SUPERNUS PHARMACEUTICALS, INC. Management report and analysis of the financial position and operating results (Form 10-Q)

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Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to help the reader understand the results of operations
and the financial condition of Supernus Pharmaceuticals, Inc. (the Company, we,
us, or our). The interim condensed consolidated financial statements included in
this report and this Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our audited
consolidated financial statements and notes thereto for the year ended
December 31, 2020 and the related Management's Discussion and Analysis of
Financial Condition and Results of Operations, both of which are contained in
our Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 8, 2021.
In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which are intended to be covered by the safe harbors
created thereby. These forward-looking statements may include declarations
regarding the Company's belief or current expectations of management, such as
statements including the words "budgeted," "anticipate," "project," "forecast,"
"estimate," "expect," "may," "believe," "potential," and similar statements or
expressions, which are intended to be among the statements that are
forward-looking statements, as such statements reflect the reality of risk and
uncertainty that is inherent in our business. Actual results may differ
materially from those expressed or implied by such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are made as of the date this report was filed with the
Securities and Exchange Commission. Our actual results and the timing of events
could differ materially from those discussed in our forward-looking statements
as a result of many factors, including those set forth under the "Risk Factors"
section of our Annual Report on Form 10-K and elsewhere in this report as well
as in other reports and documents we file with the Securities and Exchange
Commission from time to time. Except as required by law, we undertake no
obligation to update any forward-looking statements to reflect events or
circumstances occurring after the date of this Quarterly Report on Form 10-Q.
Solely for convenience, in this Quarterly Report on Form 10-Q, the trade names
are referred to without the TM symbols and the trademark registrations are
referred to without the circled R, but such references should not be construed
as any indicator that the Company will not assert, to the fullest extent under
applicable law, our rights thereto.
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Overview

We are a biopharmaceutical company focused on developing and commercializing
products for the treatment of central nervous system (CNS) diseases. Our diverse
neuroscience portfolio includes approved treatments for epilepsy, migraine,
attention-deficit hyperactivity disorder (ADHD), hypomobility in Parkinson's
Disease (PD), cervical dystonia, and chronic sialorrhea. We are also developing
a broad range of novel CNS product candidates including new potential treatments
for ADHD, hypomobility in PD, epilepsy, depression, and rare CNS disorders.
On October 10, 2021, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") by and among the Company, Adamas Pharmaceuticals, Inc.
("Adamas") and Supernus Reef, Inc., a Delaware corporation and a wholly owned
subsidiary of the Company ("Purchaser"). Pursuant to the Merger Agreement, and
upon the terms and subject to the conditions thereof, the Company has agreed to
cause Purchaser to commence a tender offer (the "Offer") to purchase all of the
outstanding shares of common stock of Adamas, par value $0.001 per share (the
"Shares" and each, a "Share"), at an offer price of (i) $8.10 per Share, in
cash, less any applicable withholding taxes and without interest (the "Cash
Amount"; an aggregate of approximately $400 million), plus (ii) two contingent
value rights per Share (each, a "CVR"; an aggregate of approximately
$50 million), which represents the right to receive $0.50 per CVR, which CVRs
will be governed by the terms of a contingent value rights agreement to be
entered into between the Company and a rights agent mutually agreeable to the
Company and Adamas, in cash, less any applicable withholding taxes and without
interest (the Cash Amount plus two CVRs, collectively, or any higher amount per
Share paid pursuant to the Offer, the "Offer Price"). Following the consummation
of the Offer and subject to the terms and conditions of the Merger Agreement,
Purchaser will be merged with and into Adamas (the "Merger") pursuant to Section
251(h) of the General Corporation Law of the State of Delaware (the "DGCL"),
with Adamas continuing as the surviving corporation in the Merger and a wholly
owned subsidiary of the Company. On October 25, 2021, the Purchaser commenced
the Offer.
At or prior to the time at which Purchaser accepts the Shares tendered in the
Offer for purchase, the Company and a rights agent mutually agreeable to the
Company and Adamas shall enter into a CVR Agreement to allow for the payment of
the milestones pursuant to each CVR. Subject to the terms of the CVR Agreement,
one CVR issued in respect of a Share shall become payable upon the first
occurrence of achievement of aggregate worldwide net sales of a specified
product in excess of $150 million during any consecutive 12-month period ending
on or before December 31, 2024. Subject to the terms of the CVR Agreement, the
second CVR issued in respect of each Share shall become payable upon the first
occurrence of aggregate worldwide net sales of a specified product in excess of
$225 million during any consecutive 12-month period ending on or before December
31, 2025. Each milestone with respect to a CVR may only be achieved one time.
The maximum amount payable with respect to the CVRs issued in respect to each
Share is $1.00. The transaction is expected to close in late fourth quarter 2021
or in early first quarter 2022 and is subject to customary conditions.
Adamas is a commercial-stage pharmaceutical company with a portfolio of
therapies to address a range of neurological diseases. Adamas' commercialized
medicine, GOCOVRI® (amantadine) extended-release capsules, is the first and only
FDA-approved medication indicated for the treatment of both "off" episodes and
dyskinesia in patients with Parkinson's disease receiving levodopa-based
therapy.
In April 2021, the U.S. Food and Drug Administration (FDA) approved Qelbree
(SPN-812) for the treatment of ADHD in pediatric patients 6 to 17 years of age.
In May 2021, we launched Qelbree in the U.S. On September 2, 2021, the FDA has
acknowledged it has received the supplemental new drug application (sNDA) for
SPN-812 for adult patients with ADHD and assigned a user fee goal date (PDUFA
date) of April 29, 2022.
On April 28, 2020, we entered into a Sale and Purchase Agreement with US
WorldMeds Partners, LLC to acquire the CNS portfolio of USWM Enterprises, LLC
(USWM Enterprises) (USWM Acquisition). With the acquisition, completed on June
9, 2020, the Company added three established commercial products and a product
candidate in late-stage development to its portfolio. These commercial products,
APOKYN, XADAGO, and MYOBLOC, are primarily for the treatment of PD. In the
second quarter of 2021 and within one year from the Closing Date, the Company
finalized its accounting for the business combination, including the purchase
price allocation.
On April 21, 2020, we entered into a Development and Option Agreement
(Development Agreement) with Navitor Pharmaceuticals, Inc. (Navitor Inc.) and
also acquired an ownership position in Navitor Inc. Under the terms of the
Development Agreement, the Company and Navitor Inc. will jointly conduct a Phase
II clinical program for NV-5138 (SPN-820) in treatment resistant depression
(TRD). In March 2021, Navitor Inc. underwent a legal restructuring whereby
Navitor Inc. became a wholly owned subsidiary of a newly formed limited
liability company, Navitor Pharmaceuticals, LLC (Navitor LLC) (Navitor
Restructuring).
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We have a portfolio of commercial products and product candidates.
Commercial Products
•Trokendi XR® (topiramate) is the first once-daily extended release topiramate
product indicated for the treatment of epilepsy in the United States (U.S.)
market. It is also indicated for the prophylaxis of migraine headache.
•Oxtellar XR® (oxcarbazepine) is indicated as therapy for partial onset seizures
in adults and children 6 years to 17 years of age and is the first once-daily
extended-release oxcarbazepine product indicated for the treatment of epilepsy
in the U.S.
•QelbreeTM (viloxazine extended-release capsules) is a novel non-stimulant
product indicated for the treatment of ADHD in pediatric patients 6 to 17 years
of age.
•APOKYN® (apomorphine hydrochloride injection) is a product indicated for the
acute, intermittent treatment of hypomobility or "off" episodes ("end-of-dose
wearing off" and unpredictable "on-off" episodes) in patients with advanced PD.
•MYOBLOC® (rimabotulinumtoxinB) is a product indicated for the treatment of
cervical dystonia and sialorrhea in adults, and it is the only Type B toxin
available on the market.
•XADAGO® (safinamide) is a once-daily product indicated as adjunctive treatment
to levodopa/carbidopa in patients with PD experiencing "off" episodes.
Product Candidates
•Qelbree (viloxazine, extended-release capsules; SPN-812) is a novel
non-stimulant product candidate for the treatment of ADHD in adult patients.
•SPN-830 (Apomorphine Infusion Pump) is a late-stage drug/device combination
product candidate for the continuous prevention of "off" episodes in PD.
•SPN-817 is a novel product candidate for the treatment of severe epilepsy.
•SPN-820 is a first-in-class product candidate for TRD. It is an orally active
small molecule that directly activates brain mechanistic target of rapamycin
complex 1 (mTORC1).
COVID-19 Impact
While the impact of the ongoing COVID-19 pandemic did not have a material
adverse effect on our financial position or results of operations for the three
and nine months ended September 30, 2021, we continue to closely monitor the
events and circumstances surrounding the COVID-19 pandemic and its impact on all
aspects of our business operations. Since the situation surrounding the COVID-19
pandemic remains fluid and the duration uncertain, the long-term nature and
extent of the impacts of the pandemic on our business operations and financial
position cannot be reasonably estimated at this time. See "Risk Factors" in Part
I, Item 1A of our Annual Report on Form 10-K for additional information on risk
factors that could impact our business and our results.
Operational Highlights
Qelbree Launch Update
•Qelbree's growth has accelerated with the arrival of the "back to school"
season in the third quarter of 2021, reaching total monthly prescriptions in
September of 7,132, an increase of 37% compared to August and up 118% compared
to the monthly average during the previous three months period. The latest
weekly prescriptions data shows 2,248 prescriptions, an increase of 51% compared
to the weekly average over the prior 12-week period.
•In addition, Qelbree's base of prescribers' has grown by 340% during the third
quarter of 2021 compared to the second quarter of 2021, with more than 3,470
physicians prescribing the product.
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Product Pipeline Update
Qelbree (viloxazine, extended-release capsules) - Novel non-stimulant for the
treatment of ADHD in adults
•The U.S. Food and Drug Administration (FDA) acknowledged it has received the
supplemental new drug application (sNDA) for Qelbree for the treatment of ADHD
in adult patients. The sNDA has a user fee goal date (PDUFA date) of April 29,
2022.
SPN-830 (apomorphine infusion pump) - Continuous treatment of motor fluctuations
("on-off" episodes) in Parkinson's disease (PD)
•We expect to resubmit the SPN-830 NDA to the FDA in November 2021.
SPN-820 - Novel first-in-class activator of mTORC1
•An Investigational New Drug (IND) application was submitted to the FDA in
September 2021. Consequently, the randomized Phase II clinical study in
treatment-resistant depression is on track and expected to start by the end of
2021.
SPN-817 - A novel product candidate for the treatment of epilepsy
•A randomized Phase II clinical study for the treatment of focal seizures is
expected to start in the second half of 2022.
SPN-443 and SPN-446 - Two novel CNS drug candidates nominated for development
•Our internal research and development discovery program generated several new
chemical entities including SPN-443 and SPN-446 that were nominated for
development across various CNS indications including ADHD.
Critical Accounting Policies and the Use of Estimates
Our condensed consolidated financial statements are prepared in accordance with
U.S. generally accepted accounting principles (U.S. GAAP), requiring us to make
estimates, judgments, and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses, and other related disclosures. Some
judgments can be subjective and complex, and therefore, actual results could
differ materially from those estimates under different assumptions or
conditions. We believe the judgments, estimates, and assumptions associated with
the following critical accounting policies have the greatest potential impact on
our condensed consolidated financial statements:
•Revenue recognition;
•Business combination accounting and valuation of acquired assets, including
goodwill and intangible assets; and
•Income taxes.
There were no changes to the disclosures with respect to the above listed
critical accounting policies in our Annual Report on Form 10-K for the year
ended December 31, 2020. A summary of our significant accounting policies
appears in the notes to our audited consolidated financial statements included
in the Annual Report on Form 10-K for the year ended December 31, 2020.
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Results of Operations
Comparison of the Three and Nine Months ended September 30, 2021 and 2020
Revenues
Revenues consist primarily of net product sales of our commercial products in
the U.S., supplemented by royalty revenues from our collaborative licensing
arrangements. The following table provides information regarding our revenues
during the three and nine months ended September 30, 2021 and 2020 (dollars in
thousands):
                                        Three Months ended                          Change                          Nine Months ended                          Change
                                           September 30,                                                              September 30,
                                      2021               2020             Amount            Percent              2021               2020             Amount            Percent
Net product sales
Trokendi XR                       $  80,935          $  82,906          $ (1,971)             (2)%           $ 231,531          $ 241,131          $ (9,600)             (4)%
Oxtellar XR                          29,728             28,364             1,364               5%               82,120             75,983             6,137               8%
APOKYN                               24,627             34,482            (9,855)            (29)%              73,338             43,082            30,256              70%
MYOBLOC (1)                           4,596              4,050               546              13%               13,477              5,279             8,198               **
XADAGO                                3,276              2,331               945              41%                9,390              3,132             6,258               **
Qelbree                               2,370                  -             2,370               **                2,685                  -             2,685               **
Total net product sales           $ 145,532          $ 152,133          $ (6,601)             (4)%           $ 412,541          $ 368,607          $ 43,934              12%
Royalty revenues                      2,932              3,002               (70)             (2)%               8,184              8,233               (49)              **
Total revenues                    $ 148,464          $ 155,135          $ (6,671)             (4)%           $ 420,725          $ 376,840          $ 43,885              12%

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(1) In April 2021, we notified the European Medicines Agency that we will cease
the marketing of rimabotulinumtoxinB in European countries where it has been
marketed as NeuroBloc.
The $6.6 million and 4% decrease in net product sales for the three months ended
September 30, 2021, as compared to the same period in 2020, was primarily due to
a $9.9 million and $2.0 million decrease in net product sales of APOKYN and
Trokendi XR, respectively. Offsetting these decreases were increases primarily
from net product sales of Oxtellar XR and Qelbree, which was launched in second
quarter of 2021.
The $43.9 million and 12% increase in net product sales for the nine months
ended September 30, 2021, as compared to the same period in 2020, was primarily
due to a $44.7 million increase in net product sales of the acquired commercial
products, $6.1 million increase in net product sales of Oxtellar XR and net
product sales from the recently launched Qelbree. Partially offsetting this
increase was $9.6 million decrease in net product sales of Trokendi XR for the
nine months ended September 30, 2021, as compared to the same period in 2020.
Trokendi XR net product sales decreased by 2% to $80.9 million for the three
months ended September 30, 2021 as compared to the same period in 2020. Trokendi
XR net product sales decreased by 4% to $231.5 million for the nine months ended
September 30, 2021 as compared to the same period in 2020. This decrease was
attributable to a decline in unit demand partially offset by the favorable
impact of the price increase taken in January 2021 and favorable improvements in
sales deductions.
Oxtellar XR net product sales increased by 5% to $29.7 million for the three
months ended September 30, 2021 as compared to the same period in 2020. Oxtellar
XR net product sales increased by 8% to $82.1 million for the nine months ended
September 30, 2021 as compared to the same period in 2020. This increase was
primarily attributable to the favorable impact of both unit demand and a price
increase in January 2021.
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Net product sales of the acquired commercial products decreased to $32.5 million
from $40.9 million for the three months ended September 30, 2021 as compared to
the same period in 2020. The decrease was primarily due to a decrease in net
product sales of APOKYN. APOKYN net product sales decreased by 29% to $24.6
million for the three months ended September 30, 2021 as compared to the same
period in 2020. This decrease was due partially to higher level of channel
inventory as well as increased market competition. Net product sales of the
acquired commercial products increased to $96.2 million from $51.5 million for
the nine months ended September 30, 2021. The increase for the nine month period
was due primarily to the timing of the USWM Acquisition, which was completed on
June 9, 2020.
Sales Deductions and Related Accruals
We record accrued product rebates and accrued product returns as current
liabilities in Accrued product returns and rebates, on our condensed
consolidated balance sheets. We record sales discounts as a reduction against
Accounts receivable on the condensed consolidated balance sheets. Both amounts
are generally affected by changes in gross product sales, changes in the
provision for net product sales deductions, and the timing of payments/credits.
The following table provides a summary of activity with respect to sales
deductions and related accruals during the periods indicated (dollars in
thousands):
                                                   Accrued Product Returns and
                                                             Rebates
                                                                                        Reduction to Accounts
                                                    Product             Product             Receivable for
                                                    Rebates             Returns            Sales Discounts              Total
Balance at December 31, 2020                     $    96,589          $ 29,603          $            11,404          $ 137,596

Disposition

Provision for current year sales                     275,352             9,945                       51,472            336,769
Adjustments relating to prior year sales               1,334            (1,525)                          19               (172)
Total provision                                  $   276,686          $  8,420          $            51,491          $ 336,597
Less: Actual payments/credits                       (274,639)           (4,611)                     (51,677)          (330,927)
Balance at September 30, 2021                    $    98,636          $ 33,412          $            11,218          $ 143,266

Balance at December 31, 2019                     $    88,811          $ 18,818          $            11,013          $ 118,642
USWM Acquisition liabilities assumed                   5,112             3,072                          293              8,477

Disposition

Provision for current year sales                     254,338             8,709                       49,987            313,034
Adjustments relating to prior year sales               3,633             9,008                          147             12,788
Total provision                                  $   257,971          $ 17,717          $            50,134          $ 325,822
Less: Actual payments/credits                       (241,351)          (13,177)                     (50,342)          (304,870)
Balance at September 30, 2020                    $   110,543          $ 26,430          $            11,098          $ 148,071


Accrued Product Returns and Rebates Balances
The accrued product rebates balance decreased from $110.5 million as of
September 30, 2020 to $98.6 million as of September 30, 2021 due to the timing
of payments which more than offsets the increase in the provision.
The accrued product returns balance increased from $26.4 million as of
September 30, 2020 to $33.4 million as of September 30, 2021 due to timing of
related return activity offset by a decrease in the provision for product
returns.
Provisions for Returns and Rebates
The provision for product rebates increased to $276.7 million for the nine
months ended September 30, 2021 compared to $258.0 million for the same period
in prior year. This increase was primarily attributable to greater utilization
of our patient co-payment programs, as well as higher per patient payments under
both Medicaid and commercial managed care programs.
The provision for product returns of $8.4 million for the nine months ended
September 30, 2021 was lower compared to $17.7 million for the nine months ended
September 30, 2020. This decrease was primarily due to the unfavorable actual
returns experienced in the first quarter of 2020 for discontinued Trokendi XR
commercial blister pack configurations, for which all production and
distribution ceased in 2017.
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Royalty Revenues
Royalty revenues were $2.9 million and $3.0 million for the three months ended
September 30, 2021 and 2020, respectively. Royalty revenues were $8.2 million
for both the nine months ended September 30, 2021 and 2020, respectively.
Royalty revenues include a royalty from net product sales of Mydayis, a product
of Takeda Pharmaceuticals Company Ltd., and noncash royalty revenue pursuant to
our agreement with Healthcare Royalty Partners III, L.P. (HC Royalty). HC
Royalty receives royalty payments from United Therapeutics Corporation (United
Therapeutics) based on net product sales of United Therapeutics' product
Orenitram.
Cost of Goods Sold
Cost of goods sold was $18.1 million and $21.4 million for the three months
ended September 30, 2021 and 2020, respectively. Cost of goods sold was $58.1
million and $33.9 million for the nine months ended September 30, 2021 and 2020,
respectively. Royalty payments associated with the acquired commercial products,
APOKYN and XADAGO, made up the majority of the cost of goods sold.
The decline in cost of goods sold for the three months period was primarily due
to lower royalties as a result of decreased APOKYN net product sales, partially
offset by additional costs of $1.3 million for rejected MYOBLOC inventory lots
in connection with the minimum purchase commitments. The increase in cost of
goods sold for the nine months period was primarily due to higher cost recorded
in 2021 for the acquired commercial products which is attributable to the timing
of the USWM Acquisition that was completed on June 9, 2020, costs of $7.0
million for rejected MYOBLOC inventory lots, partially offset by lower royalties
in the current year. Refer to Part I, Item 1, Unaudited Condensed Financial
Statements, Note 15, Commitments and Contingencies in the Notes to the Condensed
Consolidated Financial Statements for discussion regarding annual minimum
purchase quantity requirements of MYOBLOC.
Also included in cost of goods sold for the three and nine months ended
September 30, 2021 are de minimis costs for Qelbree inventory sold. We
manufacture Qelbree inventory for commercial sale and for use in our samples
program. Manufacturing costs related to Qelbree inventory build-up incurred
before FDA approval and prior to first quarter of 2020, when the Company began
capitalizing pre-launch inventory, were expensed to research and development
expense. The manufactured Qelbree inventory prior to FDA approval consisted of
$8.6 million raw materials inventory, which was expensed as research and
development expense in 2019. Therefore, cost of goods sold for Qelbree for the
three and nine months ended September 30, 2021 does not include raw material
cost that was previously expensed. We expect our cost of goods sold to increase
in the future as this inventory is sold, which will have a negative impact on
our operating earnings.
The time period over which reduced-cost Qelbree inventory is consumed will
depend on a number of factors, including the amount of future Qelbree sales, the
ultimate use of this inventory in either commercial sales, clinical development
or other research activities, and the ability to utilize inventory prior to its
expiration date. At this time, we expect to sell as commercial inventory or
consume as samples substantially all of the reduced-cost inventory by the first
half of 2022.
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Research and Development Expenses
The following table provides information regarding our research and development
(R&D) expenses during the periods indicated (dollars in thousands):
                                    Three Months ended                                                         Nine Months ended
                                       September 30,                            Change                           September 30,                            Change
                                  2021               2020             Amount            Percent              2021              2020             Amount            Percent
Direct Project Costs (1)
SPN-812                       $    2,570          $  5,048          $ (2,478)            (49)%           $   7,658          $ 16,752          $ (9,094)            (54)%
SPN-830                              322               577              (255)            (44)%                 560               865              (305)            (35)%
SPN-820                            2,527             3,537            (1,010)            (29)%               7,642             4,402             3,240              74%
SPN-860                            2,481               243             2,238               **                5,096               277             4,819               **
Others                             1,967             1,360               607              45%                6,762             7,694              (932)            (12)%
                                   9,867            10,765              (898)             (8)%              27,718            29,990            (2,272)             (8)%

Other R&D expense                      -                 -                 -               **               15,000            10,000             5,000              50%

Indirect Project Costs (1)
Share-based compensation             615               777              (162)            (21)%               1,909             2,276              (367)            (16)%
Other indirect overhead            9,172             5,297             3,875              73%               24,762            15,757             9,005              57%
                                   9,787             6,074             3,713              61%               26,671            18,033             8,638              48%
Research and development
expense                       $   19,654          $ 16,839          $  2,815              17%            $  69,389          $ 58,023          $ 11,366              20%

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(1) Direct costs, which include personnel costs and related benefits, are
recorded on a project-by-project basis. Many of our R&D costs are not
attributable to any individual project because we share resources across several
development projects. Indirect costs that support a number of our R&D activities
are recorded in the aggregate, including stock-based compensation.
R&D expenses were $19.7 million and $16.8 million for the three months ended
September 30, 2021 and 2020, respectively. The $2.8 million increase was
primarily due to higher regulatory activities related to the acquired products
from the USWM Acquisition and Qelbree, increase in costs associated with MYOBLOC
post-marketing commitment studies (SPN-860), offset by reduced spending on
SPN-812 (Qelbree) Phase III programs. Qelbree for treatment of ADHD in pediatric
patients was launched in May 2021 and the NDA for Qelbree for adults was
submitted in the first half of 2021.
R&D expenses were $69.4 million and $58.0 million for the nine months ended
September 30, 2021 and 2020, respectively. The $11.4 million increase was
primarily due to the $15 million write-down of the investment in Navitor LLC;
increased spending on SPN-820, which has advanced to a Phase II clinical
program, and on MYOBLOC post-marketing commitment studies; and higher regulatory
activities related to the acquired products. These increases are partially
offset by reduced spending on SPN-812 (Qelbree) Phase III programs and the
$10 million option fee paid in 2020. Refer to Part I, Item 1, Unaudited
Condensed Consolidated Financial Statements, Note 5, Investments, in the Notes
to the Condensed Consolidated Financial Statements, for further discussion of
the write-down of the investment in Navitor LLC in 2021 and the option fee
payment in 2020.
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Selling, General and Administrative Expenses
The following table provides information regarding our selling, general and
administrative (SG&A) expenses during the periods indicated (dollars in
thousands):
                                           Three Months ended                                                           Nine Months ended
                                              September 30,                            Change                             September 30,                            Change
                                         2021               2020             Amount             Percent              2021               2020             Amount             Percent
 Selling and marketing               $   50,704          $ 38,127          $ 12,577               33%            $ 137,531          $  95,005          $ 42,526               45%
 General and administrative              21,328            16,333             4,995               31%               65,493             49,172            16,321               33%
 Total                               $   72,032          $ 54,460          $ 17,572               32%            $ 203,024          $ 144,177          $ 58,847               41%


Selling and Marketing
Selling and marketing expenses were $50.7 million and $38.1 million for the
three months ended September 30, 2021 and 2020, respectively. Selling and
marketing expenses were $137.5 million and $95.0 million for the nine months
ended September 30, 2021 and 2020, respectively. The increases in both periods
were primarily attributable to increased marketing expenses and professional
consulting spend for the launch of Qelbree and the acquired commercial products
from the USWM Acquisition. In addition, employee-related expenses also increased
due to higher headcount to support the launch of Qelbree.
In addition, the reduced-cost Qelbree samples were included in selling and
marketing expenses for the three and nine months ended September 30, 2021. At
full cost, these Qelbree samples would have resulted in $0.8 million and $4.0
million higher SG&A for the three months ended and nine months ended September
30, 2021, respectively. At this time, we expect to sell as commercial inventory
or consume as samples the reduced-cost Qelbree inventory by the first half of
2022.
General and Administrative
General and administrative expenses were $21.3 million and $16.3 million for the
three months ended September 30, 2021 and 2020, respectively. General and
administrative expenses were $65.5 million and $49.2 million for the nine months
ended September 30, 2021 and 2020, respectively. The increases in both periods
were primarily attributable to increased professional consulting spend and
increased headcount to support the integration of the MDD operations.
Amortization of Intangible Assets
Amortization of intangible assets was $6.0 million and $6.1 million for the
three months ended September 30, 2021 and 2020, respectively. Amortization of
intangible assets was $18.0 million and $9.8 million for the nine months ended
September 30, 2021 and 2020, respectively. The increase for nine month period
was primarily due to timing of the USWM acquisition, which was completed on June
9, 2020.
Contingent Consideration Expense (Gain)
The change in the fair value of the contingent consideration liabilities
associated with the USWM Acquisition was an expense of $0.1 million for the
three months ended September 30, 2021 and a gain of $7.7 million for the nine
months ended September 30, 2021. The contingent consideration gain was primarily
due to the reduction of the sales based contingent consideration liabilities
recorded in the second quarter of 2021 offset by an increase in the estimated
fair value of regulatory and developmental milestones due to passage of time.
The Company assessed that these sales-based milestones will not be achieved
based on the revised net sales projections.
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Other Income (Expense)

                                   Three Months ended                                                        Nine Months ended
                                      September 30,                           Change                           September 30,                            Change
                                 2021               2020            Amount            Percent              2021              2020             Dollar             Percent
Interest and other income,
net                               2,281             2,659            (378)                (14) %           8,682            15,913          $ (7,231)                (45) %
Interest expense                 (5,033)           (4,945)            (88)                  2  %         (14,593)          (14,430)         $   (163)                  1  %
Interest expense on
nonrecourse liability
related to sale of future
royalties                          (892)           (1,143)            251                 (22) %          (2,896)           (3,228)              332                 (10) %
Total                        $   (3,644)         $ (3,429)         $ (215)                  6  %       $  (8,807)         $ (1,745)         $ (7,062)                    **


Other expense was $3.6 million and $3.4 million for the three months ended
September 30, 2021 and 2020, respectively. Other expense increased to $8.8
million for the nine months ended September 30, 2021 from $1.7 million for the
same period in 2020 primarily due to lower interest income on marketable
securities holdings in 2021 and gains generated from sales of our marketable
securities in 2020. Specifically, in the second quarter of 2020, we sold
securities at a gain of $3.6 million to finance the up-front cash payment of
approximately $300 million for the USWM Acquisition.
Income Tax Expense
                                    Three Months ended                                                    Nine Months ended
                                       September 30,                            Change                      September 30,                            Change
                                  2021              2020             Dollar             Percent        2021              2020              Dollar             Percent
Income tax expense             $  7,398          $ 12,714          $ (5,316)                 (42) % $ 20,142          $ 32,773          $ (12,631)                 (39) %
Effective tax rate                 25.5  %           24.1  %                                            28.3  %           25.4  %


Income tax expense was $7.4 million and $12.7 million for the three months ended
September 30, 2021 and 2020, respectively. Income tax expense was $20.1 million
and $32.8 million for the nine months ended September 30, 2021 and 2020
respectively. The decreases in both periods were mainly due to lower earnings
before taxes in 2021.
The effective income tax rate was 25.5% and 24.1% for the three months ended
September 30, 2021 and 2020, respectively. The effective income tax rate was
lower in 2020 primarily due to a greater research and development credit benefit
recognized in 2020. The effective income tax rate was 28.3% and 25.4% for the
nine months ended September 30, 2021 and 2020, respectively. The effective
income tax rate increase was mainly due to changes in the effective state tax
rates as a result of the transfer of workforce between legal entities in the
first quarter of 2021.
Liquidity and Capital Resources
We have financed our operations primarily with cash generated from product
sales, supplemented by cash generated by revenue from royalty and licensing
arrangements, as well as proceeds from the sale of equity and debt securities.
Continued cash generation is highly dependent on the continued commercial
success of our commercial products as well as the potential commercial success
of our product candidates, if approved by the FDA.
While we expect continued profitability in future years, we anticipate there may
be significant variability from year to year in the level of our profits
particularly due to the commercial launch of Qelbree in May 2021, future
commercial launch of Qelbree for treatment of ADHD in adults and SPN-830
(Apomorphine Infusion Pump), if both are approved by the FDA, continued market
and payor pressures for our commercial products and the likely unfavorable
impact of the upcoming loss of exclusivity for Trokendi XR in January 2023, or
sooner under certain conditions.
We believe our existing cash and cash equivalents, marketable securities, and
cash received from product sales will be sufficient to finance ongoing
operations, develop and launch our new products, and fund label expansions for
existing products. To continue to grow our business over the long-term, we plan
to commit substantial resources to: product development and clinical trials of
product candidates; business development, including acquisition and product
in-licensing; and supportive functions such as compliance, finance, management
of our intellectual property portfolio, information technology systems, and
personnel. In each case, spending would be commensurate with the growth and
needs of the business.
We may, from time to time, consider raising additional capital through: new
collaborative arrangements; strategic alliances; additional equity and/or debt
financings; or financing from other sources, especially in conjunction with
opportunistic business development initiatives. We will continue to actively
manage our capital structure and to consider all financing
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Contents

opportunities that could strengthen our long-term financial profile. Any such
capital raises may or may not be similar to transactions in which we have
engaged in the past. There can be no assurance that any such financing
opportunities will be available on acceptable terms, if at all.
Financial Condition
Cash and cash equivalents, marketable securities, and long term marketable
securities as of the periods presented below, are as follows (dollars in
thousands):
                                     September 30,       December 31,                Change
                                          2021               2020            Amount         Percent
  Cash and cash equivalents         $      215,281      $     288,640      $ (73,359)        (25)%
  Marketable securities                    228,571            133,893         94,678          71%
  Long term marketable securities          405,479            350,359         55,120          16%
  Total                             $      849,331      $     772,892      $  76,439          10%


Total cash and cash equivalents, marketable securities and long term marketable
securities increased by $76.4 million in the first nine months of 2021,
primarily due to cash generated from ongoing operations.
As of September 30, 2021 and December 31, 2020, the outstanding principal on our
0.625% Convertible Senior Notes Due 2023 (2023 Notes) was $402.5 million. No
2023 Notes have been converted as of September 30, 2021. There were no changes
to the separate convertible note hedge transactions (collectively, the
Convertible Note Hedge Transactions) and separate warrant transactions (the
Warrant Transactions). Refer to Part I, Item 1, Unaudited Condensed Financial
Statements, Note 8, Convertible Senior Notes Due 2023, in the Notes to the
Condensed Consolidated Financial Statements, for further discussion of the 2023
Notes and our other indebtedness.
Summary of Cash Flows
The following table summarizes the major sources and uses of cash for the
periods set forth below (dollars in thousands):

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