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SUPN > SEC Filings for SUPN > Form 10-K on 21-Mar-2014All Recent SEC Filings

Show all filings for SUPERNUS PHARMACEUTICALS INC

Form 10-K for SUPERNUS PHARMACEUTICALS INC


21-Mar-2014

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. 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 impulsive aggression in patients with ADHD.

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. A 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. We expect to experience continued increases in the number of prescriptions filled for each Oxtellar XR and Trokendi XR throughout 2014.

We have our own specialty sales force promoting both products in the U.S. market. As of December 31, 2013, this sales force consisted of more than 110 sales representatives. We anticipate that we will continue to grow this sales force to more than 150 sales representatives by mid-2014. We have incurred significant losses from operations in 2013 as part of our investment in and commitment to successful product launches for Oxtellar XR and Trokendi XR and expect to continue to experience losses from operations in 2014.

We believe believes that our cash, cash equivalents, unrestricted marketable securities and long term investments are sufficient to finance the Company through the end of 2014, by which time we expect to be cash flow break even.

As reported in Part I, Item 3 Legal Proceedings of this Annual Report on Form 10-K, in response to a Paragraph IV Notice Letter on June 26, 2013 against our Oxtellar XR Orange Book patents from generic drug makers Watson Laboratories, Inc.-Florida ("WLF"), on August 7, 2013, the Company filed a lawsuit against Actavis, Inc., WLF, Actavis Pharma, Inc., Watson Laboratories, Inc., and Anda, Inc. (collectively "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 ("the patents-in-suit") generally cover once-a-day oxcarbazepine formulations and methods of treating seizures using those formulations. Both patents do not expire


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until April 13, 2027. Although this case is in its early stages, we believe that we will be successful in the defense of our patents. However, in the event that we are not successful in upholding each of these patents, our future revenue from Oxtellar XR may be adversely affected, which could increase our expected net losses.

Product Candidates. In addition to our marketed products, we continue to develop our product candidates SPN-810 and SPN-812. We are developing SPN-810 (molindone hydrochloride) as a treatment for impulsive aggression in patients with ADHD. We completed a Phase IIb trial in 2012 demonstrating both safety and efficacy. As a result of a September 2013 scientific meeting with the FDA, we are now designing a Phase III protocol which will undergo a Special Protocol Assessment. We expect patient dosing to commence during 2015.

We are developing SPN-812 as a non-stimulant treatment for ADHD. SPN-812 completed a Phase IIa proof of concept trial in 2011, demonstrating efficacy versus placebo 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. We expect 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.

We expect to incur significant research and development expenses related to the continued development of each of our product candidates.

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 2 "Summary of Significant Accounting Policies". The preparation of our financial statements in accordance with U.S. generally accepted accounting principles, or 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 net realizable value, obsolescence and expiry. 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 current demand and the market research we used to project future demand and 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 product 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 Trokendi XR shipments to wholesalers as deferred revenue, i.e., sales price net of known sales deductions (e.g. prompt pay discounts and other similar charges).


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However, because Trokendi XR was launched in the second half of 2013, we lack the experiential data which would allow us to estimate all remaining sales rebates, allowances and returns. Accordingly, we must wait until these data become available to the Company. Because this occurs approximately eight weeks after the close of the quarter, the Company currently delays recognition of revenue on Trokendi XR until the subsequent fiscal quarter. We expect to continue to report revenue based on Trokendi XR prescriptions filled at the pharmacy level on a quarter lag basis until sufficient experience with rebates, allowances and net sales deductions is assembled to allow reporting of revenue based on shipments to wholesalers (i.e. contemporaneous basis). We expect that this will occur no earlier than the second quarter of 2014. We expect to recognize higher levels of revenue during the quarter when sales are first reported based on shipments to wholesalers.

The Company recognized revenue for Oxtellar XR in the fourth quarter of 2013 based on shipment to distributors as we have sufficient historical experience to estimate sales deductions, allowances and returns. All balances previously included in deferred revenue and deferred product costs associated with the sales of Oxtellar XR to wholesalers have been recognized in net product sales on the Statement of Operations for the year ended December 31, 2013. This includes all amounts related to prescriptions filled at the pharmacy level during the third and fourth quarters of 2013 for Oxtellar XR, as well as product in the wholesale distribution pipeline as of December 31, 2013.

For a complete description of the Trokendi XR and Oxtellar XR gross revenue and gross to net adjustments see Part II, Item 8, Financial Statements and Supplemental Data, Note 2, Revenue Recognition.

Cost of Product Sales

The cost of product sales consist primarily of materials, third-party manufacturing costs, freight and distribution costs, allocation of labor, quality control and assurance, and other overhead costs associated with the sales of Oxtellar XR based on product shipped to distributors through December 31, 2013 and sales of Trokendi XR based on prescriptions filled at the pharmacy level during the third quarter of 2013.

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

Share-Based Compensation

Employee share-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. The Company has awarded non-vested stock that vests based on service conditions. The Company recognizes expense using the straight-line method less estimated forfeitures.


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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.

Results of Operations

Comparison of the Year Ended December 31, 2013 and December 31, 2012

                                                        Year Ended
                                                       December 31,         Increase/
                                                     2013        2012       (decrease)
                                                              (in thousands)
 Revenues:
 Net product sales                                 $  11,552   $       -         11,552
 Licensing revenue                                       467       1,480         (1,013 )


 Total revenues                                       12,019       1,480


 Costs and expenses
 Cost of product sales                                 1,104           -          1,104
 Research and development                             17,245      23,517         (6,272 )
 Selling, general and administrative                  55,590      20,132         35,458


 Total costs and expenses                             73,939      43,649


 Operating loss                                      (61,920 )   (42,169 )
 Interest income and other income (expense), net         400         170            230
 Interest expense                                     (7,849 )    (3,575 )       (4,274 )
 Changes in fair value of derivative liabilities     (13,354 )      (710 )      (12,644 )
 Loss on extinguishment of debt                       (9,550 )         -         (9,550 )


 Total other expenses                                (30,353 )    (4,115 )


 Net loss                                          $ (92,273 ) $ (46,284 )

Revenues. Our net product sales of $11.6 million for the year ended December 31, 2013 are based on $11.0 million of revenue from shipments of Oxtellar XR to distributors in 2013, less estimates for discounts, rebates, other sales deductions and returns, and $0.6 million of revenue on Trokendi XR prescriptions filled at the pharmacy level during the third quarter of 2013, net of sales deductions.

According to information as reported by IMS-National Prescription Audit, or IMS-NPA, a total of 21,105 prescriptions for Oxtellar XR were written in the period from February 4, 2013 to December 31, 2013 following the commercial launch of Oxtellar XR. We expect the number of prescriptions filled for Oxtellar XR to continue to increase throughout 2014.

We have not yet recognized revenues related to the Trokendi XR prescriptions which were filled during the fourth quarter of 2013, which totaled 11,244 as reported by IMS-NPA. We expect to continue to report revenue based on Trokendi XR prescriptions filled at the pharmacy level on a quarter lag basis until sufficient experience net sales deductions, including rebates, allowances and net sales deductions is assembled to allow reporting of revenue based on shipments to wholesalers (i.e. contemporaneous basis). We expect that this will occur no earlier than the second quarter of 2014. We expect to recognize higher levels of revenue during the quarter when sales are first reported based on shipments to wholesalers. We expect the number of prescriptions filled for Trokendi XR to continue to increase throughout 2014.


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Licensing revenue decreased by $1.0 million due to receipt of milestone payment in 2012 related to the approval of Oxtellar XR.

Research and Development Expense. Research and development expenses during 2013 were $17.2 million as compared to $23.5 million in 2012, a decrease of $6.3 million or 26.7%. In 2013, our research and development expense was primarily focused on preparation for future clinical trials for the product candidates, SPN-810 and SPN-812. During the year ended December 31, 2012, research and development expense included outside services spending on contract research organizations, or CROs, related to ongoing clinical trials. Mainly due to the completion of the Company's Phase IIb study for SPN-810 in 1012, and because no new trials were commenced in 2013, research and development expenses in 2012 exceeded 2013 research and development expenses.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $55.6 million in 2013 as compared to $20.1 million in 2012, an increase of $35.5 million or 176.1%. This increase was mainly due to hiring and training our sales force which consisted of approximately 110 sales representatives as of December 31, 2013, and an $8.8 million increase in advertising expenses focused on creating promotional and marketing related programs in support of the launch and commercialization activities for Oxtellar XR and Trokendi XR in 2013. We anticipate that these expenses will continue to increase in 2014 as we increase our sales force to more than 150 sales representatives.

Interest Expense. Interest expense was $7.8 million in 2013 as compared to $3.5 million in 2012. The increase of $4.3 million was primarily due to the interest relating to 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 $13.4 million associated with the interest make-whole derivative liability related to our Convertible Debt 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. In 2013, we recognized a non-cash charge of $8.4 million related to the conversion of $40.5 million of our Convertible Debt. In addition, we recognized $1.2 million of loss related to the prepayment and settlement fees of our secured credit facility in May 2013.

Net Loss. We incurred a net loss of $92.2 million in 2013 as compared to net loss of $46.2 million in 2012, an increase of $46.0 million or 99.3%. This increase was primarily due to the hiring of our sales force as well as an increase in marketing costs associated with the launch and commercialization activities for Oxtellar XR and Trokendi XR. In addition, increased interest expense and the change in fair value of our derivative liabilities and loss on extinguishment of debt contributed to a year to year increase in net loss.


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

                                                         Year Ended
                                                        December 31,         Increase/
                                                      2012        2011       (decrease)
                                                               (in thousands)
Revenues:
Development and milestone revenues                  $   1,480   $     803            677


Total revenues                                          1,480         803


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


Total operating expenses                               43,649      38,555


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


Total other expenses                                   (4,115 )    (1,718 )
Loss from continuing operations before income
taxes                                                 (46,284 )   (39,470 )
Income tax benefit                                          -      16,245        (16,245 )


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


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

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 2013, and Trokendi XR, which occurred in August 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


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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 in 2012 of the derivative warrant liability associated with our venture debt.

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 tranche 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 increased interest expense and sales and marketing costs, offset by decreased clinical trial costs.

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

Liquidity and Capital Resources

Our working capital at December 31, 2013 was $70.8 million, an increase of $2.3 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 ($17.3 million), offset by cash used to fund our continued loss from operations of $61.9 million.

We expect to continue to incur significant sales and marketing expenses related to the commercial 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 of SPN-810 and SPN-812 as we continue to advance these clinical programs.

In addition to revenues, we have historically financed our business through the sale of our debt and equity securities. On May 3, 2013, we issued $90.0 million aggregate principal amount of 7.50% Convertible Senior Secured Notes due 2019, or the Notes, to qualified institutional buyers, the initial purchasers of the Notes or the Initial Purchasers. We issued the Notes under an Indenture, dated May 3, 2013, or the Indenture, that we entered into with U.S. Bank National Association, as Trustee and Collateral Agent.

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 then existing secured credit facility. The remainder of the net proceeds was used to fund the commercialization of our approved products, Oxtellar XR and Trokendi XR, as well as to continue development of our product candidates 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 finance the Company 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


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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 8 to the Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

As of December 31, 2013, holders of the Notes have converted a total of approximately $40.5 million of the Notes. Through December 31, 2013, we issued a total of approximately 7.6 million shares of common stock in conversion of the principal amount of the Notes and issued an additional 1.3 million shares of common stock and paid approximately $1.7 million cash in settlement of the interest make-whole provision related to the converted Notes.

During the period from January 1, 2014 to March 14, 2014 holders of the Notes converted approximately $9.5 million of the Notes and we issued a total of approximately 1.8 million shares of common stock in conversion of the principal amount of the Notes and accrued interest thereon, and issued an additional 0.3 million shares of common stock in settlement of the interest make-whole provision related to the converted Notes.

Cash Flows

The following table sets forth the major sources and uses of cash for the
periods set forth below, in thousands:

                                                     Year Ended
                                                    December 31,          Increase
                                                  2013        2012       (decrease)
                                                     (unaudited)
    Net cash (used in) provided by:
. . .
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