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SUPN > SEC Filings for SUPN > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for SUPERNUS PHARMACEUTICALS INC


15-May-2013

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, 2012 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 15, 2013. 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, 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 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 notified us that Oxtellar XR was granted a three-year marketing exclusivity period. We may be able to report revenue from prescriptions which were sold in the first quarter of 2013 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 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 grant this request, it will most likely be in the form of a tentative approval because the review period would be expected to conclude within the second quarter prior to the June 22, 2013 expiration of the pediatric exclusivity. The Company continues to expect to receive final approval of Trokendi XR and to commercially launch this product 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 in 2012 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 of the 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. A pre-IND (investigational new drug application) meeting for the extended release program is planned.


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Critical Accounting Policies and the 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" in the Company's most recently filed Annual Report on Form 10-K. The preparation of our financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires 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. Inventory values 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 are 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.

Revenue Recognition. At the present time, the Company records shipments to wholesalers as deferred revenue. Management is unable to reasonably estimate product sales and related product costs due to the lack of sufficient historical data concerning returns and allowances for Oxtellar XR. Accordingly, the Company records deferred revenue at sales price net of expected costs and the cost of product shipped. The Company currently defers recognition of revenue and the related cost of product sales on shipments of Oxtellar XR.

According to prescriptions as reported by Sympathy/Wolters Kluwer for Oxtellar XR, a total of 579 prescriptions were written in February and March following the commercial launch of Oxtellar XR on February 4, 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 and allowances 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 are 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 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 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 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 to the plan providers utilization. Our estimates for expected claimed 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


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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 distributors 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 pay cash or 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.

We have not recognized any revenue to date for sales of our own products. Each of these rebates, chargebacks and other discounts will have an effect on the timing and amount of revenue recognized in any subsequent period.

Results of Operations



Comparison of the Three Months Ended March 31, 2013 and March 31, 2012



                                                    Three Months Ended
                                                        March 31,          Increase/
                                                     2013         2012     (decrease)
                                                       (unaudited)
                                                      (in thousands)

Revenues                                          $       147   $    208          (61 )

Operating expenses
Research and development                                4,522      5,358         (836 )
Selling, general and administrative                    13,533      2,728       10,805
Total operating expenses                               18,055      8,086
Operating loss                                        (17,908 )   (7,878 )
Interest income and other income (expense), net           221       (437 )        658
Interest expense                                         (727 )     (962 )       (235 )
Total other income (expense)                             (506 )   (1,399 )
Net loss                                          $   (18,414 ) $ (9,277 )

Revenues. Our revenues were approximately $0.1 million for the three months ended March 31, 2013 compared to $0.2 million for the same period in 2012, representing a decrease of $0.1 million. This decrease is primarily attributable to a one-time milestone payment of $0.2 million in 2012 that did not occur in 2013. We did not recognize any product revenue associated with the launch of Oxtellar XR during the first quarter of 2013.

Research and Development Expense. Our research and development expenses were $4.5 million for the three months ended March 31, 2013, compared to $5.4 million for the same period in 2012, a decrease of $0.8 million or 16%. This decrease was primarily attributable to a decrease in clinical trial costs of $1.3 million for a SPN-810 Phase IIb trial completed in 2012, offset by increases in compensation for additional headcount and stock-based compensation.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $13.5 million for the three months ended March 31, 2013 compared to $2.7 million for the same period in 2012, representing an increase of approximately $10.8 million or approximately 396%. This increase is mainly due to the hiring of our sales force as well as an increase in sales and


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marketing costs associated with the commercial launch of Oxtellar XR, which occurred in February 2013, and the expected launch of Trokendi XR in the third quarter of 2013, subject to obtaining final marketing approval.

Interest Income and Other Income (Expense), Net. Interest income and other income (expense), net was an income of approximately $0.2 million for the three months ended March 31, 2013 compared to approximately ($0.4 million) expense for the same period in 2012, representing a change of $0.6 million. The change is primarily the result of the change in fair value of the derivative warrant liability during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 as well as increased interest income from an increased marketable securities balance.

Interest Expense. Interest expense was approximately $0.7 million for the three months ended March 31, 2013, compared to $1.0 million for the same period in 2012. This decrease, $0.3 million, is primarily due to the decreasing principal balance of the term loans.

Net Loss. Loss from continuing operations was $18.4 million for the three months ended March 31, 2013, compared to a loss of $9.3 million for the same period in 2012. This increase is primarily due to the increase in sales and marketing costs.

Liquidity and Capital Resources

Our working capital at March 31, 2013 was $49.3 million, a decrease of $19.2 million compared to our working capital of $68.5 million at December 31, 2012. Our working capital decreased in 2013 as a result of 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 to launch Oxtellar XR and in preparation for the commercial launch of Trokendi XR in 2013. This included building up inventory of both raw materials and finished goods (see Note 5 to the Consolidated Financial Statements) and also recording an increase in the deferred revenue related to shipments to wholesalers.

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 development efforts for SPN-810 and SPN-812.

On January 3, 2013, the underwriters of our follow-on public offering exercised their over-allotment option. As a result, we sold 239,432 shares of our common stock at a price of $8 per share, resulting in additional proceeds to the Company of $1.8 million, net of expenses.

On May 3, 2013, we issued $90.0 million aggregate principal amount of 7.50% Convertible Senior Secured Notes due 2019 (the "Notes") to two qualified institutional buyers, the initial purchasers of the Notes (the "Initial Purchasers"). The Company issued the Notes under an Indenture, dated May 3, 2013 (the "Indenture"), between the Company and U.S. Bank National Association, as Trustee and Collateral Agent. This offering generated net proceeds of approximately $86.4 million. Aggregate estimated offering expenses in connection with the transaction, including the Initial Purchasers' discount of $3.2 million, were approximately $3.6 million. We used approximately $19.6 million of these net proceeds to repay in full our borrowings under and terminate our secured credit facility. The remainder of the net proceeds will be used to fund the commercialization of our approved and tentatively approved drugs, Oxtellar XR and Trokendi XR, to continue development of our pipeline products and for other general corporate purposes, which may include research and development expenses, capital expenditures, working capital and general administrative expenses. We believe that the net proceeds of this offering, along with our current working capital, will be sufficient to fund operations through the end of 2014, by which time we expect to be cash flow break even.

The Notes provide for 7.50% interest per annum on the principal amount of the Notes, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2013. Interest will accrue on the Notes from and including May 3, 2013, and the Notes will mature on May 1, 2019, unless earlier converted, redeemed or repurchased by the Company. The Notes are secured by a first-priority lien, other than customary permitted liens, on substantially all of our and our domestic subsidiaries' assets, whether now owned or hereafter acquired.

The Notes are convertible into shares of our common stock. The conversion rate for the Notes will initially equal 188.7059 shares of common stock per $1,000 principal amount of notes (which is equivalent to an initial conversion price of approximately $5.30 per share of common stock). Upon conversion of a Note, if we have not received stockholder approval (as defined in the Indenture), a holder of Notes may surrender all or a portion of its Notes for conversion at any time prior to the close of business on the business day immediately preceding the maturity date. If stockholder approval has not been received, we will deliver for each $1,000 principal amount of converted Notes a number of shares of common stock equal to the conversion rate, together with a cash payment in lieu of any fractional shares of common stock issuable upon conversion. If we obtain stockholder approval, then we will settle conversion of the Notes through payment or delivery, as the case may be of cash, shares of common stock or a combination thereof, at our election and an interest make-whole payment, if applicable. We have no obligation to seek stockholder approval and even if we do, we cannot be certain that our stockholders will grant the stockholder approval.


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The conversion rate for the Notes will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its notes in connection with such make-whole fundamental change as described below.

On or after November 1, 2013, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending within five trading days prior to a conversion date, the last reported sale price of our common stock exceeds the conversion price on each such trading day, then we will, in certain circumstances, make an interest make-whole payment to converting holders equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the Notes to be converted has such notes remained outstanding until May 1, 2017 computed using a discount rate equal to 2%. We may pay an interest make-whole payment either in cash or in common stock, at our election. If we elect to pay an interest make-whole payment in shares of common stock, then the stock will be valued at 95% of the simple average of the daily volume-weighted average price ("VWAP") per share for the 10 trading days ending on and including the trading day immediately preceding the conversion date. Notwithstanding the foregoing, the number of shares we may deliver in connection with an interest make-whole payment, will not exceed 221.7294 shares per $1,000 principal amount of Notes, subject to adjustment. If, pursuant to our election to deliver common stock in connection with the payment of the interest make-whole amount, we would be required to deliver a number of shares of common stock in excess of such threshold, then we would deliver cash in lieu of shares otherwise deliverable upon conversions in excess thereof (based on the simple average of the daily VWAP for the 10 trading days ending on and including the trading day immediately preceding the conversion date).

Upon (i) the occurrence of a fundamental change (as defined in the Indenture) or (ii) if we call the Notes for redemption as described below (either event, a ''make-whole fundamental change'') and a holder elects to convert its Notes in connection with such make-whole fundamental change, we will, in certain circumstances, increase the conversion rate by a number of additional shares (the ''Additional Shares''). The number of additional shares by which the Company will increase the conversion rate will be determined based on the date on which the make-whole fundamental change occurs or becomes effective (the ''Effective Date'') and the price (the ''Stock Price'') paid (or deemed paid) per share of the Company's Common Stock in the fundamental change. If the holders of the Company's common stock receive only cash in a make-whole fundamental change (i) the Stock Price shall be the cash amount paid per share and (ii) the Company will satisfy its conversion obligation to a holder that converts its Notes any time after such make-whole fundamental change by delivering to such holder, on the third business day immediately following the relevant conversion date, an amount of cash, for each $1,000 principal amount of Notes converted, equal to the product of (x) the conversion rate in effect on the relevant conversion date (as increased by the Additional Shares, if any) and
(y) the Stock Price. Otherwise, (i) the Stock Price will equal the average of the last reported sale prices of the Company's Common Stock over the five trading day period ending on, and including, the trading day immediately preceding the Effective Date of the make-whole fundamental change and (ii) the Company will satisfy its conversion obligation to a holder that converts its Notes in connection with such make-whole fundamental change based on the conversion rate as increased by the number of Additional Shares. In connection with a make-whole fundamental change triggered by a redemption of the Notes, the Effective Date of such make-whole fundamental change will be the date on which the Company delivers notice of the redemption. Notwithstanding the foregoing, in no event will the conversion rate exceed the maximum conversion rate, which is 221.7294 shares per $1,000 principal amount of Notes.


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If a fundamental change occurs at any time, holders will have the right, at their option, to require the Company to purchase for cash any or all of the Notes, or any portion of the principal amount thereof, that is equal to $1,000 or an integral multiple of $1,000 in excess thereof, on a date of the Company's choosing that is not less than 20 calendar days nor more than 35 calendar days after the date on which it delivers a fundamental change notice. The price the Company is required to pay for a Note is equal to 100% of the principal amount of such Note plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date (unless the fundamental change purchase date is after a record date for the payment of interest and on or prior to the corresponding interest payment date, in which case the Company will instead pay the full amount of accrued and unpaid interest, if any, on the Note to the holder of record of such Note on the record date, and the fundamental change purchase price will instead be equal to 100% of the principal amount of such Note). Any Notes purchased by the Company will be paid for in cash.

We may not redeem the Notes prior to May 1, 2017. On or after May 1, 2017, we may redeem for cash all, but not less than all, of the Notes if the last reported sale price of our common stock equals or exceeds 140% of the applicable conversion price for at least 20 trading days during the 30 consecutive trading day period ending on the trading day immediately prior to the date we deliver written notice of the redemption. The redemption price will be equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If we call the Notes for redemption, a make-whole fundamental change will be deemed to occur and we will, in certain circumstances, increase the conversion rate for holders who convert their notes in connections with such make-whole fundamental change as described above.

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