Business And Significant Policies (Policies)

6 Months Ended

Jun. 30, 2018

BASIS OF PRESENTATION

Use of Estimates

Use of Estimates

The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, the Company evaluates its estimates, including critical accounting policies or estimates related to available-for-sale securities, debt instruments, research and development expenses, income taxes, inventories, revenues, contingencies and litigation and share-based compensation. The Company bases its estimates on historical experience, information received from third parties and on various market specific and other relevant assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates under different assumptions or conditions.

Recent Accounting Pronouncements

Recent Accounting Pronouncement Adopted

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. This standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. This new standard supersedes most previously-existing revenue recognition guidance. The Company adopted this standard in January 2018 using the modified retrospective basis. See Note 2.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. The standard clarifies how certain cash receipts and cash payments will be presented and classified in the statement of cash flows. The Company adopted this standard in January 2018, and it had no impact on its consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842), which modifies the accounting by lessees for all leases with a term greater than 12 months. This standard will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. For public companies, this standard is effective for annual and interim periods beginning on or after December 15, 2018. Early adoption is permitted, but the Company intends to adopt this guidance effective January 1, 2019 using a modified retrospective transition method. The Company’s only significant lease is its operating lease for its corporate headquarters, although it has several smaller leases. The Company is completing its analysis, but expects the adoption of this guidance to have a significant impact on its balance sheets as it will recognize right of use assets and corresponding lease liabilities. The Company expects the overall recognition of expense to be similar to current guidance, though the classification of such expense could be significantly different.

Revenue Recognition

Revenue Recognition

For all revenue transactions, the Company evaluates its contracts with its customers to determine revenue recognition using the following five-step model:

1)The Company identifies the contract(s) with a customer

2)The Company identifies the performance obligations in the contract

3)The Company determines the transaction price

4)The Company allocates the transaction price to the identified performance obligations

5)The Company recognizes revenue when (or as) the entity satisfies a performance obligation

Product Revenue:

Product revenue is recognized at the time of shipment at which time the Company has satisfied its performance obligation. Product revenue is recognized net of consideration paid to the Company’s customers, wholesalers and certified pharmacies. Such consideration is for services rendered by the wholesalers and pharmacies in accordance with the wholesalers and certified pharmacy services network agreements, and includes a fixed rate per prescription shipped and monthly program management and data fees. These services are not deemed sufficiently separable from the customers’ purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition.

Other product revenue allowances include a reserve for estimated product returns, certain prompt pay discounts and allowances offered to the Company’s customers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue at the date at which the related revenue is recognized. The Company also offers discount programs to patients. Calculating certain of these items involves estimates and judgments based on sales or invoice data, contractual terms, utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates or chargebacks. The Company reviews the adequacy of product revenue allowances on a quarterly basis. Amounts accrued for product revenue allowances are adjusted when trends or significant events indicate that adjustment is appropriate and to reflect actual experience. See Note 9 for product reserve balances.

Change in Accounting Estimate in 2017

The Company ships units of Qsymia through a distribution network that includes certified retail pharmacies. The Company began shipping Qsymia in September 2012 and grants rights to its customers to return unsold product from six months prior to and up to 12 months subsequent to product expiration. This has resulted in a potential return period of from 24 to 36 months depending on the ship date of the product. As the Company had no previous experience in selling Qsymia and given its lengthy return period, the Company was not initially able to reliably estimate expected returns of Qsymia at the time of shipment, which was required by the accounting literature at the time, and therefore recognized revenue when units were dispensed to patients through prescriptions, at which point the product was not subject to return, or when the expiration period had ended.

Beginning in the first quarter of 2017, with 48 months of returns experience, the Company believed that it had sufficient data and experience from selling Qsymia to reliably estimate expected returns. Therefore, beginning in the first quarter of 2017, under the then relevant accounting literature, the Company began recognizing revenue from the sales of Qsymia upon shipment and recording a reserve for expected returns at the time of shipment.

In accordance with this change in accounting estimate, in the first quarter of 2017 the Company recognized a one-time adjustment relating to products that had been previously shipped, consisting of $17.9 million of gross revenues, adjusted for an expected returns reserve of $5.7 million and estimated gross-to-net charges of $4.9 million, for a net impact of $7.3 million in revenues. The Company also recorded increased cost of goods sold of $0.6 million and marketing expense of $0.7 million associated with the change in accounting estimate. The increase in net product revenue resulted in a decrease in net loss of $6.0 million or $0.06 per share for the six months ended June 30, 2017.

Supply Revenue:

The Company produces STENDRA/SPEDRA through a contract manufacturing partner and then sells it to its commercialization partners. The Company is the primary responsible party in the commercial supply arrangements and bears significant risk in the fulfillment of the obligations, including risks associated with manufacturing, regulatory compliance and quality assurance, as well as inventory, financial and credit loss. As such, the Company recognizes supply revenue on a gross basis as the principal party in the arrangements. The Company recognizes supply revenue at the time of shipment and, in the unusual case where the product does not meet contractually-specified product dating criteria at the time of shipment to the partner, the Company records a reserve for estimated product returns. There are no such reserves as of June 30, 2018.

License and Milestone Revenue

License and milestone revenues related to arrangements, usually license and/or supply agreements, entered into by the Company are recognized by following the five-step process outlined above. The allocation and timing of recognition of such revenue will be determined by that process and the amounts recognized and the timing of that recognition may not exactly follow the wording of the agreement as the amount allocated following the accounting analysis of the agreement may differ and the timing of recognition of a significant performance obligation may predate the contractual date.

Royalty Revenue

The Company relies on data provided by its collaboration partner in determining its contractually-based royalty revenue. Such data includes accounting estimates and reports for various discounts and allowances, including product returns. The Company records royalty revenues based on the best data available and makes any adjustments to such revenues as such information becomes available.

Available-for-Sale Securities

As of June 30, 2018, the Company’s available-for-sale securities had original contractual maturities up to 57 months. However, the Company may sell these securities prior to their stated maturities in response to changes in the availability of and the yield on alternative investments as well as liquidity requirements. As these securities are readily marketable and are viewed by the Company as available to support current operations, securities with maturities beyond 12 months are classified as current assets. Due to their short-term maturities, the Company believes that the fair value of its bank deposits, accounts payable and accrued expenses approximate their carrying value.

Inventories

Work-in-process and finished goods inventory consist of Qsymia and STENDRA/SPEDRA and, at June 30, 2018, also included PANCREAZE inventory. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first in, first out method for all inventories, which are valued using a weighted-average cost method calculated for each production batch. The Company periodically evaluates the carrying value of inventory on hand for potential excess amounts over demand using the same lower of cost or net realizable value approach as that used to value the inventory

Income Taxes

The Company’s policy is to recognize interest and penalties related to uncertain tax positions (if any) as a component of the income tax provision.