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SEC Filings

10-Q
DEPOMED INC filed this Form 10-Q on 08/07/2017
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2017

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM        TO      

 

COMMISSION FILE NUMBER 001-13111

 

DEPOMED, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

CALIFORNIA

 

94-3229046

(STATE OR OTHER JURISDICTION OF

 

(I.R.S. EMPLOYER

INCORPORATION OR ORGANIZATION)

 

IDENTIFICATION NUMBER)

 

7999 Gateway Boulevard, Suite 300

Newark, California 94560

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

 

(510) 744-8000

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Emerging growth company ☐

 

Smaller reporting company ☐

 

 

 

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

 

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

 

The number of issued and outstanding shares of the Registrant’s Common Stock, no par value, as of August 4, 2017 was 62,988,986.

 

 

 

 

 


 

DEPOMED, INC

 

 

 

PAGE

 

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

 

 

Item 1. 

 

Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016

4

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2017 and 2016

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

Item 2. 

 

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

28

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosure About Market Risk

41

 

 

 

 

Item 4. 

 

Controls and Procedures

41

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

Item 1. 

 

Legal Proceedings

42

 

 

 

 

Item 1A. 

 

Risk Factors

45

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

67

 

 

 

 

Item 3. 

 

Defaults upon Senior Securities

67

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

67

 

 

 

 

Item 5. 

 

Other Information

67

 

 

 

 

Item 6. 

 

Exhibits

68

 

 

 

 

 

Signatures

69

 

2


 

PART I — FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

DEPOMED, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

113,225

 

$

117,709

 

Short-term investments

 

 

3,574

 

 

59,711

 

Accounts receivable, net

 

 

78,337

 

 

102,056

 

Receivables from collaborative partners

 

 

371

 

 

533

 

Inventories

 

 

10,433

 

 

13,033

 

Prepaid and other current assets

 

 

13,103

 

 

13,162

 

Total current assets

 

 

219,043

 

 

306,204

 

Property and equipment, net

 

 

14,532

 

 

15,526

 

Intangible assets, net

 

 

850,679

 

 

902,149

 

Other assets

 

 

1,346

 

 

1,458

 

Total assets

 

$

1,085,600

 

$

1,225,337

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

12,407

 

$

14,855

 

Accrued rebates, returns and discounts

 

 

140,006

 

 

131,536

 

Accrued liabilities

 

 

53,052

 

 

59,398

 

Income taxes payable

 

 

 —

 

 

59

 

Current portion of Senior Notes

 

 

57,500

 

 

 —

 

Contingent consideration liability, current portion

 

 

1,851

 

 

4,578

 

Interest payable

 

 

13,208

 

 

15,924

 

Other current liabilities

 

 

917

 

 

892

 

Total current liabilities

 

 

278,941

 

 

227,242

 

Contingent consideration liability, long-term portion

 

 

5,505

 

 

10,247

 

Senior Notes

 

 

311,112

 

 

466,051

 

Convertible Notes

 

 

260,938

 

 

252,725

 

Other long-term liabilities

 

 

17,708

 

 

18,284

 

Commitments

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock

 

 

 —

 

 

 —

 

Common stock

 

 

306,103

 

 

291,634

 

Additional paid-in capital

 

 

75,707

 

 

75,917

 

Accumulated deficit

 

 

(170,412)

 

 

(116,744)

 

Accumulated other comprehensive loss, net of tax

 

 

(2)

 

 

(19)

 

Total shareholders’ equity

 

 

211,396

 

 

250,788

 

Total liabilities and shareholders' equity

 

$

1,085,600

 

$

1,225,337

 


 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

DEPOMED, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

 

$

100,232

 

$

116,517

 

$

190,517

 

$

221,088

 

Royalties

 

 

225

 

 

165

 

 

387

 

 

374

 

Total revenues

 

 

100,457

 

 

116,682

 

 

190,904

 

 

221,462

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of intangible assets)

 

 

19,725

 

 

20,965

 

 

37,499

 

 

44,514

 

Research and development expenses

 

 

5,614

 

 

7,116

 

 

10,698

 

 

13,065

 

Selling, general and administrative expenses

 

 

50,010

 

 

51,903

 

 

98,529

 

 

104,462

 

Amortization of intangible assets

 

 

25,735

 

 

27,037

 

 

51,470

 

 

54,074

 

Restructuring charges

 

 

3,441

 

 

 —

 

 

3,441

 

 

 —

 

Total costs and expenses

 

 

104,525

 

 

107,021

 

 

201,637

 

 

216,115

 

(Loss) Income from operations

 

 

(4,068)

 

 

9,661

 

 

(10,733)

 

 

5,347

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

282

 

 

67

 

 

532

 

 

197

 

Loss on prepayment of Senior Notes

 

 

(5,364)

 

 

(5,777)

 

 

(5,364)

 

 

(5,777)

 

Interest expense

 

 

(17,758)

 

 

(20,148)

 

 

(37,882)

 

 

(42,875)

 

Total other expense

 

 

(22,840)

 

 

(25,858)

 

 

(42,714)

 

 

(48,455)

 

Net loss before income taxes

 

 

(26,908)

 

 

(16,197)

 

 

(53,447)

 

 

(43,108)

 

Benefit from income taxes

 

 

249

 

 

5,656

 

 

47

 

 

11,650

 

Net loss

 

$

(26,659)

 

$

(10,541)

 

$

(53,400)

 

$

(31,458)

 

Basic and diluted net loss per share

 

$

(0.43)

 

$

(0.17)

 

$

(0.86)

 

$

(0.52)

 

Shares used in computing basic and diluted net loss per share

 

 

62,531,696

 

 

61,166,044

 

 

62,331,471

 

 

61,032,155

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


 

DEPOMED, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Net loss

 

$

(26,659)

 

$

(10,541)

 

$

(53,400)

 

$

(31,458)

 

Unrealized gains on available-for-sale securities, net of tax

 

 

 2

 

 

(1)

 

 

17

 

 

35

 

Comprehensive loss

 

$

(26,657)

 

$

(10,542)

 

$

(53,383)

 

$

(31,423)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

 

DEPOMED, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

    

2017

    

2016

 

Operating Activities

 

 

 

 

 

 

 

Net loss

 

$

(53,400)

 

$

(31,458)

 

Adjustments for non-cash items:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

52,691

 

 

55,336

 

Accretion of debt discount and debt issuance costs

 

 

9,411

 

 

8,624

 

Loss on prepayment of Senior Notes

 

 

5,364

 

 

5,777

 

Provision for inventory obsolescence

 

 

2,110

 

 

403

 

Gain on disposal of property and equipment

 

 

(275)

 

 

 —

 

Stock-based compensation

 

 

6,959

 

 

8,238

 

Change in fair value of contingent consideration

 

 

(6,176)

 

 

527

 

Deferred income taxes

 

 

 —

 

 

(12,232)

 

Other

 

 

264

 

 

472

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

23,719

 

 

(8,354)

 

Receivables from collaborative partners

 

 

162

 

 

67

 

Inventories

 

 

490

 

 

(346)

 

Prepaid and other assets

 

 

173

 

 

(4,912)

 

Accounts payable and other accrued liabilities

 

 

(9,135)

 

 

(3,060)

 

Accrued rebates, returns and discounts

 

 

8,470

 

 

(3,251)

 

Interest payable

 

 

(2,716)

 

 

(2,889)

 

Net cash provided by operating activities

 

 

38,111

 

 

12,942

 

Investing Activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(504)

 

 

(2,538)

 

Proceeds from disposal of property and equipment

 

 

280

 

 

 —

 

Purchases of marketable securities

 

 

(2,391)

 

 

(26,570)

 

Maturities of marketable securities

 

 

58,281

 

 

103,707

 

Net cash provided by investing activities

 

 

55,666

 

 

74,599

 

Financing Activities

 

 

 

 

 

 

 

Payment of contingent consideration liability

 

 

(1,293)

 

 

(600)

 

Repayment of Senior Notes

 

 

(100,000)

 

 

(100,000)

 

Prepayment fees for repayment of Senior Notes

 

 

(4,000)

 

 

(5,000)

 

Proceeds from issuance of common stock

 

 

7,242

 

 

5,163

 

Shares withheld for payment of employee's withholding tax liability

 

 

(210)

 

 

(367)

 

Net cash used in financing activities

 

 

(98,261)

 

 

(100,804)

 

Net increase in cash and cash equivalents

 

 

(4,484)

 

 

(13,263)

 

Cash and cash equivalents at beginning of year

 

 

117,709

 

 

101,084

 

Cash and cash equivalents at end of period

 

$

113,225

 

$

87,821

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

Net cash paid for income taxes

 

$

121

 

 

78

 

Cash paid for interest

 

$

30,187

 

 

35,823

 

Capital expenditures incurred but not yet paid

 

$

130

 

 

124

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


 

DEPOMED, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

 

Depomed, Inc. (Depomed or the Company) is a specialty pharmaceutical company focused on pain and other central nervous system (CNS) conditions. The products that comprise the Company’s current specialty pharmaceutical business are (i) NUCYNTA® ER (tapentadol extended release tablets), a product for the management of pain severe enough to require daily, around-the-clock, long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy (DPN) in adults, and for which alternative treatment options are inadequate, and NUCYNTA® IR (NUCYNTA) (tapentadol), a product for the management of moderate to severe acute pain in adults, each of which the Company acquired the U.S. rights to in April 2015, (ii) Gralise® (gabapentin), a once-daily product for the management of postherpetic neuralgia (PHN) that the Company launched in October 2011, (iii) CAMBIA® (diclofenac potassium for oral solution), a product for the acute treatment of migraine attacks that the Company acquired in December 2013, (iv) Zipsor® (diclofenac potassium) liquid filled capsules, a product for the treatment of mild to moderate acute pain that the Company acquired in June 2012, and (v) Lazanda® (fentanyl) nasal spray, a product for the management of breakthrough pain in cancer patients 18 years of age and older who are already receiving and who are tolerant to opioid therapy for their underlying persistent cancer pain that the Company acquired in July 2013.

 

As of June 30, 2017, the Company has one product candidate, cebranopadol initially for the treatment of chronic lower back pain and potentially for chronic nociceptive and neuropathic pain.  The Company is currently evaluating the development plan for cebranopadol, including the timing of potential Phase 3 trials.

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements and the related footnote information of the Company have been prepared pursuant to the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying interim unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of the information for the periods presented. The results for the three and six months ended June 30, 2017 are not necessarily indicative of results to be expected for the entire year ending December 31, 2017 or future operating periods.

 

The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC (the 2016 Form 10-K). The balance sheet as of December 31, 2016 has been derived from the audited financial statements at that date, as filed in the Company’s 2016 Form 10-K.

 

See Note 14 herein for information regarding impact of an out of period adjustment related to the Branded Prescription Drug fee (“BPD”) on our consolidated financial statements.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Depomed Bermuda Ltd (Depo Bermuda), Depo NF Sub, LLC (Depo NF Sub) and Depo DR Sub, LLC (Depo DR Sub). All intercompany accounts and transactions have been eliminated on consolidation.

 

On November 17, 2015, the Company entered into a definitive agreement to acquire the U.S. and Canadian rights to cebranopadol and its related follow-on compound from Grünenthal GmbH (Grünenthal). The acquisition of these rights closed on December 30, 2015 at which point the Company assigned its rights under the agreement to Depo Bermuda, a Company which was formed in Bermuda on December 22, 2015.

7


 

 

Depo NF Sub was formed on March 26, 2015, in connection with a Note Purchase Agreement dated March 12, 2015 (Note Purchase Agreement) governing the Company’s issuance of $575.0 million aggregate principal amount of Senior Notes on April 2, 2015, for aggregate gross proceeds of approximately $562.0 million. On April 2, 2015, the Company and Depo NF Sub entered into a Pledge and Security Agreement with the Collateral Agent pursuant to which the Company and Depo NF Sub each granted the Collateral Agent (on behalf of the Purchasers) a security interest in substantially all of their assets, other than specifically excluded assets.

 

Depo DR Sub was formed in October 2013 for the sole purpose of facilitating the license of certain rights to PDL Biopharma (the PDL Transaction). The Company contributed to Depo DR Sub all of its rights, title and interests in certain license agreements to receive royalty and milestone payments. Immediately following the transaction, Depo DR Sub sold to PDL, among other things, such rights to receive royalty and milestone payments, for an upfront cash purchase price of $240.5 million.

 

The Company and Depo DR Sub continue to retain certain administrative duties and obligations under the specified license agreements. These include the collection of the royalty and milestone amounts due and enforcement of related provisions under the specified license agreements, among others. In addition, the Company and Depo DR Sub must prepare a quarterly distribution report relating to the specified license agreements, containing, among other items, the amount of royalty payments received by the Company and reimbursable expenses. The Company and Depo DR Sub must also provide PDL with notice of certain communications, events or actions with respect to the specified license agreements and infringement of any underlying intellectual property.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities as well as subsequent fair value measurements. Additionally, estimates are used in determining items such as, but not limited to, sales discounts and returns, depreciable and amortizable lives, share-based compensation assumptions, fair value of contingent consideration and taxes on income. Although management believes these estimates are based upon reasonable assumptions within the bounds of its knowledge of the Company’s business and operations, actual results could differ materially from these estimates.

 

Change in estimate – During the three months ended March 31, 2017, the Company established a reserve with respect to a dispute with a PBM over rebates relating to NUCYNTA ER, NUCYNTA and Gralise. The dispute relates to rebate claims submitted with respect to the year ended December 31, 2015 and the first half of 2016.  As of December 31, 2016, the Company established a reserve for $1.0 million with respect to these claims, and had determined the likely amount payable on settlement would not be material to the consolidated financial statements.  However, as a result of further communication with the PBM during the three months ended March 31, 2017, it became clear that the Company’s failure to pay the disputed amount would adversely impact the Company’s ability to maintain a favorable position on the PBM’s formulary. Accordingly, despite the Company’s belief that the claims in dispute are invalid, the Company increased the reserve against this matter by $4.7 million which is an offset to net sales for the three months ended March 31, 2017.  The Company will adjust net sales in the future if it resolves this matter for an amount different than currently reserved.

 

Measuring the Fair Value of Assets and Liabilities associated with Business Combinations

 

The Company accounts for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The fair value of the consideration paid, including contingent consideration, is assigned to the underlying net assets of the acquired business based on their respective fair values. Any excess or shortfall of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill or bargain purchase, as applicable.

 

Significant judgments are used in determining the estimated fair values assigned to the assets acquired, liabilities assumed, contingent consideration and in determining estimates of useful lives of long-lived assets. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future net cash flows, estimates of appropriate discount rates used to calculate present value of expected future net cash flows, the assessment

8


 

of each asset's life cycle, the impact of competitive trends on each asset's life cycle and other factors. These judgments can materially impact the estimates used to allocate acquisition date fair values to assets acquired and liabilities assumed and the resulting timing and amounts charged to, or recognized in, current and future operating results. For these and other reasons, actual results may vary significantly from estimated results.

 

Any changes in the fair value of contingent consideration resulting from a change in the underlying inputs are recognized in operating expenses until the contingent consideration arrangement is settled. Changes in the fair value of contingent consideration resulting from the passage of time are recorded within interest expense until the contingent consideration is settled.

 

Revenue Recognition

 

The Company recognizes revenue from the sale of its products, royalties and milestones earned under its contractual arrangements.

 

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred and title has passed, the price is fixed or determinable and the Company is reasonably assured of collecting the resulting receivable. Revenue arrangements with multiple elements are evaluated to determine whether the multiple elements meet certain criteria for dividing the arrangement into separate units of accounting, including whether the delivered element(s) have stand-alone value to the Company's customer or licensee. Where there are multiple deliverables combined as a single unit of accounting, revenues are deferred and recognized over the period that the Company remains obligated to perform services.

 

·

Product Sales—The Company sells commercial products to wholesale distributors and retail pharmacies. Products sales revenue is recognized when title has transferred to the customer and the customer has assumed the risks and rewards of ownership, which typically occurs on delivery to the customer.

 

·

Product Sales Allowances—The Company recognizes product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of the Company's agreements with customers, historical product returns, rebates or discounts taken or expected to be taken, estimated levels of inventory in the distribution channel, the shelf life of the product and specific known market events, such as competitive pricing and new product introductions. If actual future results vary from the Company's estimates, the Company may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. The Company's sales allowances include:

 

·

Product Returns—The Company allows customers to return product for credit with respect to product that is within six months before and up to 12 months after its product expiration date. The Company estimates product returns on NUCYNTA ER and NUCYNTA, Gralise, CAMBIA, Zipsor and Lazanda. Under the terms of the Zipsor asset purchase agreement, the Company assumed financial responsibility for returns of Zipsor product previously sold by Xanodyne Pharmaceuticals, Inc. (Xanodyne). Under the terms of the CAMBIA asset purchase agreement, the Company also assumed financial responsibility for returns of CAMBIA product previously sold by Nautilus. The Company did not assume financial responsibility for returns of NUCYNTA ER and NUCYNTA previously sold by Janssen Pharma or Lazanda product previously sold by Archimedes Pharma US Inc. See Note 12 for further information on the acquisition of NUCYNTA ER and NUCYNTA, CAMBIA, Lazanda and Zipsor.

 

The shelf life of NUCYNTA ER is 24 to 36 months and NUCYNTA is 36 months from the date of tablet manufacture, respectively. The shelf life of Gralise is 24 to 36 months from the date of tablet manufacture. The shelf life of CAMBIA is 24 to 48 months from the manufacture date. The shelf life of Zipsor is 36 months from the date of tablet manufacture. The shelf life of Lazanda is 24 to 36 months from the manufacture date. Estimates for returns are based on historical return trends by product or by return trends of similar products, taking into consideration the shelf life of product at the time of shipment, shipment and prescription trends, estimated distribution channel inventory levels and consideration of the introduction of competitive products.

 

9


 

Because of the shelf life of the Company's products and its return policy of issuing credits with respect to product that is returned within six months before and up to 12 months after its product expiration date, there may be a significant period of time between when the product is shipped and when the Company issues credit on a returned product. Accordingly, the Company may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments.

 

·

Wholesaler and Retail Pharmacy Discounts—The Company offers contractually determined discounts to certain wholesale distributors and retail pharmacies that purchase directly from it. These discounts are either taken off-invoice at the time of shipment or paid to the customer on a quarterly basis one to two months after the quarter in which product was shipped to the customer.

 

·

Prompt Pay Discounts—The Company offers cash discounts to its customers (generally 2% of the sales price) as an incentive for prompt payment. Based on the Company's experience, the Company expects its customers to comply with the payment terms to earn the cash discount.

 

·

Patient Discount Programs—The Company offers patient discount co-pay assistance programs in which patients receive certain discounts off their prescriptions at participating retail pharmacies. The discounts are reimbursed by the Company approximately one month after the prescriptions subject to the discount are filled.

 

·

Medicaid Rebates—The Company participates in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state's guidelines regarding eligibility and services. Under the Medicaid rebate programs, the Company pays a rebate to each participating state, generally two to three months after the quarter in which prescriptions subject to the rebate are filled.

 

·

Chargebacks—The Company provides discounts to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract with the Department of Veterans Affairs. These federal entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to the Company the difference between the current retail price and the price the federal entity paid for the product.

 

·

Managed Care Rebates—The Company offers discounts under contracts with certain managed care providers. The Company generally pays managed care rebates one to three months after the quarter in which prescriptions subject to the rebate are filled.

 

·

Medicare Part D Coverage Gap Rebates—The Company participates in the Medicare Part D Coverage Gap Discount Program under which it provides rebates on prescriptions that fall within the "donut hole" coverage gap. The Company generally pays Medicare Part D Coverage Gap rebates two to three months after the quarter in which prescriptions subject to the rebate are filled.

 

·

Royalties—Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectability is reasonably assured.

 

·

License and Collaborative Arrangements—Revenue from license and collaborative arrangements is recognized when the Company has substantially completed its obligations under the terms of the arrangement and the Company's remaining involvement is inconsequential and perfunctory. If the Company has significant continuing involvement under such an arrangement, license and collaborative fees are recognized over the estimated performance period. The Company recognizes milestone payments for its research and development collaborations upon the achievement of specified milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was not reasonably assured at the inception of the agreement, (2) consideration earned relates to past performance and (3) the milestone payment is nonrefundable. A milestone is considered substantive if the consideration earned from the achievement of the milestone is consistent with the Company's performance required to achieve the milestone or consistent with the increase in value to the collaboration resulting from the Company's performance; the consideration earned relates solely to past performance; and the consideration earned is reasonable relative to all of the other deliverables and payments within the arrangement. License, milestones and collaborative fee payments received in excess of amounts earned are classified as deferred revenue until earned.

 

10


 

Recently Issued Accounting Standards

 

In July 2015, the FASB issued ASU 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 requires an entity to measure inventory, other than inventory accounted for under last-in, first-out method or retail inventory method, at the lower of cost or net realizable value. ASU 2015-11 is effective for annual and interim periods beginning after December 15, 2016 on a prospective basis. The Company adopted this guidance on January 1, 2017, and the adoption of this guidance did not materially affect our consolidated financial statements.

 

In March 2016, the FASB issued ASU No 2016-09 “Improvements to Employee Share-Based Payment Accounting”. This guidance simplifies the accounting for the taxes related to stock based compensation, requiring excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than equity. This guidance also requires excess tax benefits and deficiencies to be presented as an operating activity on the statement of cash flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. The inclusion of excess tax benefits and deficiencies as a component of our income tax expense will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from stock-based compensation awards are dependent on our stock price at the date the awards vest. The magnitude of such impacts will depend upon future movements in the Company’s share price as well as the timing of stock award exercises, which are both difficult to estimate. The Company adopted this ASU as of January 1, 2017.

 

As a result of adopting this standard, the Company has made an accounting policy election to account for forfeitures as they occur, rather than estimate expected forfeitures. This change has been applied on a modified retrospective basis, resulting in a cumulative-effect adjustment to increase accumulated deficit by $0.3 million as of January 1, 2017; the date of adoption. The adoption of this guidance also requires excess tax benefits and tax deficiencies be recorded in the income statement as opposed to additional paid-in capital when the awards vest or are settled.

 

Additionally, the Company has applied the provisions of this ASU on a retrospective basis in our condensed consolidated statements of cash flows, which includes presenting: (i) excess tax benefits as an operating activity, which were previously presented as a financing activity; and (ii) cash payments to tax authorities for employee taxes when shares are withheld to meet statutory withholding requirements as a financing activity, which were previously presented as an operating activity.

 

The adoption requires recognition through opening retained earnings of any pre-adoption date net operating loss (NOL) carryforwards from non-qualified stock options and other employee share- based payments. As a result, the Company determined the impact of the adoption to be a $5.8 million increase to deferred tax assets related to share-based compensation incurred as of December 31, 2016 with a corresponding increase to the Company's valuation allowance for financial statement purposes since the Company is in a full valuation allowance position. 

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU or Update) No. 2014-09, "Revenue from Contracts with Customers". This guidance outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. On July 9, 2015, the FASB deferred the effective date of this Update to fiscal years beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. This guidance can be adopted on a full retrospective basis or on a modified retrospective basis. The Company plans to adopt this guidance on January 1, 2018, using the modified retrospective transition method applied to those contracts which were not completed as of that date. Upon adoption, the Company will recognize the cumulative effect of adopting this guidance as an adjustment to its opening balance of accumulated deficit. Prior periods will not be retrospectively adjusted. The Company has substantially completed an analysis of existing contracts with its customers and has assessed the differences in accounting for such contracts under this guidance compared with current revenue accounting standards. Based on its review of current customer contracts, the Company does not expect the implementation of this guidance to have a material impact on its consolidated financial statements as the timing of revenue recognition for product sales is not expected to significantly change.

 

11


 

In February 2016, the FASB issued ASU No. 2016-02, "Leases". This guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. If the available accounting election is made, leases with a term of twelve months or less can be accounted for similar to existing guidance for operating leases. For a public entity, the amendments in this guidance are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in this guidance is permitted for all entities. The Company is currently evaluating and has not yet determined the impact implementation will have on the Company’s consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments”. ASU 2016-15 provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. The guidance is effective for the Company in the first quarter of fiscal 2018 and will be applied on a retrospective basis. Early adoption is permitted. The Company early adopted this guidance on January 1, 2017, and the adoption of this guidance did not materially affect the Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated financial statements.

 

 

NOTE 2.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

 

Securities classified as cash and cash equivalents and short-term investments as of June 30, 2017 and December 31, 2016 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

June 30, 2017

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

91,971

 

$

 —

 

$

 —

 

$

91,971

 

Money market funds

 

 

63

 

 

 —

 

 

 —

 

 

63

 

Commercial paper

 

 

21,191

 

 

 —

 

 

 —

 

 

21,191

 

Total cash and cash equivalents

 

$

113,225

 

$

 —

 

$

 —

 

$

113,225

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities and commercial paper with maturities less than 1 year

 

$

3,576

 

$

 —

 

$

(2)

 

$

3,574

 

Total short-term investments

 

$

3,576

 

$

 —

 

$

(2)

 

$

3,574

 

Total

 

$

116,801

 

$

 —

 

$

(2)

 

$

116,799

 

 

 

12


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

December 31, 2016

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

87,845

 

$

 —

 

$

 —

 

$

87,845

 

Money market funds

 

 

532

 

 

 —

 

 

 —

 

 

532

 

Corporate debt securities and commercial paper

 

 

29,334

 

 

 —

 

 

(2)

 

 

29,332

 

Total cash and cash equivalents

 

$

117,711

 

$

 —

 

$

(2)

 

$

117,709

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities and commercial paper with maturities less than 1 year

 

$

59,728

 

$

 —

 

$

(17)

 

$

59,711

 

Total short-term investments

 

$

59,728

 

$

 —

 

$

(17)

 

$

59,711

 

Total

 

$

177,439

 

$

 —

 

$

(19)

 

$

177,420

 

 

The Company considers all highly liquid investments with a maturity at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and corporate debt securities. The Company invests its cash in marketable securities, U.S. Treasury and government agency securities, and high quality securities of financial and commercial institutions. To date, the Company has not experienced material losses on any of its balances. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in “accumulated other comprehensive loss” within shareholders’ equity on the Condensed Consolidated Balance Sheets. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in “interest and other income” in the Condensed Consolidated Statement of Operations. As of June 30, 2017, commercial paper includes $1.6 million of fair value of securities issued by Federal Home Loan Banks. As of December 31, 2016, the Company did not have any securities issued by Federal Home Loan Banks.

 

As of June 30, 2017, the Company had 1 security in an unrealized loss position. The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or greater

 

Total

 

 

    

 

 

    

Gross

    

 

 

    

Gross

    

 

 

    

Gross

 

 

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Corporate debt securities

 

$

1,178

 

$

(2)

 

$

 —

 

$

 —

 

$

1,178

 

$

(2)

 

 

The gross unrealized losses above were caused by interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the securities held by the Company. Based on the Company’s review of these securities, including the assessment of the duration and severity of the unrealized losses and the Company’s ability and intent to hold the investments until the recovery or maturity of such investments, there were no material other-than-temporary impairments for these securities at June 30, 2017. For debt securities, the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost.

 

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 Company utilizes the following fair value hierarchy based on three levels of inputs:

 

·

Level 1: Quoted prices in active markets for identical assets or liabilities.

·

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

13


 

·

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The following tables represent the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

63

 

$

 —

 

$

 —

 

$

63

 

Commercial paper

 

 

 —

 

 

23,587

 

 

 —

 

 

23,587

 

Corporate debt securities

 

 

 —

 

 

1,178

 

 

 —

 

 

1,178

 

Total

 

$

63

 

$

24,765

 

$

 —

 

$

24,828

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration—Zipsor

 

$

 —

 

$

 —

 

$

579

 

$

579

 

Contingent consideration—Lazanda

 

 

 —

 

 

 —

 

 

5,857

 

 

5,857

 

Contingent consideration—CAMBIA

 

 

 —

 

 

 —

 

 

920

 

 

920

 

 

 

$

 —

 

$

 —

 

$

7,356

 

$

7,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

532

 

$

 —

 

$

 —

 

$

532

 

Commercial paper

 

 

 —

 

 

52,192

 

 

 —

 

 

52,192

 

Corporate debt securities

 

 

 —

 

 

36,850

 

 

 —

 

 

36,850

 

Total

 

$

532

 

$

89,042

 

$

 —

 

$

89,574

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration—Zipsor

 

$

 —

 

$

 —

 

$

1,489

 

$

1,489

 

Contingent consideration—Lazanda

 

 

 —

 

 

 —

 

 

11,742

 

 

11,742

 

Contingent consideration—CAMBIA

 

 

 —

 

 

 —

 

 

1,594

 

 

1,594

 

 

 

$

 —

 

$

 —

 

$

14,825

 

$

14,825

 

 

The fair value measurement of the contingent consideration obligations arises from the Zipsor, CAMBIA and Lazanda acquisitions and relates to fair value of the potential future milestone payments and royalties payable under the respective agreements which are determined using Level 3 inputs. The key assumptions in determining the fair value are the revenue forecast, discount rate and the probability assigned to the potential milestones and royalties being achieved. At each reporting date, the Company re-measures the contingent consideration obligation arising from the above acquisitions to their estimated fair values. Any changes in the fair value of contingent consideration resulting from a change in the underlying inputs are recognized in operating expenses until the contingent consideration arrangement is settled. Changes in the fair value of contingent consideration resulting from the passage of time are recorded within interest expense until the contingent consideration is settled. The table below provides a summary of the changes in fair value recorded in interest expense and selling, general and administrative expenses for the three and six months ended June 30, 2017 and June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2017

    

2016

    

2017

    

2016

Fair value, beginning of the period

 

$

8,611

 

$

14,864

 

$

14,825

 

$

14,971

Changes in fair value recorded in interest expense

 

 

265

 

 

600

 

 

796

 

 

1,194

Changes in fair value recorded in selling, general and administrative expenses

 

 

(1,128)

 

 

(110)

 

 

(6,128)

 

 

(287)

Royalties and milestone paid

 

 

(392)

 

 

(456)

 

 

(2,137)

 

 

(980)

Total

 

 

7,356

 

 

14,898

 

 

7,356

 

 

14,898

 

The estimated fair value of the 2.50% Convertible Senior Notes Due 2021, which the Company issued on September 9, 2014 is based on a market approach. The estimated fair value, based on quoted market prices of the Company’s debt, was approximately $305.0 million and $390.0 million (par value $345.0 million) as of June 30, 2017 and December 31, 2016, respectively, and represents a Level 2 valuation. The principal amount of the Senior Notes approximates their fair value as of June 30, 2017 and represents a Level 2 valuation. When determining the estimated

14


 

fair value of the Company’s debt, the Company uses a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk. 

 

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the three and six months ended June 30, 2017 and June 30, 2016.

 

NOTE 3.  NET LOSS PER SHARE

 

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, plus potentially dilutive common shares, related to unexercised stock options, unvested restricted stock awards, outstanding shares under the employee stock purchase plan and convertible debt. As the Company had net losses for the three and six months ended June 30, 2017 and June 30, 2016, all potentially dilutive common shares were determined to be anti-dilutive. Basic and diluted earnings per common share are calculated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(in thousands, except for per share amounts)

    

2017

    

2016

    

2017

    

2016

 

Basic and diluted net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(26,659)

 

$

(10,541)

 

$

(53,400)

 

$

(31,458)

 

Denominator

 

 

62,532

 

 

61,166

 

 

62,331

 

 

61,032

 

Basic and diluted net loss per share

 

$

(0.43)

 

$

(0.17)

 

$

(0.86)

 

$

(0.52)

 

 

The following table sets forth outstanding potentially dilutive common shares that are not included in the computation of diluted net loss per share because to do so would be anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

June 30,

 

(in thousands)

    

2017

    

2016

 

Convertible debt

 

17,931

 

17,931

 

Stock options and equivalents

 

8,215

 

9,645

 

Total potentially dilutive common shares

 

26,146

 

27,576

 

 

 

 

 

 

NOTE 4.  LICENSE ARRANGEMENTS

 

Janssen Pharmaceuticals, Inc.

 

In August 2012, the Company entered into a license agreement with Janssen Pharma that granted Janssen Pharma a non-exclusive license to certain patents and other intellectual property rights to its Acuform® drug delivery technology for the development and commercialization of tapentadol extended release products, including NUCYNTA ER (tapentadol extended-release tablets). The Company receives low single digit royalties on net sales of NUCYNTA ER in Canada and Japan through December 31, 2021. The Company was also previously receiving royalties on sales of NUCYNTA ER in the U.S. until its acquisition of the U.S. rights to NUCYNTA ER from Janssen Pharma on April 2, 2015.

 

15


 

NOTE 5.  STOCK-BASED COMPENSATION

 

The following table presents stock-based compensation expense recognized for stock options, stock awards, restricted stock units and the Company’s Employee Stock Purchase Program (ESPP) in the Company’s Condensed Consolidated Statements of Operations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Cost of sales

 

$

39

 

$

8

 

$

75

 

$

16

 

Research and development expense

 

 

260

 

 

131

 

 

607

 

 

208

 

Selling, general and administrative expense

 

 

3,104

 

 

4,189

 

 

6,277

 

 

8,014

 

Total

 

$

3,403

 

$

4,328

 

$

6,959

 

$

8,238

 

 

At June 30, 2017, the Company had $34.0 million of total unrecognized compensation expense related to stock option grants and restricted stock units that will be recognized over an average vesting period of 2.62 years.

 

NOTE 6.  INVENTORIES

 

Inventories consist of finished goods, raw materials and work in process and are stated at the lower of cost or market and consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2017

 

2016

 

Raw materials

 

$

1,750

 

$

2,362

 

Work-in-process

 

 

1,152

 

 

869

 

Finished goods

 

 

7,531

 

 

9,802

 

Total

 

$

10,433

 

$

13,033

 

 

 

NOTE 7.  ACCRUED LIABILITIES

 

Accrued liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2017

 

2016

 

Accrued compensation

 

$

10,604

 

$

11,730

 

Accrued royalties

 

 

18,486

 

 

21,703

 

Other accrued liabilities

 

 

23,962

 

 

25,965

 

Total accrued liabilities

 

$

53,052

 

$

59,398

 

 

 

 

NOTE 8.  DEBT

 

Senior Notes

 

On April 2, 2015, the Company issued $575.0 million aggregate principal amount of senior secured notes (the Senior Notes) for aggregate gross proceeds of approximately $562.0 million pursuant to a Note Purchase Agreement dated March 12, 2015 (Note Purchase Agreement) between the Company and Deerfield Private Design Fund III, L.P., Deerfield Partners, L.P., Deerfield International Master Fund, L.P., Deerfield Special Situations Fund, L.P., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., BioPharma Secured Investments III Holdings Cayman LP, Inteligo Bank Ltd. and Phemus Corporation (collectively, the Purchasers) and Deerfield Private Design Fund III, L.P., as collateral agent. The Company used $550.0 million of the net proceeds received upon the sale of the Senior Notes to fund a portion of the Purchase Price paid to Janssen Pharma in connection with the NUCYNTA acquisition. The Company incurred debt issuance costs of $0.5 million during 2015.

 

The Senior Notes will mature on April 2, 2022 (unless earlier prepaid or repurchased), are secured by substantially all of the assets of the Company and any subsidiary guarantors, and bear interest at the rate equal to the lesser of (i)

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9.75% over the three month London Inter-Bank Offer Rate (LIBOR), subject to a floor of 1.0% and (ii) 11.95% (through the third anniversary of the purchase date) and 12.95% (thereafter). The interest rate is determined at the first business day of each fiscal quarter, commencing with the first such date following April 2, 2015. The interest rate for the three months ended March 31, 2017 was 10.75% and the interest rate for the three months ended June 30, 2017 was 10.90%.

 

Pursuant to the repayment terms specified in the Note Purchase Agreement, in April 2016, the Company prepaid and retired $100.0 million of the Senior Notes and paid a $5.0 million prepayment fee. The Company recorded a net loss on prepayment of the Senior Notes of $5.8 million which represented the prepayment fee of $5.0 million and the immediate recognition of unamortized balances of debt discount and debt issuance costs of $0.8 million in April 2016. 

 

In April 2017, the Company prepaid and retired $100.0 million of the Senior Notes and paid a $4.0 million prepayment fee. The Company recorded a net loss on prepayment of the Senior Notes of $5.4 million which represented the prepayment fee of $4.0 million and the immediate recognition of unamortized balances of debt discount and debt issuance costs of $1.4 million in April 2017.

 

The remaining $375.0 million of Senior Notes can be repaid prior to maturity, at the Company’s option. The Company is required to repay the outstanding Senior Notes in full if the principal amount outstanding on its existing 2.50% Convertible Senior Notes due 2021 as of March 31, 2021, is greater than $100.0 million. In addition, if the successor entity in a Major Transaction, as defined in the Note Purchase Agreement, does not satisfy specified qualification criteria, the Purchasers may require the Company to prepay the Senior Notes upon consummation of the Major Transaction in an amount equal to the principal amount of outstanding Senior Notes, accrued and unpaid interest and a prepayment premium in an amount equal to what the Company would have otherwise paid in an optional prepayment described in the following paragraph. The Company is required to make mandatory prepayments on the Senior Notes in an amount equal to the proceeds it receives in connection with asset dispositions in excess of $10.0 million, together with accrued and unpaid interest on the principal amount prepaid.

 

The Company paid a prepayment premium of $5.0 million in connection with the April 2016 prepayment of Senior Notes and a prepayment premium of $4.0 million with the April 2017 prepayment of Senior Notes. The Company is required to pay a prepayment premium equal to (i) 4% of the principal amount of the Notes to be prepaid, if such prepayment occurs after the second anniversary of the Purchase Date but on or prior to the third anniversary of the Purchase Date; (ii) 3% of the principal amount of the Notes to be prepaid, if such prepayment occurs after the third anniversary of the Purchase Date but on or prior to the fourth anniversary of the Purchase Date; (iii) 2% of the principal amount of the Notes to be prepaid, if such prepayment occurs after the fourth anniversary of the Purchase Date but on or prior to the fifth anniversary of the Purchase Date; (iv) 1% of the principal amount of the Notes to be prepaid, if such prepayment occurs after the fifth anniversary of the Purchase Date but on or prior to the sixth anniversary of the Purchase Date; and (v) zero, if such prepayment occurs after the sixth anniversary of the Purchase Date.

 

The Senior Notes and related indentures contain customary covenants, including, among other things, and subject to certain qualifications and exceptions, covenants that restrict the Company’s ability and the ability of its subsidiaries to: incur or guarantee additional indebtedness; create or permit liens on assets; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; make certain investments and other restricted payments; engage in mergers, acquisitions, consolidations and amalgamations; transfer and sell certain assets; and engage in transactions with affiliates.

 

Pursuant to the Note Purchase Agreement, upon the consummation of the sale of the Senior Notes on April 2, 2015, the Company and Depo NF Sub, LLC entered into a Pledge and Security Agreement with the Deerfield Private Design Fund III, L.P. (the Collateral Agent), pursuant to which the Company and Depo NF Sub each granted the Collateral Agent (on behalf of the Purchasers) a security interest in substantially all of their assets, other than specifically excluded assets.

 

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The principal amount of the Senior Notes is repayable as follows (amounts in thousands):

 

 

 

 

 

 

April 2, 2018

    

$

57,500

 

April 2, 2019

 

 

115,000

 

April 2, 2020

 

 

115,000

 

April 2, 2021

 

 

87,500

 

 

 

$

375,000

 

 

The following is a summary of the carrying value of the Senior Notes as of June 30, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2017

 

2016

 

Principal amount of the Senior Notes

 

$

375,000

 

$

475,000

 

Unamortized debt discount balance

 

 

(6,142)

 

 

(8,605)

 

Unamortized debt issuance costs

 

 

(246)

 

 

(344)

 

 

 

$

368,612

 

$

466,051

 

 

The debt discount and debt issuance costs are being amortized as interest expense through April 2022 using the effective interest method. The following is a summary of interest expense for the three and six months ended June 30, 2017 and June 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Contractual interest expense

 

$

10,393

 

$

12,997

 

$

23,159

 

$

28,622

 

Amortization of debt discount and debt issuance costs

 

 

595

 

 

564