NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share and per share amounts)
1. Basis of Presentation and Other Company Information
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting quarterly information. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. The condensed consolidated balance sheet at December 31, 2021 was derived from audited financial statements, but certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the financial information for the interim periods reported have been made. Results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 or any period thereafter. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 8, 2022.
We are an integrated pharmaceutical company focused on finding ways to help medicines do more for patients. We and our collaborators have the capabilities to take a molecule from preclinical research through regulatory approval and into the marketplace, including development, manufacturing and commercialization. Our business model applies our scientific expertise, proprietary research-based insights and marketplace proficiency to identify challenging-to-treat diseases of the central nervous system or metabolic critical care therapeutic areas as well as in oncology. By focusing on patients' unmet needs, we strive to provide healthcare professionals with urgently needed treatment solutions that are designed to improve patient care and outcomes and create near- and long-term value for our stakeholders, including patients and healthcare providers and our employees, marketing partners, collaborators and investors. Our science-based business model has a proven track record with the U.S. Food and Drug Administration ("FDA") approval and commercial launches of six products: PEMFEXY® (pemetrexed for injection), vasopressin, an A-rated generic alternative to Vasostrict®, Ryanodex® (dantrolene sodium) ("Ryanodex"), bendamustine ready-to-dilute ("RTD") 500ml solution ("Belrapzo"), and rapidly infused bendamustine RTD ("Bendeka") and RTD (“Treakisym”). We market our products through marketing partners and/or our internal direct sales force. We market PEMFEXY, vasopressin, Ryanodex and Belrapzo, and Teva Pharmaceutical Industries Ltd. ("Teva") markets Bendeka through its subsidiary Cephalon, Inc. SymBio Pharmaceuticals Limited ("SymBio"), markets Treakisym, a RTD product, in Japan.
On June 9, 2022, we acquired all of the outstanding share capital of Acacia Pharma Group plc (“Acacia”), which added two FDA approved new chemical entities with patent protection, BARHEMSYS® (amisulpride for injection) and BYFAVO® (remimazolam for injection). Refer to Note 14 for further details.
2. Summary of Significant Accounting Policies
Significant Accounting Policies
Our significant accounting policies are described in the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 and the notes thereto filed with the SEC on March 8, 2022. Since the date of those consolidated financial statements, there have been no material changes to our significant accounting policies other than as listed below.
Business combinations and asset acquisitions - The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs, process, and output, which would meet the requirements of a business. If determined to be a business combination, the Company accounts for the transaction under the acquisition method of accounting as indicated in Financial Accounting Standards Board (“FASB”)
Accounting Standards Update ("ASU") 2017-01, “Business Combinations”, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including any contingent assets and liabilities, and any non-controlling interest in the acquiree based on the fair value estimates as of the date of acquisition. In accordance with Accounting Standards Codification (“ASC”) 805 - Business Combinations, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.
The consideration for the Company’s business acquisitions may include future payments that are contingent upon the occurrence of a particular event or events. The obligations for such contingent consideration payments are recorded at fair value on the acquisition date. The contingent consideration obligations are then evaluated each reporting period. Changes in the fair value of contingent consideration, other than changes due to payments, would be recognized as a gain or loss and recorded condensed consolidated statement of operations.
If determined to be an asset acquisition, the Company accounts for the transaction under ASC 805-50 Business Combinations – Related Issues, which requires the acquiring entity in an asset acquisition to recognize assets acquired and liabilities assumed based on the cost to the acquiring entity on a relative fair value basis, which includes transaction costs in addition to consideration given. No gain or loss is recognized as of the date of acquisition unless the fair value of non-cash assets given as consideration differs from the assets’ carrying amounts on the acquiring entity’s financial statements. Consideration transferred that is non-cash will be measured based on either the cost (which shall be measured based on the fair value of the consideration given) or the fair value of the assets acquired and liabilities assumed, whichever is more reliably measurable. Goodwill is not recognized in an asset acquisition and any excess consideration transferred over the fair value of the net assets acquired is allocated to the identifiable assets based on relative fair values.
Significant Risks and Uncertainties
In response to the ongoing COVID-19 pandemic, we have taken and continue to take active measures designed to address and mitigate the impact of the COVID-19 pandemic on our business, such as remote working policies, facilitating management’s periodic communication to address employee and business concerns and providing frequent updates to our Board of Directors (“Board”). We anticipate that the COVID-19 pandemic may also have an impact on the clinical development timelines for certain of our clinical programs. We also anticipate that the COVID-19 pandemic may have an impact on our supply chain. The COVID-19 pandemic and associated lockdowns have resulted in a decrease in healthcare utilization broadly and specifically lead to a continuing reduction in the utilization of physician-administered oncology products including Belrapzo and Bendeka. In addition, the COVID-19 pandemic has delayed the timing of certain litigation and we anticipate that such delays will continue for the duration of the pandemic. The extent to which the COVID-19 pandemic will continue to impact our business, clinical development and regulatory efforts, supply chain and sales efforts, corporate development objectives and the value of, and market for, our common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time. The global economic slowdown, the overall disruption of global healthcare systems and other risks and uncertainties associated with the pandemic have impacted our operations and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
In addition, the U.S. government and other nations have imposed significant restrictions on most companies' ability to do business in Russia as a result of the ongoing military conflict between Russia and Ukraine. It is not possible to predict the
broader or longer-term consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial
markets. Such geopolitical instability and uncertainty could have a negative impact on our ability to further expand our business
and to otherwise generate revenues and develop our product candidates. In addition, a significant escalation or expansion of economic disruption or the conflict's current scope could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We may opportunistically seek access to additional capital to fund potential licenses, acquisitions or investments to expand our operations or for general corporate purposes. Raising additional capital could be accomplished through one or more public or private debt or equity financings, collaborations or partnering arrangements. As a result of the COVID-19 pandemic, as well as the ongoing military conflict between Russia and Ukraine and the related sanctions imposed against Russia, and countermeasures related thereto in addition to macroeconomic conditions including rising inflation, the global credit and financial markets have experienced significant volatility and disruption. If these market conditions persist and deepen, we could
experience an inability to access additional capital or our liquidity could otherwise be impacted, which could in the future negatively affect our capacity for certain corporate development transactions or our ability to make other important, opportunistic investments or acquisitions. An inability to borrow or raise additional capital in a timely manner and on attractive terms could prevent us from expanding our business or taking advantage of acquisition opportunities, and could otherwise have a material adverse effect on our business and growth prospects. In addition, if we use a substantial amount of our funds for any such potential acquisition or investment activities, we may not have sufficient additional funds to conduct all of our operations in the manner we would otherwise choose. Furthermore, any equity financing would be dilutive to our shareholders, and any financing could require the consent of the lenders under our credit facility.
We are subject to other challenges and risks specific to our business and our ability to execute on our business plan and strategy, as well as risks and uncertainties common to companies in the pharmaceutical industry with research and development operations, including, without limitation, risks and uncertainties associated with: delays or problems in obtaining clinical supply; obtaining regulatory approval of product candidates; loss of single source suppliers or failure to comply with manufacturing regulations; identifying, acquiring or in-licensing additional products or product candidates; product development and the inherent uncertainty of clinical success; the challenges of protecting and enhancing intellectual property rights; and the challenges of complying with applicable regulatory requirements. In addition, as the ongoing COVID-19 pandemic, geopolitical and macroeconomic conditions affect our business and results of operations, they may also have the effect of heightening many of the other risks and uncertainties discussed above.
Use of Estimates
These condensed consolidated financial statements are presented in U.S. dollars and are prepared in accordance with U.S. GAAP. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements including disclosure of gross to net estimates as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period and accompanying notes. Our critical accounting policies are those that are both most important to our financial condition and results of operations and also require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We anticipate that the COVID-19 pandemic will continue to disrupt our supply chain and marketing and sales efforts for certain of our products, although it is not currently expected that any disruption would be significant. As of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the carrying value of our assets or liabilities. Because of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the condensed consolidated financial statements, actual results may materially vary from these estimates, and any such differences may be material to our condensed consolidated financial statements.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. All cash and cash equivalents are held in United States financial institutions. The carrying amount of cash and cash equivalents approximates its fair value due to its short-term nature.
We, at times, maintain balances with financial institutions in excess of the Federal Deposit Insurance Corporation (“FDIC”) limit.
Fair Value Measurements
U.S. GAAP establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
•Level 1: Quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value of interest-bearing cash, cash equivalents, accounts receivable and accounts payable approximate fair value due to their life being short term in nature, and are classified as Level 1 for all periods presented.
Financial assets and liabilities measured and recognized at fair value are as follows:
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| | June 30, 2022 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
Money market funds | | $ | 30,783 | | | $ | 30,783 | | | $ | — | | | $ | — | |
Convertible promissory note | | 4,653 | | | — | | | — | | | 4,653 | |
Embedded derivative asset in convertible promissory note | | 1,027 | | | — | | | — | | | 1,027 | |
Investment in Tyme | | 2,800 | | | 2,800 | | | — | | | — | |
Liability: | | | | | | | | |
Foreign currency exchange contracts | | 685 | | | — | | | 685 | | | — | |
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| | December 31, 2021 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
Money market funds | | $ | 57,357 | | | $ | 57,357 | | | $ | — | | | $ | — | |
Convertible promissory note | | 4,021 | | | — | | | — | | | 4,021 | |
Embedded derivative asset in convertible promissory note | | 962 | | | — | | | — | | | 962 | |
Investment in Tyme | | 6,030 | | | 6,030 | | | — | | | — | |
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We recognize transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers in or out of Level 1, Level 2 or Level 3 during the three and six months ended June 30, 2022.
Our investment in the convertible promissory note and the embedded derivative are classified as Level 3. We analyzed and accessed the embedded derivative feature contained in the convertible promissory note agreement. We used a probability factor to value the embedded derivative asset based on management's best estimate, including the principal and estimated accrued interest among other contractual terms. The convertible promissory note is accounted for as available for sale. The convertible promissory note is reported at fair value with unrealized gains and losses included in Accumulated other comprehensive income (loss). Refer to Note 13, Convertible Promissory Note for further details.
In the first quarter of 2022, we entered into a forward contract to purchase euros at a forward rate. The contract settled in the second quarter of 2022 and was used to economically hedge the cost of the acquisition of Acacia. For the three and six months ended June 30, 2022, the fair value adjustment on the forward contract was a loss of $5.5 million and a loss of $4.9 million, respectively, and the adjustments were recorded in Other (expense) income on our condensed consolidated statement of operations.
In second quarter of 2022, Eagle entered into an additional forward contract to purchase euros at a forward rate. The contract is expected to be settled in the third quarter of 2022 and was used to economically hedge the assumed Acacia euro dominated debt. As of June 30, 2022, the forward contract was remeasured to reflect changes in the fair value determined using forward rates, which are observable market inputs, multiplied by the notional amount. The contract has not been designated as an accounting hedge, and therefore the net change in the fair value is reported in the condensed consolidated statement of operations. For the three and six months ended June 30, 2022, the fair value adjustment on the forward contract was a loss of $0.7 million and a loss of $0.7 million, respectively, and the adjustments were recorded in Other (expense) income on our condensed consolidated statement of operations. The fair value of the forward contract is recorded in accrued expense and other liabilities as of June 30, 2022 on our condensed consolidated balance sheet.
Our investment in restricted shares of common stock of Tyme Technologies, Inc. ("Tyme") are classified as Level 1. Refer to Note 12, License and Collaboration Agreements for further details.
The fair value of the previously existing legacy term loan is classified as Level 2 for the periods presented and approximates its book value due to the variable interest rate. The fair value of the euro denominated loan acquired as part of the acquisition of Acacia is classified as Level 2 and was recorded on the balance sheet at fair value upon acquisition. As of June 30, 2022, the fair value of the euro denominated loan approximated book value.
Refer to Note 14. Business Acquisition for details regarding fair value measurements in connection with the acquisition of Acacia.
Intangible Assets
We review the recoverability of our finite-lived intangible assets and long-lived assets for indicators of impairments. Events or circumstances that may require an impairment assessment include negative clinical trial results, a significant decrease in the market price of the asset, or a significant adverse change in legal factors or the manner in which the asset is used. If such indicators are present, we assess the recoverability of affected assets by determining if the carrying value of such assets is less than the sum of the undiscounted future cash flows of the assets. If such assets are found to not be recoverable, we measure the amount of the impairment by comparing to the carrying value of the assets to the fair value of the assets. We determined that no indicators of impairment of finite-lived intangible assets or long-lived assets existed as of June 30, 2022.
Goodwill
Goodwill represents the excess of purchase price over the fair value of net assets acquired in the Eagle Biologics and Acacia acquisitions. Goodwill is not amortized, but is evaluated for impairment on an annual basis, in the fourth quarter, or more frequently if events or changes in circumstances indicate that the reporting unit’s goodwill is less than its carrying amount. We did not identify any impairment to goodwill during the periods presented.
Concentration of Major Customers and Vendors
The Company is exposed to risks associated with extending credit to customers related to the sale of products. The Company does not require collateral to secure amounts due from its customers. The Company uses an expected loss methodology to calculate allowances for trade receivables. The Company's measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company does not currently have a material allowance for collectible trade receivables.
Further, the Company is dependent on its commercial partner to market and sell Bendeka; therefore, the Company's future revenues are highly dependent on the collaboration and distribution arrangement with Teva.
Teva markets Bendeka through a license agreement with the Company. Pursuant to that license agreement, Teva pays the Company a royalty based on net sales of the product and also purchases the product from the Company. A disruption in this arrangement, caused by, among other things, a supply disruption, loss of exclusivity or the launch of a superior product would have a material adverse effect on our balance sheet, results of operations and cash flows.
The total revenues and accounts receivables broken down by major customers as a percentage of the total are as follows:
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| Three Months Ended June 30, | | | Six Months Ended June 30, |
| 2022 | | 2021 | | | 2022 | | 2021 |
Total revenues | | | | | | | | |
Teva - See Revenue Recognition | 36 | % | | 64 | % | | | 29 | % | | 65 | % |
Customer A | 19 | % | | 10 | % | | | 19 | % | | 9 | % |
Customer B | 7 | % | | 8 | % | | | 12 | % | | 8 | % |
Customer C | 12 | % | | 4 | % | | | 13 | % | | 4 | % |
Customer D | 7 | % | | 9 | % | | | 9 | % | | 10 | % |
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Other | 19 | % | | 5 | % | | | 18 | % | | 4 | % |
| 100 | % | | 100 | % | | | 100 | % | | 100 | % |
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| June 30, | | December 31, | |
| 2022 | | 2021 | |
Accounts receivable | | | | |
Teva - See Revenue Recognition | 32 | % | | 63 | % | |
Customer A | 21 | % | | 13 | % | |
Customer B | 18 | % | | 13 | % | |
Customer C | 6 | % | | 2 | % | |
Customer D | 4 | % | | 2 | % | |
Other | 19 | % | | 7 | % | |
| 100 | % | | 100 | % | |
Inventories
Inventories are recorded at the lower of cost and net realizable value, with cost determined on a first-in first-out basis. We periodically review the composition of inventory in order to identify obsolete, slow-moving or otherwise non-saleable items. If these items are observed and there are no alternate uses for the inventory, we will record a write-down to lower of cost and net realizable value in the period that the decline in value is first recognized.
Research and Development Expense
Costs for research and development are charged to expense as incurred and include; employee-related expenses including salaries, benefits, travel and stock-based compensation expense for research and development personnel; expenses incurred under agreements with contract research organizations, contract manufacturing organizations and service providers that assist in conducting clinical and preclinical studies; costs associated with preclinical activities and development activities, costs associated with regulatory operations; and depreciation expense for assets used in research and development activities.
Costs for certain development activities, such as in licensing intellectual property related to new projects, clinical studies, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical
site activations, or information provided to us by our vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the patterns of costs incurred, and are reflected in the condensed consolidated financial statements as prepaid expenses or accrued expenses as deemed appropriate. Recoveries of previously recognized research and development expenses from third parties are recorded as a reduction to research and development expense in the period it becomes realizable.
Advertising and Marketing
Advertising and marketing costs are expensed as incurred. Advertising and marketing costs were $1.8 million and $0.4 million for the three months ended June 30, 2022 and 2021, respectively, and $3.4 million and $0.7 million for the six months ended June 30, 2022 and 2021, respectively.
Income Taxes
We account for income taxes using the liability method in accordance with ASC 740 - Income Taxes (“ASC 740”). Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and are measured by applying enacted rates and laws to taxable years in which differences are expected to be recovered or settled. Further, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (loss) in the period that the rate changes. A valuation allowance is required when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. ASC 740 also prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return, including a decision whether to file or not file a return in a particular jurisdiction. We recognize any interest and penalties accrued related to unrecognized tax benefits as income tax expense.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606 - Revenue from Contracts with Customers ("ASC 606"), the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
Product revenue - The Company recognizes net revenue on sales to its commercial partners and to end users. In each instance, revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Receivables from our product sales have payment terms ranging from 30 to 75 days with select extended terms to wholesalers on purchases of product launch quantities.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price generally utilizing the expected value method to which the Company expects to be entitled. As such, revenue on sales to end users for vasopressin, Pemfexy, Belrapzo, Ryanodex, Barhemsys, and Byfavo are recorded net of chargebacks, rebates, returns, prompt pay discounts, wholesaler fees and other deductions. Our products are contracted with a limited number of oncology distributors and hospital buying groups with narrow differences in ultimate realized contract prices used to estimate our allowance for chargebacks and rebate reserves. The Company has a product returns policy on some of its products that allows the customer to return pharmaceutical products within a specified period of time both prior to and subsequent to the product’s expiration date. The Company's estimate of the provision for returns is analyzed quarterly and is based upon many factors, including historical experience of actual returns and analysis of the level of inventory in the distribution channel, if any. The Company has terms on sales of Ryanodex by which the
Company does not accept returns. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration are made generally using the expected value method and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. The Company believes that the estimates it has established are reasonable based upon current facts and circumstances. Applying different judgments to the same facts and circumstances could result in the estimated amounts to vary.
Components of Gross-to-Net (GTN) Estimates
Chargebacks: Chargebacks are discounts that occur when certain contracted customers, including group purchasing organizations (“GPOs”), public health service institutions and federal government entities purchasing via the Federal Supply Schedule, purchase from the Company's distributors. The Company's distributors purchase product from us at invoice price, then resell the product to certain contracted customers on the basis of prices negotiated between us and the providers. The difference between the distributors’ purchase price and the typically lower certain contracted customers’ purchase price is refunded to the distributors through a chargeback credit. We record estimates for these chargebacks at the time of sale as deductions from gross revenues, with corresponding adjustments to our accounts receivable reserves and allowances.
The provision for chargebacks is the most significant provision in the context of the Company’s gross-to-net adjustments in the determination of net revenue. Chargebacks are estimated based on payer mix and contracted price, adjusted for current period assumptions.
Commercial and Medicaid Rebates: The Company contracts with government agencies or collectively, third-party payors, so that vasopressin, Pemfexy, Belrapzo, Ryanodex, Barhemsys, and Byfavo will be eligible for purchase by, or partial or full reimbursement from, such third-party payors. The Company estimates the rebates it will provide to third-party payors and deducts these estimated amounts from total gross product revenues at the time the revenues are recognized. These reserves are recorded in the same period in which the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. The current liability is included in accrued expenses and other current liabilities on the consolidated balance sheets. The Company estimates the rebates that it will provide to third-party payors based upon (i) the Company’s contracts with these third-party payors, (ii) the government mandated discounts applicable to government-funded programs, (iii) a range of possible outcomes that are probability-weighted for the estimated payer mix, and (iv) information obtained from the Company’s distributors.
The information that the Company also considers when establishing its rebate reserves are purchases by customers, projected annual sales for customers, actual rebates payments made, processing time lags, and for indirect rebates, the level of inventory in the distribution channel that will be subject to indirect rebates. We do not provide incentives designed to increase shipments to our customers that we believe would result in out-of-the-ordinary course of business inventory for them. The Company regularly reviews and monitors estimated or actual customer inventory information at its largest distributors for its key products to ascertain whether customer inventories are in excess of ordinary course of business levels.
Product Returns: The Company's provision for product returns based on the factors noted above generally encompass a time range from 12 to 48 months after revenue is recognized. The Company’s distributors have the right to return unopened unprescribed vasopressin, Pemfexy, Belrapzo, Barhemsys, and Byfavo during certain time periods around the period beginning prior to the labeled expiration date and ending after the labeled expiration date. The Company estimates future product returns on sales of vasopressin, Pemfexy, Belrapzo, Barhemsys, and Byfavo based on: (i) data provided to the Company by its distributors (including weekly reporting of distributors’ sales and inventory held by distributors that provided the Company with visibility into the distribution channel in order to determine what quantities were sold to retail pharmacies and other providers), (ii) data provided to the Company by a third-party data provider which collects and publishes prescription data, and other third parties, (iii) historical industry information regarding return rates for similar pharmaceutical products, (iv) the estimated remaining shelf life of vasopressin, Pemfexy, Belrapzo, Barhemsys, and Byfavo previously shipped and currently being shipped to distributors and (v) contractual agreements intended to limit the amount of inventory maintained by the Company’s distributors. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities on the consolidated balance sheets.
Wholesaler fees and other incentives: The Company generally provides invoice discounts on vasopressin, Pemfexy, Belrapzo, Ryanodex, Barhemsys, and Byfavo sales to its distributors for prompt payment and fees for distribution services, such as fees for certain data that distributors provide to the Company. The payment terms for sales to distributors generally include a 2% discount for prompt payment which is generally defined in invoice terms as a range from 15 to 45 days, while the fees for distribution services are based on contractual rates agreed with the respective distributors. Based on historical data, the Company expects its distributors to earn these discounts and fees, and deducts the full amount of these discounts and fees from its gross product revenues and accounts receivable at the time such revenues are recognized. In certain cases, the Company may record the fees as accrued expenses if the Company expects that the fees will be paid rather than deducted by the distributor.
Royalty Revenue — The Company recognizes revenue from license arrangements with its commercial partners' net sales of products. Royalties are recognized as earned in accordance with contract terms when they can be reasonably estimated and collectability is reasonably assured. The Company's commercial partners are obligated to report their net product sales and the resulting royalty due to the Company within 25 days from the end of each quarter. Based on historical product sales, royalty receipts and other relevant information, the Company accrues royalty revenue each quarter and subsequently determines a true-up when it receives royalty reports from its commercial partners. Historically, these true-up adjustments have been immaterial. Our receivables from royalty revenue are due 45-days from the end of the quarter.
License and other revenue — The Company analyzes each element of its licensing agreements to determine the appropriate revenue recognition. The terms of the license agreement may include payment to us of non-refundable up-front license fees, milestone payments if specified objectives are achieved, and/or royalties on product sales. The Company recognizes revenue from upfront payments at a point in time, typically upon fulfilling the delivery of the associated intellectual property to the customer.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
The Company recognizes sales-based milestone payments as revenue upon the achievement of the cumulative sales amount specified in the contract in accordance with ASC 606-10-55-65. For those milestone payments which are contingent on the occurrence of particular future events, the Company determined that these need to be considered for inclusion in the calculation of total consideration from the contract as a component of variable consideration using the most-likely amount method. As such, the Company assesses each milestone to determine the probability and substance behind achieving each milestone. Given the inherent uncertainty of the occurrence of these future events, the Company will not recognize revenue from the milestone until there is not a high probability of a reversal of revenue, which typically occurs near or upon achievement of the event.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of June 30, 2022.
Stock-Based Compensation
The Company utilizes stock-based compensation in the form of stock options, restricted stock units ("RSUs") and performance-based stock units ("PSUs"), each of which may be granted separately or in tandem with other awards.
Compensation expense is recognized in the Consolidated Statements of operations based on the estimated fair value of the awards at grant date ratably over the requisite service period, which generally equals the vesting period of the award.
The grant-date fair value of stock awards is based upon the underlying price of the stock on the date of grant. The grant-date fair value of stock option awards must be determined using an option pricing model. The Company uses the Black-Scholes
option pricing formula for determining the grant-date fair value of such awards. Option pricing models require the use of estimates and assumptions as to (a) the expected term of the option, (b) the expected volatility of the price of the underlying stock and (c) the risk-free interest rate for the expected term of the option.
The Company may also grant performance-based stock awards to employees from time-to-time in form of market condition or performance condition. The grant-date fair value of awards that vest based on achievement of certain market condition are determined using a Monte Carlo simulation technique. The grant-date fair value of awards that vest based on achievement of certain performance condition are determined using the accelerated attribution method once it is probable that the performance condition will be achieved.
Earnings Per Share
Basic earnings per common share is computed using the weighted average number of shares outstanding during the period. Diluted earnings per share is computed in a manner similar to the basic earnings per share, except that the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of options. Diluted earnings per share contemplate a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share, as calculated under the treasury method.
The anti-dilutive common share equivalents outstanding for the three and six months ended June 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, |
| 2022 | | 2021 | | | 2022 | | 2021 |
Stock options | 2,499,165 | | | 2,844,961 | | | | 2,092,420 | | | 1,622,046 | |
Restricted stock units | 77,149 | | | 223,103 | | | | 77,149 | | | 1,413,687 | |
Total | 2,576,314 | | | 3,068,064 | | | | 2,169,569 | | | 3,035,733 | |
The following table sets forth the computation for basic and diluted net (loss) earnings per share for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, |
| 2022 | | 2021 | | | 2022 | | 2021 |
Numerator | | | | | | | | |
Net (loss) income | $ | (9,450) | | | $ | 3,612 | | | | $ | 34,608 | | | $ | 3,191 | |
Denominator | | | | | | | | |
Basic weighted average common shares outstanding | 12,836,116 | | | 13,108,998 | | | | 12,773,727 | | | 13,116,370 | |
Dilutive effect of stock awards | — | | | 153,166 | | | | 178,061 | | | 177,550 | |
Diluted weighted average common shares outstanding | 12,836,116 | | | 13,262,164 | | | | 12,951,788 | | | 13,293,920 | |
Basic net (loss) earnings per share | | | | | | | | |
Basic net (loss) earnings per share | $ | (0.74) | | | $ | 0.28 | | | | $ | 2.71 | | | $ | 0.24 | |
Diluted net (loss) earnings per share | | | | | | | | |
Diluted net (loss) earnings per share | $ | (0.74) | | | $ | 0.27 | | | | $ | 2.67 | | | $ | 0.24 | |
All potentially dilutive items were excluded from the diluted share calculation for the three months ended June 30, 2022 because their effect would have been anti-dilutive, as the Company was in a loss position.
Recent Accounting Pronouncements
In March 2020, the FASB issued Update 2020-04 Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in Update 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR, formerly known as the London Interbank Offered Rate,
or another reference rate expected to be discontinued due to reference rate reform. The new guidance provides optional expedients, including; (1) Simplify accounting analyses under current GAAP for contract modifications, such as modifications of contracts within the scope of Topic 470, Debt, that will be accounted for by prospectively adjusting the effective interest rate, as if any modification was not substantial. That is, the original contract and the new contract shall be accounted for as if they were not substantially different from one another; (2) Simplify the assessment of hedge effectiveness and allow hedging relationships affected by reference rate reform to continue; (3) Allow a one-time election to sell or transfer debt securities classified as held to maturity before January 1, 2020 that reference a rate affected by reference rate reform. The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of the ASU. An entity may elect to apply the amendments prospectively through December 31, 2022. The adoption of ASU 2020-4 is not expected to have a material impact on our financial position or results of operations.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Revenue from Contracts with Customers (Topic 606) rather than adjust them to fair value at the acquisition date. This accounting standard update will be effective for public business entities in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years; therefore for us beginning in the first quarter of 2023. We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our condensed consolidated financial statements.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 801): Fair Value Hedging – Portfolio Layer Method, which expands the current single-layer hedging model to allow multiple-layer hedges of a single closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments under the method. This accounting standards update will be effective for public business entities in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years; therefore for us beginning in the first quarter of 2023. We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our condensed consolidated financial statements.
There are other new accounting pronouncements issued by the FASB that we have adopted or will adopt, as applicable. We do not believe any of these accounting pronouncements have had, or will have, a material impact on our condensed consolidated financial statements or disclosures.
3. Property and Equipment, net
Property and equipment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | | | | | Estimated Useful Life (years) |
Furniture and fixtures | $ | 1,525 | | | $ | 1,525 | | | | | | | 7 |
Office equipment | 1,077 | | | 1,077 | | | | | | | 3 |
Equipment | 4,003 | | | 3,834 | | | | | | | 7 |
Leasehold improvements | 1,155 | | | 1,155 | | | | | | | 2 |
| 7,760 | | | 7,591 | | | | | | | |
Less accumulated depreciation | (6,301) | | | (5,955) | | | | | | | |
Property and equipment, net | $ | 1,459 | | | $ | 1,636 | | | | | | | |
Depreciation expense related to property and equipment amounted to $0.2 million and $0.2 million for the three months ended June 30, 2022 and 2021, respectively, and $0.4 million and $0.4 million for the six months ended June 30, 2022 and 2021, respectively.
4. Inventories
Inventories consist of the following:
| | | | | | | | | | | |
| June 30, | | December 31, |
| 2022 | | 2021 |
Raw materials (1) | $ | 6,657 | | | $ | 7,317 | |
Work in process (2) | 16,855 | | | 9,666 | |
Finished products (3) | 34,200 | | | 4,925 | |
Total inventories | $ | 57,712 | | | $ | 21,908 | |
(1) $1.7 million of Raw materials represents inventory acquired with Acacia as detailed in Note 14.
(2) $2.9 million of Work in process represents inventory acquired with Acacia as detailed in Note 14.
(3) $21.5 million of Finished products represents inventory acquired with Acacia as detailed in Note 14.
5. Balance Sheet Accounts
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
| | | | | | | | | | | |
| June 30, | | December 31, |
| 2022 | | 2021 |
Prepaid income taxes | $ | 112 | | | $ | 1,173 | |
Prepaid FDA user fee and advances to clinical research organization | 369 | | | 1,108 | |
Prepaid insurance | 1,568 | | | 196 | |
Advances to commercial manufacturers | 2,043 | | | 2,354 | |
Prepaid R&D | 106 | | | — | |
Convertible promissory note, net | 6,210 | | | 5,312 | |
Other receivable related to cost sharing arrangement with commercial partner | 951 | | | 347 | |
All other | 2,903 | | | 1,400 | |
Total prepaid expenses and other current assets | $ | 14,262 | | | $ | 11,890 | |
Accrued Expenses
Accrued expenses consist of the following:
| | | | | | | | | | | |
| June 30, | | December 31, |
| 2022 | | 2021 |
Accrued product sales reserves | $ | 21,475 | | | $ | 4,390 | |
Income taxes payable | 10,270 | | | — | |
Royalties payable to commercial partners | 10,815 | | | 5,085 | |
Accrued salary and other compensation | 2,775 | | | 8,466 | |
Accrued professional fees | 6,408 | | | 2,013 | |
Accrued research & development | 4,846 | | | 4,100 | |
Current portion of lease liability | 1,476 | | | 1,309 | |
Inventory received but not invoiced | 7,341 | | | 6,177 | |
Accrued other | 1,744 | | | 798 | |
Total accrued expenses | $ | 67,150 | | | $ | 32,338 | |
Leases
We lease office space in Woodcliff Lake, New Jersey for our principal office under an amended lease agreement through June 2025. We also lease a lab space in Cambridge, Massachusetts under a lease agreement through April 2024, office space located in Indianapolis, Indiana through November 2023, and an office space located in Palm Beach Gardens, Florida. All of our leases are classified as operating leases and have remaining lease terms of approximately 2.5 years. The principal office and the lab space leases include renewal options to extend the lease for up to 5 years. Furthermore, we have not elected the practical expedient to separate lease and non-lease components for all classes of underlying assets.
The table below summarizes our total lease costs included in the condensed consolidated financial statements, as well as other required quantitative disclosures (in thousands):
| | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | | |
Operating lease cost | $ | 760 | | | $ | 1,407 | | | | |
Total lease cost | $ | 760 | | | $ | 1,407 | | | | |
| | | | | | |
Other information: | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
Operating cash flows for operating leases | $ | 760 | | | $ | 1,407 | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | — | | | $ | 270 | | | | |
Weighted-average remaining lease term - operating leases | 2.5 years | | 3.1 years | | | |
Weighted-average discount rate - operating leases | 6.0 | % | | 6.0 | % | | | |
| | | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Balance Sheet Classification as of June 30, 2022: | | |
Current lease liabilities (included with Accrued expenses and other liabilities) | $ | 1,476 | | |
Long-term lease liabilities (included with Other long-term liabilities) | 2,256 | | |
Total lease liabilities | $ | 3,732 | | |
6. Intangible Assets, Net
The gross carrying amounts and net book value of our intangible assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2022 |
| Useful Life (In Years) | | Gross Carrying Amount | | Accumulated Amortization | | | | Net Book Value |
Barhemsys intangible (1) | 9 | | $ | 68,000 | | | $ | (468) | | | | | $ | 67,532 | |
Byfavo intangible (1) | 9 | | 36,000 | | | (230) | | | | | 35,770 | |
Ryanodex intangible (2) | 9 | | 15,000 | | | (6,241) | | | | | 8,759 | |
Vasopressin milestone (3) | 1 | | 750 | | | (337) | | | | | 413 | |
Total | | | $ | 119,750 | | | $ | (7,276) | | | | | $ | 112,474 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| Useful Life (In Years) | | Gross Carrying Amount | | Accumulated Amortization | | | | Net Book Value |
Ryanodex intangible (1) | 9 | | $ | 15,000 | | | $ | (5,079) | | | | | $ | 9,921 | |
Developed technology | 5 | | 8,100 | | | (8,100) | | | | | — | |
Vasopressin milestone (3) | 1 | | 750 | | | — | | | | | 750 | |
Total | | | $ | 23,850 | | | $ | (13,179) | | | | | $ | 10,671 | |
(1) Represents intangible assets acquired in the Acacia acquisition as detailed in Note 14.
(2) Represents a one-time payment made to reduce the royalties payable to a third party on Ryanodex net sales.
(3) Represents milestone paid to a third party upon FDA approval of vasopressin.
Amortization expense was $1.5 million and $0.7 million for the three months ended June 30, 2022 and 2021, respectively and $2.2 million and $1.4 million for the six months ended June 30, 2022 and 2021, respectively.
Estimated Amortization Expense for Intangible Assets
Based on definite-lived intangible assets recorded as of June 30, 2022, and assuming that the underlying assets will not be impaired and that we will not change the expected lives of the assets, future amortization expenses are estimated as follows:
| | | | | |
| Estimated Amortization Expense |
|
Year Ending December 31, | |
2022 (remainder) | 7,379 | |
2023 | 14,405 | |
2024 | 14,127 | |
2025 | 13,886 | |
2026 | 11,584 | |
Thereafter | 51,093 | |
Total estimated amortization expense | $ | 112,474 | |
7. Common Stock and Stock-Based Compensation
Common Stock
Share Repurchase Program
In March 2020, our board of directors approved our current share repurchase program (the "Share Repurchase Program"), providing for the repurchase of up to an aggregate of $160 million of our outstanding common stock.
Under the Share Repurchase Program, we are authorized to repurchase shares through open market purchases, privately-negotiated transactions, accelerated share repurchases or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Exchange Act. The repurchases have no time limit and may be suspended or discontinued completely at any time. The specific timing and amount of repurchases will vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. The repurchases will be made using our cash resources.
On September 23, 2020, our Board of Directors approved a $25 million accelerated share repurchase (“ASR”) transaction with JPMorgan Chase Bank, National Association (“JP Morgan”) as part of our existing $160 million share repurchase program. The specific number of shares to be repurchased pursuant to the ASR is based on the average of the daily volume weighted average share prices of our common stock, less a discount, during the term of the ASR program. Under the terms of our agreement with JP Morgan, we paid $25 million to JP Morgan on September 24, 2020, and received 550,623 shares, representing the notional amount of the ASR, based on the average of the daily volume weighted average share prices of our common stock, less a discount, during the term of the ASR, which was $45.40. The ASR was completed in the fourth quarter of 2020. We determined the ASR contained a forward contract and therefore we recorded fair value adjustments on the accelerated share repurchase agreement in the amount of $3 million which was a loss recorded in Other expense on our consolidated statements of operations in the year ended December 31, 2020.
As of June 30, 2022, we had repurchased an aggregate of 4,278,831 shares of common stock for an aggregate of $236.1 million pursuant to our share repurchase programs in effect since August 2016.
Stock-Based Compensation
In November 2013, our Board of Directors approved the 2014 Equity Incentive Plan (the "2014 Plan") which became effective on February 11, 2014. The 2014 Plan provides for the awards of incentive stock options, non-qualified stock options, restricted stock, restricted stock units and other stock-based awards. Awards generally vest equally over a period of four years from grant date. Vesting may be accelerated under a change in control of the Company or in the event of death or disability to the recipient. In the event of termination, any unvested shares or options are forfeited.
During the first quarter of 2018, we introduced a new long-term incentive program with the objective to better align the stock-based awards granted to management with our focus on improving total shareholder return over the long-term. The stock-based awards granted under this long-term incentive program consist of time-based stock options, time-based RSUs and PSUs. PSUs are comprised of awards: i) that would have vested upon achievement of certain share price appreciation conditions or ii) that would have vested upon achievement of certain milestone events.
A summary of stock option, RSU and PSU activity under the 2014 Plan during the six months ended June 30, 2022 and 2021 is presented below:
| | | | | | | | | | | | | | | | | |
| Stock Options | | RSUs | | PSUs |
Outstanding as of December 31, 2020 | 3,331,890 | | | 328,396 | | | 97,750 | |
Granted | 106,000 | | | 106,600 | | | 159,000 | |
Stock options exercised/RSUs vested/PSUs vested | (94,328) | | | (94,273) | | | — | |
Forfeited or expired | (283,998) | | | (29,796) | | | (97,750) | |
Outstanding as of June 30, 2021 | 3,059,564 | | | 310,927 | | | 159,000 | |
| | | | | |
Outstanding as of December 31, 2021 | 2,814,878 | | | 263,306 | | | 137,300 | |
Granted | 91,700 | | | 148,000 | | | 228,200 | |
Stock options exercised/RSUs vested/PSUs vested | (62,321) | | | (101,898) | | | — | |
Forfeited or expired | (40,044) | | | (7,082) | | | — | |
Outstanding as of June 30, 2022 | 2,804,213 | | | 302,326 | | | 365,500 | |
Stock Options
The fair value of stock options granted to employees, directors, and consultants were estimated using the following assumptions:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Risk-free interest rate | 3.00% - 3.31% | | 1.01% - 1.12% | | 1.47% - 3.31% | | 0.51% - 1.12% |
Volatility | 48.42% | | 55.66% | | 46.88% | | 56.10% |
Expected term (in years) | 6.08 years | | 5.96 years | | 5.65 years | | 5.67 years |
Expected dividend yield | 0.0% | | 0.0% | | 0.0% | | 0.0% |
RSUs
Each vested time-based RSU represents the right of a holder to receive one share of our common stock. The fair value of each RSU granted was estimated based on the trading price of our common stock on the date of grant.
PSUs
During the first quarter of 2022, we granted 228.2 thousand market condition PSUs based on our total shareholder return ("TSR") relative to the TSR of each member of the S&P Biotechnology Select Industry Index (the defined peer group) with a weighted-average grant date fair value of $70.45 for the CEO and $53.43 for other executives per respective PSU. The fair value of PSUs granted to employees was estimated using a Monte Carlo simulation model. Inputs used in the calculation include a risk-free interest rate of 1.6%, an expected volatility of 41%, contractual term of 3 years, and no expected dividend yield.
The fair value of market condition PSUs granted to employees was estimated using a Monte Carlo simulation model. Inputs used in the calculation are described above.
The fair value of performance condition PSUs granted to employees was estimated based on the trading price of our common stock on the date of grant adjusted for probability of achievement of the performance conditions as described above.
We did not recognize any expense for performance based PSUs granted to employees based on our estimated probability of achievement as described above.
We recognized stock-based compensation in our condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021 as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Stock options | $ | 1,671 | | | $ | 2,547 | | | $ | 3,534 | | | $ | 5,878 | |
RSUs | 1,289 | | | 1,217 | | | 2,924 | | | 3,005 | |
PSUs | 1,540 | | | 517 | | | 2,337 | | | 1,906 | |
Stock-based compensation expense | $ | 4,500 | | | $ | 4,281 | | | $ | 8,795 | | | $ | 10,789 | |
| | | | | | | |
Selling, general and administrative | $ | 3,899 | | | $ | 3,640 | | | $ | 7,551 | | | $ | 9,253 | |
Research and development | 601 | | | 641 | | | 1,244 | | | 1,536 | |
Stock-based compensation expense | $ | 4,500 | | | $ | 4,281 | | | $ | 8,795 | | | $ | 10,789 | |
8. Commitments
Our future material contractual obligations as of June 30, 2022, included the following:
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Obligations | | Total | | 2022 | | 2023 | | 2024 | | 2025 | | | | | | Beyond |
Operating leases (1) | | $ | 4,033 | | | $ | 827 | | | $ | 1,671 | | | $ | 1,122 | | | $ | 413 | | | | | | | $ | — | |
Credit facility and Term Loans (2) | | 48,118 | | | 22,000 | | | 4,571 | | | 13,059 | | | 8,488 | | | | | | | — | |
Purchase obligations (3) | | 74,097 | | | 74,097 | | | — | | | — | | | — | | | | | | | — | |
Total obligations | | $ | 126,248 | | | $ | 96,924 | | | $ | 6,242 | | | $ | 14,181 | | | $ | 8,901 | | | | | | | $ | — | |
(1) We lease our corporate office location. The term of our existing lease expires on June 30, 2025. We also lease our lab space under a lease agreement through April 2024, office space located in Indianapolis, Indiana through November 2023, and an office space in Palm Beach Gardens, Florida, through October 31, 2024. Rental expense for the operating leases was $0.4 million and $0.3 million, for the three months ended June 30, 2022 and 2021, respectively. Rental expense for the operating leases was $0.8 million and $0.7 million for the six months ended June 30, 2022 and 2021.The remaining future lease payments under the operating leases are $4.0 million as of June 30, 2022.
(2) Refer to Note 9, “Debt” for further information regarding our Credit Agreement and Term Loans.
(3) As of June 30, 2022, we had purchase obligations in the amount of $74.1 million which represents the contractual commitments under contract manufacturing and supply agreements with suppliers. The obligations under the supply agreements are primarily for finished product, inventory, and research and development.
9. Debt
As of June 9, 2022, we assumed the borrowings of €25 million as part of the acquisition detailed in Note 14 Business Acquisition. These borrowings are in two tranches; Tranche A for a €15 million term loan with periodic payments through July 31, 2025; and Tranche B for a €10 million term loan with periodic payments through September 30, 2025. Each tranche bears an annual interest rate of 9%.
On November 8, 2019, we entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”), with JPMorgan Chase Bank, N.A., as administrative agent (the “Agent”) and the lenders party thereto. The terms and amounts borrowed under the Credit Agreement includes a drawn term loan of $40 million and an undrawn revolving credit facility of $110 million. The schedule of principal payments for the new term loan facility was extended to November 8, 2022.
We classified debt related to the pre-existing term loan of $21.8 million as current on the condensed consolidated balance sheet as of June 30, 2022. Per the terms of the Credit Agreement, we are limited in our ability to pay dividends. As of June 30, 2022, we were in compliance with each of the senior secured net leverage ratio; total net leverage ratio; and fixed charge coverage ratio covenants.
The term loan facility bears interest at the Adjusted LIBOR (equal to (a) the LIBOR for such Interest Period multiplied by (b) the Statutory Reserve Rate as established by Board of Governors of the Federal Reserve System of the United States of America) for the interest period in effect for such borrowing plus the applicable rate as described below. We and the Agent may amend the Credit Agreement to replace the LIBOR with a Benchmark Replacement, described below.
Loans under the Credit Agreement bear interest at a rate equal to either (a) the LIBOR rate, plus an applicable margin ranging from 2.25% to 3.0% per annum, based upon the total net leverage ratio (as defined in the Credit Agreement), or (b) the Benchmark Replacement which is defined as the greatest of the prime lending rate, or the NYFRB Rate (the rate for a federal funds transaction) in effect on such day plus ½ of 1% or the Adjusted LIBO Rate for a one month Interest Period on such day plus 1% plus an applicable margin ranging from 1.25% to 2.0% per annum, based upon the total net leverage ratio.
We are required to pay a commitment fee on the unused portion of the new revolving credit facility in the Credit Agreement at a rate ranging from 0.35% to 0.45% per annum based upon the total net leverage ratio.
As of June 30, 2022, we had $0.2 million of unamortized deferred debt issuance costs as part of current debt in our condensed consolidated balance sheets.
| | | | | |
Debt Maturities | As of June 30, 2022 |
2022 (remainder) | $ | 22,000 | |
2023 | 4,571 | |
2024 | 13,059 | |
2025 | 8,488 | |
Total | $ | 48,118 | |
10. Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Income tax provision | $ | (3,582) | | | $ | (1,936) | | | $ | (17,184) | | | $ | (3,697) | |
Effective tax rate | (61) | % | | 35 | % | | 33 | % | | 54 | % |
For interim periods, we recognize an income tax provision based on our estimated annual effective tax rate expected for the entire year plus the effects of certain discrete items occurring in the quarter. The interim annual estimated effective tax rate is based on the statutory tax rates then in effect, as adjusted for changes in estimated permanent differences, and certain discrete items whose tax effect, when material, is recognized in the interim period in which they occur.
The effective tax rate for the three and six months ended June 30, 2022, reflects an interim tax provision resulting from impact of certain non-deductible executive compensation and the impact of certain non-deductible cost from the acquisition of Acacia, partially offset by credits for research and development activity. The effective tax rate for the three and six months ended June 30, 2021, reflects the impact of certain non-deductible executive compensation and expired stock compensation and the impact of certain non-deductible cost from the acquisition of Acacia, partially offset by credits for research and development activity and excess tax deduction we can realize for our stock based awards. We review the realizability of our deferred tax assets on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset are considered, along with any other positive or negative evidence. Since future financial results, including the fair value adjustment on our investment in Tyme may differ from previous estimates, periodic adjustments to our valuation allowances may be necessary.
Deferred income tax assets as of June 30, 2022 consisted of temporary differences primarily related to the net operating losses of Acacia, stock-based compensation and research and development tax credit carryforwards, partially offset by temporary differences related to intangible assets and research and development expenses.
We file income tax returns in the U.S. federal jurisdiction and several states. We are currently under audit by the Internal Revenue Service and three State tax jurisdictions. We had no amount recorded for any unrecognized tax benefits as of June 30, 2022. We regularly evaluate our tax positions for additional unrecognized tax benefits and associated interest and penalties, if applicable. There are many factors that are considered when evaluating these tax positions including: interpretation of tax laws, recent tax litigation on a position, past audit or examination history, and subjective estimates and assumptions. We reflect interest and penalties attributable to income taxes, to the extent they arise, as a component of income tax provision or benefit.
11. Legal Proceedings
In addition to the below legal proceedings, from time to time, we may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters, or matters discussed below, will not have a material adverse effect on our business nor have we recorded any loss in connection with these matters because we believe that loss is neither probable nor estimable. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Patent Litigation
Eagle Pharmaceuticals, Inc., et al. v. Slayback Pharma Limited Liability Company; Eagle Pharmaceuticals, Inc., et al. v. Apotex Inc. and Apotex Corp.; Eagle Pharmaceuticals, Inc., et al. v. Fresenius Kabi USA, LLC; Eagle Pharmaceuticals, Inc., et al. v. Mylan Laboratories Limited; Eagle Pharmaceuticals, Inc. et al. v. Hospira, Inc; Eagle Pharmaceuticals, Inc. et al. v. Lupin, Ltd. and Lupin Pharmaceuticals, Inc.; Teva Pharmaceuticals Int’l GmbH et al v. Aurobindo Pharma Ltd., Aurobindo Pharma USA, Inc., and Eugia Pharma Specialities Ltd.; Teva Pharmaceuticals Int’l GmbH et al v. Accord Healthcare Inc., Accord Healthcare Ltd., and Intas Pharmaceuticals Ltd.; Teva Pharmaceuticals Int’l GmbH et al v. Dr. Reddy’s Laboratories, Ltd., and Dr. Reddy’s Laboratories, Inc. - (Bendeka®)
Bendeka, which contains bendamustine hydrochloride, is an alkylating drug that is indicated for the treatment of patients with chronic lymphocytic leukemia, as well as for the treatment of patients with indolent B-cell non-Hodgkin's lymphoma that has progressed during or within six months of treatment with rituximab or a rituximab-containing regimen. Slayback Pharma Limited Liability Company (“Slayback”), Apotex Inc. and Apotex Corp. (“Apotex”), Fresenius Kabi USA, LLC (“Fresenius”), Mylan Laboratories Limited (“Mylan”), Lupin, Ltd. and Lupin Pharmaceuticals, Inc. (“Lupin”), and Aurobindo Pharma, Ltd, Aurobindo Pharma USA, Inc., and Eugia Pharma Specialities Ltd (“Aurobindo”) have filed Abbreviated New Drug Applications (“ANDA’s”) referencing Bendeka® that include challenges to one or more of the Bendeka® Orange Book-listed patents. Hospira, Inc. (“Hospira”) filed a 505(b)(2) NDA.
We, Cephalon, Inc. and/or Teva Pharmaceuticals International GMBH (together the “Patentees”), filed separate suits against Slayback, Apotex, Fresenius, Mylan, Hospira, Lupin, and Aurobindo in the United States District Court for the District of Delaware on August 16, 2017 (Slayback (“Slayback I”)), August 18, 2017 (Apotex), August 24, 2017 (Fresenius), December 12, 2017 (Mylan), January 19, 2018 (Slayback (“Slayback II”)), July 19, 2018 (Hospira), and July 2, 2019 (Lupin) and May 11,
2020 (Aurobindo). In these Complaints, the Patentees allege infringement of the challenged patents, namely U.S. Patent Nos. 8,791,270 and 9,572,887 against Slayback (Slayback I and Slayback II), and of U.S. Patent Nos. 8,609,707, 8,791,270, 9,000,021, 9,034,908, 9,144,568, 9,265,831, 9,572,796, 9,572,797, 9,572,887, 9,579,384, 9,597,397, 9,597,398, 9,597,399 against Fresenius, Apotex, and Mylan, and of U.S. Patent Nos. 9,572,887, 10,010,533, 9,034,908, 9,144,568, 9,597,397, 9,597,398, 9,597,399, 9,000,021, 9,579,384 against Hospira, and of U.S. Patent Nos. 8,609,707, 9,000,021, 9,034,908, 9,144,568, 9,265,831, 9,572,796, 9,572,797, 9,572,887, 9,579,384, 9,597,397, 9,597,398, 9,597,399, 10,010,533, and 10,052,385 against Lupin and of U.S. Patent Nos. 8,609,707, 9,265,831, 9,572,796, 9,572,797, 9,034,908, 9,144,568, 9,572,887, 9,597,397, 9,597,398, 9,597,399, 9,000,021, 9,579,384, 10,010,533, and 10,052,385 against Aurobindo. The parties stipulated to dismiss without prejudice U.S. Patent No. 8,791,270 as to Apotex, Fresenius and Mylan on July 24, 2018, August 2, 2018, and August 3, 2018, respectively. Slayback, Apotex, Fresenius, and Mylan answered their Complaints and some filed various counterclaims on September 29, 2017 (Slayback I), February 12, 2018 (Slayback II), November 27, 2017, September 15, 2017, and February 14, 2018, respectively. The Patentees answered the Slayback I, Slayback II, Fresenius, and Apotex counterclaims on October 20, 2017, March 5, 2018, October 6, 2017, and December 18, 2017, respectively. On October 15, 2018, the Patentees filed a suit against Fresenius and Mylan in the United States District Court for the District of Delaware, alleging patent infringement of U.S. Patent Nos. 10,010,533 and 10,052,385. The Slayback I, Slayback II, Apotex, Fresenius and Mylan cases have been consolidated for all purposes (the “Consolidated Bendeka Litigation”), and a bench trial in these cases was held September 9-19, 2019. On April 27, 2020, the district court held that the asserted patents are valid and infringed by Slayback, Apotex, Fresenius and Mylan. On July 6, 2020, the district court entered a final judgment reflecting this decision, stating that pursuant to 35 U.S.C. § 271(e)(4)(A), the FDA shall not approve Apotex’s, Fresenius’s, Mylan’s, or Slayback’s ANDA products on a date which is earlier than January 28, 2031, and enjoining Apotex, Fresenius, Mylan, and Slayback from commercially manufacturing, using, offering to sell, or selling within the US or importing into the US, their ANDA products before that date. On August 4, 2020, Apotex, Fresenius, and Mylan appealed this final judgment, and filed their opening briefs on November 4, 2020. Plaintiffs’ responsive appeal brief was filed on February 12, 2021. Defendants’ reply briefs were filed April 5, 2021. On August 2, 2021, Fresenius’s appeal was dismissed pursuant to a settlement agreement reached with Patentees. Oral argument for the remaining defendants occurred on August 3, 2021. On August 13, 2021, the appeals court affirmed the trial court’s decision. The mandate was issued on October 22, 2021. Apotex filed a petition for certiorari on December 14, 2021, which the Supreme Court denied on February 22, 2022.
Hospira filed a motion to dismiss, which was fully briefed on November 16, 2018. On December 16, 2019, the United States District Court for the District of Delaware denied Hospira’s motion to dismiss with respect to U.S. Patent No. 9,572,887 and granted that motion with respect to the remaining patents. On December 15, 2020, the Court held a claim construction hearing, ruling in our favor on all claim terms. Fact discovery closed on April 1, 2021. Expert discovery ended on February 10, 2022. The parties reached a settlement on April 19, 2022, resulting in dismissal of the action.
Patentees filed suit against Hospira, Inc. on November 16, 2021. Patentees have asserted U.S. Patent No. 11,103,483. Hospira filed its Answer on December 8, 2021. The parties reached a settlement on April 19, 2022, resulting in dismissal of the action.
On March 10, 2020, the parties filed a stipulation and order of dismissal without prejudice as to Lupin, which the Court entered March 11, 2020.
Aurobindo answered the Complaint on July 20, 2020. The parties exchanged initial disclosures on December 11, 2020. Plaintiffs provided their infringement contentions on March 12, 2021. On October 20, 2021 the Court entered a stipulation of dismissal based on a settlement between the parties.
Patentees filed suit against Dr. Reddy’s Laboratories on May 13, 2021. Patentees have asserted U.S. Patent Nos. 8,609,707, 9,265,831, 9,572,796, 9,572,797, 9,034,908, 9,144,568, 9,572,887, 9,597,397, 9,597,398, 9,597,399, 9,000,021, 9,579,384, 10,010,533, and 10,052,385. Dr. Reddy’s answer was filed August 16, 2021. On December 27, 2021, Dr. Reddy’s moved for judgment on the pleadings, seeking a dismissal of all patents except the ‘887 patent. On January 27, 2022, the Court entered an agreed stipulation by the parties dismissing all patents except the ‘887. On February 8, 2022, consistent with that stipulation, Patentees filed an Amended Complaint removing the dismissed patents and adding U.S. Patent No 11,103,483. Dr. Reddy’s filed its Answer and Counterclaims to that Amended Complaint on February 22, 2022. Patentees’ filed their Counterclaim Answer on March 15, 2022. Fact discovery is ongoing. A claim construction hearing is set for September 15, 2022, and the case is set for trial on May 1, 2023.
Patentees filed suit against Accord Healthcare on June 29, 2021. Patentees have asserted U.S. Patent Nos. 8,609,707, 9,265,831, 9,572,796, 9,572,797, 9,034,908, 9,144,568, 9,572,887, 9,597,397, 9,597,398, 9,597,399, 9,000,021, 9,579,384,
10,010,533, and 10,052,385. On January 13, 2022, Accord filed a Motion to Dismiss for failure to state a claim. On January 26, 2022, Patentees filed a First Amended Complaint, removing all patents except the ‘887 patent and additionally asserting U.S. Patent No. 11,103,483. Accord filed its Answer and Counterclaims to that Amended Complaint on February 10, 2022. On February 28, 2022, Patentees filed their Answer to Accord’s Counterclaims. On March 29, 2022, the Court entered a schedule and consolidated this case with the above Dr. Reddy’s case. Fact discovery is ongoing. A claim construction hearing is set for September 15, 2022, and the case is set for trial on May 1, 2023.
Eagle Pharmaceuticals, Inc. v. Slayback Pharma Limited Liability Company, Apotex, Inc. and Apotex Corp.,
Celerity Pharmaceuticals, LLC - (Belrapzo®)
Slayback filed an ANDA referencing Eagle's Belrapzo NDA. Slayback’s ANDA includes challenges to one or more of the Belrapzo Orange Book-listed patents. On September 20, 2018, the Company filed a suit against Slayback in the United States District Court for the District of Delaware, alleging patent infringement of U.S. Patent Nos. 8,609,707, 9,265,831, 9,572,796, 9,572,797 and 10,010,533. On October 10, 2018, Slayback answered the Complaint and filed various counterclaims. On October 31, 2018, the Company answered Slayback’s counterclaims. Pursuant to a stipulation between the parties, Slayback is bound by any final judgment entered in the Consolidated Bendeka Litigation. This case is currently stayed.
Eagle Pharmaceuticals, Inc. v. Slayback Pharma Limited Liability Company, Apotex, Inc. and Apotex Corp.,
Celerity Pharmaceuticals, LLC - (Belrapzo®)
Slayback, Apotex, and Celerity Pharmaceuticals, LLC (“Celerity”) filed NDAs referencing Eagle’s Belrapzo NDA. The Company filed suits against Slayback, Apotex, and Celerity in the United States District Court for the District of Delaware on August 31, 2021 (Slayback and Apotex) and on January 11, 2022 (Celerity) alleging infringement of U.S. Patent No. 11,103,483. On September 22, 2021, both Slayback and Apotex filed their Answers. The suit against Slayback and Apotex is set for trial on September 29, 2022, and expert discovery is ongoing. On February 2, 2022, Celerity moved to dismiss the pending complaint. In response, the Company filed an Amended Complaint on March 1, 2022. Celerity filed its Answer to the Company’s Amended Complaint on March 22, 2022. On April 19, 2022, Celerity moved for judgment on the pleadings. Briefing on that motion is closed and a decision is pending. On June 24, 2022, the Court entered a schedule coordinated with the above Accord and Dr. Reddy’s cases. Fact discovery is ongoing. A claim construction hearing is set for September 15, 2022, and the case is set for trial on May 1, 2023.
Eagle Pharmaceuticals, Inc. v. Accord Healthcare Inc., Accord Healthcare Ltd., and Intas Pharmaceuticals Ltd. - (Belrapzo®)
Accord filed an NDA referencing Eagle's Belrapzo NDA. Accord’s NDA includes challenges to one or more of the Belrapzo Orange Book-listed patents. On May 27, 2022, the Company filed a suit against Accord in the United States District Court for the District of Delaware, alleging patent infringement of U.S. Patent Nos. 8,609,707, 9,265,831, 9,572,796, 9,572,797, 10,010,533, and 11,103,483. On July 6, 2022 the Company filed a First Amended Complaint, removing all patents except the ‘483 patent. Accord filed its Answer and Counterclaims on July 20, 2022. The Company’s Answer to Accord’s Counterclaims is due August 10, 2022.
Par Pharmaceutical, Inc. et al. v. Eagle Pharmaceuticals, Inc. (Vasopressin)
On May 31, 2018, Par Pharmaceutical, Inc., Par Sterile Products, LLC, and Endo Par Innovation Company, LLC (together, “Par”) filed suit against the Company in the United States District Court for the District of Delaware. Par alleged patent infringement based on the filing of the Company’s ANDA seeking approval to manufacture and sell the Company’s vasopressin product. The Company’s vasopressin product is an alternative to Vasostrict, which is indicated to increase blood pressure in adults with vasodilatory shock (e.g., post-cardiotomy or sepsis) who remain hypotensive despite fluids and catecholamines. The Company answered the complaint on August 6, 2018, and filed an amended answer and counterclaims on October 30, 2019. The court issued a Markman ruling on July 1, 2019. On December 20, 2019, Par dismissed with prejudice claims of three of the patents asserted against Eagle, and the Court entered an Order reflecting that dismissal on December 27, 2019. Mediation took place on March 3, 2020. On April 17, 2020, we submitted a letter requesting leave to file a motion for summary judgment of non-infringement. Par’s responsive letter was submitted on May 8, 2020. On May 18, 2020, the court said it would hear non-infringement arguments at trial and not through summary judgment. Fact discovery ended in October 2019, and expert discovery ended in February 2020. Due to the COVID-19 pandemic, the trial, which was scheduled to begin May 18, 2020, was rescheduled to and occurred on July 7-9, 2021. Post-trial briefing was submitted on July 28, 2021. The Court issued an opinion
on August 31, 2021 and entered a final judgment of non-infringement in favor of Eagle on September 16, 2021. Par filed a Notice of Appeal of the final judgment on September 22, 2021, and the appeal was docketed with the United States Court of Appeals for the Federal Circuit on September 23, 2021. Par filed its principal appeal brief on December 6, 2021, Eagle filed its responsive appeal brief on February 1, 2022, and Par filed its reply appeal brief on February 22, 2022. Oral argument occurred before the Federal Circuit on July 7, 2022. The FDA approved Eagle’s ANDA on December 15, 2021. On December 16, 2021, Par filed an emergency motion for temporary restraining order and preliminary injunction in the district court to enjoin Eagle from launching its product, but Par voluntarily withdrew the motion on December 20, 2021. Eagle commercially launched its ANDA product in January 2022. The 30-month stay of FDA approval expired on October 17, 2020. This suit is pending.
On December 7, 2020, Par filed a separate suit against us in the United States District Court for the District of New Jersey, asserting patent infringement of U.S. Patent No. 10,844,435, based on the filing of our ANDA seeking approval to manufacture and sell our vasopressin product. Eagle moved to dismiss Par’s complaint on March 2, 2021. On March 22, 2021, Par amended its complaint to additionally assert U.S. Patent No. 10,920,278, and on April 5, 2021, Eagle moved to dismiss Par’s amended complaint. Before the Court ruled on Eagle’s Motion to Dismiss, on May 9, 2022, Par provided notice of the dismissal of the action under Rule 41(a)(1)(A)(i), and the Court granted the dismissal of the action on May 10, 2022.
12. License and Collaboration Agreements
License agreement with Combioxin
In August 2021, we entered into a license agreement with Combioxin, SA under which the Company was granted exclusive, worldwide development and commercialization rights to CAL02, a novel first-in-class antitoxin agent ready for Phase 2b/3 development for the treatment of severe pneumonia in combination with traditional antibacterial drugs. The Company will be solely responsible for the development, regulatory, manufacturing and commercialization activities of CAL02. Combioxin will assist the Company in transitioning the manufacturing and supply of CAL02 to the Company.
Under the terms of the agreement, we paid $10 million as upfront license consideration that was expensed immediately as research and development and is reflected within the operating activities of the consolidated statements of cash flows as of December 31, 2021. The Company may pay to Combioxin up to $105 million upon achievement of certain development, regulatory and sales based milestone payments plus royalty payments at royalty rates ranging in low double digit percentages on the net sales of all products sold, subject to certain adjustments as provided in the agreement. The Company is also obligated to make certain payments based upon amounts received by sublicensees under the agreement.
License agreement with AOP Orphan
In August 2021, we entered into a licensing agreement with AOP Orphan Pharmaceuticals GmbH (“AOP Orphan”), a privately owned Austrian company devoted to the treatment of rare and special diseases, for the commercial rights to its product, landiolol in the United States. Landiolol, a leading hospital emergency use product, is currently approved in Europe for the treatment of non-compensatory sinus tachycardia and tachycardic supraventricular arrhythmias. We supported the submission of a new drug application (“NDA”) in the second quarter of 2022 by AOP Orphan to the FDA seeking approval for landiolol for the short term reduction of ventricular rate in patients with supraventricular tachycardia (“SVT”), including atrial fibrillation and atrial flutter.
Under the terms of the agreement, we paid a $5 million upfront license consideration that was expensed immediately as research and development and is reflected within the operating activities of the consolidated statements of cash flows as of December 31, 2021. We may pay to AOP Orphan up to $25 million upon achievement of certain regulatory milestone payments plus profit share payments, subject to certain adjustments as provided in the agreement. We also entered into a supply agreement at the same time as the licensing agreement.
Collaboration with Tyme
On January 7, 2020, Tyme and we announced a strategic collaboration to advance SM-88, an oral product candidate for the treatment of patients with cancer. SM-88 is an investigational agent in two Phase II studies, one for pancreatic cancer and another for prostate cancer.
Under the terms of a related co-promotion agreement, we would be responsible for 25% of the promotional sales effort of SM-88 and would receive 15% royalty on the net revenues of SM-88 in the United States. Tyme is responsible for clinical development, regulatory approval, commercial strategy, marketing, reimbursement and manufacturing of SM-88. Tyme retains the remaining 85% of net U.S. revenues and reserves the right to repurchase our U.S. co-promotion right for $200.0 million.
Our equity investment in Tyme is included in Other assets on our condensed consolidated balance sheet. For the three months ended June 30, 2022 and 2021, the fair value adjustments for the equity investment were a loss of $0.7 million and a loss of $5.2 million, respectively. For the six months ended June 30, 2022 and 2021, the fair value adjustments for the equity investment were a loss of $3.2 million and a gain of $0.4 million, respectively. These adjustments were recorded in Other (expense) income on our condensed consolidated statements of operations.
13. Convertible Promissory Note
During the first quarter of 2021, we invested $5 million in a convertible promissory note ("the note") of a privately held clinical-stage biotechnology company (the "issuer"). The note bears an 8% annual interest rate and has an 18-month term. The issuer is not required to make any principal or interest payments until the end of the term. The note, along with any accrued interest, may automatically convert into equity securities of the issuer under either a financing event or a change in control event as defined in the convertible promissory note agreement. The issuer's product development efforts could encounter technical or other difficulties that could increase their development costs more than expected. The issuer will likely require additional capital prior to obtaining certain regulatory approval or to be able to repay the convertible promissory note with accrued interest at the end of the term.
The following table summarizes the activity during the three months ended June 30, 2022;
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | Fair Value Adjustments to the note | | Accretion of Discount | | Estimated Credit Loss | | Interest Income | | Fair Value Adjustment to Embedded Derivative | | June 30, 2022 |
Fair value of the note | | $ | 5,418 | | | $ | 92 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,510 | |
Discount on the note | | (82) | | | — | | | 46 | | | — | | | — | | | — | | | (36) | |
Estimated Credit Loss | | (794) | | | — | | | — | | | (26) | | | — | | | — | | | (820) | |
Convertible Promissory Note, net | | $ | 4,542 | | | $ | 92 | | | $ | 46 | | | $ | (26) | | | $ | — | | | $ | — | | | $ | 4,654 | |
| | | | | | | | | | | | | | |
Embedded Derivative | | $ | 1,003 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 23 | | | $ | 1,026 | |
| | | | | | | | | | | | | | |
Interest Receivable | | $ | 429 | | | $ | — | | | $ | — | | | $ | — | | | $ | 101 | | | $ | — | | | $ | 530 | |
| | | | | | | | | | | | | | |
Total in Other Current Assets | | $ | 5,974 | | | $ | 92 | | | $ | 46 | | | $ | (26) | | | $ | 101 | | | $ | 23 | | | $ | 6,210 | |
The following table summarizes the amounts recorded and activity during the six months ended June 30, 2022;
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | Fair Value Adjustments to the note | | Accretion of Discount | | Estimated Credit Loss | | Interest Income | | Fair Value Adjustment to Embedded Derivative | | June 30, 2022 |
Fair value of the note | | $ | 4,906 | | | $ | 604 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,510 | |
Discount on the note | | (127) | | | — | | | 91 | | | — | | | — | | | — | | | (36) | |
Estimated Credit Loss | | (758) | | | — | | | — | | | (62) | | | — | | | — | | | (820) | |
Convertible Promissory Note, net | | $ | 4,021 | | | $ | 604 | | | $ | 91 | | | $ | (62) | | | $ | — | | | $ | — | | | $ | 4,654 | |
| | | | | | | | | | | | | | |
Embedded Derivative | | $ | 962 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 64 | | | $ | 1,026 | |
| | | | | | | | | | | | | | |
Interest Receivable | | $ | 329 | | | $ | — | | | $ | — | | | $ | — | | | $ | 201 | | | $ | — | | | $ | 530 | |
| | | | | | | | | | | | | | |
Total in Other Current Assets | | $ | 5,312 | | | $ | 604 | | | $ | 91 | | | $ | (62) | | | $ | 201 | | | $ | 64 | | | $ | 6,210 | |
14. Business Acquisition
On June 9, 2022, we completed our previously announced acquisition of the entire issued share capital of Acacia for cash consideration and common stock totaling 94.7 million euros, the equivalent of 0.90 euros per share, and an aggregate of 516,024 shares of our common stock. Each shareholder of Acacia received 0.68 euros in cash and 0.0049 shares of common stock of Eagle. Acacia is a hospital pharmaceutical company focused on the development and commercialization of new products aimed at improving the care of patients undergoing significant treatments such as surgery and other invasive procedures. The transaction was entered to expand Eagle’s current portfolio of FDA approved hospital products with the addition of Barhemsys and Byfavo.
The Company evaluated the Business Acquisition under ASC 805, Business Combinations and ASU 2017-01, Business Combinations: Clarifying the Definition of a Business. The Company concluded that substantially all of the fair value of the gross assets acquired is not concentrated in a single identifiable asset or a group of similar identifiable assets. The transaction does not pass the screen test and thus management performed an assessment to determine if the acquired entities met the definition of a business. For the assessment, management considered whether it has acquired (i) inputs, (ii) processes, and (iii) outputs. Under ASC 805, to be considered a business, a set of activities and assets is required to have only the first two of the three elements, which together are or will be used in the future to create outputs. Management determined that the acquired entities met the definition of a business since the Company acquired inputs, processes capable of producing outputs and outputs.
Therefore, the acquisition has been accounted for under the acquisition method of accounting. Under the acquisition method, the total purchase price of the acquisition is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on the fair values as of the date of the acquisition.
The fair value of the consideration totaled $101.6 million, summarized as follows (in thousands):
| | | | | | | | | | |
| | Fair Value of Consideration | | |
Cash consideration | | $ | 77,971 | | | |
Fair value of Eagle common stock issued | | 23,645 | | | |
| | | | |
| | $ | 101,616 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
The Company recorded the assets acquired and liabilities assumed as of the date of the acquisition based on the information available as of that date. As the Company finalize the fair values of the assets acquired and liabilities assumed, purchase price adjustments may be recorded during the measurement period and such adjustments could be material. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized.
The following table presents the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):
| | | | | |
| Preliminary Purchase Price Allocation |
Cash | $ | 2,556 | |
Net working capital, excluding cash | (2,158) | |
Inventory | 26,942 | |
Intangible assets | 104,000 | |
Debt | (28,503) | |
| |
Deferred tax liability, net | (4,536) | |
Fair value of net assets acquired | 98,301 | |
Goodwill | 3,315 | |
| $ | 101,616 | |
The fair value of acquired intangible assets was based on the present value of expected future after tax cash flows attributable to the commercialization of Barhemsys and Byfavo, using the net present value approach. The inventory acquired was valued at expected profit margins for the acquired products. The fair value of working capital acquired approximates its book value. The fair value of debt acquired was based on the present value of future cash outflows using the net present value approach and applying an interest rate that is considered to be a market participant equivalent rate.
The Company incurred approximately $9.8 million and $11.3 million in acquisition-related expenses, which were included in selling, general and administrative expenses in the condensed consolidated statements of operations for the three and six months ended June 30, 2022. These expenses primarily consist of legal fees and success fees paid to third party advisors. The results of Acacia operations have been included in the condensed consolidated statements of operations beginning on the acquisition date. The acquired business contributed revenues of $0.2 million and net loss of $3.4 million to the Company for the period from June 9, 2022 to June 30, 2022.
The goodwill recorded related to the acquisition is the excess of the fair value of the consideration transferred by the acquirer over the fair value of the net identifiable assets acquired and liabilities assumed at the date of acquisition. The goodwill recorded is not deductible for tax purposes.
Pro Forma Financial Information:
The following table provides unaudited pro forma financial information for the three-month and six-month periods ended June 30, 2022 and 2021 as if the acquisition of Acacia had occurred as of January 1, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Total revenue | $ | 74,546 | | | $ | 48,417 | | | $ | 191,038 | | | $ | 89,814 | |
| | | | | | | |
Net income (loss) | $ | 2,875 | | | $ | (10,156) | | | $ | 36,124 | | | $ | (51,304) | |
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These amounts have been calculated after applying our accounting policies.
The pro forma results above include the impact of the following adjustments, as necessary: additional amortization expense relating to assets acquired; interest and other financing costs relating to the acquisition transaction; and the elimination of one-time or nonrecurring items. The one-time or nonrecurring items eliminated were primarily comprised of inventory fair value step-up adjustments; transaction costs, as well as certain Acacia-related share based payment charges and employee compensation expenses.
The pro forma results do not include any anticipated cost savings or other effects of the planned integration of Acacia. Accordingly, the pro forma results above are not necessarily indicative of the results that would have been if the acquisition had occurred on the dates indicated, nor are the pro forma results indicative of results which may occur in the future.
15. Subsequent Event
On August 8, 2022, we and Enalare Therapeutics Inc. (“Enalare”) entered into a Securities Purchase Agreement, pursuant to which we have committed to provide equity investments of up to $55 million in Enalare, subject to the completion of certain development milestones (the “Purchase Agreement”). Concurrently with the execution of the Purchase Agreement, we, Enalare and Enalare’s stockholders entered into a Security Purchase Option Agreement, pursuant to which we were granted an option (the “Purchase Option”) to acquire all of the remaining outstanding shares of Enalare other than those that we already own. The Purchase Option is subject to Enalare’s receipt of communication from the FDA after the completion of the Phase 2 Clinical Trial (as defined in the Purchase Agreement) that can be reasonably interpreted as not precluding Enalare from proceeding to a Phase 3 clinical trial involving a product containing the active ingredient ENA-001.