NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Insys Therapeutics, Inc., which was incorporated in Delaware in June 1990, and our subsidiaries (collectively, “we,” “us,” and “our”) maintain headquarters in Chandler, Arizona.
We are a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. We have two commercially marketed products: SUBSYS®, a proprietary sublingual fentanyl spray for BTCP in opioid-tolerant adult patients; and SYNDROS®, a proprietary, orally administered liquid formulation of dronabinol for the treatment of CINV and anorexia associated with weight loss in patients with AIDS.
2.
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Significant Accounting Policies
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Principles of Consolidation
The consolidated financial statements include the accounts of Insys Therapeutics, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.
Reclassification
Certain amounts in prior periods have been reclassified to conform to the current period presentation.
Fair Value of Financial Instruments
The carrying values of certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair value due to the short-term nature of these financial instruments.
FASB ASC No. 820, “Fair Value Measurement” defines fair value 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. It also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
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Level 1:
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Observable inputs such as quoted prices in active markets;
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Level 2:
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Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
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Level 3:
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Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
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Revenue Recognition
We recognize revenue from the sale of SUBSYS® and SYNDROS®. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.
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SUBSYS® was commercially launched in March 2012, and is available through a U.S. Food and Drug Administration (“FDA”) mandated Risk Evaluation and Mitigation program known as the Transmucosal Immediate Release Fentanyl program (“TIRF REMS”). We sell SUBSYS® in the United States to wholesale pharmaceutical distributors and directly to specialty retail pharmacies (collectively, our customers) subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. SUBSYS® currently has a shelf life of 36 or 48 months from the date of manufacture, depending on the manufacture date. We record revenue for SUBSYS® at the time the customer receives the shipment.
SYNDROS® was commercially launched in July 2017. We sell SYNDROS® in the United States to wholesale pharmaceutical distributors and directly to retail pharmacies, collectively our customers, subject to rights of return within a period beginning six months prior to, and ending
12 months following, product expiration. SYNDROS® currently has a shelf life of 24 or 36 months from the date of manufacture, depending on the manufacture date. Given the limited sales history of SYNDROS®, the Company currently cannot reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on product shipments of SYNDROS® until the right of return no longer exists, which occurs at the earlier of the time SYNDROS® units are sold to health care facilities or dispensed through patient prescriptions, or expiration of the right of return. Units dispensed are generally not subject to return, except in the rare cases where the product malfunctions or the product is damaged in transit. The Company estimates patient prescriptions dispensed using an analysis of third-party market research data. If this third-party data underestimates or overestimates actual patient prescriptions dispensed for a given period, adjustments to revenue may be necessary in future periods. To date, such adjustments have not been material.
We recognize estimated product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with customers and third-party payers and the levels of inventory within the distribution channels that may result in future discounts taken. In certain cases, such as patient assistance programs, we recognize the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future results vary, we may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. Our product sales allowances include:
Product Returns.
We allow customers to return product for credit within six months before and up to 12 months following its product expiration date. With respect to SUBSYS®, we have monitored actual return history since product launch, which provides us with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product at the time of shipment, shipment and prescription trends, estimated distribution channel inventory levels, and consideration of the introduction of competitive products.
Given the limited sales history of SYNDROS®, the Company currently cannot reliably estimate expected returns of the product at the time of shipment.
Because of the shelf life of our products and our return policy of issuing credits on returned product that is 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 we issue credits on returned product. Accordingly, we may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments. The allowance for product returns is included in accrued sales allowances.
Wholesaler and Retailer Discounts.
We offer discounts to certain wholesale distributors and specialty retailers based on contractually determined rates. We accrue the discount as a reduction of receivables due from the wholesalers and retailers upon shipment to the respective wholesale distributors and retail pharmacies.
Prompt Pay Discounts.
We offer cash discounts to our customers, generally 2.0% of the sales price, as an incentive for prompt payment. We account for cash discounts by reducing accounts receivable by the full amount of the discount.
Stocking Allowances.
We may offer discounts and extended payment terms, generally in the month of the initial commercial launch of a new product and on the first order made by certain wholesale distributors and retail pharmacies based on contractually determined rates. We accrue the discount as a reduction of receivables due from the wholesalers and retailers upon shipment to the respective wholesale distributors and retail pharmacies.
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Patient Discount Programs
. We offer discount card programs to patients, in which patients receive discounts on their prescriptions that are reimbursed by us to the retailer. We estimate the total amount that will be redeemed based on a historical percentage of actual redemption applied to inventory in the distribution and retail channels. The allowance for patient discount programs is included in accrued sales allowances.
Rebates.
We participate in certain rebate programs, which provide discounted prescriptions to qualified insured patients. Under these rebate programs, we pay a rebate to the third-party administrator of the program, generally two to three months after the quarter in which prescriptions subject to the rebate are filled. We estimate and accrue these rebates based on current contract prices, historical and estimated future percentages of products sold to qualified patients and estimated levels of inventory in the distribution channel. The allowance for rebates is included in accrued sales allowances.
Chargebacks.
We provide discounts primarily to authorized users of the FSS of the General Services Administration under an FSS contract negotiated by the Department of Veterans Affairs and various organizations under Medicaid contracts and regulations. These entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to us the difference between the current retail price and the price the entity paid for the product. We estimate and accrue chargebacks based on estimated wholesaler inventory levels, current contract prices and historical chargeback activity.
Estimated chargebacks are recognized as a reduction of revenue in the same period the related revenue is recognized.
The allowance for chargebacks is included as a reduction to accounts receivable.
Dronabinol SG Capsule
Our Dronabinol SG Capsule product was commercially launched in December 2011, and we sold Dronabinol SG Capsule exclusively to Mylan in the United States under a supply and distribution agreement. We discontinued sales of Dronabinol SG Capsule in 2015 and do not have any current plans to manufacture or market this product in the future.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying value of those investments approximates their fair market value due to their short maturity and liquidity. Cash and cash equivalents include cash on hand and amounts on deposit with financial institutions, which at times may exceed current FDIC coverage limits of $250,000.
Short-Term and Long-Term Investments
Our policy for short-term and long-term investments is to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield in relationship to our investment guidelines and market conditions. Short-term and long-term investments consist of corporate, various government agency and municipal debt securities, as well as certificates of deposit that have maturity dates that are greater than 90 days. Certificates of deposit and commercial paper are carried at cost which approximates fair value. We classify our marketable securities as available-for-sale in accordance with FASB ASC Topic 320, “Investments — Debt and Equity Securities”. Available-for-sale securities are carried at fair value with unrealized gains and losses reported in stockholders’ equity, net of related tax effects. There were no reclassifications on available-for-sale securities during the year ended December 31, 2017. Reclassifications on available-for-sale securities were insignificant during the year ended December 31, 2016. A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary, results in impairment of the fair value of the investment. We did not have any realized gains or losses or decline in values judged to be other than temporary during the years ended December 31, 2017, 2016 and 2015. If we had realized gains and losses and declines in value judged to be other than temporary, we would have been required to include those changes in other expense in the consolidated statements of comprehensive income (loss). Premiums and discounts are amortized or accreted over the life of the related available-for-sale security. The cost of securities sold is calculated using the specific identification method. At December 31, 2017, our certificates of deposit and commercial paper as well as our marketable securities have been recorded at an estimated fair value of $4,499,000, $85,189,000 and $46,733,000 in cash and cash equivalents, short-term investments and long-term investments, respectively.
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Accounts Receivable, Net
Trade accounts receivable are recorded at the invoice amount net of allowances for wholesaler discounts, prompt pay discounts, stocking allowances, chargebacks and doubtful accounts. See “Revenue Recognition” above for a description of our wholesaler discounts, prompt pay discounts, stocking allowances and chargebacks. In the ordinary course of business, and consistent with industry practices, we may from time to time offer extended payment terms to our customers as an incentive for new product launches or in other circumstances. These extended payment terms do not represent a significant risk to the collectability of accounts receivable as of the period-end and are evaluated in accordance with ASC 605, “Revenue Recognition” as applicable. We evaluate the collectability of our accounts receivable based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experience. We write off accounts receivable against the allowance when a balance is determined to be uncollectable.
Inventories, Net
Inventories consist of raw materials, work-in-process and finished product and are valued at the lower of cost (first-in, first-out cost method) or NRV. Non-current inventories are those that are not expected to be consumed or sold within 12 months of the balance sheet date. In evaluating whether inventory should be classified as current or noncurrent, management considers factors such as historical and anticipated future sales compared to quantities on hand and the remaining shelf life of products on hand. Inventory costs are capitalized prior to regulatory approval and product launch based on management’s judgment of probable future commercial use and net realizable value of the inventory. Such judgment incorporates our knowledge and best estimate of where the relevant product is in the regulatory process, our required investment in the product, market conditions, competing products and our economic expectations for the product post-approval relative to the risk of manufacturing the product prior to approval. In evaluating the recoverability of inventories produced in preparation for product launches, we consider the probability that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approval process, as well as the market for the product in its current state. We could be required to permanently write down previously capitalized costs related to pre-approval or pre-launch inventory upon a change in such judgment, due to a denial or delay of approval by regulatory bodies, a delay in commercialization, or other potential factors including product expiration. Inventories are reviewed periodically for potential excess, dated or obsolete status. Management evaluates the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared to quantities on hand, the price we expect to obtain for products in their respective markets compared with historical cost, and the remaining shelf life of products on hand.
During the year ended December 31, 2017, the Company refined its estimate for inventory obsolescence. The new estimate more closely aligns remaining product shelf life with anticipated future production and sales. The Company evaluated this change in accordance with ASC 250, “Accounting Changes and Error Corrections” and, accordingly, accounted for this change as a change in estimate. As a result of this change, the Company increased the inventory reserves by approximately $2.1 million during the year ended December 31, 2017.
Property and Equipment, Net
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Maintenance and repairs that do not extend the life of assets are charged to expense when incurred. When property and equipment is disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reported in the period the transaction takes place.
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset.
Income Taxes
We account for our deferred income tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities, and net operating losses (“NOLs”) and other tax credit carry forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences
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are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.
We record a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. In making such determinations, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operating results.
We recognize a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.
Our policy is to classify interest and penalties associated with income tax liabilities as income tax expense (benefit) in the consolidated statements of comprehensive income (loss).
Research and Development Expenses
Research and development (“R&D”) costs are expensed when incurred. These costs consist of: (i) external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants; (ii) employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our preclinical and clinical drug development activities; (iii) facilities expense, depreciation and other allocated expenses; and (iv) equipment and laboratory supplies.
Advertising and Marketing
Advertising and marketing costs are expensed as incurred. Advertising expense totaled $993,000, $1,572,000 and $1,166,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Legal Fees
Legal fees are expensed as incurred. Accordingly, we do not accrue for estimated future legal fees to be incurred in connection with litigation and other related legal matters. Legal expense is reported in general and administrative expenses, and totaled $20,328,000, $22,840,000 and $19,448,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Stock-Based Compensation Expenses
Stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the service or vesting period, which is generally three to four years, on a straight-line basis. We account for forfeitures when they occur. We use the Black-Scholes option pricing model for estimating the grant date fair value of stock options using the following assumptions:
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•
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Volatility - Prior to our IPO, we did not have a reliable history of market prices for our common stock. Following our IPO, while we have an active trading market, we do not have sufficient historical data to accurately estimate volatility for the period equivalent to the expected term of the stock option grants. Accordingly, we estimate the expected stock price volatility for our common stock by taking the median historical stock price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. We intend to incorporate the volatility of our own common stock share price in future periods as we begin to have sufficient historical data available.
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•
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Expected term - The expected term is based on a simplified method
allowed by the SEC due to insufficient historical data, and
defines the term as the average of the contractual term of the options and the weighted-average vesting period for all open employee awards.
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•
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Risk-free rate - The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. treasury securities in effect during the quarter in which the options were granted.
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•
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Dividends - The dividend yield assumption is based on our history and expectation of paying no dividends.
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Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an on-going basis, we evaluate our estimates, including those related to revenue recognition (which is affected by prescriptions dispensed, wholesaler discounts, patient discount programs, rebates, and chargebacks), inventories, legal liabilities and settlements, stock-based compensation expense, and deferred tax valuation allowances. We base our estimates on historical experience and on various other assumptions that are believed by management to be reasonable under the circumstances. Actual results could materially differ from those estimates.
Segment Information
FASB ASC No. 280, “Segment Reporting” establishes standards for reporting information about reportable segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group (“CODM”), in deciding how to allocate resources and in assessing performance. The CODM evaluates revenues and gross profits based on product lines and routes to market. Based on our integration and management strategies, we operate in a single reportable segment.
Recently Adopted Accounting Pronouncements
Effective January 1, 2017, we adopted ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. Among other requirements, the new guidance requires all tax effects related to share-based payments at settlement (or expiration) to be recorded through the income statement. Previously, tax benefits in excess of compensation cost ("windfalls") were recorded in equity, and tax deficiencies ("shortfalls") were recorded in equity to the extent of previous windfalls, and then to the income statement. As required, this change was applied prospectively to all excess tax benefits and tax deficiencies resulting from settlements.
Under the new guidance, the windfall tax benefit is to be recorded when it arises, subject to normal valuation allowance considerations. Excess tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable were recorded through a cumulative effect adjustment as of the date of the adoption. As required, upon adoption, this change was applied on a modified retrospective basis, with a cumulative effect adjustment of a change in accounting principle of approximately $368,000 as a deferred tax asset with a corresponding valuation allowance of $368,000, which were offset in retained earnings. Additionally, our consolidated statement of cash flows now presents excess tax benefits as an operating activity, adjusted prospectively with no adjustments made to prior periods.
Additionally, ASU No. 2016-09 addressed the presentation of employee taxes paid on the statement of cash flows. We are now required to present the cost of shares withheld from the employee to satisfy the employees’ income tax liability as a financing activity on the consolidated statement of cash flows rather than as an operating cash flow. This change was applied on a retrospective basis, as required, but did not impact the consolidated statement of cash flows for year ended December 31, 2017.
ASU 2016-09 also permits entities to make an accounting policy election related to how forfeitures will impact the recognition of compensation cost for stock-based compensation to either estimate the total number of awards for which the requisite service period will not be rendered, as currently required, or to account for forfeitures as they occur. Upon adoption of ASU 2016-09, we elected to change our accounting policy to account for forfeitures as they occur. As required, this change was applied on a modified retrospective basis; however, as of December 31,
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2016, we had estimated no forfeitures relating to the outstanding equity awards. As a result, no adjustment was required.
Going forward, the adoption of ASU 2016-09 could cause volatility in the effective tax rate, as the excess tax benefits associated with the exercise of stock options could generate a significant discrete income tax benefit in a particular interim period, potentially creating volatility in net income and net income per share period-to-period and period-over-period.
Effective January 1, 2017, we adopted ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. Prior to January 1, 2017, we measured inventory at the lower of cost or market. This guidance requires us to measure inventory at the lower of cost and NRV, which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” The adoption of this guidance did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements
In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”, to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Specifically, the ASU requires modification accounting to a share-based payment award unless all of the following are the same immediately before and after the change: the award’s fair value; the award’s vesting conditions; and the award’s classification as an equity instrument or a liability instrument. The amendments should be applied prospectively to an award modified on or after the adoption date, and are effective for fiscal years beginning after December 15, 2017. We will adopt the new guidance on January 1, 2018. The adoption of this guidance will not have a material impact on our consolidated financial statements. The actual impact is subject to change prior to the filing of our 2018 first quarter results.
In March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”, to amend the amortization period for certain purchased callable debt securities held at a premium. The ASU shortens the amortization period for the premium to the earliest call date. Under current U.S. GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments should be applied on a modified retrospective basis and are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of this amendment on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”, to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current U.S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in U.S. GAAP. The amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments should be applied on a modified retrospective transition basis, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We will adopt the new guidance on January 1, 2018. The adoption of this guidance will not have a material impact on our consolidated financial statements. The actual impact is subject to change prior to the filing of our 2018 first quarter results.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. The amendments affect entities required to present a statement of cash flows and provides specific guidance on a variety of cash flow issues to reduce current and potential future diversity in practice. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented.
We will adopt the new guidance on January 1, 2018. The adoption of this guidance will not have a material impact on our consolidated financial statements. The actual impact is subject to change prior to the filing of our 2018 first quarter results.
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In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income, and are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the timelier recognition of losses. We are currently evaluating the impact of these amendments on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases: (Topic 842)”, to provide guidance on recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from all leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP guidance. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the balance sheet. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP guidance. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous U.S. GAAP guidance unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous U.S. GAAP guidance.
While the effect of the pronouncement has not yet been quantified, the Company is continuing to evaluate the impact of recording the right-of-use-assets and liabilities on its financial position. The Company anticipates it will be required to record assets and liabilities for leases currently classified as operating leases.
See Note 7,
Commitments and Contingencies,
for information about our lease commitments.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, which amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is not permitted. These amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption.
We will adopt the new guidance on January 1, 2018. The adoption of this guidance will not have a material impact on our consolidated financial statements. The actual impact is subject to change prior to the filing of our 2018 first quarter results.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The new standard aims to achieve a consistent application of revenue recognition within the United States, resulting in a single revenue model to be applied by reporting companies under U.S. GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. In March 2016 and April 2016, the FASB issued ASU No. 2016-08 and ASU No. 2016-10, respectively, which further clarified the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09 and the identification of performance obligations and
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licensing, respectively. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients”, which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition. These standards will be effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The evaluation of the impact of ASU 2014-09, and the related ASUs, on existing contracts with our customers is complete. The change in accounting standard primarily affects our recognition of revenue from the sale of SYNDROS®, which was commercially launched in July 2017. Under current guidance, given the limited sales history of SYNDROS®, we defer recognition of revenue on product shipments of SYNDROS® until the right of return no longer exists, which occurs at the earlier of the time SYNDROS® units are sold to health care facilities or dispensed through patient prescription, or expiration of the right of return. We will adopt ASU 2014-09 effective January 1, 2018, using the modified retrospective transition method. The modified retrospective method requires that the cumulative effect of initially applying this guidance be recognized as an adjustment to the opening balance of retained earnings or accumulated deficit in the annual period that includes the date of initial application. We currently expect to record a decrease in accumulated deficit and a corresponding decrease to deferred revenue of approximately $0.8 million, net of tax, as of the adoption date. This cumulative adjustment is primarily attributable to the transition from deferring revenue until the right of return no longer exists to recognizing revenue when we conclude that it is probable that there is not a risk of significant revenue reversal in future periods. The actual impact is subject to change prior to the filing of our 2018 first quarter results. Additional quantitative and qualitative presentations and disclosures will be required on identified revenue streams and performance obligations. We have identified changes to our business processes and internal controls relating to review of variable consideration, contracts and disclosures, that are needed upon the adoption of the new guidance.
3.
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Short-Term and Long-Term Investments
|
Investments consisted of the following at December 31, 2017 (in thousands):
|
|
December 31, 2017
|
|
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Other-
Than-
Temporary
Impairment
Losses
|
|
|
Fair
Value
|
|
|
Cash and
Cash
Equivalents
|
|
|
Short-term
Investments
|
|
|
Long-term
Investments
|
|
Cash and cash equivalents
|
|
$
|
12,183
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,183
|
|
|
$
|
12,183
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market
securities
|
|
|
15,317
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,317
|
|
|
|
15,317
|
|
|
|
—
|
|
|
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of
deposit
|
|
|
18,447
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,447
|
|
|
|
—
|
|
|
|
7,474
|
|
|
|
10,973
|
|
Commercial paper
|
|
|
10,560
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,560
|
|
|
|
1,499
|
|
|
|
9,061
|
|
|
|
—
|
|
Corporate securities
|
|
|
59,613
|
|
|
|
—
|
|
|
|
(206
|
)
|
|
|
—
|
|
|
|
59,407
|
|
|
|
1,500
|
|
|
|
39,622
|
|
|
|
18,285
|
|
Federal agency
securities
|
|
|
37,793
|
|
|
|
—
|
|
|
|
(203
|
)
|
|
|
—
|
|
|
|
37,590
|
|
|
|
1,500
|
|
|
|
20,015
|
|
|
|
16,075
|
|
Municipal securities
|
|
|
10,446
|
|
|
|
—
|
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
10,417
|
|
|
|
—
|
|
|
|
9,017
|
|
|
|
1,400
|
|
Total marketable
securities
|
|
|
136,859
|
|
|
|
—
|
|
|
|
(438
|
)
|
|
|
—
|
|
|
|
136,421
|
|
|
|
4,499
|
|
|
|
85,189
|
|
|
|
46,733
|
|
|
|
$
|
164,359
|
|
|
$
|
—
|
|
|
$
|
(438
|
)
|
|
$
|
—
|
|
|
$
|
163,921
|
|
|
$
|
31,999
|
|
|
$
|
85,189
|
|
|
$
|
46,733
|
|
94
Table of Contents
Investments consisted of the following at December 31, 2016 (in thousands):
|
|
December 31, 2016
|
|
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Other-
Than-
Temporary
Impairment
Losses
|
|
|
Fair
Value
|
|
|
Cash and
Cash
Equivalents
|
|
|
Short-term
Investments
|
|
|
Long-term
Investments
|
|
Cash and cash equivalents
|
|
$
|
49,331
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
49,331
|
|
|
$
|
49,331
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market securities
|
|
|
54,015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
54,015
|
|
|
|
54,015
|
|
|
|
—
|
|
|
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
26,114
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,114
|
|
|
|
—
|
|
|
|
13,855
|
|
|
|
12,259
|
|
Commercial paper
|
|
|
1,485
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,485
|
|
|
|
—
|
|
|
|
1,485
|
|
|
|
—
|
|
Corporate securities
|
|
|
39,562
|
|
|
|
—
|
|
|
|
(135
|
)
|
|
|
—
|
|
|
|
39,427
|
|
|
|
500
|
|
|
|
25,681
|
|
|
|
13,246
|
|
Federal agency securities
|
|
|
30,660
|
|
|
|
4
|
|
|
|
(92
|
)
|
|
|
—
|
|
|
|
30,572
|
|
|
|
—
|
|
|
|
10,854
|
|
|
|
19,718
|
|
Municipal securities
|
|
|
35,811
|
|
|
|
2
|
|
|
|
(81
|
)
|
|
|
—
|
|
|
|
35,732
|
|
|
|
796
|
|
|
|
26,363
|
|
|
|
8,573
|
|
Total marketable
securities
|
|
|
133,632
|
|
|
|
6
|
|
|
|
(308
|
)
|
|
|
—
|
|
|
|
133,330
|
|
|
|
1,296
|
|
|
|
78,238
|
|
|
|
53,796
|
|
|
|
$
|
236,978
|
|
|
$
|
6
|
|
|
$
|
(308
|
)
|
|
$
|
—
|
|
|
$
|
236,676
|
|
|
$
|
104,642
|
|
|
$
|
78,238
|
|
|
$
|
53,796
|
|
The amortized cost and estimated fair value of the marketable securities, by maturity, are shown below (in thousands):
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
90,071
|
|
|
$
|
89,937
|
|
|
$
|
80,092
|
|
|
$
|
80,027
|
|
Due after one year through 5 years
|
|
|
46,788
|
|
|
|
46,484
|
|
|
|
53,540
|
|
|
|
53,303
|
|
Due after 5 years through 10 years
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Due after 10 years
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
136,859
|
|
|
$
|
136,421
|
|
|
$
|
133,632
|
|
|
$
|
133,330
|
|
The following table shows the gross unrealized losses and the fair value of our investments, with unrealized losses that are not deemed to be other-than-temporarily impaired aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Less Than
12 Months
|
|
|
Greater Than
12 Months
|
|
|
Less Than
12 Months
|
|
|
Greater Than
12 Months
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
$
|
245
|
|
|
$
|
(153
|
)
|
|
$
|
7,839
|
|
|
$
|
(52
|
)
|
|
$
|
38,027
|
|
|
$
|
(134
|
)
|
|
$
|
401
|
|
|
$
|
(1
|
)
|
Federal agency securities
|
|
|
26,244
|
|
|
|
(89
|
)
|
|
|
11,346
|
|
|
|
(114
|
)
|
|
|
26,449
|
|
|
|
(91
|
)
|
|
|
1,217
|
|
|
|
(1
|
)
|
Municipal securities
|
|
|
50,537
|
|
|
|
(18
|
)
|
|
|
1,145
|
|
|
|
(12
|
)
|
|
|
30,373
|
|
|
|
(81
|
)
|
|
|
100
|
|
|
|
—
|
|
|
|
$
|
77,026
|
|
|
$
|
(260
|
)
|
|
$
|
20,330
|
|
|
$
|
(178
|
)
|
|
$
|
94,849
|
|
|
$
|
(306
|
)
|
|
$
|
1,718
|
|
|
$
|
(2
|
)
|
95
Table of Contents
As of December 31, 2017 and 2016, we have concluded that the unrealized losses on our marketable securities are temporary in nature. Marketable securities are reviewed quarterly for possible other-than-temporary impairment. This review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the expectation for that security’s performance and the creditworthiness of the issuer.
4.
|
Fair Value Measurement
|
At December 31, 2017 and 2016, we held short-term and long-term investments, as described in Note 3, that are required to be measured at fair value on a recurring basis. We had no assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2017 and 2016. Substantially all available-for-sale investments held by us at December 31, 2017 and 2016, have been valued based on Level 2 inputs. Available-for-sale securities classified within Level 2 of the fair value hierarchy are valued utilizing reports from an independent third-party public quotation service based on closing prices on the last business day of the period presented. In addition, we use the public quotation service to perform price testing by comparing quoted prices listed in reports provided by the asset managers that hold our investments to quotes listed through the public quotation service. These asset managers utilize an independent pricing source to obtain quotes for most fixed income securities, and utilize internal procedures to validate the prices obtained. Our Level 3 asset represents our investment in a long-term corporate convertible promissory note and a warrant to purchase shares issued in connection with the convertible promissory note, which converted to convertible preferred stock as of December 31, 2016. This stock is not listed on any security exchange. The fair value of the preferred stock approximates its carrying value at December 31, 2017
Our investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at December 31, 2017 were as follows (in thousands):
|
|
Fair Value Measurement at Reporting Date
|
|
|
|
Total
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
18,447
|
|
|
$
|
—
|
|
|
$
|
18,447
|
|
|
$
|
—
|
|
Commercial paper
|
|
|
10,560
|
|
|
|
—
|
|
|
|
10,560
|
|
|
|
—
|
|
Corporate securities
|
|
|
59,407
|
|
|
|
—
|
|
|
|
58,889
|
|
|
|
518
|
|
Federal agency securities
|
|
|
37,590
|
|
|
|
—
|
|
|
|
37,590
|
|
|
|
—
|
|
Municipal securities
|
|
|
10,417
|
|
|
|
—
|
|
|
|
10,417
|
|
|
|
—
|
|
Total assets measured at fair value
|
|
$
|
136,421
|
|
|
$
|
—
|
|
|
$
|
135,903
|
|
|
$
|
518
|
|
Our investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at December 31, 2016 were as follows (in thousands):
|
|
Fair Value Measurement at Reporting Date
|
|
|
|
Total
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
26,114
|
|
|
$
|
—
|
|
|
$
|
26,114
|
|
|
$
|
—
|
|
Commercial paper
|
|
|
1,485
|
|
|
|
—
|
|
|
|
1,485
|
|
|
|
—
|
|
Corporate securities
|
|
|
39,427
|
|
|
|
—
|
|
|
|
38,927
|
|
|
|
500
|
|
Federal agency securities
|
|
|
30,572
|
|
|
|
—
|
|
|
|
30,572
|
|
|
|
—
|
|
Municipal securities
|
|
|
35,732
|
|
|
|
—
|
|
|
|
35,732
|
|
|
|
—
|
|
Total assets measured at fair value
|
|
$
|
133,330
|
|
|
$
|
—
|
|
|
$
|
132,830
|
|
|
$
|
500
|
|
96
Table of Contents
The following table presents additional information about assets measured at fair value on a recurring basis and for which we utilize Level 3 inputs to determine fair value for the years ended December 31, 2017 and 2016 (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Convertible stock
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
500
|
|
|
$
|
—
|
|
Change in fair value
|
|
|
18
|
|
|
|
—
|
|
Purchases
|
|
|
—
|
|
|
|
500
|
|
Balance, end of period
|
|
$
|
518
|
|
|
$
|
500
|
|
Inventories are stated at lower of cost or NRV. Cost, which includes amounts related to materials and costs incurred by our contract manufacturers, is determined on a first-in, first-out basis. Inventories are reviewed periodically for potential excess, dated or obsolete status. Management evaluates the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared to quantities on hand, the price we expect to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand.
The components of inventories, net of allowances, are as follows (in thousands):
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Finished goods
|
|
$
|
4,709
|
|
|
$
|
8,408
|
|
Work-in-process
|
|
|
5,752
|
|
|
|
6,183
|
|
Raw materials and supplies
|
|
|
6,947
|
|
|
|
5,823
|
|
Total inventories
|
|
|
17,408
|
|
|
|
20,414
|
|
Plus: non-current raw materials and finished goods
|
|
|
826
|
|
|
|
6,257
|
|
|
|
$
|
18,234
|
|
|
$
|
26,671
|
|
As of December 31, 2017 and 2016, raw materials inventories consisted of raw materials used in the manufacture of the dronabinol API for SYNDROS® in our U.S.-based, state-of-the-art dronabinol manufacturing facility, the fentanyl API for SUBSYS®, and component parts and packaging materials used in the manufacture of both SUBSYS® and SYNDROS®. Work-in-process consists of actual production costs, including facility overhead and tooling costs of in-process dronabinol, SUBSYS® and SYNDROS® products. Finished goods inventories consisted of finished SUBSYS® and SYNDROS® products and deferred SYNDROS® cost of revenue of $59,000 and $0 as of December 31, 2017 and 2016, respectively. Non-current raw materials and finished goods represent those inventories not expected to be consumed or sold within 12 months of the balance sheet date and are included in other assets in our consolidated balance sheets. As of December 31, 2017, all work-in-process inventory is expected to be used within 12 months of the balance sheet date and, therefore, is classified as current inventory. We maintain an allowance for excess and obsolete inventory, as well as inventory where its cost is in excess of its NRV. Inventories at December 31, 2017 and 2016 were reported net of these reserves of $13,664,000 and $7,478,000, respectively.
During the year ended December 31, 2017, we increased these reserves by $6,186,000, inclusive of an allowance of $2,100,000 resulting from a change in estimate as described in Note 2. During the year ended December 31, 2016, we increased reserves by $7,397,000. During the year ended December 31, 2015, we decreased these reserves by $336,000.
97
Table of Contents
6.
|
Property and Equipment
|
Property and equipment are comprised of the following (in thousands):
|
|
Estimated
Useful Life
|
|
As of December 31,
|
|
|
|
(in years)
|
|
2017
|
|
|
2016
|
|
Computer equipment
|
|
3 — 7
|
|
$
|
3,523
|
|
|
$
|
3,462
|
|
Scientific equipment
|
|
3 — 10
|
|
|
14,962
|
|
|
|
12,930
|
|
Furniture
|
|
3 — 10
|
|
|
3,446
|
|
|
|
3,128
|
|
Manufacturing equipment
|
|
7 — 10
|
|
|
25,159
|
|
|
|
20,583
|
|
Leasehold improvements
|
|
*
|
|
|
35,595
|
|
|
|
23,243
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
(27,511
|
)
|
|
|
(20,174
|
)
|
Total fixed assets
|
|
|
|
$
|
55,174
|
|
|
$
|
43,172
|
|
*
|
The estimated useful life of the leasehold improvements is the lesser of the lease term or the estimated useful life.
|
Total depreciation and amortization expense for the years ended December 31, 2017, 2016 and 2015 was $7,337,000, $6,249,000 and $5,291,000, respectively.
As of December 31, 2017 and 2016, respectively, there was $9,663,000 and $6,857,000 of construction in progress included in total fixed assets that had not been placed into service and was not subject to depreciation.
7.
|
Commitments and Contingencies
|
Lease Commitments
We lease facilities under non-cancelable operating lease agreements. Future minimum commitments for these operating leases in place as of December 31, 2017, with a remaining non-cancelable lease term in excess of one year, are as follows (in thousands):
Years ending December 31,
|
|
|
|
|
2018
|
|
$
|
3,310
|
|
2019
|
|
|
3,405
|
|
2020
|
|
|
3,495
|
|
2021
|
|
|
2,526
|
|
2022
|
|
|
1,283
|
|
Thereafter
|
|
|
13,146
|
|
Total
|
|
$
|
27,165
|
|
The terms of certain lease agreements provide for rental payments on a graduated basis. We recognize rent expense on the straight-line basis over the lease period and have accrued for rent expense incurred but not paid. Landlord incentives are recorded as deferred rent and amortized on a straight-line basis over the lease term. Deferred rent was approximately $3,237,000 as of December 31, 2017 and $3,003,000 as of December 31, 2016. Rent expense under operating leases for the years ended December 31, 2017, 2016 and 2015 was approximately $3,335,000, $2,757,000, and $2,445,000, respectively.
Letters of Credit
As of December 31, 2017, we had a $400,000 unused letter of credit related to the requirements of our facility lease agreement.
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Material Agreements
Aptar
In October 2015, we entered into an amended and restated supply, development & exclusive licensing agreement with Aptargroup, Inc. (“Aptar”) which, among other things, extended our exclusive supply rights to the current sublingual device, currently utilized by SUBSYS®, as well as any new device(s) jointly developed by the two companies for a period of seven years. In addition to extending the term, this amendment added certain minimum purchase commitments and requires certain tiered royalties as a percentage of net revenue to be paid by us ranging from less than one percent to the low single digits, commencing in March 2016 through the term of this agreement, from our sales of SUBSYS® and future products that use the Aptar spray device technology.
In January 2016, we assigned our rights, title, duties and obligations of supply, development & exclusive licensing agreement with Aptar from our parent to our manufacturing subsidiary as part of a corporate restructuring.
In April 2017, we, through our manufacturing subsidiary, entered into a further amendment to our Aptar supply, development and exclusive licensing agreement. This amendment effectively eliminates any prior minimum purchase obligations that had been set forth in the amendment dated October 30, 2015, and beginning in 2019, replaces them with a new annual flat fee of up to $500,000 if the quantity of devices purchased in a calendar year is less than one million devices. As a result, the cumulative effect related to this amendment reduces our aggregated purchase commitment with Aptar from $20,790,000 to $9,000,000 through December 21, 2022. As of December 31, 2017, our remaining estimated annual contractual obligation under our agreement with Aptar was $7,500,000. All purchase commitments required under our agreements with Aptar were met during the year ended December 31, 2017.
Renaissance (formerly DPT)
In April 2015, we entered into an amendment to our manufacturing and supply agreement with Renaissance, which extends our existing manufacturing and supply agreement to produce SUBSYS® until the end of 2020. In addition to extending the term, this amendment added certain minimum purchase commitments.
In January 2016, we assigned our rights, title, duties and obligations of our manufacturing and supply agreement with Renaissance from our parent to our manufacturing subsidiary as part of a corporate restructuring.
In July 2016, we, through our manufacturing subsidiary, entered into a further amendment to our Renaissance manufacturing and supply agreement dated May 24, 2011, as amended. This amendment effectively eliminates any prior minimum purchase (and batch) obligations that had been set forth in the amendment dated April 30, 2015 and replaces it with a new annual purchase commitment of $4,000,000 per calendar year commencing January 1, 2017 through December 31, 2020. As a result, the cumulative effect related to this amendment reduces our aggregated minimum purchase commitments with Renaissance from $49,740,000 to $16,000,000 through December 31, 2020. As of December 31, 2017, our remaining estimated annual contractual obligation under our agreement with Renaissance was $12,000,000.
During the year ended December 31, 2017, we recorded a loss of $1,035,000 in cost of revenue in these consolidated statements of comprehensive income (loss) for a portion of this commitment which represented firm, non-cancellable and unconditional purchase commitments for quantities in excess of our current forecasts for future demand.
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The following table sets forth our aggregate minimum purchase commitments with Renaissance and Aptar under these agreements (in thousands):
Years ending December 31,
|
|
|
|
|
2018
|
|
$
|
5,500
|
|
2019
|
|
|
6,000
|
|
2020
|
|
|
6,000
|
|
2021
|
|
|
2,000
|
|
2022
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
19,500
|
|
Defined Contribution Retirement Plans (401(k) Plan)
We sponsor a 401(k) plan covering all full-time employees. Participants may contribute up to the legal limit. The 401(k) plan provides for employee contributions, and beginning October 2014, our matching contribution is 50 percent of the first 6 percent of earnings contributed by each participant. During the years ended December 31, 2017, 2016, and 2015, matching contribution plan expenses totaled approximately $647,000, $730,000 and $670,000, respectively.
Legal Matters
Other than the matters that we have disclosed below, we from time to time become involved in various ordinary course legal and administrative proceedings, which include intellectual property, commercial, governmental and regulatory investigations, employee related issues and private litigation, which we do not currently believe are either individually or collectively material.
We record accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. We have established reserves for certain of our legal matters. Our loss estimates are generally developed in consultation with outside counsel and outside accounting experts and are based on analyses of potential outcomes. As legal and governmental proceedings, disputes and investigations are inherently unpredictable and in part, beyond our control, unless otherwise indicated, we cannot reasonably predict the outcome of these legal proceedings, nor can we estimate the amount of loss, or range of loss, if any, that may result from these proceedings. While our liability in connection with certain claims cannot be currently estimated, the resolution in any reporting period of one or more of these matters could have a significant impact on our consolidated financial condition, results of operations and cash flows for that future period, could ultimately have a material adverse effect on our consolidated financial position and could cause the market value of our common shares to decline. While we believe we have valid defenses in these matters, litigation and governmental and regulatory investigations are inherently uncertain, and we may in the future incur material judgments or enter into material settlements of claims.
Government Proceedings
Like other companies in the pharmaceutical industry, we are subject to extensive regulation by national, state and local government agencies in the United States. As a result, interaction with government agencies occurs in the normal course of our operations. The following is a brief description of pending governmental investigations that we believe are potentially or actually material at this time. It is possible that criminal charges and substantial payments, fines and/or civil penalties or damages or exclusion from federal health care programs or other administrative actions, as well as a corporate integrity agreement, deferred prosecution agreement, or similar government mandated compliance document that institutes significant restrictions or obligations, could result for us from any government investigation or proceeding. In addition, even certain investigations that are not discussed below and which we do
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not deem to be material at this time could be determined to be material and could have a material adverse effect on our financial condition, results of operations and cash flows.
HHS Investigation
. We received a subpoena, dated December 9, 2013, from the Office of Inspector General of the HHS in connection with an investigation of potential violations involving HHS programs. This subpoena was issued in connection with an investigation by the U.S. Attorney’s Office for the Central District of California and requested documents regarding our business, including the commercialization of SUBSYS®. We continue to cooperate with this investigation and have produced substantial documents in response to the subpoena and have provided other requested information.
HIPAA Investigation
. On September 8, 2014, we received a subpoena issued pursuant to HIPAA from the U.S. Attorney’s Office for the District of Massachusetts. The subpoena requested documents regarding SUBSYS®, including our sales and marketing practices related to this product. This investigation also relates to activities in our patient services hub. We continue to cooperate with this investigation and have produced substantial documents in response to the subpoena and have provided other requested information.
DOJ Investigation Accrual
. We collectively refer to the HHS and HIPAA investigations discussed above as the “DOJ Investigation”. In connection with our cooperation, we have been engaged in discussions with the DOJ about these matters, including a resolution of potential liability exposure. Management accrued, as of September 30, 2017, an aggregate of $150,000,000, which represents our current best estimate of the minimum liability exposure which we expect to be paid out over five years in connection with the DOJ Investigation. This current best estimate, on the terms reflected in the foregoing sentence, reflects a minimum exposure at which management has determined a willingness to settle these matters. The accrual was recorded in accrued litigation award and settlements on our consolidated balance sheets and as an operating expense on our consolidated statements of comprehensive income (loss). There can be no assurance that future discussions with the government to resolve these matters will be successful, that the approvals we need will be obtained or that any potential settlement will be agreed to on terms and conditions acceptable to us or the DOJ. We are unable to predict when these matters will be resolved or what further action, if any, the government will take in connection with them. In addition, there are ongoing discussions related to contingency based payments to the government associated with future events, that if triggered, would require payments of up to $75,000,000 in the aggregate. At this time, we are unable to predict if these future events are probable and as a result, no accrual has been recorded. Based on the ongoing uncertainties and potentially wide range of outcomes and contingencies associated with any potential resolution of the matter under investigation by the DOJ, the ultimate amount of potential liability may materially exceed the $150,000,000 accrual we have established. This accrual does not currently meet the more likely than not standard for tax deductibility; therefore, we have recognized no tax benefit for it in these consolidated financial statements. Due to the uncertainty around the ultimate outcome of this matter, it is possible that some or all of this accrual may meet the more likely than not standard in the future, at which time the benefit would be recognized.
Health Care Professionals and Former Employees Related Investigations.
Investigations of Health Care Professionals
. A number of health care practitioners who formerly interacted with our company are under investigation or have been charged in criminal proceedings. In addition to the below investigations that are specifically directed at us, we have received governmental agency requests for information, including subpoenas, from at least the following governmental bodies: the USAO and/or HHS OIG of California (Los Angeles), Connecticut, Eastern District of Michigan, Florida (Jacksonville), Kansas, Middle District of Pennsylvania, New Hampshire, New Jersey, Northern District of California, Northern District of Texas, Rhode Island, Southern District of Alabama, Southern District of New York, Southern District of Ohio, Western District of New York, and the States of Maryland and Delaware, regarding specific health care professionals that we have interacted with in those states. In addition, at least the following health care practitioners formerly interacting with our company have been charged as follows:
On or about June 23, 2015, a nurse practitioner located in Connecticut, who served on our speaker bureau in connection with our speaker programs designed to educate and promote product awareness and safety for external health care providers, pled guilty to violating the federal Anti-Kickback Statute in connection with payments of approximately $83,000 from us.
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On February 23, 2017, two Alabama health care professionals, who served on our speaker bureau were convicted on 19 of 20 counts brought against them, which included charges related to distribution of a controlled substance, drug conspiracy, health care fraud conspiracy and money laundering.
On or about March 22, 2017, the U.S. Attorney’s Office for the District of New Hampshire filed an indictment against a physician assistant, who served on our speaker bureau, charging him with violating the federal Anti-Kickback Statute and conspiring to violate the federal Anti-Kickback Statute in connection with payments received for serving as an Insys promotional speaker. The physician assistant pled not guilty.
On or about October 20, 2017, a health care professional in Rhode Island, who served on our speaker bureau pled guilty to health care fraud and conspiracy to receive kickbacks in connection with payments of approximately $188,000 from us.
Investigations of Former Employees
. A number of our former employees have been charged in criminal proceedings related to our federal investigations and the following is certain information related thereto.
On or about February 18, 2016, one of our former sales employees located in Alabama pled guilty to a conspiracy to violate the federal Anti-Kickback Statute in connection with the two convicted Alabama health care professionals mentioned above.
On or about June 19, 2016, a former district sales manager in New York and a former sales representative in New Jersey were charged in a federal court in Manhattan, New York, with violating the federal Anti-Kickback Statute in connection with interacting with health care professionals who prescribed our product and served on our speaker bureau.
On June 1, 2017, the former district sales manager was charged in a superseding indictment with additional charges of honest services wire fraud and aggravated identity theft in connection with falsifying sign-in sheets for our speaker programs. Both of these former employees in New York and New Jersey have pled not guilty.
On or about December 8, 2016, the U.S. Attorney’s Office for the District of Massachusetts issued an indictment against six former employees, including Michael L. Babich, our former President, CEO and director, on charges including racketeering conspiracy, conspiracy to commit mail fraud, conspiracy to commit wire fraud, conspiracy to violate the Anti-Kickback Statute and forfeiture (the “Original Indictment”).
On or about February 8, 2017, a former district sales manager in the Northeast was charged in federal court in New Haven, Connecticut, with violating the federal Anti-Kickback Statute in connection with interacting with health care professionals who prescribed our product and served on our speaker bureau.
On April 5, 2017, the U.S. Attorney’s Office for the District of Massachusetts filed information charging a former prior authorization specialist and manager of our patient services hub with one count of wire fraud conspiracy; the former employee pled guilty to that information on June 19, 2017.
On or about July 11, 2017, a former district sales manager pled guilty to conspiring to violate the federal Anti-Kickback Statute related to her activities in the Southern District of Alabama, as well as the Middle and Southern Districts of Florida, including in connection with the two convicted Alabama health care professionals mentioned above.
On or about October 26, 2017, the U.S. Attorney’s Office for the District of Massachusetts issued a superseding indictment in connection with the Original Indictment and added charges against our former President, CEO and director, Dr. John N. Kapoor. After Dr. Kapoor’s indictment, he agreed to put his ownership in our common stock in a trust to be controlled independently, which was executed on February 27, 2018 and filed with the Securities and Exchange Commission on a Current Report of Form 8-K filed on February 28, 2018.
Except as otherwise indicated, we understand that each of these indicted individuals have entered pleas of not guilty to the charges against them.
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Given the ongoing investigations related to our company and our current and former employees, as well as other individuals associated with our company, including health care professionals, it is possible that additional individual or company criminal charges and convictions and pleas could result from our ongoing federal and state government investigations and related proceedings and the foregoing disclosure and the disclosure below is merely intended to provide general insight into the comprehensive nature of the scope and breadth of investigations that are being conducted related to our company and is not, nor is it intended to be, an exhaustive listing of every charge, conviction or pleading in connection with our company. We continue to assess these matters to ensure we have an effective compliance program.
Ongoing State Related Investigations
. We have received CIDs or subpoenas, as the case may be, from at least each of the following state’s Office of the Attorney General (or similarly named and authorized office) which have ongoing investigations directed at our company: Arizona, Colorado, Florida, Kansas, Kentucky, Maryland, Minnesota, Missouri, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Virginia and Washington. Moreover, we have received an administrative subpoena from the California Insurance Commissioner. In addition, we understand that numerous physicians practicing within several of the aforementioned states have received subpoenas from certain state Attorney General or Department of Justice offices in connection with interactions with us. Generally, these CIDs and subpoenas request documents regarding SUBSYS®, including our sales and marketing practices related to SUBSYS® in the applicable state, as well as our patient services hub. We are cooperating with each of these investigations and have produced documents in response to these CIDs, subpoenas and related requests for information from each office.
Resolved State Related Investigations
. Our company has resolved investigations conducted by certain states’ Office of the Attorney General (or similarly named and authorized office) as follows:
In connection with the investigation by the ODOJ, we entered into a settlement agreement with the ODOJ, referred to as an AVC, and made monetary payments totaling approximately $1,100,000. The AVC requires us to maintain certain controls and processes around our promotional and sales activity related to SUBSYS® in Oregon. This AVC expressly provides that we do not admit any violation of law or regulation. This settlement was reached as a result of our cooperation with the ODOJ's investigation and after producing documents in response to certain CIDs and related requests for information from the ODOJ. All monetary payments in connection with this settlement were made prior to December 31, 2015.
In connection with the investigation by the Illinois Office of the Attorney General, such office filed a complaint against us on behalf of the State of Illinois on August 25, 2016 in the Circuit Court of Cook County, Illinois, Chancery Division, asserting a claim for violation of the Illinois Consumer Fraud and Deceptive Business Practices Act in connection with the sales and marketing of SUBSYS®. On August 18, 2017, the Circuit Court of Cook County entered a Final Judgment and Consent Decree, which, among other things, provided for a monetary payment of $4,450,000 by Insys and requires us to maintain certain controls and processes around our promotional and sales activity related to SUBSYS® in Illinois. The Final Judgment and Consent Decree expressly provides that we do not admit any violation of law or regulation. All monetary payments in connection with this Final Judgment and Consent Decree were accrued in the consolidated balance sheet as of June 30, 2017 and the payments in connection with this settlement were made prior to September 30, 2017.
In connection with the investigation by the State of New Hampshire, we entered into a settlement agreement with the State of New Hampshire referred to as an assurance of discontinuance, and made monetary payments totaling approximately $2,900,000 to the State of New Hampshire and a charitable contribution of $500,000 to be used by a New Hampshire charitable foundation in preventing or remediating problems related to abuse, misuse or misprescribing of opioid drugs. The assurance of discontinuance expressly provides that we do not admit any violation of law or regulation and requires us to maintain certain controls and processes around our promotional and sales activity related to SUBSYS® in New Hampshire. This settlement was reached as a result of our cooperation with the State of New Hampshire investigation and after producing documents in response to certain requests for information by the State of New Hampshire. These amounts were accrued in the consolidated balance sheet as of December 31, 2016 and the payments in connection with this settlement were made during the three months ended March 31, 2017.
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In connection with the investigation by the State of Massachusetts, we entered into a settlement with the State of Massachusetts, which was entered by the Superior Court of the Commonwealth of Massachusetts in a Final Judgment by Consent on October 5, 2017. The Final Judgment by Consent provided for a monetary payment of $500,000 and requires us to maintain certain controls and processes around our promotional and sales activity related to Massachusetts. The Final Judgment by Consent expressly provides that we do not admit any liability or wrongdoing. The amount of the monetary payment was accrued in the consolidated balance sheet as of September 30, 2017 and the payments in connection with this settlement were made after September 30, 2017.
Ongoing Complaints filed in connection with State AG Investigations
. Our company has several ongoing legal proceedings related to complaints filed in connection with investigations conducted by certain states’ Office of the Attorney General (or similarly named and authorized office) as follows:
In connection with the investigation by the State of Arizona, on August 30, 2017, the Arizona Attorney General filed a complaint on behalf of the State of Arizona against us in the Maricopa County, Arizona Superior Court. The complaint asserts claims for violations of the Arizona Consumer Fraud Act in connection with the sales and marketing of SUBSYS® in Arizona and in connection with our patient services hub. The complaint seeks a permanent injunction preventing us from engaging in practices in violation of the Arizona Consumer Fraud Act, restitution to consumers and other persons, disgorgement of profits, civil penalties, and investigative costs. On or about November 10, 2017, we filed a motion to dismiss. On January 17, 2018, the Court dismissed, based upon preemption by the federal Sunshine Act, the State’s claim to the extent related to remedies that are based upon the payment and disclosure of speaker fees, but did not dismiss the rest of the complaint. The State filed a motion for leave to amend its complaint, which the Court granted. Our response to the amended complaint is due 10 days after the State files and serves its amended complaint.
In connection with the investigation by the State of New Jersey, on October 5, 2017, the New Jersey Attorney General, on behalf of the State of New Jersey, and the Acting Director of the New Jersey Division of Consumer Affairs filed a complaint against us in the Superior Court of New Jersey, Chancery Division, Middlesex Vicinage. The complaint asserts claims for violations of the New Jersey Consumer Fraud Act and for violations of the New Jersey False Claims Act in connection with the sales and marketing of SUBSYS® in New Jersey and in connection with our patient services hub. The complaint seeks a permanent injunction preventing us from engaging in practices in violation of the New Jersey Consumer Fraud Act, disgorgement of profits, civil penalties, treble damages for alleged violations of the New Jersey False Claims Act, and costs and attorneys’ fees. On November 16, 2017, the New Jersey Attorney General filed an Amended Complaint, which we moved to dismiss on January 8, 2018. The New Jersey Attorney General’s response to our motion is due on March 28, 2018.
On December 21, 2017, Attorney General of the State of North Carolina filed a complaint in Wake County, North Carolina Superior Court against us. The complaint asserts claims related to alleged violations of the North Carolina Consumer Protection Act. Our response to this complaint is due March 22, 2018.
On February 1, 2018, the Attorney General of the State of New York, filed a complaint against us in the Supreme Court of the State of New York, County of New York. The complaint asserts claims related to alleged deceptive acts and practices. Our response to this complaint is due on April 4, 2018.
On February 5, 2018, the Consumer Protection Division, Office of the Attorney General of Maryland, filed a petition to enforce an administrative subpoena against us. Our response to this petition is due on April 2, 2018.
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Multi-District Prescription Opioid Litigation
. We have been named along with various other opioid manufacturers, opioid distributors, prescribers and others in complaints focused on the national opioid epidemic filed by various cities, counties, states, and third-party payers in many state and federal courts in Alabama, Connecticut, Florida, Georgia, Kentucky, Louisiana, Maryland, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oregon, Tennessee, Texas and West Virginia. We are involved in more than 100 of these cases, over 70 of which have been consolidated into multi-district litigation (No. 2804) in the Northern District of Ohio. The cases in the multi-district litigation are presently stayed while the Court seeks to facilitate a resolution. On March 1, 2018, the United States filed a statement of interest in the multi-district litigation, in which it requested a period of thirty days to evaluate whether to participate in the multi-district litigation proceedings at this stage.
Congressional and Other Inquiries.
Many federal agencies and branches are focused on the abuse of opioids in the United States and agencies such as the HHS have expressed their belief that the United States is in the midst of a prescription opioid abuse epidemic. Moreover, President Trump has declared the opioid crisis to be a public health emergency and has made it a priority to address this crisis.
Members of our U.S. Congress have been conducting hearings and other inquiries into causes and solutions to the national opioid epidemic that have involved inquiries in our company’s practices. For example, on March 28, 2017, the Ranking Member of the Committee on Homeland Security and Governmental Affairs of the United States Senate distributed a letter to five manufacturers of opioid products, including us, requesting documents and information intended to aid such committee in understanding the challenges industry practices pose to efforts to curb opioid addiction and stem rising prescription drug costs for the federal government. This letter requests documents regarding our business, including the commercialization of SUBSYS®. This inquiry continues and has resulted in at least two reports that mention or address our company. We continue to cooperate with this inquiry.
With the exception of the investigations by the ODOJ, the State of New Hampshire, the State of Illinois, the State of Massachusetts, and the DOJ, which we have quantified above, we believe a loss from an unfavorable outcome of these federal and state governmental proceedings is reasonably possible and an estimate of the amount or range of loss from an unfavorable outcome is not determinable at these stages. We believe we have meritorious legal positions and will continue to represent our interests vigorously in these matters. However, responding to government investigations has and could continue to burden us with substantial legal costs in connection with defending any claims raised. Any potential resulting fines, restitution, damages and penalties, settlement payments, pleas or exclusion from federal health care programs or other administrative actions, as well as any related actions brought by stockholders or other third parties, could have a material adverse effect on our financial position, results of operations or cash flows. Additionally, these matters could also have a negative impact on our reputation and divert the attention of our management from operating our business.
Federal Securities Litigation and Derivative Complaints
Federal Securities Litigation.
On or about February 2, 2016, a complaint (captioned Richard Di Donato v. Insys Therapeutics, Inc., et al., Case 2:16-cv-00302-NVW) was filed in the United States District Court for the District of Arizona against us and certain of our current and former officers. The complaint was brought as a purported class action on behalf of purchasers of our common stock between March 3, 2015 and January 25, 2016. In general, the plaintiffs allege that the defendants violated the anti-fraud provisions of the federal securities laws by making materially false and misleading statements regarding our business, operations and compliance with laws during the class period, thereby artificially inflating the price of our common stock. On June 3, 2016, the Court appointed Clark Miller to serve as lead plaintiff. On June 24, 2016, the plaintiff filed a first amended complaint naming a former employee of Insys Therapeutics, Inc. as an additional defendant and extending the class period. On December 22, 2016, the plaintiff filed a second amended complaint, primarily to add allegations relating to an indictment of Michael L. Babich and certain of our former employees announced on December 8, 2016, and to extend the class period from August 12, 2014 through December 8, 2016. On January 12, 2017, the defendants moved to dismiss the second amended complaint. Oral arguments were heard by the Court on July 28, 2017 and the Court granted the motion in part and denied it in part. The plaintiff subsequently moved for leave to further amend the complaint, which we opposed. The parties await a ruling on the motion to amend. The plaintiff seeks unspecified monetary damages and other relief. We continue to vigorously defend this matter.
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On or about March 17, 2017, a complaint (captioned Kayd Currier v. Insys Therapeutics, Inc., et al., Case 1:17-cv-01954-PAC) was filed in United States District Court for the Southern District of New York against us and certain of our current and former officers. The complaint was brought as a purported class action on behalf of purchasers of our securities between February 23, 2016 and March 15, 2017. In general, the plaintiffs allege that the defendants violated the anti-fraud provisions of the federal securities laws by making materially false and misleading statements regarding our business and financial results during the class period, thereby artificially inflating the price of our securities. On or about March 28, 2017, a second complaint making similar allegations (captioned Hans E. Erdmann v. Insys Therapeutics, Inc., et al., Case 1:17-cv-02225-PAC) was filed in the same Court. On May 31, 2017, the Court consolidated the first and second complaint and appointed lead counsel in the consolidated action. On July 31, 2017, the lead counsel filed a consolidated complaint. On October 11, 2017, the Court held a pre-motion conference, at which the Court granted leave to plaintiffs to again amend the complaint. The amendment was filed on October 27, 2017, and we moved to dismiss. The Motion to Dismiss remains pending. The plaintiffs in both actions seek unspecified monetary damages and other relief. We continue to vigorously defend this matter.
Derivative Litigation.
On or about August 26, 2016, Gary Hirt and Precieux Art Jewelers Inc. filed a derivative complaint in the Court of Chancery of Delaware against members of our Board of Directors and Michael L. Babich. The plaintiffs allege, among other things, that the defendants breached their fiduciary duties by (a) knowingly overseeing the implementation of an illegal sales and marketing program, (b) consciously disregarding their duty of oversight of our compliance with laws and (c) trading on the basis of material non-public information. On November 8, 2016, the plaintiffs filed an amended derivative complaint, and on January 26, 2017, the plaintiffs supplemented the amended derivative complaint, primarily to add allegations relating to the indictment of Michael L. Babich and certain of our former employees announced on December 8, 2016. On November 22, 2016, the defendants moved to dismiss the action.
On or about February 2, 2017, Michael Bourque filed a derivative complaint in the Court of Chancery against members of our Board of Directors; Michael L. Babich; Franc Del Fosse, our General Counsel; and Sanga Emmanuel, our Vice President and Chief Compliance Officer. The Bourque derivative complaint contains similar claims as the other derivative complaint. All parties stipulated to consolidate the two actions, and the consolidated action is captioned In re Insys Therapeutics, Inc. Derivative Litigation, C.A. No. 12696-VCMR. Following the submission of motions for appointment as lead counsel, the Court held a hearing on March 23, 2017, and appointed counsel for Gary Hirt and Precieux Art Jewelers Inc. as lead counsel. Lead counsel is required to designate an operative complaint or file a consolidated complaint. The plaintiffs seek unspecified monetary damages and other relief derivatively on behalf of Insys Therapeutics, Inc.
On or about April 28, 2017, lead counsel filed a consolidated and amended complaint which maintained the original defendants this lead counsel had included in its original complaint and did not include any additional defendants included in the Bourque complaint. On May 31, 2017, we subsequently moved to stay or to dismiss the complaint and, on or about July 28, 2017, lead counsel filed an answering brief in opposition to our motion to stay or dismiss. On November 30, 2017, the Court granted our motion to stay but has required us to provide certain discovery to the plaintiffs. On February 8, 2018, in response to the plaintiffs’ motion to alter or clarify judgment, the Court ordered us to provide additional discovery to the plaintiffs. We continue to vigorously defend this matter.
Paragraph IV Challenges
On June 26, 2017, we received a Paragraph IV Notice Letter from Par Pharmaceutical related to SYNDROS®. The letter asserts that (i) the FDA received an ANDA from Par Pharmaceutical, and (ii) that Par Pharmaceutical’s formulation does not infringe SYNDROS® patents and/or that our patents for SYNDROS® are invalid. On August 3, 2017, we filed suit in United States District Court for the District of Delaware, in which we claim the ANDA was not sufficiently complete and allege patent infringement. On September 1, 2017, Par Pharmaceutical filed an answer and counterclaims, to which we have replied. On March 6, 2018, we provided to Par Pharmaceutical a covenant not to sue. We intend to represent our interests vigorously in this matter.
On November 7, 2017, we submitted to the FDA a citizen petition under sections 505(j) and 505(q) of the Federal Food, Drug, and Cosmetic Act (“FDC Act”) and the related regulations, 21 C.F.R. §§ 10.30-31, to request that the Commissioner of Food and Drugs (i) decline to receive or approve any ANDA application for generic
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dronabinol oral solution that relies on SYNDROS
®
as the Reference Listed Drug if the ANDA relies on a waiver in lieu of establishing in vivo bioequivalence to SYNDROS
®
and (ii) require that ANDA applicants for generic versions of SYNDROS
®
include federal and fasted state bioequivalence studies. We intend to represent our interests vigorously in this matter.
On or about August 2, 2017, we received a Paragraph IV Notice Letter from counsel for TEVA USA related to SUBSYS® 0.4mg. The letter asserts that (i) the FDA received an ANDA from TEVA USA and (ii) that TEVA USA’s formulation does not infringe SUBSYS® patents and/or that our patents for SUBSYS® are invalid. On September 13, 2017, we filed suit in United States District Court for the District of Delaware, in which we allege patent infringement. On January 15, 2018, TEVA USA filed an answer and counterclaims, to which we have replied. We intend to represent our interests vigorously in this matter.
On or about August 31, 2017, we received a Paragraph IV Notice Letter from counsel for Alkem Pharmaceuticals (“Alkem”) related to SYNDROS®. The letter asserts that (i) the FDA received an ANDA from Alkem Pharmaceuticals and (ii) Alkem Pharmaceuticals’ formulation does not infringe SYNDROS® patents and/or that our patents for SYNDROS® are invalid. On October 10, 2017, we filed suit in the United States District Court for the District of Delaware, in which we allege patent infringement. On November 22, 2017, Alkem Pharmaceuticals filed a motion to dismiss Insys’s complaint, which the Court subsequently denied. Alkem filed its answer and counterclaims, and Insys filed its answer to Alkem’s counterclaims on February 27, 2018. We intend to represent our interests vigorously in this matter.
On or about December 6, 2017, we received a Paragraph IV Notice Letter from counsel for TEVA USA related to SYNDROS®. The letter asserts that (i) the FDA received an ANDA from TEVA USA and (ii) that TEVA USA’s formulation does not infringe SYNDROS® patents and/or that our patents for SYNDROS® are invalid. We intend to represent our interests vigorously in this matter.
On or about January 31, 2018, we received a Paragraph IV Notice Letter from counsel for TEVA USA related to SUBSYS® 0.1mg, 0.2mg, 0.6mg, 1.2mg and 1.6mg. The letter asserts that (i) the FDA received an ANDA from TEVA USA and (ii) that TEVA USA’s formulation does not infringe SUBSYS® patents and/or that our patents for SUBSYS® are invalid. The deadline to file a patent infringement lawsuit is March 17, 2018. We intend to represent our interests vigorously in this matter.
General Litigation and Disputes
Kottayil vs. Insys Pharma, Inc
. On September 29, 2009, Insys Pharma, Inc., our wholly owned subsidiary, and certain of our officers and the five directors who comprised the Insys Pharma board of directors as of June 2009, as well as their spouses, were named as defendants in a lawsuit in the Superior Court of the State of Arizona, Maricopa County, or the Arizona Superior Court, brought by Santosh Kottayil, Ph.D., certain of his family members and a trust of which Dr. Kottayil is the trustee. Dr. Kottayil formerly served as President, Chief Scientific Officer and a director of Insys Pharma, among other positions. The complaint brought a cause of action for statutory and common law appraisal of Dr. Kottayil’s Insys Pharma common stock. The cause of action for appraisal relates to a reverse stock split that Insys Pharma effected in June 2009, which resulted in Dr. Kottayil’s ownership position becoming a fractional share of Insys Pharma common stock. Following the reverse stock split, Insys Pharma cancelled all resulting fractional shares, including the fractional share held by Dr. Kottayil, and offered a cash payment in lieu of the fractional shares. The complaint also brought causes of action for breach of fiduciary duty, fraud and negligent misrepresentation in the defendants’ dealings with Dr. Kottayil on the subject of his compensation and stock ownership in Insys Pharma. In January 2010, the plaintiffs added claims seeking to rescind Dr. Kottayil’s assignment to Insys Pharma of his interest in all of the fentanyl and dronabinol patent applications previously assigned to Insys Pharma and to recover the benefits of those interests. Dr. Kottayil was seeking, among other relief, the fair value of his Insys Pharma common stock as of June 2, 2009, compensatory and punitive damages, and rescission of all assignments to Insys Pharma of his interest in the patent applications, as well as attorneys’ fees, costs and interest.
In February 2010, Insys Pharma and the other defendants answered and filed counter-claims to Dr. Kottayil’s amended complaint. The counter-claims include actions for breach of fiduciary duty, fraud and negligent
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misrepresentations and omissions with respect to the time during which Dr. Kottayil was employed at Insys Pharma. The counter-claims, among other relief, sought compensatory and punitive damages.
On January 29, 2014, the plaintiffs filed a second amended complaint in the Arizona Superior Court in which Insys Therapeutics, Inc. was also named as defendant in this lawsuit. This amended complaint filed by plaintiffs re-alleged substantially the same claims set forth in the prior complaint, except that plaintiffs also alleged that they were entitled to rescissory damages, added our majority stockholder, a private trust, as a defendant to the breach of fiduciary duty claim and revised their fraud claim against the Insys Pharma director defendants.
The trial commenced on December 1, 2014, with the evidence phase of the trial completed on January 29, 2015.
On June 8, 2015, the Court issued findings of fact and conclusions of law in its final trial ruling. Specifically, the Court found (i) in favor of Insys Pharma, our majority stockholder, a private trust and four of the Insys Pharma directors who were on the board in July 2008 on plaintiffs’ claim for breach of fiduciary duty arising out of transactions the board approved in July 2008, (ii) found in favor of plaintiffs and against Insys Pharma, Inc., our majority stockholder, a private trust and three of the Insys Pharma directors who were on the board in June 2009 on plaintiffs’ claims under Delaware law and for breach of fiduciary duties arising out of the reverse stock split the board approved in June 2009 in the amount of $7,317,450, along with pre-judgment and post-judgment interest and court costs, (iii) found in favor of two of the Insys Pharma directors who were on the Insys Pharma board as of June 2009 and against plaintiffs on plaintiffs’ breach of fiduciary duty claims, (iv) found in favor of Insys Pharma and against plaintiff (Kottayil) on his claim for rescission of the patent application assignments that he entered in favor of Insys Pharma before and after his employment terminated, (v) found in favor of Insys Therapeutics, Inc. and against plaintiff on plaintiffs' claims of successor liability and fraudulent transfer, and (vi) found in favor of Kottayil and against Insys Pharma on Insys Pharma’s counterclaims of breach of fiduciary duty, fraud, and negligent misrepresentation.
On October 2, 2015, the Court entered a final judgment, awarding plaintiffs the amount of $7,317,450, along with pre-judgment interest from June 2, 2009, and post-judgment interest, from October 2, 2015, at the rate of 4.25% per annum, compounded quarterly and taxable costs in the amount of $93,163. On the same date, the Court denied Kottayil’s request to submit an application for attorneys’ fees for his defense of the Insys Pharma counterclaims, finding that the request was premature.
As a result of this final ruling, we accrued $9,567,000 during the year ended December 31, 2015, including $2,249,000 of estimated pre-judgement interest.
On October 20, 2015, plaintiffs appealed the foregoing judgment and on November 4, 2015, Insys Pharma and the other defendants against whom judgment was entered filed a notice of cross-appeal.
On or around November 1, 2015, we received a notice from the plaintiff’s attorneys demanding indemnification for legal and other defense costs alleged to have been incurred in connection with Dr. Kottayil’s defense of the Insys Pharma counterclaims in the amount of $3,630,000. We responded to these demands by, among other things, requesting supporting documents and information from the plaintiffs’ counsel, which we have not received yet. Accordingly, we are still in the process of assessing the merit of such claims as well as evaluating the basis for the costs claimed. Because of the uncertainty surrounding the ultimate outcome, we have not accrued for this claim at this time; however, we believe that that it is reasonably possible that there may be a material loss associated with this claim and we currently estimate the range of the reasonably possible loss to be between $0 and the $3,630,000 claimed.
On or about August 1, 2016, plaintiffs filed opening and reply and cross response briefs and we filed our answering and cross-appeal brief and our reply in support of our cross-appeal.
On Wednesday, April 5, 2017, the Arizona Court of Appeals conducted oral argument on the plaintiffs’ appeal and on our cross-appeal. On August 29, 2017, the Arizona Court of Appeals affirmed the trial court’s ruling. The
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parties subsequently agreed to settle the case, which resulted in an additional liability of $850,000, and the payments in connection with this settlement were made prior to September 30, 2017.
Insurance Litigation.
On June 23, 2017, Aetna, Inc. and a subsidiary filed an action against us and a number of former employees in the Pennsylvania Court of Common Pleas, Philadelphia County (captioned Aetna Inc. v. Insys Therapeutics, Inc., Case No. 170602779). Plaintiffs brought claims against us for: (1) insurance fraud; (2) civil conspiracy; (3) common law fraud; (4) unjust enrichment; (5) negligent misrepresentation; and (6) negligence. Through all of the claims, Aetna seeks recovery of millions of dollars paid for SUBSYS® prescriptions that, allegedly, were not properly covered. It also seeks punitive damages, investigative expenses and costs of suit, reasonable attorneys’ fees and expenses, and prejudgment and post-judgment interest. Plaintiffs served their complaint on September 25, 2017. On October 25, 2017, we removed this matter to federal court. Aetna subsequently moved to remand the case to state court. On January 6, 2018, the district court denied Aetna’s motion to remand. We moved to dismiss Aetna’s claims and the motion has been fully briefed since November 30, 2017. We intend to vigorously defend this matter.
On July 12, 2017, numerous subsidiaries of Anthem, Inc. filed a complaint in the U.S. District Court for the District Court for the District Court for the District of Arizona against us (captioned Blue Cross of California, Inc. d/b/a Anthem Blue Cross of California v. Insys Therapeutics, Inc., Case No. 2:17-cv-02286-DLR). Plaintiffs bring claims against us for: (1) violation of various state laws prohibiting deceptive, unfair, and unlawful business practices (i.e., consumer fraud); (2) fraud; (3) negligent misrepresentation; (4) unjust enrichment; and (5) civil conspiracy to commit fraud and unfair business practices. Through all of the claims, Anthem seeks recovery of more than $19,000,000 paid for SUBSYS® prescriptions that, allegedly, were not properly covered. It also seeks punitive damages and an injunction to prevent Insys from continuing to engage in the conduct underlying its claims. Plaintiffs served their complaint on July 14, 2017. On August 4, 2017, we filed an answer to such complaint. On February 2, 2018, Plaintiffs filed a motion for leave to file a second amended complaint and on February 16, 2018 we filed (i) an opposition to Plaintiff’s motion to file a second amended complaint and (ii) a motion to stay the case. We intend to vigorously defend this matter.
On August 30, 2017, Humana Inc. filed an action against us and a number of former employees in Pike County, Kentucky Circuit Court (captioned Aetna Inc. v. Insys Therapeutics, Inc., Case No. 17-CI-971). Plaintiff brought claims against us for (1) insurance fraud, (2) conspiracy to commit insurance fraud, (3) common law fraud, and (4) unjust enrichment. Through all of the claims, Humana sought recovery of millions of dollars paid for SUBSYS® prescriptions that, allegedly, were not properly covered. It also sought punitive damages, disgorgement, prejudgment and post-judgment interest, costs and expenses of suit, and reasonable attorneys’ fees and expert fees and expenses. This matter was resolved and the case was dismissed with prejudice on December 4, 2017.
On October 31, 2017, we received correspondence from Horizon Blue Cross Blue Shield of New Jersey requesting reimbursement for allegedly fraudulently induced off-label purchases of SUBSYS® in connection with alleged claim value of approximately $4,000,000. We intend to vigorously defend this matter.
Markland
. On July 1, 2016, Robert N. Markland, as the Personal Representative of the Estate of Carolyn S. Markland filed a complaint in the Circuit Court, Fourth Judicial Circuit, in and for Duval County, Florida, against Insys Therapeutics, Inc. The complaint states that it is a wrongful death products liability action brought pursuant to Section 768.16, et seq. under Florida law in connection with a death occurring in July 2014 and includes a claim of negligent marketing. The lawsuit seeks unspecified damages for past expenses and costs, pain and suffering and loss of consortium and earnings. On August 4, 2016, we removed this case to U.S. District Court in the Middle District of Florida. On September 2, 2016, we filed a motion to dismiss. The Court granted our motion on September 15, 2017. The plaintiff subsequently filed a notice of appeal, and the opening brief on appeal is due on March 9, 2018, with our answering brief due on April 9, 2018. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
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Buchalter
.
On September 9, 2016, Jeffrey Buchalter filed a complaint in the Circuit Court for Anne Arundel County, Maryland, Case No. C-02-cv-16-002718, against Dr. William Tham, Physical Medicine & Pain Management Associates, Maryland Neurological Institute, various physician assistants, and Insys Therapeutics, Inc. Plaintiff’s complaint states it is a personal injury action against Insys related to negligent misrepresentation, failure to warn and fraud under state laws. The lawsuit seeks unspecified compensatory and punitive damages. We have filed a motion to dismiss and on or about May 6, 2017, the Court denied the motion to dismiss. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
Colby
. On or about January 25, 2017, Mackenzie Colby filed a complaint in the State of New Hampshire Strafford County Superior Court, Case No. 219-2017-CV-00040, against Christopher Clough, PA, Dr. O’Connell’s Pain Care Centers, Inc., and Insys Therapeutics, Inc. Plaintiff’s complaint states it is a personal injury action against Mr. Clough related to medical negligence, against O’Connell’s Pain Care Centers, Inc. for respondeat superior claims, and against Insys Therapeutics, Inc. for negligence, all under state laws. The lawsuit seeks unspecified compensatory and punitive damages. We filed a motion to dismiss/strike on April 5, 2017 and plaintiff filed a motion to amend the complaint on April 25, 2017. On June 16, 2017, the Court dismissed the complaint with leave to refile. The complaint was refiled on June 21, 2017, and we again moved to dismiss. On October 21, 2017, the Court denied our motion to dismiss, and we filed an answer. The parties recently agreed to resolve this case, and are in the process of finalizing such agreement.
Perusse
. On or about February 21, 2017, John Perusse filed a complaint in the State of New Hampshire Strafford County Superior Court, Case No. 219-2017-CV-00067, against Christopher Clough, PA, Dr. John J. Schermerhorn, Dr. O’Connell’s Pain Care Centers, Inc., and Insys Therapeutics, Inc. Plaintiff’s complaint states it is a personal injury action against Mr. Clough related to medical negligence, against O’Connell’s Pain Care Centers, Inc. for respondeat superior claims, and against Insys Therapeutics, Inc. and Dr. Schermerhorn for negligence, all under state laws. The lawsuit seeks unspecified compensatory and punitive damages. We filed a motion to dismiss/strike on April 20, 2017 and plaintiff filed a motion to amend the complaint on April 25, 2017. On June 16, 2017, the Court dismissed the complaint with leave to refile, and we again moved to dismiss. The complaint was refiled on June 21, 2017 and we again moved to dismiss. On October 21, 2017, the Court denied our motion to dismiss, and we filed an answer. The parties are in the discovery phase of the case. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
Cassell
. On or about March 8, 2017, Jerome Cassell filed a complaint in the State of New Hampshire Strafford County Superior Court, Case No. 219-2017-CV-00085, against Christopher Clough, PA, Dr. John J. Schermerhorn, Dr. O’Connell’s Pain Care Centers, Inc., and Insys Therapeutics, Inc. Plaintiff’s complaint states it is a personal injury action against Mr. Clough related to medical negligence, against O’Connell’s Pain Care Centers, Inc. for respondeat superior claims, and against Insys Therapeutics, Inc. and Dr. Schermerhorn for negligence, all under state laws. The lawsuit seeks unspecified compensatory and punitive damages. We filed a motion to dismiss/strike on April 18, 2017 and plaintiff filed a motion to amend the complaint on April 25, 2017. On June 16, 2017, the Court dismissed the complaint with leave to refile. The complaint was refiled on June 21, 2017, and we again moved to dismiss. On October 21, 2017, the Court denied our motion to dismiss, and we filed an answer. The parties are in the discovery phase of the case. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
Fuller
. On or about March 23, 2017, Deborah Fuller & David Fuller, as Administrators Ad Prosequendum for the Estate of Sarah A. Fuller, deceased, and Deborah Fuller and David Fuller, individually, filed a complaint in the Superior Court of New Jersey Law Division, Middlesex County, Case No. L1859-17, against Vivienne Matalon, M.D., TLC Healthcare 2, LLC, Linden Care and Insys Therapeutics, Inc. The plaintiff’s complaint alleges negligence violations under the Wrongful Death Act pursuant to N.J.S.A 2A:31,
et seq.
and also brings claims for fraud and negligent misrepresentation. We filed a motion to dismiss the complaint on May 19, 2017 and the Court held oral argument on the motion on June 29, 2017. On July 27, 2017, the Court issued a ruling on the multi-party motion to dismiss. The Court dismissed some claims but denied the motion to dismiss on certain of plaintiffs’ claims. We answered the complaint, and, after plaintiffs dismissed the treating physician, on October 4, 2017, we removed the case to U.S. District Court for the District of New Jersey. Plaintiffs subsequently filed a motion to remand the case to state court on October 11, 2017. On January 19, 2018, the Magistrate Judge issued a Report and
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Recommendation, recommending that the District Court deny plaintiffs’ motion to remand. On February 5, 2018, the District Court adopted the Report and Recommendation. On February 6, 2018, plaintiffs filed a motion for leave to amend, seeking to add as defendants certain former Insys officers and a former employee. Insys filed its opposition to the motion for leave to amend on February 21, 2018. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
Cantone
. On or about June 15, 2017, we received service of a complaint filed by Angela Mistrulli Cantone and Philip L. Cantone in the State Court of South Carolina, County of Greenville, C.A. No.: 2017-CP-23 against Insys Therapeutics, Inc., Linden Care, LLC, Aathirayen Thiyagarajah, M.D. and Spine and Pain, LLC. The plaintiffs’ complaint alleges medical negligence, negligence, negligent misrepresentation, unjust enrichment, common law fraud, unfair and deceptive trade practices, aiding and abetting and loss of consortium. We filed a motion to dismiss, which the Court denied. We filed our answer on November 14, 2017. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
Ballou
.
On or about September 1, 2017, Carey Ballou filed a complaint in the circuit Court of Johnson County, Kansas, Case No. 17CV05004, against Insys Therapeutics, Inc., Insys Pharma, Inc., Torgny Andersson, Mid-America Physiatrist, P.A., Steven Simon M.D., Donna Ruck, Pharma Consultants KC, LLC, AmerisourceBergen Corporation, and Morris & Dickson Co., LLC. The plaintiffs bring claims against Insys for negligence, common law fraud, negligent misrepresentation, unfair and deceptive trade practices, unjust enrichment, conspiracy, and aiding and abetting. On December 26, 2017, Plaintiff filed a second amended complaint, which added as defendants certain former officers and employees. Insys moved to dismiss the second amended complaint on February 26, 2018. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
Whitham
.
On or about September 1, 2017, James “Mike” Whitham and Ashley Whitham filed a complaint in the Circuit Court of Johnson County, Kansas, Case No. 17CV05005, against Insys Therapeutics, Inc., Insys Pharma, Inc., Torgny Andersson, Mid-America Physiatrist, P.A., Steven Simon M.D., Donna Ruck, Pharma Consultants KC, LLC, AmerisourceBergen Corporation, and Morris & Dickson Co., LLC. The plaintiff brings claims against Insys for negligence, common law fraud, negligent misrepresentation, unfair and deceptive trade practices, unjust enrichment, loss of consortium, conspiracy, and aiding and abetting. On December 26, 2017, Plaintiff filed a second amended complaint, which added as defendants certain former officers and employees. Insys moved to dismiss the second amended complaint on February 26, 2018. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
Hartsfield
.
On or about October 4, 2017, Cheryl Hartsfield filed a complaint in the Circuit Court of Pulaski County, Arkansas, Case No. 60CV-17-5581, against Insys Therapeutics, Inc., Linden Care, LLC, Mahmood Ahmad, and United Pain Care, Ltd. The plaintiff brings claims against Insys for common law fraud and deceit, breach of fiduciary duty, violations of the Arkansas deceptive trade practices act, civil conspiracy, acting in concert, and negligence. Insys filed its answer to the complaint on November 27, 2017. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
Matalon
.
On September 15, 2017, Vivienne Matalon, M.D. filed a complaint in the Superior Court of New Jersey, Law Division, Camden County, Case No. L-3224-17, against Insys Therapeutics, Inc., Linden Care, LLC, and Melina Ebu-Isaac. The action was subsequently transferred to Middlesex County Superior Court, Law Division. The plaintiff brings claims against Insys for fraudulent misrepresentation and negligent misrepresentation. We filed a motion to dismiss on December 20, 2017. On March 2, 2018, the Court dismissed the case without prejudice for lack of prosecution. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
Breitenbach.
On December 18, 2017, Michelle Breitenbach filed a complaint in the Superior Court of New Jersey, Chancery Division, Monmouth County, against Insys Therapeutics, Inc. The plaintiff brings claims against
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Insys for breach of contract, breach of the implied covenant of good faith and fair dealing, and promissory estoppel. On January 5, 2018, we removed the case to U.S. District Court for the District of New Jersey. The parties have agreed to resolve this case, and are in the process of finalizing such agreement.
Jordan.
On January 5, 2018, Bobby Ray Jordan, individually and as Special Administrator of the Estate of Doris L. Jordan, deceased, filed a complaint in the District Court of Leavensworth County, Kansas against Insys Therapeutics, Inc., Insys Pharma, Inc., Torgny Andersson, Mid-America Physiatrist, P.A., Steven Simon, M.D., Donna Ruck, Pharma Consultants KC, LLC, John N. Kapoor, Michael L. Babich, and Alec Burlakoff. The plaintiff brings claims against Insys for negligence, conspiracy to commit fraud and breach of fiduciary duty, negligent misrepresentation, unfair and deceptive trade practices, unjust enrichment, survival action, and wrongful death action. On January 31, 2018, Insys moved to consolidate this case with the Ballou and Witham actions, which were previously consolidated for pre-trial purposes. Plaintiff opposed Insys’s motion, and the motion remains pending. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
Menucci.
On February 23, 2018, Lisa Mencucci and Angelo Mencucci filed a complaint in the Superior Court of Providence, Rhode Island against Insys Therapeutics, Inc. and Jerrold Rosenberg, M.D. Plaintiffs bring claims against Insys for common law fraud, common law fraud and misrepresentation – punitive damages, conscious misrepresentation involving risk of physical harm, conscious misrepresentation involving risk of physical harm – punitive damages, Rhode Island General Law 9-1-2, Rhode Island General Law 9-1-2 – punitive damages, negligent misrepresentation, negligent misrepresentation involving risk of physical harm, negligence, and violation of the Rhode Island Deceptive trade practices act. We have not yet responded to the complaint. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.
Except as it pertains to (i) the final settlements addressed above, (ii) the accrual of $150,000,000 related to the DOJ Investigation, and (iii) the potential for damages in the federal securities litigation and derivative action that we believe should be sufficiently covered by our director and officers insurance policies (once we have met any applicable retainage requirement under the applicable policy), we believe that the probability of unfavorable outcome or loss related to all of the above litigation matters and an estimate of the amount or range of loss, if any, from an unfavorable outcome are not determinable at this time. We believe we have meritorious legal positions and will continue to represent our interests vigorously in these matters but the range of possible outcomes on these matters is very broad and we are not able to provide a reasonable estimate of our potential liability, if any, nor are we able to predict the outcome of each litigation matter.
Responding to each of these litigation matters, defending any claims raised, and any resulting fines, restitution, damages and penalties, or settlement payments, as well as any related actions brought by shareholders or other third parties, could have a material impact on our reputation, business and financial condition and divert the attention of our management from operating our business.
Preferred Stock
In August 2014, we entered into a Rights Agreement with respect to a newly-designated Series A Junior Participating Preferred Stock. In connection with the Rights Agreement, our Board of Directors declared a dividend distribution of the right to purchase one one-hundredth of one share of our Series A Junior Participating Preferred Stock, par value $0.001 per share (a “Right”), for each outstanding share of common stock, par value $0.01 per share, held by the stockholders of the Company at the close of business on September 1, 2014 (the “Record Date”).
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Each Right entitles the registered holder to purchase from us one one-hundredth of a share of preferred stock (each, a “Preferred Share” and collectively, the “Preferred Shares”) at a price of $160 per one one-hundredth of a Preferred Share (the “Purchase Price”), subject to adjustment. Each one one-hundredth of a Preferred Share has the designations, powers, privileges, preferences, rights, qualifications, limitations and restrictions that are designed to make it the economic equivalent of one share of common stock.
The Rights will not become exercisable until the earlier to occur of the close of business on (i) the tenth calendar day following acquisition by any person, entity or group of affiliated or associated persons of beneficial ownership of 15% or more of our outstanding shares of common stock (an “Acquiring Person”) or (ii) the tenth business day (or such later date as may be determined by action of the Board prior to such time as any person or entity becomes an Acquiring Person) following the date of commencement of, or the first announcement of, an intention to commence, a tender offer or exchange offer, the consummation of which would result in any person or entity or group of persons or entities acting in concert becoming an Acquiring Person (the earlier of such dates being called the “Distribution Date”). Until the Distribution Date, the Rights will be transferable with and only with our Common Shares. The Rights will expire ten years after the execution of the Rights Agreement unless the Rights are earlier redeemed or exchanged by us.
Each Preferred Share is entitled to a minimum preferential quarterly dividend payment equal to the greater of $1.00 per share or 100 times the aggregate per share price of all cash and non-cash dividends declared per share of common stock. In the event of liquidation, the holders of the Preferred Shares would be entitled to a minimum preferential liquidation payment of $100 per share plus an amount equal to accrued and unpaid dividends and distributions thereon, provided that the Preferred Shares would be entitled to receive an aggregate amount per share equal to 100 times the aggregate amount to be distributed per share to holders of common stock. Each Preferred Share has 100 votes, voting together with the common stock.
Common Stock
On February 26, 2014, our Board of Directors approved a three-for-two stock split of our common stock effected through a stock dividend. The record date for the stock split was the close of business on March 17, 2014, with share distribution occurring on March 28, 2014. As a result of the dividend, shareholders received one additional share of Insys Therapeutics, Inc. common stock, par value $0.0002145, for each two shares they held as of the record date. All share and per share amounts were retroactively restated for the effects of this stock split.
On May 6, 2014, our shareholders approved an amendment to our certificate of incorporation to increase the authorized shares of common stock from 50,000,000 to 100,000,000 and an amendment to increase the par value for our common stock to $0.01 per share. Our consolidated financial statements and notes herein were retroactively restated to reflect the impact of this amendment.
On May 5, 2015, our Board of Directors approved a two-for-one stock split of our common stock effected through a stock dividend. The record date for the stock split was the close of business on May 26, 2015, with share distribution occurring on June 8, 2015. As a result of the dividend, shareholders received one additional share of Insys Therapeutics, Inc. common stock, par value $0.01, for each one share they held as of the record date. All share and per share amounts were retroactively restated for the effects of this stock split.
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Stock Repurchase Program
On November 5, 2015, we announced a stock repurchase program. The stock repurchase program authorizes up to $50 million in repurchases of common stock, and any shares acquired will be retired as repurchased. This program was effective immediately and has no planned expiration date. The following table summarizes our share repurchase activity for our share repurchase program:
|
|
Number of
Shares
Purchased
|
|
|
Cost of Share
Purchases
|
|
Shares purchased at December 31, 2015
|
|
|
560,200
|
|
|
$
|
16,459,000
|
|
Shares purchased during 2016
|
|
|
843,075
|
|
|
$
|
16,099,000
|
|
Shares purchased at December 31, 2016
|
|
|
1,403,275
|
|
|
$
|
32,558,000
|
|
Shares purchased during 2017
|
|
|
—
|
|
|
|
—
|
|
Shares purchased at December 31, 2017
|
|
|
1,403,275
|
|
|
$
|
32,558,000
|
|
As of December 31, 2017, we had $17,442,000 remaining under this program.
9.
|
Stock-based Compensation
|
We currently have the following stock-based incentive plans:
2013 Employee Stock Purchase Plan
The 2013 Employee Stock Purchase Plan (the “ESPP”) was adopted by our Board of Directors and approved by our stockholders, and became effective in connection with our initial public offering in May 2013. Under the terms of the ESPP, eligible employees are granted a purchase right to purchase shares of our common stock that cannot exceed 15% of their earnings, nor exceed the Board of Director defined limits on the number of our common shares that can be offered under the ESPP. The purchase right entitles the eligible employee to purchase shares at the lesser of an amount equal to 85% of the fair market value of the shares on the offering date or 85% of the fair market value of the shares on the purchase date. The ESPP authorized the issuance of 530,400 shares of common stock pursuant to purchase rights granted to our employees or to employees of any of our designated affiliates. The number of shares of common stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2014 through January 1, 2023, by the least of (a) 1% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, (b) 600,000 shares (200,000 on a pre-split basis), or (c) a number determined by our Board of Directors that is less than (a) and (b). The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). As of December 31, 2017, 1,667,773 shares of common stock have been purchased under the ESPP.
2013 Equity Incentive Plan
The 2013 Equity Incentive Plan (the “2013 Plan”) is the successor to and continuation of the 2006 Equity Incentive Plan and the Insys Pharma, Inc., Amended and Restated Equity Incentive Plan. The 2013 Plan was adopted by our Board of Directors and approved by our stockholders, and became effective in connection with our initial public offering in May 2013. The 2013 Plan provides for the grant of stock awards, including stock options, restricted stock, stock appreciation rights, performance units, performance shares and other stock awards, to our employees, directors and consultants. The number of shares of common stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2014 through January 1, 2023, by the lesser of (a) 4% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; or (b) a number of shares of common stock that may be determined each year by our Board of Directors that is less than the preceding clause (a). As of December 31, 2017, options to purchase 6,332,415 shares of common stock were outstanding and 6,232,807 shares remained available for future grant.
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Amounts recognized in the consolidated statements of comprehensive income (loss) with respect to our stock-based compensation plans were as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
3,217
|
|
|
$
|
3,931
|
|
|
$
|
2,133
|
|
General and administrative
|
|
|
12,798
|
|
|
|
17,658
|
|
|
|
19,749
|
|
Total cost of stock-based compensation
|
|
$
|
16,015
|
|
|
$
|
21,589
|
|
|
$
|
21,882
|
|
Included in stock-based compensation for the years ended December 31, 2017, 2016 and 2015 was approximately $1,450,000, $3,878,000 and $4,867,000, respectively, of expense associated with the accelerated vesting of option awards related to terminated employees.
The following table summarizes stock option activity during the year ended December 31, 2017:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (in
years)
|
|
|
Aggregate
Intrinsic
Value
(in millions)
|
|
Outstanding as of December 31, 2014
|
|
|
7,707,162
|
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,733,671
|
|
|
$
|
14.57
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(695,061
|
)
|
|
$
|
7.71
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,607,683
|
)
|
|
$
|
2.48
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
7,138,089
|
|
|
$
|
7.57
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,337,043
|
|
|
$
|
14.86
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,536,538
|
)
|
|
$
|
18.67
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(637,721
|
)
|
|
$
|
5.96
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
7,300,873
|
|
|
$
|
12.36
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,577,650
|
|
|
$
|
10.73
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(2,059,826
|
)
|
|
$
|
17.76
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(9,834
|
)
|
|
$
|
20.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,476,448
|
)
|
|
$
|
3.08
|
|
|
|
|
|
|
$
|
10.6
|
|
Outstanding as of December 31, 2017
|
|
|
6,332,415
|
|
|
$
|
12.10
|
|
|
|
7.4
|
|
|
$
|
12.0
|
|
Vested and exercisable as of December 31, 2017
|
|
|
3,499,957
|
|
|
$
|
11.43
|
|
|
|
6.1
|
|
|
$
|
10.2
|
|
The aggregate intrinsic value for stock options outstanding and exercisable is defined as the positive difference between the fair market value of our common stock and the exercise price of the stock options. As of December 31, 2017, we expect to recognize $21,748,000 of stock-based compensation for our outstanding options over a weighted-average period of 2.61 years.
The total fair value of shares vested for the years ended December 31, 2017, 2016, and 2015 was $14,511,000, $19,970,000 and $25,392,000, respectively.
Cash received from option exercises under all share-based payment arrangements for the years ended December 31, 2017, 2016 and 2015 was $4,545,000, $3,803,000 and $9,524,000, respectively. For the years ended December 31, 2016 and 2015, we recorded net reductions of $122,000 and $13,593,000 respectively, of our federal and state income tax liability, with an offsetting credit to additional paid-in capital resulting from the excess tax benefits related to exercised stock options. No such amounts were recognized during the year ended December 31, 2017, due to the implementation of ASU 2016-09.
115
Table of Contents
Stock Option Valuation Information
The weighted-average assumptions used to estimate the fair value of employee stock options granted during the periods presented are as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Expected volatility
|
|
|
57.8
|
%
|
|
|
63.3
|
%
|
|
|
69.9
|
%
|
Risk-free interest rate
|
|
|
2.2
|
%
|
|
|
1.6
|
%
|
|
|
1.9
|
%
|
Expected term (in years)
|
|
|
6.9
|
|
|
|
7.0
|
|
|
|
7.0
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
For the years ended December 31, 2017, 2016, and 2015, the weighted-average estimated fair value per option granted was $6.32, $9.20 and $19.20, respectively.
Restricted Stock Units
From time to time we grant restricted stock units to certain employees and directors. Restricted stock units are valued at the closing market price of our common stock on the day of grant and the total value of the units is recognized as expense ratably over the vesting period of the grants. The following table summarizes restricted stock unit activity during the year ended December 31, 2017:
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant-Date
Fair Value
Per Unit
|
|
Outstanding as of December 31, 2016
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
481,250
|
|
|
$
|
10.74
|
|
Cancelled
|
|
|
(85,350
|
)
|
|
$
|
12.54
|
|
Exercised
|
|
|
(14,000
|
)
|
|
$
|
12.65
|
|
Outstanding as of December 31, 2017
|
|
|
381,900
|
|
|
$
|
10.27
|
|
As of December 31, 2017, we expect to recognize $2,897,000 of stock-based compensation for outstanding restricted stock units over a weighted-average period of 2.06 years.
Income tax expense (benefit) consists of the following (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(12,474
|
)
|
|
$
|
5,916
|
|
|
$
|
31,383
|
|
State and local
|
|
|
51
|
|
|
|
554
|
|
|
|
6,473
|
|
Total current income tax
|
|
|
(12,423
|
)
|
|
|
6,470
|
|
|
|
37,856
|
|
Deferred income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
20,178
|
|
|
|
(7,762
|
)
|
|
|
(3,759
|
)
|
State and local
|
|
|
3,065
|
|
|
|
2,126
|
|
|
|
(1,156
|
)
|
Total deferred income tax
|
|
|
23,243
|
|
|
|
(5,636
|
)
|
|
|
(4,915
|
)
|
Income tax expense
|
|
$
|
10,820
|
|
|
$
|
834
|
|
|
$
|
32,941
|
|
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act. The 2017 Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to:
reduces the federal statutory income tax rate from 35% to 21% effective January 1, 2018, eliminates the ability to carryback NOLs arising after 2017 and instead would permit such NOLs to be carried forward indefinitely, repeals the domestic production deduction,
116
Table of Contents
further limits deductions for executive compensation and legal settlements, accelerates expensing for capital expenditures, and reduces the orphan drug credit to 25% from 50% of qualified clinical testing expenses.
We recognized, as a provisional estimate, a $7.5 million non-cash tax expense through income from continuing operations for the re-measurement of deferred tax assets and liabilities due to changes in tax laws included in the 2017 Tax Act. This re-measurement of deferred taxes had no impact on cash flows.
On December 22, 2017, the SEC issued
Staff Accounting Bulletin No. 118
(SAB 118) which addresses income tax accounting implications of the 2017 Tax Act. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting period in which the 2017 Tax Act was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the 2017 Tax Act upon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the 2017 Tax Act. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the 2017 Tax Act, not to extend beyond one year from the date of enactment.
Due to the timing of the enactment and the complexity involved in applying the provisions of the 2017 Tax Act, we have made reasonable estimates for certain effects of the 2017 Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. As we collect and prepare necessary data, and interpret the 2017 Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. We expect to complete our accounting for the tax effects of the 2017 Tax Act in 2018.
Estimates were used in determining the balance of deferred tax assets and liabilities subject to changes in tax laws included in the 2017 Tax Act. In addition, estimates were used in determining the timing of reversals of deferred tax assets and liabilities in assessing the ability to realize certain deferred tax assets, which impacted the valuation allowance adjustment we recorded as part of the effects of the 2017 Tax Act. Additional information and analysis is required to accurately determine the deferred tax assets and liabilities affected by the 2017 Tax Act, as well as determine the reversal pattern of such deferred tax assets and liabilities in assessing the ability to realize deferred tax assets.
Deferred Income Taxes
The tax effects of temporary differences and carry forwards that give rise to the deferred tax assets and liabilities are comprised of the following as of December 31 (in thousands):
|
|
2017
|
|
|
2016
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
NOLs and credits
|
|
$
|
38,858
|
|
|
$
|
27,046
|
|
Start-up expenditures
|
|
|
1,480
|
|
|
|
2,604
|
|
Stock-based compensation
|
|
|
6,439
|
|
|
|
11,727
|
|
Allowances
|
|
|
931
|
|
|
|
1,264
|
|
Expenses currently not deductible for tax purposes
|
|
|
6,838
|
|
|
|
10,652
|
|
Deferred revenue
|
|
|
251
|
|
|
|
—
|
|
Other
|
|
|
1,167
|
|
|
|
1,963
|
|
Gross deferred tax assets
|
|
|
55,964
|
|
|
|
55,256
|
|
Deferred income tax asset valuation allowance
|
|
|
(50,339
|
)
|
|
|
(23,508
|
)
|
Deferred income tax assets
|
|
|
5,625
|
|
|
|
31,748
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Federal impact of state taxes
|
|
|
(643
|
)
|
|
|
(1,073
|
)
|
Property and equipment
|
|
|
(4,058
|
)
|
|
|
(6,246
|
)
|
Prepaid expenses
|
|
|
(924
|
)
|
|
|
(1,186
|
)
|
Net deferred income tax assets
|
|
$
|
-
|
|
|
$
|
23,243
|
|
117
Table of Contents
As of December 31, 2017, we had approximately $1.1 million of Federal NOLs and $236.6 million of state NOLs. A portion of both of these NOLs will begin to expire in 2018. As of December 31, 2017, we had approximately $11.4 million of Federal tax credits and $5.6 million of state tax credits. A portion of both the Federal and state tax credits will begin to expire in 2030.
We record valuation allowances to reduce the book value of our deferred tax assets to amounts that are estimated on a more likely than not basis to be realized. In assessing the realization of deferred tax assets, we evaluate both positive and negative evidence with greater weight given to information that is objectively verifiable. Based on this evidence, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We also consider the scheduled reversal of deferred tax liabilities, projected future taxable income or losses, and tax planning strategies in making this assessment. As a result of this evaluation, we increased the valuation allowance for deferred taxes by $26.8 million for the period ended December 31, 2017. The establishment of a valuation allowance does not impact cash, nor does it preclude us from using our tax credits, loss carryforwards and other deferred tax assets in the future.
Effective Tax Rate Reconciliation:
Our federal statutory tax rate is 35.0%, while our effective tax rate was (5.0)% for the year ended December 31, 2017, as set forth below:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
U.S. statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Increase (reduction) of income taxes resulting
from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
0.7
|
%
|
|
|
(0.1
|
)%
|
|
|
2.3
|
%
|
Non-deductible litigation expense
|
|
|
—
|
|
|
|
3.4
|
%
|
|
|
3.5
|
%
|
Non-deductible and includible items
|
|
|
(0.9
|
)%
|
|
|
7.5
|
%
|
|
|
0.7
|
%
|
Non-deductible lobbying expense
|
|
|
—
|
|
|
|
8.3
|
%
|
|
|
—
|
|
Research and other credits
|
|
|
1.1
|
%
|
|
|
(63.5
|
)%
|
|
|
(5.4
|
)%
|
Uncertain tax positions
|
|
|
(0.1
|
)%
|
|
|
4.2
|
%
|
|
|
2.7
|
%
|
Domestic manufacturing deduction
|
|
|
—
|
|
|
|
(14.6
|
)%
|
|
|
(3.0
|
)%
|
Stock based compensation
|
|
|
(1.3
|
)%
|
|
|
5.1
|
%
|
|
|
0.4
|
%
|
Tax exempt interest income
|
|
|
—
|
|
|
|
(1.5
|
)%
|
|
|
—
|
|
Non-deductible settlement expenses
|
|
|
(24.3
|
)%
|
|
|
—
|
|
|
|
—
|
|
Adjustment of net deferred tax assets for U.S. tax reform
|
|
|
(3.5
|
)%
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
0.6
|
%
|
|
|
—
|
|
Change in valuation allowance
|
|
|
(11.7
|
)%
|
|
|
25.5
|
%
|
|
|
(0.1
|
)%
|
Total provision for income taxes
|
|
|
(5.0
|
)%
|
|
|
9.9
|
%
|
|
|
36.1
|
%
|
The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
9,800
|
|
|
$
|
8,920
|
|
Additions based on current year's tax positions
|
|
|
555
|
|
|
|
758
|
|
Deductions based on prior year's tax positions
|
|
|
(239
|
)
|
|
|
—
|
|
Additions based on prior year's tax positions
|
|
|
18
|
|
|
|
122
|
|
Ending balance
|
|
$
|
10,134
|
|
|
$
|
9,800
|
|
118
Table of Contents
We establish reserves when it is more likely than not that we will not realize the full tax benefit of a position. We had a reserve of $10.1 million as of December 31, 2017, mostly related to tax credits of $2.8 million, state and local income tax filing positions of $5.4 million, and $1.9 million of other permanent differences.
If recognized, $10.1 million would affect our effective tax rate.
Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statutes of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next 12 months. Approximately $1.3 million of interest has been included in income taxes and accounted for on the balance sheet related to unrecognized tax positions as of December 31, 2017.
We are currently under examination in the U.S. for tax years 2014 and 2015. Because of NOLs and research credit carryovers, substantially all of our tax years remain open to examination.
11.
|
Net Income (Loss) per Share
|
Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. The diluted income (loss) per share further includes any common shares available to be issued upon exercise of outstanding stock options if such inclusion would be dilutive.
The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands, except per share amounts):
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Historical net income (loss) per share - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(228,015
|
)
|
|
$
|
7,590
|
|
|
$
|
58,053
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding
|
|
|
72,259,063
|
|
|
|
71,618,793
|
|
|
|
71,592,581
|
|
Basic net income (loss) per common share
|
|
$
|
(3.16
|
)
|
|
$
|
0.11
|
|
|
$
|
0.81
|
|
Historical net income (loss) per share - Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(228,015
|
)
|
|
$
|
7,590
|
|
|
$
|
58,053
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding
|
|
|
72,259,063
|
|
|
|
71,618,793
|
|
|
|
71,592,581
|
|
Effect of dilutive stock options
|
|
|
—
|
|
|
|
2,527,125
|
|
|
|
4,115,070
|
|
Weighted average number of common shares
outstanding
|
|
|
72,259,063
|
|
|
|
74,145,918
|
|
|
|
75,707,651
|
|
Diluted net income (loss) per common share
|
|
$
|
(3.16
|
)
|
|
$
|
0.10
|
|
|
$
|
0.77
|
|
The calculation of diluted net income (loss) per common share excludes the effects of 1,677,040, 2,596,324 and 1,460,986 outstanding stock options for the years ended December 31, 2017, 2016, and 2015, respectively, as the impact of these options was anti-dilutive.
12.
|
Product Lines, Concentration of Credit Risk and Significant Customers
|
We are engaged in the business of developing and selling pharmaceutical products. In 2017, we have two product lines, SUBSYS® and SYNDROS®. Our CODM evaluates revenues based on product lines.
119
Table of Contents
The following tables summarize our net revenue by product line, as well as the percentages of revenue by route to market (in thousands):
|
|
Net Revenue by Product Line
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
SUBSYS
®
|
|
$
|
139,250
|
|
|
$
|
242,275
|
|
|
$
|
329,040
|
|
SYNDROS
®
|
|
|
1,443
|
|
|
|
—
|
|
|
|
—
|
|
Dronabinol SG Capsule
|
|
|
—
|
|
|
|
—
|
|
|
|
1,283
|
|
Total net revenue
|
|
$
|
140,693
|
|
|
$
|
242,275
|
|
|
$
|
330,323
|
|
|
|
Percent of Revenue by Route to Market
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Pharmaceutical wholesalers
|
|
|
63
|
%
|
|
|
67
|
%
|
|
|
95
|
%
|
Specialty pharmaceutical retailers
|
|
|
37
|
%
|
|
|
33
|
%
|
|
|
5
|
%
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
All our products are sold in the United States of America.
Product shipments to our three largest pharmaceutical wholesaler customers accounted for 26%, 18% and 11% of total shipments and product shipments to two specialty pharmaceutical retailers accounted for 23% and 14% of total shipments for the year ended December 31, 2017. Product shipments to our four largest pharmaceutical wholesaler customers accounted for 17%, 16%, 15% and 14% of total shipments and product shipments to one specialty pharmaceutical retailer accounted for 32% of total shipments for the year ended December 31, 2016. Product shipments to our four largest pharmaceutical wholesaler customers accounted for 32%, 20%, 17% and 14% of total shipments for the year ended December 31, 2015. Three pharmaceutical wholesalers’ accounts receivable balances accounted for 44%, 18% and 10% of gross accounts receivable as of December 31, 2017, and two specialty pharmaceutical retailers’ accounts receivable balances accounted for 13% and 12% of gross accounts receivable as of December 31, 2017. Four pharmaceutical wholesalers’ accounts receivable balances accounted for 36%, 23%, 21% and 13% of gross accounts receivable as of December 31, 2016.
Currently, for SUBSYS®, we use one vendor as our sole supplier of the active pharmaceutical ingredient in this product.
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and trade accounts receivable. We place our cash with high credit quality financial institutions and generally limit the amount of credit exposure to the amount of FDIC coverage. However, periodically during the year, we maintain cash in financial institutions in excess of the current FDIC insurance coverage limit of $250,000. We are exposed to credit risk in the event of a default by the institutions holding our cash to the extent recorded on the consolidated balance sheet. We perform ongoing credit evaluations of our customers’ financial condition but do not typically require collateral to support customer receivables. We established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
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Table of Contents
13.
|
Supplemental Financial Information
|
A summary of additions and deductions related to the allowances for accounts receivable for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
|
|
Balance at
Beginning
of Year
|
|
|
Charged to
Costs and
Expenses
|
|
|
Utilization
|
|
|
Balance at
End of
Year
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
$
|
685
|
|
|
$
|
—
|
|
|
$
|
(685
|
)
|
|
$
|
—
|
|
Year ended December 31, 2016
|
|
$
|
811
|
|
|
$
|
(96
|
)
|
|
$
|
(30
|
)
|
|
$
|
685
|
|
Year ended December 31, 2015
|
|
$
|
398
|
|
|
$
|
413
|
|
|
$
|
—
|
|
|
$
|
811
|
|
Allowance for sales wholesaler discounts,
prompt pay discounts, stocking allowances, and
chargebacks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
$
|
5,459
|
|
|
$
|
14,525
|
|
|
$
|
(16,152
|
)
|
|
$
|
3,832
|
|
Year ended December 31, 2016
|
|
$
|
7,556
|
|
|
$
|
27,968
|
|
|
$
|
(30,065
|
)
|
|
$
|
5,459
|
|
Year ended December 31, 2015
|
|
$
|
5,418
|
|
|
$
|
38,036
|
|
|
$
|
(35,898
|
)
|
|
$
|
7,556
|
|
14.
|
Quarterly Results of Operations (Unaudited)
|
The following table sets forth a summary of our unaudited quarterly operating results for each of the last eight quarters in the period ended December 31, 2017. We have derived this data from our unaudited consolidated interim financial statements that, in our opinion, have been prepared on substantially the same basis as the audited consolidated financial statements contained elsewhere in this report and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this report. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period (in thousands, except per share data).
|
|
Quarter Ended
|
|
|
|
12/31/17
|
|
|
9/30/17
|
|
|
6/30/17
|
|
|
3/31/17
|
|
Net revenue
|
|
$
|
31,485
|
|
|
$
|
30,670
|
|
|
$
|
42,576
|
|
|
$
|
35,962
|
|
Gross profit (1)
|
|
$
|
26,874
|
|
|
$
|
23,198
|
|
|
$
|
38,655
|
|
|
$
|
31,323
|
|
Net loss (2) (3)
|
|
$
|
(46,987
|
)
|
|
$
|
(166,320
|
)
|
|
$
|
(8,184
|
)
|
|
$
|
(6,524
|
)
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.65
|
)
|
|
$
|
(2.30
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.09
|
)
|
Diluted
|
|
$
|
(0.65
|
)
|
|
$
|
(2.30
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.09
|
)
|
|
|
Quarter Ended
|
|
|
|
12/31/16
|
|
|
9/30/16
|
|
|
6/30/16
|
|
|
3/31/16
|
|
Net revenue
|
|
$
|
54,860
|
|
|
$
|
57,773
|
|
|
$
|
69,221
|
|
|
$
|
60,421
|
|
Gross profit (4)
|
|
|
45,055
|
|
|
|
53,096
|
|
|
|
62,948
|
|
|
|
55,783
|
|
Net income (loss) (5)
|
|
|
(3,652
|
)
|
|
|
2,925
|
|
|
|
6,027
|
|
|
|
2,290
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.03
|
|
(1)
|
The fourth quarter of 2017 includes an allowance of $2,100,000 for excess and obsolete inventory as the result of a change in estimate.
|
(2)
|
The third quarter of 2017 includes an accrual of $150,000,000 related to the DOJ Investigation.
|
(3)
|
The fourth quarter of 2017 includes a provisional tax expense of $7,500,000 related to the 2017 Tax Act, and an increase in tax expense associated with the accrual of $22,600,000 related to the valuation allowance of deferred tax assets.
|
(4)
|
The fourth quarter of 2016 includes an allowance of $5,800,000 for excess and obsolete SUBSYS® inventory.
|
121
Table of Contents
(5)
|
The fourth quarter of 2016 includes charges related to litigation award and settlements of $3,900,000.
|