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SUPN > SEC Filings for SUPN > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for SUPERNUS PHARMACEUTICALS INC

Form 10-Q for SUPERNUS PHARMACEUTICALS INC


2-Nov-2012

Quarterly Report


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, 2011, and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on April 30, 2012 (File No. 333-171375) (the "Registration Statement"). 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 the Registration Statement 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, the trade names in this Form 10-Q are referred to without the TM symbols, 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, or CNS, diseases. Our extensive experience in product development has been built over the past 20 years: initially as a standalone development organization, then as a U.S. subsidiary of Shire plc and, upon our acquisition of substantially all of the assets of Shire Laboratories Inc. in late 2005, as Supernus Pharmaceuticals, Inc. We are developing several product candidates in neurology and psychiatry to address large market opportunities in epilepsy and attention deficit hyperactivity disorder, or ADHD, including ADHD patients with impulsive aggression.

Our two epilepsy products are Trokendi XR, formerly known as SPN-538 (extended release topiramate), for which the Food and Drug Administration (the FDA) granted tentative approval on June 25, 2012, and Oxtellar XR (extended release oxcarbazepine) for which we have received approval from the FDA on October 19, 2012. The final approval for Trokendi XR may not be made effective until the period of marketing exclusivity protection associated with safety information regarding a specific pediatric population expires on June 22, 2013. We are not required to complete any additional clinical trials for Trokendi XR. We anticipate the commercial launch of Oxtellar XR to occur during the first quarter of 2013 and the commercial launch of Trokendi XR to occur during the third quarter of 2013 assuming the receipt of final approval by the FDA.

We are also developing treatments for new indications in diseases such as ADHD and its coexisting disorders. We are developing SPN-810 (molindone hydrochloride), which is currently in a Phase IIb trial, as a novel treatment for impulsive aggression in patients who are being treated for ADHD, and are well controlled for ADHD on their existing medications. This trial is fully recruited with 121 patients. If approved by the FDA, SPN-810 could be the first product available to address this serious, unmet medical need. SPN-810 is based on molindone hydrochloride, which was previously marketed in the United States as an anti-psychotic to treat schizophrenia under the trade name Moban. In addition, SPN-812, which completed a Phase IIa trial, is being developed as a novel non-stimulant treatment for ADHD. SPN-812 is a selective norepinephrine reuptake inhibitor that we believe could be more effective and have a better side effect profile than other non-stimulant treatments for ADHD. In addition, because the active ingredient of SPN-812 has demonstrated efficacy as an antidepressant in Europe, this product candidate, if studied in that specific patient population and shown to be effective, may provide increased benefit to an estimated 40% of ADHD patients who suffer from depression.

In addition to these lead products and product candidates, we have a number of other product candidates in various stages of development such as SPN-809, which would represent a novel mechanism of action for the U.S. antidepressant market.

We intend to market our product candidates in the United States through our focused sales force targeting specialty physicians, including neurologists and psychiatrists. We believe our broad and diversified portfolio of product candidates provides us with multiple opportunities to achieve our goal of becoming a leading specialty pharmaceutical company focused on CNS diseases. We use our proprietary technologies to enhance the therapeutic benefits of approved anti-epileptic drugs, or AEDs through advanced


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extended release formulations. Our technologies have led to the tentative approval of Trokendi XR and approval of Oxtellar XR during 2012, both of which are novel oral once-daily extended release formulations of topiramate and oxcarbazepine, respectively, for the treatment of epilepsy. Immediate release formulations of topiramate and oxcarbazepine are available in generic form and are marketed under the brand names of Topamax and Trileptal, respectively. According to IMS Health, peak sales of Topamax and Trileptal represented an estimated 25.8% and 8.1% of the total seizure disorder market in 2008 and 2006, respectively. We believe there is a significant unmet need for extended release products, such as Trokendi XR and Oxtellar XR, for the treatment of epilepsy. Extended release products have been shown to improve compliance, increase seizure control, reduce side effects and improve tolerability as compared to immediate release products.

Historically, our revenues have been generated through research and development agreements, which included fees for development services provided to customers and payments for achievement of specified development, regulatory and sales milestones, as well as royalties on product sales of licensed products, Oracea, Sanctura XR, and Intuniv. Since our inception in 2005, we have generated no revenue from product sales and have incurred significant operating losses. As of September 30, 2012, we had an accumulated deficit of approximately $72.7 million and a total stockholders' equity of approximately $24.6 million. We expect to incur net losses and negative cash flow from operating activities for the foreseeable future as we continue to develop our product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of Trokendi XR and Oxtellar XR, as well as our other product candidates.

Critical Accounting Policies and the Use of Estimates

A "critical accounting policy" is one that is both important to the portrayal of our financial condition and results of operations and that requires management's most difficult, subjective or complex judgments. Such judgments are often the result of a need to make estimates about the effect of matters that are inherently uncertain. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States applicable to interim financial reporting requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ materially from those estimates.

There were no significant changes in critical accounting policies from those at December 31, 2011. During the nine months ended September 30, 2012, we consistently applied the critical accounting policies discussed in the Registration Statement, which contained our financial statements for the years ended December 31, 2009, 2010 and 2011. For a complete discussion regarding these critical accounting policies, refer to the Registration Statement.

Inventories, which are recorded at the lower of cost or market, include materials, labor and other direct and indirect costs and are valued using the first-in, first-out method. The Company capitalizes inventories produced in preparation for commercial launches when the related product candidates are considered likely to receive regulatory approval and it is probable that the related costs will be recoverable through the commercialization of the product. Following the receipt of tentative approval for Trokendi XR from the FDA on June 25, 2012, the Company began capitalizing validation batch manufacturing costs, to the extent that those validation lots are expected to be sold commercially after the product launch.


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Results of Operations



Comparison of the Three Months Ended September 30, 2011 and September 30, 2012



                                                    Three Months Ended
                                                      September 30,        Increase/
                                                     2011        2012      (decrease)
                                                       (unaudited)
                                                      (in thousands)

Revenues                                          $       11   $      91           80

Operating Expenses
Research and development                               8,425       8,306         (119 )
Selling, general and administrative                    1,501       4,075        2,574
Total operating expenses                               9,926      12,381
Operating loss from continuing operations             (9,915 )   (12,290 )
Interest income and other income (expense), net          263        (312 )       (575 )
Interest expense                                        (499 )      (880 )        381
Total other income (expense)                            (236 )    (1,192 )
Loss from continuing operations                   $  (10,151 ) $ (13,482 )
Income from discontinued operations, net of tax          417           -         (417 )
Net Loss                                          $   (9,734 ) $ (13,482 )

Revenues

During the three month periods ended September 30, 2011 and 2012, we recognized revenues related to licensing fees from our partners. Following the anticipated launches of Oxtellar XR and Trokendi XR in 2013, we expect to recognize revenue from commercial sales.

Our revenues were approximately $91,000 for the three months ended September 30, 2012 compared to $11,000 for the same period in 2011, representing an increase of $80,000. This increase was principally attributable to agreements to license Trokendi XR and Oxtellar XR outside of the United States of America.

Research and Development Expense

Research and development expenses consist of costs incurred in connection with the development of our and our collaborators' product candidates. These expenses consist primarily of:

employee-related expenses, which include salaries and benefits;

expenses incurred under agreements with contract research organizations, investigative sites and consultants that conduct our clinical trials and a substantial portion of our preclinical studies;

the cost of acquiring and manufacturing clinical trial materials;

the cost of manufacturing validation batches, if these materials are manufactured prior to obtaining regulatory approval;

costs related to facilities, depreciation and other allocated expenses;

license fees for, and milestone payments related to, in-licensed products and technology;

stock-based compensation expense to employees and consultants engaged in research and development activities; and

costs associated with non-clinical activities and regulatory approvals.


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For the three months ended September 30, 2011 and 2012, we incurred research and development expenses related to the following products:

                                             Three Months Ended September 30,
                                                2011                  2012
                                                        (unaudited)
                                                      (in thousands)
Trokendi XR                               $           3,767     $           1,451
Oxtellar XR                                           1,373                 2,201
SPN-810                                               1,461                 1,711
SPN-812 and SPN-809                                     146                 1,011
Development expenses - general                        1,678                 1,932

Total research and development expenses   $           8,425     $           8,306

Our research and development expenses were $8.3 million for the three months ended September 30, 2012, compared to $8.4 million for the same period in 2011, a decrease of $0.1 million or 1%. This decrease is attributable to lower clinical trial costs for Trokendi XR of approximately $2.3 million, partially offset by additional costs incurred primarily for validation batches for Oxtellar XR and an increase in costs for the clinical trials of SPN-810.

Selling, General and Administrative Expense. Our selling, general and administrative expenses were $4.1 million for the three months ended September 30, 2012 compared to $1.5 million for the same period in 2011, representing an increase of approximately $2.6 million or approximately 171%. This increase is mainly due to an increase in sales and marketing costs associated with preparing for launches of Oxtellar XR and Trokendi XR, which are now expected during the first and third quarters of 2013, respectively.

Interest Income and Other Income (Expense), Net. Interest income and other income (expense), net was $0.3 million income for the three months ended September 30, 2012 and $0.3 million expense for the three months ended September 30, 2011. The decrease is primarily the result of foreign currency fluctuations and an increase in marketable securities.

Interest Expense. Interest expense was approximately $ 0.9 million for the three months ended September 30, 2012 compared to $0.5 million for the same period in 2011. This increase is primarily due to the drawdown of the second $15.0 million under our secured credit facility in December 2011.

Loss from continuing operations. Loss from continuing operations was $13.5 million for the three months ended September 30, 2012 compared to a loss of $10.2 million for the same period in 2011. This increase was primarily due to the increase in sales and marketing costs.

Income from discontinued operations. Income from discontinued operations was $0.4 million for the three months ended September 30, 2011. There were no activities related to discontinued operations in 2012 as we sold our membership interests in TCD Royalty Sub, LLC in December 2011.


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Comparison of the Nine Months Ended September 30, 2011 and September 30, 2012



                                                    Nine Months Ended
                                                      September 30,       Increase/
                                                    2011        2012      (decrease)
                                                       (unaudited)
                                                     (in thousands)

Revenues                                          $     761   $     391         (370 )

Operating Expenses
Research and development                             23,126      18,367       (4,759 )
Selling, general and administrative                   5,143      11,450        6,307
Total operating expenses                             28,269      29,817
Operating loss from continuing operations           (27,508 )   (29,426 )
Interest income and other income (expense), net          59        (574 )       (633 )
Interest expense                                     (1,357 )    (2,771 )      1,414
Total other income (expense)                         (1,298 )    (3,345 )
Loss from continuing operations                   $ (28,806 ) $ (32,771 )
Income from discontinued operations, net of tax         646           -         (646 )
Net Loss                                          $ (28,160 ) $ (32,771 )

Revenues

During the nine month periods ended September 30, 2011 and 2012, we recognized revenues related to licensing fees and milestone payments associated with our licensing agreements. Following the anticipated launches of Oxtellar XR and Trokendi XR in 2013, we expect to recognize revenue from commercial sales.

Our revenues were approximately $0.4 million for the nine months ended September 30, 2012 compared to $0.8 million for the same period in 2011, representing a decrease of $0.4 million. This decrease was principally attributable to a one-time milestone payment of $0.8 million received in 2011 under our license agreement with United Therapeutics offset by recognition of revenue under our agreements with Stendhal in 2012.

Research and Development Expense

Research and development expenses consist of costs incurred in connection with the development of our and our collaborators' product candidates. These expenses consist primarily of:

employee-related expenses, which include salaries and benefits;

expenses incurred under agreements with contract research organizations, investigative sites and consultants that conduct our clinical trials and a substantial portion of our preclinical studies;

the cost of acquiring and manufacturing clinical trial materials;

the cost of manufacturing validation batches, if these materials are manufactured prior to obtaining regulatory approval;

costs related to facilities, depreciation and other allocated expenses;

license fees for, and milestone payments related to, in-licensed products and technology;

stock-based compensation expense to employees and consultants engaged in research and development activities; and

costs associated with non-clinical activities and regulatory approvals.


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For the nine months ended September 30, 2011 and 2012, we incurred research and development expenses related to the following products:

                                              Nine Months Ended September 30,
                                                2011                  2012
                                                        (unaudited)
                                                      (in thousands)
Trokendi XR                               $           5,675     $           3,205
Oxtellar XR                                           8,475                 3,458
SPN-810                                               2,919                 3,970
SPN-812 and SPN-809                                     623                 1,461
Development expenses - general                        5,434                 6,273

Total research and development expenses   $          23,126     $          18,367

Our research and development expenses were $18.4 million for the nine months ended September 30, 2012, compared to $23.1 million for the same period in 2011, a decrease of $4.7 million or 21%. This decrease was attributable to a decrease in clinical trial costs for Oxtellar XR of approximately $5.0 million as the Phase III trial for Oxtellar XR was substantially completed by the first quarter of 2012. This decrease was partially offset by increases in clinical trial costs for SPN-810 and general expenses.

Selling, General and Administrative Expense. Our selling, general and administrative expenses were $11.5 million for the nine months ended September 30, 2012 compared to $5.1 million for the same period in 2011, representing an increase of approximately $6.4 million or approximately 123%. This increase is mainly due to an increase in sales and marketing costs associated with preparing for launches of Oxtellar XR and Trokendi XR which are now expected to occur during the first and third quarters of 2013, respectively.

Interest Income and Other Income (Expense), Net. Interest income and other income (expense), net was approximately $0.6 million expense for the nine months ended September 30, 2012 compared to $0.1 million for the same period in 2011, representing an decrease of $0.7 million. The decrease is primarily the result of an increase in warrant income valuations during the nine months ended September 30, 2012 offset by fluctuations in foreign currency rates.

Interest Expense. Interest expense was approximately $2.8 million for the nine months ended September 30, 2012 compared to $1.4 million for the same period in 2011. This increase is primarily due to the drawdown of the second $15.0 million under our secured credit facility in December 2011.

Loss from continuing operations. Loss from continuing operations was $32.8 million for the nine months ended September 30, 2012 compared to a loss of $28.8 million for the same period in 2011. This increase is primarily due to the increase in sales and marketing costs offset by the decrease in clinical trial costs.

Income from discontinued operations. Income from discontinued operations was $0.6 million for the nine months ended September 30, 2011. There were no activities related to discontinued operations in 2012 as we sold our membership interests in TCD Royalty Sub, LLC in December 2011.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities at September 30, 2012 were $23.4 million, a decrease of $25.1 million from $48.5 million at December 31, 2011. This decrease is primarily due to continued losses from operations as we build towards two product launches in 2013, offset by the proceeds received from the IPO in May 2012. Although it is difficult to predict future liquidity requirements, we believe that the net proceeds from our IPO, together with our existing unrestricted cash, cash equivalents and marketable securities, and anticipated future product revenues, should be sufficient to fund operations as currently planned into the second quarter of 2013. Successful transition to profitability is dependent upon achieving a level of revenues adequate to support our cost structure, which we do not expect in the near term, if at all. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.


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As of September 30, 2012 we had drawn down $30.0 million of term loans. Our expected principal repayments over the next four years are (in thousands):

YEAR     Principal
2012    $     2,756
2013         11,809
2014         10,847
2015            569
Total   $    25,981

We expect to continue to incur substantial additional operating losses for the foreseeable future as we continue to develop our product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of Trokendi XR, Oxtellar XR and our other product candidates. With the marketing approval of Oxtellar XR, and if we obtain marketing approval for Trokendi XR, we will incur significant sales, marketing and outsourced manufacturing expenses. In addition, we expect to incur additional expenses to add operational, financial and information systems and personnel to support our planned product commercialization efforts.

Our anticipated cash burn for calendar year 2012 is in the range of $55 million to $60 million. Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:

          The receipt of marketing approval from the FDA for Trokendi XR;

          The extent to which the FDA may require us to perform additional
precommercial manufacturing activities for Oxtellar XR and Trokendi XR;

          The costs of our commercialization activities for Oxtellar XR and
Trokendi XR if it receives final approval by the FDA;

          The cost of purchasing manufacturing and other capital equipment for
our potential products;

          The cost and availability of active chemical ingredients and other
manufacturing components required to supply a finished product;

          The scope, progress, results and costs of development for our product
candidates;

          The cost, timing and outcome of regulatory review of our product
candidates;

          The extent to which we acquire or invest in products, businesses and

technologies;

The extent to which we choose to establish collaboration, co-promotion, distribution or other similar agreements for product candidates; and

The costs of preparing, submitting and prosecuting patent applications and maintaining, enforcing and defending intellectual property claims.

We anticipate we will need to obtain additional capital for the commercial launch of Trokendi XR, through equity offerings, debt financing and/or new or existing licensing and research collaboration agreements or any combination thereof. We expect that our progress in the development of our product candidates may provide sufficient value inflection milestones, based on which we may be able to seek additional funding. The type, timing, and terms of financing will depend upon our cash needs, the availability of financing sources and the prevailing conditions in the financial markets. There can be no assurance that such financing will be available to us at any given time or available on favorable terms, if at all. If sufficient funds on acceptable terms are not . . .

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