10-Q 1 coll-20180630x10q.htm 10-Q coll_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to

 

Commission file number: 001-37372

 

Collegium Pharmaceutical, Inc.

(Exact name of registrant as specified in its charter)

 

Virginia
(State or other jurisdiction of
incorporation or organization)

 

03-0416362
(I.R.S. Employer
Identification Number)

 

 

 

780 Dedham Street, Suite 800
Canton, MA
(Address of principal executive offices)

 

02021
(Zip Code)

 

(781) 713-3699

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐
(Do not check if a smaller reporting company)

 

Smaller reporting company ☐

 

 

Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

As of July 31, 2018, there were 33,221,704 shares of Common Stock, $0.001 par value per share, outstanding.

 

 

 


 

2


 

FORWARD-LOOKING STATEMENTS

 

Statements made in this Quarterly Report on Form 10-Q that are not statements of historical or current facts, such as those under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may be preceded by, followed by or include the words “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “outlook,” “plan,” “potential,” “project,” “projection,” “seek,” “may,” “could,” “would,”  “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning.

 

Forward-looking statements are inherently subject to risks, uncertainties and assumptions; they are not guarantees of performance. You should not place undue reliance on these statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that the assumptions and expectations will prove to be correct.

 

You should understand that the following important factors could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

 

·

our ability to obtain and maintain regulatory approval of our products and product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product;

·

our plans to commercialize and grow sales of our products;

·

our ability to effectively commercialize in-licensed products and manage our relationships with licensors, including our ability to satisfy our royalty payment obligations in connection with such products;

·

the size of the markets for our products and product candidates, and our ability to service those markets;

·

the success of competing products that are or become available;

·

our ability to obtain and maintain reimbursement and third-party payor contracts for our products;

·

the costs of commercialization activities, including marketing, sales and distribution;

·

the rate and degree of market acceptance of our products;

·

changing market conditions for our product;

·

the outcome of any patent infringement or other litigation that may be brought by or against us, including litigation with Purdue Pharma, L.P. and Teva Pharmaceuticals USA, Inc.;

·

our ability to attract collaborators with development, regulatory and commercialization expertise;

·

the success, cost and timing of our product development activities, studies and clinical trials;

·

our ability to obtain funding for our operations;

·

regulatory developments in the United States and foreign countries;

·

our expectations regarding our ability to obtain and maintain sufficient intellectual property protection for our products and product candidates;

·

our ability to operate our business without infringing the intellectual property rights of others;

·

the performance of our third-party suppliers and manufacturers;

·

our ability to secure adequate supplies of active pharmaceutical ingredient for each of our products and product candidates;

·

our ability to comply with stringent U.S. and foreign government regulations relating to the manufacturing and marketing of pharmaceutical products, including U.S. Drug Enforcement Agency, or DEA, compliance;

·

the loss of key scientific or management personnel;

·

our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act;

·

our customer concentration. which may adversely affect our financial condition and results of operations;

·

the accuracy of our estimates regarding expenses, revenue, capital requirements and need for additional financing; and

·

the other risks, uncertainties and factors discussed under the heading “Risk Factors” in this Quarterly Report on Form 10-Q.

 

In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Quarterly Report on Form 10-Q (including the exhibits hereto) might not occur. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, even if experience or future developments make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law.

 

These and other risks are described under the heading “Risk Factors” in this Quarterly Report on Form 10-Q. Those factors and the other risk factors described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements.

 

 

 

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PART I—FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements (Unaudited).

 

Collegium Pharmaceutical, Inc.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

June 30, 

 

December 31, 

 

 

2018

 

2017

Assets

 

 

    

 

 

    

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

133,747

 

$

118,697

Accounts receivable

 

 

68,380

 

 

9,969

Inventory

 

 

8,544

 

 

1,813

Prepaid expenses and other current assets

 

 

5,622

 

 

3,005

Total current assets

 

 

216,293

 

 

133,484

Property and equipment, net

 

 

3,203

 

 

1,826

Intangible assets, net

 

 

453,694

 

 

 —

Restricted cash

 

 

 —

 

 

97

Other long-term assets

 

 

139

 

 

161

Total assets

 

$

673,329

 

$

135,568

Liabilities and shareholders' equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

18,692

 

$

5,684

Accrued expenses

 

 

23,395

 

 

8,541

Accrued rebates, returns and discounts

 

 

107,790

 

 

15,784

Current portion of asset acquisition obligations

 

 

114,825

 

 

 —

Current portion of term loan payable

 

 

 —

 

 

1,479

Total current liabilities

 

 

264,702

 

 

31,488

Asset acquisition obligations, long-term

 

 

314,446

 

 

 —

Term loan payable, long-term

 

 

11,500

 

 

 —

Total liabilities

 

 

590,648

 

 

31,488

Commitments and contingencies (see Note 12)

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value; authorized shares - 5,000,000 at June 30, 2018 and December 31, 2017; issued and outstanding shares - none at June 30, 2018 and December 31, 2017

 

 

 

 

 

 —

Common stock, $0.001 par value; authorized shares - 100,000,000 at June 30, 2018 and December 31, 2017; issued and outstanding shares - 33,179,860 at June 30, 2018 and 32,770,678 at December 31, 2017

 

 

33

 

 

33

Additional paid-in capital

 

 

412,409

 

 

402,096

Accumulated deficit

 

 

(329,761)

 

 

(298,049)

Total shareholders’ equity

 

 

82,681

 

 

104,080

Total liabilities and shareholders’ equity

 

$

673,329

 

$

135,568

 

 

See accompanying notes to the Condensed Consolidated Financial Statements.

4


 

Collegium Pharmaceutical, Inc.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 

 

Six months ended June 30, 

 

2018

 

2017

 

2018

 

2017

Product revenues, net

$

73,061

 

$

3,560

 

$

136,810

 

$

5,732

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

46,838

 

 

577

 

 

89,944

 

 

948

Research and development

 

2,237

 

 

2,179

 

 

4,505

 

 

4,309

Selling, general and administrative

 

31,279

 

 

22,062

 

 

62,861

 

 

44,909

Total costs and expenses

 

80,354

 

 

24,818

 

 

157,310

 

 

50,166

Loss from operations

 

(7,293)

 

 

(21,258)

 

 

(20,500)

 

 

(44,434)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(6,158)

 

 

 —

 

 

(11,858)

 

 

 —

Interest income

 

391

 

 

137

 

 

646

 

 

235

Net loss

$

(13,060)

 

$

(21,121)

 

$

(31,712)

 

$

(44,199)

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share - basic and diluted

$

(0.40)

 

$

(0.72)

 

$

(0.96)

 

$

(1.50)

Weighted-average shares - basic and diluted

 

32,967,718

 

 

29,441,514

 

 

32,935,873

 

 

29,396,143

 

See accompanying notes to the Condensed Consolidated Financial Statements.

5


 

Collegium Pharmaceutical, Inc.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

 

 

 

 

 

 

 

Six months ended June 30, 

 

 

2018

    

 

2017

Operating activities

 

 

 

 

 

Net loss

$

(31,712)

 

$

(44,199)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and other amortization expense

 

578

 

 

332

Nucynta amortization expense

 

61,933

 

 

Lease incentive obligation

 

 —

 

 

(17)

Stock-based compensation expense

 

6,254

 

 

3,767

Non-cash interest expense

 

11,471

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(58,411)

 

 

(2,748)

Inventories

 

(508)

 

 

(204)

Prepaid expenses and other assets

 

(608)

 

 

(1,083)

Accounts payable

 

13,008

 

 

(3,494)

Accrued expenses

 

13,917

 

 

1,074

Accrued rebates, returns and discounts

 

69,346

 

 

 —

Deferred revenue

 

 —

 

 

5,417

Net cash provided by (used in) operating activities

 

85,268

 

 

(41,155)

Investing activities

 

 

 

 

 

Cash paid for asset acquisition

 

(18,877)

 

 

 —

Purchases of property and equipment

 

(987)

 

 

(478)

Net cash used in investing activities

 

(19,864)

 

 

(478)

Financing activities

 

 

 

 

 

Cash paid for common stock offerings costs

 

(30)

 

 

(87)

Proceeds from issuances of common stock from employee stock purchase plans

 

510

 

 

673

Proceeds from term loan amendment, net of repayment of amended term loan

 

10,020

 

 

 —

Repayment of asset acquisition obligations

 

(64,500)

 

 

 —

Repayment of term note

 

 —

 

 

(1,333)

Proceeds from the exercise of stock options

 

3,905

 

 

415

Payments made for employee restricted stock tax withholdings

 

(356)

 

 

(51)

Net cash used in financing activities

 

(50,451)

 

 

(383)

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

14,953

 

 

(42,016)

Cash, cash equivalents and restricted cash at beginning of period

 

118,794

 

 

153,322

Cash, and cash equivalents and restricted cash at end of period

$

133,747

 

$

111,306

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid for offering costs

$

30

 

$

87

Cash paid for interest

$

242

 

$

88

 

 

 

 

 

 

Supplemental disclosure of non-cash activities

 

 

 

 

 

Offering costs in accrued expenses

$

25

 

$

25

Acquisition of property and equipment in accrued expenses

$

1,184

 

$

304

Liabilities assumed from asset acquisition in accrued rebates, returns and discounts

$

22,660

 

$

 —

 

See accompanying notes to the Condensed Consolidated Financial Statements.

 

6


 

Table of Contents

Collegium Pharmaceutical, Inc.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(unaudited, in thousands, except share and per share amounts)

 

1. Nature of Business

 

Collegium Pharmaceutical, Inc. (the “Company”) was incorporated in Delaware in April 2002 and then reincorporated in Virginia in July 2014. The Company has its principal operations in Canton, Massachusetts. The Company is a specialty pharmaceutical company focused on becoming the leader in responsible pain management by developing and commercializing innovative, differentiated products for people suffering from pain and our communities. The Company’s first product, Xtampza ER®, or Xtampza, is an abuse-deterrent, extended-release, oral formulation of oxycodone, a widely prescribed opioid medication. In April 2016, the U.S. Food and Drug Administration (“FDA”) approved the Company’s new drug application (“NDA”) filing for Xtampza for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate.  In June 2016, the Company announced the commercial launch of Xtampza.

 

In December 2017, the Company and its wholly owned subsidiary, Collegium NF, LLC (“Collegium NF”) entered into a Commercialization Agreement with Depomed, Inc. (“Depomed”), pursuant to which Depomed agreed to grant a sublicense of certain of its intellectual property related to Nucynta ER and IR products (the “Nucynta Products”) to the Company for commercialization of the Nucynta Products in the United States. On January 9, 2018, the parties amended the Commercialization Agreement (as amended, the “Commercialization Agreement”) and consummated the transactions contemplated thereby.  Nucynta ER is an extended release formulation of tapentadol that is indicated for the management of pain severe enough to require daily, around the clock, long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy in adults, and for which alternate treatment options are inadequate. Nucynta IR is an immediate release formulation of tapentadol that is indicated for the management of moderate to severe acute pain in adults. The Company began shipping and recognizing product sales on the Nucynta Products on January 9, 2018 and began commercial promotion of the Nucynta Products in February 2018. The assets and liabilities assumed by the Company in connection with the Commercialization Agreement are further described in Note 7.

 

The Company’s operations are subject to certain risks and uncertainties. The principal risks include inability to successfully commercialize products, changing market conditions for products and product candidates (including development of competing products), changing regulatory environment and reimbursement landscape, litigation related to opioid marketing and distribution practices, inability or delay in completing clinical trials or obtaining regulatory approvals, inability to secure adequate supplies of active pharmaceutical ingredients for each of our products and product candidates, key personnel retention and protection of intellectual property, patent infringement litigation and the availability of additional capital financing on terms acceptable to the Company.

 

The Company has experienced net losses and negative cash flows from operating activities since its inception, and, as of June 30, 2018 had an accumulated deficit of $329,761. The Company expects to continue to incur net losses in the near future. A successful transition to profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure.

 

The Company believes that its cash and cash equivalents at June 30, 2018 together with expected cash inflows from the commercialization of its products, will enable the Company to fund its operating expenses, debt service and capital expenditure requirements under its current business plan for the foreseeable future.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Collegium Pharmaceutical, Inc. (a Virginia corporation) as well as the accounts of Collegium Securities Corp. (a Massachusetts corporation), incorporated in December 2015, and Collegium NF, LLC (a Delaware limited liability company), organized in December 2017, both wholly owned subsidiaries requiring consolidation. The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States

7


 

(“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

 

In the opinion of the Company’s management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to fairly present the financial position of the Company as of June 30, 2018, the results of operations for the three and six months ended June 30, 2018 and 2017, and cash flows for the six months ended June 30, 2018 and 2017. The results of operations for the six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the full year. 

 

When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to revenue recognition, including the estimates of product returns, units prescribed, discounts and allowances related to commercial sales of its products, estimates utilized in the valuation of inventory, estimates of useful lives with respect to intangible assets, accounting for stock-based compensation, contingencies, intangible assets, and tax valuation reserves. The Company bases estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. The Company’s actual results may differ from these estimates under different assumptions or conditions. The consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “Annual Report”).  

 

Significant Accounting Policies

 

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report. There have been no material changes in the Company’s significant accounting policies, other than the adoption of accounting pronouncements below, as compared to the significant accounting policies described in the Annual Report.

 

Controlled Equity Offering Sales Agreement

 

In March 2017, the Company entered into a Controlled Equity Offering Sales Agreement (the “ATM Sales Agreement”), with Cantor Fitzgerald & Co., as sales agent (“Cantor Fitzgerald”), pursuant to which the Company may issue and sell, from time to time, through Cantor Fitzgerald, shares of the Company’s common stock, up to an aggregate offering price of $60,000 (the “ATM Shares”).

 

Under the ATM Sales Agreement, Cantor Fitzgerald may sell the ATM Shares by methods deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), including sales made directly on The NASDAQ Global Select Market, on any other existing trading market for the ATM Shares or to or through a market maker. In addition, under the ATM Sales Agreement, Cantor Fitzgerald may sell the ATM Shares by any other method permitted by law, including in privately negotiated transactions.

 

The Company is not obligated to make any sales of the ATM Shares under the ATM Sales Agreement. The Company or Cantor Fitzgerald may suspend or terminate the offering of ATM Shares upon notice to the other party and subject to other conditions. The Company will pay Cantor Fitzgerald a commission of up to 3.0% of the gross proceeds from the sale of the ATM Shares pursuant to the ATM Sales Agreement and has agreed to provide Cantor Fitzgerald with customary indemnification and contribution rights.

 

As of June 30, 2018, the Company had sold an aggregate of 3,126,998 shares at an average gross sales price of $11.36 per share generating net proceeds of $34,283, after deduction of underwriting discounts and commissions and expenses payable by the Company. All shares sold pursuant to the ATM Sales agreement were sold during the year ended December 31, 2017.  The Company did not sell any shares pursuant to the ATM sales agreement during the six months ended June 30, 2018.

 

8


 

Advertising and Product Promotion Costs

 

Advertising and product promotion costs are included in selling, general and administrative expenses and were $5,720 and $2,567 in the three months ended June 30, 2018 and 2017, respectively. Advertising and product promotion costs were $8,282 and $6,427 in the six months ended June 30, 2018 and 2017, respectively. Advertising and product promotion costs are expensed as incurred.

 

Restricted Cash 

   

Restricted cash represents cash held in a depository account at a financial institution to collateralize a conditional stand‑by letter of credit related to the Company’s facility lease agreements. The Company no longer has restricted cash as of June 30, 2018.

 

Leases

 

In March 2018, the Company entered into a lease for its new corporate headquarters (the “Lease”) pursuant to which the Company will lease approximately 50,678 of rentable square feet of space, in Stoughton, Massachusetts.  The Lease will commence when the tenant improvements in the space are substantially complete and will continue thereafter for a term of ten years.  The Company has the right to extend the term of the Lease for two additional five-year terms, provided that written notice is provided to the Landlord no later than twelve months prior to the expiration of the current Lease term.  The initial annual base rent is $1,214, or $23.95 per rentable square foot, and will increase annually by 2.5% to 3.1% over the subsequent Lease years. The Lease term will commence upon possession of the new space.  The Company expects to take possession of the new space in the third quarter of 2018.

 

Income Taxes

 

For the three and six months ended June 30, 2018 and 2017, the Company did not record a current or deferred income tax expense or benefit due to current and historical losses incurred by the Company. The Company's losses before income taxes consist solely of losses from domestic operations. As of June 30, 2018, the Company has recorded a full valuation allowance for deferred tax assets including net operating loss (“NOL”) and tax credit carryovers.  The Tax Cuts and Jobs Act of 2017 (“TCJA” or “2017 Tax Act”), which was signed into law in December 2017, resulted in significant changes to the U.S. corporate income tax system. The SEC staff issued Staff Accounting Bulletin (“SAB”) 118, which allows companies the ability to record provisional amounts during a measurement period not to extend more than one year beyond the Tax Act enactment date.  The Company reasonably estimated the effects of the 2017 Tax Act by remeasuring its federal net deferred tax asset as of December 31, 2017.  For additional information related to the TCJA and its impact on the Company, please read Note 13, Income Taxes, in the Company’s Annual Report.  Since the Company has recorded a full valuation allowance, this provisional estimate resulted in no impact to the financial statements.  As the Company completes its analysis of the 2017 Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, it may be required to make adjustments to the original provisional estimate, however the Company has not made any material changes to its provisional estimates during the three and six months ended June 30, 2018.  The Company plans to finalize its review and conclusion of the impact of TCJA before year end in accordance with SAB 118 and adjust its provisional estimates as may be required by the TCJA.

 

Recently Adopted Accounting Pronouncements

 

New accounting pronouncements are issued periodically by the Financial Accounting Standards Board (“FASB”) and are adopted by the Company as of the specified effective dates.

 

In May 2014, the FASB issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the guidance for accounting for revenue from contracts with customers.  This ASU supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and creates a new Topic 606, Revenue from Contracts with Customers.  In 2015, 2016 and 2017, the FASB issued additional ASUs related to Topic 606, including ASUs 2015-14, 2016-08, 2016-10, 2016-12, 2016-20, 2017-13, 2017-14, that delayed the effective date of and clarified various aspects of the new guidance, including principal versus agent considerations, identifying performance obligations, and licensing. The Company adopted ASC Topic 606, Revenue from Contracts with

9


 

Customers, on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption.  The adoption of ASU 2014-09 did not have an impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the three or six months ended June 30, 2018. Refer to Note 3 "Revenue from Contracts with Customers" for the required disclosures and a discussion of the Company's policies related to revenue recognition.

 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, and in November 2016, the FASB issued ASU 2016-18, Restricted Cash. The purpose of ASU 2016-15 is to reduce the diversity in presentation and classification of the following items within the Statement of Cash Flows: debt prepayments, settlement of zero coupon debt instruments, contingent consideration payments, insurance proceeds, securitization transactions and distributions from equity method investees. The update also addresses classification of transactions that have characteristics of more than one class of cash flows. ASU 2016-18 requires the Statement of Cash Flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. The Company adopted these new standards on January 1, 2018 using the retrospective transition method as required with respect to each period presented. The adoption of these standards did not have an impact on the Company’s consolidated financial statements. 

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 most significantly impacts lessee accounting and disclosures. First, this guidance requires lessees to identify arrangements that should be accounted for as leases. Under ASU 2016-02, for lease arrangements exceeding a 12-month term, a right-of-use asset and lease obligation is recorded by the lessee for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. Leases with a term of 12 months or less will be accounted for in a manner similar to existing guidance for operating leases. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities. The Company has not chosen early adoption for this ASU and is currently evaluating its effect on the Company’s consolidated financial statements. Based on its preliminary assessment, the Company expects to recognize a right-to-use asset and corresponding lease liability on its balance sheet related to the lease agreement for its corporate headquarters upon adoption of this ASU.

 

 

3. Revenue from Contracts with Customers

 

The Company’s only source of revenue to date has been generated by sales of the Company’s products, which are primarily sold to distributors and retailers (“customers”), which in turn sell the product to pharmacies for the treatment of patients (“end users”).

 

Revenue Recognition

 

In accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes

10


 

as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

Adoption of ASC Topic 606, Revenue from Contracts with Customers

 

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Under this method, prior periods were not retrospectively adjusted and, as a result, the reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC Topic 605, Revenue Recognition (“legacy GAAP”). 

 

Immediately prior to the adoption date of January 1, 2018, the Company recognized revenue in accordance with legacy GAAP, or when there was persuasive evidence of an arrangement; when title and risk of loss had passed to the customer; when estimated provisions for chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns were reasonably determinable; and when collectability was reasonably assured. The satisfaction of these criteria generally occurred upon delivery of products to customers, or the sell-in method of revenue recognition under legacy GAAP.  The Company began recognizing revenue on the sell-in method in the third quarter of 2017.  Prior to the third quarter of 2017, the Company recognized revenue when products were dispensed to end users, or the sell-through method of revenue recognition under legacy GAAP, as the Company did not have sufficient experience with product sales to estimate returns at the time product was sold to customers. 

 

As a result of the considerations discussed above, the Company concluded that, as of the adoption date, it would record revenue net of a provision for estimated chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns upon delivery of products to customers under either the sell-in method of revenue recognition under legacy GAAP or under Topic 606 as of the adoption date. Therefore, the adoption of Topic 606 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of January 1, 2018, however, periods presented prior to the third quarter of 2017, when the Company recognized revenue on the sell-through method under legacy GAAP, would be impacted. For the three and six months ended June 30, 2017, the Company determined that, under Topic 606, the only significant changes to the reported results for the three and six months ended June 30, 2017 under Topic 606 would be higher product sales of $1,229 and $2,449, respectively, due to the acceleration of revenue recognition for product sales in which recognition was previously deferred due to the fees not being fixed or determinable under the sell-through method under legacy GAAP.

 

Performance Obligations

 

The Company determined that performance obligations are satisfied and revenue is recognized when a customer takes control of the Company’s product, which occurs at a point in time. This generally occurs upon delivery of the products to customers, at which point the Company recognizes revenue and records accounts receivable, which represents the Company’s only contract asset. Payment is typically received 30 to 60 days after satisfaction of the Company’s performance obligations and generally does not have an effect on contract asset and contract liability balances. Under the practical expedients permitted by the rules of the adoption, the Company will expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the assets is one year or less.

 

Transaction Price and Variable Consideration

 

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). The transaction price for product sales includes variable consideration related to chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns. The Company will estimate the amount of variable consideration that should be included in the transaction price under the expected value method.  These estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. These provisions reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract.  The amount of variable consideration that is included in the transaction price may be constrained and is included in net sales only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.  In general, performance obligations do not include any estimated amounts of variable consideration that are constrained. Actual amounts of consideration ultimately received may differ from the Company’s estimates.  If actual results in the future vary from the Company’s estimates,

11


 

the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. 

 

The following table summarizes activity in each of the Company’s product revenue provision and allowance categories for the six months ended June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

    

Rebates and

    

Product

    

Trade Allowances and

 

 

Incentives (1)

 

Returns (2)

 

Chargebacks (3)

Balance at December 31, 2017

 

$

12,647

 

$

3,137

 

$

2,256

Provision related to current period sales

 

 

117,462

 

 

8,374

 

 

33,682

Changes in estimate related to prior period sales

 

 

(32)

 

 

 

 

Credits/payments made

 

 

(53,165)

 

 

(3,039)

 

 

(13,054)

Balance at June 30, 2018

 

$

76,912

 

$

8,472

 

$

22,884

 

 

 

 

 

 

 

(1)

 

Rebates and incentives includes managed care rebates, government rebates, co-pay program incentives, and sales incentives and allowances. Provisions for rebates and discounts are deducted from gross revenues at the time revenues are recognized and are included in accrued rebates, returns and discounts in the Company’s Condensed Consolidated Balance Sheets.

 

 

(2)

 

Provisions for product returns are deducted from gross revenues at the time revenues are recognized and are included in accrued rebates, returns and discounts in the Company’s Condensed Consolidated Balance Sheets.

 

 

 

 

 

 

 

(3)

 

Trade allowances and chargebacks include fees for distribution service fees, prompt pay discounts, and chargebacks. Trade allowances and chargebacks are deducted from gross revenue at the time revenues are recognized and are recorded as a reduction to accounts receivable in the Company’s Condensed Consolidated Balance Sheets.

 

In addition to the above, the Company also recorded a liability of $22,660  related to sales of Nucynta Products that occurred prior to the closing date of January 9, 2018 which the Company is liable for under the terms of the Commercialization Agreement. This assumed liability, representing $22,406 of assumed rebates and incentives and $254 of assumed trade allowances and chargebacks, was recorded as a component of the intangible asset acquired as of the closing date of January 9, 2018.

 

As of June 30, 2018, the Company did not have any transaction price allocated to remaining performance obligations and any costs to obtain contracts with customers, including pre-contract costs and set up costs, were immaterial.

 

Disaggregation of Revenue

 

Product revenues, net consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 

 

Six months ended June 30, 

 

2018

 

2017

 

2018

 

2017

Xtampza

$

18,116

    

$

3,560

 

$

33,911

 

$

5,732

Nucynta

 

54,945

 

 

 —

 

 

102,899

 

 

 —

Total product revenues, net

$

73,061

 

$

3,560

 

$

136,810

 

$

5,732

12


 

 

 

 

4. Loss per Common Share

 

The following table presents the computations of basic and dilutive net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 

 

Six months ended June 30, 

 

June 30, 

 

June 30, 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

Loss attributable to common shareholders — basic and diluted

$

(13,060)

 

$

(21,121)

 

$

(31,712)

 

$

(44,199)

Weighted-average number of common shares used in net loss per share - basic and diluted

 

32,967,718

 

 

29,441,514

 

 

32,935,873

 

 

29,396,143

Loss per share - basic and diluted

$

(0.40)

 

$

(0.72)

 

$

(0.96)

 

$

(1.50)

 

The following potentially dilutive securities, which represent all outstanding potentially dilutive securities, were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect (in common stock equivalent shares):

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 

 

Six months ended June 30, 

 

 

2018

 

2017

 

2018

 

2017

 

Outstanding stock options

3,665,459

 

3,124,039

 

3,665,459

 

3,124,039

 

Warrants

 —

 

2,445

 

 —

 

2,445

 

Unvested restricted stock (1)

12,072

 

57,228

 

12,072

 

57,228

 

Restricted stock units

522,190

 

223,194

 

522,190

 

223,194

 

 

 

 

 

 

 

 

 

 

(1) - Includes shares of unvested restricted stock remaining from the early exercise of stock options.

 

 

 

5. Fair Value of Financial Instruments

 

Disclosures of fair value information about financial instruments are required, whether recognized in the Balance Sheet or not, for financial instruments with respect to which it is practicable to estimate that value. Fair value measurements and disclosures describe the fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, as follows:

 

 

 

Level 1 inputs:

Quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2 inputs:

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3 inputs:

Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability

 

The following tables present the Company’s financial instruments carried at fair value using the lowest level input applicable to each financial instrument at June 30, 2018 and December 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

other

 

 

Significant

 

 

 

 

 

 

in active

 

 

observable

 

 

unobservable

 

 

 

 

 

 

markets

 

 

inputs

 

 

inputs

June 30, 2018

    

 

Total

    

 

(Level 1)

    

 

(Level 2)

    

 

(Level 3)

Money market funds, included in cash equivalents

 

$

121,877

 

$

121,877

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds, included in cash equivalents

 

$

81,225

 

$

81,225

 

$

 —

 

$

 —

 

 

13


 

The Company’s cash equivalents are comprised of money market funds that are measured on a recurring basis based on quoted market prices. As of June 30, 2018 and December 31, 2017, the carrying amounts of cash and cash equivalents, accounts receivable, inventory, prepaid expenses and other current assets, intangible assets,  accounts payable, accrued expenses, accrued rebates, returns and discounts, asset acquisition obligations and term loan payable approximated their estimated fair values.

 

In connection with the Commercialization Agreement for the Nucynta Products, the Company recorded a liability of $482,300 representing the fair value of the future minimum royalty payments owed under the terms of the Commercialization Agreement.  The fair value of the minimum royalty payments was measured by calculating the present value of the minimum royalty payments using a discount rate of 5.7%. The discount rate is a Level 2 input which was based on a review of observable market data of similar liabilities. The liability associated with the future minimum royalty payments is included as a component of the intangible asset acquired and as a component of the obligations assumed in connection with the Commercialization Agreement, which is further described in Note 7.

 

 

6. Inventory

 

Inventory consisted of the following:

 

 

 

 

 

 

 

 

 

 

As of June 30, 

 

As of December 31, 

 

 

2018

 

2017

Raw materials

 

$

350

 

$

616

Work in process

 

 

709

 

 

322

Finished goods

 

 

7,485

 

 

875

Total inventory

 

$

8,544

 

$

1,813

 

The aggregate charges related to excess inventory for the three and six months ended June 30, 2018 were immaterial. During the three and six months ended June 30, 2017, the aggregate charges related to excess inventory were $257 and $350, respectively. These expenses were recorded as a component of cost of product revenues. 

 

 

 

7. Intangible Assets and Asset Acquisition Obligations

 

As of June 30, 2018, the Company’s only intangible asset related to the Company’s Commercialization Agreement with Depomed, pursuant to which Depomed agreed to grant a sublicense of certain of its intellectual property related to the Nucynta Products to the Company for commercialization of the Nucynta Products in the United States (the “Nucynta Intangible Asset”). The Company closed the transactions contemplated by the Commercialization Agreement, as amended, on January 9, 2018, and began marketing the Nucynta Products in February 2018.

 

Nucynta Intangible Asset

 

The Company determined that the Commercialization Agreement represented an asset acquisition, as substantially all of the fair value of the gross assets acquired is concentrated in the sublicense of the Nucynta Products, which is a single identifiable asset or group. The consideration transferred in the asset acquisition was measured at cost, including transaction costs, assets transferred by the acquirer, and liabilities assumed by the acquirer.

 

14


 

The transaction resulted in the Company receiving the assets and assuming the liabilities noted below, which were recognized at cost as a component of intangible assets in the Condensed Consolidated Balance Sheets upon acquisition:

 

 

 

 

Cash paid for asset acquisition

$

18,877

 

 

 

Identifiable assets acquired and liabilities assumed:

 

 

Intangible assets

$

515,627

Inventory

 

6,223

Prepaid expenses

 

1,987

Minimum royalty payments

 

(482,300)

Other liabilities

 

(22,660)

Total

$

18,877

 

The Company will amortize the Nucynta Intangible Asset over its useful life, which is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. The Company determined that the useful life for the intangible asset is approximately 4.0 years from the closing date of January 9, 2018.  The Company will recognize amortization expense as cost of product revenues in the Statement of Operations on a straight-line basis over its useful life as it approximates cash flows.  For the three and six months ended June 30, 2018, the Company recognized amortization expense of $32,407 and $61,933, respectively. As of June 30, 2018, the remaining amortization period is approximately 3.5 years and estimated amortization for the remainder of 2018, 2019, 2020, and 2021 is expected to be $64,813,  $129,627,  $129,627, and $129,627, respectively.

 

As of June 30, 2018, the gross carrying amount and accumulated amortization of the Nucynta Intangible Asset were as follows:

 

 

 

 

 

As of June 30, 

 

2018

Gross carrying amount

$

515,627

Accumulated amortization

 

(61,933)

Intangible assets, net

$

453,694

 

Nucynta Asset Acquisition Obligations

 

From January 9, 2018 through December 2021, under the terms of the Commercialization Agreement, the Company will be required to pay a minimum royalty of $135,000 per year, payable in quarterly payments of $33,750, prorated in 2018 for the closing date of January 9, 2018.  The total required minimum royalty payment from the closing date of January 9, 2018 through December 2021 is $537,000.  Payments are swept to Depomed daily based on proceeds received for Nucynta Product sales, and minimum payments are paid in full within 45 days of the quarter end.

 

Due to the nature of the obligation and fact that it will be settled in cash, the Company determined that the minimum royalty payments represented a liability incurred at the closing of the transaction and that the liability should be recorded at its fair value as of the closing date on the Condensed Consolidated Balance Sheet. The Company calculated the fair value of the minimum royalty payments to be $482,300,  which was the calculated present value of the minimum royalty payments using a discount rate of 5.7%. The discount rate was determined based on a review of observable market data of similar liabilities. The Company will recognize the $54,700 discount as interest expense in the Statement of Operations using the effective interest method and will recognize the interest over the repayment period from January 9, 2018 through December 2021.

 

For the three and six months ended June 30, 2018,  the Company recognized interest expense of $5,943 and $11,471, respectively, relating to the minimum royalty payments.  As of June 30, 2018, the remaining interest expense relating to the minimum royalty payments for the remainder of 2018, 2019, 2020, and 2021 is expected to be $10,912,  $17,138,  $10,907, and $4,272, respectively.

 

15


 

For the three and six months ended June 30, 2018, the Company paid Depomed minimum royalty payments of $51,455 and $64,500, respectively.    

 

As of June 30, 2018, the remaining minimum royalty payments due under the Commercialization Agreement are as follows:

 

 

 

 

 

 

2018

 

$

67,500

2019

 

 

135,000

2020

 

 

135,000

2021

 

 

135,000

Total remaining minimum royalty payments due

 

$

472,500

Less: Unamortized discount

 

 

(43,229)

Carrying value of minimum royalty payments

 

$

429,271

 

 

Onsolis Intangible Asset

 

In May 2016, the Company entered into an agreement with BioDelivery Sciences International, Inc. (“BDSI”) to license the rights to develop, manufacture, and commercialize Onsolis® (fentanyl buccal soluble film), (“Onsolis”), in the United States. Onsolis is a Transmucosal Immediate-Release Fentanyl (“TIRF”) film indicated for the management of breakthrough pain in certain cancer patients.

 

During the year ended December 31, 2016, the Company made an upfront payment of $2,500 and recorded the payment as a component of intangible assets (the “Onsolis Intangible Asset”). On December 8, 2017, the Company, after a review of its product portfolio, provided written notice to BDSI of termination of the License and Development Agreement. The termination was effective pursuant to the terms of such agreement on March 8, 2018. Upon such termination of the License Agreement, the Company’s rights to develop and commercialize Onsolis reverted to BDSI. As a result of this notice of termination, the Company determined that the carrying amount of the intangible asset was not recoverable and that the carrying amount exceeded its fair value. As such, an impairment loss of $1,845 was recognized and included as a component of sales, general and administrative expense during the year ended December 31, 2017 and the net intangible asset is zero as of June 30, 2018 and December 31, 2017. 

 

Amortization Expense

 

Amortization expense relating to the Company’s intangible assets for the three and six months ended June 30, 2018 and 2017 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

Nucynta amortization expense included in cost of product revenues

$

32,407

 

$

 —

 

$

61,933

 

$

 —

Onsolis amortization expense included in selling, general and administrative expense

 

 —

    

 

47

 

 

 —

    

 

177

Total amortization expense

$

32,407

 

 

47

 

$

61,933

 

 

177

 

 

 

16


 

8. Accrued Expenses

 

Accrued expenses consisted of the following:

 

 

 

 

 

 

 

 

As of June 30, 

 

As of December 31, 

 

2018

 

2017

Accrued cost of product revenues

$

14,540

 

$

 —

Accrued bonuses

 

1,828

 

 

2,940

Accrued incentive compensation

 

1,643

 

 

1,790

Accrued other operating costs

 

1,433

 

 

877

Accrued payroll and related benefits

 

1,401

 

 

1,382

Accrued inventory

 

1,385

 

 

 —

Accrued audit and legal

 

551

 

 

405

Accrued sales and marketing

 

259

 

 

624

Accrued development costs

 

202

 

 

517

Accrued interest

 

153

 

 

 6

Total accrued expenses

$

23,395

 

$

8,541

 

 

 

 

 

9. Term Loan Payable 

On August 28, 2012, the Company entered into a loan agreement (“Original Term Loan”) with Silicon Valley Bank (“SVB”) to borrow up to a maximum amount of $1,000. The Original Term Loan bore interest at a rate per annum of 2.25% above the prime rate fixed at the time of advance of the Original Term Loan (5.50%). The Original Term Loan was subsequently amended in 2014 and 2015 to provide for additional borrowings of up to $8,000, adjust the interest rate, extend the loan draw period, and modify loan covenants (as amended, the “Existing Term Loan”).  As of December 31, 2017, the future payments under the Existing Term Loan were $1,479.

In connection with, and as a condition to, consummation of the transactions contemplated by the Commercialization Agreement with Depomed, the Company entered into a Consent and Amendment to Loan and Security Agreement (the “Consent and Amendment”) with SVB to amend the Existing Term Loan. The Consent and Amendment provided the Company with a new term loan facility in an original principal amount of $11,500 (the “New Term Loan”), which replaced the Existing Term Loan and the proceeds of which were used by the Company to finance certain payment obligations under the Commercialization Agreement and to repay the balance of the Existing Term Loan. The Consent and Amendment also provided SVB’s consent with respect to transactions contemplated by the Commercialization Agreement, including the delivery by SVB of a standby letter of credit in an aggregate amount of $33,750. 

 

The New Term Loan bears interest at a rate per annum of 0.75% above the prime rate (as defined in the Consent and Amendment). The Company will repay the New Term Loan in equal consecutive monthly installments of principal plus monthly payments of accrued interest, commencing in July 2019, provided that, if the Company achieves EBITDA (as defined in the Consent and Amendment) in excess of $2,500 for two (2) consecutive calendar quarters prior to June 2019, such payments will commence in January 2020. All outstanding principal and accrued and unpaid interest under the New Term Loan, and all other outstanding obligations with respect to the New Term Loan, are due and payable in full in December 2022. The Company may prepay the New Term Loan, in full but not in part, with a prepayment fee of (i) 3.0% of the outstanding principal balance prior to the first anniversary of the Consent and Amendment, (ii) 2.0% of the outstanding principal balance following the first anniversary of the Consent and Amendment and prior to the second anniversary of the Consent and Amendment and (iii) 1.0% of the outstanding principal balance following the second anniversary of the Consent and Amendment, plus, in each case, a final payment fee of $719. The Company is required to refinance the New Term Loan on August 31, 2018.

 

Under the New Term Loan, the Company will be required to maintain a liquidity ratio of at least 2.0 to 1.0.  Any amounts outstanding during the continuance of any event of default under the New Term Loan will bear additional interest at the per annum rate of 5.0%.

 

17


 

As of June 30, 2018, scheduled principle repayments under the Company’s term loan are as follows:

 

 

 

 

2018

$

 —

2019

 

1,642

2020

 

3,286

2021

 

3,286

2022

 

3,286

Balance

$

11,500

 

 

10. Equity

 

The changes in shareholders’ equity for the six months ended June 30, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Additional

    

 

 

    

Total

 

Common Stock

 

Paid- In

 

Accumulated

 

Shareholders’

 

Shares

    

 

Amount

 

Capital

 

Deficit

 

Equity (Deficit)

Balance, December 31, 2017

32,770,678

 

$

33

 

$

402,096

 

$

(298,049)

 

$

104,080

Exercise of common stock options

321,406

 

 

 —

 

 

3,905

 

 

 —

 

 

3,905

Issuance for employee stock purchase plan

50,151

 

 

 —

 

 

510

 

 

 —

 

 

510

Vesting of restricted stock units

53,640

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Shares withheld for employee taxes upon vesting of restricted stock units

(16,015)

 

 

 —

 

 

(356)

 

 

 —

 

 

(356)

Stock-based compensation

 —

 

 

 —

 

 

6,254

 

 

 —

 

 

6,254

Net loss

 —

 

 

 —

 

 

 —

 

 

(31,712)

 

 

(31,712)

Balance, June 30, 2018

33,179,860

 

$

33

 

$

412,409

 

$

(329,761)

 

$

82,681

 

 

 

11. Stock-based Compensation

 

A summary of the Company’s stock-based compensation expense included in the Condensed Consolidated Statements of Operations are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 

 

Six months ended June 30, 

 

2018

 

2017

 

2018

 

2017

Research and development expenses

$

380

    

$

242

 

$

703

    

$

451

Selling, general and administrative expenses

 

3,146

 

 

1,704

 

 

5,551

 

 

3,316

Total stock-based compensation expense

$

3,526

 

$

1,946

 

$

6,254

 

$

3,767

 

At June 30, 2018, there was approximately $34,073 of unrecognized compensation expense related to unvested options, restricted stock units and restricted stock awards, which is expected to be recognized as expense over a weighted average period of approximately 2.6 years.

 

Restricted Stock Awards, Restricted Stock Units and Stock Options 

 

In May 2015, the Company adopted the Amended and Restated 2014 Stock Incentive Plan (the “Plan”), under which an aggregate of 2,700,000 shares of common stock were authorized for issuance to employees, officers, directors, consultants and advisors of the Company, plus an annual increase on the first day of each fiscal year until the expiration of the Plan equal to 4% of the total number of outstanding shares of common stock on December 31st of the immediately preceding calendar year (or a lower amount as otherwise determined by the board of directors prior to January 1st). As of June 30, 2018, there were 1,139,189 shares of common stock available for issuance pursuant to the Plan. The Plan provides for granting of both Internal Revenue Service qualified incentive stock options and non-qualified options, restricted stock awards and restricted stock units. The Company’s equity awards generally vest ratably over a four  year period of service. The stock options generally have a ten  year contractual life and, upon termination, vested options are generally exercisable between one and three months following the termination date, while unvested options are forfeited immediately. 

 

18


 

In June 2018, the Company’s board of directors approved a modification to the former President and Chief Executive Officer’s equity-based awards to provide that all of those awards, to the extent unvested as of the Company’s 2020 annual meeting of shareholders, will vest on such date, subject to his continued service on the Company’s board of directors through such date. This modification was effective on June 4, 2018 and affected 116,250 shares of non-vested restricted stock units and 225,625 unvested stock options to purchase the Company’s common stock. This modification did not create incremental value as the fair value of these awards was unchanged. The shorter requisite service period will result in the accelerated recognition of stock-based compensation expense through 2020.

 

A summary of the Company’s restricted stock award activity for the six months ended June 30, 2018 and related information is as follows:

 

 

 

 

 

 

 

    

 

    

Weighted-Average

 

 

 

 

Purchase Price

 

 

Shares (1)

 

per Share

Unvested at December 31, 2017

 

10,816

 

$

5.73

Granted

 

 —

 

 

 —

Vested

 

(10,816)

 

 

5.73

Unvested at June 30, 2018

 

 —

 

$

 —


(1)Excludes activity from the early exercise of stock options. As of June 30, 2018, 12,072 shares of unvested restricted stock remain outstanding from the early exercise of stock options.

 

A summary of the Company’s restricted stock units activity for the six months ended June 30, 2018 and related information is as follows:

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

Shares

 

Grant Date Fair Value

Outstanding at December 31, 2017

 

218,872

 

$

12.64

Granted

 

360,858

 

 

23.62

Vested

 

(53,640)

 

 

12.57

Forfeited

 

(3,900)

 

 

21.00

Outstanding at June 30, 2018

 

522,190

 

$

20.17

 

A summary of the Company’s stock option activity and related information follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

 

 

 

 

Average

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

Exercise Price

 

Contractual

 

 

Intrinsic

 

 

    

Shares

    

 

per Share

    

Term (in years)

    

 

Value

 

Outstanding at December 31, 2017

 

3,037,690

 

$

13.00

 

8.4

 

$

16,829

 

Granted

 

1,045,662

 

 

24.17

 

 

 

 

 

 

Exercised

 

(321,406)

 

 

12.15

 

 

 

 

 

 

Cancelled

 

(96,487)

 

 

16.22

 

 

 

 

 

 

Outstanding at June 30, 2018

 

3,665,459

 

$

16.17

 

8.4

 

$

29,126

 

Exercisable at June 30, 2018

 

1,312,351

 

$

12.73

 

7.5

 

$

14,588

 

Vested and expected to vest at June 30, 2018

 

3,408,606

 

$

15.83

 

8.3

 

$

28,146

 

 

 

19


 

The fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model using the following assumptions:

 

 

 

 

 

 

 

 

Six months ended June 30, 

 

2018

 

2017

Risk-free interest rate

2.6

%  

 

2.0

%  

Volatility

65

%  

 

71

%  

Expected term (years)

6.11

 

 

6.02

 

Expected dividend yield

 —

%  

 

 —

%  

 

Employee Stock Purchase Plan

 

The Company’s 2015 Employee Stock Purchase Plan allows employees to purchase shares of the Company’s common stock. The purchase price is equal to 85% of the lower of the closing price of our common stock on (1) the first day of the purchase period or (2) the last day of the purchase period. During the six months ended June 30, 2018, 50,151 shares of common stock were purchased for total proceeds of $510. The expense for the three months ended June 30, 2018 and 2017 was $120 and $108, respectively.  The expense for the six months ended June 30, 2018 and 2017 was $242 and $214, respectively. 

 

12. Commitments and Contingencies

 

From time to time, the Company may face legal claims or actions in the normal course of business. Except as disclosed below, the Company is not currently a party to any litigation and, accordingly, does not have any amounts recorded for any litigation related matters.

 

Xtampza Litigation 

   

The Company filed the NDA for Xtampza as a 505(b)(2) application, which allows the Company to reference data from an approved drug listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book), in this case OxyContin OP. The 505(b)(2) process requires that the Company certifies to the FDA and notify Purdue Pharma, L.P (“Purdue”), as the holder of the NDA and any other Orange Book-listed patent owners, that the Company does not infringe any of the patents listed for OxyContin OP in the Orange Book, or that the patents are invalid. The Company made such certification and provided such notice on February 11, 2015 and such certification documented why Xtampza does not infringe any of the 11 Orange Book listed patents for OxyContin OP, five of which have been invalidated in court proceedings. Under the Hatch-Waxman Act of 1984, Purdue had the option to sue the Company for infringement and receive a stay of up to 30 months before the FDA could issue a final approval for Xtampza ER, unless the stay was earlier terminated.

 

Purdue exercised its option and elected to sue the Company for infringement in the District of Delaware on March 24, 2015 asserting infringement of three of Purdue’s Orange Book-listed patents (Patent Nos. 7,674,799, 7,674,800, and 7,683,072) and a non-Orange Book-listed patent (Patent No. 8,652,497), and accordingly, received a 30-month stay of FDA approval.

   

The Delaware court transferred the case to the District of Massachusetts. After the Company filed a partial motion for judgment on the pleadings relating to the Orange Book-listed patents, the District Court of Massachusetts ordered judgment in the Company’s favor on those three patents, and dismissed the claims asserting infringement of those patents with prejudice. Upon dismissal of those claims, the 30-month stay of FDA approval was lifted. As a result, the Company was able to obtain final approval for Xtampza ER and launch the product commercially.

   

In November 2015, Purdue filed a follow-on suit asserting infringement of another patent, Patent No. 9,073,933. In June 2016, Purdue filed another follow-on suit asserting infringement of another non-Orange Book listed patent, Patent No. 9,155,717. In April 2017, Purdue filed another follow-on suit asserting infringement of another patent, Patent No. 9,522,919, which was late-listed in the Orange Book and therefore could not trigger any stay of FDA approval. Then, in September 2017, Purdue filed another follow-on suit asserting infringement of another non-Orange Book listed patent, Patent No. 9,693,961.

 

20


 

On March 13, 2018, the Company filed a Petition for Post-Grant Review (“PGR”) of the ʼ961 patent with the Patent Trial and Appeal Board (“PTAB”). The PGR argues that the ʼ961 patent is invalid for lack of a written description, for lack of enablement, for indefiniteness, and as being anticipated by prior art. Purdue filed its Patent Owner Preliminary Response on July 10, 2018. The PTAB will make its institution decision on or before October 10, 2018.

   

In October 2017, and in response to the filing of the Company’s Supplemental NDA (“sNDA”) seeking to update the drug abuse and dependence section of the Xtampza label, Purdue filed another suit asserting infringement of the ʼ933 and ʼ919 patent. The Company filed a motion to dismiss that action, and the Court granted its motion on January 16, 2018.

   

The current suits have been consolidated by the District of Massachusetts, where Purdue continues to assert infringement of five patents: the ʼ497 patent, the ʼ933 patent, the ʼ717 patent, the ʼ919 patent, and the ʼ961 patent. None of these suits are associated with any stay of FDA approval for Xtampza. Purdue has made a demand for monetary relief but has not quantified their alleged damages. Purdue has also requested a judgment of infringement, an adjustment of the effective date of FDA approval, and an injunction on the sale of the Company’s products accused of infringement. The Company has denied all claims and seeks a judgment that the patents are invalid and/or not infringed by the Company; the Company is also seeking a judgment that the case is exceptional, with an award to the Company of its fees for defending the case.

   

The parties are in the early stages of fact discovery. Written discovery has commenced with depositions expected to commence during the second half of 2018. A claim construction and summary judgment hearing was held on June 1, 2017. On November 21, 2017, the Court issued its claim construction ruling, construing certain claims of the ʼ933, ʼ497, and ʼ717 patents. At this time, the Motion for Summary Judgment, which asserted that claims of the ’933, ’497, and ’717 patents are invalid and not infringed, remains pending. The Company is not able to predict with certainty when the Court will decide the Company’s motion. The Scheduling Order has been amended to stay the close of fact discovery until after the Court decides our Motion for Summary Judgment. No trial date has been scheduled.

   

The Company is, and plans to continue, defending this case vigorously. At this stage, the Company is unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any.

 

Nucynta Litigation 

   

On February 7, 2018, Purdue filed a patent infringement suit against Collegium NF and the Company in the District of Delaware. Specifically, Purdue argues that the Company’s sale of immediate release and extended release Nucynta infringes U.S. Patent Nos. 9,861,583, 9,867,784, and 9,872,836. Purdue has made a demand for monetary relief in its Complaint but has not quantified its alleged damages. The Company filed its answer to the Complaint on April 9, 2018. Purdue filed its answer to the Company’s counterclaims on April 30, 2018. The Court adopted the parties’ proposed scheduling order on June 6, 2018. Fact and expert discovery will close on October 9, 2019 and March 18, 2020, respectively. The Court scheduled trial for September 28, 2020.

     

The Company plans to defend this case vigorously. At this stage, the Company is unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any.

   

Teva Litigation 

   

The Company has fourteen patents listed in the FDA Orange Book as covering the Company’s abuse-deterrent product and methods of using it to treat patients: Patents Nos.  7,399,488; 7,771,707; 8,449,909;  8,557,291;  8,758,813;  8,840,928;  9,044,398; 9,248,195;  9,592,200;  9,682,075; 9,737,530, 9,763,883; 9,968,598; 10,004,729 (the “Orange Book Patents”).

   

Teva Pharmaceuticals USA, Inc. (“Teva”) filed a Notice Letter of Patent Certification against twelve of the fourteen listed Orange Book Patents (the ’598 and ’729 patents were listed among the Orange Book Patents after receipt of Teva’s Notice Letter), alleging that they were invalid and/or not infringed by the proposed oxycodone products that are the subject of Teva’s Abbreviated New Drug Application (“ANDA”). On February 22, 2018—within the 45-day period that gives the Company a 30-month stay on FDA approval of Teva’s ANDA while the parties have an opportunity to litigate—the Company sued Teva in the District of Delaware on eleven of the Orange Book Patents. Teva responded to the Company’s complaint on May 14, 2018, alleging that the Orange Book Patents are invalid and are not infringed by

21


 

Teva’s proposed ANDA products and asserting counterclaims of non-infringement and invalidity of the Orange Book Patents. The Company answered Teva’s counterclaims on June 4, 2018. The parties have proposed a schedule and the court will hold a case management conference on July 23, 2018. According to the proposed schedule, fact discovery will close on July 30, 2019 and expert discovery will close on January 31, 2020.

 

Opioid Litigation

 

On March 19, 2018, a lawsuit was filed by multiple local governments in the Circuit Court of Crittenden County, Arkansas, against the Company and other pharmaceutical manufacturers and distributors.  The action alleges a variety of claims related to opioid marketing and distribution practices, including false advertising, deceptive trade practices, public nuisance, unjust enrichment, violations of state narcotics statutes and civil conspiracy.  The suit seeks monetary penalties.  The Company was served with the lawsuit on April 30, 2018.

 

On March 21, 2018, the Company and other pharmaceutical manufacturers and distributors were named in a class-action lawsuit filed in the Eastern District of Kentucky by a family practice clinic, on behalf of other similarly-situated healthcare providers.  The action alleges violations of the Racketeer Influenced and Corrupt Organizations Act relating to opioid marketing and distribution practices.  On April 2, 2018, the lawsuit was conditionally transferred by the Judicial Panel on Multi-District Litigation to the federal Prescription Opiate Multi District Litigation (the “MDL”) in the Southern District of Ohio.  On April 10, 2018, the conditional transfer was finalized and the lawsuit was docketed in the MDL on April 11, 2018. On May 4, 2018, the Company and other pharmaceutical manufacturers and distributors were named in two lawsuits filed in the MDL by the Fiscal Court of Bourbon County, Kentucky and the Fiscal Court of Owen County, Kentucky, relating to opioid marketing and distribution practices.  On June 11 and 12, 2018, the Company was named in four lawsuits filed in the MDL by a health system and various member hospitals.  The lawsuits allege violations of the RICO Act, fraud, public nuisance, negligence, and violations of state consumer protections laws.  The lawsuits all seek, generally, penalties and/or injunctive relief.  The MDL lawsuits in which the Company has been named are not designated representative cases in the MDL and, therefore, are effectively currently stayed.

 

On May 29, 2018, a lawsuit was filed by Bucks County, Pennsylvania against the Company and other pharmaceutical manufacturers.  On June 12, 2018, a lawsuit was filed by Clinton County, Pennsylvania, against the Company and other pharmaceutical manufacturers and distributors.  Both lawsuits allege claims related to opioid marketing and distribution, including negligence, fraud, unjust enrichment, public nuisance, and violations of state consumer protections laws.  The Company has not been served with either lawsuit.   

 

The Company disputes the allegations in these lawsuits and intends to vigorously defend these actions.  At this stage, the Company is unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any.

 

Opioid-Related Request and Subpoenas 

   

The Company, like a number of other pharmaceutical companies, has received subpoenas or civil investigative demands related to opioid sales and marketing. The Company has received such subpoenas or civil investigative demands from the Offices of the Attorney General of each of Washington, New Hampshire, and Massachusetts. The Company is currently cooperating with the each of the foregoing states in their respective investigations

 

 

Item 2.  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 financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that involve risks uncertainties and assumptions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of many factors.  We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Quarterly Report on Form 10-Q, including those set forth under “Forward-looking Statements” and “Risk Factors”, as revised and supplemented by those risks described from time to time in other reports which we file with the SEC.

 

OVERVIEW

22


 

 

We are a specialty pharmaceutical company focused on becoming the leader in responsible pain management by developing and commercializing innovative, differentiated products for people suffering from pain and our communities. Our first product, Xtampza, is an abuse-deterrent, extended-release, oral formulation of oxycodone, a widely prescribed opioid medication. In April 2016, the U.S. Food and Drug Administration, or FDA, approved our New Drug Application, or NDA, filing for Xtampza for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate.  Certain human abuse potential studies are included in the approved label, as well as data supporting the administration of the product as a sprinkle or administered through feeding tubes.  In June 2016, we announced the commercial launch of Xtampza.

   

Xtampza has the same active ingredient as OxyContin OP, which is the largest selling abuse-deterrent, extended-release opioid in the United States by dollars, with $1.7 billion in U.S. sales in 2017. We conducted a comprehensive preclinical and clinical program for Xtampza consistent with FDA guidance on abuse-deterrence. These studies and clinical trials demonstrated, among other things, that chewing, and crushing Xtampza, and then taking it orally, did not meaningfully change its drug release profile or safety characteristics. On the basis of these studies and clinical trials, the FDA concluded that Xtampza ER has properties that are expected to reduce abuse via the oral and intranasal routes and that are expected to make abuse by injection difficult. By contrast, clinical trials performed by us and others — including head-to-head clinical trials comparing Xtampza with OxyContin OP — have shown that drug abusers could achieve rapid release and absorption of the active ingredient by manipulating OxyContin OP using common household tools and methods commonly available on the Internet.  In November 2017, we announced the approval of a Supplemental New Drug Application by the FDA for Xtampza to include comparative oral pharmacokinetic data from the clinical study evaluating the effect of physical manipulation by crushing Xtampza compared with OxyContin OP and a control (oxycodone hydrochloride immediate-release), results from an oral human abuse potential study and the addition of an oral abuse deterrent claim.  

   

In December 2017, we entered into a Commercialization Agreement with Depomed, Inc., or Depomed, pursuant to which Depomed agreed to grant us a sublicense of certain of its intellectual property related to Nucynta ER and Nucynta IR, or the Nucynta Products, for commercialization of such products in the United States. Nucynta ER is an extended release formulation of tapentadol that is indicated for the management of pain severe enough to require daily, around‑the‑clock, long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy in adults, and for which alternate treatment options are inadequate. Nucynta IR is an immediate release formulation of tapentadol that is indicated for the management of moderate to severe acute pain in adults.

 

We closed the transactions contemplated by the Commercialization Agreement, as amended, on January 9, 2018, and we began marketing and commercially selling the Nucynta Products in February 2018.

 

Outlook

 

We expect to continue to incur significant commercialization expenses related to marketing, manufacturing, distribution, selling and reimbursement activities. We are promoting Xtampza to approximately 10,700 physicians who write approximately 60% of the branded extended-release oral opioid prescriptions in the United States with a sales team of approximately 150 sales representatives and sales managers. In addition, we deploy a separate, hospital focused sales team.

 

We began shipping and recognizing product sales on the Nucynta Products on January 9, 2018, and we began commercial promotion of the Nucynta Products in February 2018. We are detailing the Nucynta Products to the same physicians to whom we detail Xtampza, leveraging our existing sales organization. We will pay a royalty to Depomed on all revenues from the sale of Nucynta Products based on certain net sales thresholds, with a minimum royalty of $135.0 million per year during the first four years of the Commercialization Agreement, with 2018 prorated for the closing of the transactions on January 9, 2018, subject to certain conditions. If Depomed or its contract manufacturers are unable to deliver a certain percentage of ordered quantities of the Nucynta Products for a period of two months or longer in calendar year 2018, then Depomed may be required to make a payment (or offset the minimum royalties) to ensure that we receive a minimum level of gross profit for 2018.

 

We have never been profitable and have incurred net losses in each year since inception. We incurred net losses of $31.7 million and $44.2 million for the six months ended June 30, 2018 and 2017 respectively.  As of June 30, 2018, we had an accumulated deficit of $329.8 million. Substantially all of our net losses resulted from costs incurred in connection with

23


 

our research and development programs and from selling, general and administrative costs associated with our operations. We expect to continue to incur net losses in the near future as we continue to commercialize Xtampza and the Nucynta Products. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect our expenses will increase in connection with our ongoing activities as we:

·

expand our promotional efforts for Xtampza and the Nucynta Products, including hiring additional personnel to expand our commercial organization;

·

expand our regulatory and compliance functions;

·

continue scale-up and improvement of our manufacturing processes;

·

continue our research and development efforts;

·

maintain, expand and protect our intellectual property portfolio;

·

hire additional scientific and clinical personnel to support our product development efforts;

·

implement operational, financial and management systems; and

·

hire additional selling, general and administrative personnel to operate as a commercial stage public company.

 

We believe that our cash and cash equivalents at June 30, 2018 together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future.

 

 

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

 

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used, which would have resulted in different financial results.

 

The critical accounting policies we identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, or Annual Report, relate to revenue recognition, inventory, impairment of long-lived assets, stock-based compensation and income taxes. We have also identified the accounting policy related to intangible assets as a critical accounting policy in the interim periods ended June 30, 2018.  Estimates include revenue recognition, including the estimates of product returns, units prescribed, discounts and allowances related to commercial sales of our products, estimates utilized in the valuation of inventory, accounting for stock-based compensation, contingencies, and tax valuation reserves. We have also identified the estimate of useful lives with respect to intangible assets as a significant estimate in the interim periods ended June 30, 2018. We base our estimates and assumptions on historical experience when available and on various factors that we believe are reasonable under the circumstances, and we evaluate our estimates and assumptions on an ongoing basis.  Our actual results may differ from these estimates under different assumptions or conditions. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report.

 

Revenue Recognition

 

Effective January 1, 2018, we adopted Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606 using the modified retrospective method. Under this method, prior periods were not retrospectively adjusted.  As a result, the reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC Topic 605, Revenue Recognition (“legacy GAAP”). 

 

Immediately prior to the adoption date of January 1, 2018, we recognized revenue in accordance with legacy GAAP, or when there was persuasive evidence of an arrangement; when title and risk of loss had passed to the customer; when estimated provisions for chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns were reasonably determinable; and when collectability was reasonably assured. The satisfaction of these criteria generally occurred upon delivery of products to customers, or the sell-in method of revenue recognition under legacy GAAP.  We began recognizing revenue on the sell-in method in the third quarter of 2017.  Prior to the third quarter of 2017, we recognized revenue when products were dispensed to end users, or the sell-through method of revenue recognition under

24


 

legacy GAAP, as we did not have sufficient experience with product sales to estimate returns at the time product was sold to customers. 

 

We concluded that, as of January 1, 2018, we would record revenue net of a provision for estimated chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns upon delivery of products to customers, as we have been under legacy GAAP since the third quarter of 2018, under either the sell-in method of revenue recognition under legacy GAAP or under ASC 606 as of the adoption date. Therefore, the adoption of ASC 606 did not have a material impact on our consolidated financial position, results of operations, equity or cash flows as of January 1, 2018.

 

 

RESULTS OF OPERATIONS

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 

 

Six months ended June 30, 

 

2018

 

2017

 

2018

 

2017

 

(in thousands)

 

 

 

 

 

 

Product revenues, net

$

73,061

    

$

3,560

 

$

136,810

    

$

5,732

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

46,838

    

 

577

 

 

89,944

    

 

948

Research and development

 

2,237

 

 

2,179

 

 

4,505

 

 

4,309

Selling, general and administrative

 

31,279

 

 

22,062

 

 

62,861

 

 

44,909

Interest expense

 

(6,158)

 

 

 —

 

 

(11,858)

 

 

 —

Interest income

 

391

 

 

137

 

 

646

 

 

235

Net loss

$

(13,060)

 

$

(21,121)

 

$

(31,712)

 

$

(44,199)

 

Comparison of the three months ended June 30, 2018 and June 30, 2017

 

Product revenues, net were $73.1 million for the three months ended June 30, 2018, or the 2018 Quarter, compared to $3.6 million for the three months ended June 30, 2017, or the 2017 Quarter.  The $69.5 million increase was primarily related to the Commercialization Agreement with Depomed consummated in January 2018 to sublicense the Nucynta Products.  In the 2018 Quarter, Nucynta IR and ER product revenues, net were $34.2 million and $20.8 million, respectively. In addition, Xtampza product revenues, net were $18.1 million in the 2018 Quarter, which represents a $14.5 million increase compared to the 2017 Quarter.  The increase in Xtampza product revenues, net was primarily due to an increase in sales volume due to increasing demand.    

 

Cost of product revenues was $46.8 million for the 2018 Quarter, compared to $577,000 for the 2017 Quarter.  The $46.2 million increase was primarily related to $32.4 million of amortization expense associated with the intangible asset related to the Commercialization Agreement for the Nucynta Products.  The remaining increase was primarily related to increased product revenues in the 2018 Quarter.

 

Research and development expenses were $2.2 million for the 2018 Quarter, compared to $2.2 million for the 2017 Quarter. In the 2018 Quarter, salaries, wages and benefits increased $178,000, primarily due to increases in employee headcount, including an increase in stock-based compensation expense, offset by a $202,000 decrease in manufacturing costs relating to Onsolis.

 

Selling, general and administrative expenses were $31.3 million for the 2018 Quarter, compared to $22.1 million for the 2017 Quarter. The $9.2 million increase was primarily related to:

·

an increase in salaries, wages and benefits of $3.1 million, primarily due to an increase in employee headcount, including an increase in stock-based compensation expense, of $1.4 million, and incentive compensation; 

·

an increase in commercialization costs, including consulting and marketing expenses, of $3.1 million primarily related to the Nucynta Products and continued support of Xtampza;

·

an increase in audit, legal, and other professional fees of $1.2 million;

·

an increase in regulatory costs, including consulting and subscriptions, of $753,000 primarily due to the acquisition of the Nucynta Products; and

·

an increase in PDUFA related expenses of $733,000, primarily due to the acquisition of the Nucynta Products.

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Interest expense was $6.2 million for the 2018 Quarter, compared to none in the 2017 Quarter. The increase was primarily due to an increase of $5.9 million in interest expense associated with the minimum royalty payments related to the Commercialization Agreement for Nucynta, which was entered into in the 2018 Quarter, and interest expense on our term loan of $215,000.

 

Interest income was $391,000 for the 2018 Quarter, compared to $137,000 in the 2017 Quarter.  The increase was primarily due to higher interest rates on money market funds.

 

Comparison of the six months ended months June 30, 2018 and June 30, 2017

   

Product revenues, net were $136.8 million for the six months ended June 30, 2018, or the 2018 Period, compared to $5.7 million for the six months ended June 30, 2017, or the 2017 Period.  The $131.1 million increase was primarily related to the Commercialization Agreement with Depomed consummated in January 2018 to sublicense the Nucynta Products.  In the 2018 Period, Nucynta IR and ER product revenues, net were $61.4 million and $41.5 million, respectively. In addition, Xtampza product revenues, net were $33.9 million in the 2018 Period, which represents a $28.2 million increase compared to the 2017 Period.  The increase in Xtampza product revenues, net was primarily due to an increase in sales volume due to increasing demand. 

   

Cost of product revenues were $89.9 million for the 2018 Period, compared to $948,000 for the 2017 Period.  The $89.0 million increase was primarily related to $61.9 million of amortization expense associated with the intangible asset related to the Commercialization Agreement for the Nucynta Products.  The remaining increase was primarily related to increased product revenues in the 2018 Period.  

   

Research and development expenses were $4.5 million for the 2018 Period, compared to $4.3 million for the 2017 Period.  The $200,000 increase was primarily due to increases in employee headcount, including an increase in stock-based compensation expense.  

 

Selling, general and administrative expenses were $62.9 million for the 2018 Period, compared to $44.9 million for the 2017 Period. The $18.0 million increase was primarily related to:

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an increase in salaries, wages and benefits of $6.9 million, primarily due to increases in employee headcount, including an increase in incentive compensation and stock-based compensation expense;

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an increase in sales and marketing costs of $3.5 million, primarily related to the Nucynta Products and continued support of Xtampza;

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an increase in audit, legal, and other professional fees of $1.8 million;

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an increase in PDUFA related expenses of $1.6 million, primarily due to the acquisition of the Nucynta Products;

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an increase in regulatory costs, including consulting and subscriptions, of $1.5 million, primarily due to the acquisition of the Nucynta Products