SUPERNUS PHARMACEUTICALS, INC. - Quarter Report: 2015 March (Form 10-Q)

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UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2015

 

OR

 

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

 

For the transition period from               to              

 

Commission File Number: 001-35518

 

SUPERNUS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

(301) 838-2500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o 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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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

 

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of the close of business on May 4, 2015 was 47,762,504.

 

 

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SUPERNUS PHARMACEUTICALS, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015

TABLE OF CONTENTS

 

	Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014	1
Consolidated Statements of Operations for the three month periods ended March 31, 2015 and 2014 (Unaudited)	2
Consolidated Statements of Comprehensive Income (Loss) for the three month periods ended March 31, 2015 and 2014 (Unaudited)	3
Consolidated Statements of Cash Flows for the three month periods ended March 31, 2015 and 2014 (Unaudited)	4
Notes to Consolidated Financial Statements (Unaudited)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures about Market Risk	25
Item 4. Controls and Procedures	25
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3. Defaults Upon Senior Securities	28
Item 4. Mine Safety Disclosures	28
Item 5. Other Information	28
Item 6. Exhibits	29
SIGNATURES	30

 

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PART I — FINANCIAL INFORMATION

 

Supernus Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 

		March 31,			December 31,
		2015			2014
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	25,810		$	36,396
Marketable securities		39,026			37,940
Accounts receivable, net		19,271			17,270
Inventories, net		13,702			13,441
Prepaid expenses and other current assets		3,696			3,845
Total current assets		101,505			108,892
Long term marketable securities		27,315			19,816
Property and equipment, net		2,481			2,448
Intangible assets, net		7,839			5,434
Other non-current assets		497			918
Total assets		$	139,637		$	137,508
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	859		$	1,863
Accrued expenses		25,853			25,487
Deferred licensing revenue		143			143
Total current liabilities		26,855			27,493
Deferred licensing revenue, net of current portion		1,238			1,274
Convertible notes, net of discount		11,708			26,947
Other non-current liabilities		2,561			3,876
Derivative liabilities		2,691			6,564
Total liabilities		45,053			66,154
Stockholders’ equity:
Common stock, $0.001 par value, 130,000,000 shares authorized at March 31, 2015 and December 31, 2014; 47,513,429 and 42,974,463 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively		48			43
Additional paid-in capital		252,341			230,122
Accumulated other comprehensive loss		(65		)	(154		)
Accumulated deficit		(157,740		)	(158,657		)
Total stockholders’ equity		94,584			71,354
Total liabilities and stockholders’ equity		$	139,637		$	137,508

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

 

		Three Months ended March 31,
		2015			2014
		(unaudited)
Revenue
Net product sales		$	28,097		$	8,995
Licensing revenue		36			86
Total revenue		28,133			9,081
Costs and expenses
Cost of product sales		1,618			494
Research and development		3,683			4,482
Selling, general and administrative		19,402			17,527
Total costs and expenses		24,703			22,503
Operating income (loss)		3,430			(13,422		)
Other income (expense)
Interest income		113			102
Interest expense		(381		)	(1,207		)
Changes in fair value of derivative liabilities		(49		)	677
Loss on extinguishment of debt		(2,134		)	(1,693		)
Total other income (expense)		(2,451		)	(2,121		)
Earnings (loss) before income taxes		979			(15,543		)
Income tax expense		62			—
Net income (loss)		$	917		$	(15,543	)
Income (loss) per common share:
Basic		$	0.02		$	(0.38	)
Diluted		$	0.02		$	(0.38	)
Weighted-average number of common shares:
Basic		44,563,299			41,129,055
Diluted		44,901,298			41,129,055

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

		Three Months ended March 31,
		2015			2014
		(unaudited)
Net income (loss)		$	917		$	(15,543	)
Other comprehensive income:
Unrealized net gain on marketable securities		89			1
Other comprehensive income:		89			1
Comprehensive income (loss)		$	1,006		$	(15,542	)

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

		Three Months ended March 31,
		2015			2014
		(unaudited)
Cash flows from operating activities
Net income (loss)		$	917		$	(15,543	)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
Loss on extinguishment of debt		2,134			1,693
Change in fair value of derivative liability		49			(677		)
Unrealized gain on marketable securities		89			1
Depreciation and amortization		214			227
Amortization of deferred financing costs and debt discount		374			574
Share-based compensation expense		901			667
Changes in operating assets and liabilities:
Accounts receivable		(2,001		)	(4,671		)
Inventories		(261		)	(805		)
Prepaid expenses and other assets		38			(660		)
Accounts payable		(1,004		)	(975		)
Accrued expenses		366			(2,681		)
Deferred product revenue, net		—			4,389
Deferred licensing revenue		(36		)	(67		)
Other non-current liabilities		(1,277		)	(576		)
Net cash provided by (used in) operating activities		503			(19,104		)
Cash flows from investing activities
Purchases of marketable securities		(17,315		)	(9,406		)
Sales and maturities of marketable securities		8,731			9,096
Purchases of property and equipment, net		(189		)	(263		)
Deferred legal fees		(2,463		)	(1,056		)
Net cash used in investing activities		(11,236		)	(1,629		)
Cash flows from financing activities
Proceeds from issuance of common stock		147			6
Cash settlement of debt to equity conversion		—			(1		)
Net cash provided by financing activities		147			5
Net change in cash and cash equivalents		(10,586		)	(20,728		)
Cash and cash equivalents at beginning of period		36,396			32,980
Cash and cash equivalents at end of period		$	25,810		$	12,252
Noncash financial activity:
Conversion of convertible notes and interest make-whole		$	21,176		$	10,418

 

See accompanying notes.

 

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Supernus Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements

For the Three Months ended March 31, 2015 and 2014
(unaudited)

 

1.  Organization and Business

 

Supernus Pharmaceuticals, Inc. (the Company) is a specialty pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases, including neurological and psychiatric disorders.  The Company markets two epilepsy products, Oxtellar XR and Trokendi XR, and has several proprietary product candidates in clinical development that address the psychiatry market.

 

The Company commenced the commercialization of Oxtellar XR and Trokendi XR in 2013.

 

2.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Company’s unaudited consolidated financial statements include the accounts of Supernus Pharmaceuticals, Inc. and Supernus Europe Ltd. These are collectively referred to herein as “Supernus” or “the Company.” All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s unaudited consolidated financial statements have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (SEC) for interim financial information.

 

As permitted under Generally Accepted Accounting Principles in the United States (U.S. GAAP), certain notes and other information have been omitted from the interim unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

In the opinion of management, the consolidated financial statements reflect all adjustments necessary to fairly present the Company’s financial position, results of operations, and cash flows for the periods presented. These adjustments are of a normal recurring nature.  The Company currently operates in one business segment.

 

The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the Company’s future financial results.

 

Accounts Receivable, net

 

Accounts receivable are reported in the consolidated balance sheets at outstanding amounts, less an allowance for doubtful accounts and discounts. The Company extends credit without requiring collateral. The Company writes off uncollectible receivables when the likelihood of collection is remote. The Company evaluates the collectability of accounts receivable on a regular basis. An allowance, when needed, is based upon various factors including the financial condition and payment history of customers, an overall review of collections experience on other accounts, and economic factors or events expected to affect future collections experience. No accounts have been written off in 2015 and 2014. The Company recorded an allowance of approximately $3.4 million and $4.1 million for expected sales discounts as of March 31, 2015 and December 31, 2014, respectively.

 

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Revenue Recognition

 

Revenue from product sales is recognized when persuasive evidence of an arrangement exists; delivery has occurred and title to the product and associated risk of loss has passed to the customer; the price is fixed or determinable; collection from the customer has been reasonably assured; all performance obligations have been met; and returns and allowances can be reasonably estimated.  Product sales are recorded net of estimated rebates, chargebacks, discounts, co-pay assistance and other deductions as well as estimated product returns (collectively, “sales deductions”).Our products are distributed through wholesalers and pharmaceutical distributors. Each of these wholesalers and distributors will take title and ownership to the product upon physical receipt of the product and then distribute our products to pharmacies. For the three months ended March 31, 2015, the revenue for Oxtellar XR and Trokendi XR was recognized contemporaneously upon shipment of finished product to wholesalers, net of allowances for estimated sales deductions and returns.  For the three months ended March 31, 2014, Oxtellar XR revenue was recognized contemporaneously upon shipment of finished product to wholesalers, net of allowances for estimated sales deductions and returns. The Trokendi XR revenue for the three months ended March 31, 2014 was recognized for prescriptions filled during the fourth quarter of 2013.   During the three month period ended March 31, 2014, the Company recorded shipments of Trokendi XR to wholesalers as deferred revenue i.e., sales price net of known sales deductions (e.g. prompt pay discounts and other similar charges defined below). At the time, we lacked the experiential data which would allow us to estimate all remaining sales rebates, allowances and returns. The Company moved to contemporaneous revenue recognition for Trokendi XR in the second quarter of 2014.

 

Sales Deductions

 

Allowances for estimated sales deductions are provided for the following:

 

·                  Rebates.  Rebates include mandated discounts under the Medicaid Drug Rebate Program, the Medicare coverage gap program, as well as negotiated discounts with commercial health-care providers. Rebates are amounts owed after the final dispensing of products to a benefit plan participant and are based upon contractual agreements or legal requirements with the public sector (e.g. Medicaid) and with private sector benefit providers. The allowance for rebates is based on statutory and contractual discount rates and expected claimed rebates paid based on a plan provider’s utilization. Rebates are generally invoiced and paid quarterly 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’ unpaid rebates. If actual future rebates vary from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

 

·                  Chargebacks.  Chargebacks are discounts that occur when contracted customers purchase directly from an intermediary distributor or wholesaler. Contracted customers, which currently consist primarily of Public Health Service institutions and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The distributor or wholesaler, in turn, charges back the difference between the price initially paid by the distributor or wholesaler and the discounted price paid to the distributor or wholesaler by the customer. The allowance for distributor/wholesaler chargebacks is based on known sales to contracted customers.

 

·                  Distributor/Wholesaler deductions and discounts.  U.S. specialty distributors and wholesalers are offered various forms of consideration including allowances, service fees and prompt payment discounts as consideration for distributing our products. Distributor allowances and service fees arise from contractual agreements with distributors and are generally a percentage of the purchase price paid by the distributors and wholesalers. Wholesale customers are offered a prompt pay discount for payment within a specified period.

 

·                  Co-pay assistance.  Patients who pay in cash or have commercial insurance and meet certain eligibility requirements may receive co-pay assistance from the Company. The intent of this program is to reduce the patient’s out of pocket costs. Liabilities for co-pay assistance are based on actual program participation and estimates of program redemption using data provided by third-party administrators.

 

·                  Returns.  Sales of our products are not subject to a general right of return; however, the Company will accept product that is damaged or defective when shipped directly from our warehouse or for expired product up to 12 months subsequent to its expiry date. Product that has been used to fill patient prescriptions is no longer subject to any right of return.

 

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Milestone Payments

 

Milestone payments on licensing agreements are recognized as revenue when the collaborative partner acknowledges completion of the milestone and substantive effort was necessary to achieve the milestone. Management may recognize revenue contingent upon the achievement of a milestone in its entirety in the period in which the milestone is achieved only if the milestone meets all the criteria to be considered substantive.  The Company recorded no milestone revenue during the three months ended March 31, 2015 and 2014.

 

Cost of Product Sales

 

The cost of product sales consist primarily of materials, third-party manufacturing costs, freight and distribution costs, allocation of labor, quality control and assurance, and other manufacturing overhead costs.

 

Income Taxes

 

The Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.

 

The Company accounts for uncertain tax positions in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. The Company’s policy is to recognize any interest and penalties related to income taxes in income tax expense.

 

During the three months ended March 31, 2015, the Company had pre-tax income of $1.0 million. The provision for Federal and state income taxes related to such pre-tax income has been largely offset by the utilization of available net operating loss carryforwards (“NOL’s”). Accordingly, the Company reduced its valuation allowance against its deferred tax assets and recognized an income tax expense for the jurisdictions that did not have sufficient NOL’s to offset the expected tax expense.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principles-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. Presently, the Company is assessing what effect the adoption of ASU 2014-09 will have on our consolidated financial statements and accompanying notes.

 

In August 2014, the FASB issued Accounting Standards Update 2014-15 “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). The new standard requires management to perform interim and annual assessments of an entity’s ability to continue to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We do not believe the adoption of the new standard will have a significant impact on our operations.

 

The Company has evaluated all other ASUs issued through the date the consolidated financials were issued and believes that the adoption of these will not have a material impact on the Company’s consolidated financial statements.

 

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3.  Fair Value of Financial Instruments

 

The fair value of an asset or liability should represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Such transactions to sell an asset or transfer a liability are assumed to occur in the principal or most advantageous market for the asset or liability. Accordingly, fair value is determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant rather than from a reporting entity’s perspective.

 

The Company reports assets and liabilities that are measured at fair value using a three level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

·                  Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

·                  Level 2—Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

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

 

In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value, in thousands:

 

		Fair Value Measurements at
		March 31, 2015
		(unaudited)
								Significant
		Total Carrying			Quoted Prices			Other			Significant
		Value at			in Active			Observable			Unobservable
		March 31,			Markets			Inputs			Inputs
		2015			(Level 1)			(Level 2)			(Level 3)
Assets:
Cash and cash equivalents		$	25,810		$	25,810		$	—		$	—
Marketable securities		39,026			—			39,026			—
Long term marketable securities		27,315			—			27,315			—
Marketable securities - restricted (SERP)		267			—			267			—
Total assets at fair value		$	92,418		$	25,810		$	66,608		$	—
Liabilities:
Derivative liabilities		$	2,691		$	—		$	—		$	2,691

 

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		Fair Value Measurements at
		December 31, 2014
								Significant
		Total Carrying			Quoted Prices			Other			Significant
		Value at			in Active			Observable			Unobservable
		December 31,			Markets			Inputs			Inputs
		2014			(Level 1)			(Level 2)			(Level 3)
Assets:
Cash and cash equivalents		$	36,396		$	36,396		$	—		$	—
Marketable securities		37,940			—			37,940			—
Long term marketable securities		19,816			—			19,816			—
Marketable securities - restricted (SERP)		305			—			305			—
Total assets at fair value		$	94,457		$	36,396		$	58,061		$	—
Liabilities:
Derivative liabilities		$	6,564		$	—		$	—		$	6,564

 

The fair value of the restricted marketable securities is included within other non-current assets in the consolidated balance sheets.

 

The Company’s Level 1 assets include money market funds and U.S. Treasury and government agency debt securities with quoted prices in active markets.

 

Level 2 assets include mutual funds in which the SERP (Supplemental Executive Retirement Plan) assets are invested, commercial paper and investment grade corporate bonds and other fixed income securities. Level 2 securities are valued using third-party pricing sources that apply applicable inputs and other relevant data into their models to estimate fair value.

 

Level 3 liabilities include the estimated fair value of the interest make-whole liability associated with the Company’s 7.50% Convertible Senior Secured Notes due 2019 (the Notes) and the outstanding warrants to purchase Common Stock, which are recorded as derivative liabilities.

 

The fair value of the interest make-whole liability of the Notes was calculated using a binomial-lattice model with the following key assumptions as of March 31, 2015, unaudited:

 

Volatility		45%
Stock Price as of March 31, 2015		$12.09 per share
Credit Spread		1388 bps
Term		2.1 years
Dividend Yield		0.0%

 

The fair value of the common stock warrant liability was calculated using a Black-Scholes model with the following assumptions as of March 31, 2015, unaudited:

 

Exercise Price		$4.00 - $5.00 per share
Volatility		65%
Stock Price as of March 31, 2015		$12.09 per share
Term		5.8 - 6.8 years
Dividend Yield		0.0%
Risk-Free Rate		1.5% -1.7%

 

Significant changes to these assumptions could result in increases/decreases to the fair value of the derivative liabilities.

 

Changes in the fair value of the warrants and the interest make-whole liability are recognized as a component of Other Income (Expense) in the Consolidated Statements of Operations. The following table presents information about the Company’s Level 3

 

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liabilities as of December 31, 2014 and March 31, 2015 that are included in the Non-Current Liabilities section of the Consolidated Balance Sheets, in thousands:

 

		Three Months ended
		March 31,
		2015
		(unaudited)
Balance at December 31, 2014		$	6,564
Changes in fair value of derivative liabilities included in earnings		49
Reduction due to conversion of debt to equity		(3,922		)
Balance at March 31, 2015		$	2,691

 

The carrying value, face value and estimated fair value of the Notes was approximately $11.7 million, $14.7 million and $35.8 million, respectively, as of March 31, 2015. The fair value was estimated based on actual trade information as well as quoted prices provided by bond traders, which would be characterized within Level 2 of the fair value hierarchy. This fair value amount gives recognition to the value of the interest make-whole liability and the value of the conversion option. These items have been accounted for as derivative liabilities and additional paid-in-capital, respectively.

 

The carrying amounts of other financial instruments, including accounts receivable, accounts payable and accrued expenses approximate fair value due to their short-term maturities.

 

Unrestricted marketable securities held by the Company were as follows, in thousands:

 

At March 31, 2015 (unaudited):

 

Available for Sale		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Corporate debt securities		$	66,406		$	15		$	(80	)	$	66,341

 

At December 31, 2014:

 

Available for Sale		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Corporate debt securities		$	57,910		$	4		$	(158	)	$	57,756

 

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

 

		March 31,
		2015
		(unaudited)
Less Than 1 Year		$	39,026
1-5 years		27,315
Greater Than 5 Years		—
Total		$	66,341

 

The Company has not experienced any other-than-temporary losses on its marketable securities and restricted marketable securities. The cost of securities sold is calculated using the specific identification method.

 

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4.  Inventories

 

Inventories consist of the following, in thousands:

 

		March 31,			December 31,
		2015			2014
		(unaudited)
Raw materials		$	3,132		$	2,491
Work in process		6,328			6,328
Finished goods		4,242			4,622
		$	13,702		$	13,441

 

5.  Property and Equipment

 

Property and equipment consist of the following, in thousands:

 

		March 31,			December 31,
		2015			2014
		(unaudited)
Computer equipment		$	932		$	862
Software		314			254
Lab equipment and furniture		5,235			5,194
Leasehold improvements		2,446			2,428
		8,927			8,738
Less accumulated depreciation and amortization		(6,446		)	(6,290		)
		$	2,481		$	2,448

 

Depreciation expense on property and equipment was approximately $156,000 for the three months ended March 31, 2015 and $169,000 for the three months ended March 31, 2014.

 

6.  Intangible Assets

 

The Company purchased certain patents from Shire Laboratories, Inc. pursuant to a 2005 purchase agreement. These patents are being amortized over the weighted average life of the patents purchased in that transaction. Deferred legal fees have been incurred in connection with complaints related to patents for Oxtellar XR and Trokendi XR (see Part II, Item I—Legal Proceedings in this Quarterly Report on Form 10-Q). The following sets forth the gross carrying amount and related accumulated amortization of these intangible assets, in thousands:

 

				March 31, 2015
				(unaudited)						December 31, 2014
		Weighted-		Gross Carrying			Accumulated			Gross Carrying			Accumulated
		Average Life		Amount			Amortization			Amount			Amortization
Purchased patents		10.0		$	2,292		$	2,125		$	2,292		$	2,067
Deferred legal fees				$	7,672		$	—		$	5,209		$	—

 

Deferred legal fees will be capitalized as part of the patents upon successful outcome of the on-going litigation related to these patents, at which point amortization of those costs will begin. If the Company is unsuccessful, the deferred legal fees will be expensed at that time. Four U.S. patents have been issued covering Oxtellar XR and six U.S. patents have been issued covering Trokendi XR, providing patent protection through at least 2027.

 

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Amortization expense associated with purchased patents was approximately $57,000 for each of the three months ended March 31, 2015 and 2014. The estimated annual aggregate amortization expense through December 31, 2015 is $229,000. The net book value of intangible assets as of March 31, 2015 was approximately $7.8 million and December 31, 2014 was approximately $5.4 million.

 

There were no indicators of impairment identified at March 31, 2015 or December 31, 2014.

 

7.  Accrued Liabilities

 

Accrued Liabilities are comprised of the following, in thousands:

 

		March 31,			December 31,
		2015			2014
		(unaudited)
Accrued sales deductions		$	10,025		$	8,461
Accrued compensation		7,334			5,829
Accrued professional fees		3,546			2,049
Accrued clinical trial and clinical supply costs		1,698			2,942
Accrued sales and marketing expenses		1,051			1,017
Accrued interest expense		646			639
Accrued product costs		131			3,014
Other accrued liabilities		1,422			1,536
		$	25,853		$	25,487

 

8.  Convertible Senior Secured Notes

 

The table below summarizes activity related to the Notes from issuance on May 3, 2013 through March 31, 2015, in thousands:

 

Gross proceeds		$	90,000
Initial value of interest make-whole derivative reported as debt discount		(9,270		)
Conversion option reported as debt discount and APIC		(22,336		)
Conversion of debt to equity - principal		(53,941		)
Conversion of debt to equity - accretion of debt discount		17,926
Accretion of debt discount		4,568
December 31, 2014 carrying value		26,947
Conversion of debt to equity - principal		(21,407		)
Conversion of debt to equity - accretion of debt discount		5,826
Accretion of debt discount		342
March 31, 2015 carrying value, unaudited		$	11,708

 

During the three month period ended March 31, 2015, approximately $21.4 million of the Notes were presented to the Company for conversion. Accordingly, the Company issued approximately 4.0 million shares of common stock in conversion of the principal amount of the Notes.  The Company issued an additional 0.4 million shares of common stock in settlement of the interest make-whole provision related to the converted Notes.  As a result of the conversions, the Company incurred a loss of approximately $2.1 million on extinguishment of debt during the three months ended March 31, 2015, which is included as a separate component of other income (expense) on the consolidated statement of operations.   During the three month period ended March 31, 2014, as a result of approximately $9.5 million in note conversions, the Company incurred a loss of approximately $1.7 million on extinguishment of debt.

 

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9.  Share-Based Payments

 

The Company has adopted the Supernus Pharmaceuticals, Inc. 2012 Equity Incentive Plan (the 2012 Plan), which is stockholder approved, and provides for the grant of stock options and certain other awards, including stock appreciation rights (SAR), restricted and unrestricted stock, stock units, performance awards, cash awards and other awards that are convertible into or otherwise based on the Company’s common stock, to the Company’s key employees, directors, and consultants and advisors. The 2012 Plan is administered by the Company’s Board of Directors and provides for the issuance of up to 4,000,000 shares of the Company’s Common Stock upon the exercise of stock options. Option awards are granted with an exercise price equal to the estimated fair value of the Company’s Common Stock at the grant date; those option awards generally vest in four annual installments, starting on the first anniversary of the date of grant and have ten year contractual terms. Share-based compensation recognized related to the grant of employee and non-employee stock options, SAR, potential Employee Stock Purchase Plan (ESPP) awards and non-vested stock was as follows, in thousands:

 

		March 31,
		2015			2014
		(unaudited)
Research and development		$	204		$	184
Selling, general and administrative		697			483
Total		$	901		$	667

 

The following table summarizes stock option and SAR activity:

 

		Number of Options		Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term (in years)
Outstanding, December 31, 2014		2,080,749		$	7.93		8.04
Granted (unaudited)		866,300		$	9.22
Exercised (unaudited)		(68,896	)	$	2.13
Forfeited or expired (unaudited)		(11,656	)	$	7.95
Outstanding, March 31, 2015 (unaudited)		2,866,497		$	8.46		8.51
As of December 31, 2014:
Vested and expected to vest		2,041,026		$	7.91		8.03
Exercisable		626,548		$	6.40		6.91
As of March 31, 2015:
Vested and expected to vest (unaudited)		2,793,934		$	8.45		8.49
Exercisable (unaudited)		913,327		$	7.54		7.42

 

10.  Earnings per Share

 

Basic income (loss) per common share is determined by dividing income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted income (loss) per share is computed by dividing the income (loss) attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company’s stock option grants, SARs, potential ESPP awards and warrants, and the if-converted method is used to determine the

 

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dilutive effect of the Company’s Notes.  The assumed conversion of the Notes would result in a loss on extinguishment which would cause a net loss in 2015; thus, the effect would be anti-dilutive.  The following common stock equivalents were excluded in the calculation of diluted income (loss) per share because their effect would be anti-dilutive as applied to the income (loss) from continuing operations applicable to common stockholders for the three months ended March 31, 2015 and 2014:

 

		Three Months ended March 31,
		2015		2014
		(unaudited)
Shares underlying Convertible Senior Secured Notes		6,071,894		7,556,001
Warrants to purchase common stock		21,800		21,273
Stock options, stock appreciation rights, non-vested stock options, and ESPP awards		—		356,364

 

The following table sets forth the computation of basic and diluted net income per share for the three months ended March 31, 2015 and 2014, in thousands, except share and per share amounts:

 

		Three Months ended March 31,
		2015			2014
		(unaudited)
Numerator, in thousands:
Net income (loss) used for calculation of basic and diluted EPS		$	917		$	(15,543	)
Denominator:
Weighted average shares outstanding, basic		44,563,299			41,129,055
Stock options, stock appreciation rights, non-vested stock options, and ESPP awards		337,999			—
Total potential dilutive common shares		337,999			—
Weighted average shares outstanding, diluted		44,901,298			41,129,055
Net income (loss) per share, basic		$	0.02		$	(0.38	)
Net income (loss) per share, diluted		$	0.02		$	(0.38	)

 

11.  Commitments and Contingencies

 

The Company has concurrent leases for office and lab space that extend through April 2020. The Company may elect to extend the term of the leases for an additional five-year term. The leases provide for a tenant improvement allowance of approximately $2.1 million in aggregate. During the three months ended March 31, 2015 and 2014, none of the allowance was utilized.  As of March 31, 2015, $0.7 million is available for tenant improvements. Rent expense for the leased facilities and leased vehicles for the three months ended March 31, 2015 and 2014 was approximately, $0.7 million, and $0.5 million, respectively.

 

Future minimum lease payments under non-cancelable operating leases as of March 31, 2015 are as follows, in thousands:

 

Year ending December 31:
2015 (remaining)		$	1,311
2016		1,287
2017		1,291
2018		1,314
Thereafter		1,795
		$	6,998

 

The Company has obtained exclusive licenses from third parties for proprietary rights to support the product candidates in the Company’s psychiatry portfolio. Under license agreements with Afecta Pharmaceuticals, Inc. (“Afecta”), the Company has an

 

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exclusive option to evaluate Afecta’s CNS pipeline and to obtain exclusive worldwide rights to selected product candidates, including an exclusive license to SPN-810. The Company does not owe any future milestone payments for SPN-810. The Company is obligated to pay royalties to Afecta based on worldwide net sales of each of these products in the low-single digits.

 

The Company has also entered into a purchase and sale agreement with Rune Healthcare Limited (“Rune”), where the Company obtained the exclusive worldwide rights to a product concept from Rune. There are no future milestone payments due to Rune under this agreement. If the Company receives approval to market and sell any products based on the Rune product concept for SPN-809, the Company is obligated to pay royalties to Rune based on net sales worldwide in the low single digits.

 

12.  Subsequent Events

 

Subsequent to March 31, 2015, holders of the Notes converted approximately $1.2 million of the Notes and we issued a total of approximately 0.2 million shares of common stock in conversion of the principal amount of the Notes and accrued interest thereon, and issued an additional 20,000 shares of common stock in settlement of the interest make-whole provision related to the converted Notes.

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and financial condition of the Company. The interim financial statements included in this report and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2014 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2015.  In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. These forward-looking statements may include declarations regarding the Company’s belief or current expectations of management, such as statements including the words “budgeted,” “anticipate,” “project,” “estimate,” “expect,” “may,” “believe,” “potential,” and similar statements or expressions are intended to be among the statements that are forward-looking statements, as such statements reflect the reality of risk and uncertainty that is inherent in the Company’s business. Actual results may differ materially from those expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of the date this report was filed with the Securities and Exchange Commission. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under the “Risk Factors” section of our Annual Report on Form 10-K and elsewhere in this report as well as in other reports and documents we file with the Securities and Exchange Commission from time to time. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

 

Solely for convenience, in this Quarterly Report on Form 10-Q the trade names are referred to without the TM symbols and the trademark registrations are referred to without the circled R, but such references should not be construed as any indicator that the Company will not assert, to the fullest extent under applicable law, our rights thereto.

 

Overview

 

We are a specialty pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (“CNS”) diseases. In 2013, we launched Oxtellar XR (extended-release oxcarbazepine) and Trokendi XR (extended-release topiramate), our two novel treatments for epilepsy.

 

In addition, we are developing multiple product candidates in psychiatry to address the large unmet medical need and market opportunity for the treatment of attention deficit hyperactivity disorder (“ADHD”), and with SPN-810 specifically, addressing impulsive aggression in patients who have ADHD and who are being treated with standard ADHD treatment, an indication area for which there is currently no approved product.

 

The table below summarizes our current pipeline of novel products and product candidates.

 

Product		Indication		Status
Oxtellar XR		Epilepsy		Launched
Trokendi XR		Epilepsy		Launched
SPN-810		Impulsive Aggression*		Phase III expected in 4Q2015
SPN-812		ADHD		Phase IIb expected in 4Q2015
SPN-809		Depression		Active IND

 

*              Initial program will be in patients with ADHD, with a plan to follow on in other indications, such as autism and bipolar disorder.

 

We are continuing to expand our intellectual property portfolio to provide additional protection for our technologies, products, and product candidates. We currently have four U.S. patents issued covering Oxtellar XR and six U.S. patents issued covering Trokendi XR, providing patent protection expiring no earlier than 2027 for each product.

 

Marketed Products.  Oxtellar XR and Trokendi XR are the first once-daily extended release oxcarbazepine and topiramate products indicated for epilepsy in the U.S. market. These products are different from the immediate release products by offering convenient once-daily dosing and unique pharmacokinetic profiles that can have very positive clinical effects for some patients with epilepsy. We

 

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believe a once-daily dosing regimen improves compliance, making it more probable that patients maintain sufficient level of medication in their bloodstream to protect against seizures. In addition, the unique smooth and steady pharmacokinetic profiles of our once-daily formulations avoid the blood level fluctuations that are typically associated with immediate release products and can result in adverse events, symptomatic side effects, or decreased efficacy. In a retrospective medical chart review of 200 patients treated with immediate release oxcarbazepine versus Oxtellar XR, the patients taking Oxtellar XR showed a significantly lower rate of inpatient hospitalization stays, lower rate of emergency department visits, and a higher rate of compliance.

 

Trokendi XR

 

Trokendi XR is the first once-daily topiramate product indicated for epilepsy in the U.S. market, designed to improve patient compliance and to show a better pharmacokinetic profile than  the current immediate release products, which must be taken multiple times per day. Trokendi XR’s pharmacokinetic profile results in lower peak plasma concentrations, higher trough plasma concentrations, and slower input rate. This results in smoother and more consistent blood levels of topiramate than immediate release topiramate formulations can deliver. We believe that such a profile mitigates blood level fluctuations that are frequently associated with many of the symptomatic side effects or breakthrough seizures that patients can suffer when taking immediate release products. Side effects can lead patients to skipping doses, whereupon the increased non- adherence could place them at higher risk for breakthrough seizures.

 

Oxtellar XR

 

Oxtellar XR is the only once-daily oxcarbazepine product indicated for the treatment of epilepsy in the U.S. as an adjunctive therapy. With its novel pharmacokinetic profile showing lower peak plasma concentrations, a slower rate of input, higher trough plasma concentrations, and smoother and more consistent blood levels compared to immediate release products, we believe Oxtellar XR has the potential to improve the tolerability of oxcarbazepine and thereby reduce the side effects. This could enable more patients to tolerate higher doses of oxcarbazepine, which would permit them to benefit from the resulting improved efficacy and greater seizure control, which has been  previously reported in patients taking  higher doses. Patients taking higher doses of immediate release oxcarbazepine are often unable to tolerate the increased side effects. In addition, Oxtellar XR once-per-day dosing is designed to improve patient compliance compared to the current immediate release products that must be taken multiple times per day.

 

We expect the number of prescriptions filled for Oxtellar XR and Trokendi XR to increase throughout 2015. Data from Wolters- Kluwer/Symphony show 78,763 prescriptions filled for both drugs during the three months ended March 31, 2015, representing a growth of 145% as compared to the 32,063 prescriptions reported for the three months ended March 31, 2014.  Prescriptions grew by 11.3% as compared to the three months ended December 31, 2014, which totaled 70,739 prescriptions filled. 

 

Total net product sales for the first quarter of 2015 were $28.1 million, compared to total net product sales of $9.0 million for the same quarter last year and $30.5 million for the fourth quarter of 2014. In the fourth quarter of 2014 and first quarter of 2015, net sales results were affected by changes in wholesaler inventory levels and ordering patterns.  The Company estimates that inventory levels have been well within industry norm, ranging from 2-4 weeks.

 

Total revenue grew by 212% as compared to the $9.0 million product sales reported for the three months ended March 31, 2014.

 

We first achieved positive cash flows from operations during the fourth quarter of 2014, a trend that we expect to continue in 2015. We expect the business to be cash flow positive and profitable for the calendar year 2015 and beyond. We believe our net working capital and long term marketable securities balance of $102.0 million as of March 31, 2015, along with revenues from increasing product sales, will be sufficient to finance the Company including our increased research and development activities.

 

We are progressing with our Phase IV post-marketing commitments for Oxtellar XR and Trokendi XR. The work we are completing to meet our Food and Drug Administration (“FDA”) commitments may also have applicability in life-cycle management.

 

We have received several Paragraph IV Notice Letters concerning Oxtellar XR and Trokendi XR from various third-parties. In response to these Paragraph IV notice letters, we have filed several complaints against these third parties alleging infringement of our intellectual property rights. We intend to vigorously defend our intellectual property rights in each of these cases and we anticipate continuing to incur increasing amounts of legal fees and related expenses for these cases as they progress (See Part II, Item 1—Legal Proceedings in this Quarterly Report on Form 10-Q for additional information).

 

Oxtellar XR was one of several products prescribed to children whose safety profile was reviewed at a Pediatric Advisory Committee meeting in March 2015.  The committee voted for the FDA to continue their safety monitoring of this product per their current routine.  As part of the preparation for this committee review, FDA noted that safety information in the Oxtellar XR package insert

 

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