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SUPN > SEC Filings for SUPN > Form 10-Q on 13-Nov-2013All Recent SEC Filings

Show all filings for SUPERNUS PHARMACEUTICALS INC

Form 10-Q for SUPERNUS PHARMACEUTICALS INC


13-Nov-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, the description of our Convertible Notes and the risks related there to set forth under the "Risk Factors" section of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 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. 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 market opportunity in the treatment of attention deficit hyperactivity disorder, or ADHD, including ADHD in patients with impulsive aggression.

Marketed Products. Oxtellar XR and Trokendi XR are the first and only once-daily extended release oxcarbazepine and topiramate products, respectively, indicated for epilepsy in the U.S. market. The products are differentiated compared to the immediate release products by offering convenient once-daily dosing and unique pharmacokinetic profiles that can be very important for patients with epilepsy. Once-daily dosing regimen has been shown to improve compliance allowing patients to benefit from their medications, and the unique smooth and steady pharmacokinetic profiles avoid the blood level fluctuations that are typically associated with immediate release products and their side effects. To date, we have received positive feedback from patients and physicians regarding the benefits of and clinical outcomes they are experiencing with our products.

The Company has its own specialty sales force promoting both products in the U.S. market. We have incurred significant losses from operations in 2013 as part of our investment in and commitment to successful product launches.

The Company received a Paragraph IV Notice Letter against our Oxtellar XR Orange Book patents from generic drug makers Actavis Inc., Watson Laboratories, Inc. - Florida, Actavis Pharma, Inc., Watson Laboratories, Inc. and Anda, Inc. (collectively "Watson") on June 26, 2013. On August 7, 2013, the Company filed a lawsuit against Watson alleging infringement of two patents that are listed in the FDA's Orange Book covering its antiepileptic drug Oxtellar XR. Supernus's United States Patent Nos. 7,722,898 and 7,910,131 cover once-a-day oxcarbazepine formulations and methods of treating seizures using those formulations. Both patents do not expire until April 13, 2027.

The Complaint - filed in the U.S. District Court for the District of New Jersey
- alleges that Watson infringed the Company's Oxtellar XR patents by submitting to the Food and Drug Administration ("FDA") an Abbreviated New Drug Application ("ANDA") seeking to market a generic version of Oxtellar XR prior to the expiration of Supernus's patents. Filing its Complaint within 45 days of receiving


Watson's Paragraph IV certification notice entitles Supernus to an automatic stay preventing the FDA from approving Watson's ANDA for 30 months. On September 30, 2013, Watson answered, denying the substantive allegations of the Complaint. One defendant, Watson Laboratories, Inc - Florida, asserted Counterclaims, seeking declaratory judgments of non-infringement and invalidity of the patents-in-suit. On October 30, 2013, the Company filed its Reply, denying the substantive allegations of the Counterclaims. The case has been assigned to Renee M. Bumb, U.S.D.J. and Joel Schneider. U.S.M.J. The case is in its early stages and discovery is proceeding.

Pipeline Products. In addition to our marketed products, our pipeline includes SPN-810 and SPN-812. SPN-810 (molindone hydrochloride) is being developed as a treatment for impulsive aggression in patients with ADHD. The Company completed a Phase IIb trial in 2012. As a result of a September 2013 scientific meeting with the FDA, the Company's current plans are to proceed to a Phase III trial under a Special Protocol Assessment.

SPN-812 is being developed as a non-stimulant treatment for ADHD. SPN-812 completed a Phase IIa proof of concept trial in 2011 and we have completed the development of several extended release formulations that will be tested in a future Phase IIb trial. We held a pre-IND (investigational new drug application) meeting with the FDA for the extended release program in June 2013. The Company expects to conduct a multi-dose steady state pharmacokinetic study in the first half of 2014 to select the final product formulation for a Phase IIb trial.

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 and in this report. 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, and other direct and indirect overhead. 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 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. Prior to capitalization, the costs of manufacturing drug product are recognized as research and development expense in the period the cost is incurred. Such costs incurred after capitalization are included in inventory and eventually cost of sales. Accordingly, we began to capitalize inventories for Trokendi XR following the June 25, 2012 tentative approval from the FDA and for Oxtellar XR following the October 19, 2012 final approval from the FDA.

Revenue Recognition and Deferred Revenue. At the present time, the Company records shipments to wholesalers as deferred revenue as the Company is unable to reasonably estimate product returns and related sales deductions (primarily rebates, chargebacks and other sales deductions (defined below)) due to the lack of sufficient historical data for Oxtellar XR and Trokendi XR. Accordingly, the Company records shipments to wholesalers as deferred revenue at sales price net of sales deductions.

The Company currently recognizes revenue on product sales upon filling prescriptions at pharmacies and net of sales deductions, when all deductions become known.

As prescriptions filled at the pharmacy level have no remaining right of return, there is no need to establish an allowance for such returns. Due to lack of sufficient sales history, we cannot reasonably estimate all other sales rebates and allowances, but rather must wait until this data becomes available to the Company. Because this occurs approximately eight weeks after the close of the quarter, the Company currently delays recognition of revenue until the subsequent fiscal quarter.

The Company believes the compilation of sufficient product specific historical data to reasonably estimate returns, rebates, and allowances may be available by the end of 2013 for Oxtellar XR, at which time the Company may record revenue based on shipments to wholesalers rather than on prescriptions filled at the pharmacy level.


With respect to prescriptions which were filled in the second quarter, data on rebates and allowances were generally received by the end of August. As a result of the time lag between the end of the quarter and receipt of these data, the Company could not determine net revenue in a timeframe which would allow reporting net revenue in the Form 10-Q filed for the second quarter. Consequently, revenue generated from prescriptions filled at the pharmacy level in the second quarter are being reported in the Company's third quarter financial results; i.e., on a 'quarter lag basis'. We expect to continue to report revenue based on prescriptions filled at the pharmacy level until sufficient experience with rebates and allowances is assembled to allow reporting of revenue based on shipments to wholesalers. This practice has resulted in our recognition of lower revenues to date in 2013 and, once sufficient historical data is compiled, the Company will likely recognize higher levels of revenue during the quarter when such sales occur.

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 accrued liabilities for estimated rebates, chargebacks, discounts, co-pay assistance and other accrued liabilities (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 provisions 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 based on plan provider's 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 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 to 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. 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.


Results of Operations



Comparison of the Three Months Ended September 30, 2013 and September 30, 2012








                                                    Three Months ended
                                                       September 30,         Increase
                                                     2013         2012      (decrease)

                                                         (unaudited)
                                                       (in thousands)

Revenue
Net product sales                                 $   1,130    $        -       1,130
Licensing revenue                                       127           91           36
Total revenue                                         1,257           91

Costs and expenses
Cost of product sales                                    33             -          33
Research and development                              3,779        8,306       (4,527)
Selling, general and administrative                  14,620        4,075       10,545
Total cost and expenses                              18,432       12,381
Operating loss                                      (17,175)     (12,290)
Interest income and other income (expense), net         102          (18)         120
Interest expense                                     (2,870)        (880)       1,990
Changes in fair value of derivative liabilities      (4,153)        (294)       3,859
Total other (expense) income                         (6,921)      (1,192)
Net loss                                          $ (24,096)   $ (13,482)

Revenues. Our net product sales of $1.1 million for the three months ended September 30, 2013 are based on 3,648 Oxtellar XR prescriptions filled at the pharmacy level during the second quarter of 2013.

According to prescriptions as reported by IMS - National Prescription Audit (IMS
- NPA) for Oxtellar XR, a total of 11,773 prescriptions were written in the period from February 4, 2013 to September 30, 2013 following the commercial launch of Oxtellar XR. We have not yet recognized revenues related to the Oxtellar XR and Trokendi XR prescriptions which were filled during the third quarter of 2013, which totaled 7,596 and 1,434 respectively. We expect to recognize revenue from these prescriptions in the fourth quarter of 2013.

Research and Development Expense. Research and development expense during the three months ended September 30, 2013 were primarily focused on research and preparation for future clinical trials for the product candidates, SPN-810 and SPN-812. During the three months ended September 30, 2012 research and development expense included outside services spending on contract research organizations ("CRO's") related to clinical trials that completed in 2012. This outside expense spending is the primary reason the three months ended September 30, 2012 expenses exceeded three months ended September 30, 2013 expenses.

Selling, General and Administrative Expenses. The year over year increase of $10.6 million was mainly due to an increase in expense from hiring our sales force and creating promotional and marketing related items in support of the commercial launches of Oxtellar XR and Trokendi XR.

Interest Expense. The increase of $2.0 million was primarily due to $1.7 million of interest accrued on the $90.0 million of Convertible Debt which was issued in May 2013.

Changes in fair value of derivative liability. We recognized a non-cash charge of $4.1 million associated with the change in value of the interest make-whole derivative during the third quarter of 2013 as compared to the second quarter. This change in valuation was primarily due to the passage of time as our stock price remains above the $5.30 conversion price.

Net Loss. The increase in net loss from of $10.6 million was primarily due to the increase in sales and marketing costs associated with the hiring of our sales force for the commercial launch of Oxtellar XR and Trokendi XR, as well as the change in fair value of our derivative liabilities and increased interest expense.


Comparison of the Nine Months Ended September 30, 2013 and September 30, 2012









                                                     Nine Months ended
                                                       September 30,         Increase
                                                     2013         2012      (decrease)

                                                         (unaudited)
                                                       (in thousands)


Revenue
Net product sales                                 $   1,283    $        -       1,283
Licensing revenue                                       401          391           10
Total revenue                                         1,684          391

Costs and expenses
Cost of product sales                                    37             -          37
Research and development                             11,844       18,367       (6,523)
Selling, general and administrative                  40,366       11,450       28,916
Total cost and expenses                              52,247       29,817
Operating loss                                      (50,563)     (29,426)
Interest income and other income (expense), net         292          192          100
Interest expense                                     (5,742)      (2,771)       2,971
Changes in fair value of derivative liabilities     (12,692)        (766)      11,926
Loss on extinguishment of debt                       (1,162)            -       1,162
Total other (expense) income                        (19,304)      (3,345)
Net loss                                          $ (69,867)   $ (32,771)

Revenues. Our net product sales of $1.3 million for the nine months ended September 30, 2013 are based on 4,177 Oxtellar XR prescriptions filled at the pharmacy level during the first and second quarters of 2013. Prescriptions filled in the first quarter of 2013 totaled 529, prescriptions filled in the second quarter of 2013 totaled 3,648 and increased to 7,596 prescriptions in the third quarter of 2013. In the third quarter, Oxtellar XR prescriptions had a quarter-over-quarter growth of approximately 108%. There were no product sales during the nine months ended September 30, 2012.

Research and Development Expense. Research and development expense during the nine months ended September 30, 2013 were primarily focused on research and preparation for future clinical trials for the product candidates, SPN-810 and SPN-812. The nine months ended September 30, 2012 research and development expense included outside services spending on CRO's related to clinical trials that completed in 2012. This outside service expense is the primary reason the nine months ended September 30, 2012 expenses exceeded nine months ended September 30, 2013 expenses.

Selling, General and Administrative Expenses. The increase of $28.9 million was mainly due to an increase in expense from hiring our sales force and creating promotional and marketing related items in support of with the commercial launches of Oxtellar XR and Trokendi XR in 2013.

Interest Expense. The increase of $3.0 million was primarily due to the accrued interest on the $90.0 million of Convertible Debt issued in May 2013 of $2.8 million, partially offset by the increase in interest expense resulting from extinguishing our previous secured credit facility in May 2013.

Changes in fair value of derivative liability. We recognized a non-cash charge of $12.7 million associated with the interest make-whole derivative liability during 2013, primarily due to the passage of time as our stock price remains above the $5.30 conversion price.

Loss on extinguishment of debt. We incurred a $1.2 million loss on extinguishment of our secured credit facility on May 3, 2013.


Net Loss. The increase in net loss from continuing operations of $37.1 million was primarily due to the hiring of our sales force as well as an increase in sales and marketing costs associated with the commercial launches of Oxtellar XR and Trokendi XR, as well as the change in fair value of our derivative liabilities and loss on the extinguishment of our debt facility.

Liquidity and Capital Resources

Our working capital at September 30, 2013 was $77.7 million, an increase of $9.2 million compared to our working capital of $68.5 million at December 31, 2012. This increase was attributable to the closing of our $90.0 million offering of Convertible Senior Secured Notes on May 3, 2013, as well as cash received for product shipments of Oxtellar XR and Trokendi XR to wholesalers and specialty distributors ($6.1 million), offset by cash used to fund our continued loss from operations as we have continued to dedicate and commit resources to our sales and marketing activities in support of the commercial launches of Oxtellar XR and Trokendi XR, and repayment of our prior secured credit facility.

We expect to continue to incur significant sales and marketing expenses related to the launches and continued support of Oxtellar XR and Trokendi XR. 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 as we continue to advance these clinical programs.

On May 3, 2013, we issued $90.0 million aggregate principal amount of 7.50% Convertible Senior Secured Notes due 2019 (the "Notes") to 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. A portion of these proceeds were used to extinguish our existing secured credit facility.

Aggregate offering expenses in connection with the transaction, were approximately $3.5 million, resulting in net proceeds of approximately $86.5 million. We used approximately $19.6 million of these net proceeds to repay in full our borrowings under and terminate our than existing secured credit facility. The remainder of the net proceeds will be used to fund the commercialization of our approved products, Oxtellar XR and Trokendi XR, as well as 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 project 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. For a full description of the Notes and the Indenture, see Note 9 to the Financial Statements included in Part I, Item 1 of this Quarterly Report on form 10-Q.

A total of approximately $17.1 million of the Notes have been presented to the Company for conversion. Accordingly, the Company has issued a total of approximately 3.2 million shares of common stock in conversion of the principal amount of the Notes. The Company has issued an additional 0.6 million shares of common stock and paid approximately $0.8 million cash in settlement of the interest make-whole provision related to the converted Notes.

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