Quarterly Report (10-q)

Date : 05/09/2018 @ 7:25AM
Source : Edgar (US Regulatory)
Stock : Acorda Therapeutics, Inc. (ACOR)
Quote : 17.43  -0.43 (-2.41%) @ 6:01PM

Quarterly Report (10-q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2018

OR

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

For the transition period from          to          

Commission File Number 000-50513

 

ACORDA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

13-3831168

(State or other jurisdiction of incorporation

or organization)

 

(I.R.S. Employer

Identification No.)

 

420 Saw Mill River Road, Ardsley, New York

 

10502

(Address of principal executive offices)

 

(Zip Code)

(914) 347-4300

(Registrant’s telephone number,

including area code)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

Emerging growth company

 

 

 

 

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at May 7, 2018

Common Stock, $0.001 par value

per share

 

47,066,476 shares

 

 


 

ACORDA THERAPEUTICS, INC.

TABLE OF CONTENTS

 

 

 

Page

PART I—FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

1

 

Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017

 

1

 

Consolidated Statements of Operations (unaudited) for the Three-month Periods Ended March 31, 2018 and 2017

 

2

 

Consolidated Statements of Comprehensive Loss (unaudited) for the Three-month Periods Ended March 31, 2018 and 2017

 

3

 

Consolidated Statements of Cash Flows (unaudited) for the Three-month Periods Ended March 31, 2018 and 2017

 

4

 

Notes to Consolidated Financial Statements (unaudited)

 

5

Item 2 .

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

29

Item 4.

Controls and Procedures

 

30

PART II—OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

31

Item 1A.

Risk Factors

 

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

Item 6.

Exhibits

 

41

Signatures

 

 

42

 

 


 

This Quarterly Report on Form 10-Q contains forward ‑looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Stockholders are cautioned that such statements involve risks and uncertainties, including: the ability to realize the benefits anticipated from acquisitions, among other reasons because acquired development programs are generally subject to all the risks inherent in the drug development process and our knowledge of the risks specifically relevant to acquired programs generally improves over time; we may need to raise additional fu nds to finance our operations and may not be able to do so on acceptable terms; our ability to successfully market and sell Ampyra (dalfampridine) Extended Release Tablets, 10 mg in the U.S., which will likely be materially adversely affected by the March 2017 court decision in our litigation against filers of Abbreviated New Drug Applications to market generic versions of Ampyra in the U.S.; the risk of unfavorable results from future studies of Inbrija ( levodopa inhalation powder ) or from our other resear ch and development programs, or any other acquired or in-licensed programs; we may not be able to complete development of, obtain regulatory approval for, or successfully market Inbrija, or any other products under development; risks associated with comple x, regulated manufacturing processes for pharmaceuticals, which could affect whether we have sufficient commercial supply of Inbrija to meet market demand, if it receives regulatory approval; third party payers (including governmental agencies) may not rei mburse for the use of Ampyra, Inbrija or our other products at acceptable rates or at all and may impose restrictive prior authorization requirements that limit or block prescriptions; the occurrence of adverse safety events with our products; the outcome (by judgment or settlement) and costs of legal, administrative or regulatory proceedings, investigations or inspections, including, without limitation, collective, representative or class action litigation ; competition; failure to protect our intellectual property, to defend against the intellectual property claims of others or to obtain third party intellectual property licenses needed for the commercialization of our products; and failure to comply with regulatory requirements could result in adverse acti on by regulatory agencies. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions. All statements, other than stat ements of historical facts, included in this report regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipates ,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make, and investors should not place undue reliance on these statements. In addition to the risks and uncertainties describ ed above, we have included important factors in the cautionary statements included in this report and in our Annual Report on Form 10-K, as amended by Amendment No.1 on Form 10-K/A, for the year ended December 31, 2017, particularly in the “Risk Factors” s ection (as updated by the disclosures in our subsequent quarterly reports, including this report), that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make. Forward-looking statements in this report are made only as of the date hereof, and we do not assume any obligation to publi cly update any forward-looking statements as a result of developments occurring after the date of this report.

We and our subsidiaries own several registered trademarks in the U.S. and in other countries. These registered trademarks include, in the U.S., the marks “Acorda Therapeutics,” our stylized Acorda Therapeutics logo, “Biotie Therapies,” “Ampyra” “Qutenza” and “ARCUS.”  Also, our mark “Fampyra” is a registered mark in the European Community Trademark Office and we have registrations or pending applications for this mark in other jurisdictions. Our trademark portfolio also includes several registered trademarks and pending trademark applications (e.g., “Inbrija”) in the U.S. and worldwide for potential product names or for disease awareness activities. Third party trademarks, trade names, and service marks used in this report are the property of their respective owners.

 

 

 


 

P ART I

Item 1.  Financial Statements

ACORDA THERAPEUTICS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

(In thousands, except share data)

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

226,276

 

 

$

307,068

 

Restricted cash

 

 

460

 

 

 

410

 

Short term investments

 

 

106,767

 

 

 

 

Trade accounts receivable, net of allowances of $2,129 and $845, as of

   March 31, 2018 and December 31, 2017, respectively

 

 

50,787

 

 

 

81,403

 

Prepaid expenses

 

 

14,782

 

 

 

13,333

 

Finished goods inventory held by the Company

 

 

27,662

 

 

 

37,501

 

Other current assets

 

 

1,454

 

 

 

1,983

 

Total current assets

 

 

428,188

 

 

 

441,698

 

Property and equipment, net of accumulated depreciation

 

 

39,023

 

 

 

36,669

 

Goodwill

 

 

289,577

 

 

 

286,611

 

Intangible assets, net of accumulated amortization

 

 

429,791

 

 

 

430,603

 

Non-current portion of deferred cost of license revenue

 

 

 

 

 

1,638

 

Other assets

 

 

494

 

 

 

750

 

Total assets

 

$

1,187,073

 

 

$

1,197,969

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

18,377

 

 

$

27,367

 

Accrued expenses and other current liabilities

 

 

91,782

 

 

 

100,128

 

Current portion of deferred license revenue

 

 

 

 

 

9,057

 

Current portion of loans payable

 

 

663

 

 

 

645

 

Current portion of liability related to sale of future royalties

 

 

6,536

 

 

 

6,763

 

Total current liabilities

 

 

117,358

 

 

 

143,960

 

Convertible senior notes (due 2021)

 

 

311,228

 

 

 

308,805

 

Non-current portion of acquired contingent consideration

 

 

117,983

 

 

 

112,722

 

Non-current portion of deferred license revenue

 

 

 

 

 

23,398

 

Non-current portion of loans payable

 

 

25,900

 

 

 

25,670

 

Deferred tax liability

 

 

24,936

 

 

 

22,459

 

Non-current portion of liability related to sale of future royalties

 

 

27,859

 

 

 

29,025

 

Other non-current liabilities

 

 

11,884

 

 

 

11,943

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value. Authorized 1,000,000 shares at March 31,

   2018 and December 31, 2017; no shares issued as of March 31,

   2018 and December 31, 2017, respectively

 

 

 

 

 

 

Common stock, $0.001 par value. Authorized 80,000,000 shares at March 31,

   2018 and December 31, 2017; issued 46,724,546 and 46,441,428 shares,

   including those held in treasury, as of March 31, 2018 and

   December 31, 2017, respectively

 

 

47

 

 

 

46

 

Treasury stock at cost (62,936 shares at March 31, 2018 and 16,151 shares

  at December 31, 2017)

 

 

(1,591

)

 

 

(389

)

Additional paid-in capital

 

 

977,881

 

 

 

968,580

 

Accumulated deficit

 

 

(435,725

)

 

 

(455,108

)

Accumulated other comprehensive income

 

 

9,313

 

 

 

6,858

 

Total stockholders’ equity

 

 

549,925

 

 

 

519,987

 

Total liabilities and stockholders’ equity

 

$

1,187,073

 

 

$

1,197,969

 

 

 

See accompanying Unaudited Notes to Consolidated Financial Statements

1


 

ACORDA THERAPEUTICS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

 

(In thousands, except per share data)

 

Three-month period ended March 31, 2018

 

 

Three-month period ended March 31, 2017

 

Revenues:

 

 

 

 

 

 

 

 

Net product revenues

 

$

103,003

 

 

$

112,593

 

Royalty revenues

 

 

3,162

 

 

 

4,528

 

License revenue

 

 

 

 

 

2,265

 

Total net revenues

 

 

106,165

 

 

 

119,386

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of sales

 

 

21,350

 

 

 

25,183

 

Cost of license revenue

 

 

 

 

 

159

 

Research and development

 

 

30,560

 

 

 

46,493

 

Selling, general and administrative

 

 

47,601

 

 

 

52,024

 

Changes in fair value of acquired contingent consideration

 

 

6,200

 

 

 

10,800

 

Total operating expenses

 

 

105,711

 

 

 

134,659

 

Operating income (loss)

 

 

454

 

 

 

(15,273

)

Other (expense) income, (net):

 

 

 

 

 

 

 

 

Interest and amortization of debt discount expense

 

 

(5,497

)

 

 

(4,143

)

Interest income

 

 

326

 

 

 

38

 

Realized loss on foreign currency transactions

 

 

(5

)

 

 

(444

)

Total other expense, (net)

 

 

(5,176

)

 

 

(4,549

)

Loss before taxes

 

 

(4,722

)

 

 

(19,822

)

(Provision for) benefit from income taxes

 

 

(3,477

)

 

 

918

 

Net loss

 

$

(8,199

)

 

$

(18,904

)

Net loss per share—basic and diluted

 

$

(0.18

)

 

$

(0.41

)

Weighted average common shares outstanding used in

   computing net loss per share—basic and diluted

 

 

46,529

 

 

 

45,808

 

 

See accompanying Unaudited Notes to Consolidated Financial Statements

2


 

ACORDA THERAPEUTICS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

(unaudited)

 

(In thousands)

 

Three-month period ended March 31, 2018

 

 

Three-month period ended March 31, 2017

 

Net loss

 

$

(8,199

)

 

$

(18,904

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

2,547

 

 

 

2,402

 

Unrealized losses on available for sale debt securities

 

 

(92

)

 

 

Other comprehensive income, net of tax

 

 

2,455

 

 

 

2,402

 

Comprehensive loss

 

$

(5,744

)

 

$

(16,502

)

 

See accompanying Unaudited Notes to Consolidated Financial Statements

3


 

ACORDA THERAPEUTICS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

(In thousands)

 

Three-month period ended March 31, 2018

 

 

Three-month period ended March 31, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(8,199

)

 

$

(18,904

)

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

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

5,867

 

 

 

7,872

 

Amortization of net premiums and discounts on investments

 

 

(92

)

 

 

Amortization of debt discount and debt issuance costs

 

 

4,003

 

 

 

2,580

 

Depreciation and amortization expense

 

 

3,310

 

 

 

5,647

 

Change in acquired contingent consideration obligation

 

 

6,200

 

 

 

10,800

 

Unrealized foreign currency transaction loss

 

 

 

 

 

247

 

Non-cash royalty revenue

 

 

(2,782

)

 

 

 

Deferred tax benefit

 

 

(293

)

 

 

(4,673

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in accounts receivable

 

 

30,616

 

 

 

2,011

 

(Increase) decrease in prepaid expenses and other current assets

 

 

(1,535

)

 

 

497

 

Decrease (increase) in inventory

 

 

9,839

 

 

 

(2,918

)

Decrease in non-current portion of deferred cost of license revenue

 

 

 

 

 

159

 

Decrease (increase) in other assets

 

 

8

 

 

 

(3,415

)

Decrease in accounts payable, accrued expenses, other current

   liabilities

 

 

(18,271

)

 

 

(23,093

)

Decrease in non-current portion of deferred license revenue

 

 

 

 

 

(2,264

)

Increase in other non-current liabilities

 

 

30

 

 

 

35

 

Net cash provided by (used in) operating activities

 

 

28,701

 

 

 

(25,419

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(4,807

)

 

 

(5,773

)

Purchases of intangible assets

 

 

(5

)

 

 

(76

)

Purchases of investments

 

 

(106,767

)

 

 

Net cash used in investing activities

 

 

(111,579

)

 

 

(5,849

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock and option exercises

 

 

3,367

 

 

 

5,474

 

Refund of deposit for purchase of noncontrolling interest

 

 

 

 

 

2,722

 

Purchase of treasury stock

 

 

(1,202

)

 

 

Repayment of loans payable

 

 

(656

)

 

 

(2,225

)

Net cash provided by financing activities

 

 

1,509

 

 

 

5,971

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

378

 

 

 

361

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(80,991

)

 

 

(24,936

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

308,039

 

 

 

158,871

 

Cash, cash equivalents and restricted cash at end of period

 

$

227,048

 

 

$

133,935

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

26

 

 

$

29

 

Cash paid for taxes

 

 

465

 

 

 

1,915

 

 

See accompanying Unaudited Notes to Consolidated Financial Statements

4


 

ACORDA THERAPEUTICS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

(1) Organization and Business Activities

Acorda Therapeutics, Inc. (“Acorda” or the “Company”) is a biopharmaceutical company focused on developing therapies that restore function and improve the lives of people with neurological disorders.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information, Accounting Standards Codification (ASC) Topic 270-10 and with the instructions to Form 10-Q. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In management’s opinion, all adjustments considered necessary for a fair presentation have been included in the interim periods presented and all adjustments are of a normal recurring nature. The Company has evaluated subsequent events through the date of this filing. Operating results for the three-month period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. When used in these notes, the terms “Acorda” or “the Company” mean Acorda Therapeutics, Inc. The December 31, 2017 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. You should read these unaudited interim condensed consolidated financial statements in conjunction with the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, for the year ended December 31, 2017.

Certain reclassifications were made to prior period amounts in the consolidated financial statements and accompanying notes to conform with the current year presentation due to the adoption of ASU 2016-18 “Statement of Cash Flows” and Topic 230: Restricted Cash. See Note 2.

(2) Summary of Significant Accounting Policies

Our critical accounting policies are detailed in our Annual Report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, for the year ended December 31, 2017. Effective January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606), ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, ASU 2016-15 “Statement of Cash Flows” (Topic 230): Classification of Certain Cash Receipts and Cash Payments, ASU 2016-18 “Statement of Cash Flows” (Topic 230): Restricted Cash , ASU 2017-01, “Business Combinations” (Topic 805): Clarifying the Definition of a Business, and ASU 2017-09, “Compensation – Stock Compensation” (Topic 718): Scope of Modification Accounting and ASU 2017-01 . Other than the adoption of the new accounting guidance, our critical accounting policies have not changed materially from December 31, 2017.

Revenue Recognition

On January 1, 2018, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers” (Topic 606) (“ASC 606”) and the related amendments to all contracts with customers that were not completed as of the date of adoption using the modified retrospective method. ASC 606 supersedes prior revenue guidance under ASC 605 “Revenue Recognition” (“ASC 605”) and requires entities to recognize revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company completed its assessment of the new guidance and evaluated the new requirements as applied to its existing revenue contracts not completed as of the date of initial application. As a result of the assessment, with the exception of the changes to our recognition of license revenue as further described below, the Company determined that adoption of the new standard did not have a significant impact on its revenue recognition methodology. In accordance with ASC 606, the Company recognizes revenue when the customer obtains control of a promised good or service, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for the good or service.

The Company determined that the revenue recognition methodology for the deferred license revenue changed as a result of the adoption of ASC 606. License revenue recorded by the Company prior to January 1, 2018 related exclusively to the recognition of the upfront payment received from Biogen upon the execution of the License and Collaboration agreement

5


 

that granted Biogen an exclu sive non sub-licensable license to sell Fampyra outside of the U.S. License revenue recorded prior to January 1, 2018 was recognized under ASC 605 on a pro rata basis as the Company’s obligations were satisfied throughout the duration of the license and co llaboration agreement. As of January 1, 2018, the Company adopted ASC 606 which changed the Company’s determination of its distinct performance obligations resulting in an acceleration of the recognition of the revenue in the arrangement. The material perf ormance obligations were completed prior to January 1, 2018, and as a result, the Company recognized its previously deferred revenue as a cumulative effect adjustment of $27.6 million within the accumulated deficit on the consolidated balance sheet as of J anuary 1, 2018.

 

The cumulative effect of applying ASC 606 to the company’s consolidated balance sheet was as follows:

(In thousands)

Balance as of December 31, 2017

 

Net Adjustments

 

Balance as of

January 1, 2018

 

Assets

 

 

 

 

 

 

 

 

 

Other current assets

$

1,983

 

$

(634

)

$

1,349

 

Non-current portion of deferred cost of license revenue

 

1,638

 

 

(1,638

)

 

 

    Total Assets

$

1,197,969

 

$

(2,272

)

$

1,195,697

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Current portion of deferred license revenue

$

9,057

 

$

(9,057

)

$

 

Non-current portion of deferred license revenue

 

23,398

 

 

(23,398

)

 

 

Deferred tax liability

 

22,459

 

 

2,600

 

 

25,059

 

Accumulated deficit

 

(455,108

)

 

27,583

 

 

(427,525

)

    Total liabilities and stockholders' equity

$

1,197,969

 

$

(2,272

)

$

1,195,697

 

          

The impact of the adoption of ASC 606 on the Company’s consolidated balance sheet as of March 31, 2018 was as follows:

(In thousands)

Balance as of

March 31, 2018

Prior to Adoption

of ASC 606

 

Net Adjustments

 

Balance as of

March 31, 2018

as Reported

Under ASC 606

 

Assets

 

 

 

 

 

 

 

 

 

Other current assets

$

2,088

 

$

(634

)

$

1,454

 

Non-current portion of deferred cost of license revenue

 

1,479

 

 

(1,479

)

 

 

    Total Assets

$

1,189,186

 

$

(2,113

)

$

1,187,073

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Current portion of deferred license revenue

$

9,057

 

$

(9,057

)

$

 

Non-current portion of deferred license revenue

 

21,134

 

 

(21,134

)

 

 

Deferred tax liability

 

22,336

 

 

2,600

 

 

24,936

 

Accumulated deficit

 

(461,203

)

 

25,478

 

 

(435,725

)

    Total liabilities and stockholders' equity

$

1,189,186

 

$

(2,113

)

$

1,187,073

 

 

The impact of the adoption of ASC 606 on the Company’s consolidated statement of operations for the three-month period ended March 31, 2018 was as follows:

(In thousands)

Three-Month Period Ended March 31, 2018 Balance Prior to

Adoption of ASC 606

 

Effect of Change

 

Three-Month Period

Ended March 31, 2018

Balance as Reported

Under ASC 606

 

License revenue

$

2,264

 

$

(2,264

)

$

 

Cost of license revenue

 

159

 

 

(159

)

 

 

Operating income

$

2,559

 

$

(2,105

)

$

454

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(6,094

)

$

(2,105

)

$

(8,199

)

Net loss per share (basic and diluted)

$

(0.13

)

$

(0.05

)

$

(0.18

)

6


 

 

ASC 606 did not have an aggregate impact on the Company’s net cash provided by operating activities.

ASC 606 outlines a five-step process for recognizing revenue from contracts with customers: i) identify the contract with the customer, ii) identify the performance obligations in the contract, (iii) determine the transaction price, iv) allocate the transaction price to the separate performance obligations in the contract, and (v) recognize revenue associated with the performance obligations as they are satisfied.

The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606, the Company determines the performance obligations that are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to each respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company's performance obligations are transferred to customers at a point in time, typically upon receipt of the product by the customer.

Product Revenue, Net

 Net revenue from product sales is recognized at the transaction price when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon receipt of the product by the customer. The Company’s products are sold to a network of specialty providers which are contractually obligated to hold no more than an agreed upon number of days inventory.  The Company’s payment terms are between 30 to 34 days.

The Company’s net revenues represent total revenues adjusted for discounts and allowances, including estimated price discounts, rebates and chargebacks. These adjustments represent variable consideration under ASC 606 and are recorded for cash consideration given by the Company to a customer that is presumed to be a reduction of the transaction price of the Company’s products and, therefore, are characterized as a reduction of revenue. These adjustments are established by management as its best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances. Adjustments for variable consideration are determined based on the contractual terms with customers, historical trends, communications with customers and the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product and anticipated introduction of competitive products.

Discounts and Allowances

Revenue from product sales are recorded at the transaction price, which includes estimates for discounts and allowances for which reserves are established and includes cash discounts, chargebacks, rebates, returns, copay assistance, data fees and wholesaler fees for services Discounts and allowances are recorded following shipment of product and the appropriate reserves are credited. These reserves are classified as reductions of accounts receivable (if the amount is payable to the Customer and right of offset exists) or a current liability (if the amount is payable to a party other than a Customer). These allowances are established by management as its best estimate based on historical experience and data points available and are adjusted to reflect known changes in the factors that impact such reserves. Allowances for customer credits, chargebacks, rebates, data fees and wholesaler fees for services, returns, and discounts are established based on contractual terms with customers and analyses of historical usage of these items. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. The nature of our allowances and accruals requiring critical estimates, and the specific considerations it uses in estimating their amounts are as follows:

Government Chargebacks and Rebates: We contract for Medicaid and other U.S. Federal government programs to allow for our products to remain eligible for reimbursement under these programs. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program.  Based upon our contracts and the most recent experience with respect to sales through each of these channels, we provide an allowance for chargebacks and rebates. We monitor the sales trends and adjust the chargeback and rebate percentages on a regular basis to reflect the most recent chargebacks and rebate experience. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current

7


 

qua rter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.

Managed Care Contract Rebates: We contract with various managed care organizations including health insurance companies and pharmacy benefit managers. These contracts stipulate that rebates and, in some cases, administrative fees, are paid to these organizations provided our product is placed on a specific tier on the organization’s drug formulary. Based upon our contracts and the most recent experience with respect to sales through managed care channels, we provide an allowance for managed care contract rebates. We monitor the sales trends and adjust the allowance on a regular basis to reflect the most recent rebate experience. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.

Copay Mitigation Rebates: We offer copay mitigation to commercially insured patients who have coverage for our products (in accordance with applicable law) and are responsible for a cost share. Based upon our contracts and the most recent experience with respect to actual copay assistance provided, we provide an allowance for copay mitigation rebates. We monitor the sales trends and adjust the rebate percentages on a regular basis to reflect the most recent rebate experience.

Cash Discounts: We sell directly to our network of specialty pharmacies, Kaiser and the specialty distributor to the U.S. Department of Veterans Affairs. We generally provide invoice discounts for prompt payment for our products. We estimate our cash discounts based on the terms offered to our customers. Discounts are estimated based on rates that are explicitly stated in the Company’s contracts as it is expected they will take the discount and are recorded as a reduction of revenue at the time of product shipment when product revenue is recognized. We adjust estimates based on actual activity as necessary.

Product Returns: We either offer customers no return except for products damaged in shipping or consistent with industry practice, a limited right of return based on the product’s expiration date. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The company currently estimates product return liabilities using historical sales information and inventory remaining in the distribution channel.

Data Fees and Fees for Service Payable to Specialty Pharmacies: We have contracted with certain specialty pharmacies to obtain transactional data related to our products in order to develop a better understanding of our selling channel as well as patient activity and utilization by the Medicaid program and other government agencies and managed care organizations. We pay a variable fee to the specialty pharmacies to provide us the data. We also pay the specialty pharmacies a flat fee in exchange for providing distribution and inventory management services, including the provision of inventory management data to the Company. We estimate our fee for service accruals and allowances based on sales to each specialty pharmacy and the applicable contracted rate.

Royalty Revenue

Royalty revenue recorded by the Company relates exclusively to the Company’s License and Collaboration agreement with Biogen which provides for ongoing royalties based on sales of Fampyra outside of the U.S. The Company recognizes revenue for royalties under ASC 606, which provides revenue recognition constraints by requiring the recognition of revenue at the later of the following: 1) sale or usage of the products or 2) satisfaction of the performance obligations. The Company has satisfied its performance obligations and therefore recognizes royalty revenue when the sales to which the royalties relate are completed.

Milestone Revenue

Milestone revenue relates to the License and Collaboration agreement with Biogen which provides for milestone payments for the achievement of certain regulatory and sales milestones during the term of the agreement. Regulatory milestones are contingent upon the approval of Fampyra for new indications outside of the U.S. Sales milestones are contingent upon the achievement of certain net sales targets for Fampyra sales outside of the U.S. The Company recognizes milestone revenue under ASC 606, which provides constraints for entities to recognize milestone revenue which is deemed to be variable by requiring the Company to estimate the amount of consideration to which it is entitled in exchange for transferring the promised goods or services to a customer. The Company recognizes an estimate of revenue to the extent that

8


 

it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the milestone is achieved. For regulatory milestones, the Company evaluates whether t he milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone val ue is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. For s ales-based milestones, the Company has satisfied its performance obligations and, therefore, recognizes revenue upon the achievement of the specific sale milestones.

The following table disaggregates our revenue by major source (in thousands):

 

 

Three-month period ended March 31, 2018

 

 

Three-month period ended March 31, 2017

 

Revenues:

 

 

 

 

 

 

 

 

Net product revenues

 

$

103,003

 

 

$

112,593

 

Royalty revenues

 

 

3,162

 

 

 

4,528

 

License revenue

 

 

 

 

 

2,265

 

Total net revenues

 

$

106,165

 

 

$

119,386

 

Foreign Currency Translation

The functional currency of operations outside the United States of America is deemed to be the currency of the local country, unless otherwise determined that the United States dollar would serve as a more appropriate functional currency given the economic operations of the entity. Accordingly, the assets and liabilities of the Company’s foreign subsidiary, Biotie, are translated into United States dollars using the period-end exchange rate; income and expense items are translated using the average exchange rate during the period; and equity transactions are translated at historical rates. Cumulative translation adjustments are reflected as a separate component of equity. Foreign currency transaction gains and losses are recognized in the period incurred and are reported as other income (expense) in the statement of operations.

Segment and Geographic Information

 

The Company is managed and operated as one business which is focused on developing therapies that restore function and improve the lives of people with neurological disorders. The entire business is managed by a single management team that reports to the Chief Executive Officer. The Company does not operate separate lines of business with respect to any of its products or product candidates and the Company does not prepare discrete financial information with respect to separate products or product candidates or by location. Accordingly, the Company views its business as one reportable operating segment. Net product revenues reported to date are derived from the sales of Ampyra and Qutenza in the U.S.

 

 

Subsequent Events

Subsequent events are defined as those events or transactions that occur after the balance sheet date, but before the financial statements are filed with the Securities and Exchange Commission. The Company completed an evaluation of the impact of any subsequent events through the date these financial statements were issued, and determined there were no subsequent events requiring disclosure in these financial statements.

Accounting Pronouncements Adopted

As noted above, in May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (Topic 606) (ASU 2014-09). This new standard replaced all previous U.S. GAAP guidance on this topic and eliminated all industry-specific guidance. The new standard requires the application of a five-step model to determine the amount and timing of revenue to be recognized. The underlying principle is that revenue is to be recognized for the transfer of goods or services to customers that reflects the amount of consideration that the Company expects to be entitled to in exchange for those goods or services. The Company adopted the new standard effective January 1, 2018 using the modified retrospective transition method. See discussion of the adoption above in Revenue Recognition .

9


 

In January 2016, the FASB issued Accounting Stand ards Update 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The main objective of this update is to enhance the reporting model for financial instruments to provide us ers of financial statements with more decision-useful information. The new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company adopted this guidance effective January 1, 2018. T he adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued Accounting Standards Update ASU 2016-15 “Statement of Cash Flows” (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which specifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU requires retrospective application to all periods presented. The Company adopted this guidance effective January 1, 2018. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued Accounting Standards Update ASU 2016-18 “Statement of Cash Flows” (Topic 230); Restricted Cash (ASU 2016-18), which defines new requirements for the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The amendments in this ASU require retrospective application to each period presented. The Company adopted this guidance effective January 1, 2018 retrospectively. This ASU requires the entities to present statement of cash flows in a manner such that it reconciles beginning and ending totals of cash, cash equivalents, restricted cash or restricted cash equivalents. Also, when cash, cash equivalents, restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity should, for each period that a statement of financial position is presented, present on the face of the statement of cash flows or disclose in the notes to the financial statements, the line items and amounts of cash, cash equivalents, and restricted cash or restricted cash equivalents reported within the statement of financial position. The amounts, disaggregated by the line item in which they appear within the statement of financial position, shall sum to the total amount of cash, cash equivalents, and restricted cash or restricted cash equivalents at the end of the corresponding period shown in the statement of cash flows.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same amounts shown in the statement of cash flows:

 

Three months ended March 31, 2018

 

 

Three months ended March 31, 2017

 

(In thousands)

Beginning of period

 

 

End of period

 

 

Beginning of period

 

 

End of period

 

Cash and cash equivalents

$

307,068

 

 

$

226,276

 

 

$

158,537

 

 

$

133,619

 

Restricted cash

 

410

 

 

 

460

 

 

 

79

 

 

 

61

 

Restricted cash included in Other assets

 

561

 

 

 

312

 

 

 

255

 

 

 

255

 

Total Cash, cash equivalents and restricted cash per statement of cash flows

$

308,039

 

 

$

227,048

 

 

$

158,871

 

 

$

133,935

 

Amounts included in restricted cash represent those amounts required to be set aside to cover the Company’s self-funded employee health insurance. Restricted cash included in other assets on the statement of financial position relates to cash collateralized standby letters of credit in connection with obligations under facility leases, which is included with other assets in the consolidated balance sheet due to the long-term nature of the letters of credit.

In January 2017, the FASB issued Accounting Standards Update 2017-01, “Business Combinations” (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which provides additional clarification to aid in determining when a set of assets and activities is not a business. The amendments in this update require prospective applications. The Company adopted this guidance effective January 1, 2018. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued Accounting Standards Update 2017-09, “Compensation – Stock Compensation” (Topic 718): Scope of Modification Accounting (ASU 2017-09). This new standard 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. ASU 2017-09 allows for prospective application and is effective for fiscal years beginning after December 15, 2017, and interim periods therein with early adoption permitted for interim or annual periods. The Company adopted this guidance effective January 1, 2018. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

10


 

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases” (Topic 842). The main objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact it may have on its consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update 2017-04, “Intangibles – Goodwill and Other” (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This new standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 allows for prospective application and is effective for fiscal years beginning after December 15, 2019, and interim periods therein with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating whether it will adopt this guidance early. The Company does not expect the adoption of this guidance to have a significant impact on the consolidated financial statements.

In February 2018, the FASB issued Accounting Standards Update 2018-02, ‘Income Statement—Reporting Comprehensive Income’ (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). This new standard provides entities with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. ASC 740-10-35-4 requires that deferred tax assets and liabilities should be adjusted to account for any changes in tax laws or rates within the period that the enactment of these changes occurs and any adjustments to flow through income from continuing operations. Since the adjustments due to the Tax Cuts and Jobs Act are required to flow through income from continuing operations, the tax effects of items within accumulated other comprehensive income known now as “stranded tax effects,” do not reflect the appropriate tax rate. As such, FASB issued ASU 2018-02, in order to address these stranded income tax effects. The new standard requires entities to disclose the following:

 

A description of the accounting policy for releasing income tax effects from AOCI;

 

Whether they elect to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act, and

 

Information about the other income tax effects that are reclassified.

 

The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements.

In March 2018, the FASB issued Accounting Standards Update 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118’. The ASU adds seven paragraphs to ASC 740, Income Taxes, that contain SEC guidance related to SAB 118 (codified as SEC SAB Topic 5.EE, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act”), which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act in the period of enactment which is the period that includes December 22, 2017. The measurement period should not extend beyond one year from the enactment date. The Company is currently evaluating the impact the adoption of this guidance may have on its consolidated financial statements.

(3) Share-based Compensation

During the three‑month periods ended March 31, 2018 and 2017, the Company recognized share-based compensation expense of $5.9 million and $7.8 million, respectively. Activity in options and restricted stock during the three-month period ended March 31, 2018 and related balances outstanding as of that date are reflected below. The weighted average fair value per share of options granted to employees for the three-month periods ended March 31, 2018 and 2017 were approximately $12.37 and $13.02, respectively.

11


 

The following table summarizes share-based compensation expense included within the consolidated statements of operations:

 

 

 

For the three-month

period ended March 31,

 

(In millions)

 

2018

 

 

2017

 

Research and development

 

$

1.7

 

 

$

2.5

 

Selling, general and administrative

 

 

4.2

 

 

 

5.3

 

Total

 

$

5.9

 

 

$

7.8

 

 

A summary of share-based compensation activity for the three-month period ended March 31, 2018 is presented below:

Stock Option Activity

 

 

 

Number of

Shares

(In   thousands)

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Intrinsic

Value

(In   thousands)

 

Balance at January 1, 2018

 

 

8,929

 

 

$

29.46

 

 

 

 

 

 

 

 

 

Granted

 

 

536

 

 

 

24.39

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(201

)

 

 

23.89

 

 

 

 

 

 

 

 

 

Exercised

 

 

(172

)

 

 

19.61

 

 

 

 

 

 

 

 

 

Balance at March 31, 2017

 

 

9,092

 

 

$

29.47

 

 

 

6.0

 

 

$

8,141

 

Vested and expected to vest at

    March 31, 2018

 

 

9,032

 

 

$

29.50

 

 

 

6.0

 

 

$

8,068

 

Vested and exercisable at

    March 31, 2018

 

 

6,728

 

 

$

30.49

 

 

 

5.1

 

 

$

4,605

 

 

Restricted Stock and Performance Stock Unit Activity

 

(In thousands)

 

 

 

 

Restricted Stock and Performance Stock Units

 

Number of Shares

 

Nonvested at January 1, 2018

 

 

698

 

Granted

 

 

 

Vested

 

 

(111

)

Forfeited

 

 

(71

)

Nonvested at March 31, 2018

 

 

516

 

 

Unrecognized compensation cost for unvested stock options, restricted stock awards and performance stock units as of March 31, 2018 totaled $33.7 million and is expected to be recognized over a weighted average period of approximately 1.9 years.

During the three‑month period ended March 31, 2018, the Company repurchased 46,785 shares of common stock at an average price of $25.69 per share or approximately $1.2 million. The share repurchase consists of common stock withheld to cover the tax liability in connection with the settlement of vested restricted stock units and stock options that were exercised in the there-month period ended March 31, 2018.

12


 

(4) Loss Per Share

The following table sets forth the computation of basic and diluted loss per share for the three-month periods ended March 31, 2018 and 2017:

 

(In thousands, except per share data)

 

Three-month period ended March 31, 2018

 

 

Three-month period ended March 31, 2017

 

 

Basic and diluted

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,199

)

 

$

(18,904

)

 

Weighted average common shares outstanding used in

   computing net loss per share—basic and diluted

 

 

46,529

 

 

 

45,808

 

 

Net loss per share—basic and diluted

 

$

(0.18

)

 

$

(0.41

)

 

 

Securities that could potentially be dilutive are excluded from the computation of diluted earnings per share when a loss from continuing operations exists or when the exercise price exceeds the average closing price of the Company’s common stock during the period, because their inclusion would result in an anti-dilutive effect on per share amounts.

The following amounts were not included in the calculation of net loss per diluted share because their effects were anti-dilutive:

 

(In thousands)

 

Three-month period ended March 31, 2018

 

 

Three-month period ended March 31, 2017

 

Denominator

 

 

 

 

 

 

 

 

Stock options and restricted common shares

 

 

7,504

 

 

 

8,258

 

 

Additionally, the impact of the convertible debt and the impact of the convertible capital loan assumed from Biotie were determined to be anti-dilutive and excluded from the calculation of net loss per diluted share for the three-month periods ended March 31, 2018 and 2017.

(5) Income Taxes

The Company’s effective income tax rate differs from the U.S. statutory rate principally due to state taxes, Federal research and development tax credits, jurisdictions with pretax losses for which no tax benefit can be recognized, changes in the valuation allowance and the effects of share based compensation which are recorded discretely in the quarters in which they occur

For the three-month periods ended March 31, 2018 and 2017, the Company recorded a $(3.5) million provision and $0.9 million benefit for income taxes, respectively. The effective income tax rates for the Company for the three-month periods ended March 31, 2018 and 2017 were (74%) and 5%, respectively. The variance in the effective tax rates for the three-month period ended March 31, 2018 as compared to the three-month period ended March 31, 2017 was due primarily to the decrease in the federal statutory tax rate as a result of tax reform, the valuation allowance recorded on deferred tax assets for which no tax benefit can be recognized, state taxes, and the reduction in the research & development tax credit.

 

The Company continues to evaluate the realizability of its deferred tax assets and liabilities on a quarterly basis and will adjust such amounts in light of changing facts and circumstances including, but not limited to, future projections of taxable income, tax legislation, rulings by relevant tax authorities, the progress of ongoing tax audits and the regulatory approval of products currently under development. Any changes to the valuation allowance or deferred tax assets and liabilities in the future would impact the Company's income taxes.

 

The Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and includes a variety of other changes.

 

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. For the three months

13


 

ended March 31, 2018, the Company has not completed its accounting for the tax effects of the enactment of the Act; however, in certain cases, we have ma de a reasonable estimate of the effects on our existing deferred tax balances. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to the enactment. T he Company has not obtained additional information affecting the provisional amounts initially recorded. The Company did not record a provision related to the one-time tra nsition tax on mandatory repatriation of undistributed foreign earnings and profits per the Act, since a preliminary analysis has determined that there is no accumulated earnings and profits.

 

Additional work is still necessary for a more detailed analysis of the Company's deferred tax assets and liabilities and its historical foreign earnings as w ell as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

 

The Internal Revenue Service commenced an examination of the Company’s US income tax return for 2015 in the third quarter of 2017.

(6) Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates, exchange rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability. The Company’s Level 1 assets consist of time deposits and investments in a Treasury money market fund. The Company’s level 2 assets consist of investments in corporate bonds and commercial paper which are categorized as cash equivalents for those investments with original maturities of three months or less and short-term investments for those investments with original maturities between three months and one year. The Company’s Level 3 liabilities represent acquired contingent consideration related to the acquisition of Civitas and are valued using a probability weighted discounted cash flow valuation approach. No changes in valuation techniques occurred during the three-month period ended March 31, 2018. The estimated fair values of all of our financial instruments approximate their carrying values at March 31, 2018, except for the fair value of the Company’s convertible senior notes, which was approximately $313.1 million as of March 31, 2018. The Company estimates the fair value of its notes utilizing market quotations for the debt (Level 2).

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Assets Carried at Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

19,621

 

 

$

32,452

 

 

$

 

Short-term investments

 

 

 

 

 

106,767

 

 

 

 

Liabilities Carried at Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired contingent consideration

 

 

 

 

 

 

 

 

119,200

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Assets Carried at Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

9,163

 

 

$

 

 

$

 

Liabilities Carried at Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired contingent consideration

 

 

 

 

 

 

 

 

113,000

 

 

14


 

The following table presents additional information about liabilities measured at fair value on a recurring basis and for which the Company utilizes Level 3 inputs to determine fair value.

Acquired contingent consideration

 

(In thousands)

 

Three-month period ended March 31, 2018

 

 

Three-month period ended March 31, 2017

 

Acquired contingent consideration:

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

113,000

 

 

$

72,100

 

Fair value change to contingent consideration

   included in the statement of operations

 

 

6,200

 

 

 

10,800

 

Balance, end of period

 

$

119,200

 

 

$

82,900

 

 

The Company estimates the fair value of its acquired contingent consideration using a probability weighted discounted cash flow valuation approach based on estimated future sales expected from Inbrija (levodopa inhalation powder) , a potential new drug candidate for the treatment of OFF periods of Parkinson’s disease and CVT-427, a Phase I candidate. CVT-427 is an inhaled triptan intended for acute treatment of migraine using the ARCUS drug delivery technology. Using this approach, expected probability adjusted future cash flows are calculated over the expected life of the agreement and discounted to estimate the current value of the liability at the period end date. Some of the more significant assumptions made in the valuation include (i) the estimated Inbrija and CVT-427 revenue forecasts, (ii) probabilities of success, and (iii) discount periods and rate. The probability of achievement of revenue milestones ranged from 26.3% to 85.0% with milestone payment outcomes ranging from $0 to $69 million in the aggregate for Inbrija and CVT-427. The valuation is performed quarterly. Gains and losses are included in the statement of operations. For the three-month period ended March 31, 2018, changes in the fair value of the acquired contingent consideration were due to the re-calculation of cash flows for the passage of time.

The acquired contingent consideration is classified as a Level 3 liability as its valuation requires substantial judgment and estimation of factors that are not currently observable in the market. If different assumptions were used for the various inputs to the valuation approach, including but not limited to, assumptions involving probability adjusted sales estimates for Inbrija and CVT-427 and estimated discount rates, the estimated fair value could be significantly higher or lower than the fair value determined.

 

(7) Investments

The Company has determined that all of its investments are classified as available-for-sale. Available-for-sale debt securities are carried at fair value with interest on these investments included in interest income and are recorded based primarily on quoted market prices. Available-for-sale investments consisted of the following at March 31, 2018:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Cash Equivalents

 

$

32,457

 

 

$

1

 

 

$

(6

)

 

$

32,452

 

Short Term Investments

 

 

106,854

 

 

 

6

 

 

 

(93

)

 

 

106,767

 

Total

 

$

139,311

 

 

$

7

 

 

$

(99

)

 

$

139,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments with maturities of three months or less from date of purchase have been classified as cash equivalents, and amounted to approximately $32.5 million as of March 31, 2018. Short-term investments have original maturities of greater than 3 months but less than 1 year and amounted to approximately $106.8 million as of March 31, 2018. The Company held no short-term investments at December 31, 2017. Short-term investments at March 31, 2018 primarily consisted of high-grade commercial paper and corporate bonds. Long-term investments have original maturities of greater than 1 year. There were no investments classified as long-term at March 31, 2018 or December 31, 2017. The Company has determined that there were no other-than-temporary declines in the fair values of its investments as of March 31, 2018 as the Company does not intend to sell its investments and it is not more likely than not that the Company will be required to sell its investments prior to the recovery of its amortized cost basis.

15


 

Unrealized holding gains and losses, which relate to debt instruments, are reported within accumulated other comprehensive income (AOCI) in the s tatements of comprehensive income. The changes in AOCI associated with the unrealized holding gains on available-for-sale investments during the three-month period ended March 31, 2018, were as follows (in thousands):

 

(In thousands)

 

Net Unrealized Gains (Losses) on Marketable Securities

 

Balance at December 31, 2017

 

$

 

Other comprehensive loss before reclassifications

 

 

(92

)

Amounts reclassified from accumulated other comprehensive income

 

 

 

Net current period other comprehensive loss

 

 

(92

)

Balance at March 31, 2018

 

$

(92

)

 

(8) Liability Related to Sale of Future Royalties

As of October 1, 2017, the Company completed a royalty purchase agreement with HealthCare Royalty Partners , or HCRP (“Royalty Agreement”). In exchange for the payment of $40 million to the Company, HCRP obtained the right to receive Fampyra royalties payable by Biogen under the License and Collaboration Agreement between the Company and Biogen, up to an agreed upon threshold of royalties. When this threshold is met, if ever, the Fampyra royalties will revert back to the Company and the Company will continue to receive the Fampyra royalties from Biogen until the revenue stream ends. The transaction does not include potential future milestones to be paid.

The Company maintained the rights under the license and collaboration agreement with Biogen, therefore, the Royalty Agreement has been accounted for as a liability that will be amortized using the effective interest method over the life of the arrangement, in accordance with the relevant accounting guidance. The Company recorded the receipt of the $40 million payment from HCRP and established a corresponding liability in the amount of $40 million, net of transaction costs of approximately $2.2 million. The net liability is classified between the current and non-current portion of liability related to sale of future royalties in the consolidated balance sheets based on the recognition of the interest and principal payments to be received by HCRP in the next 12 months from the financial statement reporting date. The total net royalties to be paid, less the net proceeds received will be recorded to interest expense using the effective interest method over the life of the Royalty Agreement. The Company will estimate the payments to be made to HCRP over the term of the Agreement based on forecasted royalties and will calculate the interest rate required to discount such payments back to the liability balance. Over the course of the Royalty Agreement, the actual interest rate will be affected by the amount and timing of net royalty revenue recognized and changes in forecasted revenue. On a quarterly basis, the Company will reassess the effective interest rate and adjust the rate prospectively as necessary.

The Company recognized non-cash royalty revenue of approximately $2.8 million, non-cash interest expense of approximately $1.2 million and debt discount amortization costs of approximately $0.2 million for the three-month period ended March 31, 2018. The interest and debt discount amortization expense is reflected as interest and amortization of debt discount expense in the Statement of Operations.

(In thousands)

 

Three-month period ended March 31, 2018

 

 

Liability related to sale of future royalties - beginning balance

 

$

35,788

 

 

Deferred transaction costs recognized

 

 

202

 

 

Non-cash royalty revenue payable to HCRP

 

 

(2,781

)

 

Non-cash interest expense recognized

 

 

1,186

 

 

Liability related to sale of future royalties - ending balance