been charged to expenses, primarily cost of sales.

8. Property and Equipment

The following table represents the components of property and equipment (in thousands):

	June 30, 2014			December 31, 2013
Computers and Software	$	931		$	563
Furniture and Fixtures		320			320
Office Equipment		53			53
Capital work in progress		209			264
		1,513			1,200
Less: Accumulated depreciation		(457	)		(264	)
Total property and equipment, net	$	1,056		$	936

Depreciation expense for the three and six months ended June 30, 2014 was $0.1 million and $0.2 million, respectively. Depreciation expense for the three and six months ended June 30, 2013 was $32,000 and $0.1 million, respectively.

9. Intangible Assets and Goodwill

Finite lived intangible asset

In May 2013, the Company acquired BUPHENYL and as part of this transaction, the Company recognized $16.5 million of an intangible asset relating to BUPHENYL product rights. The intangible asset is amortized over the estimated useful life using the economic use method, which reflects the pattern that the economic benefit of the intangible asset is consumed as revenue is generated. The pattern of consumption of the economic benefit is estimated using the future projected cash flow of the intangible asset. The Company estimated the useful life of the BUPHENYL product rights to be 10 years. The weighted average life remaining as of June 30, 2014 is 8.5 years.

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Intangible asset amortization expense was $1.0 million and $0.3 million for the three months ended June 30, 2014 and 2013, respectively. Intangible asset amortization expense was $2.0 million and $0.3 million for the six months ended June 30, 2014 and 2013, respectively.

Estimated aggregate amortization expense for each of the five succeeding years ending December 31 is as follows (in thousands):

	2014		2015		2016		2017		2018
Amortization expense	$	4,053	$	3,294	$	1,157	$	1,048	$	1,012

Indefinite lived intangible asset and Goodwill

In June 2014, the Company acquired Andromeda and as part of this transaction, the Company recognized $135.7 million of an intangible asset relating to purchased IPR&D and $3.8 million of goodwill. The intangible asset related to the IPR&D projects is considered to be an indefinite-lived asset until the completion or abandonment of the associated research and development efforts. The Company does not amortize goodwill and intangible asset with indefinite useful lives. The Company tests goodwill and its indefinite-lived intangible asset for impairment on an annual basis and in between annual tests if they become aware of any events or changes that would indicate a reduction in the fair value of the assets below their carrying amounts.

10. Accrued Liabilities

The following table represents the components of accrued liabilities (in thousands):

	June 30, 2014		December 31, 2013
Clinical trial expenses	$	226	$	246
Payroll and related expenses		2,780		4,278
Gross to net sales accruals		7,991		5,235
Royalty payable		2,525		1,154
Legal accrual		368		45
Taxes payable		629		326
Interest payable		40		61
Liability with respect to acquisition of Andromeda		4,615		—
Other liabilities		12,161		842
Total	$	31,335	$	12,187

For the period ended June 30, 2014, Other liabilities includes an amount of $10.9 million relating to acquisition related consideration which was subsequently paid in July 2014.

11. Notes Payable

In April 2012, the Company borrowed $10.0 million (the “April 2012 Notes”) pursuant to a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank and Leader Lending, LLC—Series B (the “Lenders”). The loan carries an interest rate of 8.88%, with interest only payments for the period of 9 months from May 1, 2012. The loan is then payable in equal monthly principal payments plus interest over a period of 27 months from February 1, 2013. In connection with the Loan Agreement, the Company granted a security interest in all of its assets, except intellectual property. The Company’s obligations to the Lenders include restrictions on borrowing, asset transfers, placing liens or security interest on its assets including the Company’s intellectual property, mergers and acquisitions and distributions to stockholders. The Loan Agreement also requires the Company to provide the Lenders monthly financials and compliance certificate within 30 days of each month end, annual audited financials within 180 days of each fiscal year-end and annual approved financial projections. The Company issued warrants to the Lenders to purchase a total of 75,974 shares of common stock with an exercise price of $4.08 per share. The Loan Agreement requires immediate repayment of amounts outstanding upon an event of default, as defined in the Loan Agreement, which includes events such as a payment default, a covenant default or the occurrence of a material adverse change, as defined in the Loan Agreement. In addition, a final payment equal to 6.5% of the principal loan amount is due on the earlier of (i) maturity date, (ii) prepayment of the loan or (iii) an event of default.

Pursuant to the terms of the Loan Agreement, once the Company raised at least $30.0 million from the sale of equity securities or subordinated debt, the Lenders agreed to lend the Company a one-time single loan in the amount of $2.5 million (the “Bank Term Loan”). In September 2012, the Company borrowed an additional $2.5 million (the “September 2012 Note”) from Silicon Valley Bank pursuant to the terms of the Bank Term Loan. In addition, the Company issued warrants to Silicon Valley Bank to purchase a total of 8,408 shares of common stock with an exercise price of $5.05 per share. A final payment equal to 6.5% of the principal loan amount is due on the earlier of (i) maturity date, (ii) prepayment of the loan or (iii) an event of default. The principal amount outstanding under the Bank Term Loan accrues interest at a per annum rate equal to the greater of (i) 8.88% and (ii) the Treasury Rate, as defined in the Loan Agreement, on the date the loan is funded plus 8.50%, with interest only payments for the period of 9 months from the date the loan is funded. The loan is then payable in equal monthly principal payments plus interest over a period of 27 months from the date the loan is funded.

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Amortization of debt discount for the three and six month periods ended June 30, 2014 and 2013 was $0.1 million and $0.3 million, respectively.

As discussed in Note 19, the outstanding notes payable were paid in full on July 18, 2014.

12. Warrants

In connection with a Loan and Security Agreement entered into in October 2007, the Company issued warrants to purchase 274 shares of Series B convertible preferred stock. In June 2009, as part of the recapitalization, these warrants were converted into warrants to purchase shares of common stock. The warrants are exercisable at $1,913.05 per share and will expire in October 2017 (the “October 2007 common stock warrants”).

The following table summarizes the outstanding warrants and the corresponding exercise price as of March 31, 2014 and December 31, 2013:

	Number of Shares Outstanding
	June 30, 2014		December 31, 2013		Per Share Exercise Price
October 2007 common stock warrants		274		274	$	1,913.05
Total		274		274

13. Commitments and Contingencies

Contingencies

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. Further, the Company may be subject to certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

In accordance with the Company’s amended and restated certificate of incorporation and amended and restated bylaws, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been no claims to date and the Company has a director and officer insurance policy that may enable it to recover a portion of any amounts paid for future claims.

The Company is contingently committed for development milestone payments as well as sales-related milestone payments and royalties relating to potential future product sales under the restated collaboration agreement and purchase agreement with Ucyclyd (Note 3). The amount, timing and likelihood of these payments are unknown as they are dependent on the occurrence of future events that may or may not occur, including approval by the FDA of GPB for HE.

In addition to above, due to the acquisition of Andromeda (Note 4), the Company may be liable to pay the former shareholders of Andromeda and other third parties for potential regulatory and milestone payments and royalties relating to future product sales and has recorded an acquisition related contingent consideration and contingent liability on its condensed consolidated balance sheets. The amount, timing and likelihood of these payments are unknown as they are dependent on the occurrence of future events that may or may not occur.

Other Matters

From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and government inspections and other legal matters arising in the ordinary course of business or otherwise. On March 17, 2014, the Company received notification of a Paragraph IV certification from the generic drug manufacturer Par Pharmaceutical, Inc. (“Par”) that it had filed an Abbreviated New Drug Application with the FDA seeking approval for a generic version of RAVICTI Oral Liquid. The Paragraph IV certification alleges that certain of the Company’s patents are invalid and/or will not be infringed by Par’s manufacture, use or sale of the product for which the ANDA was submitted. The Company filed suit against Par on April 23, 2014 to protect its patents and to obtain a stay of the FDA’s approval of Par’s ANDA. On July 22, 2014, Par filed a motion to dismiss for lack of personal jurisdiction, or in the alternative, a motion to transfer the case to the Southern District of New York.

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14. Equity Incentive Plan and Stock-Based Compensation

Equity Incentive Plans

In April 2012, the board of directors of the Company adopted the 2012 Omnibus Incentive Plan (the “2012 Plan”). The Company’s stockholders approved the 2012 Plan in July 2012. The 2012 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, dividend equivalent rights, other equity-based awards and cash bonus awards. The 2012 Plan became effective on July 25, 2012

Effective January 1, 2014, pursuant to the provisions of the 2012 Plan providing for an annual automatic increase in the number of shares of common stock reserved for issuance under the plan, the shares available for issuance under the 2012 Plan increased by 805,485 shares. As of June 30, 2014, the Company had 793,351 shares of common stock available for issuance and 1,672,768 options, 126,705 restricted stock units (“RSU’s”) and 8,988 performance stock units (“PSU’s”) were outstanding under the 2012 Plan. During the six months ended June 30, 2014, the board of directors approved the grants of 620,769 stock options at exercise prices in the range of $24.64 - $31.00, 115,455 RSU’s and 8,988 PSU’s under the 2012 Plan.

On July 25, 2012, the effective date of the 2012 Plan, the 2006 Equity Incentive Plan was frozen and no additional awards will be made under the 2006 Plan. Any shares remaining available for future grant were allocated to the 2012 Plan and any shares underlying outstanding options that terminate by expiration, forfeiture, cancellation, or otherwise without issuance of such shares, will be allocated to the 2012 Plan. As of June 30, 2014, there were 1,441,158 options outstanding under the 2006 Plan.

In March 2014, the Company recorded an expense of $0.1 million related to the modification of certain stock options.

Stock-Based Compensation

The Company estimates the fair value of stock options using the Black-Scholes option valuation model. The fair value of employee stock options and RSU’s is being amortized on a straight-line basis over the requisite service period of the awards.

Total stock-based compensation expense related to options and awards granted was allocated as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Cost of sales	$	40	$	2	$	42	$	3
Research and development		278		143		425		235
Selling general and administrative		1,576		1,108		2,795		1,521
Total	$	1,894	$	1,253	$	3,262	$	1,759

Stock-based compensation of $10,000 and $18,000 was capitalized into inventories for the three and six months ended June 30, 2014. Stock-based compensation of $17,000 and $26,000 was capitalized into inventories for the three and six months ended June 30, 2013. Capitalized stock-based compensation is recognized as cost of sales when the related product is sold. Allocations to research and development, selling, general and administrative expenses are based upon the department to which the associated employee reported.

15. Income Taxes

At December 31, 2013, the Company had U.S. net operating loss carryforwards of approximately $72.5 million and $112.5 million available to reduce future taxable income, if any, for both federal and California state income tax purposes, respectively. The net operating loss carryforwards will begin to expire in 2026 for federal and 2016 for state purposes. At June 12, 2014, the Company had Israeli net operating loss carryforwards of $61.6 million which do not expire.

GPB was granted orphan drug designation in 2009 by the FDA for the maintenance treatment of patients with UCD and for the intermittent or chronic treatment of patients with any grade of HE. The orphan drug designation allows the Company to claim increased federal tax credits for its research and development activities. The Company had $18.0 million of federal credit carryforwards of which $17.4 million relates to Orphan Drug Credit claims for 2009 through 2013. The Company has claimed tax credits for its research and development activities in Israel and has $3.0 million of credit carryforwards.

The Company intends to continue maintaining a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, considering the Company’s current assessment of income from potential future sales, there is a reasonable possibility that, within the next year, sufficient positive evidence may become available to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. As such, the Company may release a significant portion of its valuation allowance against its deferred tax assets within the next 12 months. This release would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period such release is recorded.

Income tax benefit was $2.1 million and $2.0 million for the three and six months ended June 30, 2014, respectively. Expected taxable income in 2014 in the U.S. will largely be offset by federal and state net operating losses and credits. Expected losses in 2014 in Israel will create additional net operating losses, which are currently benefited as there is sufficient future taxable income to offset them.

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There was no interest or penalties accrued through June 30, 2014. The Company’s policy is to recognize any related interest or penalties in income tax expense. The Company is subject to potential examination by tax authorities for tax years ended 2006 through the current period include the United States federal and California jurisdictions and for the years 2010 through the current period in Israel. The Company is not currently under income tax examinations by any tax authorities.

16. Net Income per Share of Common Stock

The following table sets forth the computation of basic and diluted net income per share of common stock for the periods indicated (in thousands, except share and per share amounts):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Net income per share
Numerator:
Net income	$	17,479	$	25,022	$	18,735	$	16,047
Denominator:
Weighted-average number of common shares outstanding – basic		20,335,618		20,050,987		20,263,803		18,716,332
Dilutive effect of stock-options and awards		1,278,378		1,307,288		1,308,913		1,261,757
Weighted average common shares outstanding – dilutive		21,613,996		21,358,275		21,572,716		19,978,089
Net income per share:
Basic	$	0.86	$	1.25	$	0.92	$	0.86
Diluted	$	0.81	$	1.17	$	0.87	$	0.80

The following outstanding potentially dilutive securities were excluded from the computation of diluted net income per share, as the effect of including them would have been antidilutive:

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Stock options		1,366,021		675,969		1,365,873		380,745
October 2007, April 2008 and 2012 common stock warrants		274		274		274		274
Total		1,366,295		676,243		1,366,147		381,019

17. Related Party Transaction

As part of the Company’s acquisition of BUPHENYL, the Company assumed the existing BUPHENYL distributor’s agreements, including the distribution agreement with Swedish Orphan Biovitrum AB (“SOBI”). Additionally, in the third quarter of 2013 SOBI was granted exclusive rights by the Company to distribute RAVICTI on a named patient basis for the chronic treatment of UCD in various territories in the Middle East. SOBI’s chairman, Bo Jesper Hansen, is a member of the Company’s Board of Directors. During the three and six months ended June 30, 2014 the Company recognized $1.9 million and $2.2 million, respectively, from sales to SOBI. During the first half of 2013 there were no revenues recognized from SOBI. As of June 30, 2014, trade receivable from SOBI amounted to $1.0 million.

18. Segment Reporting

The Company operates as one operating segment and uses one measurement of profitability to manage its business.

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Net product revenue for RAVICTI and BUPHENYL for the three and six months ended June 30, 2014 and 2013 are as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
RAVICTI		31,553			6,210		47,069			6,993
BUPHENYL		5,742			1,095		9,708			1,095
Co-payment assistance		(200	)		—		(200	)		—
Total		37,095			7,305		56,577			8,088

Net product revenue for RAVICTI and BUPHENYL by geographic region are as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
United States		34,056		7,223		52,052		8,006
Canada		983		—		1,783		—
Rest of the world		2,056		82		2,742		82
Total		37,095		7,305		56,577		8,088

Long lived assets consist of property and equipment which at June 30, 2014 and December 31, 2013 are primarily in the U.S.

19. Subsequent Events

On July 18, 2014, the Company entered into a Loan and Security Agreement with Silicon Valley Bank, providing for two tranches of term loans of up to $16.0 million (the “Term Loans”) and a revolving credit line of up to $5.0 million (the “Revolving Loans” and together with the Term Loans, the “Loans”). The Company drew down both tranches of the Term Loans at closing, of which approximately $5.8 million was used to pre-pay the Company’s existing notes payable (as discussed in Note 11). The actual amount of Revolving Loans that are available from time to time under the Loan and Security Agreement is limited to a borrowing base amount that is determined according to, among other things, a percentage of the value of eligible accounts.

The Company’s obligations under the Loan and Security Agreement are collateralized by a first priority security interest in substantially all of the Company’s assets, excluding its intellectual property. The Company has also agreed not to pledge or otherwise encumber its intellectual property assets, except that the Company may grant licenses of its intellectual property as set forth in the Loan and Security Agreement.

The Company is required to pay interest only for the first 18 months of the Term Loans, followed by 30 equal monthly payments of interest and principal. The Term Loans will mature on June 30, 2018. The Revolving Loans will mature on July 18, 2017. The Loan and Security Agreement provides for an interest rate of 4.0% per year on the Term Loans and the prime rate plus 0.75% per year on the Revolving Loans, with a minimum interest requirement on the Revolving Loans. Upon the maturity date of the Term Loans, a final payment fee of 6.75% of the original principal amount of such Term Loans (the “Final Payment”) will be due.

The Loan and Security Agreement contains customary representations, warranties and covenants (including the requirement to meet one of two financial covenants) by the Company, as well as customary events of default and indemnification obligations of the Company. Upon an event of default, after any applicable grace or cure period, all amounts owed under the Loan Agreement may be declared due and payable, including the original principal amount of the Loans, the accrued but unpaid interest thereon, the Final Payment and the prepayment fee.

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

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2013, included in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”).

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Overview

We are a commercial biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat disorders in the area of orphan diseases. Our products, RAVICTI^® (glycerol phenylbutyrate) Oral liquid, BUPHENYL^® and AMMONAPS^® (sodium phenylbutyrate) Tablets and Powder, are designed to lower ammonia in the blood. Ammonia is produced in the intestine after a person eats protein and is normally detoxified in the liver by conversion to urea. Elevated levels of ammonia are potentially toxic and can lead to severe medical complications which may include death. We have developed RAVICTI, which we launched during the first quarter of 2013, to treat most urea cycle disorders (“UCD”) including 7 of the 8 most prevalent UCD subtypes, and are developing glycerol phenylbutyrate (“GPB”), the active pharmaceutical ingredient in RAVICTI, to treat hepatic encephalopathy (“HE”). HE may develop in some patients with liver scarring, known as cirrhosis, or acute liver failure and is a chronic complication of cirrhosis which fluctuates in severity and may lead to serious neurological damage. UCD and HE are diseases in which blood ammonia is elevated. UCD are inherited rare genetic diseases caused by a deficiency of one or more enzymes or transporters that constitute the urea cycle, which in a healthy individual removes ammonia through its conversion to urea. We estimate there are approximately 2,100 cases of UCD in the United States of which approximately 1,100 have been diagnosed. However, we estimate that only about 600 patients are currently treated with an FDA approved medication. In addition, we are developing DiaPep277^®, a first-in-class immune intervention therapy for the potential treatment of Type 1 diabetes in patients with residual beta cell function. Type 1 (or insulin dependent) diabetes is an auto immune disease that results in the destruction of beta cells, the insulin secreting cells in the pancreas, resulting in loss of glycemic (glucose or blood sugar) control.

On February 1, 2013, the U.S. Food and Drug Administration (“FDA”) granted approval of RAVICTI for chronic management of 7 of the 8 subtypes of UCD in adult and pediatric patients greater than two years of age who cannot be managed by dietary protein restriction and/or amino acid supplementation alone. Limitations of use include treatment of patients with acute hyperammonemia (“HA”) crises for whom urgent intervention is typically necessary, patients with N-acetylglutamate synthetase (“NAGS”) deficiency for whom the safety and efficacy of RAVICTI has not been established, and UCD patients under two months of age for whom RAVICTI is contraindicated due to uncertainty as to whether newborns, who may have immature pancreatic function, can effectively digest RAVICTI.

In May 2013, we acquired BUPHENYL, an FDA-approved therapy for treatment of 3 of the most prevalent UCD subtypes, from Ucyclyd Pharma Inc. (“Ucyclyd”), a subsidiary of Valeant Pharmaceuticals International, Inc. (“Valeant”). In Europe and the Middle East, BUPHENYL is sold under the brand name AMMONAPS^®. The active pharmaceutical ingredient in BUPHENYL and AMMONAPS is sodium phenylbutyrate (“NaPBA”). References to BUPHENYL in this Form 10-Q include AMMONAPS when referring to the product in the Middle East and Europe. Subsequent to the acquisition, we began selling BUPHENYL within the United States to patients who have not transitioned to RAVICTI. In addition, we sell BUPHENYL through our distributors outside the United States. In 2011, an Abbreviated New Drug Application (“ANDA”) for a generic tablet form of NaPBA was approved in the U.S., and in 2013, an ANDA for generic powder was approved. Both of these generic forms are owned by companies other than Hyperion. References to NaPBA in this Form 10-Q include the generically available tablet and powdered forms of the drug, as well as our branded products in both powdered and tablet forms.

An average gross selling price per patient per year of RAVICTI therapy is currently approximately $350,000. The price of BUPHENYL per gram is approximately one quarter that of RAVICTI. Prices for both therapies vary among patients because doses are individualized based on a patient’s weight and disease severity. We have launched a dedicated call center, which serves as an integrated resource for RAVICTI prescription intake and distribution, reimbursement adjudication, patient financial support, and ongoing compliance support for patients. In addition, the call center provides financial support assistance to BUPHENYL patients. Together with distribution via two specialty pharmacies, we believe these services provide important support to UCD patients and their physicians, and help them achieve more favorable outcomes in managing their disease. As part of our ongoing commitment to the patient community, we provide our UCD products at no cost to patients as we help them establish insurance coverage for our UCD products and donate to an independent foundation with an established track record of enabling patients to access medications affordably.

RAVICTI was granted orphan drug exclusivity in the United States for the maintenance treatment of patients with UCD shortly after its FDA approval in 2013. This exclusivity extends through February 1, 2020. RAVICTI has also received orphan drug designation in the European Union (“EU”), although the right to marketing exclusivity cannot be determined until it is authorized to market in the EU. In March 2013, U.S. Patent No. 8,404,215 entitled “Methods of Therapeutic Monitoring of Nitrogen Scavenging Drugs” issued from U.S. Patent Appl. No. 13/417,137 with claims directed to methods of optimizing the dosage of nitrogen scavenging drugs based on target fasting ammonia levels. This patent will expire in March 2032, and is currently listed in the FDA publication “Approved Drug Products with Therapeutic Equivalence Evaluations,” known as the Orange Book. In February 2014, U.S. Patent 8,642,012 entitled “Methods of Treatment Using Ammonia Scavenging Drugs” issued from U.S. Patent Appl. No. 12/350,111 with claims directed to methods of treating patients with UCD using phenylacetic acid (“PAA”) prodrugs based on in part on target urinary phenylacetylglutamine (“PAGN”) levels. This patent will expire in September 2030 with Patent Term Extension (“PTE”)and is currently listed in the Orange Book. Both of these patents are currently the subject of litigation with Par Pharmaceutical, Inc. (“Par”).

We believe GPB has potential in other indications; and therefore in 2012 we completed a Phase II trial assessing the safety and efficacy of GPB in the treatment of episodic overt HE. Episodic overt HE can be diagnosed clinically through a set of signs and

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symptoms. The Phase II trial met its primary endpoint, which was to demonstrate that the proportion of patients experiencing an HE event was significantly lower on GPB versus placebo, both administered in addition to standard of care, which included lactulose and/or rifaximin. The FDA has granted orphan drug designation to GPB for this indication, but whether a compound receives exclusivity for an indication is not determined by the FDA until the drug has been approved for marketing. HE is a serious but potentially reversible neurological disorder that can occur in patients with cirrhosis or acute liver failure. It comprises a spectrum of neuropsychiatric abnormalities and motor disturbances that are associated with varying degrees of disability, ranging from subtle to lethal. HE is believed to occur when the brain is exposed to ammonia that is normally removed from the blood by a healthy liver. We believe that ammonia plays a central role in this disease, and the most commonly utilized therapies for the treatment of HE are believed to act by reducing ammonia. Published epidemiological data suggest that there are approximately 140,000 patients in the United States who have episodic HE. We believe GPB, if approved for HE, would treat HE through a systemic reduction of ammonia.

In June 2014, we completed the acquisition of Andromeda. Andromeda was incorporated in Israel in 2007 and is primarily focused on the development of DiaPep277, a first-in-class immune intervention therapy for Type 1 diabetes in patients with residual beta cell function, an orphan indication with approximately 35,000 adults diagnosed annually across the U.S. and Europe. DiaPep277 is currently being evaluated in a Phase 3 clinical study in adult patients (ages 20-45) with Type 1 diabetes diagnosed within the last six months. The Phase 3 study is fully enrolled and results are anticipated in the first quarter of 2015. If the data from the study is positive, we plan to file a New Drug Application (“NDA”) and a Marketing Authorization Application (“MAA”) in the second half of next year, with the US and EU, respectively. Andromeda is also conducting an open label extension study to gather an additional two years of safety data, to further support the safety of the drug. This study is expected to complete in 2017, and is not required for filing or approval.

Financial Overview

Revenues

Our product revenues consist of the following:

• Revenues from the sale of RAVICTI which was approved by the FDA on February 1, 2013 and was commercially launched in the U.S. during the period ended March 31, 2013; and

• Revenues from the sale of BUPHENYL which we acquired from Ucyclyd on May 31, 2013, pursuant to the restated collaboration agreement. We currently distribute BUPHENYL in the U.S. and certain countries outside the U.S.

See “Results of Operations” below for more detailed discussion on revenues.

Cost of sales

Our cost of sales includes third-party manufacturing costs, royalty fees payable under our restated collaboration agreement with Ucyclyd, and other indirect costs including compensation cost of personnel, shipping and supplies.

The manufacturing costs we incurred prior to FDA approval of RAVICTI have been recorded as research and development expenses in our condensed consolidated statements of operations. For RAVICTI, we expect that cost of sales as a percentage of sales will increase in future periods as product manufactured prior to FDA approval is utilized, as these previously manufactured products have been fully expensed as research and development expenses in prior periods.

As a result of the business combination related to the purchase of BUPHENYL, cost of sales is higher due to the recording of the step-up value on BUPHENYL inventories acquired from Ucyclyd which were expensed to cost of sales as that inventory was sold and is not indicative of cost of sales in future periods. Since the inventories we purchased were part of the business combination, the inventories were recorded at fair value on the acquisition date.

Research and Development Expenses

We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:

• salaries and related expenses for personnel, including expenses related to stock options or other stock-based compensation granted to personnel in development functions;

• fees paid to clinical consultants, clinical trial sites and vendors, including clinical research organizations (“CROs”), in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;

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• other consulting fees paid to third parties;

• expenses related to production of clinical supplies, including fees paid to contract manufacturers;

• expenses related to license fees and milestone payments under in-licensing agreements;

• expenses related to compliance with drug development regulatory requirements in the United States, the European Union and other foreign jurisdictions; and

• depreciation and other allocated expenses.

We expense both internal and external research and development expenses as they are incurred. We have developed RAVICTI in UCD and GPB for HE in parallel, and we typically use our employees, consultants and infrastructure resources across our two programs. Thus, some of our research and development expenses are not attributable to an individual program, but rather are allocated across our programs and these costs are included in unallocated costs as detailed below. Allocated expenses include salaries, stock-based compensation and related benefit expenses for our employees, consulting fees and fees paid to clinical suppliers. The following table shows our research and development expenses for the three and six months ended June 30, 2014 and 2013 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
UCD Program	$	2,379	$	1,618	$	4,731	$	2,545
HE Program		892		235		1,552		549
DiaPep277 Program		574		—		574		—
Unallocated		201		709		407		1,307
Total	$	4,046	$	2,562	$	7,264	$	4,401

We expect our research and development expenses to increase when we initiate our Phase III trial of GPB for the treatment of patients with episodic HE. Additionally, we expect these costs to increase due to the acquisition of Andromeda and its ongoing Phase 3 trial of DiaPep277. Due to the inherently unpredictable nature of product development, we are currently unable to exactly predict the expenses we will incur or the duration of the trial. Based on our current discussions with FDA, our estimate of the cost of our Phase III trial of GPB in HE will be between $50.0 million to $55.0 million from initiation of the trial until submission of data to FDA.

Our research and development expenditures are subject to numerous uncertainties in timing and cost to completion. Development timelines, the probability of success and development expenses can differ materially from expectations. Clinical trials in orphan diseases, such as UCD, HE and Type 1 diabetes in patients with residual beta cell function may be difficult to enroll given the small number of patients with these diseases. Completion of clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

• the number of trials required for approval;

• the number of sites included in the trials;

• the length of time required to enroll suitable patients;

• the number of patients that participate in the trials;

• the drop-out or discontinuation rates of patients;

• the duration of patient follow-up;

• the number and complexity of analyses and tests performed during the trial;

• the phase of development of the product candidate; and

• the efficacy and safety profile of the product candidate.

Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.

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Selling, General and Administrative Expenses

Selling general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for employees in administration, finance and business development, legal, investor relations, marketing, commercial and sales functions, including fees to third party vendors providing customer support services. Other significant expenses include consulting fees, allocated facilities expenses and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents. We expect that our selling, general and administrative expenses will increase with the acquisition of Andromeda and continued commercialization of RAVICTI and marketing of BUPHENYL. We expect these increases will likely include increased expenses for insurance, expenses related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants.

On February 6, 2014, the Board of Directors of the Company approved performance RSU grants to sales individuals. These RSU’s will become fully vested if both the performance and service conditions are met. If the performance and service conditions are met, the total expense recorded in the current year for these RSU’s would be approximately $0.2 million.

On March 17, 2014, we received notification of a Paragraph IV certification from the generic drug manufacturer Par Pharmaceutical, Inc. (“Par”) that it had filed an Abbreviated New Drug Application with the FDA seeking approval for a generic version of RAVICTI Oral Liquid. The Paragraph IV certification alleges that certain our patents are invalid and/or will not be infringed by Par’s manufacture, use or sale of the product for which the ANDA was submitted. We filed suit against Par on April 23, 2014 to protect our patents and to obtain a stay of the FDA’s approval of Par’s ANDA.On July 22, 2014, Par filed a motion to dismiss for lack of personal jurisdiction, or in the alternative, a motion to transfer the case to the Southern District of New York. As a result of this pending litigation and the expansion of our business, we expect our legal expenses to increase in the future.

Amortization of intangible asset

In 2014, the amortization of intangible asset pertains to the amortization expense of BUPHENYL product rights acquired on May 31, 2013. For additional information, see Note 9 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.

Change in acquisition-related contingencies

In connection with the acquisition of Andromeda, we may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approval or sales-based milestone events. We estimated the fair value of the acquisition-related contingent consideration and contingent liabilities on the acquisition date and at the end of the reporting period thereafter. Any change in the fair value of contingent consideration on the reporting date and the acquisition date is recorded in this line item on the condensed consolidated statements of operations. Contingent liabilities are evaluated in accordance with ASC 450 at each reporting period with charges recorded in this line item on the condensed consolidated statements of operations. For additional information, see Note 6 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.

Interest Income

Interest income consists of interest earned on our investments and cash and cash equivalents.

Interest Expense

Interest expense consists primarily of non-cash and cash interest costs related to our borrowings.

Gain from settlement of retention option

The amount of gain is comprised of (i) fair value of BUPHENYL of $20.4 million and (ii) net cash received from Ucyclyd of $10.9 million off-set by (iii) the $0.3 million carrying value of the option to purchase the rights to BUPHENYL and AMMONUL. Accordingly, we recorded the resulting net settlement of $31.1 million as gain from our settlement of the retention option on our condensed consolidated statements of operations. For additional information, see Note 3 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.

Other Income (Expense), net

Other income (expense), net for the six months ended June 30, 2014 was $0.2 million expense and primarily includes amortization of discount on available-for-sale investments partially offset by the gain on foreign currency transactions. During the six months ended June 30, 2013 other income (expense), net consisted of a $0.5 million payment from Ucyclyd in accordance with the restated collaboration agreement.

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Income Taxes

We have been granted orphan drug designation by the FDA for our products currently under development. The orphan drug designation allowed us to claim increased federal tax credits for its research and development activities. We have $18.0 million of federal credit carryforwards of which $17.4 million relates to Orphan Drug Credit claims for 2009 through 2013. We have claimed tax credits for our research and development activities in Israel and have $3.0 million of credit carryforwards.

We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, considering our current assessment of income from potential future sales, there is a reasonable possibility that, within the next year, sufficient positive evidence may become available to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. As such, we may release a significant portion of our valuation allowance against our deferred tax assets within the next 12 months. This release would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period such release is recorded.

For the three and six months ended June 30, 2014, we recorded an income tax benefit of $2.1 million and $2.0 million, respectively. Income before income taxes for the three and six months ended June 30, 2014 was $15.4 million and $16.7 million, respectively. The effective income tax benefit rate was 13.8% and 12.2% for the three and six months ended June 30, 2014, respectively. The difference between the effective rate and the U.S. statutory rate is primarily due to the valuation allowance on the U.S. deferred taxes and lower foreign tax rates. There was no income tax expense or benefit for the three and six months ended June 30, 2013.

Our expected taxable income in 2014 will largely be offset by federal and state net operating losses and credits.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. For additional information on our critical accounting policies, please refer to the information contained in Note 2 of the accompanying unaudited condensed consolidated financial statements and the Critical Accounting Policies and Estimates section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Annual Report on Form 10-K for the year ended December 31, 2013.

Business Combinations

We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred.

Valuation of Acquisition-Related Contingencies Resulting from the Andromeda Business Combination

In conjunction with the acquisition of Andromeda, we have recorded acquisition-related contingencies upon the achievement of specified development, regulatory approval or sales-based milestone events. The acquisition-related contingencies are measured at their respective fair values as of the acquisition date. The models used in valuing these acquisition-related contingencies require the use of significant estimates and assumptions including but not limited to:

• estimates of revenues and operating profits related to the product candidate;

• the probability of success for unapproved product candidate considering their stage of development;

• the time and resources needed to complete the development and approval of product candidate;

• the life of the potential commercialized products and associated risks, including the inherent difficulties and uncertainties in developing a product candidate such as obtaining FDA and other regulatory approvals; and

• risks related to the viability of and potential alternative treatments in any future target markets.

We revalue contingent consideration obligations each quarter following the acquisition and record increases or decreases in their fair value in our condensed consolidated statements of operations.

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Increases or decreases in the fair value of our contingent consideration liabilities are recorded in our statements of operations and can result from updates to assumptions such as the expected timing or probability of achieving the specified milestones, changes in projected revenues or changes in discount rates. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Updates to assumptions could have a significant impact on our results of operations in any given period. Actual results may differ from estimates.

Valuation of Acquisition-Related Contingent Liability

Acquisition-related contingent liability, which consists primarily of potential milestone payments and royalty obligations, and potential payments to certain employees of Andromeda is recorded in the condensed consolidated balance sheets at its acquisition date estimated fair value. We reassess the probability and estimates associated with the contingent liability at each reporting period. For liability payable to third parties, any increase in the liability is recorded in the condensed consolidated statements of operations. For liabilities payable to employees, we account for the liability in accordance with ASC 450Contingencies.

Accounts Receivable

Our trade accounts receivable are recorded net of product sales allowances for prompt-payment discounts, chargebacks and doubtful accounts. We estimate chargebacks and prompt-payment discounts based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs.

Inventories

Our inventories are stated at the lower of cost or market value with cost determined under the first-in-first-out (FIFO) cost method. Our inventories consist of raw materials, work in process and finished goods. Subsequent to the FDA approval of RAVICTI on February 1, 2013, we began capitalizing inventories as the related costs were expected to be recoverable through the commercialization of the product. Prior to the FDA approval of RAVICTI, we recorded the costs incurred as research and development expenses in the condensed consolidated statements of operations. If information becomes available that suggest that our inventories may not be realizable, we may be required to expense a portion or all of the previously capitalized inventories.

The costs of our inventories consists mainly of third party manufacturing costs, associated compensation related costs of personnel indirectly involved in the manufacturing process and other overhead costs attributable to the manufacture of inventories.

Products that have been approved by the FDA or other regulatory authorities, such as RAVICTI are also used in clinical programs, to assess the safety and efficacy of the products for usage in diseases that have not been approved by the FDA or other regulatory authorities. The form of RAVICTI utilized for both commercial and clinical programs is identical and, as a result, the inventory has an “alternative future use”. Raw materials and purchased drug product associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes and, therefore, does not have an “alternative future use”.

On May 31, 2013, we acquired BUPHENYL including inventory from Ucyclyd. We recorded these inventories at fair value in the amount of $3.9 million on the acquisition date. As of June 30, 2014, we sold the entire inventory acquired from the acquisition of BUPHENYL.

We evaluate for potential excess inventory by analyzing current and future product demand relative to the remaining product shelf life. We develop demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. During the quarter ended June 30, 2014, we recorded a provision for inventory obsolescence of $0.1 million which was recorded into cost of sales in our condensed consolidated statements of operations.

Goodwill and Intangible Assets

We record intangible assets at acquisition cost less accumulated amortization and impairment. Intangible asset with finite lives are amortized over their estimated useful life using the economic use method, which reflects the pattern that the economic benefits of the intangible asset are consumed as revenue is generated. The pattern of consumption of the economic benefits is estimated using the future projected cash flows of the intangible asset.

The goodwill and indefinite lived intangible asset we acquired in a business combination is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Impairment of Long-lived Assets

We review our property and equipment and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset class may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net undiscounted cash flows that the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value determined using projected discounted future net cash flows arising from the assets.

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Fair Value of Financial Instruments

We measure our financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid for to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The carrying amounts of our financial instruments, including cash equivalents, short-term investments, accounts payable, and accrued liabilities, approximate fair value due to their short maturities. The carrying amounts of long-term investments and the acquisition-related contingent consideration represent their estimated fair values.

Income Taxes

We are subject to income taxes in the U.S. and we use estimates in determining our provision for income taxes. We use the liability method of accounting for income taxes, whereby deferred income tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income.

Recognition of deferred income tax assets is appropriate when based on the weight of positive and negative evidence realization of such assets is more likely than not. We recognize a valuation allowance against our net deferred income tax assets if it is more likely than not that some portion of the deferred income tax assets will not be fully realizable. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.

We apply the provisions of FASB’s guidance on accounting for uncertainty in income taxes. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and the tax benefit to be recognized is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

Revenue Recognition

We recognize revenue in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605,Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; and the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. We determine that persuasive evidence of an arrangement exists based on written contracts that define the terms of our arrangements. In addition, we determine that services have been delivered in accordance with the arrangement. We assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.

Product Revenue

During the three and six months ended June 30, 2014, our product revenues represent sales of RAVICTI and BUPHENYL in the U. S. and outside the U.S. We recognized revenue once all four revenue recognition criteria described above are met.

In 2013, we began distributing RAVICTI to two specialty pharmacies through a specialty distributor. The specialty pharmacies then in turn dispense RAVICTI to patients in fulfillment of prescriptions. As RAVICTI was our first commercial product, we could not reasonably assess potential product sales allowances at the time of sale to the specialty distributor. As a result, the price of RAVICTI was not deemed fixed or determinable. We deferred the recognition of revenues on product shipments of RAVICTI to the specialty distributor until the product was shipped to patients by the specialty pharmacies at which time our related product sales allowances could be reasonably estimated. Starting June 2014, we could reasonably estimate and determine sales allowances, therefore we began recognizing RAVICTI revenue at the point of sale to the specialty distributor, which resulted in the one-time non- recurring recognition of an additional $8.6 million in net revenues.

We sell BUPHENYL in the United States to a specialty distributor, who in turn sells this product to retail pharmacies, hospitals and other dispensing organizations. We recognize revenue from BUPHENYL sales upon receipt by the specialty distributor. For product sales of BUPHENYL outside the United States, revenue is recognized once the product is accepted by the customer or once their acceptance period has expired whichever comes first.

We recognize revenue net of product sales allowances, including estimated rebates, chargebacks, prompt-payment discounts, returns, distribution service fees and Medicare Part D coverage gap reimbursements. Product shipping and handling costs are included in cost of sales.

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Product Sales Allowances

We establish reserves for prompt-payment discounts, government and commercial rebates, product returns and chargebacks. Allowances relating to prompt-payment discounts and chargebacks are recorded at the time of revenue recognition, resulting in a reduction in product sales revenue and a decrease in trade accounts receivables. Accruals related to government rebates, product returns and other applicable allowances such as distributor fees are recognized at the time of revenue recognition, resulting in a reduction in product sales and an increase in accrued expenses or a reduction in the related accounts receivable depending on the nature of the sales deduction.

Co-payment assistance

We provide cash donation to an independent non-profit third party organization (which supports patients who have commercial insurance and meet certain financial eligibility requirements) with co-payment assistance and travel costs. We account for the amount of co-payment assistance as a reduction of product revenues.

The following table summarizes the provisions, and credits/payments, for the gross to net sales deductions:

(in thousands)	Rebates & Chargebacks			Prompt pay discounts			Other Sales- Related Deductions			Total
Balance as of December 31, 2013	$	5,051		$	—		$	184		$	5,235
Provision related to current period sales		8,203			2,350			997			11,550
Credits/payments		(5,745	)		(2,350	)		(699	)		(8,794	)
Balance as of June 30, 2014	$	7,509		$	—		$	482		$	7,991

Stock-Based Compensation

We recognize as compensation expense the fair value of stock options and other stock-based compensation issued to employees over the requisite service periods, which are typically the vesting periods. We determine the fair value of restricted stock units using the closing price of our common stock on the date of grant. We estimate the fair value of stock options using the Black-Scholes option valuation model. The fair value of employee stock options and restricted stock units is amortized on a straight-line basis over the requisite service period of the awards.

Cost of Sales

Our cost of sales during the quarter ended June 30, 2014 consist mainly of third party manufacturing cost of products sold, royalty fees and other indirect costs related to personnel compensation, shipping and supplies.

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We recorded costs incurred prior to the FDA approval of RAVICTI as research and development expenses in our condensed consolidated statement of operations. We expect that cost of sales relating to RAVICTI as a percentage of revenue will increase in future periods as product manufactured prior to FDA approval, and therefore fully expensed, is utilized. The cost of BUPHENYL sales as a percentage of revenue was higher due to the recording of the step-value on BUPHENYL inventories acquired from Ucyclyd which was expensed to cost of sales as the inventory was sold and is not indicative of cost of sales in future periods.

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Results of Operations

Comparison of the Three and Six Months Ended June 30, 2014 and 2013

	Three Months Ended June 30,						Increase/ (Decrease)			% Increase/ (Decrease)			Six Months Ended June 30,						Increase/ (Decrease)			% Increase/ (Decrease)
(in thousands, except for percentages)	2014			2013									2014			2013
	(unaudited)												(unaudited)
Product revenue, net	$	37,095		$	7,305		$	29,790			408	%	$	56,577		$	8,088		$	48,489			600	%
Cost of sales		4,473			875			3,598			411			6,856			943			5,913			627
Research and development		4,046			2,562			1,484			58			7,264			4,401			2,863			65
Selling general and administrative		11,365			9,220			2,145			23			22,536			17,164			5,372			31
Amortization of intangible asset		1,014			329			685			208			2,028			329			1,699			516
Change in acquisition-related contingencies		704			—			704			100			704			—			704			100
Interest income		140			11			129			1,173			278			12			266			2217
Interest expense		(269	)		(387	)		(118	)		(30	)		(569	)		(795	)		(226	)		(28	)
Gain from settlement of retention option		—			31,079			(31,079	)		(100	)		—			31,079			(31,079	)		(100	)
Other income (expense), net		(4	)		—			4			100			(194	)		500			694			139
Income tax benefit		2,119			—			2,119			100			2,031			—			2,031			100

Revenues

During the three and six months ended June 30, 2014, we generated $37.1 million and $56.6 million of net product revenues. During the three and six months ended June 30, 2013, we generated $7.3 million and $8.1 million of net product revenues. Product revenues from the sale of RAVICTI and BUPHENYL are recorded net of sales returns and estimated product sales allowances including government rebates, chargebacks, prompt -payment discounts and distributor fees.

For the three months period ended June 30, 2014 and 2013, net product revenues consisted of the following:

• net U.S. sales from RAVICTI in the amount of $31.6 million and $6.2 million, respectively; and

• net sales from BUPHENYL in the amount of $5.7 million (of which amount $3.0 million relates to sales outside the U.S. and $2.7 million sales in the U.S.) and $1.1 million (of which amount $0.1 million relates to sales outside the U.S. and $1.0 million sales in the U.S.), respectively.

For the six months period ended June 30, 2014 and 2013, net product revenues consisted of the following:

• net U.S. sales from RAVICTI in the amount of $47.1 million and $7.0 million, respectively; and

• net sales from BUPHENYL in the amount of $9.7 million (of which amount $4.5 million relates to sales outside the U.S. and $5.2 million sales in the U.S.) and $1.1 million (of which amount $0.1 million relates to sales outside the U.S. and $1.0 million sales in the U.S.), respectively.

The above amounts for the three and the six month periods ended June 30, 2014 were partially offset by $0.2 million of co-payment assistance.

Prior to June 2014, revenue from the sale of RAVICTI was recognized based on the amount of product sold through to the end user consumer. Starting June 2014, we were able to reasonably estimate and determine sales allowances, therefore we began recognizing RAVICTI revenue at the point of sale to the specialty distributor, which resulted in the one-time non-recurring recognition of an additional $8.6 million in net revenues for the three and the six months ended June 30, 2014.

Cost of Sales

Cost of sales of $4.5 million for the three months ended June 30, 2014 consisted of BUPHENYL product costs of $1.8 million and RAVICTI product costs of $2.7 million. Cost of sales of $6.9 million for the six months ended June 30, 2014 consisted of BUPHENYL product costs of $2.8 million and RAVICTI product costs of $4.1 million. RAVICTI product costs included $2.5 million and $3.8 million for the three and six months ended June 30, 2014 for royalty expenses payable under our restated collaboration agreement with Ucyclyd Pharma, Inc. Cost of sales of $0.9 million for the three and six months ended June 30, 2013 consisted of BUPHENYL product costs of $0.3 million and RAVICTI product costs of $0.6 million. RAVICTI product costs for the three and six months ended June 30, 2013 primarily included royalty expenses payable under our restated collaboration agreement with Ucyclyd Pharma, Inc.

We began capitalizing inventory costs after FDA approval of RAVICTI as the related costs were expected to be recoverable through the commercialization of the product. We recorded costs incurred prior to FDA approval of RAVICTI as research and development expenses in our 2012 consolidated statement of operations.

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For BUPHENYL, cost of sales was higher and not indicative of cost of sales in future periods due to the recording of the step-up value on BUPHENYL inventories acquired from Ucyclyd which will be expensed to cost of sales as the inventory is sold. Since the inventories were purchased as part of a business combination, they were recorded at fair value on the acquisition date.

Research and Development Expenses

Research and development expenses increased by $1.5 million, or 58%, to $4.0 million for the three months ended June 30, 2014, from $2.6 million for the three months ended June 30, 2013. This increase was primarily due to increases of $0.6 million in compensation related expenses, $0.7 million increase in EU and Canada regulatory preparation and filing fees related to RAVICTI and $0.6 million due to expenses incurred by Andromeda from the date of acquisition to the reporting date. This was partially offset by decreases of $0.2 million in consulting costs and $0.2 million in clinical development costs.

Research and development expenses increased by $2.9 million, or 65%, to $7.3 million for the six months ended June 30, 2014, from $4.4 million for the six months ended June 30, 2013. This increase was primarily due to increases of $1.3 million in compensation related expenses, $0.1 million increase in consulting costs, $0.9 million increase in EU and Canada regulatory preparation and filing fees related to RAVICTI and $0.6 million due to expenses incurred by Andromeda from the date of acquisition to the reporting date.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $2.1 million, or 23%, to $11.4 million for the three months ended June 30, 2014, from $9.2 million for the three months ended June 30, 2013. This increase was primarily due to increases of $1.0 million in compensation expense as a result of hiring additional employees in the sales and marketing departments, $0.6 million related to the legal costs incurred for the Andromeda acquisition, $0.2 million related to information technology infrastructure expenses, $0.2 million in other office and administrative related expenses and $0.1 million due to expenses incurred by Andromeda from the date of acquisition to the reporting date.

Selling, general and administrative expenses increased by $5.4 million, or 31%, to $22.5 million for the six months ended June 30, 2014, from $17.2 million for the six months ended June 30, 2013. This increase was primarily due to increases of $3.6 million in compensation expense as a result of hiring additional employees, $1.3 million related to the costs incurred for Andromeda acquisition, $0.3 million related to information technology infrastructure expenses, $0.1 million in other office and administrative related expenses, and $0.1 million due to expenses incurred by Andromeda from the date of acquisition to the reporting date.

Amortization of intangible asset

For the three and six months ended June 30, 2014, amortization of intangible asset in the amount of $1.0 million and $2.0 million pertains to the amortization expense for BUPHENYL product rights acquired as part of the BUPHENYL acquisition on May 31, 2013.

For the three and six months ended June 30, 2013, amortization of intangible asset in the amount of $0.3 million pertains to the amortization expense for BUPHENYL product rights acquired as part of the BUPHENYL acquisition on May 31, 2013.

Change in acquisition-related contingencies

For the three and six month periods ended June 30, 2014, change in value of acquisition –related contingencies of $0.7 million pertains to the change in the fair value of the acquisition related contingent consideration and change in the acquisition related contingent liability between the acquisition date and the reporting date.

Interest Income

The changes in interest income were not significant for the three and six months ended June 30, 2014 and 2013.

Interest Expense

Interest expense were $0.3 million and $0.4 million for the three months ended June 30, 2014 and 2013, respectively. Interest expense were $0.6 million and $0.8 million for the six months ended June 30, 2014 and 2013, respectively.

Interest expense decreased by $0.2 million, or 28% primarily due to the repayment of our notes.

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Gain from settlement of retention option

The amount of gain is comprised of (i) fair value of BUPHENYL of $20.4 million and (ii) net cash received from Ucyclyd of $10.9 million off-set by (iii) the $0.3 million carrying value of the option to purchase the rights to BUPHENYL and AMMONUL. Accordingly, we recorded the resulting net settlement of $31.1 million as gain from our settlement of the retention option on our condensed consolidated statements of operations. For additional information, see Note 3 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.

Other Income (Expense), net

Other income (expense), net for the six months ended June 30, 2014 was $0.2 million expense and primarily includes amortization of discount on available-for-sale investments partially offset by the gain on foreign currency transactions.

During the six months ended June 30, 2013, we recorded $0.5 million in income related to Ucyclyd’s payment to us in relation to our restated collaboration agreement.

Income tax benefit

Income tax benefit was $2.1 million and $2.0 million for the three and six months ended June 30, 2014, respectively. The effective income tax benefit rate was 13.8% and 12.2% for the three and six months ended June 30, 2014. The difference between the effective rate and the U.S. statutory rate is primarily due to the valuation allowance on the U.S. deferred taxes and lower foreign tax rates.There was no income tax expense or benefit for the three and six months ended June 30, 2013.

Liquidity and Capital Resources

During the six months ended June 30, 2014, we generated net revenues of $56.6 million.

As of June 30, 2014 and December 31, 2013, our principal sources of liquidity were our cash provided by operating activities and our cash and cash equivalents and investments.

Prior to our commercialization of RAVICTI our principal source of liquidity was sales of our equity securities. On March 13, 2013, we completed our follow-on offering. We received net proceeds from the offering of $63.7 million, after deducting underwriting discounts and commissions of $4.1 million and expenses of $0.8 million.

On August 14, 2013, we filed a shelf registration statement on Form S-3, which was declared effective by the SEC on September 13, 2013. The shelf registration statement permits: (a) the offering, issuance and sale of up to a maximum aggregate offering price of $150.0 million of our common stock, preferred stock, debt securities, warrants and/or units; (b) the sale of up to 8,727,000 shares of common stock by certain selling stockholders; and (c) the offering, issuance and sale of up to a maximum aggregate offering price of $50.0 million of our common stock that may be issued and sold under a sales agreement with Cantor Fitzgerald & Co. As of June 30, 2014, there were no sales of any securities registered pursuant to the shelf registration statement.

At June 30, 2014, we had an accumulated deficit of $103.6 million. We expect to incur increased research and development expenses when we initiate a Phase III trial of GPB for the treatment of patients with episodic HE and due to the acquisition of Andromeda and its ongoing Phase 3 trial of DiaPep277. In addition, we expect to continue to incur significant commercial, sales and marketing, and outsourced manufacturing expenses in connection with commercialization of RAVICTI and marketing of BUPHENYL in UCD. These increased expenses as compared to prior years include payroll related expenses due to hiring additional employees, costs related to operation of our distribution network and marketing costs and general infrastructure expenses as we expand our organization. Our plans with respect to these matters include utilizing a substantial portion of our capital resources and efforts in completing the development and obtaining regulatory approval of DiaPep 277 in Type 1 diabetes and of GPB in HE, expanding our organization, and commercialization of RAVICTI and marketing of BUPHENYL.

We believe that our existing cash and cash equivalents as of June 30, 2014, and our future expected income will be sufficient to fund our operations for at least the next 12 months.

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Cash Flows

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

	Six Months Ended June 30,
(In thousands)	2014			2013
	(unaudited)
Net cash provided by (used in):
Operating activities	$	23,459		$	(12,999	)
Investing activities		(15,570	)		10,529
Financing activities		(1,484	)		62,344
Net increase in cash and cash equivalents	$	6,405		$	59,874

Cash provided by operating activities of $23.5 million for the six months ended June 30, 2014 included our net income of $18.7 million, adjusted for non-cash items such as $0.7 million of change in acquisition-related contingencies, $0.3 million of amortization of debt discount and debt issuance cost, $2.0 million of amortization of intangible asset, $3.2 million of stock-based compensation expense, $0.2 million of amortization of discount on available-for-sale investments, $0.2 million of depreciation expense, $0.1 million of provision for inventory obsolescence, a net cash inflow of $11.6 million related to changes in operating liabilities partially offset by a net cash outflow of $14.0 million related to changes in operating assets. Cash used in operating activities of $13.0 million for the six months ended June 30, 2013 included our net income of $16.0 million, adjusted for non-cash items such as $31.1 million of gain from the settlement of retention option, $0.3 million of amortization of debt discount, $0.3 million of amortization of intangible asset, $1.8 million of stock-based compensation expense, a net cash outflow of $2.4 million related to changes in operating assets partially offset by a net cash inflow of $2.1 million related to changes in operating liabilities.

Net cash used in investing activities was $15.6 million for the six months ended June 30, 2014 and primarily consisted of the $14.0 million paid to acquire Andromeda and additions made to property, plant and equipment of $0.3 million. Net cash provided by investing activities was $10.5 million for the six months ended June 30, 2013 and includes a net payment of $11.0 million received from Ucyclyd partially offset by additions made to property and equipment of $0.4 million.

Net cash used in financing activities was $1.5 million for the six months ended June 30, 2014 and primarily consisted of payments of notes payable of $2.8 million partially offset by proceeds from issuance of common stock due to exercise of stock options of $1.2 million. Net cash provided by financing activities was $62.3 million for the six months ended June 30, 2013 related primarily to the proceeds from our follow-on offering of $64.5 million (net of underwriting discounts and commissions) and proceeds from issuance of common stock due to exercise of stock options of $0.3 million partially offset by our payments of notes payable of $1.7 million and payments of deferred offering costs of $ 0.8 million.

Future Funding Requirements

We will likely need to obtain additional financing to fund our future operations, including supporting sales and marketing activities related to RAVICTI and BUPHENYL, funding a Phase III trial in HE, as well as funding the ongoing development of DiaPep277 and any additional product candidates we might acquire or develop on our own. Our future funding requirements will depend on many factors, including, but not limited to

• our ability to successfully commercialize RAVICTI and market BUPHENYL;

• the amount of sales and other revenues from products and product candidates that we may commercialize, if any, including the selling prices for such products and the availability of adequate third-party reimbursement;

• selling and marketing costs associated with our UCD products, including the cost and timing of expanding our marketing and sales capabilities and establishing a network of specialty pharmacies;

• the progress, timing, scope and costs of our nonclinical studies and clinical trials, including the ability to timely enroll patients in our planned and potential future clinical trials;

• the time and cost necessary to obtain regulatory approvals and the costs of post-marketing studies that may be required by regulatory authorities;

• the costs of obtaining clinical and commercial supplies of RAVICTI, BUPHENYL and DiaPep277

• payments of milestones and royalties to third parties;

• cash requirements of any future acquisitions of product candidates;

• the time and cost necessary to respond to technological and market developments:

• the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

• any new collaborative, licensing and other commercial relationships that we may establish.

We believe that our current cash and cash equivalents will be sufficient to fund our operations for at least the next 12 months.

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We have based these estimates on a number of assumptions that may prove to be wrong, and changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate. For example, we may not achieve the revenues we anticipated and our HE Phase III clinical trial may cost more than we expect. Because of the numerous risks and uncertainties associated with the development and commercialization of GPB and DiaPep277 or any other product candidates, we are unable to estimate with any certainty the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.

Additional financing may not be available when we need it or may not be available on terms that are favorable to us. We may seek to raise additional capital through a combination of private and public equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends.

If adequate funds are not available to us on a timely basis, or at all, we may be required to terminate or delay clinical trials or other development activities for RAVICTI, GPB and DiaPep277, or delay our establishment of sales and marketing capabilities or other activities that may be necessary to successfully market BUPHENYL. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable.

Off-Balance Sheet Arrangements

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Jumpstart Our Business Startups Act of 2012

The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include risk related to interest rate sensitivities and foreign currency exchange rate risk. During the three and six months ended June 30, 2014, our market risks have not changed materially from those discussed in Item 7A of our Form 10-K for the year ended December 31, 2013.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On March 17, 2014, we received notification of the Paragraph IV certification from Par Pharmaceutical, Inc. (“Par”) advising us that it had filed an ANDA with the FDA for a generic version of 1.1 gm/ml RAVICTI oral liquid. The Paragraph IV certification, filed on November 19, 2013, alleges that our U.S. Patent No. 8,404,215, titled “Methods of therapeutic monitoring of nitrogen scavenging drugs,” which expires in March 2032, and U.S. Patent No. 8,642,012, titled “Methods of treatment using ammonia scavenging drugs,” which expires in September 2030, are invalid and/or will not be infringed by Par’s manufacture, use or sale of the product for which the ANDA was submitted. Par did not challenge the validity, enforceablility, or infringement of our U.S. Patent No. 5,968,979, titled “Triglycerides and ethyl esters of phenylalkanoic acid and phenylalkenoic acid useful in treatment of various disorders,” which expires in February 2015. We filed suit against Par on April 23, 2014 in Federal district court in the Eastern District of Texas in order to protect our patents. On July 22, 2014, Par filed a motion to dismiss for lack of personal jurisdiction, or in the alternative, a motion to transfer the case to the Southern District of New York. We are currently evaluating our options to respond to these motions. However, we cannot predict the outcome of this litigation.

Item 1A. Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking information based on our current expectations. Because our business is subject to many risks and our actual results may differ materially from any forward-looking statements made by or on behalf of us, this section includes a discussion of important factors that could affect our business, operating results, financial condition and the trading price of our common stock. You should carefully consider the following risk factors and the additional risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2014, together with all of the other information included in this Quarterly Report on Form 10-Q as well as our other publicly available filings with the SEC.

We are involved in litigation with respect to certain patents on our product RAVICTI, which we expect will be costly and time-consuming and the outcome of which is uncertain.

On March 17, 2014, we received notice from Par, the generic drug manufacturer that it had filed an Abbreviated New Drug Application (an “ANDA”) with the FDA seeking approval for a generic version of our product RAVICTI. The ANDA contained what is known as a “Paragraph IV certification.” The Paragraph IV certification alleges that two of our patents covering RAVICTI, U.S. Patent No. 8,404,215, titled “Methods of therapeutic monitoring of nitrogen scavenging drugs,” which expires in March 2032, and U.S. Patent No. 8,642,012, titled “Methods of treatment using ammonia scavenging drugs,” which expires in September 2030, are invalid and/or will not be infringed by Par’s manufacture, use or sale of the product for which the ANDA was submitted. Par did not challenge the validity, enforceablility, or infringement of the Company’s U.S. Patent No. 5,968,979, titled “Triglycerides and ethyl esters of phenylalkanoic acid and phenylalkenoic acid useful in treatment of various disorders,” which expires in February 2015. Upon notice of the Paragraph IV certification, we had 45 days to file suit to protect our patents in order to obtain a stay of the FDA’s approval of PAR’s ANDA for 30 months, or as lengthened or shortened by the court.

We filed suit against Par on April 23, 2014 and intend to vigorously protect our patents. However, we cannot predict the outcome of this or any litigation. If Par were to prevail and its ANDA were to receive FDA approval, RAVICTI would face generic competition when its orphan exclusivity expires in February 2020, and its sales would likely materially decline. Should sales decline, our results of operations and cash flows could be materially and adversely affected. Even if we successfully defend our patents against Par’s challenge, the litigation will be costly and time consuming and will require substantial time and attention from our management team, which could materially and adversely affect our financial condition and results of operations.

In addition, we may be sued by others who hold intellectual property rights who claim that their issued patents are infringed by RAVICTI, BUPHENYL or any of our future products or product candidates. Our patents and patent applications, or those of our licensors, could also face other challenges, such as interference proceedings, opposition proceedings, and re-examination proceedings. Any of these lawsuits and challenges, if successful, could result in the invalidation of, or in a narrowing of the scope of, any of our patents and patent applications subject to the suit or challenge. Any of these, regardless of their success, would likely be time consuming and expensive to defend and resolve and would divert our management’s time and attention.

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Our intellectual property may not protect against competitors entering the market, including with generic versions of our products, and sales of affected products may decline materially.

Our composition of matter patent covering RAVICTI expires in the United States in 2015. We have applied for a four-year extension of patent coverage for this patent under the Drug Price Competition and Patent Term Restoration Act (the “Hatch-Waxman Act”).

We own one United States patent with claims directed to methods of using, administering and adjusting the effective dose of a phenylacetic acid (“PAA”) prodrug, including RAVICTI, based on fasting ammonia levels and a second patent with claims directed to methods of treating UCD and administering PAA prodrugs, including RAVICTI based in part on target urinary phenylacetylglutamine (“PAGN”) levels. These patents are the subject of our litigation with Par. Par challenges the validity and/or enforceability of such patents and claims the generic product for which it is seeking FDA approval does not infringe our patents. Any subsequent patents issued may also be subject to challenge by competitors and invalidated or deemed not to be infringed by competing products.

We own a first family of pending patent applications in the United States, Europe, Japan, and Canada directed to methods of using, administering, and adjusting the effective dosage of PAA prodrugs including RAVICTI. These methods are based in part on novel findings regarding the conversion of PAA prodrugs to urinary PAGN. We own five additional families of pending patent applications in the United States and internationally pursuant to the Patent Cooperation Treaty (“PCT”). These applications are directed to methods of using, administering, and adjusting the effective dosage of a PAA prodrug, including RAVICTI, and to methods of diagnosing, grading, and treating hepatic encephalopathy (“HE”). If granted, these applications could extend patent protection until 2029 to 2034; however, there is a significant risk that these applications will not issue timely, or that they may not issue at all. In particular, claims directed to dosing and dose adjustment may be substantially less likely to issue in light of the Supreme Court decision inMayo Collaborative Services v. Prometheus Laboratories, Inc. Further, any patents issuing from these applications could be vulnerable to future validity challenges based onMayo and subsequent court decisions that further clarify the scope ofMayo. InMayo, the Court held that claims directed to methods of determining whether to adjust drug dosing levels based on drug metabolite levels in the red blood cells were not patent eligible because they were directed to a law of nature. This decision may have wide-ranging implications on the validity and scope of pharmaceutical method claims and may affect the outcome of our litigation with Par, although its full impact will not be known for many years. Moreover, even if granted, these applications may not provide protection sufficient to protect against the introduction to the market of generic forms of RAVICTI. The entry of generic competitors to the market would likely result in a material decline in sales of RAVICTI.

Andromeda Biotech Ltd. (“Andromeda”), an Israeli company we acquired in June 2014, has exclusive license rights from Yeda Research and Development Company, Ltd. (“Yeda”) to seven different families of United States and non-United States patent applications. Overall, these seven families include nine issued United States patents, six issued EP patents, and over 50 issued non-EP foreign patents, with claims directed to DiaPep277 and other HSP-derived peptides, as well as formulations and methods of use thereof. The United States patents in these licensed families currently expire between September 2014 and August 2016. If DiaPep277 is approved by the FDA, one of the licensed United States patents may be eligible for a Hatch-Waxman term extension of up to five years, which could extend composition of matter coverage to 2020 or 2021.

In addition, Andromeda owns two families of patents and applications with claims directed to HSP-derived peptides other than DiaPep277 and to methods of treating diabetes using DiaPep277 and other HSP-derived peptides. These two families include one issued United States patent, one pending and allowed United States patent application, 2 pending EP patent applications, 2 issued non-EP foreign patents, and 2 pending non-EP foreign patent applications. United States patents issuing from these two families will have a base expiration date between August 2024 and January 2025.

Even if our patent applications do not issue or our patents are invalidated or become unenforceable, we still may have protection under two different forms of regulatory exclusivity. The first form, orphan drug exclusivity, prohibits the FDA from approving another product with the same active ingredient for the same use for seven years from the date of approval. RAVICTI has orphan drug exclusivity for the treatment of UCD until February 2020.

Orphan exclusivity will not, however, bar approval of another product under certain circumstances. One such circumstance is if a product with the same active ingredient is proven safe and effective for a different indication. Another circumstance is if a subsequent product with the same active ingredient for the same indication is shown to be clinically superior to the approved product on the basis of greater efficacy or safety, or providing a major contribution to patient care. FDA may also approve another product with the same active ingredient and the same indication if the company with orphan drug exclusivity is not able to meet market demand. Further, FDA may approve more than one product for the same orphan indication or disease as long as the products contain different active ingredients. As a result, even if one of our product candidates receives orphan exclusivity, the FDA can still approve other drugs that have a different active ingredient for use in treating the same indication or disease. All of the above circumstances could create a more competitive market for us.

Even if patent protection and orphan drug exclusivity become unavailable, our products may still have limited protection against generic competition under a second form of regulatory exclusivity, which derives from the Hatch-Waxman Act. Under the Hatch-Waxman Act, a pharmaceutical manufacturer may file an ANDA seeking approval of a generic copy of an approved innovator product once all patent protection for the approved product has expired or seeking immediate approval on the grounds that the applicable

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patents are invalid or unenforceable, as Par has done with respect to two of our patents on RAVICTI. Under the Hatch-Waxman Act, a manufacturer may also submit an NDA under section 505(b)(2) of the FDCA that references the FDA’s prior approval of the innovator product. A 505(b)(2) NDA product may be for a new or improved version of the original innovator product, but similarly is only available when no patent protection remains or the applicable patents are challenged or are not enforced. To maintain sufficient incentives for innovators to develop new drugs and to improve existing drugs, however, the Hatch-Waxman Act also provides for certain periods of regulatory exclusivity, which preclude FDA approval (or in some circumstances, FDA filing and reviewing) of an ANDA or 505(b)(2) NDA.

RAVICTI was granted a three-year period of regulatory exclusivity under the Hatch-Waxman Act, which expires on February 1, 2016. That exclusivity means that, even in the absence of any patent protection or orphan drug exclusivity, FDA could not grant final approval to an ANDA for a generic version of RAVICTI until February 1, 2016. The exclusivity also prohibits FDA from approving a 505(b)(2) NDA that references FDA’s approval of RAVICTI or includes the same active ingredient and uses as RAVICTI.

BUPHENYL’s composition of matter patent protection and orphan drug exclusivity have expired. Because BUPHENYL has no regulatory exclusivity or listed patents, there is nothing to prevent a competitor from submitting an ANDA for a generic version of BUPHENYL and receiving FDA approval. For example, the FDA approved an ANDA for sodium phenylbutyrate, the active ingredient in BUPHENYL (“NaPBA”) powder in the first quarter of 2013, and the generic product was launched in April 2013. Lucane Pharma received marketing approval from the European Medicines Agency for taste-masked NaPBA, and we believe they are also seeking approval via an ANDA in the United States. We are also aware of an ANDA that was approved in November 2011 for NaPBA tablets. However, these tablets have not yet been made commercially available to UCD patients. Since the ANDA process is confidential if no Paragraph IV certifications are filed, there may be additional BUPHENYL ANDAs pending. Generic versions of BUPHENYL to date have been priced at a discount relative to BUPHENYL or RAVICTI, and physicians, patients, or payors may decide that this less expensive alternative is preferable to either of our drugs. If this occurs, our UCD product sales could be materially reduced, but we would nevertheless be required to make royalty payments to Ucyclyd and Brusilow at the same royalty rates.

We may not be successful in securing or maintaining proprietary patent protection for products we currently market or for products and technologies we develop or license.

We may not be able to protect our proprietary technology in the marketplace.

Where appropriate, we seek patent protection for certain aspects of our technology. Patent protection may not be available for some of the products or technology we are developing. If we must spend significant time and money protecting or enforcing our patents, our business and financial prospects may be harmed. We may not develop additional proprietary products which are patentable. Further competitors may obtain patents covering compositions or methods that encompass our products or uses thereof. In such a situation ownership may be determined by first to invent or first to file depending on when the applications were submitted. The patent positions of pharmaceutical products are complex and uncertain. The scope and extent of patent protection for RAVICTI and our future products and product candidates are particularly uncertain. Publication of information related to RAVICTI and our future products and product candidates may prevent us from obtaining or enforcing patents relating to these products and product candidates, including without limitation composition-of-matter patents, which are generally believed to offer the strongest patent protection.

We have licensed patents in the United States and in certain foreign jurisdictions related to RAVICTI, including U.S. Patent 5,968,979, which covers the composition of matter of RAVICTI, which we license from Brusilow Enterprises, LLC (“Brusilow”). Our Brusilow license may be terminated if we do not comply with the terms of the license.

Patents that we own or license do not ensure protection of our intellectual property for a number of reasons, including without limitation the following:

• our patents may not be broad or strong enough to prevent competition from other products including identical or similar products;

• U.S. Patent 5,968,979 covering RAVICTI composition of matter expires February 7, 2015, unless its term is successfully extended;

• upon expiration of U.S. Patent 5,968,979, we do not at this time own or control a granted U.S. patent that completely prevents generic entry into the United States market for RAVICTI;

• we may be required to disclaim part of the term of one or more patents;

• there may be prior art of which we are not aware that may affect the validity or enforceability of a patent claim;

• there may be prior art of which we are aware, which we do not believe affects the validity or enforceability of a patent claim, but which, nonetheless ultimately may be found to affect the validity or enforceability of a patent claim;

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• there may be other patents existing in the patent landscape for RAVICTI that will affect our freedom to operate;

• a court could determine that our patents are not valid or enforceable;

• a court could determine that a competitor’s technology or product does not infringe our patents; and

• our patents could irretrievably lapse due to failure to pay fees or otherwise comply with regulations, or could be subject to compulsory licensing.

We own two issued patents in the United States and multiple pending patent applications in the United States and in foreign jurisdictions relating to methods of treatment with RAVICTI or other PAA prodrugs, including dosing and dose adjustment. These patents and applications do not ensure the protection of our intellectual property. Our pending applications may not issue or may issue with claims significantly narrower than we currently seek, and we may not prevail in our litigation with Par in its challenge to the validity of our issued patents. Unless and until our pending applications issue, their protective scope is impossible to determine, and even after issuance their protective scope may be limited. For example, we may not have developed a method for determining dosing for RAVICTI before others developed identical, similar methods or distinct methods, in which case we may not receive a granted patent or any granted patent may not cover potential competition.

If we encounter delays in our development or clinical trials, the period of time during which we could market our products under patent protection would be reduced.

If we engage in additional acquisitions, we will incur a variety of costs and we may never realize the anticipated benefits of such acquisitions.

We may attempt to continue to acquire businesses, technologies, services, products or product candidates that we believe will maximize stockholder value. On June 12, 2014, we completed our acquisition of Andromeda. Andromeda is currently conducting Phase 3 clinical trials of its product candidate known as DiaPep277, which is being developed to preserve residual beta cell function in newly diagnosed adult onset Type 1 diabetics. While Andromeda will remain a wholly-owned subsidiary, we are currently in the process of integration activities with Andromeda which may result in unforeseen operating difficulties and expenditures. These difficulties may include diversion of resources and management’s attention from our core business and failure to retain key Andromeda executives and employees, which may reduce the value of the acquisition or give rise to additional integration costs. These difficulties may be exacerbated because we have limited experience managing foreign operations.

Upon closing of the acquisition, we paid Andromeda’s security holders an aggregate of $12.5 million in cash, less adjustments for expenses incurred in connection with the transaction and issued 312,869 shares of our common stock with an aggregate fair value of approximately $7.8 million. We also assumed Andromeda’s liabilities on the date of the close. As additional consideration in the Andromeda acquisition, we may pay the former security holders of Andromeda contingent payments as follows: (i) potential global regulatory and approval milestones payments that total $120 million, the first of which would be due upon acceptance of the first marketing application filing for review in either the US or Europe, whichever occurs first; (ii) up to $430 million in commercial milestones, the first of which would be due upon achievement of annual worldwide net sales of $450 million, and (iii) tiered contingent sales payments ranging from 10% on annual worldwide net sales up to $300 million to 17% for annual worldwide net sales that exceed $1.2 billion, with the exception of sales by distributors in certain territories, for which the rate is 25%. The initial costs and future contingent payments we may pay the former security holders are large, and revenue on DiaPep277, if achieved, may not be sufficient to offset these costs.

The Andromeda acquisition and any future acquisitions could also result in the incurrence of additional debt, contingent liabilities or the amortization of expenses related to other intangible assets, any of which could adversely affect our operating results. In addition, Andromeda’s product candidate and any additional product candidates acquired in the future may fail to gain approval or authorization or may fail to meet our commercial objectives. Any such failure may result in our inability to realize the anticipated benefits of any acquisition.

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If we acquire additional products or technologies, we will incur a variety of costs, may have integration difficulties and may experience numerous other risks that could adversely affect our business.

In addition to our recent acquisition of Andromeda, we may decide to acquire additional products or technologies. Although we acquired BUPHENYL in May 2013, we have limited experience in successfully acquiring and integrating products into our current infrastructure and have no experience integrating products outside the UCD indication. We may not be able to successfully integrate technologies or products without a significant expenditure of operating, financial and management resources. In addition, other acquisitions of products or technologies could require significant capital infusions and could involve many risks, including, but not limited to the following:

• acquisitions may negatively impact our results of operations because it may require us to: incur large one-time charges to earnings, amortize or write down amounts related to goodwill and other intangible assets, incur or assume substantial debt or liabilities, or it may cause adverse tax consequences or substantial depreciation;

• we may encounter difficulties in assimilating and integrating the business, technologies or products that we acquire;

• acquisitions may require significant expected and unanticipated capital infusions, and the acquired products or technologies may not generate sufficient revenue to offset acquisition costs;

• acquisitions may disrupt our ongoing business, divert resources, increase our expenses and distract our management; and

• the Andromeda acquisition does, and additional acquisitions may, involve the entry into a geographic or business market in which we have little or no prior experience and will provide challenges associated with managing an increasingly diversified business.

Any of the foregoing risks could have a significant adverse effect on our business, financial condition and results of operations.

Our failure to adequately address the financial, operational or legal risks of any acquisitions, including the Andromeda acquisition, could harm our business. In addition to the financial and operational risks associated with acquisitions enumerated above that could adversely affect our business, the legal risks associated with business acquisitions include the assumption of known and unknown liabilities of the acquired company, including potential intellectual property claims, contract, tort and employment claims. For example, Evotec International GmbH (“Evotec”), the company from which Andromeda had purchased much of its intellectual property, has asserted that under the terms of its asset purchase agreement, our acquisition of Andromeda triggered a milestone payment obligation of approximately €3.38 million, based on a provision of the agreement triggering such payment upon a sub-licensing transaction to a global pharmaceutical company. Yeda, the institution that holds the patents underlying the technology purchased from Evotec and which would be entitled to 10% of such payment, agrees with Evotec, and has declined to sign a proposed three-way agreement that would resolve the issue. Evotec has stated its intention to file a lawsuit after September 30, 2014 if the matter is not resolved before then. Yeda has also informed us that it is conducting a legal review regarding whether the acquisition constitutes a “sublicense” under Andromeda’s contract with Yeda such that Yeda is entitled to additional amounts received for or from the Andromeda acquisition, and has requested a teleconference between its legal counsel and our personnel to further discuss. We have retained legal counsel to address these matters, and we will incur legal and other costs in resolving them.

If we are unable to successfully manage the Andromeda acquisition and any future acquisitions, our ability to develop and commercialize new products and continue to expand our product pipeline may be limited.

Budget constraints may require us to expend our limited resources to pursue particular product candidates or indications at the expense of others that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources and drug development is an expensive process, we must regularly assess the most efficient allocation of our resources, focusing on development programs and product candidates for the specific indications that we believe are the most scientifically and commercially promising. Accordingly, we may choose to delay our development efforts for a promising product candidate or we may elect to terminate our programs for and, in certain cases, our licenses to, such product candidates or programs in order to allocate resources to other programs, which could cause us to alter near-term development and/or commercialization objectives. As a result, we may not be able to fully realize the value of some of our product candidates in a timely manner, since those products will be delayed in reaching the market, or may not reach the market at all. If we terminate a clinical program in which we have invested significant resources, we will have expended resources on a program that will not provide a return on our investment.

Furthermore, our resource allocation decisions, and our decisions about whether and how to develop or commercialize any particular product candidate may be based on evaluations of the scientific and commercial potential or target market for the product candidate that later prove to be inaccurate. If we enter into collaborations, licensing or other royalty arrangements to develop or commercialize a particular product candidate, we may relinquish valuable rights to that product candidate in situations where it would have been more advantageous for us to retain rights to development and commercialization.

We may need to obtain additional financing to fund our operations.

We will likely need to obtain additional financing in order to have sufficient resources to fund current programs. Our future funding requirements will depend on many factors, including, but not limited to:

• our ability to successfully maintain sales of RAVICTI and BUPHENYL for the treatment of UCD;

• the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

• the costs of litigation relating to Par or any other litigation or disputes that we may become party to;

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• the costs of integrating acquired businesses or technologies; the amount of sales and other revenues from RAVICTI and BUPHENYL and any other product candidates, including DiaPep277 and GPB for the treatment of HE, that we may develop or acquire, including the selling prices for such products and the availability of adequate third-party reimbursement;

• selling and marketing costs associated with our UCD products;

• the progress, timing, scope and costs of our nonclinical studies and clinical trials, including the ability to timely enroll patients in our planned and potential future clinical trials;

• the time and cost necessary to obtain regulatory approvals and the costs of post-marketing studies that may be required by regulatory authorities;

• the costs of obtaining clinical and commercial supplies of RAVICTI, BUPHENYL, GPB and DiaPep277;

• payments of milestones and royalties to third parties, including Ucyclyd and Andromeda’s former securityholders;

• cash requirements of any future business acquisitions of products or product candidates;

• the time and cost necessary to respond to technological and market developments;

• changes to the design of our clinical trials; and

• any new collaborative, licensing, or other commercial relationships that we may establish.

Until we can generate a sufficient amount of revenue, we expect to finance future cash needs through public or private equity offerings or debt financings. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay or reduce the scope of or eliminate one or more of our research or development programs or our commercialization efforts. We may seek to access the public or private capital markets, even if we do not have an immediate need for additional capital at that time. Our inability to obtain additional funding when we need it could seriously harm our business.

We may never obtain approval for or commercialize RAVICTI outside of the United States, which would limit our ability to realize its full market potential

We currently only have approval to market RAVICTI in the United States. In order to market RAVICTI outside of the United States, we must comply with regulatory requirements of and obtain required regulatory approvals in other countries. On June 25, 2014 the European Medicines Agency (EMA) accepted our Marketing Authorisation Application, commencing its review process which is expected to be completed in the second half of 2015. In addition, we announced on June 3, 2014 that Health Canada (“HC”) had completed its validation process for our New Product Submission (NDS) for approval to market RAVICTI in Canada. The NDS was granted priority review, expediting the review process to approximately 6 months. However, we cannot be assured that the EMA or HC will approve our applications to market RAVICTI in Europe and Canada, respectively, nor can we be certain of the timelines for these agencies to make their determinations. If we fail to obtain and maintain required approvals or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of RAVICTI will be harmed.

In addition to the regulatory approvals that we must obtain in Europe and Canada in order to market RAVICTI, we must obtain approvals for reimbursement on a province by province basis in Canada and on a country by country basis in Europe. If we cannot obtain adequate reimbursement for RAVICTI in these markets, even if we obtain marketing approvals, it may not be commercially viable for us to expand our sales outside the U.S.

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

On June 12, 2014, the Company issued 312,869 shares of its common stock valued at approximately $7.8 million to the former parent company of Andromeda, Clal Biotechnology Industries, Ltd. as part of the consideration for the Company’s acquisition of Andromeda. The shares were issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act.

On July 31, 2012, we completed our initial public offering (“IPO”) and issued 5,000,000 shares of our common stock at an initial offering price of $10.00 per share. We sold an additional 750,000 shares of common stock directly to our underwriters when they exercised their over-allotment option in full at the initial offering price of $10.00 per share. We received net proceeds from the IPO of $51.3 million, after deducting underwriting discounts and commissions of $4.0 million and expenses of $2.2 million. None of the expenses associated with the IPO were paid to directors, officers, persons owning 10% or more of any class of equity securities, or to their associates, or to our affiliates. Leerink Swann LLC and Cowen and Company, LLC acted as joint book-running managers and Needham & Company, LLC acted as co-manager for the offering.

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The shares were registered under the Securities Act on a Registration Statement on Form S-1 (Registration No. 333-180694) which was declared effective by the SEC on July 25, 2012. On July 31, 2012, following the sale of 5,750,000 shares of common stock, the offering terminated.

As of June 30, 2014, we have used approximately $38.6 million of the proceeds from our IPO to fund operations, capital expenditures, working capital and other general corporate purposes. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b).

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which are incorporated herein by reference.

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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.

	Hyperion Therapeutics, Inc.
Date: August 8, 2014	/s/ Donald J. Santel
	Donald J. Santel Chief Executive Officer and President (Principal Executive Officer)
Date: August 8, 2014	/s/ Jeffrey S. Farrow
	Jeffrey S. Farrow Chief Financial Officer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the SEC on July 31, 2012).
3.2	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.4 to the Company’s Registration Statement on Form S-1/A (File No. 333-180694), as filed with the SEC on May 24, 2012).
4.1	Specimen Common Stock Certificate of the Company (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A (File No. 333-180694), as filed with the SEC on July 5, 2012).
4.2	Amended and Restated Warrant issued pursuant to the Loan and Security Agreement by and between the Company and Comerica Bank, dated October 2, 2007, and as amended on July 6, 2012 (incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-180694), as filed with the SEC on July 13, 2012).
10.1*†	Stock Purchase Agreement by and among Hyperion Therapeutics, Inc., Hyperion Therapeutics Israel Holding Corp. Ltd. Andromeda Biotech Ltd., and Clal Biotechnology Industries Ltd. Dated April 23, 2014.
10.2*†	Research and Licence Agreement by and between Yeda Research and Development Company Ltd and Portman Pharmaceuticals, Inc., dated January 12, 1994, as amended
10.3	Loan and Security Agreement between the Company and Silicon Valley Bank dated July 18, 2014 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the SEC on July 21, 2014)
31.1*	Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2*	Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1*	Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101**	Financial statements from the Quarterly Report on Form 10-Q of Hyperion Therapeutics, Inc. for the quarter ended June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements.

* Filed herewith.

** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

† The Company has requested confidential treatment for certain portions of this agreement. This exhibit omits the information subject to this confidentiality request. The omitted portions have been filed separately with the SEC.

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