Item 1.
Financial
Statements
SUCAMPO PHARMACEUTICALS,
INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share
data)
|
|
June 30,
2017
|
|
December 31,
2016
|
|
|
(unaudited)
|
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
84,734
|
|
|
$
|
198,308
|
|
Product royalties receivable
|
|
|
20,552
|
|
|
|
26,261
|
|
Accounts receivable, net
|
|
|
19,812
|
|
|
|
42,998
|
|
Restricted cash
|
|
|
213
|
|
|
|
213
|
|
Inventories, net
|
|
|
23,098
|
|
|
|
23,468
|
|
Prepaid expenses and other current
assets
|
|
|
16,726
|
|
|
|
15,984
|
|
Total current assets
|
|
|
165,135
|
|
|
|
307,232
|
|
Investments, non-current
|
|
|
5,619
|
|
|
|
5,495
|
|
Property and equipment, net
|
|
|
5,880
|
|
|
|
6,216
|
|
Intangible assets, net
|
|
|
114,629
|
|
|
|
128,134
|
|
Goodwill
|
|
|
73,022
|
|
|
|
73,022
|
|
Other assets
|
|
|
798
|
|
|
|
752
|
|
Total assets
|
|
$
|
365,083
|
|
|
$
|
520,851
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,171
|
|
|
$
|
9,190
|
|
Accrued expenses
|
|
|
12,265
|
|
|
|
12,389
|
|
Accrued interest
|
|
|
425
|
|
|
|
129
|
|
Deferred revenue, current
|
|
|
177
|
|
|
|
1,315
|
|
Income tax payable
|
|
|
4,381
|
|
|
|
7,153
|
|
Other current liabilities
|
|
|
3,692
|
|
|
|
2,175
|
|
Total current liabilities
|
|
|
32,111
|
|
|
|
32,351
|
|
Notes payable, non-current
|
|
|
291,456
|
|
|
|
290,516
|
|
Deferred revenue, non-current
|
|
|
2,783
|
|
|
|
805
|
|
Deferred tax liability, net
|
|
|
2,995
|
|
|
|
21,289
|
|
Other liabilities
|
|
|
9,390
|
|
|
|
8,791
|
|
Total liabilities
|
|
|
338,735
|
|
|
|
353,752
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 5,000,000 shares authorized at June 30,
2017 and December 31, 2016; no shares issued and outstanding at June 30, 2017 and December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
Class A common stock, $0.01 par value; 270,000,000 shares
authorized at June 30, 2017 and December 31, 2016; 46,552,462 and 46,415,749 shares issued and outstanding at June 30, 2017
and December 31, 2016, respectively
|
|
|
464
|
|
|
|
464
|
|
Class B common stock, $0.01 par value; 75,000,000 shares authorized at
June 30, 2017 and December 31, 2016; no shares issued and outstanding at June 30, 2017 and December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
127,208
|
|
|
|
120,251
|
|
Accumulated other comprehensive income
|
|
|
54,434
|
|
|
|
54,527
|
|
Treasury stock, at cost; 227,266 and 3,009,942 shares at June 30, 2017
and December 31, 2016, respectively
|
|
|
(4,018
|
)
|
|
|
(46,269
|
)
|
(Accumulated deficit) retained earnings
|
|
|
(151,740
|
)
|
|
|
38,126
|
|
Total stockholders' equity
|
|
|
26,348
|
|
|
|
167,099
|
|
Total liabilities and stockholders'
equity
|
|
$
|
365,083
|
|
|
$
|
520,851
|
|
The accompanying Notes are an integral
part of these Condensed Consolidated Financial Statements.
SUCAMPO PHARMACEUTICALS,
INC.
Condensed Consolidated Statements of
Operations and Comprehensive (Loss) Income (Unaudited)
(In thousands, except per share data)
|
|
Three Months Ended June
30,
|
|
Six Months Ended June
30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
Product royalty revenue
|
|
$
|
20,562
|
|
|
$
|
18,735
|
|
|
$
|
38,997
|
|
|
$
|
35,451
|
|
Product sales revenue
|
|
|
34,237
|
|
|
|
28,389
|
|
|
|
68,391
|
|
|
|
54,984
|
|
Research and development revenue
|
|
|
5,051
|
|
|
|
3,369
|
|
|
|
8,499
|
|
|
|
6,799
|
|
Contract and collaboration revenue
|
|
|
46
|
|
|
|
1,458
|
|
|
|
292
|
|
|
|
1,925
|
|
Total revenues
|
|
|
59,896
|
|
|
|
51,951
|
|
|
|
116,179
|
|
|
|
99,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of goods sold
|
|
|
17,035
|
|
|
|
20,354
|
|
|
|
33,918
|
|
|
|
43,692
|
|
Research and development
|
|
|
19,099
|
|
|
|
10,933
|
|
|
|
29,432
|
|
|
|
25,604
|
|
Acquired in-process research and development
|
|
|
186,603
|
|
|
|
-
|
|
|
|
186,603
|
|
|
|
-
|
|
General and administrative
|
|
|
11,583
|
|
|
|
12,423
|
|
|
|
29,274
|
|
|
|
21,350
|
|
Selling and marketing
|
|
|
1,411
|
|
|
|
623
|
|
|
|
1,927
|
|
|
|
1,398
|
|
Total costs and expenses
|
|
|
235,731
|
|
|
|
44,333
|
|
|
|
281,154
|
|
|
|
92,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(175,835
|
)
|
|
|
7,618
|
|
|
|
(164,975
|
)
|
|
|
7,115
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
|
10
|
|
|
|
28
|
|
|
|
35
|
|
Interest expense
|
|
|
(2,916
|
)
|
|
|
(5,972
|
)
|
|
|
(5,806
|
)
|
|
|
(12,242
|
)
|
Other expense, net
|
|
|
(476
|
)
|
|
|
(2,539
|
)
|
|
|
(265
|
)
|
|
|
(2,886
|
)
|
Total non-operating expense, net
|
|
|
(3,392
|
)
|
|
|
(8,501
|
)
|
|
|
(6,043
|
)
|
|
|
(15,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(179,227
|
)
|
|
|
(883
|
)
|
|
|
(171,018
|
)
|
|
|
(7,978
|
)
|
Income tax (provision) benefit
|
|
|
(1,940
|
)
|
|
|
51
|
|
|
|
(5,525
|
)
|
|
|
3,089
|
|
Net loss
|
|
$
|
(181,167
|
)
|
|
$
|
(832
|
)
|
|
$
|
(176,543
|
)
|
|
$
|
(4,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(3.92
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(3.94
|
)
|
|
$
|
(0.11
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
46,195
|
|
|
|
42,759
|
|
|
|
44,826
|
|
|
|
42,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(181,167
|
)
|
|
$
|
(832
|
)
|
|
$
|
(176,543
|
)
|
|
$
|
(4,889
|
)
|
Other comprehensive income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on pension benefit obligation, net of tax
|
|
|
(16
|
)
|
|
|
33
|
|
|
|
(16
|
)
|
|
|
25
|
|
Foreign currency translation gain (loss), net of tax
|
|
|
-
|
|
|
|
20,700
|
|
|
|
(77
|
)
|
|
|
36,255
|
|
Comprehensive (loss) income
|
|
$
|
(181,183
|
)
|
|
$
|
19,901
|
|
|
$
|
(176,636
|
)
|
|
$
|
31,391
|
|
The accompanying Notes are an integral
part of these Condensed Consolidated Financial Statements.
SUCAMPO PHARMACEUTICALS,
INC.
Condensed Consolidated Statement
of Changes in Stockholders’ Equity (Unaudited)
(In thousands, except share data)
|
|
Class A
Common Stock
|
|
Additional
Paid-In
|
|
Accumulated
Other
Comprehensive
|
|
Treasury Stock
|
|
Retained
Earnings
(Accumulated
|
|
Total
Stockholders'
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
|
|
Shares
|
|
Amount
|
|
Deficit)
|
|
Equity
|
Balance at December 31, 2016
|
|
|
46,415,749
|
|
|
$
|
464
|
|
|
$
|
120,251
|
|
|
$
|
54,527
|
|
|
|
3,009,942
|
|
|
$
|
(46,269
|
)
|
|
$
|
38,126
|
|
|
$
|
167,099
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
5,566
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,566
|
|
Stock issued in connection with employee stock plan
|
|
|
120,224
|
|
|
|
-
|
|
|
|
283
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
283
|
|
Stock issued under employee stock purchase plan
|
|
|
16,489
|
|
|
|
-
|
|
|
|
150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150
|
|
Stock withheld to cover employee taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
(114
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(114
|
)
|
Treasury stock issued for Vtesse acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(2,782,676
|
)
|
|
|
42,251
|
|
|
|
(12,251
|
)
|
|
|
30,000
|
|
Unrealized loss on pension benefit obligation, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16
|
)
|
Foreign currency translation, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(77
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(77
|
)
|
Cumulative-effect adjustment from adoption of ASU 2016-09
|
|
|
-
|
|
|
|
-
|
|
|
|
1,072
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(1,072
|
)
|
|
|
-
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(176,543
|
)
|
|
|
(176,543
|
)
|
Balance at June 30, 2017
|
|
|
46,552,462
|
|
|
$
|
464
|
|
|
$
|
127,208
|
|
|
$
|
54,434
|
|
|
|
227,266
|
|
|
$
|
(4,018
|
)
|
|
$
|
(151,740
|
)
|
|
$
|
26,348
|
|
The accompanying Notes are an integral
part of these Condensed Consolidated Financial Statements.
SUCAMPO PHARMACEUTICALS,
INC.
Condensed Consolidated Statements of
Cash Flows (Unaudited)
(In thousands)
|
|
Six Months Ended June
30,
|
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(176,543
|
)
|
|
$
|
(4,889
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14,880
|
|
|
|
30,098
|
|
Loss on disposal of property and equipment
|
|
|
-
|
|
|
|
533
|
|
Deferred tax (benefit) provision
|
|
|
(4,681
|
)
|
|
|
4,960
|
|
Stock-based compensation
|
|
|
5,566
|
|
|
|
3,723
|
|
Acquired in-process research and development
|
|
|
186,603
|
|
|
|
-
|
|
Unrealized currency translations
|
|
|
221
|
|
|
|
9,123
|
|
Shortfall from stock-based compensation
|
|
|
143
|
|
|
|
(25
|
)
|
Windfall benefit from stock-based compensation
|
|
|
(151
|
)
|
|
|
(455
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Product royalties receivable
|
|
|
5,709
|
|
|
|
4,048
|
|
Accounts receivable
|
|
|
23,443
|
|
|
|
5,866
|
|
Inventory
|
|
|
370
|
|
|
|
309
|
|
Prepaid and income taxes receivable and payable, net
|
|
|
(2,764
|
)
|
|
|
(18,221
|
)
|
Accounts payable
|
|
|
458
|
|
|
|
(5,296
|
)
|
Accrued expenses
|
|
|
49
|
|
|
|
(3,466
|
)
|
Accrued interest payable
|
|
|
296
|
|
|
|
(70
|
)
|
Deferred revenue
|
|
|
840
|
|
|
|
119
|
|
Collaboration obligation
|
|
|
-
|
|
|
|
(1,826
|
)
|
Other assets and liabilities, net
|
|
|
1,753
|
|
|
|
1,754
|
|
Net cash provided by operating activities
|
|
|
56,192
|
|
|
|
26,285
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Convertible note receivable
|
|
|
-
|
|
|
|
(5,000
|
)
|
Changes in restricted cash
|
|
|
-
|
|
|
|
10,598
|
|
Payment of squeeze-out liability for non-tendering R-Tech shareholders
|
|
|
-
|
|
|
|
(7,668
|
)
|
Purchase of in-process research and development, net of cash acquired
|
|
|
(169,665
|
)
|
|
|
-
|
|
Purchases of property and equipment
|
|
|
(354
|
)
|
|
|
(823
|
)
|
Net cash used in investing activities
|
|
|
(170,019
|
)
|
|
|
(2,893
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments of notes payable
|
|
|
-
|
|
|
|
(30,082
|
)
|
Changes in restricted cash
|
|
|
-
|
|
|
|
17,676
|
|
Proceeds from exercise of stock options
|
|
|
283
|
|
|
|
1,643
|
|
Proceeds from employee stock purchase plan
|
|
|
150
|
|
|
|
128
|
|
Tax payment upon settlement of stock awards
|
|
|
(114
|
)
|
|
|
-
|
|
Net cash provided by (used in) financing activities
|
|
|
319
|
|
|
|
(10,635
|
)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(66
|
)
|
|
|
6,940
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(113,574
|
)
|
|
|
19,697
|
|
Cash and cash equivalents at beginning of period
|
|
|
198,308
|
|
|
|
108,284
|
|
Cash and cash equivalents at end of period
|
|
$
|
84,734
|
|
|
$
|
127,981
|
|
The accompanying Notes are an integral
part of these Condensed Consolidated Financial Statements.
1.
Business Organization and Basis of Presentation
Description of the Business
Sucampo Pharmaceuticals,
Inc., (Company) is a global biopharmaceutical company focused on developing, identifying, acquiring and bringing to market innovative
medicines that meet unmet medical needs. The Company’s primary focus areas are medicines that treat gastrointestinal, ophthalmic,
neurological, and oncology disorders.
The Company currently
generates revenue mainly from product royalties, upfront and milestone payments, product sales and reimbursements for development
activities. The Company expects to continue to incur significant expenses for the next several years as it continues its research
and development activities, seeks additional regulatory approvals and additional indications for approved products and other compounds,
and seeks strategic opportunities for acquiring new products and product candidates.
AMITIZA
®
(lubiprostone) is being marketed for three gastrointestinal indications under the collaboration and license agreement (as
amended in October 2014, the North America Takeda Agreement) with Takeda Pharmaceutical Company Limited (Takeda). These indications
are chronic idiopathic constipation (CIC) in adults, irritable bowel syndrome with constipation (IBS-C) in adult women and opioid-induced
constipation (OIC) in adults suffering from chronic non-cancer related pain. Under the North America Takeda Agreement, the Company
is primarily responsible for clinical development activities, while Takeda is responsible for commercialization of AMITIZA in
the United States (U.S.) and Canada. The Company and Takeda initiated commercial sales of AMITIZA in the U.S. for the treatment
of CIC in April 2006, for the treatment of IBS-C in May 2008 and for the treatment of OIC in May 2013. Takeda is required to provide
a minimum annual commercial investment during the current term of the North America Takeda Agreement and may reduce the minimum
annual commercial investment when a generic equivalent enters the market. In October 2015, Health Canada approved AMITIZA for
CIC in adults. In October 2014, the Company and Takeda executed amendments to the North America Takeda Agreement which, among
other things, extended the term of the North America Takeda Agreement beyond December 2020. During the extended term beginning
in January 2021, Takeda and the Company will share the annual net sales revenue of the branded AMITIZA products.
The Company has also
partnered with Par Pharmaceuticals, Inc. (Par) and Dr. Reddy’s Laboratories, Ltd. (Dr. Reddy’s) in connection with
the settlement of patent litigation in the U.S. related to the Company’s AMITIZA 8 mcg and 24 mcg soft gelatin capsule products.
Under the Company’s agreement with Par, the Company granted Par a non-exclusive license to market Par’s generic version
of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the indications approved for AMITIZA beginning January
1, 2021, or earlier under certain circumstances. Beginning on January 1, 2021, Par will split with the Company the gross profits
of the licensed products sold during the term of the agreement, which continues until each of the Company’s related patents
has expired. Under the Company’s agreement with Dr. Reddy’s, the Company granted Dr. Reddy’s a non-exclusive
license to market Dr. Reddy’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the
indications approved for AMITIZA. This license does not begin until more than six years from November 9, 2016, or earlier under
certain circumstances. Dr. Reddy’s will pay to the Company a share of net profits of generic lubiprostone products sold
during the term of the agreement, which decreases over time and ends when all of the Company’s related patents have expired.
In the event that either Par or Dr. Reddy’s elect to launch an authorized generic form of lubiprostone, the Company has
agreed to supply such product under the terms of a manufacturing and supply agreement at a negotiated price.
In Japan, AMITIZA
is marketed under a license, commercialization and supply agreement (the Japan Mylan Agreement) that was transferred to Mylan,
Inc. (Mylan) from Abbott Laboratories, Inc. (Abbott), as of February 2015, as part of Mylan’s acquisition of a product portfolio
from Abbott. The Company received approval of its new drug application (NDA) for AMITIZA for the treatment of chronic constipation
(CC), excluding constipation caused by organic diseases, from Japan’s Ministry of Health, Labour and Welfare in June 2012
and pricing approval in November 2012. AMITIZA is the only prescription medicine for CC approved in Japan. The Company did not
experience any significant changes in the commercialization of AMITIZA in Japan as a result of the transfer of the Japan Mylan
Agreement from Abbott to Mylan.
In May 2015, the Company entered into an exclusive
license, development, commercialization and supply agreement (the China Gloria Agreement) with Harbin Gloria Pharmaceuticals Co.,
Ltd. (Gloria) for AMITIZA in the People’s Republic of China. Under the China Gloria Agreement, Gloria is responsible for
all development activities and costs, as well as commercialization and regulatory activities, for AMITIZA in the People’s
Republic of China. The Company will be the exclusive supplier of AMITIZA to Gloria at an agreed upon supply price. Upon entering
into the China Gloria Agreement, the Company received an upfront payment of $1.0 million. In June 2015, the China Food and Drug
Administration accepted an Investigational New Drug (IND) application for a pivotal trial of AMITIZA in patients with CIC; as
a result, the Company received an additional payment of $500,000 from Gloria. In addition to the $1.5 million in payments received
and recognized as revenue through June 2015, the Company is eligible to receive an additional payment in the amount of $1.5 million
upon the occurrence of a specified regulatory or commercial milestone event.
In October 2014,
the Company entered into an exclusive license, development, commercialization and supply agreement (the Global Takeda Agreement)
for lubiprostone with Takeda, through which Takeda has the exclusive rights to further develop and commercialize AMITIZA in all
global markets, except the U.S., Canada, Japan and the People’s Republic of China. Takeda became the marketing authorization
holder in Switzerland in April 2015, as well as in the United Kingdom (U.K.), Austria, Belgium, Germany, Netherlands, Ireland,
Italy, Luxembourg and Spain during 2016.
Before the execution
of the Global Takeda Agreement, the Company retained full rights to develop and commercialize AMITIZA for the rest of the world’s
markets outside of the U.S., Canada and Japan. In the U.K., the Company received approval in September 2012 from the Medicines
and Healthcare Products Regulatory Agency (MHRA) for the use of AMITIZA to treat CIC. The Company made AMITIZA available in the
U.K. in the fourth quarter of 2013. In July 2014, National Institute of Health and Care Excellence (NICE) published the technology
appraisal guidance recommending the use of AMITIZA in the treatment of CIC and associated symptoms in adults who have failed laxatives.
In January 2015, the Company successfully completed the European mutual recognition procedure (MRP) for AMITIZA for the treatment
of CIC in select European countries, resulting in marketing authorizations in these countries.
In Switzerland, AMITIZA
was approved to treat CIC in 2009. In 2012, the Company reached an agreement with the Bundesamt fur Gesundheit, (BAG), the Federal
Office of Public Health in Switzerland, on a reimbursement price for AMITIZA in Switzerland, and began active marketing in the
first quarter of 2013. In February 2014, the Company announced that the BAG revised several reimbursement limitations with which
AMITIZA was first approved for reimbursement and inclusion in the Spezialitätenliste (SL) to allow all Swiss physicians to
prescribe AMITIZA to patients who have failed previous treatments with at least two laxatives over a nine-month period. In July
2014, AMITIZA was approved for the treatment of OIC in chronic, non-cancer adult patients by the Swissmedic, the Swiss Agency
for Therapeutic Products, and in October 2015, the BAG added this indication to the SL.
In October 2015,
Takeda obtained approval of the clinical trial application (CTA) for AMITIZA for the treatment of CIC and IBS-C in Russia that
was submitted in June 2015. In December 2015, a CTA was filed for AMITIZA for the treatment of CIC, IBS-C and OIC in Mexico and
South Korea. Takeda initiated Phase 3 registration trials in Russia in March 2016 and in South Korea and Mexico in May 2016. An
NDA for the treatment of CIC, IBS-C, and OIC was submitted in Israel in June 2015, and approved in July 2016. An NDA for the treatment
of CIC, IBS-C and OIC was approved in Kazakhstan in December 2015. Additional NDA submissions have been made by Takeda in Singapore
in May 2016, and in South Africa and Indonesia in June 2016, and are planned in various other markets in 2017 and future years.
In the U.S., the Company ceased marketing
RESCULA (unoprostone isopropyl), an ophthalmology product, in the fourth quarter of 2014 and no product was made available after
the March 2015 expiration date. In May 2015, the Company returned all licenses for unoprostone isopropyl to R-Tech Ueno, Ltd.
(R-Tech). As part of the acquisition of R-Tech in October 2015, the Company acquired all rights to RESCULA. RESCULA is being commercialized
by Santen Pharmaceutical Co., Ltd. in Japan, and Zuellig Pharma Inc. in Taiwan.
The Company’s
clinical development programs include the following:
Lubiprostone
Alternate Formulation
The Company has been
developing an alternate formulation of lubiprostone for both adult and pediatric patients who are unable to take or tolerate capsules
and for naso-gastric tube fed patients. Takeda has agreed to fund 100% of the costs, up to a cap, of this alternate formulation
work. The Company initiated the Phase 3 program of the alternate formulation of lubiprostone in adults in the second half of 2016
and, if the program is successful, the Company intends to file an NDA in the U.S. for the alternate formulation for adults in
the second half of 2017.
Lubiprostone
for Pediatric Functional Constipation
A Phase 3 program required to support an application
for marketing authorization of lubiprostone for pediatric functional constipation comprises four clinical trials. The first two
trials, one of which was completed in late 2016, test the soft gelatin capsule formulation of lubiprostone in patients 6 to 17
years of age. The first of these trials was a pivotal 12-week, randomized, placebo-controlled trial which was initiated in December
2013 and completed enrollment in April 2016. The second trial is a follow-on, long-term safety extension trial that was initiated
in March 2014. In November 2016, the Company announced that the Phase 3 trial of AMITIZA in pediatric functional constipation
in children 6 to 17 years of age failed to achieve its primary endpoint of overall spontaneous bowel movement (SBM), response.
The trial achieved statistical significance for some secondary endpoints, notably overall SBM frequency, straining, and stool
consistency. In addition, in this study lubiprostone was well tolerated. The Company has entered into a process with the U.S.
Food and Drug Administration (FDA) and other constituencies, and as a result of initial discussion with the FDA submitted a supplemental
NDA on July 28, 2017. Additionally, after further consultations with the FDA to better determine the doses and endpoints that
should be studied, we expect the Phase 3 program for the alternate formulation of lubiprostone described above will be followed
in mid-2018 with a Phase 3 program in patients 6 months to likely 6 years of age using the alternate formulation. Takeda has agreed
to fund 70% of the costs up to a cap, and then 50% of the costs thereafter, of this pediatric functional constipation program.
CPP 1-X/Sulindac
Combination Product
In January 2016, the
Company entered into an option and collaboration agreement under which Cancer Prevention Pharmaceuticals, Inc. (CPP) granted the
Company the sole option to acquire an exclusive license to commercialize CPP-1X/sulindac combination product in North America.
This product is currently in a Phase 3 clinical trial, which is being conducted by CPP for the treatment of familial adenomatous
polyposis (FAP). Under the agreement with CPP, the Company has the exclusive option to license this product in North America.
There are currently no approved treatments for FAP. The ongoing Phase 3 study, known as CPP FAP-310, is a 150-patient, three-arm,
double-blind, randomized trial of the combination agent and the single agent comparators.
On
June 7, 2017, CPP informed the Company that an Independent Data Monitoring Committee (IDMC), following a planned interim futility
analysis, found no reason to discontinue the Phase 3 study, CPP FAP-310, evaluating CPP-1X/sulindac for adults with FAP. Results
from the clinical trial are expected by the end of 2018. Pursuant to the Company’s agreement with CPP, the Company made
the $4.5 million payment for the second option fee tranche in July 2017, which was recorded in research and development expense
for the three and six months ended June 30, 2017.
VTS-270 for
Niemann-Pick Disease Type C1 (NPC-1)
On
March 31, 2017, the Company entered into an Agreement and Plan of Merger with Vtesse Inc. (Vtesse), a privately-held rare disease
company. The Company acquired Vtesse’s lead product candidate, known as VTS-270, upon closing the acquisition on April 3,
2017. VTS-270 is a well-characterized mixture of 2-hydroxypropyl-ß-cyclodextrins (HPßCD) with a specific compositional
fingerprint that distinguishes it from other HPßCD mixtures. It is administered by an intrathecal infusion to directly address
the neurological manifestations of disease. Preclinical and early clinical studies suggest that the administration of VTS-270
may slow or stop certain indicators of NPC-1, an ultra-orphan, progressive and fatal disease caused by a defect in lipid transport
within the cell. VTS-270, which is currently in a fully-enrolled pivotal Phase 2b/3 trial, has been granted breakthrough therapy
designation in the U.S. and orphan designation in both the U.S. and EU. Effective treatment of NPC-1 remains a high unmet need,
with no approved products for patients in the U.S. Results from the pivotal trial are expected in mid-2018.
The Company accounted
for the transaction as an asset acquisition and incurred an acquired in-process research and development charge of $186.6 million
(and no related current tax benefit) in the second quarter of 2017. Additionally, the Company recorded a deferred tax asset of
$13.6 million related to Vtesse’s net operating loss.
Basis of Presentation
The accompanying
unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles
in the United States of America (GAAP) and the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for
interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statements and should be read in conjunction with the Company’s Consolidated Financial Statements as of and for
the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March
8, 2017. The financial information as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 is unaudited.
The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures
required by GAAP. In the opinion of the Company’s management, all adjustments, consisting only of normal recurring adjustments
or accruals, considered necessary for a fair statement of the results of these interim periods have been included. The results
of the Company’s operations for any interim period are not necessarily indicative of the results that may be expected for
any other interim period or for a full fiscal year.
The Condensed Consolidated
Financial Statements include the accounts of the Company and its wholly-owned subsidiaries: Sucampo AG (SAG) and Sucampo Acquisitions
GmbH (SAQ) based in Zug, Switzerland and Vtesse Europe Ltd., based in the United Kingdom, through which the Company conducts certain
of its worldwide and European operations; Sucampo Pharma, LLC (SPL) based in Tokyo, Japan, through which the Company conducts
its Asian operations, manufacturing and certain development operations; and Sucampo Pharma Americas LLC (SPA) and Vtesse Inc.,
based in Rockville, Maryland, through which the Company conducts its North American operations. All inter-company balances and
transactions have been eliminated.
The preparation of
financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets
and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities, and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates.
2.
Summary of Significant Accounting Policies
Certain Risks, Concentrations and
Uncertainties
Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist of cash and cash equivalents, restricted cash and receivables.
The Company places its cash, cash equivalents and restricted cash with highly rated financial institutions. As of June 30, 2017
and December 31, 2016, approximately $1.3 million or 1%, and $1.2 million, or less than 1%, respectively, of the Company’s
cash, cash equivalents, and restricted cash were issued or insured by the U.S. government or other government agencies. The Company
has not experienced any losses on these accounts related to amounts in excess of insured limits.
Revenues from Takeda,
an unrelated party, accounted for 65.4% and 69.3% of the Company’s total revenues for the three months ended June
30, 2017 and 2016, respectively, and 62.3% and 65.5% of the Company’s total revenues for the six months ended June 30, 2017
and 2016, respectively. Accounts receivable and product royalties receivable from Takeda accounted for 80.9% and 69.6% of the
Company’s total accounts receivable and product royalties receivable at June 30, 2017 and December 31, 2016, respectively.
Revenues from another unrelated party, Mylan, accounted for 31.1% and 28.2% of the Company’s total
revenues for the three months ended June 30, 2017 and 2016, respectively, and 33.3% and 29.3% of the Company’s total revenues
for the six months ended June 30, 2017 and 2016, respectively. Accounts receivable from Mylan accounted for 14.5% and 30.1% of
the Company’s total accounts receivable and product royalties receivable at June 30, 2017 and December 31, 2016, respectively.
The Company depends
significantly upon collaborations with Takeda and Mylan, and its activities may be impacted if these relationships are disrupted.
Fair Value of Financial Instruments
The carrying values
of the Company’s financial instruments approximate their fair values due to their short maturities, independent valuations
or internal assessments. The Company’s financial instruments include cash and cash equivalents, restricted cash, receivables,
accounts payable and other accrued liabilities. The Company’s investment in CPP is measured at fair value on a recurring
basis, and the Company estimated the fair value of its long-term debt as of June 30, 2017 based on the available market data as
of June 30, 2017.
Variable Interest Entities
The Company performs
initial and on-going evaluations of the entities with which it has variable interests, such as equity ownership, in order to identify
entities (i) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional
subordinated financial support or (ii) in which the equity investors lack an essential characteristic of a controlling financial
interest. Such entities are classified as variable interest entities (VIEs). If an entity is identified as a VIE, the Company
performs an assessment to determine whether the Company has both (i) the power to direct activities that most significantly impact
the VIE’s economic performance and (ii) have the obligation to absorb losses from or the right to receive benefits of the
VIE that could potentially be significant to the VIE. If both of these criteria are satisfied, the Company is identified as the
primary beneficiary of the VIE. As of June 30, 2017 and December 31, 2016, CPP, in which the Company held a variable interest,
was determined to be a VIE; however, the Company does not have the power to direct CPP’s economic performance and, as a
result, the Company is not the primary beneficiary of CPP and the entity is not consolidated with the financial statements of
the Company.
Recently Adopted Accounting Pronouncements
In July 2015, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, "Inventory (Topic 330):
Simplifying the Measurement of Inventory." ASU No. 2015-11 applies only to inventory for which cost is determined by methods
other than last in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out
or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable
value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs
of completion, disposal, and transportation. The Company adopted this standard on January 1, 2017. The adoption of this standard
had no impact on the Company’s consolidated financial statements.
In March 2016, the
FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which changes the accounting
for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to
be recorded in the statement of operations when the awards vest or are settled. In addition, cash flows related to excess tax
benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard
also clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing
activity on the statement of cash flows, and provides an accounting policy election to account for forfeitures as they occur.
The new standard is effective for the Company’s calendar year beginning January 1, 2017. On January 1, 2017, as a result
of adopting ASU No. 2016-09, the Company recorded a cumulative-effect adjustment of $1.1 million between retained earnings and
additional paid in capital as the Company elected to recognize forfeitures as they occur. Additionally, a retrospective adjustment
to the Company’s statement of cash flows for the six months ended June 30, 2016 resulted in an increase of $455,000 to net
cash provided by operating activities and a decrease of $455,000 to net cash provided by financing activities.
In January 2017,
the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business.” This definition, as defined in ASC 805,
is used in determining whether acquisitions are accounted for as business combinations or as the acquisition of assets. This standard
modifies the definition of a business, including providing a screen to determine when an acquired set of assets and activities
is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired is concentrated
in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The standard also makes other
modifications to clarify what must be included in an acquired set for it to be a business and how to evaluate the set to determine
whether it is a business. The Company’s acquisitions subsequent to December 31, 2016, such as the acquisition of Vtesse,
are subject to the application of the modified definition.
In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles - Goodwill and Other (Topic 350): Simplifying the test for goodwill impairment.” ASU No. 2017-04 simplifies
the subsequent measurement of goodwill by eliminating Step 2 in the quantitative test and record an requires an entity to record
impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 will be applied
prospectively and is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December
15, 2019. The new standard is effective for the Company for its fiscal 2021 fourth quarter goodwill impairment test. Early adoption
is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company elected to early adopt
ASU No. 2017-04 on January 1, 2017. The adoption had no impact on the Company’s consolidated financial statements as of
and for the three and six months ended June 30, 2017.
Accounting Pronouncements Not Yet
Adopted
In May 2014, the
FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which will replace numerous requirements in
U.S. GAAP, including industry-specific requirements. This guidance provides a five-step model to be applied to all contracts with
customers, with an underlying principle that an entity will recognize revenue to depict the transfer of goods or services to customers
at an amount that the entity expects to be entitled to in exchange for those goods or services. The FASB has issued several
amendments to the standard including clarification on accounting for licenses of intellectual property, identifying performance
obligations, and most recently, technical corrections on the interpretation of the new guidance. ASU No. 2014-09 requires extensive
quantitative and qualitative disclosures covering the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including disclosures on significant judgments made when applying the guidance. This guidance is effective
for annual reporting periods beginning after December 15, 2017 and interim periods therein. An entity can elect to apply the guidance
under one of the following two methods: (i) retrospectively to each prior reporting period presented – referred to as the
full retrospective method or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at
the date of initial application in retained earning – referred to as the modified retrospective method.
The Company has established
a project team in order to analyze the effect of the standard on its revenue streams by reviewing its current accounting policies
and practices to identify potential differences which would result from applying the requirements of the new standard to its revenue
contracts. The Company has identified each revenue stream and is nearing the completion of its assessment of all potential effects
of the standard. The Company continues to evaluate the impact of adoption, the implementation approach to be used and the applicable
disclosure requirements, which the Company expects will be significant and comprehensive. The Company plans to adopt the new standard
effective January 1, 2018, anticipates using the full retrospective method, and will continue to monitor additional changes, modifications,
clarifications or interpretations by the FASB, which may impact the Company’s current conclusions.
In February 2016,
the FASB issued ASU No. 2016-02, “Leases,” that requires lessees to recognize assets and liabilities on the balance
sheet for most leases including operating leases. Lessees now classify leases as either finance or operating leases and lessors
classify all leases as sales-type, direct financing or operating leases. The statement of operations presentation and expense
recognition for lessees for finance leases is similar to that of capital leases under Accounting Standards Codification (ASC)
840 with separate interest and amortization expense with higher periodic expense in the earlier periods of a lease. For operating
leases, the statement of operations presentation and expense recognition is similar to that of operating leases under ASC 840
with single lease cost recognized on a straight-line basis. This guidance is to be applied using a modified retrospective approach
at the beginning of the earliest comparative period presented in the financial statements and is effective for annual periods
beginning after December 15, 2018 and interim periods therein. Early adoption is permitted. The Company is currently evaluating
the effect ASU No. 2016-02 may have on its condensed consolidated financial statements and related disclosures, but expects recognizing
the lease liability and related right-of-use asset will impact its consolidated balance sheet.
In
March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU No. 2017-07 requires that
an employer report the service cost component in the same line item or items as other compensation costs arising from
services rendered during the period. The other components of net benefit cost are required to be presented in the income
statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.
The amendments in this ASU No. 2017-07 also allow only the service cost component to be eligible for capitalization when
applicable. The amendments in ASU No. 2017-07 are effective for public business entities for annual periods beginning after
December 15, 2017 and are to be applied retrospectively, including interim periods within those annual periods. Early
adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not
been issued or made available for issuance. The Company is currently analyzing the impact of ASU No. 2017-07, and is
currently unable to determine the impact of the new standard, if any, on the Company’s consolidated financial
statements.
In May 2017, the
FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”.
ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity
to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following
are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before the original
award is modified, 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award
immediately before the original award is modified, and 3) the classification of the modified award as an equity instrument or
a liability instrument is the same as the classification of the original award immediately before the original award is modified.
The amendment in ASU No. 2017-09 is effective for public business entities for annual periods beginning after December 15, 2017
and is to be applied prospectively. Early adoption is permitted, including adoption in any interim period. The Company adopted ASU No. 2017-09 on July 1, 2017.
3.
Net Loss per Share
Basic net loss per
share is computed by dividing net loss by the weighted average common shares outstanding. Diluted net loss per share is computed
by dividing net loss by the weighted average common shares outstanding without the impact of potential dilutive common shares
outstanding because they would have an anti-dilutive impact on diluted net loss per share. The treasury-stock method is used to
determine the dilutive effect of the Company’s stock option grants, and the if-converted method is used to determine the
dilutive effect of the Company’s convertible notes.
The computation of
net loss per share for the three and six months ended June 30, 2017 and 2016 is shown below.
|
|
Three Months Ended June
30,
|
|
Six Months Ended June
30,
|
(In thousands, except per share data)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Basic net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(181,167
|
)
|
|
$
|
(832
|
)
|
|
$
|
(176,543
|
)
|
|
$
|
(4,889
|
)
|
Weighted-average number of common shares-basic and diluted
|
|
|
46,195
|
|
|
|
42,759
|
|
|
|
44,826
|
|
|
|
42,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(3.92
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(3.94
|
)
|
|
$
|
(0.11
|
)
|
The Company is excluding
both the shares from the convertible note under the if-converted method and the outstanding options to purchase common stock from
the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive
effect:
|
|
Three Months Ended June
30,
|
|
Six Months Ended June
30,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Employee stock options
|
|
|
6,579
|
|
|
|
5,382
|
|
|
|
6,579
|
|
|
|
5,382
|
|
Convertible note, assumed shares if-converted
|
|
|
18,079
|
|
|
|
-
|
|
|
|
18,079
|
|
|
|
-
|
|
4.
Segment Information
The Company has one
operating segment which is the development and commercialization of pharmaceutical products. Summarized product category and geographic
information is shown in the tables below.
Product Category
Information
Revenues for product
categories are attributed based on the following categories.
Product royalty revenue
represents royalty revenue earned on the net sales of AMITIZA in North America. Product sales revenue represents drug product
net sales of AMITIZA in North America, Japan and Europe and drug product net sales of RESCULA in Japan. Research and development
revenue represents funded development work primarily related to AMITIZA. Contract and collaboration revenue represents the amortization
of up-front payments under the North America Takeda Agreement and release of the collaboration obligation under the Global Takeda
Agreement.
Company revenues
by product category for the three and six months ended June 30, 2017 and 2016 were as follows:
|
|
Three Months Ended June
30,
|
|
Six Months Ended June
30,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Product royalty revenue
|
|
$
|
20,562
|
|
|
$
|
18,735
|
|
|
$
|
38,997
|
|
|
$
|
35,451
|
|
Product sales revenue - AMITIZA
|
|
|
32,131
|
|
|
|
27,001
|
|
|
|
63,471
|
|
|
|
50,121
|
|
Product sales revenue - RESCULA
|
|
|
2,106
|
|
|
|
1,388
|
|
|
|
4,920
|
|
|
|
4,863
|
|
Research and development revenue
|
|
|
5,051
|
|
|
|
3,369
|
|
|
|
8,499
|
|
|
|
6,799
|
|
Contract and collaboration revenue
|
|
|
46
|
|
|
|
1,458
|
|
|
|
292
|
|
|
|
1,925
|
|
Total
|
|
$
|
59,896
|
|
|
$
|
51,951
|
|
|
$
|
116,179
|
|
|
$
|
99,159
|
|
Geographical Information
Revenues are attributable
to countries based on the location of the customer. The Company operates a manufacturing facility in Japan that supplies products
to customers as well as the Company’s subsidiaries in other countries. The sales from the manufacturing operations to other
countries are included in the net sales of the country in which the manufacturing location is based. All intercompany sales are
excluded to derive consolidated revenues. The Company’s country of domicile is the United States.
Company revenues
by geographic location for the three and six months ended June 30, 2017 and 2016 were as follows:
|
|
Three Months Ended June
30,
|
|
Six Months Ended June
30,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States
|
|
$
|
39,133
|
|
|
$
|
34,529
|
|
|
$
|
72,331
|
|
|
$
|
63,162
|
|
Japan
|
|
|
20,730
|
|
|
|
16,011
|
|
|
|
43,615
|
|
|
|
34,165
|
|
Rest of the world
|
|
|
33
|
|
|
|
1,411
|
|
|
|
233
|
|
|
|
1,832
|
|
Total
|
|
$
|
59,896
|
|
|
$
|
51,951
|
|
|
$
|
116,179
|
|
|
$
|
99,159
|
|
The Company’s
property and equipment, net by geographic location where located on June 30, 2017 and December 31, 2016 were as follows:
(In thousands)
|
|
June 30,
2017
|
|
December 31,
2016
|
United States
|
|
$
|
2,768
|
|
|
$
|
3,065
|
|
Japan
|
|
|
3,086
|
|
|
|
3,119
|
|
Rest of the world
|
|
|
26
|
|
|
|
32
|
|
Total
|
|
$
|
5,880
|
|
|
$
|
6,216
|
|
5.
Asset Acquisition
The following table and narrative summarizes
the Company’s asset acquisition during the three months ended June 30, 2017.
Counterparty
|
|
Compound(s) or Therapy
|
|
Acquisition
Month
|
|
Phase of
Development
(1)
|
|
Acquired
IPR&D Expense
(In
thousands)
|
Vtesse Inc
|
|
VTS-270 - 2-hydroxypropyl-ß-cyclodextrins
(HPßCD)
|
|
April 2017
|
|
Phase 2b / 3
|
|
$
|
186,603
|
|
|
(1)
|
The phase of development presented
is as of the date of the arrangement.
|
In April 2017, the
Company acquired Vtesse, including its Phase 2b/3 product candidate, VTS-270 (the IPR&D asset), a well-characterized mixture
of HPßCD with a specific compositional fingerprint that distinguishes it from other HPßCD mixtures, for the treatment
of NPC-1, an ultra-orphan, progressive and fatal disease. Under the terms of the agreement, the Company acquired Vtesse for upfront
consideration of $212.0 million, and agreed to pay Vtesse stockholders contingent consideration based on mid-single digit to double-digit
royalties on global net sales of the product based on increasing net sales levels, and a share of net proceeds that may be generated
from the monetization of the pediatric review voucher, which is expected to be granted in connection with the approval of
the product in the U.S. Of the $212.0 million consideration, the Company made a cash payment of $182.0 million and re-issued $30.0
million of Treasury Stock, 2,782,678 Class A common shares, based upon the closing price of $10.78 on April 3, 2017, to
Vtesse stockholders.
The preliminary purchase
price allocation was determined as follows:
|
|
April 3,
2017
|
|
Total purchase price
|
|
$
|
211,996
|
|
|
(In thousands)
|
|
|
|
|
|
Total fair value of tangible assets acquired and liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
|
(13,613
|
)
|
|
Net Assets
|
|
|
(11,780
|
)
|
|
Total IPR&D asset
|
|
$
|
186,603
|
|
|
Vtesse did not meet
the definition of a business under ASC 805 as substantially all of the fair value of Vtesse was attributable to the VTS-270 IPR&D
asset. Based on the asset acquisition method of accounting, the consideration paid was allocated primarily to the IPR&D asset
acquired of $186.6 million, which was immediately expensed as the IPR&D asset has no other alternate use. The balance was
allocated to the remaining assets and liabilities based on their estimated fair values. The acquired IPR&D expense is not
tax deductible.
6.
Fair Value Measurements
The Company performs
fair value measurements in accordance with the FASB’s guidance for fair value measurements and disclosures, which defines
fair value as the exchange price that would be received for selling an asset or paid to transfer a liability in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. A fair value hierarchy is established which requires the Company to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The Company classifies its assets and liabilities into the following categories
based on the three levels of inputs used to measure fair value:
Level 1
: Observable
inputs, such as quoted prices in active markets for identical assets or liabilities;
Level 2
: Inputs,
other than the quoted price in active markets, that are observable, either directly or indirectly, such as quoted prices in active
markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not
active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities; or
Level 3
: Unobservable
inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The carrying values
of cash and cash equivalents, restricted cash, accounts receivable, product royalties receivable, accounts payable and other accrued
liabilities, approximate their fair values due to their short maturities.
The Company has elected
the fair value option on its investment in CPP; as such, it is measured at fair value on a recurring basis and was classified
as Level 2. At June 30, 2017, the estimated fair value of the investment in CPP was $5.4 million. For the three months ended June
30, 2017, the Company recorded $0.1 million in other income due to the increase in fair value of the investment in CPP.
The estimated fair
value of long term debt at June 30, 2017 was $292.1 million, was classified as Level 2, and was based on the available market
data as of June 30, 2017.
The estimated fair
values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that
will be realized in the future. As of June 30, 2017 and December 31, 2016, there were no financial instruments measured at fair
value on a non-recurring basis.
7.
Inventory
Inventories are valued
under a standard costing method and are stated at the lower of cost or net realizable value. Inventories consist of raw materials,
work-in-process and finished goods. The Company’s inventories include the direct purchase cost of materials and supplies
and manufacturing overhead costs.
Inventory consisted
of the following at June 30, 2017 and December 31, 2016:
(In thousands)
|
|
June 30,
2017
|
|
December 31,
2016
|
Raw materials
|
|
$
|
3,658
|
|
|
$
|
1,414
|
|
Work in process
|
|
|
19,405
|
|
|
|
18,045
|
|
Finished goods
|
|
|
35
|
|
|
|
4,009
|
|
Total
|
|
$
|
23,098
|
|
|
$
|
23,468
|
|
8.
Investments, Non-Current
Investment in
CPP
In 2016, the Company
entered into a Securities Purchase Agreement (CPP Securities Agreement) and an Option and Collaboration Agreement (CPP Agreement)
with CPP for the development and commercialization of CPP-1X/sulindac combination.
Under the terms of
the CPP Securities Agreement, the Company provided $5.0 million to CPP in exchange for a convertible note. The convertible note
bears interest at the rate of 5% per annum and matures on January 31, 2019 unless earlier converted or prepaid. Under the terms
of the CPP Agreement, CPP granted the Company the sole option to acquire an exclusive license to commercialize CPP-1X/sulindac
combination product in North America.
Under the terms of an Option and Collaboration
Agreement, CPP granted the Company the sole option to acquire an exclusive license to commercialize CPP-1X/Sulindac combination
product in North America and granted the rest of world rights for CPP-1X/Sulindac to a third party, who is operating under a similar
option and license agreement. CPP-1X/Sulindac is currently in a Phase 3 clinical trial for the treatment of FAP. Target enrollment
in the study was achieved in April of 2016 and the trial is expected to conclude in 2018. The Company agreed to pay CPP an option
fee of $7.5 million, payable in two tranches. The first tranche of $3.0 million was paid in January 2016 upon signing. On
June 7, 2017, CPP informed the Company that an IDMC, following a planned interim futility analysis, found no reason to discontinue
the Phase 3 study, CPP FAP-310, evaluating CPP-1X/sulindac for adults with FAP.
Pursuant to the Company’s
agreement with CPP, the Company made the $4.5 million payment for the second option fee tranche, which was recorded in research
and development expense for the three and six months ended June 30, 2017. CPP will complete the ongoing Phase 3 trial under the
oversight of a joint steering committee between CPP and the Company.
CPP is considered
to be a VIE with respect to the Company and, as a result of the $4.5 million tranche payment, continues to conclude the power
to direct the activities that most significantly impact CPP’s economic performance is held by the board of directors of
CPP. The Company does not have a representative on CPP’s board and does not have the right to appoint or elect such a representative.
Therefore, the Company is not the primary beneficiary of CPP, and the entity is not consolidated with the financial statements
of the Company.
The Company’s
maximum exposure to loss as a result of its involvement with CPP was $5.4 million and $5.2 million as of June 30, 2017, and December
31, 2016, respectively.
The Company has elected
the fair value option on the convertible note received from CPP due to the nature of the financial characteristics of the investment.
As of June 30, 2017 and December 31, 2016, the fair value of the convertible note was $5.4 million and $5.2 million, respectively.
9.
Intangible Assets and Goodwill
Intangible assets
by major class consisted of the following as of June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
December 31, 2016
|
(In thousands)
|
|
Weighted
average life
(in months)
|
|
Carrying
amount
|
|
Weighted
average life
(in months)
|
|
Carrying
amount
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent and license rights
|
|
|
54
|
|
|
$
|
10,513
|
|
|
|
60
|
|
|
$
|
10,513
|
|
Manufacturing know-how
|
|
|
61
|
|
|
|
134,600
|
|
|
|
65
|
|
|
|
134,600
|
|
Accumulated amortization
|
|
|
|
|
|
|
(47,647
|
)
|
|
|
|
|
|
|
(34,142
|
)
|
Impairment losses
|
|
|
|
|
|
|
(5,651
|
)
|
|
|
|
|
|
|
(5,651
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
22,814
|
|
|
|
|
|
|
|
22,814
|
|
Total amortized intangible assets
|
|
|
|
|
|
$
|
114,629
|
|
|
|
|
|
|
$
|
128,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
$
|
73,022
|
|
|
|
|
|
|
$
|
73,022
|
|
Total unamortized intangible assets
|
|
|
|
|
|
$
|
73,022
|
|
|
|
|
|
|
$
|
73,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
187,651
|
|
|
|
|
|
|
$
|
201,156
|
|
The changes in intangible
assets for the six months ended June 30, 2017 are as follows:
(In thousands)
|
|
Amortized
intangibles
|
|
Goodwill
|
Balance at December 31, 2016
|
|
$
|
128,134
|
|
|
$
|
73,022
|
|
Amortization
|
|
|
(13,505
|
)
|
|
|
-
|
|
Balance at June 30, 2017
|
|
$
|
114,629
|
|
|
$
|
73,022
|
|
10.
Accrued Expenses and Other Current Liabilities
Accrued expenses
consisted of the following at June 30, 2017 and December 31, 2016:
(In thousands)
|
|
June 30,
2017
|
|
December 31,
2016
|
Research and development costs
|
|
$
|
4,605
|
|
|
$
|
3,030
|
|
Employee compensation
|
|
|
5,123
|
|
|
|
7,513
|
|
Legal and accounting fees
|
|
|
1,091
|
|
|
|
622
|
|
Restructuring
|
|
|
187
|
|
|
|
163
|
|
Other accrued expenses
|
|
|
1,259
|
|
|
|
1,061
|
|
Total
|
|
$
|
12,265
|
|
|
$
|
12,389
|
|
Other current liabilities
consisted of the following at June 30, 2017 and December 31, 2016:
(In thousands)
|
|
June 30,
2017
|
|
December 31,
2016
|
Indirect taxes payable
|
|
$
|
3,267
|
|
|
$
|
1,756
|
|
Squeeze out liability for non-tendering R-Tech shareholders
|
|
|
150
|
|
|
|
155
|
|
Other current liabilities
|
|
|
275
|
|
|
|
264
|
|
Total
|
|
$
|
3,692
|
|
|
$
|
2,175
|
|
In December 2015,
the Company adopted a plan to restructure certain of its operations and to consolidate certain functions in the Company’s
corporate headquarters located in Rockville, Maryland and in the Company’s Japanese subsidiary. In connection with these
restructuring activities, the Company recorded restructuring charges of $0.4 million and $1.7 million for the six months ended
June 30, 2017 and 2016, respectively. These costs are reflected within general and administrative expenses and consisted primarily
of termination benefits.
No restructuring
charges were recorded under this plan for the three months ended June 30, 2017, and the Company does not expect to record any
additional restructuring charges under this plan. The Company has incurred total restructuring charges under this plan of $3.7
million through June 30, 2017.
In June 2017, the
Company adopted a separate plan to restructure certain research and development operations at the Company’s Japan subsidiary.
This restructuring plan includes a headcount reduction following the discontinuance of the VAP-1 Inhibitor RTU-1096 development
program and VAP-1 Inhibitor RTU-009 programs and back up programs, the ending of the AMITZIA clinical studies, and the recognition
of further synergies in the manufacturing process.
As of June 30, 2017,
the expected amount of the restructuring accrual of $0.2 million for termination benefits was included in accrued liabilities.
The changes in accrued
restructuring costs for the six months ended June 30, 2017 are as follows:
(In thousands)
|
|
Accrued
Restructuring
|
|
Balance at December 31, 2016
|
|
$
|
163
|
|
|
Expenses incurred
|
|
|
552
|
|
|
Amounts paid
|
|
|
(528
|
)
|
|
Balance at June 30, 2017
|
|
$
|
187
|
|
|
12.
Other Liabilities
Other liabilities
consisted of the following at June 30, 2017 and December 31, 2016:
(In thousands)
|
|
June 30,
2017
|
|
December 31,
2016
|
Deferred grants
|
|
$
|
750
|
|
|
$
|
750
|
|
Unrecognized tax benefits
|
|
|
4,261
|
|
|
|
4,060
|
|
Deferred leasehold incentive
|
|
|
1,500
|
|
|
|
1,582
|
|
Defined benefit obligation
|
|
|
870
|
|
|
|
818
|
|
Lease liability
|
|
|
1,591
|
|
|
|
1,183
|
|
Other
|
|
|
418
|
|
|
|
398
|
|
Total
|
|
$
|
9,390
|
|
|
$
|
8,791
|
|
13.
Convertible Notes Payable
On December 27, 2016,
the Company issued $300.0 million aggregate principal amount of its 3.25% Convertible Senior Notes due in 2021 (the Convertible
Notes). Interest is payable semi-annually in cash in arrears on June 15 and December 15 of each year, beginning on June 15, 2017,
at a rate of 3.25% per year. The Convertible Notes mature on December 15, 2021 unless earlier converted or repurchased, are not
redeemable prior to the maturity date and no sinking fund is provided for the Convertible Notes.
As of June 30, 2017,
the Company was compliant with all covenants and conditions under the Convertible Notes.
The Convertible Notes
are subject to the fair value disclosure requirements as discussed in Note 6 and are classified as a Level 2 instrument. The estimated
fair value of the Convertible Notes at June 30, 2017 and December 31, 2016 was $292.1 million and $319.5 million, respectively.
Total future interest
and debt repayment obligations related to the Convertible Notes were as follows as of June 30, 2017:
(In thousands)
|
|
June 30,
2017
|
|
2017
|
|
$
|
4,915
|
|
|
2018
|
|
|
9,750
|
|
|
2019
|
|
|
9,750
|
|
|
2020
|
|
|
9,752
|
|
|
2021
|
|
|
309,323
|
|
|
Total minimum interest and debt payments
|
|
$
|
343,490
|
|
|
14.
Commitments and Contingencies
Operating Leases
The Company leases
office space in the United States, Switzerland and Japan under operating leases through 2027. Total future minimum, non-cancelable
lease payments under operating leases are as follows:
(In thousands)
|
|
June 30,
2017
|
|
2017
|
|
$
|
1,161
|
|
|
2018
|
|
|
2,043
|
|
|
2019
|
|
|
1,516
|
|
|
2020
|
|
|
1,103
|
|
|
2021
|
|
|
997
|
|
|
Total minimum lease payments
|
|
$
|
6,820
|
|
|
Rent expense for
all operating leases was $0.4 million and $0.7 million for the three months ended June 30, 2017 and June 30, 2016,
respectively and $0.8 million and $1.3 million for the six months ended June 30, 2017 and 2016, respectively.
CPP
Under the terms of
an Option and Collaboration Agreement, CPP granted the Company the sole option to acquire an exclusive license to commercialize
CPP-1X/Sulindac combination product in North America. This product is currently in a Phase 3 clinical trial for the treatment
of FAP Target enrollment in the study was achieved in April 2016 and the trial is expected to conclude in 2018. The Company agreed
to pay CPP an option fee of $7.5 million, payable in two tranches. The first tranche of $3.0 million was paid in January 2016
and expensed as research and development expense. On June 7, 2017, CPP informed the Company that an IDMC, following a planned
interim futility analysis, found no reason to discontinue the Phase 3 study, CPP FAP-310, evaluating CPP-1X/sulindac for adults
with FAP.
Pursuant to the Company’s
agreement with CPP, the Company made the $4.5 million
payment for the second option fee tranche, which was recorded in research and development expense for the three and six months
ended June 30, 2017. CPP will complete the ongoing Phase 3 trial under the oversight of a joint steering committee between CPP
and the Company.
Upon exercise of
its exclusive option, the Company would acquire the rights to negotiate an exclusive license to develop and commercialize the
product in North America for all indications. In connection with the exercise and finalization of the license right, the Company
would be obligated to pay CPP up to an aggregate of $190.0 million of specified clinical development and sales milestones. Under
the terms of the license, the Company and CPP would share equally in net profits from the sale of licensed products.
Under the CPP Securities
Agreement, the successful completion of the Phase 3 futility analysis, as described above, gave CPP the right to secure an additional
investment of $5.0 million from the Company in exchange for a convertible note in such principal amount, on substantially the
same terms as the Company’s initial such investment in CPP. CPP has notified the Company of its desire to receive this additional
investment, though the timing and mechanics thereof are still under discussion.
15.
Stock Option Plans
A summary of employee
stock option activity for the six months ended June 30, 2017 under the Company’s Amended and Restated 2006 Stock Incentive
Plan is presented below:
2006 Stock Incentive Plan
|
|
Shares
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
Options outstanding, December 31, 2016
|
|
|
4,648,549
|
|
|
$
|
10.86
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(49,147
|
)
|
|
$
|
5.78
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(310,094
|
)
|
|
$
|
11.26
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(12,599
|
)
|
|
$
|
9.60
|
|
|
|
|
|
|
|
|
|
Options outstanding, June 30, 2017
|
|
|
4,276,709
|
|
|
$
|
10.90
|
|
|
|
7.3
|
|
|
$
|
6,805,827
|
|
Options exercisable, June 30, 2017
|
|
|
2,387,102
|
|
|
$
|
9.96
|
|
|
|
6.6
|
|
|
$
|
5,031,285
|
|
Options vested and expected to vest, June 30, 2017
|
|
|
4,276,709
|
|
|
$
|
10.90
|
|
|
|
7.3
|
|
|
$
|
6,805,827
|
|
A summary of employee
stock option activity for the six months ended June 30, 2017 under the Company’s 2016 Equity Incentive Plan (the “2016
Plan”) is presented below:
The weighted average
grant date fair value of options granted during the six months ended June 30, 2017 was $5.28.
2016 Equity Incentive Plan
|
|
Shares
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
Options outstanding, December 31, 2016
|
|
|
74,750
|
|
|
$
|
12.66
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
1,857,844
|
|
|
$
|
11.38
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(63,000
|
)
|
|
$
|
11.85
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(36,700
|
)
|
|
$
|
13.97
|
|
|
|
|
|
|
|
|
|
Options outstanding, June 30, 2017
|
|
|
1,832,894
|
|
|
$
|
11.37
|
|
|
|
7.9
|
|
|
$
|
340,600
|
|
Options exercisable, June 30, 2017
|
|
|
364,275
|
|
|
$
|
11.39
|
|
|
|
0.5
|
|
|
$
|
325,500
|
|
Options vested and expected to vest, June 30, 2017
|
|
|
1,832,894
|
|
|
$
|
11.37
|
|
|
|
7.9
|
|
|
$
|
340,600
|
|
A summary of employee
restricted stock units activity for the six months ended June 30, 2017 under the Company’s 2016 Plan is presented below:
2016 Equity Incentive Plan
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding Restricted Stock Units, December 31, 2016
|
|
|
63,700
|
|
|
$
|
12.29
|
|
Restricted Stock Units granted
|
|
|
487,454
|
|
|
$
|
11.66
|
|
Restricted Stock Units vested
|
|
|
(82,000
|
)
|
|
$
|
11.47
|
|
Restricted Stock Units forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding Restricted Stock Units, June 30, 2017
|
|
|
469,154
|
|
|
$
|
11.77
|
|
Employee Stock Purchase Plan
The following table
summarizes the Company’s 2006 Employee Stock Purchase Plan activity for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended June
30,
|
(In thousands, except share amounts)
|
|
2017
|
|
2016
|
Shares issued under the ESPP
|
|
|
16,489
|
|
|
|
7,502
|
|
Cash received under the ESPP
|
|
$
|
150,283
|
|
|
$
|
69,919
|
|
Accumulated Other Comprehensive
Income
The following table
details the accumulated other comprehensive income (loss) activity for the six months ended June 30, 2017 and 2016:
(In thousands)
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Income on Investments, Net of Tax Effect
|
|
Unrealized
Gain (Loss) on Pension Benefit Obligation
|
|
Accumulated Other Comprehensive Income
|
Balance January 1, 2016
|
|
$
|
14,243
|
|
|
$
|
42
|
|
|
$
|
(873
|
)
|
|
$
|
13,412
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
36,255
|
|
|
|
-
|
|
|
|
25
|
|
|
|
36,280
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance June 30, 2016
|
|
$
|
50,498
|
|
|
$
|
42
|
|
|
$
|
(848
|
)
|
|
$
|
49,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2017
|
|
$
|
55,119
|
|
|
$
|
42
|
|
|
$
|
(634
|
)
|
|
$
|
54,527
|
|
Other comprehensive loss before reclassifications
|
|
|
(77
|
)
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
(104
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
11
|
|
Balance June 30, 2017
|
|
$
|
55,042
|
|
|
$
|
42
|
|
|
$
|
(650
|
)
|
|
$
|
54,434
|
|
16.
Income Taxes
The provision for
income taxes is based upon the estimated annual effective tax rates for the year applied to the current period income before tax
plus the tax effect of any significant unusual items, discrete events or changes in tax law. The Company’s operating subsidiaries
are exposed to effective tax rates ranging from zero to approximately 40%. Fluctuations in the distribution of pre-tax income
among the Company’s operating subsidiaries can lead to fluctuations of the effective tax rate in the condensed consolidated
financial statements. In the three months ended June 30, 2017 and 2016, the actual effective tax rates were (1.1%) and 5.8%, respectively,
and for the six months ended June 30, 2017 and 2016, the actual effective tax rates were (3.2%) and 38.7%, respectively. The decrease
in the effective tax rate for both the three and six months ended June 30, 2017 and June 30, 2016 was primarily due to the non-deductibility
of the acquired in-process research and development expense during 2017. Tax expense for both the three and six months ended June
30, 2017 increased compared to the three and six months ended June 30, 2016 primarily due an increase in earnings with no tax
benefit available for the acquired in-process research and development in 2017 from Vtesse.
The Company assesses
uncertain tax positions in accordance with ASC 740 (ASC 740-10 Accounting for Uncertainties in Tax). As of June 30, 2017, the
Company’s net unrecognized tax benefits totaled $3.2 million, excluding interest and penalties. Of this balance, $1.7 million
would favorably impact the Company’s effective tax rate in the periods if they are recognized. Management has not identified
any material uncertain tax positions that are reasonably likely to be released during the next 12 months due to lapse of statutes
of limitations or settlements with tax authorities.
The Company conducts
business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S., Switzerland and Japan,
as well as in various other state and foreign jurisdictions. In the normal course of business, the Company is subject to examination
by taxing authorities throughout the world. Currently tax years 2012 to 2016 remain open and subject to examination in the major
tax jurisdictions in which tax returns are filed. The tax years 2009-2011 were examined by the U.S. tax authorities and resulted
in no tax adjustments.
Item 2.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly
Report on Form 10-Q contains forward-looking statements regarding Sucampo Pharmaceuticals, Inc. and our business, financial condition,
results of operations and prospects within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise
are not statements of historical fact. These forward-looking statements are based on our current expectations and projections
about future events and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments
to differ materially from those expressed or implied in such statements. Factors that could cause or contribute to such differences
include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors”
included in our other filings with the Securities and Exchange Commission (SEC) including our Annual Report on Form 10-K for the
fiscal year ended December 31, 2016, which we filed with the SEC on March 8, 2017. Statements made herein are as of the date of
the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by
applicable law, we do not undertake, and we specifically disclaim any obligation to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the date of such statement.
The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated
financial statements and related notes that appear in Item 1 of this Form 10-Q and with our consolidated financial statements
and related notes for the year ended December 31, 2016 which are included in our Annual Report on Form 10-K.
Overview
We are a global biopharmaceutical
company focused on innovative research and development of proprietary drugs to treat gastrointestinal, ophthalmic, autoimmune,
inflammatory, neurological and oncology disorders.
We currently generate
revenue mainly from product royalties, development milestone payments, product sales and reimbursements for clinical development
activities. We expect to continue to incur significant expenses for the next several years as we continue our research and development
activities, seek additional regulatory approvals and additional indications for our approved products and other compounds and
seek strategic opportunities for acquiring new products and product candidates.
Our operations are
conducted through subsidiaries based in the United States (U.S.), Japan, Switzerland, and the United Kingdom (U.K.). We operate
as one segment, which focuses on the development and commercialization of pharmaceutical products.
AMITIZA (lubiprostone)
United States
and Canada
AMITIZA is marketed
in the U.S. for three gastrointestinal indications under a collaboration and license agreement (North America Takeda Agreement)
with Takeda Pharmaceutical Company Limited (Takeda). These indications are chronic idiopathic constipation (CIC) in adults, irritable
bowel syndrome with constipation (IBS-C) in adult women, and opioid-induced constipation (OIC) in adults suffering from chronic
non-cancer related pain. Under the North America Takeda Agreement, we are primarily responsible for clinical development activities,
while Takeda is responsible for commercialization of AMITIZA in the U.S. and Canada. Takeda is required to provide a minimum annual
commercial investment during the current term of the North America Takeda Agreement and may reduce the minimum annual commercial
investment when a generic equivalent enters the market. In October 2015, Health Canada approved AMITIZA for CIC in adults. In
October 2014, we signed an amendment (Takeda Amendment) to the North America Takeda Agreement which, among other things, extended
the term of the North American Takeda Agreement beyond December 2020. During the extended term beginning in January 2021, we will
share with Takeda the net sales revenue on branded AMITIZA sales.
We have also partnered
with Par Pharmaceuticals, Inc. (Par) and Dr. Reddy’s Laboratories, Ltd. (Dr. Reddy’s), in connection with the settlement
of patent litigation in the U.S. related to our AMITIZA 8 mcg and 24 mcg soft gelatin capsule products. Under our agreement with
Par, we granted Par a non-exclusive license to market Par’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin
capsules in the U.S. for the indications approved for AMITIZA beginning January 1, 2021, or earlier under certain circumstances.
Beginning on January 1, 2021, Par will split with us the gross profits of the licensed products sold during the term of the agreement,
which continues until each of our related patents has expired. Under our agreement with Dr. Reddy’s, we granted Dr. Reddy’s
a non-exclusive license to market Dr. Reddy’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in
the U.S. for the indications approved for AMITIZA. This license does not begin until more than six years from November 9, 2016,
or earlier under certain circumstances. Dr. Reddy’s will pay to us a share of net profits of generic lubiprostone products
sold during the term of the agreement, which decreases over time and ends when all of our related patents have expired. In the
event that either Par or Dr. Reddy’s elect to launch an authorized generic form of lubiprostone, we have agreed to supply
such product under the terms of a manufacturing and supply agreement at a negotiated price.
Japan
In Japan, AMITIZA
is the only prescription medicine for chronic constipation, excluding constipation caused by organic diseases, and is marketed
under a license, commercialization and supply agreement (Japan Mylan Agreement) originally entered into with Abbott Laboratories,
Inc. (Abbott). In February 2015, Mylan, Inc. (Mylan) purchased Abbott’s non-U.S. developed markets specialty and branded
generics business, as a result of which Mylan acquired the rights to commercialize AMITIZA in Japan. We did not experience any
significant changes in the commercialization of AMITIZA in Japan as a result of the transfer of the Japan Mylan Agreement from
Abbott to Mylan.
People’s
Republic of China
In May 2015, we entered
into an exclusive license, development, commercialization and supply agreement (China Gloria Agreement) with Harbin Gloria Pharmaceuticals
Co., Ltd. (Gloria) for AMITIZA in the People’s Republic of China. We will be the exclusive supplier of AMITIZA to Gloria
at an agreed upon supply price. Under the China Gloria Agreement, Gloria is responsible for all development activities and costs,
as well as commercialization and regulatory activities, for AMITIZA in the People’s Republic of China. Upon entering into
the China Gloria Agreement, we received an upfront payment of $1.0 million. In June 2015, the China Food and Drug Administration
accepted an Investigational New Drug (IND) application for a pivotal trial of AMITIZA in patients with CIC, as a result of which
we received an additional payment of $500,000 from Gloria. In addition to the $1.5 million in payments received and recognized
as revenue through June 2015, we are eligible to receive an additional payment in the amount of $1.5 million upon the occurrence
of a specified regulatory or commercial milestone event.
Other Global
Markets
In October 2014,
we entered into an exclusive license, development, commercialization and supply agreement (Global Takeda Agreement) for lubiprostone
with Takeda. Under the Global Takeda Agreement, Takeda develops and markets AMITIZA globally except in the U.S., Canada, Japan
and the People’s Republic of China. We supply Takeda with the clinical and commercial product at a negotiated price. Takeda
currently markets AMITIZA for CIC and OIC in Switzerland, and for CIC in the U.K.
In January 2016,
we received notification from the Medicines and Healthcare Products Regulatory Agency of the U.K. that our appeal for the OIC
indication was not approved. In January 2015, we successfully completed the European mutual recognition procedure for AMITIZA
for the treatment of CIC in Austria, Belgium, Germany, Italy, Ireland, Luxembourg, Netherlands and Spain, resulting marketing
authorizations in these markets. Takeda became the marketing authorization holder in Switzerland in April 2015, as well as in
the U.K., Austria, Belgium, Germany, Netherlands, Ireland, Italy, Luxembourg and Spain during 2016.
In October 2015,
Takeda obtained approval of the clinical trial application (CTA) for AMITIZA for the treatment of CIC and IBS-C in Russia that
was submitted in June 2015. In December 2015, a CTA was filed for AMITIZA for the treatment of CIC, IBS-C and OIC in Mexico and
South Korea. Takeda initiated Phase 3 registration trials in Russia in March 2016 and in South Korea and Mexico in May 2016. A
new drug application (NDA) for the treatment of CIC, IBS-C, and OIC was submitted in Israel in June 2015, and approved in July
2016. An NDA for the treatment of CIC, IBS-C and OIC was[approved] in Kazakhstan in December 2015. Additional NDA submissions
have been made by Takeda in Singapore in May 2016, and in South Africa and Indonesia in June 2016, and are planned in various
other markets in 2017 and future years.
RESCULA (unoprostone isopropyl)
As part of the acquisition
of R-Tech Ueno, Ltd. (R-Tech) in October 2015, we acquired global rights to RESCULA, an ophthalmology product used to lower intraocular
pressure (IOP).
In the fourth quarter
of 2014 we ceased marketing RESCULA in the United States and no product was made available after the March 2015 expiration date.
In May 2015, we returned all licenses for unoprostone isopropyl to R-Tech. In June 2016, we completed the withdrawal of the marketing
authorization for RESCULA in the U.S.
In Japan, RESCULA
was approved by the Ministry of Health, Labour and Welfare in 1994 for the treatment of glaucoma and ocular hypertension. In Japan,
RESCULA is no longer protected by regulatory or intellectual property exclusivity. In March 2012, R-Tech signed a distribution
agreement (Japan Santen Agreement) with Santen Pharmaceutical Co., Ltd. (Santen) to commercialize RESCULA in Japan. As part of
the acquisition of R-Tech in 2015, we acquired R-Tech’s rights and obligations under the Japan Santen Agreement.
In Taiwan, R-Tech
signed a manufacturing and supply agreement with Sinphar Pharmaceutical, Co., Ltd. and also executed the distribution agreement
with Zuellig Pharma, Inc. in April 2013.
In February 2017, the
import license for RESCULA in South Korea was withdrawn by Dong-A ST Co., Ltd., our local distributor.
Product Pipeline
The table below summarizes
the development status of our marketed products and key product candidates. The commercialization rights to lubiprostone have
been licensed to Takeda on a global basis other than Japan and the People’s Republic of China, to Mylan for Japan, and to
Gloria for the People’s Republic of China. Commercialization of each product candidate may occur after successful completion
of clinical trials and approval from competent regulatory agencies. For CPP-1X/sulindac, we have an option to acquire an exclusive
license to commercialize in North America.
|
Country
|
Program Type
|
Target Indication
|
Development Phase
|
Next Milestone
|
Lubiprostone (AMITIZA ®)
|
|
|
|
U.S.
|
Commercial
|
Chronic idiopathic constipation (CIC) adults of all ages
|
Marketed
|
_____
|
|
U.S.
|
Commercial
|
Irritable bowel syndrome with constipation (adult women) (IBS-C)
|
Marketed
|
Initiate Phase 4 study on higher dosage and with additional male subjects
|
|
U.S.
|
Commercial
|
Opioid-induced constipation (OIC) in patients with chronic non-cancer pain
|
Marketed
|
_____
|
|
U.S.
|
Clinical
|
Alternate (Sprinkle) formulation - adults of all ages
|
In development
|
submit NDA
|
|
U.S. &
European Union (EU)
|
Clinical
|
Pediatric functional constipation
(6 months - 6 years)
|
Alternate (Sprinkle) formulation in development
|
Initiate Phase 3 program
|
|
U.S.
|
Clinical
|
Pediatric IBS-C
(6 years - 17 years)
|
Alternate (Sprinkle) formulation in development
|
Initiate Phase 3 program
|
|
U.S. & EU
|
Clinical
|
Pediatric functional constipation
(6 years - 17 years)
|
submit sNDA
|
Regulatory review for market approval.
|
|
Japan
|
Commercial
|
Chronic constipation
|
Marketed
|
_____
|
|
Japan
|
Clinical
|
CIC adults, 2x12mcg capsule
|
Submit SNDA
|
Regulatory review for market approval.
|
|
Switzerland
|
Commercial
|
CIC-adults of all ages
|
Marketed
|
_____
|
|
Switzerland
|
Commercial
|
OIC in patients with chronic non-cancer pain
|
Marketed
|
_____
|
|
U.K.
|
Commercial
|
CIC-adults of all ages
|
Marketed
|
_____
|
|
Canada
|
Clinical
|
CIC-adults of all ages
|
Received approval from Health Canada
|
Determine launch feasibility and plans
|
|
China
|
Clinical
|
CIC-adults of all ages
|
IND accepted
|
Initiate CIC study
|
|
European Union
|
Clinical
|
CIC-adults of all ages
|
Received national marketing approvals in Ireland, Germany, Austria, Belgium, the Netherlands, Luxembourg, Italy and Spain (where product is not yet launched)
|
Launch feasibility and planning under evaluation
|
|
Israel
|
Commercial
|
CIC-adults of all ages
|
Approved and marketed
|
_____
|
|
Israel
|
Commercial
|
IBS-C - adult women
|
Approved and marketed
|
_____
|
|
Israel
|
Commercial
|
OIC in patients with chronic non-cancer pain
|
Approved and marketed
|
_____
|
|
Mexico
|
Clinical
|
CIC-adults of all ages
|
CTA Approved
|
Regulatory review for market approval
|
|
Mexico
|
Clinical
|
IBS-C - adult women
|
CTA Approved
|
Regulatory review for market approval
|
|
Mexico
|
Clinical
|
OIC in patients with chronic non-cancer pain
|
CTA Approved
|
Regulatory review for market approval
|
|
Russia
|
Clinical
|
CIC-adults of all ages
|
Phase 3 completed
|
Regulatory review for market approval
|
|
Russia
|
Clinical
|
IBS-C - adult women
|
Phase 3 completed
|
Regulatory review for market approval
|
|
South Korea
|
Clinical
|
CIC-adults of all ages
|
CTA Approved
|
Regulatory review for market approval
|
|
South Korea
|
Clinical
|
IBS-C - adult women
|
CTA Approved
|
Regulatory review for market approval
|
|
South Korea
|
Clinical
|
OIC in patients with chronic non-cancer pain
|
CTA Approved
|
Regulatory filing for market approval
|
|
Kazhakstan
|
Commercial
|
CIC-adults of all ages
|
Registered
|
Determine launch feasibility and plans
|
|
Kazhakstan
|
Commercial
|
IBS-C - adult women
|
Registered
|
Determine launch feasibility and plans
|
|
Kazhakstan
|
Commercial
|
OIC in patients with chronic non-cancer pain
|
Registered
|
Determine launch feasibility and plans
|
Unoprostone isopropyl (RESCULA®)
|
|
|
|
Japan
Taiwan
|
Commercial
|
Glaucoma and ocular hypertension
|
Marketed
|
_____
|
CPP-1X/sulindac combination product
|
|
|
|
U.S.
|
Clinical and Option
|
Familial adenomatous polyposis (FAP) - adults of all ages
|
Phase 3
|
Complete Phase 3 trial
|
VTS-270 for Niemann-Pick disease type C1 product
|
|
|
|
U.S. & EU (and rest of world)
|
Clinical
|
Niemann-Pick disease type C1
|
Phase 2b/3
|
Complete Phase 2b/3 trial
|
Our Clinical Development Programs
Lubiprostone
Alternate Formulation
We are developing
an alternate formulation of lubiprostone for both adult and pediatric patients who are unable to take or tolerate capsules and
for naso-gastric tube fed patients. Takeda has agreed to fund 100% of the costs, up to a cap, of this alternate formulation work.
We initiated the Phase 3 program of the alternate formulation of lubiprostone in adults in the second half of 2016 and, if the
program is successful, we intend to file an NDA in the U.S. for the alternate formulation for adults in the second half of 2017.
Pediatric Functional
Constipation
A Phase 3 program
required to support an application for marketing authorization of lubiprostone for pediatric functional constipation comprises
four clinical trials. The first two trials, one of which was recently completed, test the soft gelatin capsule formulation of
lubiprostone in patients 6 to 17 years of age. The first of these trials was a pivotal 12-week, randomized, placebo-controlled
trial which was initiated in December 2013 and completed enrollment in April 2016. The second trial is a follow-on, long-term
safety extension trial that was initiated in March 2014. In November 2016, we announced that the Phase 3 trial of AMITIZA in pediatric
functional constipation in children 6 to 17 years of age failed to achieve its primary endpoint of overall spontaneous bowel movement
(SBM) response. The trial achieved statistical significance for some secondary endpoints, notably overall SBM frequency, straining,
and stool consistency. In addition, in this study lubiprostone was well tolerated. We have entered into a process with the U.S.
Food and Drug Administration (FDA) and other constituencies, and as a result of initial discussion with the FDA we submitted an
sNDA on July 28, 2017. Additionally, after further consultations with the FDA to better determine the doses and endpoints that
should be studied, following the Phase 3 program for the alternate formulation of lubiprostone described above, we plan to initiate
in mid-2018 a Phase 3 program in patients 6 months to likely 6 years of age using the alternate formulation. Takeda has agreed
to fund 70% of the costs, up to a cap, and then 50% of the costs thereafter, of this pediatric functional constipation program.
CPP 1-X/Sulindac Combination Product
In January 2016,
we entered into an option and collaboration agreement under which Cancer Prevention Pharmaceuticals, Inc. (CPP) has granted us
the sole option to acquire an exclusive license to commercialize CPP-1X/sulindac combination product in North America. This product
is currently in a Phase 3 clinical trial, conducted by CPP for the treatment of familial adenomatous polyposis (FAP). Under our
agreement with CPP, we have the exclusive option to license this product for North America. There are currently no approved treatments
for FAP. The ongoing Phase 3 study, known as CPP FAP-310, is a 150-patient, three-arm, double-blind, randomized trial of
the combination agent and the single agent comparators. Enrollment in the study has completed. On June 7, 2017 CPP informed
us that an independent Data Monitoring Committee, following a planned interim futility analysis, found no reason to discontinue
the Phase 3 study. Results from the clinical trial are expected at the end of 2018. Pursuant to our agreement with CPP, we made
the $4.5 million payment for the second option fee tranche in July 2017, which we recorded in research and development expense
for the three and six months ended June 30, 2017.
VTS-270 for Niemann-Pick Disease Type
C1 (NPC-1)
On
March 31, 2017, we entered into an Agreement and Plan of Merger with Vtesse Inc. (Vtesse) a privately-held rare disease company.
Following the closing of this acquisition on April 3, 2017, we acquired Vtesse’s lead product candidate, known as VTS-270.
VTS-270 is a well-characterized mixture of 2-hydroxypropyl-ß-cyclodextrins (HPßCD) with a specific compositional fingerprint
that distinguishes it from other HPßCD mixtures. It is administered by an intrathecal infusion to directly address the neurological
manifestations of disease. Preclinical and early clinical studies suggest that the administration of VTS-270 may slow or stop
certain indicators of NPC-1, an ultra-orphan, progressive and fatal disease caused by a defect in lipid transport within the cell.
VTS-270, which is currently in a fully-enrolled pivotal Phase 2b/3 trial, has been granted breakthrough therapy designation in
the U.S. and orphan designation in both the U.S. and EU. Effective treatment of NPC-1 remains a high unmet need, with no approved
products for patients in the U.S. Results from the pivotal trial are expected in mid-2018.
Non-GAAP Financial Metrics
In addition to disclosing
financial results that are determined in accordance with GAAP, we also use the following non-GAAP financial metrics to understand
and evaluate our operating performance:
|
·
|
Adjusted net income, which is GAAP net income (loss) adjusted to exclude the tax-effected impact
of (i) amortization of acquired intangibles, (ii) inventory step-up adjustment, (iii) research and development license option expense,
(iv) restructuring costs, (v) one-time severance payments (vi) acquisition and integration related expenses, (vii)
acquired
in-process research and development,
(viii) amortization of debt financing costs, and (ix) foreign currency effect;
|
|
·
|
Adjusted EPS-diluted, which is adjusted net income as defined above expressed on a diluted per
share basis;
|
|
·
|
EBITDA, which is GAAP net income adjusted to exclude (i) taxes, (ii) interest expense, (iii) interest
income, (iv) depreciation and amortization, (v) amortization of acquired intangibles, and (vi) inventory step-up adjustment;
|
|
·
|
Adjusted EBITDA, which is EBITDA as defined above further adjusted to exclude (i) share-based compensation
expense, (ii) restructuring costs, (iii) one-time severance payments, (iv)
acquired in-process research
and development
, (v) acquisition and integration related expenses, (vi) research and development license option expense,
and (vii) foreign currency effect.
|
We believe that providing
this additional information is useful to the reader to better assess and understand our operating performance, primarily because
management typically monitors the business adjusted for these items in addition to GAAP results. These non-GAAP financial metrics
should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. Our definition
of these non-GAAP metrics may differ from similarly titled metrics used by others. We view these non-GAAP financial metrics as
a means to facilitate our financial and operational decision-making, including evaluation of our historical operating results
and comparison to competitors’ operating results. These non-GAAP financial metrics reflect an additional way of viewing
aspects of our operations that, when viewed with GAAP results may provide a more complete understanding of factors and trends
affecting our business. The determination of the amounts that are excluded from these non-GAAP financial metrics is a matter of
management judgment and depends upon, among other factors, the nature of the underlying expense or income amounts. Because non-GAAP
financial metrics exclude the effect of items that will increase or decrease our reported results of operations, we strongly encourage
investors to review our consolidated financial statements and periodic reports in their entirety.
The following tables
present reconciliations of these non-GAAP financial metrics to the most directly comparable GAAP financial measure for the three
and six months ended June 30, 2017 and 2016.
Non-GAAP Financial Metrics
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands, except per share amounts)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Non-GAAP adjusted net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net loss
|
|
$
|
(181,167
|
)
|
|
$
|
(832
|
)
|
|
$
|
(176,543
|
)
|
|
$
|
(4,889
|
)
|
Amortization of acquired intangibles
|
|
|
6,753
|
|
|
|
6,334
|
|
|
|
13,506
|
|
|
|
12,245
|
|
Inventory step-up adjustment
|
|
|
-
|
|
|
|
6,303
|
|
|
|
-
|
|
|
|
15,235
|
|
R&D license option expense
|
|
|
4,500
|
|
|
|
-
|
|
|
|
4,500
|
|
|
|
3,000
|
|
Restructuring costs
|
|
|
189
|
|
|
|
1,504
|
|
|
|
554
|
|
|
|
1,687
|
|
One-time severance payments
|
|
|
984
|
|
|
|
-
|
|
|
|
1,460
|
|
|
|
-
|
|
Acquisition and integration related expenses
|
|
|
1,111
|
|
|
|
1,105
|
|
|
|
8,121
|
|
|
|
1,632
|
|
Acquired in-process research and development
|
|
|
186,603
|
|
|
|
-
|
|
|
|
186,603
|
|
|
|
-
|
|
Amortization of debt financing costs
|
|
|
477
|
|
|
|
889
|
|
|
|
949
|
|
|
|
1,811
|
|
Foreign currency effect
|
|
|
511
|
|
|
|
2,658
|
|
|
|
317
|
|
|
|
3,009
|
|
Tax effect of adjustments
|
|
|
(3,500
|
)
|
|
|
(7,641
|
)
|
|
$
|
(10,028
|
)
|
|
$
|
(13,660
|
)
|
Non-GAAP adjusted net income
|
|
$
|
16,461
|
|
|
$
|
10,320
|
|
|
$
|
29,439
|
|
|
$
|
20,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted EPS - diluted
|
|
$
|
0.28
|
|
|
$
|
0.24
|
|
|
$
|
0.51
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net loss
|
|
$
|
(181,167
|
)
|
|
$
|
(832
|
)
|
|
$
|
(176,543
|
)
|
|
$
|
(4,889
|
)
|
Taxes
|
|
|
1,940
|
|
|
|
(51
|
)
|
|
|
5,525
|
|
|
|
(3,089
|
)
|
Interest expense
|
|
|
2,916
|
|
|
|
5,972
|
|
|
|
5,806
|
|
|
|
12,242
|
|
Interest income
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
(28
|
)
|
|
|
(35
|
)
|
Depreciation
|
|
|
222
|
|
|
|
205
|
|
|
|
420
|
|
|
|
464
|
|
Amortization of acquired intangibles
|
|
|
6,753
|
|
|
|
6,334
|
|
|
|
13,506
|
|
|
|
12,245
|
|
Inventory step-up adjustment
|
|
|
-
|
|
|
|
6,303
|
|
|
|
-
|
|
|
|
15,235
|
|
EBITDA
|
|
$
|
(169,336
|
)
|
|
$
|
17,921
|
|
|
$
|
(151,314
|
)
|
|
$
|
32,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(169,336
|
)
|
|
$
|
17,921
|
|
|
|
(151,314
|
)
|
|
|
32,173
|
|
Share-based compensation expense
|
|
|
2,849
|
|
|
|
1,783
|
|
|
|
5,124
|
|
|
|
3,698
|
|
Restructuring costs
|
|
|
189
|
|
|
|
1,504
|
|
|
|
554
|
|
|
|
1,687
|
|
One-time severance payments
|
|
|
984
|
|
|
|
-
|
|
|
|
1,460
|
|
|
|
-
|
|
Acquired in-process research and development
|
|
|
186,603
|
|
|
|
-
|
|
|
|
186,603
|
|
|
|
-
|
|
Acquisition and integration related expenses
|
|
|
1,111
|
|
|
|
1,105
|
|
|
|
8,121
|
|
|
|
1,632
|
|
R&D license option expense
|
|
|
4,500
|
|
|
|
-
|
|
|
|
4,500
|
|
|
|
3,000
|
|
Foreign currency effect
|
|
|
511
|
|
|
|
2,658
|
|
|
|
317
|
|
|
|
3,009
|
|
Adjusted EBITDA
|
|
$
|
27,411
|
|
|
$
|
24,971
|
|
|
$
|
55,365
|
|
|
$
|
45,199
|
|
Results of Operations
Comparison of Three Months Ended
June 30, 2017 and 2016
Revenues
The following table
summarizes our revenues for the three months ended June 30, 2017 and 2016:
|
|
Three Months Ended June
30,
|
(In thousands)
|
|
2017
|
|
2016
|
Product royalty revenue
|
|
$
|
20,562
|
|
|
$
|
18,735
|
|
Product sales revenue - AMITIZA
|
|
|
32,132
|
|
|
|
27,001
|
|
Product sales revenue - RESCULA
|
|
|
2,105
|
|
|
|
1,388
|
|
Research and development revenue
|
|
|
5,051
|
|
|
|
3,369
|
|
Contract and collaboration revenue
|
|
|
46
|
|
|
|
1,458
|
|
Total
|
|
$
|
59,896
|
|
|
$
|
51,951
|
|
Total revenues were
$59.9 million for the three months ended June 30, 2017, compared to $52.0 million for the three months ended June 30, 2016, an
increase of $7.9 million or 15.3%.
Product royalty
revenue
Product royalty revenue
primarily represents royalty revenue earned on Takeda net sales of AMITIZA in North America and was $20.6 million for the three
months ended June 30, 2017 compared to $18.7 million for the three months ended June 30, 2016, an increase of $1.8 million or
9.8%. The increase was due to higher Takeda reported AMITIZA net sales which were primarily driven by price and volume increases.
Product sales
revenue
Product sales revenue
represents drug product sales of AMITIZA in North America, Japan and Europe, and drug product sales of RESCULA in Japan. AMITIZA
product sales revenue was $32.1 million for the three months ended June 30, 2017 compared to $27.0 million for the three months
ended June 30, 2016, an increase of $5.1 million or 19.0%. The increase was primarily attributable to increased AMITIZA sales
in Japan under the Japan Mylan Agreement. RESCULA product sales revenue was $2.1 million for the three months ended June 30, 2017
compared to $1.4 million for the three months ended June 30, 2016, an increase of $0.7 million.
Research and
development revenue
Research and development revenue was $5.1 million for the three months ended June 30, 2017 compared to
$3.4 million for the three months ended June 30, 2016. The increase was primarily due to increases in pediatric and alternative
formulation studies.
Contract and
collaboration revenue
Contract and collaboration
revenue was $46,000 for the three months ended June 30, 2017 compared to $1.5 million for the three months ended June 30, 2016,
a decrease of $1.4 million or 96.8%. The decrease was primarily due to the release of the collaboration obligation under the Global
Takeda Agreement in the second quarter of 2016.
Costs of Goods Sold
Costs of goods
sold were $17.0 million for the three months ended June 30, 2017 compared to $20.4 million for the three months ended June 30,
2016, a decrease of $3.4 million or 16.3%. The decrease was primarily due to a $6.3 million decrease in amortization of R-Tech
inventory step up, partially offset by an increased cost of goods related to higher volume of AMITIZA product sales and changes
in foreign currency exchange rates.
Research and Development Expenses
The following table
summarizes our research and development expenses for the three months ended June 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Direct costs:
|
|
|
|
|
|
|
|
|
Lubiprostone
|
|
$
|
7,382
|
|
|
$
|
5,726
|
|
Cobiprostone
|
|
|
-
|
|
|
|
2,930
|
|
CPP-1X
|
|
|
4,518
|
|
|
|
(61
|
)
|
RTU-1096
|
|
|
-
|
|
|
|
1,227
|
|
VTS270
|
|
|
4,748
|
|
|
|
-
|
|
Other
|
|
|
1,188
|
|
|
|
442
|
|
|
|
|
17,836
|
|
|
|
10,264
|
|
Indirect costs
|
|
|
1,263
|
|
|
|
669
|
|
Total
|
|
$
|
19,099
|
|
|
$
|
10,933
|
|
Total research and
development expenses for the three months ended June 30, 2017 were $19.1 million compared to $10.9 million for the three months
ended June 30, 2016, an increase of $8.2 million or 74.7%. The increase was primarily due to research and development activity
related to the newly acquired VTS-270 and the option fee related to the positive result from CPP’s futility analysis, partially
offset by discontinuing certain research and development programs.
Acquisition
In April
2017, we acquired Vtesse, including its Phase 2b/3 product candidate known as VTS-270 (the IPR&D asset),
a
well-characterized mixture of 2-hydroxypropyl-ß-cyclodextrins (HPßCD) with a specific compositional fingerprint that
distinguishes it from other HPßCD mixtures, for the treatment of Niemann-Pick Disease Type C1 (NPC-1),
an
ultra-orphan, progressive and fatal disease. Among the significant strategic benfits of the acquisition are that the purchased
IPR&D further diversified our pipeline through the acquisition of a late-stage program, increased the Company’s focus
on specialized area of high unmet need, and is expected to be accretive beginning in 2019. Under the terms of the agreement,
the
Company acquired Vtesse for upfront consideration of $212.0 million, and agreed to pay Vtesse shareholders contingent consideration
based on mid-single digit to double-digit royalties on global net sales of the product based on increasing net sales levels, and
a share of net proceeds that may be generated from the monetization of the pediatric review voucher, which is expected to
be granted in connection with the approval of the product in the U.S.
Of the $212.0 million consideration, the Company
made a cash payment of $182.0 million and re-issued $30.0 million of Treasury Stock, 2,782,678 Class A common shares,
based
upon the closing price of $10.78 on April 3, 2017,
to Vtesse stockholders.
The preliminary purchase
price allocation was determined as follows:
|
|
April 3,
|
|
|
|
2017
|
|
Total purchase price
|
|
$
|
211,996
|
|
|
(In thousands)
|
|
|
|
|
|
Total fair value of tangible assets acquired and liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
|
(13,613
|
)
|
|
Net Assets
|
|
|
(11,780
|
)
|
|
Total IPR&D asset
|
|
$
|
186,603
|
|
|
Vtesse did not meet
the definition of a business under ASC 805 as substantially all of the fair value of Vtesse was attributable to the VTS-270 IPR&D
asset. Based on the asset acquisition method of accounting, the consideration paid was allocated primarily to the IPR&D asset
acquired of $186.6 million, which was immediately expensed as the IPR&D asset has no other alternate use. The balance was
allocated to the remaining assets and liabilities based on their estimated fair values. The acquired IPR&D expense is not
tax deductible.
The acquisition of the IPR&D asset and related expense had a significant impact on our results of operation
for the three month ended June 30, 2017. The following summary shows the impact of IPR&D expense on our net loss per share:
|
|
Three Months Ended
|
|
|
June 30,
|
|
|
2017
|
(In thousands, except per share data)
|
|
|
|
|
Net loss
|
|
$
|
(181,167
|
)
|
Weighted average Common Class A shares outstanding - basic and diluted
|
|
|
46,195
|
|
Net loss per share - Basic and diluted
|
|
$
|
(3.92
|
)
|
|
|
|
|
|
Net loss adjustments:
|
|
|
|
|
Add: Acquired in-process research and development
|
|
$
|
186,603
|
|
Add: Remaining adjusted net income (loss) items
|
|
|
11,025
|
|
Non-GAAP adjusted net income
|
|
$
|
16,461
|
|
|
|
|
|
|
Add back: Accrued interest expense on convertible debt, net of tax
|
|
$
|
1,454
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
Assumed exercise of options under treasury stock method
|
|
|
424
|
|
Assumed shares if-converted
|
|
|
18,079
|
|
Weighted average Common Class A shares outstanding- Diluted
|
|
|
64,698
|
|
|
|
|
|
|
Impact of IPR&D per share - diluted
|
|
$
|
2.88
|
|
|
|
|
|
|
Impact of other adjusted net income (loss) items - diluted
|
|
$
|
0.17
|
|
|
|
|
|
|
Non-GAAP adjusted EPS - diluted
|
|
$
|
0.28
|
|
General and Administrative Expenses
The following table
summarizes our general and administrative expenses for the three months ended June 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Salaries, benefits and related costs
|
|
$
|
4,166
|
|
|
$
|
2,877
|
|
Legal, consulting and other professional expenses
|
|
|
3,228
|
|
|
|
2,834
|
|
Stock-based compensation expenses
|
|
|
1,785
|
|
|
|
1,284
|
|
Pharmacovigilance
|
|
|
388
|
|
|
|
443
|
|
Restructuring costs
|
|
|
-
|
|
|
|
1,504
|
|
R-Tech opportunity costs
|
|
|
-
|
|
|
|
1,105
|
|
Other expenses
|
|
|
2,016
|
|
|
|
2,376
|
|
Total
|
|
$
|
11,583
|
|
|
$
|
12,423
|
|
General and administrative
expenses were $11.6 million for the three months ended June 30, 2017, compared to $12.4 million for the three months ended June
30, 2016, an decrease of $0.8 million or 6.8%. The decrease was primarily due to a $2.6 million in restructuring and R-Tech acquisition
costs that occurred in the second quarter of 2016 but did not occur in the second quarter 2017, partially offset by the Vtesse
acquisition and inclusion of Vtesse administrative costs and personnel costs related to severance of multiple executives.
Selling and Marketing Expenses
The following table
summarizes our selling and marketing expenses for the three months ended June 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Salaries, benefits and related costs
|
|
$
|
622
|
|
|
$
|
107
|
|
Consulting and other professional expenses
|
|
|
48
|
|
|
|
21
|
|
Data purchases
|
|
|
37
|
|
|
|
43
|
|
Promotional materials & programs
|
|
|
150
|
|
|
|
796
|
|
Other expenses
|
|
|
554
|
|
|
|
(344
|
)
|
Total
|
|
$
|
1,411
|
|
|
$
|
623
|
|
Selling and marketing expenses were $1.4
million for the three months ended June 30, 2017, compared to $0.6 million for the three months ended June 30, 2016, an increase
of $0.8 million or 126.5%. The increase was primarily due to the creation of a commercial function to support VTS-270 during the
three months ended June 30, 2017.
Non-Operating Income and Expense
The following table
summarizes our non-operating income and expense for the three months ended June 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Interest income
|
|
$
|
-
|
|
|
$
|
10
|
|
Interest expense
|
|
|
(2,916
|
)
|
|
|
(5,972
|
)
|
Other expense, net
|
|
|
(476
|
)
|
|
|
(2,539
|
)
|
Total
|
|
$
|
(3,392
|
)
|
|
$
|
(8,501
|
)
|
Interest expense
was $2.9 million for the three months ended June 30, 2017, compared to $6.0 million for the three months ended June 30, 2016,
a decrease of $3.1 million or 51.2%. This decrease resulted from interest rates on notes payable decreasing from 8.4% to 3.3%
as a result of refinancing our debt. The benefit from the lower interest rates was partially offset by higher principal balance.
Other expense, net
was $0.5 million for the three months ended June 30, 2017, compared to $2.5 million for the three months ended June 30, 2016,
a change of $2.0 million, substantially all of which was attributable to a decrease in foreign currency exchange losses.
Income Taxes
We recorded an income
tax expense of $1.9 million and benefit of $0.1 million for the three months ended June 30, 2017 and 2016, respectively. In 2017,
earnings (prior to considering the expense recognized for acquired in-process research and development) exceeded the pre-tax earnings
for the three months ended June 30, 2016. This increase in earnings, along with no tax benefit available for the acquired in-process
research and development from Vtesse, were the primary drivers of increase in tax expense.
The effective tax
rate (ETR) for the three months ended June 30, 2017 was (1.1)%, compared to 5.8% in the same period of 2016. The ETR for the quarter
was based on a projection of the full year rate. The decrease in the ETR was primarily due to the non-deductibility of the acquired
in-process research and development expense.
Comparison of Six Months Ended June
30, 2017 and 2016
Revenues
The following table
summarizes our revenues for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended
|
|
|
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Product royalty revenue
|
|
$
|
38,997
|
|
|
$
|
35,451
|
|
Product sales revenue - AMITIZA
|
|
|
63,472
|
|
|
|
50,121
|
|
Product sales revenue - RESCULA
|
|
|
4,919
|
|
|
|
4,863
|
|
Research and development revenue
|
|
|
8,499
|
|
|
|
6,799
|
|
Contract and collaboration revenue
|
|
|
292
|
|
|
|
1,925
|
|
Total
|
|
$
|
116,179
|
|
|
$
|
99,159
|
|
Total
revenues were $116.2 million for the six months ended June 30, 2017, compared to $99.2 million for the six months ended June 30,
2016, an increase of $17.0 million or 17.2%.
Product royalty
revenue
Product royalty revenue
primarily represents royalty revenue earned on Takeda net sales of AMITIZA in North America and was $39.0 million for the six
months ended June 30, 2017 compared to $35.5 million for the six months ended June 30, 2016, an increase of $3.6 million or 10.0%.
The increase was primarily due to higher Takeda reported AMITIZA net sales which were driven by a mix of price and volume increases.
Product sales
revenue
AMITIZA product sales
revenue was $63.5 million for the six months ended June 30, 2017 compared to $50.1 million for the six months ended June 30, 2016,
an increase of $13.4 million or 26.6%. The increase was primarily due to increased volumes of AMITIZA sold to Mylan in Japan and
Takeda in North America. RESCULA product sales revenue was $4.9 million for both the six months ended June 30, 2017 and the six
months ended June 30, 2016.
Research and development
revenue
Research and development
revenue was $8.5 million for the six months ended June 30, 2017 compared to $6.8 million for the six months ended June 30, 2016,
an increase of $1.7 million or 25.0%. The increase was due to increased activity on the advancement of pediatric and alternative
formulation studies for the six months ended June 30, 2016, for which we receive reimbursement from Takeda.
Contract and collaboration
revenue
Contract and collaboration
revenue was $0.3 million for the six months ended June 30, 2017 compared to $1.9 million for the six months ended June 30, 2016,
a decrease of $1.6 million or 84.8%. The decrease was primarily attributable to the release of the collaboration obligation under
the Global Takeda Agreement in the six months ended June 30, 2017.
Costs of Goods Sold
Costs of goods sold were $33.9 million for
the six months ended June 30, 2017 compared to $43.7 million for the same period in 2016, an decrease of $9.8 million or 22.4%.
The decrease was primarily due to the release of inventory step up of $15.2 million in 2016 that did not recur in 2017, partially
offset by an increased cost of goods related to higher volume of AMITIZA product sales and foreign currency fluctuations
.
Research and Development Expenses
The following table
summarizes our research and development expenses for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended
|
|
|
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Direct costs:
|
|
|
|
|
|
|
|
|
Lubiprostone
|
|
$
|
15,347
|
|
|
$
|
11,352
|
|
Cobiprostone
|
|
|
-
|
|
|
|
5,039
|
|
CPP-1X
|
|
|
4,518
|
|
|
|
2,928
|
|
RTU-1096
|
|
|
-
|
|
|
|
2,147
|
|
VTS270
|
|
|
4,748
|
|
|
|
-
|
|
Other
|
|
|
2,244
|
|
|
|
1,861
|
|
|
|
|
26,857
|
|
|
|
23,327
|
|
Indirect costs
|
|
|
2,575
|
|
|
|
2,277
|
|
Total
|
|
$
|
29,432
|
|
|
$
|
25,604
|
|
Total research and
development expenses for the six months ended June 30, 2017 were $29.4 million compared to $25.6 million for the six months ended
June 30, 2016, an increase of $3.8 million or 15.0%. The increase was primarily due to research and development activity related
to the newly acquired VTS-270 product candidate and the option fee related to the positive result from CPP’s futility analysis,
partially offset by discontinuing certain research and development programs.
Acquisition
In April
2017, we acquired Vtesse, including its Phase 2b/3 product candidate known as VTS-270 (the IPR&D asset),
a
well-characterized mixture of 2-hydroxypropyl-ß-cyclodextrins (HPßCD) with a specific compositional fingerprint that
distinguishes it from other HPßCD mixtures, for the treatment of Niemann-Pick Disease Type C1 (NPC-1),
an
ultra-orphan, progressive and fatal disease. Among the significant strategic benfits of the acquisition are that the purchased
IPR&D further diversified our pipeline through the acquisition of a late-stage program, increased the Company’s focus
on specialized area of high unmet need, and is expected to be accretive beginning in 2019. Under the terms of the agreement,
the
Company acquired Vtesse for upfront consideration of $212.0 million, and agreed to pay Vtesse shareholders contingent consideration
based on mid-single digit to double-digit royalties on global net sales of the product based on increasing net sales levels, and
a share of net proceeds that may be generated from the monetization of the pediatric review voucher, which is expected to
be granted in connection with the approval of the product in the U.S.
Of the $212.0 million consideration, the Company
made a cash payment of $182.0 million and re-issued $30.0 million of Treasury Stock, 2,782,678 Class A common shares,
based
upon the closing price of $10.78 on April 3, 2017,
to Vtesse stockholders.
The preliminary purchase
price allocation was determined as follows:
|
|
April 3,
|
|
|
|
2017
|
|
Total purchase price
|
|
$
|
211,996
|
|
|
(In thousands)
|
|
|
|
|
|
Total fair value of tangible assets acquired and liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
|
(13,613
|
)
|
|
Net Assets
|
|
|
(11,780
|
)
|
|
Total IPR&D asset
|
|
$
|
186,603
|
|
|
Vtesse did not meet
the definition of a business under ASC 805 as substantially all of the fair value of Vtesse was attributable to the VTS-270 IPR&D
asset. Based on the asset acquisition method of accounting, the consideration paid was allocated primarily to the IPR&D asset
acquired of $186.6 million, which was immediately expensed as the IPR&D asset has no other alternate use. The balance was
allocated to the remaining assets and liabilities based on their estimated fair values. The acquired IPR&D expense is not
tax deductible.
The acquisition of
the IPR&D asset and related expense had a significant impact on our results of operation for the three month ended June 30,
2017. The following summary shows the impact of IPR&D expense on our net loss per share:
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2017
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Net loss
|
|
$
|
(176,543
|
)
|
Weighted average Common Class A shares outstanding - basic and diluted
|
|
|
44,826
|
|
Net loss per share - Basic and diluted
|
|
$
|
(3.94
|
)
|
|
|
|
|
|
Net loss adjustments:
|
|
|
|
|
Add: Acquired in-process research and development
|
|
$
|
186,603
|
|
Add: Remaining adjusted net income (loss) items
|
|
|
19,378
|
|
Non-GAAP adjusted net income
|
|
$
|
29,439
|
|
|
|
|
|
|
Add back: Accrued interest expense on convertible debt, net of tax
|
|
$
|
2,892
|
|
|
|
|
|
|
Assumed exercise of options under treasury stock method
|
|
|
511
|
|
Assumed shares if-converted
|
|
|
18,079
|
|
Weighted average Common Class A shares outstanding- Diluted
|
|
|
63,416
|
|
|
|
|
|
|
Impact of IPR&D per share - diluted
|
|
$
|
2.94
|
|
|
|
|
|
|
Impact of other adjusted net income (loss) items - diluted
|
|
$
|
0.31
|
|
|
|
|
|
|
Non-GAAP adjusted EPS - diluted
|
|
$
|
0.51
|
|
General and Administrative Expenses
The following table
summarizes our general and administrative expenses for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended
|
|
|
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Salaries, benefits and related costs
|
|
$
|
7,860
|
|
|
$
|
5,924
|
|
Legal, consulting and other professional expenses
|
|
|
12,974
|
|
|
|
4,990
|
|
Stock-based compensation expenses
|
|
|
3,393
|
|
|
|
2,671
|
|
Pharmacovigilance
|
|
|
548
|
|
|
|
871
|
|
Restructuring costs
|
|
|
365
|
|
|
|
1,633
|
|
R-Tech opportunity costs
|
|
|
-
|
|
|
|
1,687
|
|
Other expenses
|
|
|
4,134
|
|
|
|
3,574
|
|
Total
|
|
$
|
29,274
|
|
|
$
|
21,350
|
|
General and administrative expenses were $29.3 million for the six
months ended June 30, 2017, compared to $21.4 million for the six months ended June 30, 2016, an increase of $7.9 million or 37.1%.
The increase was primarily due to a $8.1 million increase in legal, consulting and other professional expenses related to the initiation
of our patent litigation against Amneal (as discussed under “Legal Proceedings” below) and the acquisition of Vtesse
and subsequent inclusion of Vtesse administrative costs, partially offset by lower restructuring costs and R-Tech opportunity costs
for the six months ended June 30, 2017 compared to the six months ended June 30, 2016.
Selling and Marketing Expenses
The following table
summarizes our selling and marketing expenses for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended
|
|
|
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Salaries, benefits and related costs
|
|
$
|
861
|
|
|
|
334
|
|
Consulting and other professional expenses
|
|
|
118
|
|
|
|
56
|
|
Data purchases
|
|
|
77
|
|
|
|
89
|
|
Promotional materials & programs
|
|
|
217
|
|
|
|
797
|
|
Other expenses
|
|
|
654
|
|
|
|
122
|
|
Total
|
|
$
|
1,927
|
|
|
$
|
1,398
|
|
Selling and marketing
expenses were $1.9 million for the six months ended June 30, 2017, compared to $1.4 million for the six months ended June 30,
2016, an increase of $0.5 million or 37.8%. The increase was primarily due to creation of a commercial function to support VTS-270,
partially offset by reduction in RESCULA sales and marketing effort in Japan.
Non-Operating Income and Expense
The following table
summarizes our non-operating income and expense for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended
|
|
|
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Interest income
|
|
$
|
28
|
|
|
$
|
35
|
|
Interest expense
|
|
|
(5,806
|
)
|
|
|
(12,242
|
)
|
Other expense, net
|
|
|
(265
|
)
|
|
|
(2,886
|
)
|
Total
|
|
$
|
(6,043
|
)
|
|
$
|
(15,093
|
)
|
Interest expense
was $5.8 million for the six months ended June 30, 2017, compared to $12.2 million for the six months ended June 30, 2016,
a decrease of $6.4 million or 52.6%. This decrease resulted from interest rates on notes payable decreasing from 8.4% to 3.3%
as a result of refinancing our debt. The benefit from the lower interest rates was partially offset by higher principal balances.
Other expense, net
was $0.3 million expense for the six months ended June 30, 2017, compared to $2.9 million expense for the six months ended June
30, 2016, a positive change of $2.7 million. The change was primarily attributable to foreign currency exchange rate fluctuations.
Income Taxes
We recorded an income
tax expense of $5.5 million and income tax benefit of $3.1 million for the six months ended June 30, 2017 and 2016, respectively.
In 2017, the year to date earnings (prior to considering the expense recognized for acquired in-process research and development)
exceeded the pre-tax earnings for the six months ended June 30, 2016. This increase in earnings, along with no tax benefit available
for the acquired in-process research and development from Vtesse, were the primary drivers of increase in tax expense.
The effective tax
rate (ETR) for the six months ended June 30, 2017 was (3.2%) compared to 38.7% in the same period of 2016. The ETR for the quarter
was based on a projection of the full year rate. The decrease in the ETR was was primarily due to the non-deductibility of the
acquired in-process research and development expense.
Reportable Operating Segments
We have one operating
segment which is the development and commercialization of pharmaceutical products.
Financial Condition, Liquidity and
Capital Resources
Financial Condition
Sources of Liquidity
We finance
our operations principally from cash generated from revenues, cash and cash equivalents on hand, debt and to a lesser extent,
from cash generated from the issuance and sale of our class A common stock and through the exercise of employee stock options.
Revenues generated from operations principally consist of a combination of royalty payments, product sales, upfront and milestone
payments, and research and development expense reimbursements received from Takeda, Mylan and other parties.
Our cash,
cash equivalents and restricted cash consist of the following as of June 30, 2017 and December 31, 2016:
|
|
June 30,
|
|
December 31,
|
(In thousands)
|
|
2017
|
|
2016
|
Cash and cash equivalents
|
|
$
|
84,734
|
|
|
$
|
198,308
|
|
Restricted cash, current
|
|
|
213
|
|
|
|
213
|
|
Total
|
|
$
|
84,947
|
|
|
$
|
198,521
|
|
Our cash and cash
equivalents are deposited in operating accounts and highly liquid investments with an original maturity at time of purchase of
90 days or less. As of June 30, 2017, and December 31, 2016, our restricted cash consisted of a certificate of deposit pledged
to support an operating lease for our former office facility in Bethesda, Maryland.
On April 3, 2017,
we acquired Vtesse for upfront consideration of $212.0 million. The acquisition was funded through the issuance of 2,782,676 shares
of our Class A common stock and $182.0 million of cash on hand. Substantially all of the fair value of Vtesse is related to VTS-270,
its only significant asset. VTS-270 is an investigational drug in a pivotal Phase 2b/3 study for the treatment of NPC-1, an ultra-orphan,
progressive and fatal disease.
Cash Flows
The following table
summarizes our cash flows for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
56,192
|
|
|
$
|
26,285
|
|
Investing activities
|
|
|
(170,019
|
)
|
|
|
(2,893
|
)
|
Financing activities
|
|
|
319
|
|
|
|
(10,635
|
)
|
Effect of exchange rates
|
|
|
(66
|
)
|
|
|
6,940
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(113,574
|
)
|
|
$
|
19,697
|
|
Six months ended June 30, 2017
Net cash provided
by operating activities was $56.2 million for the six months ended June 30, 2017. This was primarily due to net loss of $176.5
million plus adjustments to reconcile net income to net cash provided by operating activities consisting of acquired in-process
research and development of $186.6 million, depreciation and amortization of $14.9 million, stock-based compensation expense of
$5.6 million, less deferred tax provision of $4.7 million, as well as changes in operating assets and liabilities consisting of
a increase in accounts receivable and product royalties receivable, net of $29.2 million.
Net cash used in
investing activities was $170.0 million for the six months ended June 30, 2017 due to the $182.0 million of cash used to purchase
in-process research and development from Vtesse, net of $12.3 million cash acquired.
Net cash provided
by financing activities was $0.3 million for the six months ended June 30, 2017. The cash received was primarily the result issuing
Class A common stock upon the exercise of options and purchases through the employee stock purchase plan.
The effect of exchange
rates on the cash balances of currencies held in foreign denominations for six months ended June 30, 2017 was a decrease of $66,000.
Six months ended June 30, 2016
Net cash provided
by operating activities was $26.3 million for the six months ended June 30, 2016. This was primarily due to adjustments to reconcile
net loss to net cash consisting of depreciation and amortization of $30.1 million, unrealized currency translation losses of $9.1
million, deferred tax provision increase of $5.0 million, and stock-based compensation expense of $3.7 million. Additional cash
provided by operating activities consisted of decreases in receivables of $9.9 million and changes in other assets and liabilities,
net of $1.3 million. Partially offsetting these items were increases in prepaid and income taxes payable and receivable, net of
$18.2 million, decreases in payables of $11.1 million and a net loss of $4.9 million.
Net cash used in
investing activities was $2.9 million for the six months ended June 30, 2016. This was primarily due to the payment of the squeeze-out
liability for non-tendering R-Tech shareholders of $7.7 million and investment in a convertible note receivable of $5.0 million,
partially offset by a decrease in restricted cash of $10.6 million.
Net cash used in
financing activities was $10.2 million for the six months ended June 30, 2016. This was primarily due to repayments of notes payable
(net of restricted cash) of $12.4 million, partially offset by the issuance of Class A common stock upon the exercise of options.
The effect of exchange rates on the cash balances
of currencies held in foreign denominations for the six months ended June 30, 2016 was an increase of $6.9 million.
Off-Balance Sheet Arrangements
As of June 30, 2017,
we did not have any off-balance sheet arrangements, as such term is defined in Item 303(a)(4) of Regulation S-K under the Securities
Act of 1933, as amended.
Funding Requirements and Capital
Resources
We may need substantial
amounts of capital to continue growing our business. We may require this capital, among other things, to fund:
|
·
|
our
share of the on-going development program of AMITIZA;
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research,
development, manufacturing, regulatory and marketing efforts for VTS-270 and other potential
product candidates;
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the
costs involved in obtaining and maintaining proprietary protection for our products,
technology and know-how, including litigation costs and the results of such litigation;
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activities
to resolve our on-going and potential legal matters;
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any
option and milestone payments under general option and licensing ventures, including
our exclusive option and collaboration agreement with CPP;
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other
business development activities, including partnerships, alliances and investments in
or acquisitions of other businesses, products and technologies;
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the
expansion of our commercialization activities including the purchase of inventory; and
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the
payment of principal and interest under our Convertible Notes.
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The timing of these
funding requirements is difficult to predict due to many factors, including the outcomes of our preclinical and clinical research
and development programs and when those outcomes are determined, the timing of obtaining regulatory approvals and the presence
and status of competing products. Our capital needs may exceed the capital available from our future operations, collaborative
and licensing arrangements and existing liquid assets. Our future capital requirements and liquidity will depend on many factors,
including, but not limited to:
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the
cost and time involved to pursue our research and development programs;
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our
ability to establish collaborative arrangements and to enter into licensing agreements
and contractual arrangements with others; and
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any
future change in our business strategy.
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To the extent that
our capital resources may be insufficient to meet our future capital requirements, we may need to finance our future cash needs
through at-the-market sales, public or private equity offerings, further debt financings or corporate collaboration and licensing
arrangements.
Based upon our current
business plan, we believe our future cash flows from operating activities and our existing capital resources will be sufficient
to meet our cash requirements for at least the next 12 months.
Effects of Foreign Currency
We currently receive
a portion of our revenue, incur a portion of our operating expenses, and have assets and liabilities denominated in currencies
other than the U.S. Dollar, the reporting currency for our consolidated financial statements. As such, the results of our operations
could be adversely affected by changes in exchange rates either due to transaction losses, which are recognized in the statement
of operations, or translation losses, which are recognized in comprehensive income. We currently do not hedge foreign exchange
rate exposure via derivative instruments.