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SUPN > SEC Filings for SUPN > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for SUPERNUS PHARMACEUTICALS INC


15-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, some of the information in this discussion and analysis contains forward-looking statements reflecting our current expectations and involves risk and uncertainties. For example, statements regarding our expectations as to our plans and strategy for our business, future financial performance, expense levels and liquidity sources are forward-looking statements. 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 and elsewhere in this report.

Overview

We are a specialty pharmaceutical company focused on developing and commercializing products for the treatment of central nervous system, or CNS diseases. Our two lead products are Oxtellar XR and Trokendi XR both of which are neurology products for the treatment of epilepsy. The Food & Drug Administration, or FDA, granted final approval for Oxtellar XR (extended-release oxcarbazepine) on October 19, 2012 and we launched this product commercially on February 4, 2013. Additionally, on November 15, 2012, the FDA granted Oxtellar XR a three-year marketing exclusivity period. We may be able to report revenue from prescriptions which are sold in the first quarter in the Quarterly Report on Form 10-Q that we will file for the quarter ended June 30, 2013.

Trokendi XR (extended-release topiramate) received tentative approval from the FDA on June 25, 2012 and may not receive final approval until after the expiry of marketing exclusivity associated with safety information of Topamax's NDA in a specific pediatric population. In early December, 2012, the Company submitted to the FDA a request for final approval as an amendment to the NDA including a safety data update, a new package insert and packaging configurations for Trokendi XR and was informed that should the FDA approve such amendment, it will most likely be in the form of a tentative approval because the review period of such amendment would be expected to conclude in the second quarter prior to the June 22, 2013 expiration of the pediatric exclusivity. The Company continues to expect getting the final approval and commercially launching Trokendi XR in the third quarter of 2013.

We intend to market both products through our in-house sales force. We hired approximately 75 sales representatives for the commercial launch of Oxtellar XR and we may expand this sales force to over 100 sales representatives over the next six months to support the launch of Trokendi XR later this year.

In addition to our two lead products, we have a product pipeline with several lead product candidates. SPN-810 (molindone hydrochloride) is being developed as a treatment for impulsive aggression in patients with ADHD and completed a Phase IIb trial that showed positive topline results. We expect to advance this program into later stage clinical development after we meet with the FDA. Our plans for SPN-810 involve a continued, in-depth analysis of the full dataset from the Phase IIb trial along with plans to meet with the FDA to discuss the next steps in the development program and the design and protocol for Phase III clinical trials.

SPN-812 is being developed as a non-stimulant treatment for ADHD. SPN-812 completed a Phase IIa proof on concept trial in 2011 and we are currently focused on developing an extended release formulation that will be the subject of a future Phase IIb trial.


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Critical Accounting Policies and Use of Estimates

The significant accounting policies and basis of presentation for our consolidated financial statements are described in Note 3 "Summary of Significant Accounting Policies". The preparation of our financial statements in accordance with U.S. generally accepted accounting principles requires (GAAP) us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and the disclosure of contingent assets and liabilities in our financial statements. Actual results could differ from those estimates.

We believe the following accounting policies and estimates to be critical:

Inventories. We carry inventories at the lower of cost or market using the first-in, first-out method. Although at December 31, 2012 inventory is 100% raw materials, in the future inventory values will include materials, labor, overhead and other direct and indirect costs. Inventory is evaluated for impairment through consideration of factors such as lower of cost or market, net realizable value, expiry and obsolescence. Our inventories have values that do not exceed either replacement cost or net realizable value. We believe Oxtellar XR and Trokendi XR have limited risk of obsolescence or expiry based on the market research we used to project future demand and based on anticipated product dating.

We capitalize inventories produced in preparation for commercial launches when it becomes probable the related product candidates will receive regulatory approval and the related costs will be recoverable through the commercial sale of the product. Accordingly, we began to capitalize inventories for Trokendi following the June 25, 2012 tentative approval from the FDA and for Oxtellar XR following the October 19, 2012 final approval from the FDA. Prior to capitalization, the costs of manufacturing drug product is recognized in research and development expense in the period the cost is incurred. Therefore, manufacturing costs incurred prior to capitalization are included in research and development; such costs incurred after capitalization are included in cost of sales.

Deferred Revenue. We have entered into collaboration agreements to have both Oxtellar XR and Trokendi XR commercialized outside of the U.S. These agreements generally include an up-front license fee and ongoing milestone payments upon the achievement of specific events. We believe the milestones meet all of the necessary criteria to be considered substantive and therefore should be recognized as revenue when and if occurred. For the up-front license fee, we have estimated the service period of the contract and are recognizing this payment as revenue on a straight-line basis over this service period.

Revenue Recognition-Product Sales. We anticipate recognizing revenue from product sales during 2013. Revenue from product sales will be recognized when persuasive evidence of an arrangement exists, delivery has occurred and title of 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 and all performance obligations have been met and returns can be reasonably estimated. Product sales are recorded net of accruals for estimated rebates, chargebacks, discounts, co-pay assistance and other accruals (collectively, "sales deductions") as well as estimated product returns.

Our products will be distributed through wholesalers and pharmaceutical distributors. Each of these wholesalers and distributors will take title and ownership of the product upon physical receipt of the product and then distribute our products to the pharmacies. Though these distributors will be invoiced concurrent with the product shipment, we will be unable to recognize revenue upon shipment until such time as we can reasonably estimate and record accruals for sales deductions and product returns


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utilizing historical information and market research projections. Specific consideration for sales of both Oxtellar XR and Trokendi XR are:


Rebates. Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program as well as negotiated discounts with commercial health-care providers. Rebates are amounts owed after the final dispensing of the products to a benefit plan participant and are based upon contractual agreements or legal requirements with the public sector (e.g. Medicaid) and private sector benefit providers. The allowance for rebates is based on statutory and contractual discount rates and expected utilization. Our estimates for expected utilization of rebates are based in part on third party market research. 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. U.S. specialty distributor and wholesalers are offered various forms of consideration including allowances, service fees and prompt payment discounts. 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 have commercial insurance and meet certain eligibility requirements may receive co-pay assistance from the Company. Liabilities for co-pay assistance will be 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.

Although we have not recognized any revenue to date for sales of our own products, we anticipate doing so in 2013 and each of these rebates, chargebacks and other discounts will have an effect on the timing and amount of revenue recognized in any period.

Research and Development Expenses

Research and development expenditures are expensed as incurred. Research and development costs primarily consist of employee-related expenses, including salaries and benefits; expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct the Company's clinical trials; the cost of acquiring and manufacturing clinical trial materials; the cost of manufacturing materials used in process validation, to the extent that those materials are manufactured prior to receiving regulatory approval for those products and are not expected to be sold commercially, facilities costs that do not have an alternative future use; related depreciation and other allocated expenses; license fees for and milestone payments related to in-licensed products and technologies;


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stock-based compensation expense; and costs associated with non-clinical activities and regulatory approvals.

Stock-Based Compensation

Employee stock-based compensation is measured based on the estimated fair value on the grant date. The grant date fair value of options granted is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. For awards that vest based on service conditions, the Company recognizes expense using the straight-line method less estimated forfeitures. The Company has awarded non-vested stock. Prior to the Company's IPO the estimated fair value of these awards was determined at the date of grant based upon the estimated fair value of the Company's common stock. Subsequent to the Company's IPO, the fair value of the common stock is based on observable market prices.

For stock option grants and non-vested stock subject to performance-based milestone vesting, the Company records the expense over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the relative satisfaction of the performance conditions as of the applicable reporting date.

The Company records the expense for stock option grants to non-employees based on the estimated fair value of the stock option using the Black-Scholes option-pricing model. The fair value of non-employee awards is re-measured at each reporting period. As a result, stock compensation expense for non-employee awards with vesting is affected by subsequent changes in the fair value of the Company's common stock.


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Results of Operations

Comparison of the Year Ended December 31, 2011 and December 31, 2012

                                                         Year Ended
                                                        December 31,         Increase/
                                                      2011        2012       (decrease)
                                                       (in thousands)
Revenues:
Development and milestone revenues                  $     803   $   1,480            667

Total revenues                                            803       1,480

Operating Expenses:
Research and development                               30,627      23,517         (7,110 )
Selling, general and administrative                     7,928      20,132         12,204

Total operating expenses                               38,555      43,649

Operating loss from continuing operations             (37,752 )   (42,169 )
Interest income and other income (expense), net           148        (540 )         (688 )
Interest expense                                       (1,866 )    (3,575 )        1,709

Total other expense                                    (1,718 )    (4,115 )

Loss from continuing operations before income
taxes                                                 (39,470 )   (46,284 )
Income tax benefit                                     16,245           -        (16,245 )

Loss from continuing operations                       (23,225 )   (46,284 )

Discontinued operations:
Income from discontinued operations, net of tax         2,188           -          2,188
Gain on disposal of discontinued operations, net
of tax                                                 74,852           -         74,852

Income from discontinued operations                    77,040           -

Net income (loss)                                   $  53,815   $ (46,284 )

Revenues

Our revenues were approximately $1.5 million for the year ended December 31, 2012 compared to $0.8 million for the same period in 2011, representing an increase of $0.7 million. This increase is primarily attributable to one-time milestone payments of $1.1 million as well as the recognition of previously deferred up-front license payments of $0.4 million received under our license agreements with Stendhal in 2012.

Research and Development Expense

Our research and development expenses were $23.5 million for the year ended December 31, 2012, compared to $30.6 million for the same period in 2011, a decrease of $7.1 million or 23%. This decrease was primarily attributable to a decrease in clinical trial costs for Oxtellar XR of approximately $6.5 million and approximately $2.2 million for Trokendi XR, offset by increases in manufacturing and validation costs and general expenses.

Selling, General and Administrative Expense

Our selling, general and administrative expenses were $20.1 million for the year ended December 31, 2012 compared to $7.9 million for the same period in 2011, representing an increase of approximately $12.2 million or approximately 154%. This increase is mainly due to an increase in sales and marketing costs, associated with preparing for commercial launches of Oxtellar XR, which occurred in February


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2013, and Trokendi XR, which is anticipated to occur, subject to obtaining final marketing approval, expected to occur during the third quarter of 2013, respectively.

Interest Income and Other Income (Expense), Net

Interest income and other income (expense), net was an expense of approximately $0.5 million for the year ended December 31, 2012 compared to income of approximately $0.1 million for the same period in 2011, representing a change of $0.7 million. The change is primarily the result of the change in fair value of the derivative warrant liability during the year ended December 31, 2012 as compared to the year ended December 31, 2011.

Interest Expense

Interest expense was approximately $3.6 million for the year ended December 31, 2012, compared to $1.9 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, resulting in this additional amount of indebtedness being outstanding and accruing interest throughout 2012.

Loss from continuing operations

Loss from continuing operations was $46.3 million for the year ended December 31, 2012, compared to a loss of $39.5 million for the same period in 2011. This increase is primarily due to the increase in interest expense and sales and marketing costs offset by the decrease in clinical trial costs.

Income from discontinued operations

Income from discontinued operations was $77.0 million for the year ended December 31, 2011. There were no activities related to discontinued operations in 2012 from the sale of TCD Royalty Sub, LLC in December 2011.


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Comparison of the Year Ended December 31, 2011 and the Year Ended December 31,

2010

                                                         Year Ended
                                                        December 31,         Increase/
                                                      2010        2011       (decrease)
                                                               (in thousands)
Revenues:
Development and milestone revenues                  $     106   $     803    $       697

Total revenues                                            106         803

Operating Expenses:
Research and development                               35,149      30,627         (4,522 )
Selling, general and administrative                     5,080       7,928          2,848

Total operating expenses                               40,229      38,555

Operating loss from continuing operations             (40,123 )   (37,752 )
Interest income and other income (expense), net           649         148           (501 )
Interest expense                                            -      (1,866 )       (1,866 )

Loss from continuing operations before income
taxes                                                 (39,474 )   (39,470 )
Income tax benefit                                        399      16,245         15,846

Loss from continuing operations                       (39,075 )   (23,225 )

Discontinued operations:
Income from discontinued operations, net of tax           612       2,188          1,576
Gain on disposal of discontinued operations, net
of tax                                                      -      74,852         74,852

Income from discontinued operations                       612      77,040

Net income (loss)                                   $ (38,463 ) $  53,815

Revenues

Our revenues were approximately $0.8 million for the year ended December 31, 2011 compared to approximately $0.1 million for the same period in 2010, representing an increase of $0.7 million. This increase was principally attributable to a one-time milestone payment of $0.8 in 2011 under our license agreement with United Therapeutics.

Research and Development

Our research and development expenses were $30.6 million for the year ended December 31, 2011 compared to $35.1 million for the same period in 2010, representing a decrease of approximately $4.5 million or approximately 13%. This decrease was attributable to a decrease in clinical trial costs of approximately $4.8 million as the Phase III trial for Oxtellar XR was substantially completed by the first quarter of 2011.

Selling, General and Administrative

Our selling, general and administrative expenses were $7.9 million for the year ended December 31, 2011 compared to $5.1 million for the same period in 2010, representing an increase of approximately $2.8 million or approximately 56%. This increase was mainly due to an increase in marketing costs during the year ended December 31, 2011 associated with preparing for commercial launches of Oxtellar XR and Trokendi XR in 2013.


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Interest Income and Other Income (Expense), Net

Interest income and other income (expense), net was $0.1 million for the year ended December 31, 2011 compared to $0.6 million for the same period in 2010, representing a decrease of $0.5 million. The decrease was primarily the result of a federal grant credit received in 2010 under the federal Qualifying Therapeutic Discovery Project Program, which was created in March 2010 as part of the Patient Protection and Affordability Care Act of 2010.

Interest Expense

Interest expense was $1.9 million for the year ended December 31, 2011 which primarily consisted of interest expense associated with our secured credit facility, together with the amortization of the associated deferred financing costs and the debt discount arising from the allocation of fair value to the preferred stock warrants issued in connection with our term loans. There was no interest expense from continuing operations for the year ended December 31, 2010.

Loss from continuing operations

Loss from continuing operations was $23.2 million for the year ended December 31, 2011 compared to a loss of $39.1 million for the same period in 2010. This decrease was primarily due to the income tax benefit to continuing operations of $16.2 million in 2011 generated from the sale of TCD.

Income from discontinued operations

Income from discontinued operations was $77.0 million for the year ended December 31, 2011 compared to $0.6 million for the same period in 2010, representing an increase of approximately $76.4 million. This increase was due to a gain on sale of TCD Royalty Sub of approximately $74.9 million, net of taxes, calculated as the aggregate of the fair value of consideration of $27.0 million and the carrying value of Royalty Sub's assets and liabilities, less its fees and expenses. Additionally, in 2011, we realized increased royalty revenues of approximately $1.0 million from Oracea and Sanctura XR for the year ended December 31, 2011. For additional details on our discontinued operations, refer to Note 10 to our consolidated financial statements.

Liquidity and Capital Resources

Our working capital at December 31, 2012 was $68.8 million, an increase of $38.2 million compared to our working capital of $30.6 million at December 31, 2011. Our working capital increased in 2012 as a result of the net proceeds of $47.6 million from our May 2012 Initial Public Offering and net proceeds of $46.6 million from the sale of common stock in our follow-on offering in November 2012. These increases were offset by the use of cash reserves to fund our operating expenses as we continued our clinical development programs and increased our sales, marketing and manufacturing activities in preparation for the commercial launches of Oxtellar XR and Trokendi XR in 2013.

We expect to continue to incur significant sales and marketing expenses in 2013 related to the launches of Oxtellar XR and of Trokendi XR, assuming receipt of final marketing approval. In addition, we expect to incur substantial expenses related to our research and development efforts, primarily related to preclinical activities and our development efforts for SPN-810 and SPN-812.

The Company's current operating assumptions, which reflect management's best estimate of future revenue and operating expenses, indicate that current cash on hand, including the cash proceeds received from the common stock offerings in 2012, should be sufficient to fund operations as currently planned into the fourth quarter of 2013. The Company will need to raise additional capital through either a public offering of its common stock, a private placement offering of equity securities, issuance of a debt instrument, or any combination thereof, to fund deficits in operating cash flows and continue


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its business operations as currently planned. However, there can be no assurance that such financing will be available to the Company at any given time or available on favorable terms. The type, timing, and terms of financing selected by the Company will be dependent upon the Company's cash needs, the availability of financing sources, and the prevailing conditions in the financial markets.

In the event the Company does not gain access to additional funding, the Company will likely revise its commercial plans for Oxtellar XR and Trokendi XR, its planned clinical trials, other development activities, capital expenditure plans, and the scale of its operations, until it is able to obtain sufficient financing to do so, or pursue other alternatives. If the Company is required to significantly reduce operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs, these events could have a material adverse effect on the Company's business, results of operations and financial condition.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of
December 31, 2012 (except as noted below):

                                   Less than     1 - 3      3 - 5    Greater than
Contractual Obligations             1 Year       Years      Years       5 Years       Total
                                                       ($ in thousands)
Secured Credit Facility(1)         $   11,809   $ 11,416   $     -     $         -   $ 23,225
. . .
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