NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Our Company
Assertio Therapeutics, Inc. (Assertio or the Company) is a leading diversified, specialty pharmaceutical company focused on distinctive products that offer enhanced therapeutic options for patients in need, while maintaining the highest ethical standards in all our business practices.
As of December 31, 2019, the Company’s specialty pharmaceutical business consisted primarily of Gralise® (gabapentin), a once daily product for the management of postherpetic neuralgia (PHN) that we launched in 2011; CAMBIA®(diclofenac potassium for oral solution), a nonsteroidal anti-inflammatory drug for the acute treatment of migraine attacks, acquired by the Company in December 2013; and Zipsor® (diclofenac potassium liquid filled capsules), a nonsteroidal anti-inflammatory drug for the treatment of mild to moderate acute pain, acquired by the Company in June 2012, marketed in the U.S.
On December 4, 2017, the Company announced a commercialization agreement with Collegium Pharmaceutical, Inc. (Collegium), pursuant to which the Company granted Collegium the right to commercialize the NUCYNTA franchise of products in the U.S. (the Commercialization Agreement). Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing, and the Company received royalties on all NUCYNTA revenues based on certain net sales thresholds.
On December 12, 2019, the Company announced it entered into an agreement with Golf Acquiror LLC, an affiliate to Alvogen, Inc. (Alvogen), a global privately held pharmaceutical company, under which Alvogen acquired and assumed all responsibilities associated with the product Gralise (gabapentin). Under the terms of the agreement, Alvogen will pay Assertio a total value of $127.5 million. This included $75.0 million in cash at closing on January 10, 2020, and the balance payable as 75% of Alvogen’s first $70.0 million of Gralise net sales after the closing. Alvogen also paid the Company for certain inventories relating to Gralise.
On February 6, 2020, the Company announced it entered into a definitive agreement with Collegium pursuant to which Collegium acquired the NUCYNTA franchise of products from the Company, and assumed certain contracts, liabilities and obligations of the Company relating to the NUCYNTA products, including those related to manufacturing and supply, post-market commitments and clinical development costs. Under the terms of the agreement, Collegium paid Assertio $375.0 million in cash at closing on February 13, 2020, less royalties paid to the Company in 2020. Collegium also paid the Company for certain inventories relating to the products.
On February 13, 2020, the Company repaid in full its outstanding aggregate principal amount of senior secured notes (Senior Notes) pursuant to a Note Purchase Agreement dated March 12, 2015 (Note Purchase Agreement) and all subsequent amendments to the Note Purchase Agreement.
On February 19, 2020, the Company announced it entered into separate, privately negotiated agreements with a limited number of holders of the Company’s 2021 Notes and 2024 Notes to repurchase approximately $188.0 million aggregate principal amount of the outstanding 2021 Notes and 2024 Notes.
Basis of Preparation
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and U.S. Securities and Exchange Commission (SEC) regulations for annual reporting
In connection with the preparation of the financial statements for the year ended December 31, 2019, the Company evaluated whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity's ability to continue as a going concern within twelve months after the date of the issuance of these financial statements noting that there did not appear to be evidence of substantial doubt of the entity's ability to continue as a going concern.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Depomed Bermuda Ltd (Depo Bermuda), Depo NF Sub, LLC (Depo NF Sub) and Depo DR Sub, LLC (Depo DR Sub). These subsidiaries are all holding companies created to facilitate certain transactions and serve in certain administrative capacities. There are no material operating results from these subsidiaries and all intercompany accounts and transactions have been eliminated on consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities as well as subsequent fair value measurements. Additionally, estimates are used in determining items such as sales discounts and returns, depreciable and amortizable lives, share-based compensation assumptions and taxes on income. Although management believes these estimates are based upon reasonable assumptions within the bounds of its knowledge of the Company, actual results could differ materially from these estimates.
Cash, Cash Equivalents, Short-term Investments and Marketable Securities
The Company considers all highly liquid investments with an original maturity (at date of purchase) of three months or less to be cash equivalents. All marketable securities with original maturities at the date of purchase greater than three months and remaining maturities of less than one year are classified as short-term investments. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and commercial paper. The Company places its cash, cash equivalents, short-term investments and marketable securities with high-quality U.S. government and financial institutions and to date has not experienced material losses on any of its balances.
Accounts Receivable
Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment. To date the Company has not recorded a bad debt allowance since the majority of its product revenue comes from sales to a limited number of financially sound companies who have historically paid their balances timely. The need for a bad debt allowance is evaluated each reporting period based on the Company’s assessment of the credit worthiness of its customers or any other potential circumstances that could result in bad debt.
Inventories
Inventories are stated at the lower of cost or net realizable value with cost determined by specific manufactured lot. Inventories consist of costs of the active pharmaceutical ingredient, contract manufacturing and packaging costs. Additionally, the Company writes off the value of inventory for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand and projected demand.
Investments
Assertio has two long-term investments as of December 31, 2019. During the year ended December 31, 2018, Assertio invested $3.0 million in a company engaged in medical research. This investment is structured as a long-term loan receivable with a convertible feature and is valued at amortized cost.
Assertio received warrants to purchase Collegium stock in conjunction with the November 2018 amendment to the Commercialization Agreement. Such warrants are measured at fair value with changes in fair value recorded in Other income, net on the Company’s Consolidated Statements of Comprehensive Income.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, as follows:
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Furniture and office equipment
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3 - 5 years
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Machinery and equipment
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5 - 7 years
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Laboratory equipment
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3 - 5 years
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Leasehold improvements
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Shorter of estimated useful life or lease term
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Intangible Assets
Intangible assets consist of purchased developed technology and trademarks that are accounted for as definite-lived intangible assets subject to amortization. The Company determines the fair values of acquired intangible assets as of the acquisition date. Discounted cash flow models are typically used in these valuations, which require the use of significant estimates and assumptions, including but not limited to, developing appropriate discount rates and estimating future cash flows from product sales and related expenses. The fair value recorded is amortized on a straight-line basis over the estimated useful life of the asset. The Company evaluates purchased intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when the fair value of the asset is lower than the carrying amount. To test for impairment, the Company estimates undiscounted future cash flows expected to result from the use of the asset and its eventual disposition and compares that amount to the asset’s carrying amount. Estimating future cash flows related to an intangible asset involves significant estimates and assumptions.
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with Customers (ASC 606) on January 1, 2018 using the modified retrospective transition method. There was no adjustment to the Company’s opening balance of accumulated deficit resulting from the adoption of this guidance.
Prior to the adoption of ASC 606, the Company recognized revenue from the sale of its products, royalties earned, and payments received and services performed under contractual arrangements in accordance with ASC 605. Under ASC 605, Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred and title has passed, the price is fixed or determinable and the Company is reasonably assured of collecting the resulting receivable. Revenue arrangements with multiple elements are evaluated to determine whether the multiple elements meet certain criteria for dividing the arrangement into separate units of accounting, including whether the delivered element(s) have stand-alone value to the Company’s customer or licensee. Where there are multiple deliverables combined as a single unit of accounting, revenues are deferred and recognized over the performance period.
Under ASC 606, the Company recognizes revenue when its customer obtains control of the promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation, when (or as) the performance obligation is satisfied. The Company assesses the term of the contract based upon the contractual period in which the Company and Collegium have enforceable rights and obligations.
Variable consideration arising from sales or usage-based royalties, promised in exchange for a license of the Company’s Intellectual Property, is recognized at the later of (i) when the subsequent product sales occur or (ii) the performance obligation, to which some or all of the sales-based royalty has been allocated, has been satisfied.
The Company recognizes a contract asset relating to its conditional right to consideration for completed performance obligations. Accounts receivable are recorded when the right to consideration becomes unconditional. A contract liability is recorded for payments received in advance of the related performance obligation being satisfied under the contract.
Commercialization Agreement
The Company derives revenue under the Commercialization Agreement with Collegium whereby the Company granted Collegium the right to commercialize the NUCYNTA franchise of products in the U.S. The Company entered into the Commercialization Agreement in December 2017, which became effective in January 2018, and amended the agreement in August 2018 and in November 2018. The Company views its performance obligations as a series of distinct goods or services that are substantially the same and that have the same pattern of transfer. Prior to the November 2018 amendment, the consideration related to the license and facilitation services was fixed and recognized ratably over the contract term. Following the November 2018 amendment, the royalty payments represent variable consideration that are subject to the sales-based royalty exception for licenses of intellectual property and are recognized at the later of (i) when the subsequent product sales occur or (ii) the performance obligation, to which some or all of the sales-based royalty has been allocated, has been satisfied.
The Company is responsible for royalty payments to a third party related to sales of NUCYNTA. Prior to the November 2018 amendment, Collegium became primarily responsible for these royalties in connection with the Commercialization Agreement; however, a portion of these payments remained the responsibility of the Company. Following the November 2018 amendment, effective January 1, 2019, Collegium became responsible for the third-party royalty payments entirely. As the Company is not actively commercializing NUCYNTA, such royalties are recorded by the Company on a systematic basis in proportion to the underlying net product sales, subject to the sales-based royalty exemption for license of intellectual property, and are included as gross-to-net adjustments in the related revenue line in the Company’s Statements of Comprehensive Income. Such amounts, over the course of the calendar year, have no net impact.
Product Sales
The Company sells commercial products to wholesale distributors and specialty pharmacies. Product sales revenue is recognized when title has transferred to the customer and the customer has assumed the risks and rewards of ownership, which typically occurs on delivery to the customer. The Company’s performance obligation is to deliver product to the customer, and the performance obligation is completed upon delivery. The transaction price consists of a fixed invoice price and variable product sales allowances, which include rebates, discounts and returns. Product sales revenues are recorded net of applicable sales tax and reserves for these product sales allowances. Receivables related to product sales are typically collected one to two months after delivery.
Product Sales Allowances—The Company considers products sales allowances to be variable consideration and estimates and recognizes product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on actual or estimated amounts owed on the related sales. These estimates take into consideration the terms of the Company’s agreements with customers, historical product returns, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product and specific known market events, such as competitive pricing and new product introductions. The Company uses the most likely method in estimating product sales allowances. If actual future results vary from the Company’s estimates, the Company may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. The Company’s sales allowances include:
Product Returns—The Company allows customers to return product for credit with respect to that product within six months before and up to 12 months after its product expiration date. The Company estimates product returns and associated credit on NUCYNTA ER and NUCYNTA, Gralise, CAMBIA, Zipsor and Lazanda. Estimates for returns are based on historical return trends by product or by return trends of similar products, taking into consideration the shelf life of the product at the time of shipment, shipment and prescription trends, estimated distribution channel inventory levels and consideration of the introduction of competitive products. The Company did not assume financial responsibility for returns of NUCYNTA ER and NUCYNTA previously sold by Janssen Pharma or Lazanda product previously sold by Archimedes Pharma US Inc. Under the Commercialization Agreement with Collegium for NUCYNTA ER and NUCYNTA and the divestiture of Lazanda to Slán, the Company is only financially responsible for product returns for product that were sold by the Company, which are identified by specific lot numbers.
The shelf life of NUCYNTA ER and NUCYNTA is 24 months to 36 months from the date of tablet manufacture. The shelf life of Gralise is 24 months to 36 months from the date of tablet manufacture. The shelf life of CAMBIA is 24 months to 48 months from the manufacture date. The shelf life of Zipsor is 36 months from the date of tablet manufacture. The shelf life of Lazanda is 24 to 36 months from the manufacture date. Because of the shelf life of the Company’s products and its return policy of issuing credits with respect to product that is returned within six months before and up to 12 months after its product expiration date, there may be a significant period of time between when the product is shipped and when the Company issues credit on a returned product. Accordingly, the Company may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments.
Wholesaler and Pharmacy Discounts—The Company offers contractually determined discounts to certain wholesale distributors and specialty pharmacies that purchase directly from it. These discounts are either taken off invoice at the time of shipment or paid to the customer on a quarterly basis one to two months after the quarter in which product was shipped to the customer.
Prompt Pay Discounts—The Company offers cash discounts to its customers (generally 2% of the sales price) as an incentive for prompt payment. Based on the Company’s experience, the Company expects its customers to comply with the payment terms to earn the cash discount.
Patient Discount Programs—The Company offers patient discount co-pay assistance programs in which patients receive certain discounts off their prescriptions at participating retail and specialty pharmacies. The discounts are reimbursed by the Company approximately one month after the prescriptions subject to the discount are filled.
Medicaid Rebates—The Company participates in Medicaid rebate programs, which provide assistance to certain low income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, the Company pays a rebate to each participating state, generally two to three months after the quarter in which prescriptions subject to the rebate are filled.
Chargebacks—The Company provides discounts to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract with the Department of Veterans Affairs. These federal entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to the Company the difference between the current retail price and the price the federal entity paid for the product.
Managed Care Rebates—The Company offers discounts under contracts with certain managed care providers. The Company generally pays managed care rebates one to three months after the quarter in which prescriptions subject to the rebate are filled.
Medicare Part D Coverage Gap Rebates — The Company participates in the Medicare Part D Coverage Gap Discount Program under which it provides rebates on prescriptions that fall within the “donut hole” coverage gap. The Company generally pays Medicare Part D Coverage Gap rebates two to three months after the quarter in which prescriptions subject to the rebate are filled.
Royalties
For arrangements that include sales-based royalties and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes royalty revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
We currently have the right to receive royalties based on sales of CAMBIA in Canada, which are recognized as revenue when the related sales occur as there are no continuing performance obligations by the Company under those agreements.
Milestones
For arrangements that include milestones, the Company recognizes such revenue using the most likely method. As part of adopting ASC 606, the Company evaluated whether the future milestones should have been included as part of the transaction price in periods before January 1, 2018. The Company concluded that because of development and regulatory risks at the time, it was probable that a significant revenue reversal could have occurred. At the end of each subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue in the period of adjustment.
Leases
The Company adopted ASC 842, Leases (ASC 842), on January 1, 2019 using the modified retrospective approach with cumulative effect. There was no adjustment to the Company's opening balance of accumulated deficit resulting from the adoption of this guidance. In addition, the Company elected the package of practical expedients, which among other things, allowed for the carryforward of the historical lease classification. The Company did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. Prior to the adoption of ASC 842, the Company accounted for
its operating leases in accordance with ASC 840. Under ASC 840, only capital leases were recognized on the balance sheet and therefore the Company’s operating leases were reflected in the financial statement footnotes. The adoption of ASC 842 did not materially affect the Company’s consolidated comprehensive income.
The Company assesses contracts for lease arrangements at inception. Operating right-of-use (ROU) assets and liabilities are recognized at the lease commencement date equal to the present value of future lease payments using the implicit, if readily available, or incremental borrowing rate based on the information readily available at the commencement date. ROU assets include any lease payments as of commencement and initial direct costs but exclude any lease incentives. Lease and non-lease components are generally accounted for separately and the Company recognizes operating lease expense straight-line over the term of the lease. Operating leases are included in other long term assets, other current liabilities, and other long term liabilities in the consolidated balance sheet.
The Company accounts for operating leases with an initial term of 12 months or less on a straight-line basis over the lease term in the Consolidated Statements of Comprehensive Income.
Stock‑Based Compensation
The Company’s stock-based compensation generally includes stock options, restricted stock units (RSUs), performance share units (PSUs), and purchases under the Company’s employee stock purchase plan (ESPP). The Company accounts for forfeitures as they occur for each type of award. Stock-based compensation expense related to restricted stock unit awards (RSUs) is based on the market value of the underlying stock on the date of grant and the related expense is recognized ratably over the requisite service period.
The stock-based compensation expense related to performance share units (PSUs) is estimated at grant date based on the fair value of the award. The PSU awards are measured exclusively to the relative total shareholder return (TSR) performance, which is measured against the three-year TSR of a custom index of companies. The actual number of shares awarded is adjusted to between zero and 200% of the target award amount based upon achievement in each of the three independent successive one-year tranches. TSR relative to peers is considered a market condition under applicable authoritative guidance. For PSUs granted with vesting subject to market conditions, the fair value of the award is determined at grant date using the Monte Carlo model, and expense is recognized ratably over the requisite service period regardless of whether or not the market condition is satisfied. The Monte Carlo valuation model considers a variety of potential future share prices for Assertio and our peer companies in a selected market index.
The Company uses the Black-Scholes option valuation model to determine the fair value of stock options and employee stock purchase plan (ESPP) shares. The determination of the fair value of stock-based payment awards on the date of grant using an option valuation model is affected by our stock price as well as assumptions, which include the expected term of the award, the expected stock price volatility, risk-free interest rate and expected dividends over the expected term of the award. The Company uses historical option exercise data to estimate the expected term of the options. The Company estimates the volatility of our common stock price by using the historical volatility over the expected term of the options. The Company bases the risk-free interest rate on U.S. Treasury zero coupon issues with terms similar to the expected term of the options as of the date of grant. The Company does not anticipate paying any cash dividends in the foreseeable future, and therefore, uses an expected dividend yield of zero in the option valuation model. Stock-based compensation expense related to the ESPP and options is recognized on a straight-line basis over its respective term.
Research and Development Expense and Accruals
Research and development expenses include salaries, clinical trial costs, consultant fees, supplies, manufacturing costs for research and development programs, allocations of corporate costs, as well as post-marketing clinical studies. All such costs are charged to research and development expense as incurred. These expenses result from the Company’s independent research and development efforts as well as efforts associated with collaborations. The Company reviews and accrues clinical trial expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies and other events. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a research agreement or clinical trial can be made. Accrued clinical costs are subject to revisions as trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known.
Acquired In-Process Research and Development
The initial costs of rights to IPR&D projects acquired in an asset acquisition are expensed as IPR&D unless the project has an alternative future use. Development costs incurred after an acquisition are expensed as incurred.
Shipping and Handling Costs
Shipping and handling costs incurred for product shipments are recorded in cost of sales in the Statements of Comprehensive Income.
Advertising Costs
Costs associated with advertising are expensed as incurred. Advertising expense for the years ended December 31, 2019, 2018 and 2017 were $0.7 million, $0.8 million and $3.7 million, respectively.
Restructuring
Restructuring costs are included in (Loss) income from operations in the Consolidated Statements of Comprehensive Income. The Company has accounted for these costs in accordance with ASC 420, Exit or Disposal Cost Obligations (ASC 420) and ASC 712, Compensation - Nonretirement Postemployment Benefits (ASC 712). The one-time termination benefits are recorded at the time they are communicated to the affected employees. Ongoing benefits are recognized when they are estimable and probable.
Income Taxes
The Company’s income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the Company’s accompanying consolidated balance sheets, as well as operating loss and tax credit carryforwards. The Company follows the guidelines set forth in the applicable accounting guidance regarding the recoverability of any tax assets recorded on the consolidated balance sheet and provides any necessary allowances as required. Determining necessary allowances requires the Company to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities.
The Company is subject to examination of its income tax returns by various tax authorities on a periodic basis. The Company regularly assesses the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of its provision for income taxes. The Company has applied the provisions of the applicable accounting guidance on accounting for uncertainty in income taxes, which requires application of a more-likely-than-not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the Company to recognize a tax benefit measured at the largest amount of tax benefit that, in the Company’s judgment, is more than 50 percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such change.
Segment Information
The Company operates in one operating segment and has operations and long-lived assets solely in the U.S. To date, all of the Company’s revenues from product sales are related to sales in the U.S.
Concentration of Risk
The Company is subject to credit risk from its accounts receivable related to product sales and royalties. The three large, national wholesale distributors represent the vast majority of the Company’s business and represented the following percentages of product shipments and accounts receivable for the years ended December 31, 2019, 2018 and 2017.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue
|
|
Accounts Receivable related to product sales
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
McKesson Corporation
|
16
|
%
|
|
14
|
%
|
|
36
|
%
|
|
46
|
%
|
|
28
|
%
|
|
41
|
%
|
AmerisourceBergen Corporation
|
12
|
%
|
|
13
|
%
|
|
27
|
%
|
|
17
|
%
|
|
28
|
%
|
|
27
|
%
|
Cardinal Health
|
10
|
%
|
|
11
|
%
|
|
26
|
%
|
|
25
|
%
|
|
32
|
%
|
|
23
|
%
|
Collegium
|
52
|
%
|
|
55
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
All others
|
10
|
%
|
|
7
|
%
|
|
11
|
%
|
|
12
|
%
|
|
12
|
%
|
|
9
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Accounts receivable balances related to product sales were $38.4 million and $23.1 million for the years ended December 31, 2019 and 2018, respectively. To date, the Company has not experienced any bad debt losses with respect to the collection of its accounts receivable and believes that its entire accounts receivable balances are collectible.
Receivables related to Collegium following the commencement of the Commercialization Agreement in 2018 were $4.1 million at December 31, 2019. Inventory held on behalf of Collegium, which is in production at contract manufacturers and will be provided to Collegium following the completion of production of $1.5 million, is held in Prepaid and other current assets on the Company’s consolidated balance sheets as of December 31, 2019.
The Company is dependent upon third-party manufacturers to supply product for commercialize use. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for all commercialized products. Such production arrangements could be adversely affected by a significant interruption which would negatively impact the supply of final drug product. The Company relies on a single third‑party contract manufacturer organization in Puerto Rico to manufacture Gralise and one third‑party supplier for the supply of gabapentin, the active pharmaceutical ingredient in Gralise. The Company also relies on single third party contract suppliers: MiPharm, S.p.A. and Catalent Ontario Limited for supply of CAMBIA and Zipsor, respectively. Janssen Pharmaceuticals is the sole source supplier of NUCYNTA ER and Halo is the sole supplier of NUCNYTA. Effective January 10, 2020 and February 13, 2020, the Company divested its rights, title and interest in and to Gralise and its NUCYNTA franchise, respectively.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02). This guidance enhances comparability and transparency among organizations by requiring the recognition of right-of-use assets and liabilities on the balance sheet for both financing and operating leases greater than 12 months. The Company adopted the standard as of January 1, 2019 using the modified retrospective approach with cumulative effect. There was no adjustment to the Company's opening balance of accumulated deficit resulting from the adoption of this guidance. In addition, the Company elected the package of practical expedients, which among other things, allowed for the carryforward of the historical lease classification. The Company did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The new standard did not materially affect the Company’s consolidated comprehensive income nor have a notable impact on its liquidity. The standard had no impact on the Company’s debt-covenant compliance under its current agreements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (ASU 2016-13): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. Early adoption is permitted; however, the Company will adopt the standard in the first quarter of 2020. The Company determined that the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU 2018-18 Collaborative Arrangements (ASU 2018-18), which clarifies the interaction between ASC 808, Collaborative Arrangements (ASC 808) and ASC 606, Revenue from Contracts with Customers (ASC 606). The update clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, the update precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the counterparty is not a customer for that
transaction. This update will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. ASU 2018-18 should be applied retrospectively to the date of initial application of ASC 606 and early adoption is permitted. The Company will adopt the standard in the first quarter of 2020 and has determined that the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Accounting for Cloud Computing Arrangements (Subtopic 350-40), which provides new guidance on the accounting for implementation, set-up, and other upfront costs incurred in a hosted cloud computing arrangement. Under the new guidance, entities will apply the same criteria for capitalizing implementation costs as they would for an internal-use software license arrangement. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. This ASU can be adopted prospectively to eligible costs incurred on or after the date of adoption or retrospectively. The Company will adopt the standard in the first quarter of 2020 and has determined that the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement Disclosure Framework (ASU 2018-03), which is part of a broader disclosure framework project by the FASB to improve the effectiveness of disclosures by more clearly communicating the information to the user. Modifications to the required disclosures are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company will adopt the standard in the first quarter of 2020 and has determined that the adoption of this guidance will not materially impact on the Company’s disclosures.
In December 2019, the FASB issued ASU 2019-12 Income Taxes (ASU 2019-02): Simplifying the Accounting for Income Taxes. The amendments in this update remove certain exceptions of Topic 740 including: exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regard to: franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
NOTE 2. REVENUE
The following table summarizes revenue from contracts with customers for the years ended December 31, 2019, 2018 and 2017 (in thousands) into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Product sales, net:
|
|
|
|
|
|
|
Gralise
|
|
$
|
63,124
|
|
|
$
|
58,077
|
|
|
$
|
77,034
|
|
CAMBIA
|
|
32,453
|
|
|
35,803
|
|
|
31,597
|
|
Zipsor
|
|
12,498
|
|
|
16,387
|
|
|
16,700
|
|
Total neurology product sales, net
|
|
108,075
|
|
|
110,267
|
|
|
125,331
|
|
NUCYNTA products
|
|
927
|
|
|
18,944
|
|
|
239,539
|
|
Lazanda
|
|
(196
|
)
|
|
755
|
|
|
15,010
|
|
Total product sales, net
|
|
108,806
|
|
|
129,966
|
|
|
379,880
|
|
Commercialization agreement:
|
|
|
|
|
|
|
Commercialization rights and facilitation services, net
|
|
118,614
|
|
|
100,038
|
|
|
—
|
|
Revenue from transfer of inventory
|
|
—
|
|
|
55,705
|
|
|
—
|
|
Royalties and milestone revenue
|
|
2,084
|
|
|
26,061
|
|
|
844
|
|
Total revenues
|
|
$
|
229,504
|
|
|
$
|
311,770
|
|
|
$
|
380,724
|
|
NUCYNTA product sales for the year ended December 31, 2018 reflect the Company’s sales of NUCYNTA between January 1 and January 8, 2018. During the first quarter of 2018, in connection with the Collegium transaction, the Company recognized revenue of $12.5 million related to the release of NUCYNTA sales reserves which were primarily recorded in the fourth quarter of 2017, as financial responsibility for those reserves transferred to Collegium upon closing of the Commercialization Agreement. During the years ended December 31, 2019 and 2018, the Company recognized sales reserve estimate adjustments related to sales recognized for NUCYNTA and Lazanda in prior periods.
Original Commercialization Agreement with Collegium
In December 2017, the Company, Collegium and Collegium NF, LLC, a Delaware limited liability company and wholly owned subsidiary of Collegium (Newco), entered into a Commercialization Agreement (Commercialization Agreement), pursuant to which the Company granted Collegium the right to commercialize the NUCYNTA franchise of products in the U.S. Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. The Company also agreed to provide services to Collegium, including to arrange for the supply of NUCYNTA products by the Company’s existing contract manufacturing organizations (“CMOs”) (the “Facilitation Services”). The Company identified the following three promised goods and services under the Commercialization Agreement: (1) the license to commercialize the NUCYNTA products (License), (2) services to arrange for supplies of NUCYNTA products using the Company’s existing contract manufacturing contracts with third parties (Facilitation Services); and (3) the transfer of control of all NUCYNTA finished goods held at closing (Inventory Transfer).
The Inventory Transfer was deemed to be a distinct performance obligation which was completed during the first quarter of 2018. The Company concluded that the License and the Facilitation Services are not distinct from one another as the Commercialization Agreement does not grant to Collegium a license to manufacture NUCYNTA. The Company (i) exclusively controls the intellectual property underlying the NUCYNTA products for the U.S. market, (ii) retains responsibility for facilitating NUCYNTA product supply through its CMOs, and (iii) exclusively maintains all CMO contractual relationships. As a result, Collegium’s right to commercialize NUCYNTA is inherently dependent upon the Facilitation Services. Because (i) Collegium is contractually required to use the Facilitation Services to arrange for product supply and (ii) tapentadol is a Schedule II controlled substance for which manufacturing arrangements are not easily transferred or bypassed, there is strong interdependency between the License and the Facilitation Services. These Facilitation Services are administrative in nature but necessary for the commercialization right to have utility to Collegium.
In January 2018, the Company determined the total fixed elements of the transaction price to be $553.2 million, which consisted of $537.0 million in total annual minimum royalty payments for years 2018 through 2021, a $10.0 million upfront fee, and a $6.2 million payment for NUCYNTA finished goods inventory. The Company determined that the duration of the Commercialization Agreement began on the effective date of January 9, 2018 and lasts through December 31, 2021, including the minimum royalty period and the period in which Collegium would incur a $25.0 million termination penalty on terminating the Commercialization Agreement. Beginning January 1, 2022 and for each year of the Commercialization Agreement thereafter, royalties are: (i) 58% of net sales of NUCYNTA up to $233.0 million, payable quarterly within 45 days of the end of
each calendar quarter, plus (ii) 25% of annual net sales of NUCYNTA between $233.0 million and $258.0 million, plus (iii) 17.5% of annual net sales of NUCYNTA above $258.0 million. Payments described in clauses (ii) and (iii) hereof will be paid annually within 60 days of the end of the calendar year.
The portion of the transaction price allocated to the Inventory Transfer was $55.7 million and was recognized on the closing date as the control of such inventory was transferred to Collegium. The portion of the transaction price allocated to the License and Facilitation Services, as a combined performance obligation, was $497.5 million and would be recognized ratably through December 31, 2021.
In addition, Collegium assumed responsibility for a portion of the royalties owed by the Company to a third party on sales of NUCYNTA. The royalties owed by Collegium to the third party are 14% of sales with the Company ensuring a minimum royalty of $34.0 million per year on net sales of NUCYNTA greater than $180.0 million. The Company is obligated to cover any shortfall between the minimum royalty amount of $34.0 million and the amounts paid to the third party by Collegium for each of the years ended December 31, 2018 through 2021, as a result of which the Company could be obligated to pay up to $8.8 million per year for each of the years ended December 31, 2018 through 2021.
Amended Commercialization Agreement with Collegium
On November 8, 2018, the Company, Collegium and Newco entered into a third amendment to the Commercialization Agreement (the Commercialization Amendment). Pursuant to the Commercialization Amendment, the royalties payable by Collegium to the Company in connection with Collegium’s commercialization of NUCYNTA were amended such that effective as of January 1, 2019 through December 31, 2021, the Company will receive: (i) 65% of net sales of NUCYNTA up to $180.0 million, plus (ii) 14% of annual net sales of NUCYNTA between $180.0 million and up to $210.0 million, plus (iii) 58% of annual net sales of NUCYNTA between $210.0 million and $233.0 million, plus (iv) 20% of annual net sales of NUCYNTA between $233.0 million and up to $258.0 million, plus (v) 15% of annual net sales of NUCYNTA above $258.0 million. The Commercialization Amendment does not change the royalties that the Company will receive on annual net sales of NUCYNTA by Collegium for the period beginning January 1, 2022 and for each year of the Commercialization Agreement term thereafter.
In addition, the Commercialization Amendment provides that Collegium shall reimburse the Company for the amount of any minimum annual royalties paid by the Company to the third party on net sales of NUCYNTA during the first
four years of the Commercialization Agreement beginning in 2019. The Commercialization Amendment also provides for Collegium to share certain costs related to the License. The reimbursement and the cost sharing are considered variable consideration. The Commercialization Amendment is being accounted for prospectively.
In connection with the Commercialization Amendment, Collegium issued the Company a warrant to purchase up to 1,041,667 shares of Collegium common stock at an exercise price of $19.20 per share (Warrant). The Warrant is exercisable for a period of four years and contains customary terms, including with regard to net exercise. The Warrant was valued at $8.8 million as of the date of the Commercialization Amendment and is considered to be a component of the fixed consideration associated with the Commercialization Agreement. These Warrants are included in Investments on the Company’s consolidated balance sheet; however, as they are non-cash they do not impact investing cash flows.
In November 2018, the Company determined the total fixed elements of the transaction price following the Commercialization Amendment to be $157.0 million, which consisted of $132.0 million in total annual minimum royalty payments for 2018, the $10.0 million upfront fee, the $6.2 million payment for NUCYNTA finished goods inventory and the $8.8 million attributed to the Warrant. There were no new performance obligations following the modification of the Commercialization Agreement and at the time of the modification, the remaining periods in the series of services related to the single performance obligation to deliver the license and provide facilitation services are distinct from those prior to the modification. As a result, the modification was accounted for as a termination of the old arrangement and the entering into of a new agreement, in accordance with the guidance of ASC 606.
Pursuant to the Commercialization Amendment, Collegium may only terminate the Commercialization Agreement after December 31, 2020, with 12-months’ notice. In the event any such termination notice has an effective date of termination prior to December 31, 2022, then Collegium shall pay a $5.0 million termination fee to the Company concurrent with the delivery of such notice. The Company determined that the $5.0 million termination fee is not substantive and therefore the duration of the Commercialization Agreement is unchanged by the Commercialization Amendment and lasts through December 31, 2021, which is consistent with the contractual period in which the Company and Collegium have enforceable rights and obligations.
The Commercialization Amendment provides that the Company may terminate the Commercialization Agreement upon 60 days’ prior written notice to Collegium in the event that (i) the net sales of NUCYNTA by Collegium during any period of 12 consecutive calendar months ending on or before December 31, 2021 are less than $180.0 million, or (ii) the net sales of NUCYNTA by Collegium during any period of 12 consecutive calendar months commencing on or after January 1, 2022 are less than $170.0 million.
Revenue from the Commercialization Agreement
For the year ended December 31, 2019, the Company recognized net revenue from the Commercialization Agreement of $118.6 million. This is primarily consisting of sales-based variable royalty revenue for the year ended December 31, 2019 of $118.6 million. Variable royalty revenue became effective for sales beginning January 1, 2019 as recognition of such royalties are constrained by the sales-based royalty exception related to intellectual property. Other components of net revenue from the Commercialization Agreement include the amortization of revenue from contract liabilities arising from the warrants and prepayments received, amortization of the contract asset arising from the Inventory Transfer, and variable consideration revenue for reimbursement of certain shared costs. In addition, there were no remaining net expenses related to the third-party royalties which have been paid in full by Collegium on behalf of Assertio for the year ended December 31, 2019. It is the Company’s expectation that, in accordance with the amended Commercialization Agreement, Collegium will pay the full royalty owed to the third-party in 2019, 2020 and 2021 and that such amounts, over the course of the calendar year, will have no net impact to the Company.
For the year ended December 31, 2018, the Company recognized royalty revenue from the Commercialization Agreement of $100.0 million. The Company also recognized $55.7 million of revenue related to the Inventory Transfer upon closing in January 2018.
Effective as of February 13, 2020, the Company divested its rights, title and interest in and to its NUCYNTA franchise of products in the U.S. to Collegium. In connection with the sale, the Commercialization Agreement terminated at closing with certain specified provisions of the Commercialization Agreement surviving in accordance with the terms of the purchase agreement.
Collaboration and License Agreements
Nuvo Pharmaceuticals, Inc. (Nuvo) In November 2010, we entered into a license agreement with Tribute Pharmaceuticals Canada Ltd. (now Nuvo Pharmaceuticals, Inc.) granting it the rights to commercially market CAMBIA in Canada. Nuvo independently contracts with manufacturers to produce a specific CAMBIA formulation in Canada. We receive royalties on net sales on a quarterly basis as well as certain one-time contingent milestone payments upon the occurrence of certain events. During the year ended December 31, 2019, we recognized $2.1 million of revenue related to CAMBIA in Canada. The revenue recognized in 2019 included a $0.3 million one-time amendment fee to support the continued collaboration with our partner in Canada following their acquisition and a $0.5 million milestone payment. During the year ended December 31, 2018, we recognized $0.8 million of revenue related to CAMBIA in Canada. We will receive additional one-time contingent milestone payments upon the achievement of scaling twelve-month cumulative sales targets and certain development milestones in the future.
PDL BioPharma, Inc. (PDL) In October 2013, we sold our interests in royalty and milestone payments under our license agreements relating to our Acuform technology in the Type 2 diabetes therapeutic area to PDL for $240.5 million. On August 2, 2018, we sold our remaining interest in such payments to PDL for $20.0 million. The $20.0 million of revenue was recognized as royalty revenue for the year ended December 31, 2018.
Ironwood Pharmaceuticals, Inc. The future contingent milestones under the Ironwood Agreement are considered variable consideration and are estimated using the most likely method. At the end of each subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue in the period of adjustment. There was no revenue recognized under this agreement for the year ended December 31, 2019. During the second and third quarter of 2018, the Company recognized and collected a $5.0 million milestone payment related to the dosing of the first patient in a Phase 3 trial.
Contract Assets
The following table presents changes in the Company’s contract assets as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
Balance as of
|
|
December 31, 2018
|
|
Additions
|
|
Deductions
|
|
December 31, 2019
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
Contract asset - CAMBIA Canada
|
$
|
—
|
|
|
$
|
300
|
|
|
$
|
(300
|
)
|
|
$
|
—
|
|
Contract asset - Collegium, net
|
2,416
|
|
|
783
|
|
|
(1,303
|
)
|
|
1,896
|
|
|
$
|
2,416
|
|
|
$
|
1,083
|
|
|
$
|
(1,603
|
)
|
|
$
|
1,896
|
|
The Collegium contract asset, net represents the conditional right to consideration for completed performance under the Commercialization Agreement arising from the transfer of inventory to Collegium on the date of closing of the agreement in January 2018 net of the contract liability of $10.0 million resulting from the upfront payment received and the $8.8 million of warrants received. Portions of the contract asset are reclassified to accounts receivable when the right to consideration becomes unconditional. As of December 31, 2019, $0.8 million and $1.1 million of the contract asset has been recorded within prepaid and other current assets and other long-term assets, respectively.
NOTE 3. ACCOUNTS RECEIVABLES, NET
Accounts receivables, net, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Receivables related to product sales, net
|
$
|
38,353
|
|
|
$
|
23,078
|
|
Receivables from Collegium
|
4,104
|
|
|
14,011
|
|
Other
|
287
|
|
|
122
|
|
Total accounts receivable, net
|
$
|
42,744
|
|
|
$
|
37,211
|
|
As of December 31, 2019 and 2018, allowances for cash discounts for prompt payment were $1.2 million and $0.4 million, respectively.
NOTE 4. INVENTORIES, NET
Inventories, net, consist of raw materials, work-in-process and finished goods are stated at the lower of cost or net realizable value and consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Raw materials
|
$
|
1,065
|
|
|
$
|
1,376
|
|
Work-in-process
|
426
|
|
|
732
|
|
Finished goods
|
1,921
|
|
|
1,288
|
|
Total
|
$
|
3,412
|
|
|
$
|
3,396
|
|
As of December 31, 2019 and 2018 inventory reserves were $0.4 million and $0.7 million, respectively.
NOTE 5. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Furniture and office equipment
|
$
|
2,557
|
|
|
$
|
2,237
|
|
Machinery and equipment
|
2,731
|
|
|
11,391
|
|
Laboratory equipment
|
221
|
|
|
351
|
|
Leasehold improvements
|
9,858
|
|
|
9,858
|
|
|
15,367
|
|
|
23,837
|
|
Less: Accumulated depreciation and amortization
|
(11,870
|
)
|
|
(10,773
|
)
|
Property and equipment, net
|
$
|
3,497
|
|
|
$
|
13,064
|
|
Depreciation expense was $1.2 million, $4.7 million and $2.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. Depreciation for the year ended December 31, 2018 includes $2.7 million of accelerated depreciation related to leasehold improvements in our former Newark, California headquarters upon the exit of that facility in 2018.
During the third quarter of 2019, the Company committed to a plan to dispose by abandonment certain owned machinery, with a carrying value of $9.6 million, residing at a manufacturing supplier as it would no longer be used in future production. The Company recognized a loss on disposition of equipment of $10.1 million, inclusive of $0.5 million for disposal costs, in Selling, general and administrative expenses in the Company’s consolidated statements of comprehensive income for the year ended December 31, 2019.
NOTE 6. INTANGIBLE ASSETS
The gross carrying amounts and net book values of the Company’s intangible assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Product rights
|
|
Remaining
Useful Life
(In years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net Book
Value
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
NUCYNTA
|
|
6.0
|
|
$
|
1,019,978
|
|
|
$
|
(455,192
|
)
|
|
$
|
(189,790
|
)
|
|
$
|
374,996
|
|
|
$
|
1,019,978
|
|
|
$
|
(360,891
|
)
|
|
$
|
659,087
|
|
CAMBIA
|
|
4.0
|
|
51,360
|
|
|
(31,027
|
)
|
|
—
|
|
|
20,333
|
|
|
51,360
|
|
|
(25,891
|
)
|
|
25,469
|
|
Zipsor
|
|
2.2
|
|
27,250
|
|
|
(22,044
|
)
|
|
—
|
|
|
5,206
|
|
|
27,250
|
|
|
(19,707
|
)
|
|
7,543
|
|
|
|
|
|
$
|
1,098,588
|
|
|
$
|
(508,263
|
)
|
|
(189,790
|
)
|
|
$
|
400,535
|
|
|
$
|
1,098,588
|
|
|
$
|
(406,489
|
)
|
|
$
|
692,099
|
|
Amortization expense was $101.8 million, $101.8 million and $102.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company evaluates the intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. At December 31, 2019 the Company determined there were indicators of impairment present related to the NUCYNTA intangible asset based on current unfavorable commercial outlook resulting in a downward revision to the expected future cash flows from the NUCYNTA franchise. As a result, we recognized an impairment loss of $189.8 million on the NUCYNTA intangible asset to reduce the carrying value of $564.8 million to its estimated fair value of $375.0 million at December 31, 2019. The evaluation of fair value was determined under ASC 820, Fair Value Measurement (ASC 820) as the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date of December 31, 2019. The fair value was based on a combination of an income approach and the observable transaction price from Collegium’s purchase of the NUCYTNA franchise in February 2020. The income approach consisted of the present value of future cash flows that a market participant would expect to receive from holding the asset in its current use. This included assumptions of a market participant’s view such as, but not limited to, future product net sales, related operating expenses, competitive landscape, and a discount rate to reflect the risk inherent in the future cash flows.
The Company expects future amortization expense, inclusive of the effect of the sale of the NUCYNTA asset on February 13, 2020, to be as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31,
|
|
Estimated
Amortization
Expense
|
2020
|
|
$
|
13,400
|
|
2021
|
|
7,473
|
|
2022
|
|
5,668
|
|
2023
|
|
4,925
|
|
Thereafter
|
|
—
|
|
Total
|
|
$
|
31,466
|
|
NOTE 7. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Accrued compensation
|
$
|
6,188
|
|
|
$
|
5,475
|
|
Accrued royalties
|
887
|
|
|
2,773
|
|
Accrued restructuring and one-time termination costs
|
3,763
|
|
|
1,578
|
|
Other accrued liabilities
|
8,110
|
|
|
21,535
|
|
Total accrued liabilities
|
$
|
18,948
|
|
|
$
|
31,361
|
|
NOTE 8. DEBT
Senior Notes
On April 2, 2015, the Company issued $575.0 million aggregate principal amount of senior secured notes (the Senior Notes) for aggregate gross proceeds of approximately $562.0 million pursuant to a Note Purchase Agreement dated March 12, 2015 (Note Purchase Agreement) among the Company and Deerfield Private Design Fund III, L.P., Deerfield Partners, L.P., Deerfield International Master Fund, L.P., Deerfield Special Situations Fund, L.P., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., BioPharma Secured Investments III Holdings Cayman LP, Inteligo Bank Ltd. and Phemus Corporation (collectively, the Purchasers) and Deerfield Private Design Fund III, L.P., as collateral agent. The Company used $550.0 million of the net proceeds received upon the sale of the Senior Notes to fund a portion of the Purchase Price paid to Janssen Pharma in connection with the NUCYNTA acquisition. The Company incurred debt issuance costs of $0.5 million for 2015.
The Senior Notes will mature on April 14, 2021 (unless earlier prepaid or repurchased), are secured by substantially all of the assets of the Company and any subsidiary guarantors, and bear interest at the rate equal to the lesser of (i) 9.75% over the three-month London Inter-Bank Offer Rate (LIBOR), subject to a floor of 1.0% and (ii) 11.95% (through the third anniversary of the purchase date) and 12.95% (thereafter). The interest rate is determined at the first business day of each fiscal quarter, commencing with the first such date following April 2, 2015. The interest rate for the three months ended December 31, 2019 and 2018 was 11.83% and 12.15%, respectively.
In April 2017, the Company prepaid and retired $100.0 million of the Senior Notes and paid a $4.0 million prepayment fee. In November 2017, the Company prepaid and retired an additional $10.0 million of the Senior Notes and paid a $0.4 million prepayment fee in connection with the Company’s entry into the Collegium Commercialization Agreement. During 2017 the Company recorded a net loss on prepayment of the Senior Notes of $5.9 million, which represented the prepayment fees of $4.4 million and the immediate recognition of unamortized balances of debt discount and debt issuance costs of $1.5 million. This loss is recorded as a loss on prepayment of Senior Notes in the consolidated statements of operations for 2017.
The balance of the Senior Notes can be prepaid, at the Company’s option or following a Major Transaction or asset disposition. If the successor entity in a Major Transaction, as defined in the Note Purchase Agreement, does not satisfy specified qualification criteria, the Purchasers may require the Company to prepay the Senior Notes upon consummation of the
Major Transaction in an amount equal to the principal amount of outstanding Senior Notes, accrued and unpaid interest and a prepayment premium in an amount equal to what the Company would have otherwise paid in an optional prepayment described below. In addition, the Company is required to make mandatory prepayments on the Senior Notes in an amount equal to the proceeds it receives in connection with asset dispositions in excess of $10.0 million, together with accrued and unpaid interest on the principal amount prepaid.
Pursuant to the Note Purchase Agreement, upon the consummation of the sale of the Senior Notes on April 2, 2015, the Company and Depo NF Sub, LLC entered into a Pledge and Security Agreement with the Deerfield Private Design Fund lll, L.P. (the Collateral Agent), pursuant to which the Company and Depo NF Sub each granted the Collateral Agent (on behalf of the Purchasers) a security interest in substantially all of their assets, other than specifically excluded assets.
On December 4, 2017, the Company and the Purchasers entered into a Second Amendment to the Note Purchase Agreement (the Second Amendment). The Second Amendment facilitated the Company’s entry into the Collegium Commercialization Agreement.
In connection with its entry into the Commercialization Agreement, the Purchasers (i) waived the requirement that some or all of the Asset Disposition Proceeds realized from the granting of the Exclusive License be used to prepay the outstanding principal amount of the Notes pursuant to Section 2.7(b) of the Note Purchase Agreement and (ii) agreed to (a) replace the minimum net sales covenant in Section 6.7 of the Note Purchase Agreement with a minimum EBITDA covenant, and (b) made certain other amendments related to the amortization of the Notes and prepayment premiums, all of which were revised by subsequent amendments to the Note Purchase Agreement, as noted below. The Commercialization Amendment also modified the repayment schedule; and required the Company to prepay and retire $10.0 million of the Senior Notes and pay a $0.4 million prepayment fee. The Company paid a $3.0 million upfront non-refundable amendment fee which was capitalized and is being amortized over the remaining term of the Senior Notes using the effective interest method. The Purchasers also consented to terms and conditions of the Commercialization Amendment to the Commercialization Agreement with Collegium described in “Note 2 - Revenue.”
In January 2019, the Company entered into a Fourth Amendment to the Note Purchase Agreement (the Fourth Amendment) with respect to the Note Purchase Agreement, dated as of March 12, 2015, among the Company, the other credit parties party thereto, the purchasers party thereto and Deerfield. Pursuant to the Fourth Amendment, the minimum EBITDA covenant was replaced with a senior secured debt leverage ratio covenant and a minimum net sales covenant, the prepayment premium was adjusted to be 3.0% of the principal amount of notes prepaid on or prior to April 14, 2020 and 1.0% of the principal amount of notes prepaid thereafter, flexibility to sell certain royalty assets and/or modify the terms thereof was added, certain definitions were amended and certain other amendments were made. The Company paid a $3.2 million upfront non-refundable amendment fee to the Purchasers in the first quarter of 2019 which was capitalized and is being amortized over the remaining term of the Senior Notes using the effective interest method.
In August 2019, the Company entered into a Fifth Amendment to the Note Purchase Agreement (the Fifth Amendment) with respect to the Note Purchase Agreement, dated as of March 12, 2015. The Fifth Amendment modified certain provision of the Note Purchase Agreement to facilitate the exchange of the Company’s 2.50% Convertible Senior Notes Due 2021, including providing the Company the ability to use up to $30.0 million in connection with the exchange. The Fifth Amendment included a $4.4 million exit fee due upon the earlier of the maturity date or date of full repayment of the Senior Notes, which was accounted as an increase in discount on the Senior Notes and accrued in Other long-term liabilities on the consolidated balance sheet. The incremental discount is being amortized over the remaining term of the Senior Notes using the effective interest method.
In December 2019 the Company entered into the Sixth Amendment to the Note Purchase Agreement (the Sixth Amendment) with respect to the Note Purchase Agreement, dated as of March 12, 2015. The Sixth Amendment was executed in connection with the divestiture of Gralise and became effective upon the completion of the sale on January 10, 2020. The Sixth Amendment, among other things, provides that a portion of the purchase price shall be used to prepay $60.5 million principal, which is subject the applicable prepayment fee. The Sixth Amendment also modified the principal payment schedule and minimum net sales covenant as of the closing date of the sale, January 10, 2020. The amounts related to the Senior Notes on the Company’s consolidated balance sheet as of December 31, 2019 do not reflect the prepayment or other amended terms of the Sixth Amendment. See “Note 15. Acquisitions and Divestitures” for discussion of the transaction.
The Senior Notes and related indenture contain customary covenants, including, among other things, and subject to certain qualifications and exceptions, covenants that restrict the Company’s ability and the ability of its subsidiaries to: incur or guarantee additional indebtedness; create or permit liens on assets; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; make certain investments and other restricted payments; engage in mergers,
acquisitions, consolidations and amalgamations; transfer and sell certain assets; and engage in transactions with affiliates. The Company was in compliance with its covenants with respect to the Senior Notes as of December 31, 2019.
The following is a summary of the carrying value of the Senior Notes as of December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Principal amount of the Senior Notes
|
$
|
162,500
|
|
|
$
|
282,500
|
|
Unamortized debt discount balance
|
(4,035
|
)
|
|
(2,541
|
)
|
Unamortized debt issuance costs
|
(2,022
|
)
|
|
(1,650
|
)
|
Total Senior Notes
|
$
|
156,443
|
|
|
$
|
278,309
|
|
The debt discount and debt issuance costs are amortized as interest expense using the effective interest method. The following is a summary of Senior Notes interest expense for 2019, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
|
2017
|
Contractual interest expense
|
$
|
25,559
|
|
|
$
|
38,242
|
|
|
$
|
44,212
|
|
Amortization of debt discount and debt issuance costs
|
5,783
|
|
|
3,589
|
|
|
2,631
|
|
Total interest expense
|
$
|
31,342
|
|
|
$
|
41,831
|
|
|
$
|
46,843
|
|
As of December 31, 2019, the Company was scheduled to make Senior Notes principal payments of $80.0 million and $82.5 million prior to December 31, 2020 and December 31, 2021, included within the Current portion of Senior Notes and Senior Notes on the Company’s consolidated balance sheet, respectively.
2.50% Convertible Senior Notes Due 2021
On September 9, 2014, the Company issued $345.0 million aggregate principal amount of 2.50% Convertible Senior Notes Due 2021 (the 2021 Notes) resulting in net proceeds to the Company of $334.2 million after deducting the underwriting discount and offering expenses of $10.4 million and $0.4 million, respectively.
The Convertible Notes were issued pursuant to an indenture, as supplemented by a supplemental indenture dated September 9, 2014, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee), and mature on September 1, 2021, unless earlier converted, redeemed or repurchased. The Convertible Notes bear interest at the rate of 2.50% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, beginning March 1, 2015.
Prior to March 1, 2021, holders of the 2021 Convertible Notes can convert their securities, at their option: (i) during any calendar quarter commencing after December 31, 2015, if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to $25.01 (130% of the $19.24 conversion price) on each applicable trading day (ii) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; and (iii) at any time upon the occurrence of specified corporate transactions, to include a change of control (as defined in the Notes Indenture). On or after March 1, 2021 to the close of business on the second scheduled trading day immediately preceding the maturity date, the holders of the 2021 Convertible Notes may convert all or any portion of their notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. The initial conversion rate of 51.9852 shares of common stock per $1,000 principal amount of Convertible Notes is equivalent to a conversion price of approximately $19.24 per share of common stock.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. If the conversion obligation
is satisfied solely in cash or through payment and delivery of a combination of cash and shares, the amount of cash and shares, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading day observation period.
The 2021 Notes bear interest at the rate of 2.50% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, beginning March 1, 2015.
The Convertible Notes were accounted for in accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options (ASU Subtopic 470-20). Pursuant to ASC Subtopic 470-20, since the Convertible Notes can be settled in cash, shares of common stock or a combination of cash and shares of common stock at the Company’s option, the Company is required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of any outstanding debt instrument is computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the convertible debt instrument. The effective interest rate used in determining the liability component of the Convertible Notes was 9.34%. This resulted in the initial recognition of $226.0 million as the liability component net of a $119.0 million debt discount with a corresponding net of tax increase to paid-in capital of $73.3 million representing the equity component of the Convertible Notes. The underwriting discount of $10.4 million and offering expenses of $0.4 million were allocated between debt issuance costs and equity issuance costs in proportion to the allocation of the proceeds. Equity issuance costs of $3.7 million related to the convertible notes were recorded as an offset to additional paid-in capital.
On August 13, 2019, the Company entered into separate, privately negotiated exchange agreements (the Exchange Agreements) with a limited number of holders of the Company’s 2021 Notes. The Company exchanged (the Convertible Note Exchange) $200.0 million aggregate principal amount of the 2021 Notes for a combination of (a) its new $120.0 million aggregate principal amount of 5.00% Convertible Senior Notes due August 15, 2024 (the 2024 Notes), (b) an aggregate cash payment of $30.0 million, and (c) an aggregate of 15.8 million shares of the Company’s common stock. The Company did not receive any cash proceeds from the issuance of the 2024 Notes or the issuance of the shares of its common stock. In connection with the Convertible Note Exchange a beneficial owner holding more than 10% of the Company’s common stock exchanged$22.0 million in aggregate principal of the 2021 Notes for a combination of $13.2 million in aggregate principal of the 2024 Notes, 1.7 million shares of the Company’s common stock, and $3.5 million in cash.
The Convertible Note Exchange was accounted for in accordance with ASC 470-50, Debt Modifications and Extinguishments (ASC 470-50). Pursuant to ASC 470-50, the Convertible Note Exchange was deemed to be an extinguishment of debt as there was a substantive modification in the conversion option of the 2024 Notes from 2021 Notes. During the three months ended September 30, 2019, the Company recognized a $26.4 million gain on debt extinguishment, which represented the difference between the carrying value and the fair value of the 2021 Notes just prior to Convertible Note Exchange. The Company also recognized reacquisition of $6.2 million in additional paid-in capital related to the equity component of the 2021 Notes based on the excess of the fair value of total considerations provided in the Convertible Note Exchange against the fair value of the 2021 Notes just prior to the Convertible Note Exchange. The components of total consideration given in the Convertible Note Exchange consisted of (a) the new 2024 Notes, (b) an aggregate cash payment of $30.0 million, and (c) an aggregate of 15.8 million shares of the Company’s common stock. Upon completion of the Convertible Note Exchange, the aggregate principal amount of the 2021 Notes was reduced by $200.0 million to $145.0 million, the unamortized debt discount and debt issuance costs was reduced by $26.1 million to $18.9 million and the carrying amount of the equity component was reduced by $6.2 million to $112.8 million.
The closing price of the Company’s common stock did not exceed 130% of the $19.24 conversion price, for the required period during the quarter ended December 31, 2019. As a result, the 2021 Notes are not convertible as of December 31, 2019.
The following is a summary of the liability component of the Convertible Notes as of December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Principal amount of the 2021 Notes
|
$
|
145,000
|
|
|
$
|
345,000
|
|
Unamortized discount of the liability component
|
(14,963
|
)
|
|
(54,521
|
)
|
Unamortized debt issuance costs
|
(725
|
)
|
|
(2,681
|
)
|
Total 2021 Notes
|
$
|
129,312
|
|
|
$
|
287,798
|
|
The debt discount and debt issuance costs are amortized as interest expense using the effective interest method. The following is a summary of interest expense for 2019, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Stated coupon interest
|
|
$
|
6,708
|
|
|
$
|
8,624
|
|
|
$
|
8,625
|
|
Amortization of debt discount and debt issuance costs
|
|
15,398
|
|
|
18,288
|
|
|
16,784
|
|
Total interest expense 2021 Notes
|
|
$
|
22,106
|
|
|
$
|
26,912
|
|
|
$
|
25,409
|
|
5.00% Convertible Senior Notes Due 2024
On August 13, 2019, as part of the Convertible Note Exchange, the Company issued $120.0 million aggregate principal of 2024 Notes which mature on August 14, 2024 and bear interest at a rate of 5.0%, payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2020. The 2024 Notes were issued pursuant to the Third Supplemental Indenture (the Third Indenture), dated August 13, 2019, to the indenture of the 2021 Notes, dated September 9, 2014, between the Company and the Bank of New York Mellon Trust Company, N.A.
Holders may convert their 2024 Notes at any time prior to the earlier of (i) the close of business on the trading day immediately preceding the Maturity Date and (ii) if the Company calls the 2024 Notes for optional redemption, the close of business on the second trading day prior to the redemption date. The 2024 Notes will be convertible at an initial conversion rate of 323.5198 shares per $1,000 in principal amount, equivalent to a conversion price of approximately $3.09 per share. The Company may settle conversions in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. If the conversion obligation is satisfied solely in cash or through payment and delivery of a combination of cash and shares of the Company’s common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 consecutive trading day observation period.
Upon the occurrence of a fundamental change (as defined in the Third Indenture) at any time, the holder of the 2024 Notes will have the right to require the Company to repurchase for cash any or all the 2024 Notes, or any portion of the principal amount, that is equal to $1,000 or a multiple of $1,000. The price the Company is required to pay equals 100% of the principal amount plus accrued and unpaid interest (up to but excluding the fundamental change purchase date).
On or after August 20, 2020, the Company may redeem for cash all or part of the notes, at its option, if the last reported sale price of the Company’s common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price is equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Upon conversion as a result of an optional redemption by the Company, the holder will also receive a payment equal to all remaining required interest payments due on each $1,000 principal amount being converted through and including the maturity date (excluding accrued but unpaid interest to the applicable conversion date), known as an interest make-whole payment. The Company may pay any interest make-whole amount either in cash, in shares of common stock or a combination thereof, at its election.
Upon the occurrence of an event of default (as defined by the Third Indenture), the holders of the notes may accelerate the maturity of the notes and 100% of the principal and accrued and unpaid interest shall be due and payable immediately. If the Company fails to comply with certain reporting covenants under the Supplemental Indenture, the Company may elect to pay additional interest on the 2024 Notes as the sole remedy for such default.
Additionally, if the Company consolidates or merges with or into, sells, conveys, transfers or leases its consolidated properties and assets substantially as an entirety to a foreign entity, it may be required to pay additional amounts for withholding taxes, duties, assessments or governmental charges as necessary to the 2024 Note holders.
The 2024 Notes are accounted for in accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options (ASC Subtopic 470-20). Pursuant to ASC Subtopic 470-20, since the 2024 Notes can be settled in cash, shares of common stock or a combination of cash and shares of common stock at the Company’s option, the Company is required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of any outstanding debt instrument is computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the convertible debt instrument. The effective interest rate used in determining the liability component of the 2024 Notes was 17.82%. The fair value of the 2024 Notes, which also represents the proceeds received, was $98.4 million as of the date of the Convertible Note Exchange. This resulted in the recognition of $65.8 million as the liability component of the 2024 Notes and the recognition of the residual $54.2 million as the debt discount composed of $21.6 million in fair value discount and $32.6 million for the equity component. The equity component is reflected as an increase to additional paid-in capital. The total issuance costs of $4.3 million were allocated between the debt and equity issuance costs in proportion to the allocation of the liability and equity components of the 2024 Notes. Total debt issuance costs of $2.9 million were recorded on the issuance date and are reflected in the Company’s consolidated balance sheet as a direct deduction from the carrying value of the associated debt liability. The debt discount and debt issuance costs will be amortized as non-cash interest expense through maturity, August 14, 2024 using the effective interest method.
The 2024 Notes are not convertible or redeemable as of December 31, 2019. The following is a summary of the liability component of the 2024 Notes as of December 31, 2019 (in thousands):
|
|
|
|
|
|
December 31,
|
|
2019
|
Principal amount of the 2024 Notes
|
$
|
120,000
|
|
Unamortized discount of the liability component
|
(51,701
|
)
|
Unamortized debt issuance costs
|
(2,796
|
)
|
Total 2024 Notes
|
$
|
65,503
|
|
The debt discount and debt issuance costs are amortized as interest expense using the effective interest method. The following is a summary of interest expense for the 2024 Notes for year ended December 31, 2019 (in thousands):
|
|
|
|
|
|
December 31,
|
|
2019
|
Stated coupon interest
|
$
|
2,250
|
|
Amortization of debt discount and debt issuance costs
|
2,583
|
|
Total interest expense 2024 Notes
|
$
|
4,833
|
|
NOTE 9. RESTRUCTURING CHARGES
The Company continually evaluates its operations to identify opportunities to streamline operations and optimize operating efficiencies as an anticipation to changes in the business environment. In November 2019, the Company announced an acceleration of cost-saving initiatives that included a decision to discontinue its relationship with its contract sales organization, a reduction in the use of certain outside vendors and consultants, and the reorganization of certain functions resulting in a reduction of staff at its headquarters office and remote positions during the fourth quarter of 2019. The 2019 cost-saving initiative was substantially complete as of December 31, 2019. As a result, $3.9 million of severance and benefits costs for the reduction of staff were recognized during the year ended December 31, 2019. The Company does not expect to incur future costs related to the 2019 cost-saving initiative.
In June 2017, the Company announced a limited reduction-in-force in order to streamline operations that was completed during the third quarter of 2017. In December 2017, the Company initiated a company-wide restructuring plan following the entry into the Commercialization Agreement with Collegium. This plan focused on a reduction of the Company’s pain sales force during the first quarter of 2018, a reduction of the staff at its headquarters office during the second quarter of
2018 and a move from its headquarters facility in Newark, California to Lake Forest, Illinois in the third quarter of 2018. The 2017 restructuring plan activities were substantially completed as of December 31, 2018 and no additional charges were incurred during the year ended December 31, 2019.
The following table summarizes the total expenses related to restructuring activities by type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Employee compensation costs
|
$
|
3,891
|
|
|
$
|
16,852
|
|
|
$
|
13,247
|
|
Fixed Asset disposals and accelerated depreciation of leasehold improvements
|
—
|
|
|
3,511
|
|
|
—
|
|
Other exit costs
|
—
|
|
|
238
|
|
|
—
|
|
Total restructuring costs
|
$
|
3,891
|
|
|
$
|
20,601
|
|
|
$
|
13,247
|
|
Cash activity related to accrued restructuring is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation costs
|
|
Other exit costs
|
|
Total
|
Net accruals
|
13,247
|
|
|
—
|
|
|
13,247
|
|
Non-cash additions/(reductions)
|
—
|
|
|
—
|
|
|
—
|
|
Cash paid
|
(3,764
|
)
|
|
—
|
|
|
(3,764
|
)
|
Balance at December 31, 2017
|
$
|
9,483
|
|
|
$
|
—
|
|
|
$
|
9,483
|
|
Net accruals
|
16,852
|
|
|
3,749
|
|
|
20,601
|
|
Non-cash additions/(reductions)
|
(2,146
|
)
|
|
(3,511
|
)
|
|
(5,657
|
)
|
Cash paid
|
(22,611
|
)
|
|
(238
|
)
|
|
(22,849
|
)
|
Balance at December 31, 2018
|
$
|
1,578
|
|
|
$
|
—
|
|
|
$
|
1,578
|
|
Net accruals
|
$
|
3,891
|
|
|
$
|
—
|
|
|
$
|
3,891
|
|
Non-cash additions/(reductions)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash paid
|
$
|
(1,706
|
)
|
|
$
|
—
|
|
|
$
|
(1,706
|
)
|
Balance at December 31, 2019
|
$
|
3,763
|
|
|
$
|
—
|
|
|
$
|
3,763
|
|
The December 31, 2018 restructuring liability of $1.6 million related to the 2017 restructuring plan and was entirely settled during the year ended December 31, 2019. As of December 31, 2019, the remaining accrued restructuring liability balance of $3.8 million related to the 2019 cost-saving initiative and was classified as a current liability in the consolidated balance sheet. Non-cash charges during 2018 related to stock based compensation and accelerated amortization of leasehold improvements at the Newark, CA headquarters in connection with the 2017 restructuring plan.
NOTE 10. LEASES
The Company has non-cancelable operating leases for its office and laboratory facilities, automobiles used by its sales force, and certain operating leases for office equipment.
The Company relocated its corporate headquarters from Newark, CA to Lake Forest, Illinois in 2018 and subsequently entered into two subleases which, together, account for the entirety of the Newark facility. Each sublease contains abated rent periods resulting in reduced operating lease cash flows through May 2019. Operating lease costs and sublease income related to the Newark facility are accounted for in Other income, net in the Consolidated Statements of Comprehensive Income. The Company has the right to renew the term of the Lake Forest lease for one period of five years, provided that written notice is made to the Landlord no later than twelve months prior to the expiration of the initial term of the Lease.
Lease expense during the period included the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2019
|
|
Financial Statement Classification
|
|
Operating lease cost
|
Selling, general and administrative expenses
|
|
$
|
718
|
|
Operating lease cost
|
Other income, net
|
|
591
|
|
Total lease cost
|
|
|
$
|
1,309
|
|
|
|
|
|
Sublease Income
|
Other income, net
|
|
$
|
1,386
|
|
Supplemental cash flow and other information related to leases were as follows (in thousands):
|
|
|
|
|
|
|
|
Year ended
December 31, 2019
|
|
|
Cash paid for amounts included in measurement of liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
2,446
|
|
Supplemental balance sheet information related to leases consisted of the following (in thousands):
|
|
|
|
|
|
|
|
Financial Statement Classification
|
|
December 31,
2019
|
Assets
|
|
|
|
Operating lease right-of-use assets
|
Other long-term assets
|
|
$
|
2,776
|
|
Liabilities
|
|
|
|
Current operating lease liabilities
|
Other current liabilities
|
|
$
|
2,094
|
|
Noncurrent operating lease liabilities
|
Other long term liabilities
|
|
4,820
|
|
Total lease liabilities
|
|
|
$
|
6,914
|
|
Maturity of lease liabilities as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
Operating Leases
|
2020
|
|
$
|
2,431
|
|
2021
|
|
2,323
|
|
2022
|
|
2,188
|
|
Thereafter
|
|
632
|
|
Total lease payments
|
|
$
|
7,574
|
|
Less: Interest
|
|
660
|
|
Present value of lease liabilities
|
|
$
|
6,914
|
|
Future undiscounted cash flows to be received from subleases is expected to be approximately $1.7 million on an annual basis in 2020, 2021, and 2022.
Lease term and discount rate consisted of the following:
|
|
|
|
|
|
|
December 31,
2019
|
Weighted-average remaining lease term (years):
|
|
|
Operating leases
|
|
3.2
|
|
Weighted-average discount rate:
|
|
|
Operating leases
|
|
6.0
|
%
|
Future minimum lease payments under the Company’s non-cancelable operating leases as of December 31, 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
Lease Payments
|
2019
|
|
$
|
2,624
|
|
2020
|
|
2,526
|
|
2021
|
|
2,322
|
|
2022
|
|
2,188
|
|
2023
|
|
632
|
|
Thereafter
|
|
—
|
|
Total
|
|
$
|
10,292
|
|
NOTE 11. COMMITMENTS AND CONTINGENCIES
As of December 31, 2019 and December 31, 2018, the Company had $2.4 million and $6.0 million, respectively, of non-cancelable purchase orders related to consulting services.
Legal Matters
Company v. NUCYNTA and NUCYNTA ER ANDA Filers
Actavis & Alkem: In July 2013, Janssen Pharma filed patent infringement lawsuits in the U.S. District Court for the District of New Jersey (the District Court) against Actavis Elizabeth LLC, Actavis Inc. and Actavis LLC (collectively, Actavis), as well as Alkem Laboratories Limited and Ascend Laboratories, LLC (collectively, Alkem). The patent infringement claims against Actavis and Alkem relate to their respective ANDAs seeking approval to market generic versions of NUCYNTA® and NUCYNTA® ER before the expiration of U.S. Reissue Patent No. 39,593 (the ’593 Patent), U.S. Patent No. 7,994,364 (the ’364 Patent) and, as to Actavis only, U.S. Patent No. 8,309,060 (the ’60 Patent). In December 2013, Janssen Pharma filed an additional complaint in the District Court against Alkem asserting that newly issued U.S. Patent No. 8,536,130 (the ’130 Patent) was also infringed by Alkem’s ANDA seeking approval to market a generic version of NUCYNTA ER. In August 2014, Janssen Pharma amended the complaint against Alkem to add additional dosage strengths.
Sandoz & Roxane: In October 2013, Janssen Pharma received a Paragraph IV Notice from Sandoz, Inc. (Sandoz) with respect to NUCYNTA related to the ’364 Patent, and a Paragraph IV Notice from Roxane Laboratories, Inc. (Roxane) with respect to NUCYNTA related to the ’364 and ’593 Patents. In response to those notices, Janssen Pharma filed an additional complaint in the District Court against Roxane and Sandoz asserting the ’364 Patent against Sandoz and the ’364 and ’593 Patents against Roxane. In April 2014, Janssen Pharma and Sandoz entered into a joint stipulation of dismissal of the case against Sandoz, based on Sandoz’s agreement not to market a generic version of NUCYNTA products prior to the expiration of the asserted patents. In June 2014, in response to a new Paragraph IV Notice from Roxane with respect to NUCYNTA ER, Janssen Pharma filed an additional complaint in the District Court asserting the ’364, ’593, and ’130 Patents against Roxane.
Watson: In July 2014, in response to a Paragraph IV Notice from Watson Laboratories, Inc. (Watson) with respect to the NUCYNTA oral solution product and the ’364 and ’593 Patents, Janssen Pharma filed a lawsuit in the District Court asserting the ’364 and ’593 Patents against Watson.
In each of the foregoing actions, the ANDA filers counterclaimed for declaratory relief of non-infringement and patent invalidity. At the time that the actions were commenced, Janssen Pharma was the exclusive U.S. licensee of the patents referred to above. On April 2, 2015, the Company acquired the U.S. rights to NUCYNTA ER and NUCYNTA from Janssen Pharma. As part of the acquisition, the Company became the exclusive U.S. licensee of the patents referred to above. The Company was added as a plaintiff to the pending cases and is actively litigating them.
In September 2015, the Company filed an additional complaint in the District Court asserting the ’130 Patent against Actavis. The ’130 Patent issued in September 2013 and was timely listed in the Orange Book for NUCYNTA ER, but Actavis did not file a Paragraph IV Notice with respect to this patent. In its new lawsuit, the Company claimed that Actavis would infringe or induce infringement of the ’130 Patent if its proposed generic products were approved. In response, Actavis counterclaimed for declaratory relief of non-infringement and patent invalidity, as well as an order requiring the Company to change the corrected use code listed in the Orange Book for the ’130 Patent.
In February 2016, Actavis, Roxane and Alkem each stipulated to infringement of the ’593 and ’364 patents. On March 9, 2016, a two-week bench trial on the validity of the three asserted patents and infringement of the ’130 patent
commenced. Closing arguments took place on April 27, 2016. On September 30, 2016, the District Court issued its final decision. The District Court found that the ’593 Patent, ’364 Patent, and ’130 Patent are all valid and enforceable, that Alkem will induce infringement of the ’130 Patent, but that Roxane and Actavis will not infringe the ’130 Patent.
On April 11, 2017, the District Court entered final judgment in favor of the Company on the validity and enforceability of all three patents, on infringement of the ’593 and ’364 Patents by all defendants, and on infringement of the ’130 Patent against Alkem. The judgment includes an injunction enjoining all three defendants from engaging in certain activities with regard to tapentadol (the active ingredient in NUCYNTA), and ordering the effective date of any approval of Actavis and Roxane’s ANDAs, and Alkem’s ANDA for NUCYNTA IR to be no earlier than the expiry of the ’364 Patent (June 27, 2025), and the effective date of any approval of Alkem’s ANDA for NUCYNTA ER to be no earlier than the expiry of the ’130 Patent (September 22, 2028). The period of exclusivity with respect to all four defendants may in the future be extended with the award of pediatric exclusivity.
Notices of appeal were filed by defendants Alkem and Roxane concerning the validity of the ’364 and ’130 patents. The Company filed its own cross-appeal with regard to the District Court’s finding that Roxane and Actavis will not infringe the claims of the ’130 Patent. The appeals were consolidated at the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit). Briefing concluded in March 2018 and oral arguments occurred on September 4, 2018. In March 2019, the Federal Circuit affirmed the decision in all respects. On April 29, 2019, Alkem filed a petition for panel rehearing and rehearing en banc with the Federal Circuit, which was denied on May 31, 2019. The period during which Aklem could have petitioned the U.S. Supreme Court for writ of certiorari has passed. As a result, the District Court’s decision is final and non-appealable as to the proposed labels of the defendants.
On December 13, 2019, Alkem filed a motion in the District Court, seeking to modify the final judgment and injunction based on a purported change to Alkem’s proposed label for its generic version of NUCYNTA ER, which change would make the label similar to those of Actavis and Roxane. Alkem allegedly made this change in June 2019, and argues that it no longer infringes the asserted ’130 Patent claims based on this change. Accordingly, Alkem is seeking to modify the final judgment and injunction to allow the effective date for approval of its ANDA to occur upon the expiry of the ’364 Patent (June 27, 2025). Assertio filed an opposition to Alkem’s motion on January 21, 2020. Assertio argues, for instance, that Alkem is not entitled to such extraordinary relief because this allegedly new circumstance brought about by Alkem was wholly foreseeable and within Alkem’s control throughout the several years of litigation, including before entry of the final judgment and injunction. Briefing was completed in February 2020. Resolution of the motion is expected later this year.
Effective as of February 13, 2020, we divested our rights, title and interest in and to this litigation to Collegium.
Company v. Purdue
The Company sued Purdue Pharma L.P (Purdue) for patent infringement in a lawsuit filed in January 2013 in the U.S. District Court for the District of New Jersey. The lawsuit arose from Purdue’s commercialization of reformulated OxyContin® (oxycodone hydrochloride controlled-release) in the U.S. and alleges infringement of U.S. Patent Nos. 6,340,475 (the ’475 Patent) and 6,635,280 (the ’280 Patent), which expired in September 2016.
On September 28, 2015, the Court stayed the Purdue lawsuit pending the decision of the U.S. Court of Appeals for the Federal Circuit (CAFC) in Purdue’s appeal of the Final Written Decisions of the Patent Trial Appeal Board (PTAB) described below. On June 30, 2016, the district court lifted the stay based on the CAFC’s opinion and judgment affirming the PTAB’s Final Written Decisions confirming the patentability of the patent claims of the ’475 and ’280 Patents Purdue had challenged. On June 10, 2016, the Company filed a motion for leave to file a second amended Complaint to plead willful infringement. On June 21, 2016, Purdue filed an opposition to the Company’s motion for leave to plead willful infringement. On January 31, 2017, the Court granted the Company’s motion for leave to plead willful infringement.
On February 1, 2017, the Company filed a Second Amended Complaint pleading willful infringement. On July 10, 2017, the case was reassigned to Judge Wolfson. On February 15, 2017, Purdue answered the Company’s Second Amended Complaint and pled counterclaims of non-infringement, invalidity, unenforceability and certain affirmative defenses. On September 26, 2017, the case was reassigned to Judge Martinotti. On December 22, 2017, the Court set the close of expert discovery for March 30, 2018. On January 5, 2018, the Court vacated the January 25, 2018 pretrial conference.
On July 9, 2018, the Court issued an order administratively terminating the case pending the outcome of settlement discussions between the parties. On August 28, 2018, the Company and each of Purdue, The P.F. Laboratories, Inc., a New Jersey corporation, and Purdue Pharmaceuticals L.P., a Delaware limited partnership (collectively, Purdue Companies), entered into a Settlement Agreement. Pursuant to the Settlement Agreement: (i) Purdue Companies paid the Company $30 million on August 28, 2018 and paid the Company an additional $32.0 million on January 30, 2019; (ii) each party covenanted not to the sue the other with regard to any alleged infringement of such party’s patents or patent rights as a result of the commercialization of the other party’s current product portfolio; (iii) each party covenanted not to challenge the other party’s
patents or patent rights covering such other party’s current product portfolio; and (iv) each party agreed to a mutual release of claims relating to any claim or potential claim relating to the other party’s current product portfolio.
Glumetza Antitrust Litigation
Antitrust class actions and related direct antitrust actions have been filed in the Northern District of California against the Company and several other defendants relating to the drug Glumetza®. The named class representatives in these actions include Meijer, Inc., Bi-Lo, LLC, Winn-Dixie Logistics, Inc., City of Providence, KPH Healthcare Services, Inc., UFCW Local 1500 Welfare Fund, and MSP Recovery Claims, Series LLC. The class representatives seek to represent (i) a putative class of direct purchasers of Glumetza, and (ii) a putative class of end payers for Glumetza. In addition, several retailers, including CVS Pharmacy, Inc., Rite Aid Corporation, Walgreen Co., the Kroger Co., the Albertsons Companies, Inc., H-E-B, L.P., and Hy-Vee, Inc., have filed substantially similar direct antitrust claims based on alleged assignments of claims from direct purchaser wholesalers.
These antitrust cases arise out of a Settlement and License Agreement (the Settlement) that the Company, Santarus, Inc. (Santarus) and Lupin Limited (Lupin) entered into in February 2012 that resolved patent infringement litigation filed by the Company against Lupin regarding Lupin’s Abbreviated New Drug Application for generic 500 mg and 1000 mg tablets of Glumetza. The antitrust plaintiffs allege, among other things, that the Settlement violated the antitrust laws because it allegedly included a “reverse payment” that caused Lupin to delay its entry in the market with a generic version of Glumetza. The alleged “reverse payment” is an alleged commitment on the part of the settling parties not to launch an authorized generic version of Glumetza for a certain period. The antitrust plaintiffs allege that the Company and its co-defendants, which include Lupin as well as Bausch Health (the alleged successor in interest to Santarus) are liable for damages under the antitrust laws for overcharges that the antitrust plaintiffs allege they paid when they purchased the branded version of Glumetza® due to delayed generic entry. Plaintiffs seek treble damages for alleged past harm, attorneys’ fees and costs.
These lawsuits are in the earliest stages of proceedings, and the Company intends to defend itself vigorously in these matters.
Securities Class Action Lawsuit and Related Matters
On August 23, 2017, the Company, its current chief executive officer and president, its former chief executive officer and president, and its former chief financial officer were named as defendants in a purported federal securities law class action filed in the U.S. District Court for the Northern District of California (the District Court). The action (Huang v. Depomed et al., No. 4:17-cv-4830-JST, N.D. Cal.) alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 relating to certain prior disclosures of the Company about its business, compliance, and operational policies and practices concerning the sales and marketing of its opioid products and contends that the conduct supporting the alleged violations affected the value of Company common stock and is seeking damages and other relief. In an amended complaint filed on February 6, 2018, the lead plaintiff (referred to in its pleadings as the Depomed Investor Group), which seeks to represent a class consisting of all purchasers of Company common stock between July 29, 2015 and August 6, 2017, asserted the same claims arising out of the same and similar disclosures against the Company and the same individuals as were involved in the original complaint. The Company and the individuals filed a motion to dismiss the amended complaint on April 9, 2018. On March 18, 2019, the District Court granted the motion to dismiss without prejudice, and the plaintiffs filed a second amended complaint on May 2, 2019. The second amended complaint asserted the same claims arising out of the same and similar disclosures against the Company and the same individuals as were involved in the original complaint. The Company and the individuals filed a motion to dismiss the second amended complaint on June 17, 2019. The lead plaintiff filed an opposition to the motion on August 1, 2019. The Company and the individuals filed a reply in support of their motion to dismiss on August 30, 2019. The District Court held oral argument on December 18, 2019. The Company believes that the action is without merit and intends to contest it vigorously.
In addition, five shareholder derivative actions were filed on behalf of the Company against its officers and directors for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and violations of the federal securities laws. The claims arise out of the same factual allegations as the class action. The first derivative action was filed in the Superior Court of California, Alameda County on September 29, 2017 (Singh v. Higgins et al., RG17877280). The second and third actions were filed in the Northern District of California on November 10, 2017 (Solak v. Higgins et al., No. 3:17-cv-6546-JST) and November 15, 2017 (Ross v. Fogarty et al., No. 3:17-cv-6592- JST). The fourth action was filed in the District of Delaware on December 21, 2018 (Lutz v. Higgins et al, No. 18-2044-CFC). The fifth derivative action was filed in the Superior Court of California, Alameda County on January 28, 2019 (Youse v. Higgins et al, No. HG19004409). On December 7, 2017, the plaintiffs in Solak v. Higgins, et al. voluntarily dismissed the first federal derivative action. The Ross, Singh, and Lutz actions were stayed on January 18, 2018, January 23, 2018, and January 11, 2019,
respectively, pending the resolution of the motion to dismiss in the securities class action. On May 28, 2019, during a brief lift of the stay in the Singh and Youse actions while the parties’ motion to consolidate was pending, after having been ordered to respond to the Singh and Youse complaints, the Company did so by filing demurrers. On July 12, 2019, the Singh and Youse actions were consolidated, and the consolidated matter was stayed pending the resolution of the motion to dismiss in the federal class action. The plaintiffs have indicated that they intend to file an amended consolidated complaint. The Company believes that these actions are without merit and intends to contest them vigorously.
Opioid-Related Request and Subpoenas
As a result of the greater public awareness of the public health issue of opioid abuse, there has been increased scrutiny of, and investigation into, the commercial practices of opioid manufacturers generally by federal, state, and local regulatory and governmental agencies. In March 2017, the Company received a letter from then-Sen. Claire McCaskill (D-MO), the then-Ranking Member on the U.S. Senate Committee on Homeland Security and Governmental Affairs, requesting certain information from the Company regarding its historical commercialization of opioid products. The Company voluntarily furnished information responsive to Sen. McCaskill’s request. Since 2017, the Company has received and responded to subpoenas from the U.S. Department of Justice (DOJ) seeking documents and information regarding its historical sales and marketing of opioid products. The Company has also received and responded to subpoenas or civil investigative demands focused on its historical promotion and sales of Lazanda, NUCYNTA, and NUCYNTA ER from various state attorneys general seeking documents and information regarding the Company’s historical sales and marketing of opioid products. In addition, the Company received and responded to a subpoena from the State of California Department of Insurance (CDI) seeking information relating to its historical sales and marketing of Lazanda. The CDI subpoena also seeks information on Gralise, a non-opioid product formerly in the Company’s portfolio. Most recently, the Company received a subpoena from the New York Department of Financial Services seeking information relating to its historical sales and marketing of opioid products. The Company also from time to time receives and complies with subpoenas from governmental authorities related to investigations primarily focused on third parties, including healthcare practitioners. The Company is cooperating with the foregoing governmental investigations and inquiries.
Multidistrict Opioid Litigation
A number of pharmaceutical manufacturers, distributors and other industry participants have been named in numerous lawsuits around the country brought by various groups of plaintiffs, including city and county governments, hospitals and others. In general, the lawsuits assert claims arising from defendants’ manufacturing, distributing, marketing and promoting of FDA-approved opioid drugs. The specific legal theories asserted vary from case to case, but most of the lawsuits include federal and state statutory claims as well as claims arising under state common law. Plaintiffs seek various forms of damages, injunctive and other relief and attorneys’ fees and costs.
For such cases filed in or removed to federal court, the Judicial Panel on Multi-District Litigation issued an order in December 2017, establishing a Multi-District Litigation court (MDL Court) in the Northern District of Ohio (In re National Prescription Opiate Litigation, Case No. 1:17-MD-2804). Since that time, more than 2,000 such cases that were originally filed in U.S. District Courts, or removed to federal court from state court, have been transferred to the MDL Court. The Company is currently involved in a subset of the lawsuits that have been transferred to the MDL Court. The Company is also involved in other federal lawsuits that have not yet been transferred to the MDL Court pending a determination of whether those lawsuits should proceed in state or other originating court. Plaintiffs may file additional lawsuits in which the Company may be named. Plaintiffs in the pending federal cases involving the Company include individuals, county and municipal governmental entities, employee benefit plans, health clinics and health insurance providers who assert federal and state statutory claims and state common law claims, such as conspiracy, nuisance, fraud, negligence, gross negligence, deceptive trade practices, and products liability claims (defective design/failure to warn). In these cases, plaintiffs seek a variety of forms of relief, including actual damages to compensate for alleged personal injuries and for alleged past and future costs such as to provide care and services to persons with opioid-related addiction or related conditions, injunctive relief, including to prohibit alleged deceptive marketing practices and abate an alleged nuisance, establishment of a compensation fund, disgorgement of profits, punitive and statutory treble damages, and attorneys’ fees and costs. These lawsuits are in the earliest stages of proceedings, and the Company intends to defend itself vigorously in these matters.
State Opioid Litigation
Related to the cases in the MDL Court noted above, there have been hundreds of similar lawsuits filed in state courts around the country, in which various groups of plaintiffs assert opioid-drug related claims against similar groups of defendants. The Company is currently named in a subset of those cases, including cases in Alabama, Florida, Missouri, Pennsylvania, Texas and Utah. Plaintiffs may file additional lawsuits in which the Company may be named. In the pending cases involving the Company, plaintiffs are asserting state common law and statutory claims against the defendants similar in nature to the
claims asserted in the MDL cases. Plaintiffs are seeking past and future damages, disgorgement of profits, injunctive relief, punitive and statutory treble damages, and attorneys’ fees and costs. These lawsuits are likewise in their earliest stages, and the Company intends to defend itself vigorously in these matters.
Insurance Litigation
On January 15, 2019, the Company was named as a defendant in a declaratory judgment action filed by Navigators Specialty Insurance Company (Navigators) in the U.S. District Court for the Northern District of California (Case No. 3:19-cv-255). Navigators is the Company’s primary product liability insurer. Navigators is seeking declaratory judgment that opioid litigation claims noticed by the Company (as further described above under “Multidistrict Opioid Litigation” and “State Opioid Litigation”) are not covered by the Company’s life sciences liability policies with Navigators. The Company filed a counterclaim on February 28, 2019. Navigators filed an answer on April 11, 2019. This litigation is ongoing. The parties expect to file summary judgment briefing relating to Navigators’ duty to defend the opioid litigation in the second quarter of 2020, and to receive a ruling by the end of 2020.
General
The Company cannot reasonably predict the outcome of the legal proceedings described above, nor can the Company estimate the amount of loss, range of loss or other adverse consequence, if any, that may result from these proceedings or the amount of any gain in the event the Company prevails in litigation involving a claim for damages. As such the Company is not currently able to estimate the impact of the above litigation on its financial position or results of operations.
The Company may from time to time become party to actions, claims, suits, investigations or proceedings arising from the ordinary course of its business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims and other matters. The Company may also become party to further litigation in federal and state courts relating to opioid drugs. Although actions, claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, other than the matters set forth above, the Company is not currently involved in any matters that the Company believes may have a material adverse effect on its business, results of operations or financial condition. However, regardless of the outcome, litigation can have an adverse impact on the Company because of associated cost and diversion of management time.
NOTE 12. STOCK-BASED COMPENSATION
The Company’s stock-based compensation generally includes stock options, restricted stock units (RSUs), performance share units (PSUs), and purchases under the Company’s employee stock purchase plan (ESPP).
The following table presents stock‑based compensation expense recognized for stock options, RSUs, PSUs, and the ESPP in the Company’s consolidated statements of comprehensive income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Cost of sales
|
$
|
106
|
|
|
$
|
30
|
|
|
$
|
98
|
|
Research and development expenses
|
693
|
|
|
446
|
|
|
710
|
|
Selling, general and administrative expenses
|
9,797
|
|
|
9,963
|
|
|
12,157
|
|
Restructuring charges
|
—
|
|
|
2,146
|
|
|
51
|
|
Total
|
$
|
10,596
|
|
|
$
|
12,585
|
|
|
$
|
13,016
|
|
There is no stock‑based compensation recorded within inventory in any of the years presented. The recognized tax benefits on total stock-based compensation expense during the years ended December 31, 2019, 2018 and 2017 was $0.6 million, $0.7 million and $0.4 million, respectively.
At December 31, 2019, the Company had $9.2 million, $4.4 million, and $1.1 million of total unrecognized compensation expense related to RSUs, PSUs, and stock option grants, respectively, that will be recognized over a weighted average vesting period of 1.78, 1.71, and 1.32 years, respectively.
The Company did not grant any options during 2019. The weighted‑average grant date fair value of options granted during the years ended December 31, 2018 and 2017 was $4.32 and $5.55, respectively. The company used the following
assumptions to calculate the fair value of option grants for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Employee and Director Stock Options
|
|
|
|
|
Risk-free interest rate
|
|
2.17%
|
|
1.65 - 1.93%
|
Expected option term (in years)
|
|
4.34
|
|
4.24 - 4.30
|
Expected stock price volatility
|
|
61.94%
|
|
51.67 - 59.59%
|
Stock options exercised during 2019 were immaterial. The total intrinsic value of options exercised during the years ended December 31, 2018 and 2017 was $0.6 million and $5.0 million, respectively. Cash received from stock option exercises for the years ended December 31, 2018 and 2017 was $1.5 million and $7.0 million, respectively. The total grant date fair value of options that vested during the years ended December 31, 2019, 2018 and 2017 was $1.4 million, $2.3 million and $4.7 million, respectively.
The weighted‑average grant date fair value of stock purchase rights granted under the ESPP during the years ended December 31, 2019, 2018 and 2017 was $1.15, $1.73 and $2.97, respectively. The company used the following assumptions to calculate the fair value of option grants and stock purchase rights granted under the ESPP for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Employee Stock Purchase Plan
|
|
|
|
|
|
Risk-free interest rate
|
1.63 - 2.35%
|
|
2.05 - 2.50%
|
|
1.07 - 1.45%
|
Expected option term (in years)
|
0.5
|
|
0.5
|
|
0.5
|
Expected stock price volatility
|
57.2 - 132.2%
|
|
56.1 - 58.6%
|
|
52.2 - 82.0%
|
2004 Equity Incentive Plan
The Company’s 2004 Equity Incentive Plan (2004 Plan) was adopted by the Board of Directors and approved by the shareholders in May 2004. The 2004 Plan provides for the grant to employees of the Company, including officers, of incentive stock options, and for the grant of non-statutory stock options to employees, directors and consultants of the Company. The number of shares authorized under the 2004 Plan was 14,450,000 shares and there were no more shares available for future issuance at December 31, 2019.
Generally, the exercise price of all incentive stock options and non-statutory stock options granted under the 2004 Plan must be at least 100% and 85%, respectively, of the fair value of the common stock of the Company on the grant date. The term of incentive and non-statutory stock options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over four years at the rate of at least 25% by the end of the first year and then ratably in monthly installments over the remaining vesting period of the option.
The following tables summarize the activity for the year ended December 31, 2019 under the 2004 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Options outstanding at December 31, 2018
|
1,169,412
|
|
|
$
|
7.57
|
|
|
|
|
|
Options granted
|
—
|
|
|
—
|
|
|
|
|
|
Options exercised
|
(13,691
|
)
|
|
1.83
|
|
|
|
|
|
Options forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Options expired
|
(810,515
|
)
|
|
—
|
|
|
|
|
|
Options outstanding at December 31, 2019
|
345,206
|
|
|
$
|
7.29
|
|
|
2.58
|
|
$
|
—
|
|
Options vested and expected to vest at December 31, 2019
|
345,206
|
|
|
$
|
7.29
|
|
|
2.58
|
|
$
|
—
|
|
Options exercisable at December 31, 2019
|
345,206
|
|
|
$
|
7.29
|
|
|
2.58
|
|
$
|
—
|
|
There were no restricted stock units granted under the 2004 Equity Incentive Plan.
2014 Omnibus Incentive Plan
The Company’s 2014 Omnibus Incentive Plan (2014 Plan) was adopted by the Board of Directors and approved by the shareholders in May 2014. The 2014 Plan provides for the grant of stock options, stock appreciation rights, stock awards, cash awards and performance award to the employees, non-employee directors and consultants of the Company. The number of shares authorized under the 2014 Plan is 15,780,000 shares, of which 7,233,105 were available for future issuance at December 31, 2019.
Incentive Stock Options
Generally, the exercise price of all incentive stock options and non-statutory stock options granted under the 2014 Plan must be the fair value of the common stock of the Company on the grant date. The term of incentive and non-statutory stock options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over four years at the rate of at least 25% by the end of the first year and then ratably in monthly installments over the remaining vesting period of the option. The following table summarize the options activity for the year ended December 31, 2019 under the 2014 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Options outstanding at December 31, 2018
|
1,461,469
|
|
|
$
|
12.90
|
|
|
|
|
|
Options granted
|
—
|
|
|
—
|
|
|
|
|
|
Options exercised
|
—
|
|
|
—
|
|
|
|
|
|
Options forfeited
|
(102,669
|
)
|
|
13.86
|
|
|
|
|
|
Options expired
|
(180,755
|
)
|
|
14.01
|
|
|
|
|
|
Options outstanding at December 31, 2019
|
1,178,045
|
|
|
$
|
12.64
|
|
|
6.15
|
|
$
|
—
|
|
Options vested and expected to vest at December 31, 2019
|
1,178,045
|
|
|
$
|
12.64
|
|
|
6.15
|
|
$
|
—
|
|
Options exercisable at December 31, 2019
|
892,730
|
|
|
$
|
13.50
|
|
|
5.77
|
|
$
|
—
|
|
Restricted Stock Units
RSUs generally vest over three or four years, with 33% or 25% of each award vesting annually, respectively. The following table summarizes the RSUs activity for the year ended December 31, 2019 under the 2014 Plan:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair
Value
Per Share
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
Non-vested restricted stock units at December 31, 2018
|
1,938,788
|
|
|
$
|
6.94
|
|
|
|
Granted
|
2,750,408
|
|
|
3.84
|
|
|
|
Vested
|
(873,784
|
)
|
|
8.08
|
|
|
|
Forfeited
|
(878,697
|
)
|
|
5.40
|
|
|
|
Non-vested restricted stock units at December 31, 2019
|
2,936,715
|
|
|
$
|
4.64
|
|
|
1.05
|
The total fair value of RSUs that vested during the years ended December 31, 2019, 2018 and 2017 was $3.1 million, $3.1 million, and $3.9 million, respectively.
Performance-based Restricted Stock Units
During the twelve months ended December 31, 2019, the Company granted PSUs with an aggregate target award of 643,266 units and a weighted-average grant-date fair value of $6.87 per unit. The PSUs vest in annual cliffs over a three year period based on the Relative Total Shareholder Return (TSR) of the Company’s common stock against the Russell 3000 Pharmaceuticals Total Return Index over the period. The ultimate award, which is determined at the end of the three-year cycle, can range from zero to 200% of the target. The recipients of the PSU awards will have voting rights and the right to receive a dividend once the underlying shares have been issued. The grant-date fair value is based upon the Monte Carlo simulation method. The following table summarizes the PSU activity for the year ended December 31, 2019 under the 2014 Plan (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair
Value
Per Share
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Non-vested performance-based restricted stock units at December 31, 2018
|
374,824
|
|
|
$
|
10.14
|
|
|
|
|
|
Granted
|
643,266
|
|
|
6.87
|
|
|
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
(34,247
|
)
|
|
6.87
|
|
|
|
|
Non-vested performance-based restricted stock units at December 31, 2019
|
983,843
|
|
|
$
|
8.11
|
|
|
1.71
|
|
$
|
1,230
|
|
Equity Match Program
On December 6, 2017, the Company Board of Directors approved a one-time incentive program (the Equity Match Program) for the Company’s Chief Executive Officer (the CEO). The Equity Match Program was intended to provide an incentive for the CEO to purchase shares of the Company’s common stock, no par value (the Common Stock), through open-market purchases between December 5, 2017 and February 3, 2018 (the Purchase Period). Under the terms of the Equity Match Program, for each $100,000 of Common Stock purchased by the CEO during the Purchase Period (up to $600,000 in total), the Company granted the CEO an award of restricted stock units (the Matching Units) under the Company’s 2014 Omnibus Incentive Plan with a grant-date value equal to the purchase price of the Common Stock purchased by the CEO (rounded down to the nearest $100,000). The Matching Units were granted on the first business day following the earlier of: (i) the CEO’s purchase of a total of $600,000 of Common Stock, or (ii) the end of the Purchase Period. The Matching Units will vest in full on the third anniversary of the first day during the Purchase Period that the CEO purchased Common Stock in the open market, subject to the CEO’s continued employment through such date. Notwithstanding the foregoing, the Matching Units may vest in full upon a termination without cause or resignation for good reason (including following a change of control of the Company), or upon the CEO’s death or total and permanent disability. Under the Equity Match Program 75,000 shares of the Company Common Stock were purchased by the CEO at an average price per share of $8.16 and Matching Units of 73,529 shares were awarded, with a fair value of $8.16 at the grant date.
NOTE 13. SHAREHOLDERS' EQUITY
Reincorporation
On August 14, 2018, Depomed reincorporated from California to Delaware (the Reincorporation) and changed its name to Assertio Therapeutics, Inc. To effectuate the Reincorporation, Depomed merged with and into Assertio Therapeutics, Inc., a Delaware corporation and wholly owned subsidiary of Depomed prior to the effective time of the merger, with Assertio continuing as the surviving corporation. Pursuant to the merger, each share of Depomed common stock, no par value, was converted into one share of Assertio common stock, $0.0001 par value, and all outstanding Depomed equity awards were assumed by Assertio. As a result of the Reincorporation and the related conversion of each share of Depomed-California common stock, no par value, into one share of Assertio-Delaware common stock, $0.0001 par value, the Company has separated the par value of stock within Common Stock from additional-paid-in-capital on the Company's consolidated balance sheets. The Company has elected to present this impact of the Reincorporation retrospectively. Accordingly, to conform to current year presentation, the Company reclassified $264.5 million from common stock to additional paid-in capital as of December 31, 2015 on the Company's consolidated balance sheets.
Employee Stock Purchase Plan
In May 2004, the ESPP was approved by the shareholders. The ESPP is qualified under Section 423 of the Internal Revenue Code. The ESPP is designed to allow eligible employees to purchase shares of the Company’s common stock through periodic payroll deductions. The price of the common stock purchased under the ESPP must be equal to at least 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or the specified purchase date. The number of shares authorized for issuance under the ESPP as of December 31, 2019 was 3,000,000, of which 133,759 shares were available for future issuance.
In 2019, the Company sold 168,790 shares of its common stock under the ESPP. The shares were purchased at a weighted‑average purchase price of $1.34 with proceeds of approximately $0.2 million. In 2018, the Company sold 106,500 shares of its common stock under the ESPP. The shares were purchased at a weighted‑average purchase price of $4.95 with proceeds of approximately $0.5 million.
Option Exercises
Stock options exercised during 2019 were immaterial. Employees exercised options to purchase 278,000 shares of the Company’s common stock with net proceeds to the Company of approximately $1.5 million during 2018.
NOTE 14. NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share is calculated by dividing the net (loss) income by the weighted-average number of shares of common stock outstanding during the period. Diluted net (loss) income per share is calculated by dividing the net income by the weighted-average number of shares of common stock outstanding during the period, plus potentially dilutive common shares, consisting of stock options and convertible debt. The Company uses the treasury-stock method to compute diluted earnings per share with respect to its stock options and equivalents. The Company uses the if-converted method to compute diluted earnings per share with respect to its convertible debt. For purposes of this calculation, options to purchase stock are considered to be potential common shares and are only included in the calculation of diluted net (loss) income per share when their effect is dilutive. Basic and diluted earnings per common share are calculated as follows (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Basic net income (loss) per share
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(217,201
|
)
|
|
$
|
36,908
|
|
|
$
|
(102,496
|
)
|
Weighted average common shares outstanding
|
|
70,716
|
|
|
63,794
|
|
|
62,702
|
|
Basic net (loss) income per share
|
|
$
|
(3.07
|
)
|
|
$
|
0.58
|
|
|
$
|
(1.63
|
)
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(217,201
|
)
|
|
$
|
36,908
|
|
|
$
|
(102,496
|
)
|
Weighted average common shares outstanding
|
|
70,716
|
|
|
63,794
|
|
|
62,702
|
|
Add: effect of dilutive securities
|
|
—
|
|
|
414
|
|
|
—
|
|
Denominator for diluted income (loss) per share
|
|
70,716
|
|
|
64,208
|
|
|
62,702
|
|
Diluted net (loss) income per share
|
|
$
|
(3.07
|
)
|
|
$
|
0.57
|
|
|
$
|
(1.63
|
)
|
The following table sets forth outstanding potential shares of common stock that are not included in the computation of diluted net income (loss) per share because, to do so would be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
2.5% Convertible Notes due 2021
|
|
13,895
|
|
|
17,931
|
|
|
17,931
|
|
5.0% Convertible Notes due 2024
|
|
14,895
|
|
|
—
|
|
|
—
|
|
Stock options and equivalents
|
|
6,486
|
|
|
3,701
|
|
|
5,618
|
|
Total potentially dilutive common shares
|
|
35,276
|
|
|
21,632
|
|
|
23,549
|
|
NOTE 15. ACQUISITIONS AND DISPOSITIONS
On November 7, 2017, the Company entered into an agreement with Slán Medicinal Holdings Limited (Slán) under which it (i) acquired from Slán certain rights to market the specialty drug, long-acting cosyntropin in the U.S. and (ii) divested to Slán all of its rights to Lazanda® (fentanyl) nasal spray CII.
The acquisition of exclusive rights to market long-acting cosyntropin in the U.S. was treated as an asset acquisition under the applicable guidance contained with U.S. GAAP. The fair value of the license to market long-acting cosyntropin was estimated to be approximately $24.9 million which, in accordance with the applicable accounting rules, was recorded as Acquired in-process research and development in the accompanying consolidated statements of operations as long-acting cosyntropin is still under development and the rights the Company acquired were deemed to have no alternative future use.
As consideration for this acquisition, the Company provided the seller all of the rights and obligations, as defined under the arrangement, associated with Lazanda and together with $5.0 million in cash to Slán. The divestiture of Lazanda was treated as a disposition of a business for accounting purposes and resulted in a gain of approximately $17.1 million which was recorded as Gain on divestiture of Lazanda in the accompanying consolidated statements of operations. The Company determined that the divestiture of Lazanda does not qualify for reporting as discontinued operations as the divestiture does not constitute on its own a strategic shift that will have a major effect on the Company’s operations and financial results.
As outlined in the Slán Agreements, each party would support the development, including clinical development, of the licensed product and efforts to obtain regulatory approval of the initial NDA. Subsequent to approval of the initial NDA, Assertio and Slán would share in the net sales of long-acting cosyntropin for a 10-year period (after which time the product will revert back to Slán). At December 31, 2019 the Company wrote-off $3.2 million of development expenses reimbursable by Slán as a result of the Company’s assessment of probability of collection. Of the $3.2 million, $1.9 million and $1.3 million was recognized in Research and development expenses and Selling, general and administrative expenses, respectively, on the Company’s consolidated statement of comprehensive income reflecting the original allocation of resources billed. As of December 31, 2019 and 2018 the Company had $2.0 million and $4.6 million, respectively, of reimbursable development expenses in Prepaid and other current assets on the Company’s consolidated balance sheets.
NOTE 16. FAIR VALUE
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
|
|
•
|
Level 1: Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices 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.
|
|
|
•
|
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Financial Statement Classification
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Collegium warrants
|
|
Investments
|
|
$
|
—
|
|
|
$
|
9,629
|
|
|
$
|
—
|
|
|
$
|
9,629
|
|
Total
|
|
|
|
$
|
—
|
|
|
$
|
9,629
|
|
|
$
|
—
|
|
|
$
|
9,629
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
Contingent consideration liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
168
|
|
|
$
|
168
|
|
Total
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
168
|
|
|
$
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Financial Statement Classification
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
Cash and cash equivalents
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
Commercial paper
|
|
Cash and cash equivalents
|
|
—
|
|
|
14,028
|
|
|
—
|
|
|
14,028
|
|
Agency bond
|
|
Cash and cash equivalents
|
|
—
|
|
|
1,250
|
|
|
—
|
|
|
1,250
|
|
Collegium warrants
|
|
Investments
|
|
—
|
|
|
8,784
|
|
|
—
|
|
|
8,784
|
|
Total
|
|
|
|
$
|
11
|
|
|
$
|
24,062
|
|
|
$
|
—
|
|
|
$
|
24,073
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
Contingent consideration liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,038
|
|
|
$
|
1,038
|
|
Total
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,038
|
|
|
$
|
1,038
|
|
The Company generally invests its cash in money market funds and marketable securities including U.S. Treasury and government agency securities, and commercial paper. These investments are all highly liquid investments with a maturity at date of purchase of three months or less. These securities are carried at fair value, which is based on readily available quoted market information. Realized gains or losses have been insignificant and are included in Other income, net in the Consolidated Statements of Comprehensive Income.
The fair value of the warrants to purchase Collegium’s common stock was calculated using the Black-Scholes option pricing model. As of November 8, 2018, the significant inputs included the fair value of Collegium’s common stock of $15.56, an expected term of 4 years and a risk-free rate of 3.05%. As of December 31, 2018, the significant inputs included the fair value of Collegium’s common stock of $17.17, an expected term of 3.86 years and a risk-free rate of 2.48%. The expected term was based on the remaining contractual period of 3.86 years, and the volatility was determined using Collegium’s historical common stock volatility over the expected term. For the year ended December 31, 2019, the Company recorded a gain of $0.8 million in “Other income, net” for the change in fair value of the Collegium warrants.
The fair value measurement of the contingent consideration obligations arises from the Zipsor, CAMBIA and Lazanda acquisitions and relates to fair value of the potential future contingent milestone payments and royalties payable under the
respective agreements which are determined using Level 3 inputs. The remaining contingent consideration liability following the divestiture of Lazanda in November 2017 was $0.2 million. This liability was settled in the first quarter of 2018. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones and royalties being achieved. At each reporting date, the Company re-measures the contingent consideration obligation arising from the above acquisitions to their estimated fair values. Any changes in the fair value of contingent consideration resulting from a change in the underlying inputs are recognized in operating expenses until the contingent consideration arrangement is settled. Changes in the fair value of contingent consideration resulting from the passage of time are recorded within interest expense until the contingent consideration is settled.
The table below provides a summary of the changes in fair value recorded in interest expense, selling, general and administrative expense, and gain on divestiture of Lazanda measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2019, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
|
2017
|
Fair value, beginning of the period
|
$
|
1,038
|
|
|
$
|
1,613
|
|
|
$
|
14,825
|
|
Changes in fair value recorded in interest expense
|
113
|
|
|
124
|
|
|
1,079
|
|
Changes in fair value recorded in selling, general and administrative expenses
|
(983
|
)
|
|
(515
|
)
|
|
(7,708
|
)
|
Royalties and milestone paid
|
—
|
|
|
(184
|
)
|
|
(3,068
|
)
|
Divestiture of Lazanda
|
—
|
|
|
—
|
|
|
(3,515
|
)
|
Total
|
$
|
168
|
|
|
$
|
1,038
|
|
|
$
|
1,613
|
|
The Company estimates the fair value of its convertible notes based on a market approach which represents a Level 2 valuation. The estimated fair value of the 2.50% Convertible Senior Notes Due 2021, which the Company issued on September 9, 2014, was approximately $108.1 million (par value $145.0 million) and $231.8 million (par value $345.00 million) as of December 31, 2019 and 2018, respectively. The estimated fair value of the 5.00% Convertible Senior Notes Due 2024, which the Company issued on August 13, 2019, was approximately $81.6 million (par value $120.00 million) as of December 31, 2019. The principal amount of the Senior Notes (as defined in “Note 8. Debt”), approximates their fair value as of December 31, 2019 and 2018, respectively and represents a Level 2 valuation. When determining the estimated fair value of the Company’s debt, the Company uses a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk.
There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended December 31, 2019 and 2018.
NOTE 17. INCOME TAXES
The (benefit) provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(1,231
|
)
|
|
$
|
896
|
|
|
$
|
384
|
|
State
|
1,715
|
|
|
171
|
|
|
(1,813
|
)
|
Total current taxes
|
$
|
484
|
|
|
$
|
1,067
|
|
|
$
|
(1,429
|
)
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
(5,767
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
—
|
|
|
—
|
|
|
—
|
|
Total deferred taxes
|
(5,767
|
)
|
|
—
|
|
|
—
|
|
Total (benefit) provision for income taxes
|
$
|
(5,283
|
)
|
|
$
|
1,067
|
|
|
$
|
(1,429
|
)
|
A reconciliation of income taxes at the statutory federal income tax rate to the actual tax rate included in the Statements of Comprehensive Income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Tax at federal statutory rate
|
$
|
(46,722
|
)
|
|
$
|
7,975
|
|
|
$
|
(36,374
|
)
|
State tax, net of federal benefit
|
(3,845
|
)
|
|
3,280
|
|
|
(3,395
|
)
|
Research credit
|
(138
|
)
|
|
(41
|
)
|
|
(41
|
)
|
Stock based compensation
|
2,038
|
|
|
1,259
|
|
|
159
|
|
Non-deductible meals and entertainment
|
129
|
|
|
223
|
|
|
973
|
|
Non-deductible other expense
|
5,837
|
|
|
308
|
|
|
6,508
|
|
Change in valuation allowance
|
48,943
|
|
|
(12,321
|
)
|
|
4,792
|
|
Uncertain tax provisions
|
(5,758
|
)
|
|
384
|
|
|
(1,611
|
)
|
Intraperiod tax allocations
|
(5,767
|
)
|
|
—
|
|
|
—
|
|
Tax rate changes
|
—
|
|
|
—
|
|
|
27,560
|
|
Total tax (benefit) expense
|
$
|
(5,283
|
)
|
|
$
|
1,067
|
|
|
$
|
(1,429
|
)
|
During 2019, the Company recorded income tax benefit of approximately $5.3 million, principally due to the release of FIN 48 liabilities based on lapsing of statute of limitation, and tax benefits being recorded as a result of intraperiod tax allocation from the Convertible Note Exchange.
During 2018, the Company recognized a tax expense of approximately $1.1 million, principally due to the increase in book income from Purdue litigation settlement.
During 2017, the Company recorded income tax benefit of approximately $1.4 million, principally due to release of liability and accrued interest and penalties associated with uncertain tax.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the Tax Act). The Tax Act included significant changes to the U.S. corporate income tax system including, but not limited to, a federal corporate rate reduction from 35% to 21% and limitations on the deductibility of interest expense and executive compensation. In order to calculate the effects of the new corporate tax rate on deferred tax balances, ASC 740 Income Taxes (ASC 740) required the re-measurement of deferred tax balances as of the enactment date of the Tax Act, based on the rates at which the balances were expected to reverse in the future. Due to the Company’s full valuation allowance position, there was no change to the presentation of the deferred tax balances on the financial statements, except for the re-measurement of these deferred tax balances in the income
tax footnote. The re-measurement resulted in a one-time reduction in federal and state deferred tax assets of approximately $25.5 million, which was fully offset by a corresponding change to the Company’s valuation allowance. The Company completed accounting for all tax effects related to the Tax Act in 2019, and there were no material adjustments recorded during 2018 to the previously recorded provisional amounts reflected in the 2017 financial statements.
As of December 31, 2019, the Company had net operating loss carry forwards for federal income tax purposes of approximately $3.7 million, which begin to expire in 2021. Net operating loss carryforwards for state income tax purposes were approximately $74.9 million, which began to expire in 2019. The Company had California state research and development credit carryforwards of $2.4 million, which have no expiration.
Utilization of the Company’s net operating loss and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
Deferred income taxes reflect the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Net operating losses
|
$
|
5,885
|
|
|
$
|
6,618
|
|
Tax credit carryforwards
|
1,411
|
|
|
1,096
|
|
Intangibles
|
82,582
|
|
|
33,604
|
|
Stock-based compensation
|
1,907
|
|
|
2,286
|
|
Operating lease liabilities
|
1,577
|
|
|
|
Reserves and other accruals not currently deductible
|
10,447
|
|
|
10,706
|
|
Total deferred tax assets
|
103,809
|
|
|
54,310
|
|
Valuation allowance for deferred tax assets
|
(90,820
|
)
|
|
(41,905
|
)
|
|
$
|
12,989
|
|
|
$
|
12,405
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Convertible debt
|
$
|
(12,247
|
)
|
|
$
|
(12,213
|
)
|
Fixed Assets
|
(109
|
)
|
|
(192
|
)
|
Operating lease right-of-use assets
|
(633
|
)
|
|
—
|
|
Net deferred tax asset (liability)
|
$
|
—
|
|
|
$
|
—
|
|
In 2019, the Company recorded a valuation allowance of $90.8 million to offset, in full, the benefit related to its net deferred tax assets as of December 31, 2019 because realization of the future benefits is uncertain. The Company reviewed both positive evidence such as, but not limited to, the projected availability of future taxable income and negative evidence such as the history of cumulative losses in recent years. The Company will continue to assess the realizability of its deferred tax assets on a quarterly basis, and assess whether an additional reserve or a release of the valuation allowance is required in future periods.
The valuation allowance increased by $48.9 million, decreased by $12.3 million, and increased by $9.0 million during the years ended December 31, 2019, 2018 and 2017, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and in various states, and the tax returns filed for the years 1997 through 2018 and the applicable statutes of limitation have not expired with respect to those returns. Because of net operating losses and unutilized R&D credits, substantially all of the Company’s tax years remain open to examination.
Interest and penalties, if any, related to unrecognized tax benefits would be recognized as income tax expense by the Company. At December 31, 2019, the Company had approximately $0.4 million of accrued interest and penalties associated with any unrecognized tax benefits.
The following table summarizes the activity related to the Company’s unrecognized tax benefits for the three years ended December 31, 2019 (in thousands):
|
|
|
|
|
Unrecognized tax benefits—January 1, 2017
|
$
|
14,687
|
|
Increases related to current year tax positions
|
3,423
|
|
Changes in prior year tax positions
|
(30
|
)
|
Decreases related to lapse of statutes
|
(936
|
)
|
Unrecognized tax benefits—December 31, 2017
|
17,144
|
|
Increases related to current year tax positions
|
611
|
|
Changes in prior year tax positions
|
(1,623
|
)
|
Decreases related to lapse of statutes
|
(68
|
)
|
Unrecognized tax benefits—December 31, 2018
|
16,064
|
|
Increases related to current year tax positions
|
212
|
|
Changes in prior year tax positions
|
(232
|
)
|
Decreases related to lapse of statutes
|
(12,011
|
)
|
Unrecognized tax benefits—December 31, 2019
|
$
|
4,033
|
|
The total amount of unrecognized tax benefit that would affect the effective tax rate is approximately $4.0 million as of December 31, 2019 and $16.1 million as of December 31, 2018.
The Company does not expect a significant change to its unrecognized tax benefits over the next twelve months. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of business.
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth certain unaudited quarterly financial data for each of the eight quarters beginning with the quarter ended March 31, 2018 through the quarter ended December 31, 2019 (in thousands). This quarterly financial data is unaudited, but has been prepared on the same basis as the annual financial statements and, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments necessary for a fair representation of the information for the periods presented. Operating results for any quarter are not necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
Product sales
|
|
$
|
26,450
|
|
|
$
|
25,937
|
|
|
$
|
27,502
|
|
|
$
|
28,917
|
|
Total revenues
|
|
57,929
|
|
|
57,203
|
|
|
55,147
|
|
|
59,225
|
|
Income (loss) from operations (1)
|
|
3,072
|
|
|
3,618
|
|
|
(10,133
|
)
|
|
(190,985
|
)
|
Net (loss) income
|
|
(14,301
|
)
|
|
(13,605
|
)
|
|
3,331
|
|
|
(192,626
|
)
|
Basic net (loss) income per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
0.05
|
|
|
$
|
(2.65
|
)
|
Diluted net (loss) income per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
0.05
|
|
|
$
|
(2.65
|
)
|
(1) At December 31, 2019 the Company recognized an impairment loss of $189.8 million on its NUCYNTA intangible.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
Product sales
|
|
$
|
44,354
|
|
|
$
|
26,838
|
|
|
$
|
29,435
|
|
|
$
|
29,339
|
|
Total revenues
|
|
128,404
|
|
|
63,274
|
|
|
77,493
|
|
|
42,599
|
|
Income (loss) from operations
|
|
51,338
|
|
|
(4,225
|
)
|
|
9,628
|
|
|
(13,082
|
)
|
Net income (loss)
|
|
33,824
|
|
|
(21,048
|
)
|
|
48,270
|
|
|
(24,138
|
)
|
Basic net income (loss) per share
|
|
$
|
0.53
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.76
|
|
|
$
|
(0.38
|
)
|
Diluted net income (loss) per share
|
|
$
|
0.48
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.65
|
|
|
$
|
(0.38
|
)
|
NOTE 19. SUBSEQUENT EVENTS
Sale of Gralise
On December 12, 2019 the Company entered into a purchase agreement with Golf Acquiror LLC, an affiliate of Alvogen, Inc. (Alvogen) to divest its rights, title and interest in and to Gralise, including certain related assets, to Alvogen. The transaction subsequently closed on January 10, 2020. At closing, the Company received approximately $78.6 million, including a $75.0 million base purchase price and a preliminary positive inventory adjustment equal to approximately $3.6 million. In addition, the Company is entitled to receive 75% of Alvogen’s first $70.0 million of Gralise net sales after closing. Alvogen has also assumed, pursuant to the terms of the Asset Purchase Agreement, certain contracts, liabilities and obligations of the Company relating to Gralise, including those related to manufacturing and supply, post-market commitments and clinical development costs.
Gralise did not meet the criteria of a discontinued operation as of December 31, 2019 as it was not considered a component of an entity that comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company, nor did it represent a strategic shift of the Company.
Sale of NUCYNTA
On February 6, 2020, the Company entered into a purchase agreement with Collegium, to divest its remaining rights, title and interest in and to the NUCYNTA franchise of products from the Company, and assumed certain contracts, liabilities and obligations of the Company relating to the NUCYNTA products, including those related to manufacturing and supply, post-market commitments and clinical development costs. The transaction subsequently closed on February 13, 2020.
The Company received approximately $368.0 million in net proceeds, which consisted of $375.0 million in base purchase price, plus approximately $6.0 million in preliminary positive inventory value (Inventory Amount) and less $13.0 million for royalties paid to the Company by Collegium between January 1, 2020 and February 11, 2010 pursuant to the Final Commercialization Agreement Payment Value of the Asset Purchase Agreement. The Inventory Amount is subject to customary post-Closing adjustments which are not expected to be material. In connection with the sale, the Company entered into a third-party consent agreement which requires two lump sum payments of $4.5 million payable in 2021 and 2022 subject to Collegium achieving certain net sales in 2020 and 2021, respectively.
Since January 9, 2018, Collegium has been responsible for the commercialization of NUCYNTA in the U.S., including sales and marketing, and the Company received royalties based on certain net sales thresholds, in accordance with the Commercialization Agreement. The Commercialization Agreement terminated at closing with certain specified provisions of the Commercialization Agreement surviving in accordance with the terms of the Purchase Agreement.
Senior Notes Repayment
As of February 13, 2020, the Company had repaid in full all outstanding indebtedness, and terminated all commitments and obligations, under its Note Purchase Agreement. The Company used proceeds from the sale of Gralise and NUCYNTA to repay the outstanding principal of $162.5 million. In addition, the Company paid approximately $4.9 million and $4.4 million in prepayment premiums and exit fees, respectively, plus accrued but unpaid interest. In connection with the termination of the Note Purchase Agreement, the Company was released from all security interests, liens and encumbrances under the Note Purchase Agreement.
Convertible Notes
On February 19, 2020, the Company entered into separate, privately negotiated purchase agreements (Purchase Agreements) with a limited number of holders of the Company’s currently outstanding 2021 Notes and 2024 Notes. Pursuant to the Purchase Agreements, the Company repurchased approximately $188.0 million aggregate principal amount of 2021 Notes and 2024 Notes for a cash payment plus accrued but unpaid interest.
Termination of Long-acting Cosyntropin Development Partnership
On February 6, 2020, the Company entered into an amended agreement with Eolas Pharma Teoranta (Eolas), an affiliate of Slán. Pursuant to the amendment the license granted to the Company for the commercialization of long-acting cosyntropin was terminated and the Company received $2.0 million in settlement of the December 31, 2019 receivable for reimbursable development expenses. Additionally, the Company may receive up to $10.0 million in future payments based
upon commercial sales of long-acting cosyntropin if Eolas successfully obtains regulatory approval for and commercializes the product.