vvus_Current Folio_10Q

Table of Contents

 

 

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 September 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 001-33389

VIVUS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

94-3136179

(State or other jurisdiction of

 

(IRS employer

incorporation or organization)

 

identification number)

 

 

 

 

 

900 E. Hamilton Avenue, Suite 550

 

 

Campbell, California

 

95008

(Address of principal executive office)

 

(Zip Code)

 

(650) 934-5200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

 

 

 

 

 

 

Large accelerated filer ☐

Accelerated filer 

Non-accelerated filer ☐

Smaller reporting company ☐

 

 

(Do not check if a smaller reporting company)

Emerging growth company ☐

 

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

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

At October 31, 2017,  105,953,444 shares of common stock, par value $.001 per share, were outstanding.

 

 

 

 


 

Table of Contents

VIVUS, INC.

 

Quarterly Report on Form 10-Q 

 

INDEX

 

 

 

 

 

PART I —  FINANCIAL INFORMATION

3

 

 

 

Item 1 

Condensed Consolidated Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

3

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016

4

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and 2016

4

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2 

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

19

Item 3 

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4 

Controls and Procedures

30

 

 

 

 

PART II  — OTHER INFORMATION

31

 

 

 

Item 1 

Legal Proceedings

31

Item 1A 

Risk Factors

33

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

67

 

Signatures

70

 

 

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Table of Contents

PART I: FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

VIVUS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

2017

 

2016

ASSETS

 

Unaudited

    

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

73,151

 

$

84,783

Available-for-sale securities

 

162,872

 

 

184,736

Accounts receivable, net

 

11,806

 

 

9,478

Inventories

 

13,442

 

 

16,186

Prepaid expenses and other current assets

 

3,754

 

 

8,251

Total current assets

 

265,025

 

 

303,434

Property and equipment, net

 

606

 

 

788

Non-current assets

 

1,108

 

 

1,554

Total assets

$

266,739

 

$

305,776

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

4,430

 

$

4,707

Accrued and other liabilities

 

19,806

 

 

15,686

Deferred revenue

 

1,884

 

 

19,174

Current portion of long-term debt

 

9,357

 

 

8,708

Total current liabilities

 

35,477

 

 

48,275

Long-term debt, net of current portion

 

225,354

 

 

232,610

Deferred revenue, net of current portion

 

5,205

 

 

6,449

Non-current accrued and other liabilities

 

348

 

 

257

Total liabilities

 

266,384

 

 

287,591

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock; $1.00 par value; 5,000 shares authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016

 

 —

 

 

 —

Common stock; $.001 par value; 200,000 shares authorized; 105,858 and 104,874 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

105

 

 

105

Additional paid-in capital

 

833,997

 

 

831,750

Accumulated other comprehensive loss

 

(257)

 

 

(616)

Accumulated deficit

 

(833,490)

 

 

(813,054)

Total stockholders’ equity

 

355

 

 

18,185

Total liabilities and stockholders’ equity

$

266,739

 

$

305,776

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

VIVUS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

2017

    

2016

    

2017

    

2016

Revenue:

 

    

    

 

    

 

 

    

    

 

    

Net product revenue

$

9,911

 

$

12,294

 

$

36,049

 

$

37,455

License and milestone revenue

 

2,500

 

 

 —

 

 

7,500

 

 

 —

Supply revenue

 

2,133

 

 

 —

 

 

8,064

 

 

1,526

Royalty revenue

 

649

 

 

1,059

 

 

1,819

 

 

3,472

Total revenue

 

15,193

 

 

13,353

 

 

53,432

 

 

42,453

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

3,514

 

 

2,065

 

 

13,251

 

 

8,416

Selling, general and administrative

 

8,388

 

 

10,440

 

 

31,449

 

 

39,254

Research and development

 

865

 

 

1,696

 

 

4,059

 

 

3,821

Total operating expenses

 

12,767

 

 

14,201

 

 

48,759

 

 

51,491

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations

 

2,426

 

 

(848)

 

 

4,673

 

 

(9,038)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and other expense, net

 

8,412

 

 

8,313

 

 

25,112

 

 

24,209

Loss before income taxes

 

(5,986)

 

 

(9,161)

 

 

(20,439)

 

 

(33,247)

Provision for (benefit from) income taxes

 

 8

 

 

(9)

 

 

(3)

 

 

14

Net loss

$

(5,994)

 

$

(9,152)

 

$

(20,436)

 

$

(33,261)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

$

(0.06)

 

$

(0.09)

 

$

(0.19)

 

$

(0.32)

Shares used in per share computation:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

105,826

 

 

104,484

 

 

105,674

 

 

104,228

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

2017

 

2016

 

2017

 

2016

Net loss

$

(5,994)

 

$

(9,152)

    

$

(20,436)

    

$

(33,261)

Unrealized gain (loss) on securities, net of taxes

 

125

 

 

(158)

 

 

359

 

 

469

Comprehensive loss

$

(5,869)

 

$

(9,310)

 

$

(20,077)

 

$

(32,792)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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VIVUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30, 

 

2017

 

2016

Cash flows from operating activities:

 

    

    

 

    

Net loss

$

(20,436)

 

$

(33,261)

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

 

 

 

 

 

Depreciation and amortization

 

656

 

 

823

Amortization of debt issuance costs and discounts

 

15,163

 

 

13,860

Amortization of discount or premium on available-for-sale securities

 

605

 

 

700

Share-based compensation expense

 

2,221

 

 

1,740

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(2,328)

 

 

(1,298)

Inventories

 

2,744

 

 

2,343

Prepaid expenses and other assets

 

4,490

 

 

4,206

Accounts payable

 

(277)

 

 

(620)

Accrued and other liabilities

 

4,211

 

 

(7,227)

Deferred revenue

 

(18,534)

 

 

67,323

Net cash (used for) provided by operating activities

 

(11,485)

 

 

48,589

Cash flows from investing activities:

 

 

 

 

 

Property and equipment purchases

 

(21)

 

 

 —

Purchases of available-for-sale securities

 

(20,915)

 

 

(50,523)

Proceeds from maturity of available-for-sale securities

 

29,120

 

 

60,050

Proceeds from sales of available-for-sale securities

 

13,413

 

 

6,960

Net cash provided by investing activities

 

21,597

 

 

16,487

Cash flows from financing activities:

 

 

 

 

 

Repayments of notes payable

 

(21,770)

 

 

(6,359)

Sale of common stock through employee stock purchase plan

 

26

 

 

25

Net cash used for financing activities

 

(21,744)

 

 

(6,334)

Net (decrease) increase in cash and cash equivalents

 

(11,632)

 

 

58,742

Cash and cash equivalents:

 

 

 

 

 

Beginning of year

 

84,783

 

 

95,395

End of period

$

73,151

 

$

154,137

See accompanying notes to unaudited condensed consolidated financial statements.

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VIVUS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

1. BASIS OF PRESENTATION

VIVUS is a biopharmaceutical company committed to the development and commercialization of innovative therapies that focus on advancing treatments for patients with serious unmet medical needs, with two approved therapies and one product candidate in active clinical development. Qsymia® (phentermine and topiramate extended release) is approved by FDA for chronic weight management and STENDRA® (avanafil) is approved by FDA for erectile dysfunction, or ED, and by the European Commission, or EC, under the trade name SPEDRA in the EU. Tacrolimus is in clinical development for the treatment of Pulmonary Arterial Hypertension, or PAH.

Qsymia incorporates a proprietary formulation combining low doses of active ingredients from two previously approved drugs, phentermine and topiramate, and is being commercialized by the Company in the U.S. through a sales force who promote Qsymia to physicians. Avanafil is an oral phosphodiesterase type 5 inhibitor that is being commercialized in the U.S., EU and other countries through commercialization collaborators.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. Management has evaluated all events and transactions that occurred after September 30, 2017 through the date these unaudited condensed consolidated financial statements were filed. There were no events or transactions during this period that require recognition or disclosure in these unaudited condensed consolidated financial statements. The December 31, 2016 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 as filed on March 8, 2017 with the Securities and Exchange Commission, or SEC, and as amended by the Form 10-K/A filed on April 26, 2017 with the SEC. The unaudited condensed consolidated financial statements include the accounts of VIVUS, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

When reference is made to the “Company” or “VIVUS” in these footnotes, it refers to the Delaware corporation, or VIVUS, Inc., and its California predecessor, as well as all of its consolidated subsidiaries.

Use of Estimates

The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, the Company evaluates its estimates, including critical accounting policies or estimates related to available-for-sale securities, debt instruments, research and development expenses, income taxes, inventories, revenues, contingencies and litigation and share-based compensation. The Company bases its estimates on historical experience, information received from third parties and on various market specific and other relevant assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates under different assumptions or conditions.

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Significant Accounting Policies

There have been no changes to the Company’s significant accounting policies since the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 with the exception of the following:

Revenue Recognition

Product Revenue:

The Company recognizes product revenue when:

(i)persuasive evidence that an arrangement exists,

(ii)delivery has occurred and title has passed,

(iii)the price is fixed or determinable, and

(iv)collectability is reasonably assured.

Revenue from sales transactions where the customer has the right to return the product is recognized at the time of sale only if: (i) the Company’s price to the customer is substantially fixed or determinable at the date of sale, (ii) the customer has paid the Company, or the customer is obligated to pay the Company and the obligation is not contingent on resale of the product, (iii) the customer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product, (iv) the customer acquiring the product for resale has economic substance apart from that provided by the Company, (v) the Company does not have significant obligations for future performance to directly bring about resale of the product by the customer, and (vi) the amount of future returns can be reasonably estimated.

Product revenue is recognized net of consideration paid to the Company’s customers, wholesalers and certified pharmacies. Such consideration is for services rendered by the wholesalers and pharmacies in accordance with the wholesalers and certified pharmacy services network agreements, and includes a fixed rate per prescription shipped and monthly program management and data fees. These services are not deemed sufficiently separable from the customers’ purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition.

Other product revenue allowances include certain prompt pay discounts and allowances offered to the Company’s customers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue at the later of the date at which the related revenue is recognized or the date at which the allowance is offered. The Company also offers discount programs to patients. Calculating certain of these items involves estimates and judgments based on sales or invoice data, contractual terms, utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates or chargebacks. The Company reviews the adequacy of product revenue allowances on a quarterly basis. Amounts accrued for product revenue allowances are adjusted when trends or significant events indicate that adjustment is appropriate and to reflect actual experience.

The Company ships units of Qsymia through a distribution network that includes certified retail pharmacies. The Company began shipping Qsymia in September 2012 and grants rights to its customers to return unsold product from six months prior to and up to 12 months subsequent to product expiration. This has resulted in a potential return period of from 24 to 36 months depending on the ship date of the product. As the Company had no previous experience in selling Qsymia and given its lengthy return period, the Company was not initially able to reliably estimate expected returns of Qsymia at the time of shipment, and therefore recognized revenue when units were dispensed to patients through prescriptions, at which point, the product is not subject to return, or when the expiration period had ended.

Beginning in the first quarter of 2017, with 48 months of returns experience, the Company now believes that it has sufficient data and experience from selling Qsymia to reliably estimate expected returns. Therefore, beginning in the first quarter of 2017, the Company began recognizing revenue from the sales of Qsymia upon shipment and recording a reserve for expected returns at the time of shipment.

In accordance with this change in accounting estimate, the Company recognized a one-time adjustment of $7.3 million of revenues, net of expected returns reserve and gross-to-net charges, in the first quarter of 2017 relating to products that had been previously shipped. This increase in net product revenue resulted in a decrease in net loss of $6.0 million or $0.06 per share for the nine months ended September 30, 2017.

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Recent Accounting Pronouncements Adopted

In July 2015, the FASB issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory - Inventory (Topic 330), which changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” This standard eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. The Company adopted this standard in the first quarter of 2017 and it did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The Company adopted this standard in the first quarter of 2017, and it did not have a material impact on the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. This standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. This new standard will supersede most current revenue recognition guidance.  In July 2015, the FASB voted to delay the effective date of this standard by one year to the first quarter of 2018. Early adoption is permitted, but not before the first quarter of 2017. This new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption, or the “modified retrospective basis.” The Company plans to adopt this standard in the first quarter of 2018 using the modified retrospective basis. The Company has analyzed the effect of this standard on its consolidated financial statements and currently does not expect the adoption of this standard to have a material impact on the Company’s net product revenues and supply revenues in the first quarter of adoption or on the timing of future recognition of net product revenues and supply revenues, as the Company expects that revenues generated will continue to be recognized upon the shipment of products to customers.  Similarly, the Company does not expect a material impact on the recognition of royalty revenue. The Company does not expect the adoption of this standard to have a material impact on the Company’s license and milestone revenue in the first quarter of adoption; however, the Company does expect that the timing of recognition of future milestone revenue related to current license and supply agreements as well as the timing and allocation of revenue related to any future license and supply agreements entered into by the Company may be impacted.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842), which modifies the accounting by lessees for all leases with a term greater than 12 months. This standard will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. For public companies, this standard is effective for annual and interim periods beginning on or after December 15, 2018. Early adoption is permitted. The Company’s only significant lease is its operating lease for its corporate headquarters, and, while the Company cannot yet estimate the amounts by which its financial statements will be affected by the adoption of this guidance, it expects that the overall recognition of expense will be similar to current guidance, though possibly in different classifications, but that there will be a significant change in the balance sheet due to the recognition of right of use assets and the corresponding lease liabilities. The Company plans to adopt the new leases guidance effective January 1, 2019 using a modified retrospective transition method.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. The standard clarifies how certain cash receipts and cash payments will be presented and classified in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

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2. SHARE-BASED COMPENSATION

Total share-based compensation expense for all of the Company’s share-based awards was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

2017

   

2016

   

2017

   

2016

Cost of goods sold

$

13

 

$

40

 

$

41

 

$

115

Selling, general and administrative

 

652

 

 

413

 

 

1,920

 

 

1,299

Research and development

 

88

 

 

188

 

 

260

 

 

326

Total share-based compensation expense

$

753

 

$

641

 

$

2,221

 

$

1,740

Share-based compensation costs capitalized as part of the cost of inventory were $3,000 and $19,000 for the three months ended September 30, 2017 and 2016, respectively, and $8,000 and $26,000 for the nine months ended September 30, 2017 and 2016, respectively.

3. CASH, CASH EQUIVALENTS, AND AVAILABLE-FOR-SALE SECURITIES

The fair value and the amortized cost of cash, cash equivalents, and available-for-sale securities by major security type are presented in the tables that follow (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

As of September 30, 2017

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

Cash and cash equivalents and available-for-sale securities

     

Cost

     

Gains

     

Losses

     

Fair Value

Cash and money market funds

 

$

73,151

 

$

 —

 

$

 —

 

$

73,151

U.S. Treasury securities

 

 

17,621

 

 

 —

 

 

(94)

 

 

17,527

Corporate debt securities

 

 

145,509

 

 

83

 

 

(247)

 

 

145,345

Total

 

 

236,281

 

 

83

 

 

(341)

 

 

236,023

Less amounts classified as cash and cash equivalents

 

 

(73,151)

 

 

 —

 

 

 —

 

 

(73,151)

Total available-for-sale securities

 

$

163,130

 

$

83

 

$

(341)

 

$

162,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

As of December 31, 2016

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

Cash and cash equivalents and available-for-sale securities

     

Cost

     

Gains

     

Losses

     

Fair Value

 

Cash and money market funds

 

$

84,783

 

$

 —

 

$

 —

 

$

84,783

 

U.S. Treasury securities

 

 

24,780

 

 

 7

 

 

(110)

 

 

24,677

 

Corporate debt securities

 

 

160,571

 

 

52

 

 

(564)

 

 

160,059

 

Total

 

 

270,134

 

 

59

 

 

(674)

 

 

269,519

 

Less amounts classified as cash and cash equivalents

 

 

(84,783)

 

 

 —

 

 

 —

 

 

(84,783)

 

Total available-for-sale securities

 

$

185,351

 

$

59

 

$

(674)

 

$

184,736

 

As of September 30, 2017, the Company’s available-for-sale securities had original contractual maturities up to 67 months. However, the Company may sell these securities prior to their stated maturities in response to changes in the availability of and the yield on alternative investments as well as liquidity requirements. As these securities are readily marketable and are viewed by the Company as available to support current operations, securities with maturities beyond 12 months are classified as current assets. Due to their short-term maturities, the Company believes that the fair value of its bank deposits, accounts payable and accrued expenses approximate their carrying value.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability 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

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observable inputs and minimize the use of unobservable inputs. Three levels of inputs, of which the first two are considered observable and the last unobservable, may be used to measure fair value. The three levels are:

·

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

·

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

·

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

The following table represents the fair value hierarchy for our cash equivalents and available-for-sale securities by major security type (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

As of September 30, 2017

 

     

Level 1

     

Level 2

     

Level 3

     

Total

Cash and money market funds

 

$

73,151

 

$

 —

 

$

 —

 

$

73,151

U.S. Treasury securities

 

 

17,527

 

 

 —

 

 

 —

 

 

17,527

Corporate debt securities

 

 

 —

 

 

145,345

 

 

 —

 

 

145,345

Total

 

$

90,678

 

$

145,345

 

$

 —

 

$

236,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

As of December 31, 2016

 

     

Level 1

     

Level 2

     

Level 3

     

Total

Cash and money market funds

 

$

84,783

 

$

 —

 

$

 —

 

$

84,783

U.S. Treasury securities

 

 

24,677

 

 

 —

 

 

 —

 

 

24,677

Corporate debt securities

 

 

 —

 

 

160,059

 

 

 —

 

 

160,059

Total

 

$

109,460

 

$

160,059

 

$

 —

 

$

269,519

 

 

 

4. ACCOUNTS RECEIVABLE

Accounts receivable consist of the following (in thousands):

 

 

 

 

 

 

 

Balance as of

 

September 30, 

 

December 31, 

 

2017

 

2016

Qsymia

$

9,870

 

$

8,982

STENDRA/SPEDRA

 

2,131

 

 

709

 

 

12,001

 

 

9,691

Qsymia allowance for cash discounts

 

(195)

 

 

(213)

Net

$

11,806

 

$

9,478

 

 

5. INVENTORIES

Inventories consist of the following (in thousands):

 

 

 

 

 

 

 

Balance as of

 

September 30, 

 

December 31, 

 

2017

 

2016

Raw materials

$

11,506

    

$

9,412

Work-in-process

 

41

 

 

2,984

Finished goods

 

1,895

 

 

3,110

Deferred costs

 

 —

 

 

680

Inventories

$

13,442

 

$

16,186

Raw materials inventories consist primarily of the active pharmaceutical ingredients, or API, for Qsymia and STENDRA/SPEDRA. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first in, first out method for all inventories, which are valued using a weighted-average cost method

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calculated for each production batch. The Company periodically evaluates the carrying value of inventory on hand for potential excess amounts over demand using the same lower of cost or net realizable value approach as that used to value the inventory.

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

 

 

 

 

 

Balance as of

 

September 30, 

 

December 31, 

 

2017

 

2016

Prepaid sales and marketing expenses

$

1,663

 

$

1,767

Prepaid insurance

 

143

 

 

1,182

Other prepaid expenses and assets

 

1,948

 

 

5,302

Total

$

3,754

 

$

8,251

 

The amounts included in prepaid expenses and other assets consist primarily of prepayments for future services, non-trade receivables, prepaid interest and interest income receivable. These costs have been deferred as prepaid expenses and other current assets on the condensed consolidated balance sheets and will be either (i) charged to expense accordingly when the related prepaid services are rendered to the Company, or (ii) converted to cash when the receivable is collected by the Company.

7. NON-CURRENT ASSETS

Non-current assets consist primarily of patent acquisition and assignment costs.

8. ACCRUED AND OTHER LIABILITIES

Accrued and other liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

Balance as of

 

September 30, 

 

December 31, 

 

2017

 

2016

Accrued employee compensation and benefits

$

2,357

    

$

3,014

Reserve for product returns

 

7,152

 

 

 —

Product-related accruals

 

5,207

 

 

671

Accrued interest on debt (see Note 13)

 

2,335

 

 

1,509

Accrued manufacturing costs

 

545

 

 

6,835

Accrued non-recurring charges (see Note 10)

 

 —

 

 

 5

Other accrued liabilities

 

2,210

 

 

3,652

Total

$

19,806

 

$

15,686

 

The amounts included in other accrued liabilities consist of obligations primarily related to sales, marketing, research, clinical development, corporate activities, the STENDRA license and royalties.

9. NON-CURRENT ACCRUED AND OTHER LIABILITIES

Non-current accrued and other liabilities were $0.3 million and $0.3 million at September 30, 2017 and December 31, 2016, respectively, and were primarily comprised of deferred rent and security deposits.

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10. NON-RECURRING CHARGES

The following table sets forth activities for the Company’s obligations related to its July 2015 corporate restructuring plan (in thousands):

 

 

 

 

Severance

 

obligations

Balance of accrued costs at January 1, 2017

$

 5

Charges

 

 —

Payments

 

(5)

Balance of accrued costs at September 30, 2017

$

 —

Accrued employee severance costs as of December 31, 2016 are included under current liabilities in “Accrued and other liabilities.”

 

11. DEFERRED REVENUE

Deferred revenue consists of the following (in thousands):

 

 

 

 

 

 

 

Balance as of

 

September 30, 

 

December 31, 

 

2017

 

2016

Qsymia deferred revenue - current

$

 —

    

$

17,558

STENDRA deferred revenue - current

 

1,884

 

 

1,616

Deferred revenue - current

$

1,884

 

$

19,174

 

 

 

 

 

 

STENDRA deferred revenue - non-current

$

5,205

 

$

6,449

The Company ships units of Qsymia through a distribution network that includes certified retail pharmacies. The Company was not initially able to reliably estimate expected returns of Qsymia at the time of shipment, and therefore recognized revenue when units were dispensed to patients through prescriptions, at which point, the product is not subject to return, or when the expiration period had ended. Qsymia deferred revenue at December 31, 2016 consisted of product shipped to the Company’s wholesalers, certified retail pharmacies and certified home delivery pharmacy services networks, but not yet dispensed to patients through prescriptions, net of prompt payment discounts. Beginning in the first quarter of 2017, the Company began recognizing revenue from the sales of Qsymia upon shipment and recording a reserve for expected returns at the time of shipment. Accordingly, all of the Qsymia deferred revenue, net of appropriate reserves, was recognized as revenue as of January 1, 2017 (See Note 1).

SPEDRA deferred revenue relates to a prepayment for future royalties on sales of SPEDRA.

12. LICENSE, COMMERCIALIZATION AND SUPPLY AGREEMENTS

During 2013, the Company entered into separate license and commercialization agreements and separate commercial supply agreements with each of the Menarini Group, through its subsidiary Berlin Chemie AG, or Menarini, Auxilium Pharmaceuticals, Inc, or Auxilium, and Sanofi and its affiliate, or Sanofi, to commercialize and promote avanafil (STENDRA/SPEDRA) in their respective territories. Menarini’s territory is comprised of over 40 European countries, including the European Union, or EU, plus Australia and New Zealand. Sanofi’s territory was comprised of Africa, the Middle East, Turkey and Eurasia. Auxilium’s territory was comprised of the United States and Canada and their respective territories. In January 2015, Auxilium was acquired by Endo. Auxilium terminated the supply agreement effective June 30, 2016 and the license agreement effective September 30, 2016. On March 23, 2017, the Company and Sanofi entered into the Termination, Rights Reversion and Transition Services Agreement, or the Transition Agreement, effective February 28, 2017. Under the Transition Agreement, effective upon the thirtieth (30th) day following February 28, 2017, the license and commercialization agreement with Sanofi terminated for all countries in the Sanofi territory. In addition, under the Transition Agreement, Sanofi will provide the Company with certain transition services in support of ongoing regulatory approval efforts while the Company seeks to obtain a new commercial partner or partners for the Sanofi territory. The Company will pay certain transition service fees to Sanofi as part of the Transition Agreement.

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On September 30, 2016, the Company entered into a license and commercialization agreement, or the Metuchen License Agreement, and a commercial supply agreement, or the Metuchen Supply Agreement, with Metuchen Pharmaceuticals LLC, or Metuchen. Under the terms of the Metuchen License Agreement, Metuchen received an exclusive license to develop, commercialize and promote STENDRA in the United States, Canada, South America and India, or the Metuchen Territory, effective October 1, 2016. The Company and Metuchen have agreed not to develop, commercialize, or in-license any other product that operates as a PDE-5 inhibitor in the Metuchen Territory for a limited time period, subject to certain exceptions. The Metuchen License Agreement will terminate upon the expiration of the last-to-expire payment obligations under the Metuchen License Agreement; upon expiration of the term of the Metuchen License Agreement, the exclusive license granted under the Metuchen License Agreement shall become fully paid-up, royalty-free, perpetual and irrevocable as to the Company but not certain trademark royalties due to Mitsubishi Tanabe Pharmaceutical Corporation, or MTPC.

Metuchen will obtain STENDRA exclusively from the Company. For each calendar year during the term of the Metuchen Supply Agreement, if Metuchen fails to purchase an agreed minimum purchase amount of STENDRA from the Company, it will reimburse the Company for the shortfall as it relates to the Company’s out of pocket costs to acquire certain raw materials needed to manufacture STENDRA. Upon the termination of the Metuchen Supply Agreement (other than by Metuchen for the Company’s uncured material breach or upon completion of the transfer of the control of the supply chain), Metuchen’s agreed minimum purchase amount of STENDRA from the Company shall accelerate for the entire then current initial term or renewal term, as applicable. The initial term under the Metuchen Supply Agreement will be for a period of five years, with automatic renewal for successive two-year periods unless either party provides a termination notice to the other party at least two years in advance of the expiration of the then current term. On September 30, 2016, the Company received $70 million from Metuchen under the Metuchen License Agreement, which was recorded as deferred revenue on the consolidated balance sheet at September 30, 2016, with $69.4 million of license revenue recorded in the fourth quarter of 2016. The Metuchen License Agreement is royalty-free as to the Company, but Metuchen will reimburse the Company for payments made to cover royalty and milestone obligations to MTPC during the term of the Metuchen License Agreement.

In September 2017, the Company entered into a license and commercialization agreement, or the Alvogen License Agreement, and a commercial supply agreement, or the Alvogen Supply Agreement, with Alvogen Malta Operations (ROW) Ltd, or Alvogen. Under the terms of the Alvogen License Agreement, Alvogen will be solely responsible for obtaining and maintaining regulatory approvals for all sales and marketing activities for Qsymia in South Korea. The Company received an upfront payment of $2.5 million in September 2017, which was recorded in license and milestone revenue in the third quarter of 2017, and is eligible to receive additional payments upon Alvogen achieving marketing authorization, commercial launch and reaching a  sales milestone. Additionally, the Company will receive a royalty on Alvogen’s Qsymia net sales in South Korea. Under the Alvogen Supply Agreement, the Company will supply product to Alvogen.

13. LONG-TERM DEBT AND COMMITMENTS

Convertible Senior Notes Due 2020

In May 2013, the Company closed an offering of $220.0 million in 4.5% Convertible Senior Notes due May 2020, or the Convertible Notes. The Convertible Notes are governed by an indenture, dated May 2013 between the Company and Deutsche Bank National Trust Company, as trustee. In May 2013, the Company closed on an additional $30.0 million of Convertible Notes upon exercise of an option by the initial purchasers of the Convertible Notes at a conversion rate of approximately $14.86 per share. Total net proceeds from the Convertible Notes were approximately $241.8 million. The Convertible Notes are convertible at the option of the holders under certain conditions at any time prior to the close of business on the business day immediately preceding November 1, 2019. On or after November 1, 2019, holders may convert all or any portion of their Convertible Notes at any time at their option at the conversion rate then in effect, regardless of these conditions. Subject to certain limitations, the Company will settle conversions of the Convertible Notes by paying or delivering, as the case may be, cash, shares of its common stock or a combination of cash and shares of our common stock, at the Company’s election. Interest payments are made semi-annually.

For the three and nine months ended September 30, 2017, total interest expense related to the Convertible Notes was $8.3 million and $24.3 million, respectively, including amortization of $4.9 million and $14.3 million, respectively, of the debt discount and amortization of $259,000 and $758,000, respectively, of deferred financing costs. For the three and nine months ended September 30, 2016, total interest expense related to the Convertible

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Notes was $7.5 million and $22.1 million, respectively, including amortization of $4.4 million and $13.0 million, respectively, of the debt discount and amortization of $235,000 and $689,000, respectively, of deferred financing costs.

Senior Secured Notes Due 2018

In March 2013, the Company entered into the Purchase and Sale Agreement between the Company and BioPharma Secured Investments III Holdings Cayman LP, or Biopharma, a Cayman Islands exempted limited partnership, providing for the purchase of a debt like instrument, or the Senior Secured Notes. Under the agreement, the Company received $50 million, less $500,000 in funding and facility payments, at the initial closing in April 2013. The scheduled quarterly payments on the Senior Secured Notes are subject to the net sales of (i) Qsymia and (ii) any other obesity agent developed or marketed by us or our affiliates or licensees. The scheduled quarterly payments, other than the payment(s) scheduled to be made in the second quarter of 2018, are capped at the lower of the scheduled payment amounts or 25% of the net sales of (i) and (ii) above. Accordingly, if 25% of the net sales is less than the scheduled quarterly payment, then 25% of the net sales is due for that quarter, with the exception of the payment(s) scheduled to be made in the second quarter of 2018, when any unpaid scheduled quarterly payments plus any accrued and unpaid make whole premiums must be paid. Any quarterly payment less than the scheduled quarterly payment amount will be subject to a make whole premium equal to the applicable scheduled quarterly payment of the preceding quarter less the actual payment made to BioPharma for the preceding quarter multiplied by 1.03. The Company may elect to pay full scheduled quarterly payments if it chooses.

For the three and nine months ended September 30, 2017, the interest expense related to the Senior Secured Notes was $0.7 million and $2.7 million, respectively, including amortization of deferred financing costs of $46,000 and $126,000, respectively. For the three and nine months ended September 30, 2016, the interest expense related to the Senior Secured Notes was $1.3 million and $3.6 million, respectively, including amortization of deferred financing costs of $46,000 and $189,000, respectively.

The following table summarizes information on the debt (in thousands):

 

 

 

 

September 30, 

 

2017

Convertible Senior Notes due 2020

$

250,000

Senior Secured Notes due 2018

 

10,494

 

 

260,494

Less: Debt issuance costs

 

(1,332)

Less: Discount on convertible senior notes

 

(24,451)

 

 

234,711

Less: Current portion

 

(9,357)

Long-term debt, net of current portion

$

225,354

 

 

 

    Future estimated payments on the Senior Secured Notes as of September 30, 2017 are as follows:

 

 

 

 

 

2017 (remaining 3 months)

$

10,625

2018

 

18,606

Total

 

29,231

Less: Interest portion

 

(18,737)

Senior Secured Notes

$

10,494

As a condition of FDA granting approval to commercialize Qsymia in the U.S., the Company agreed to complete certain post-marketing requirements. One requirement was to perform a cardiovascular outcomes trial, or CVOT, on Qsymia. The cost of a CVOT is estimated to be between $180 million and $220 million incurred over a period of approximately five years. The Company is working with FDA to significantly reduce or remove the requirements of the CVOT. To date, the Company has not incurred expenses related to the CVOT.

 

 

14. NET INCOME (LOSS) PER SHARE

The Company computes basic net income (loss) per share applicable to common stockholders based on the weighted average number of common shares outstanding during the applicable period. Diluted net income per share

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is based on the weighted average number of common and common equivalent shares, which represent shares that may be issued in the future upon the exercise of outstanding stock options or upon a net share settlement of the Company’s Convertible Notes. Common share equivalents are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the price exceeds the average market price over the period have an anti-dilutive effect on net income per share and, accordingly, are excluded from the calculation. The triggering conversion conditions that allow holders of the Convertible Notes to convert have not been met. If such conditions are met and the note holders opt to convert, the Company may choose to pay in cash, common stock, or a combination thereof; however, if this occurs, the Company has the intent and ability to net share settle this debt security; thus the Company uses the treasury stock method for earnings per share purposes. Due to the effect of the capped call instrument purchased in relation to the Convertible Notes, there would be no net shares issued until the market value of the Company’s stock exceeds $20 per share, and thus no impact on diluted net income per share. Further, when there is a net loss, potentially dilutive common equivalent shares are not included in the calculation of net loss per share since their inclusion would be anti-dilutive.

As the Company recognized a net loss for each of the three and nine month periods ended September 30, 2017 and 2016, all potential common equivalent shares were excluded for these periods as they were anti-dilutive. Awards and options which were not included in the computation of diluted net loss per share because the effect would be anti-dilutive were 13,724,000 and 13,435,000, respectively for the three and nine months ended September 30, 2017 and were 10,261,000 and 10,520,000, respectively, for the three and nine months ended September 30, 2016.

15. INCOME TAXES

For the three and nine months ended September 30, 2017, the Company recorded a provision of $8,000 and a benefit of $3,000, respectively. For the three and nine months ended September 30, 2016, the Company recorded a benefit of $9,000 and a provision for taxes $14,000, respectively. The benefit and provision for income taxes for each of the periods was primarily comprised of state taxes during the period.

The Company periodically evaluates the realizability of its net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on the Company’s ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. The Company weighed both positive and negative evidence and determined that there is a continued need for a full valuation allowance on its deferred tax assets in the United States as of September 30, 2017. Should the Company determine that it would be able to realize its remaining deferred tax assets in the foreseeable future, an adjustment to its remaining deferred tax assets would cause a material increase to income in the period such determination is made.

As of September 30, 2017, the Company’s unrecognized tax benefit is related to the federal and California research and development credits which result in an unrecognized tax benefit balance of $84,000. The Company does not expect to have any other significant changes to unrecognized tax benefits through the end of the fiscal year. Because of the Company’s history of tax losses, certain tax years remain open to tax audit. The Company’s policy is to recognize interest and penalties related to uncertain tax positions (if any) as a component of the income tax provision.

16. LEGAL MATTERS

Shareholder Lawsuit

On March 27, 2014, Mary Jane and Thomas Jasin, who purport to be purchasers of VIVUS common stock, filed an Amended Complaint in Santa Clara County Superior Court alleging securities fraud against the Company and three of its former officers and directors.  In that complaint, captioned Jasin v. VIVUS, Inc., Case No. 114-cv-261427, plaintiffs asserted claims under California’s securities and consumer protection securities statutes. Plaintiffs alleged generally that defendants misrepresented the prospects for the Company’s success, including with respect to the launch of Qsymia, while purportedly selling VIVUS stock for personal profit. Plaintiffs alleged losses of “at least” $2.8 million, and sought damages and other relief.  On July 18, 2014, the same plaintiffs filed a complaint in the United States District Court for the Northern District of California, captioned Jasin v. VIVUS, Inc., Case No. 5:14-cv-03263.  The Jasins’ federal complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, based on facts substantially similar to those alleged in their state court action. 

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On September 15, 2014, pursuant to an agreement between the parties, plaintiffs voluntarily dismissed their state court action with prejudice.  Defendants moved to dismiss the federal action and moved to dismiss again after plaintiffs amended their complaint to include additional factual allegations and to add seven new claims under California law. The court granted the latter motion on June 18, 2015, dismissing the seven California claims with prejudice and dismissing the two federal claims with leave to amend. Plaintiffs filed a Second Amended Complaint on August 17, 2015. Defendants moved to dismiss that complaint as well.  On April 19, 2016, the court granted defendants’ motion to dismiss with prejudice and entered judgment in favor of defendants. Plaintiffs filed a notice of appeal to the Ninth Circuit Court of Appeals on May 18, 2016.  Briefing on the appeal has now been completed, and the Ninth Circuit has set the matter for oral argument on November 13, 2017. The Company maintains directors’ and officers’ liability insurance that it believes affords coverage for much of the anticipated cost of the remaining Jasin action, subject to the use of the Company’s financial resources to pay for its self-insured retention and the policies’ terms and conditions.

The Company and the defendant former officers and directors cannot predict the outcome of the lawsuit, but they believe the lawsuit is without merit and intend to continue vigorously defending against the claims.

Qsymia ANDA Litigation

On May 7, 2014, the Company received a Paragraph IV certification notice from Actavis Laboratories FL indicating that it filed an abbreviated new drug application, or ANDA, with the U.S. Food and Drug Administration, or FDA, requesting approval to market a generic version of Qsymia and contending that the patents listed for Qsymia in FDA Orange Book at the time the notice was received (U.S. Patents 7,056,890, 7,553,818, 7,659,256, 7,674,776, 8,580,298, and 8,580,299) (collectively “patents-in-suit”) are invalid, unenforceable and/or will not be infringed by the manufacture, use, sale or offer for sale of a generic form of Qsymia as described in their ANDA. On June 12, 2014, the Company filed a lawsuit in the U.S. District Court for the District of New Jersey against Actavis Laboratories FL, Inc., Actavis, Inc., and Actavis PLC, collectively referred to as Actavis. The lawsuit (Case No. 14-3786 (SRC)(CLW)) was filed on the basis that Actavis’ submission of their ANDA to obtain approval to manufacture, use, sell or offer for sale generic versions of Qsymia prior to the expiration of the patents-in-suit constitutes infringement of one or more claims of those patents.

On January 21, 2015, the Company received a second Paragraph IV certification notice from Actavis contending that two additional patents listed in the Orange Book for Qsymia (U.S. Patents 8,895,057 and 8,895,058) are invalid, unenforceable and/or will not be infringed by the manufacture, use, sale, or offer for sale of a generic form of Qsymia. On March 4, 2015, the Company filed a second lawsuit in the U.S. District Court for the District of New Jersey against Actavis (Case No. 15-1636 (SRC)(CLW)) in response to the second Paragraph IV certification notice on the basis that Actavis’ submission of their ANDA constitutes infringement of one or more claims of the patents-in-suit.

On July 7, 2015, the Company received a third Paragraph IV certification notice from Actavis contending that two additional patents listed in the Orange Book for Qsymia (U.S. Patents 9,011,905 and 9,011,906) are invalid, unenforceable and/or will not be infringed by the manufacture, use, sale, or offer for sale of a generic form of Qsymia.  On August 17, 2015, the Company filed a third lawsuit in the U.S. District Court for the District of New Jersey against Actavis (Case No. 15-6256 (SRC)(CLW)) in response to the third Paragraph IV certification notice on the basis that Actavis’ submission of their ANDA constitutes infringement of one or more claims of the patents-in-suit.  The three lawsuits against Actavis were consolidated into a single suit (Case No. 14-3786 (SRC)(CLW)).

On June 29, 2017, the Company entered into a settlement agreement with Actavis resolving the suit against Actavis. On July 5, 2017, the U.S. District Court for the District of New Jersey entered an order dismissing the suit.  In accordance with legal requirements, we have submitted the settlement agreement to the U.S. Federal Trade Commission and the U.S. Department of Justice for review.

On March 5, 2015, the Company received a Paragraph IV certification notice from Teva Pharmaceuticals USA, Inc. indicating that it filed an ANDA with FDA, requesting approval to market a generic version of Qsymia and contending that eight patents listed for Qsymia in the Orange Book at the time of the notice (U.S. Patents 7,056,890, 7,553,818, 7,659,256, 7,674,776, 8,580,298, 8,580,299, 8,895,057 and 8,895,058) (collectively “patents-in-suit”) are invalid, unenforceable and/or will not be infringed by the manufacture, use or sale of a generic form of Qsymia as described in their ANDA. On April 15, 2015, the Company filed a lawsuit in the U.S. District Court for the District of New Jersey against Teva Pharmaceutical USA, Inc. and Teva Pharmaceutical Industries, Ltd., collectively referred to as Teva. The lawsuit (Case No. 15-2693 (SRC)(CLW)) was filed on the basis that Teva’s

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submission of their ANDA to obtain approval to manufacture, use, sell, or offer for sale generic versions of Qsymia prior to the expiration of the patents-in-suit constitutes infringement of one or more claims of those patents.

On August 5, 2015, the Company received a second Paragraph IV certification notice from Teva contending that two additional patents listed in the Orange Book for Qsymia (U.S. Patents 9,011,905 and 9,011,906) are invalid, unenforceable and/or will not be infringed by the manufacture, use, sale, or offer for sale of a generic form of Qsymia. On September 18, 2015, the Company filed a second lawsuit in the U.S. District Court for the District of New Jersey against Teva (Case No. 15-6957(SRC)(CLW)) in response to the second Paragraph IV certification notice on the basis that Teva’s submission of their ANDA constitutes infringement of one or more claims of the patents-in-suit.  The two lawsuits against Teva were consolidated into a single suit (Case No. 15-2693 (SRC)(CLW)). On September 27, 2016, Dr. Reddy’s Laboratories, S.A. and Dr. Reddy’s Laboratories, Inc., collectively referred to as DRL, were substituted for Teva as defendants in the lawsuit.

On August 28, 2017, the Company entered into a settlement agreement with DRL resolving the suit against DRL. On September 6, 2017, the U.S. District Court for the District of New Jersey entered an order dismissing the suit.  In accordance with legal requirements, we have submitted the settlement agreement to the U.S. Federal Trade Commission and the U.S. Department of Justice for review.

The settlement agreement with DRL resolves all patent litigation brought by VIVUS against generic pharmaceutical companies that have filed ANDAs seeking approval to market generic versions of Qsymia.

STENDRA ANDA Litigation

On June 20, 2016, the Company received a Paragraph IV certification notice from Hetero USA, Inc. and Hetero Labs Limited, collectively referred to as Hetero, indicating that it filed an ANDA with FDA, requesting approval to market a generic version of STENDRA and contending that patents listed for STENDRA in the Orange Book at the time of the notice (U.S. Patents 6,656,935, and 7,501,409) (collectively “patents-in-suit”) are invalid, unenforceable and/or will not be infringed by the manufacture, use or sale of a generic form of STENDRA as described in their ANDA. On July 27, 2016, the Company filed a lawsuit in the U.S. District Court for the District of New Jersey against Hetero (Case No. 16-4560 (KSH)(CLW)). On January 3, 2017, we entered into a settlement agreement with Hetero.  Under the settlement agreement, Hetero was granted a license to manufacture and commercialize the generic version of STENDRA described in its ANDA filing in the United States as of the date that is the later of (a) October 29, 2024, which is 180 days prior to the expiration of the last to expire of the patents-in-suit, or (b) the date that Hetero obtains final approval from FDA of the Hetero ANDA. The settlement agreement provides for a full settlement of all claims that were asserted in the suit.

The Company is not aware of any other asserted or unasserted claims against it where it believes that an unfavorable resolution would have an adverse material impact on the operations or financial position of the Company.

17. SEGMENT INFORMATION

The Company operates in one reportable segment—the development and commercialization of novel therapeutic products. The Company has identified its Chief Executive Officer as the Chief Operating Decision Maker, or CODM, who manages the Company’s operations on a consolidated basis for purposes of allocating resources. When evaluating financial performance, the CODM reviews individual customer and product information, while other financial information is reviewed on a consolidated basis. Therefore, results of operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Disclosures about revenues by product and by geographic area are presented below.

Geographic Information

Outside the United States, or ROW, the Company sells avanafil (STENDRA/SPEDRA) through a commercialization licensee principally in the EU. The geographic classification of product sales was based on the location of the customer. The geographic classification of supply, license and milestone revenue was based on the domicile of the entity from which the revenue was earned.

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Net product revenue by geographic region was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

2017

 

2016

 

U.S.

 

     ROW     

 

Total

 

U.S.

 

     ROW     

 

Total

Qsymia—Net product revenue

$

9,911

    

$

 —

    

$

9,911

    

$

12,294

    

$

 —

    

$

12,294

Qsymia—License revenue

 

 —

 

 

2,500

 

 

2,500

 

 

 —

 

 

 —

 

 

 —

STENDRA/SPEDRA—Supply revenue

 

1,070

 

 

1,063

 

 

2,133

 

 

 —

 

 

 —

 

 

 —

STENDRA/SPEDRA —Royalty revenue

 

 —

 

 

649

 

 

649

 

 

425

 

 

634

 

 

1,059

Total revenue

$

10,981

 

$

4,212

(1)  

$

15,193

 

$

12,719

 

$

634

(2)  

$

13,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

2017

 

2016

 

U.S.

 

ROW

 

Total

 

U.S.

 

ROW

 

Total

Qsymia—Net product revenue

$

36,049

 

$

 —

 

$

36,049

 

$

37,455

 

$

 —

 

$

37,455

Qsymia—License and milestone revenue

 

5,000

 

 

2,500

 

 

7,500

 

 

 —

 

 

 —

 

 

 —

STENDRA/SPEDRA—Supply revenue

 

4,845

 

 

3,219

 

 

8,064

 

 

 —

 

 

1,526

 

 

1,526

STENDRA/SPEDRA —Royalty revenue

 

 —

 

 

1,819

 

 

1,819

 

 

1,649

 

 

1,823

 

 

3,472

Total revenue

$

45,894

 

$

7,538

(3)  

$

53,432

 

$

39,104

 

$

3,349

(4)  

$

42,453

 


(1)

$1.7 million of which was attributable to Germany and $2.5 million of which was attributable to South Korea.

(2) $0.6 million of which was attributable to Germany.

(3)

$5.0 million of which was attributable to Germany and $2.5 million of which was attributable to South Korea.

(4) $3.3 million of which was attributable to Germany.

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q contain “forward looking” statements that involve risks and uncertainties. These statements typically may be identified by the use of forward-looking words or phrases such as “may,” “believe,” “expect,” “forecast,” “intend,” “anticipate,” “predict,” “should,” “planned,” “likely,” “opportunity,” “estimated,” and “potential,” the negative use of these words or other similar words. All forward-looking statements included in this document are based on our current expectations, and we assume no obligation to update any such forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for such forward-looking statements. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause actual results and experiences to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, and results of our business include but are not limited to:

·

the timing of initiation and completion of the post-approval clinical studies required as part of the approval of Qsymia® (phentermine and topiramate extended release) capsules by the U.S. Food and Drug Administration, or FDA;

·

the response from FDA to the data that we will submit relating to post-approval clinical studies required for Qsymia;

·

the impact of the indicated uses and contraindications contained in the Qsymia label and the Risk Evaluation and Mitigation Strategy requirements;

·

our ability to continue to certify and add to the Qsymia retail pharmacy network and continue to sell Qsymia through this network;

·

whether the Qsymia retail pharmacy network will simplify and reduce the prescribing burden for physicians, improve access and reduce waiting times for patients seeking to initiate therapy with Qsymia;

·

that we may be required to provide further analysis of previously submitted clinical trial data;

·

our ability to work with FDA to significantly reduce or remove the requirements of the clinical post-approval cardiovascular outcomes trial, or CVOT;

·

our dialog with the European Medicines Agency, or EMA, relating to our CVOT for Qsymia, and the resubmission of an application for the grant of a marketing authorization to the EMA, the timing of such resubmission, if any, the results of the CVOT, assessment by the EMA of the application for marketing authorization, and their agreement with the data from the CVOT;

·

our, or our current or potential partners’, ability to successfully seek approval for Qsymia in other territories outside the U.S. and EU;

·

whether healthcare providers, payors and public policy makers will recognize the significance of the American Medical Association officially recognizing obesity as a disease, or the new American Association of Clinical Endocrinologists guidelines;

·

our, or our partner’s, ability to successfully commercialize Qsymia including risks and uncertainties related to expansion to retail distribution, the broadening of payor reimbursement, the expansion of Qsymia’s primary care presence, and the outcomes of our discussions with pharmaceutical companies and our strategic and franchise-specific pathways for Qsymia;

·

our ability to focus our promotional efforts on health-care providers and on patient education that, along with increased access to Qsymia and ongoing improvements in reimbursement, will result in the accelerated adoption of Qsymia;

·

our ability to minimize expenses that are not essential to expanding the use of STENDRA® (avanafil) and Qsymia or that are not related to product development;

·

our ability to ensure that the entire supply chain for Qsymia efficiently and consistently delivers Qsymia to our customers and to manage the supply chain for STENDRA/SPEDRA for our collaborators;

·

risks and uncertainties related to the timing, strategy, tactics and success of the launches and commercialization of STENDRA or SPEDRA™ (avanafil) by our sublicensees;

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·

our ability to successfully complete on acceptable terms, and on a timely basis, avanafil partnering discussions for territories under our license with Mitsubishi Tanabe Pharma Corporation in which we do not have a commercial collaboration;

·

Sanofi Chimie’s ability to undertake manufacturing of the avanafil active pharmaceutical ingredient and Sanofi Winthrop Industrie’s ability to undertake manufacturing of the tablets for avanafil;

·

the ability of our partners to maintain regulatory approvals to manufacture and adequately supply our products to meet demand;

·

our ability to accurately forecast Qsymia demand;

·

our, or our partner’s, ability to commercialize Qsymia efficiently;

·

the number of Qsymia prescriptions dispensed;

·

the impact of promotional programs for Qsymia on our net product revenue and net income (loss) in future periods;

·

our history of losses and variable quarterly results;

·

substantial competition;

·

risks related to our ability to protect our intellectual property and litigation in which we are involved or may become involved;

·

uncertainties of government or third-party payor reimbursement;

·

our reliance on sole-source suppliers, third parties and our collaborative partners;

·

our ability to successfully develop or acquire a proprietary formulation of tacrolimus as a precursor to the clinical development process;

·

our ability to continue to identify, acquire and develop innovative investigational drug candidates and drugs;

·

risks related to the failure to obtain FDA or foreign authority clearances or approvals and noncompliance with FDA or foreign authority regulations;

·

our ability to develop a proprietary formulation and to demonstrate through clinical testing the quality, safety, and efficacy of our current or future investigational drug candidates;

·

the timing of initiation and completion of clinical trials and submissions to U.S. and foreign authorities;

·

the results of post-marketing studies are not favorable;

·

compliance with post-marketing regulatory standards, post-marketing obligations or pharmacovigilance rules is not maintained;

·

the volatility and liquidity of the financial markets;

·

our liquidity and capital resources;

·

our expected future revenues, operations and expenditures;

·

potential change in our business strategy to enhance long-term stockholder value;

·

our ability to address or potentially reduce our outstanding debt balances:

·

the impact, if any, of changes to our Board of Directors or management team; and

·

other factors that are described from time to time in our periodic filings with the Securities and Exchange Commission, or the SEC, including those set forth in this filing as “Item 1A. Risk Factors.”

 

When we refer to “we,” “our,” “us,” the “Company” or “VIVUS” in this document, we mean the current Delaware corporation, or VIVUS, Inc., and its California predecessor, as well as all of our consolidated subsidiaries.

All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full fiscal year or any future period.

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 8,

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2017 and as amended by the Form 10-K/A filed with the SEC on April 26, 2017, and other disclosures (including the disclosures under “Part II. Item 1A. Risk Factors”) included in this Quarterly Report on Form 10-Q. Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars.

 

OVERVIEW

VIVUS is a biopharmaceutical company developing and commercializing innovative, next-generation therapies to address unmet medical needs in human health, with two approved therapies and one product candidate in active clinical development. Qsymia® (phentermine and topiramate extended release) is approved by FDA for chronic weight management and STENDRA® (avanafil) is approved for erectile dysfunction, or ED, by FDA and by the EC under the trade name SPEDRA in the EU. Tacrolimus is in active clinical development for the treatment of pulmonary arterial hypertension, or PAH.

Commercial Products

Qsymia

FDA approved Qsymia in July 2012, as an adjunct to a reduced calorie diet and increased physical activity for chronic weight management in adult obese or overweight patients in the presence of at least one weight related comorbidity, such as hypertension, type 2 diabetes mellitus or high cholesterol, or dyslipidemia. Qsymia incorporates a proprietary formulation combining low doses of active ingredients from two previously approved drugs, phentermine and topiramate. Although the exact mechanism of action is unknown, Qsymia is believed to suppress appetite and increase satiety, or the feeling of being full, the two main mechanisms that impact eating behavior.

We commercialize Qsymia in the U.S. through a sales force who promote Qsymia to physicians. Our sales efforts are focused on maintaining a commercial presence with important Qsymia prescribers, as well as covering prescriptions from physicians who begin prescribing branded anti-obesity products without any prior sales efforts by us.

Our marketing efforts have focused on rolling out unique programs to encourage targeted prescribers to gain more experience with Qsymia with their obese or overweight patient population. We continue to invest in digital media in order to amplify our messaging to information-seeking consumers. The digital messaging encourages those consumers most likely to take action to speak with their physicians about obesity treatment options. We believe our enhanced digital strategies deliver clear and compelling communications to potential patients. We  utilize a patient savings plan to further drive Qsymia brand preference at the point of prescription and to encourage long-term use of the brand.

Upon receiving approval to market Qsymia, FDA required that we perform additional studies of Qsymia including a cardiovascular, or CV, outcome trial, or CVOT. To date, there have been no indications throughout the Qsymia clinical development program or post-marketing experience of any increase in adverse CV events.  Given this historical information, along with the established safety profiles of phentermine and topiramate, we continue to believe that Qsymia poses no true CV safety risk. We have met with FDA to discuss alternative strategies for obtaining CV outcomes data that would be substantially more feasible and that ensure timely collection of data to better inform on the CV safety of Qsymia. We worked with CV and epidemiology experts in exploring alternate solutions to demonstrate the long-term CV safety of Qsymia. After reviewing a summary of Phase 3 data relevant to CV risk and post-marketing safety data, the cardiology experts noted that they believe there was an absence of an overt CV risk signal and indicated that they did not believe a randomized placebo-controlled CVOT would provide additional information regarding the CV risk of Qsymia. We voluntarily performed a retrospective analysis of patients using Qsymia, phentermine, topiramate and a non-Qsymia combination of phentermine and topiramate, and found no indication of additional CV risk.  Although we and consulted experts believe there is no overt signal for CV risk to justify the CVOT, we are committed to working with FDA to significantly reduce or remove the requirements of the CVOT. There is no assurance, however, that FDA will accept any measures short of those specified in the CVOT to satisfy this requirement.

In May 2013, the EC issued a decision refusing the grant of marketing authorization in the EU for Qsiva™, the approved trade name for Qsymia in the EU. In September 2013, we submitted a request to the EMA for Scientific Advice, a procedure similar to the U.S. Special Protocol Assessment process, regarding use of a pre-

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specified interim analysis from the CVOT to assess the long-term treatment effect of Qsymia on the incidence of major adverse CV events in overweight and obese subjects with confirmed CV disease. Our request was to allow this interim analysis to support the resubmission of an application for a marketing authorization for Qsiva for the treatment of obesity in accordance with the EU centralized marketing authorization procedure. We received feedback in 2014 from the EMA and the various competent authorities of the EU Member States associated with review of the CVOT protocol. Even if FDA were to accept a retrospective observational study or alternative solutions in lieu of a CVOT, there would be no assurance that the EMA would accept the same.

In June 2017 and August 2017, we entered into settlement agreements with Actavis Laboratories FL, Inc., or Actavis, and Dr. Reddy’s Laboratories, S.A. and Dr. Reddy’s Laboratories, Inc.,  collectively referred to as Dr. Reddy’s, respectively, resolving patent litigation related to Qsymia.  The litigation resulted from the submissions by Actavis and Dr. Reddy’s of Abbreviated New Drug Applications to the U.S. Food and Drug Administration seeking approval to market generic versions of Qsymia. The settlement agreements permit Actavis to begin selling a generic version of Qsymia on December 1, 2024, and Dr. Reddy’s to begin selling a generic version of Qsymia on June 1, 2025. Both Actavis and Dr. Reddy’s could enter the market earlier under certain circumstances.  In the event of an earlier launch upon the satisfaction of one of these circumstances, we will receive a royalty on sales of the generic version of Qsymia through the original launch dates.  This royalty will range from a percentage in the mid-teens to the mid-twenties depending on the launch date.

In September 2017, we entered into a license and commercialization agreement, or the Alvogen License Agreement, and a commercial supply agreement, or the Alvogen Supply Agreement, with Alvogen Malta Operations (ROW) Ltd, or Alvogen. Under the terms of the Alvogen License Agreement, Alvogen will be solely responsible for obtaining and maintaining regulatory approvals for all sales and marketing activities for Qsymia in South Korea. We received an upfront payment of $2.5 million in September 2017 and are eligible to receive additional payments upon Alvogen achieving marketing authorization, commercial launch and reaching a sales milestone.  Additionally, we will receive a royalty on Alvogen’s Qsymia net sales in South Korea. Under the Alvogen Supply Agreement, the Company will supply product to Alvogen.

Foreign regulatory approvals, including EC marketing authorization to market Qsiva in the EU, may not be obtained on a timely basis, or at all, and the failure to receive regulatory approvals in a foreign country would prevent us from marketing our products that have failed to receive such approval in that market, which could have a material adverse effect on our business, financial condition and results of operations.

STENDRA/SPEDRA

STENDRA is an oral phosphodiesterase type 5, or PDE5, inhibitor that we have licensed from Mitsubishi Tanabe Pharma Corporation, or MTPC. FDA approved STENDRA in April 2012 for the treatment of ED in the United States. In June 2013, the EC adopted a decision granting marketing authorization for SPEDRA, the approved trade name for avanafil in the EU, for the treatment of ED in the EU.

In July 2013, we entered into a license and commercialization agreement, or the Menarini License Agreement, with the Menarini Group, through its subsidiary Berlin Chemie AG, or Menarini, under which Menarini received an exclusive license to commercialize and promote SPEDRA for the treatment of ED in over 40 countries, including the EU, Australia and New Zealand. Menarini commenced its commercialization launch of the product in the EU in early 2014. As of the date of this filing, SPEDRA is commercially available in 31 countries within the territory granted to Menarini pursuant to its license and commercialization agreement, in addition to certain territories in Asia licensed directly from MTPC. Under the Menarini License Agreement, we have received payments of $63.0 million relating to license and milestone payments and royalty prepayments.  Additionally, we are entitled to receive potential milestone payments based on certain net sales targets, plus royalties on SPEDRA sales. Menarini will also reimburse us for payments made to cover various obligations to MTPC during the term of the Menarini License Agreement.

In September 2016, we entered into a license and commercialization agreement, or the Metuchen License Agreement, and a commercial supply agreement, or the Metuchen Supply Agreement, with Metuchen Pharmaceuticals LLC, or Metuchen. Under the terms of the Metuchen License Agreement, Metuchen received an exclusive license to develop, commercialize and promote STENDRA in the United States, Canada, South America and India, or the Metuchen Territory, effective October 1, 2016. We received an upfront license fee of $70 million under the Metuchen License Agreement. Metuchen will also reimburse us for payments made to cover royalty and

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milestone obligations to MTPC during the term of the Metuchen License Agreement, but will otherwise owe us no future royalties. Metuchen will obtain STENDRA exclusively from us.

In December 2013, we entered into a license and commercialization agreement with Sanofi, or the Sanofi License Agreement, under which Sanofi received an exclusive license to commercialize and promote avanafil for therapeutic use in humans in Africa, the Middle East, Turkey, and the Commonwealth of Independent States, or CIS, including Russia, or the Sanofi Territory. Sanofi was responsible for obtaining regulatory approval in its territories. In March 2017, we and Sanofi entered into the Termination, Rights Reversion and Transition Services Agreement, or the Transition Agreement, effective February 28, 2017. Under the Transition Agreement, effective upon the thirtieth day following February 28, 2017, the Sanofi License Agreement terminated for all countries in the Sanofi Territory as a termination by Sanofi for convenience notwithstanding any notice requirements contained in the Sanofi License Agreement. In addition, under the Transition Agreement, Sanofi will provide us with certain transition services in support of ongoing regulatory approval efforts while we seek to obtain a new commercial partner or partners for the Sanofi Territory. We will pay certain transition service fees to Sanofi as part of the Transition Agreement.

We are currently in discussions with potential collaboration partners to develop, market and sell STENDRA for territories in which we do not currently have a commercial collaboration, including Africa, the Middle East, Turkey, the CIS, including Russia, Mexico and Central America.

Development Program

Pulmonary Arterial Hypertension - Tacrolimus

PAH is a chronic, life-threatening disease characterized by elevated blood pressure in the pulmonary arteries, which are the arteries between the heart and lungs, due to severe constriction of these blood vessels. Pulmonary blood pressure is normally between 8 and 20 mmHg at rest as measured by right heart catheterization. In patients with PAH, the pressure in the pulmonary artery is greater than 25 mmHg at rest or 30 mmHg during physical activity.  These high pressures make it difficult for the heart to pump blood through the lungs to be oxygenated.

The current medical therapies for PAH involve endothelin receptor antagonists, PDE5 inhibitors, prostacyclin analogues, selective prostaglandin I2 receptor agonists, and soluble guanate cyclase stimulators, which aim to reduce symptoms and improve quality of life. All currently approved products treat the symptoms of PAH, but do not address the underlying disease.  We believe that tacrolimus can be used to enhance reduced bone morphogenetic protein receptor type 2, or BMPR2, signaling that is prevalent in PAH patients and may therefore address a fundamental cause of PAH.

The prevalence of PAH varies among specific populations, but it is estimated at between 15 and 50 cases per million adults.  PAH usually develops between the ages of 20 and 60 but can occur at any age, with a mean age of diagnosis around 45 years.  Idiopathic PAH is the most common type, constituting approximately 40% of the total diagnosed PAH cases, and occurs two to four times more frequently in females.

On January 6, 2017, we entered into a Patent Assignment Agreement with Selten Pharma, Inc., or Selten, whereby we received exclusive, worldwide rights for the development and commercialization of BMPR2 activators for the treatment of PAH and related vascular diseases. As part of the agreement, Selten assigned to us its license to a group of patents owned by the Board of Trustees of the Leland Stanford Junior University, or Stanford, which cover uses of tacrolimus and ascomycin to treat PAH. Under this agreement, Selten received an upfront payment of $1.0 million and is entitled to milestone payments based on global development status and future sales milestones, as well as tiered royalty payments on future sales of these compounds.  The total potential milestone payments are $39.0 million to Selten. We have assumed full responsibility for the development and commercialization of the licensed compounds for the treatment of PAH and related vascular diseases.

In October 2017, we held a pre-IND meeting with FDA for our proprietary formulation of tacrolimus for the treatment of PAH.  FDA addressed our questions related to preclinical, nonclinical and clinical data and the planned design of clinical trials of tacrolimus in class III and IV PAH patients, and clarified the requirements needed to file an IND to initiate a clinical trial in this indication. As discussed with FDA, we currently intend to design and conduct clinical trials that could qualify for Fast Track and/or Breakthrough Therapy designation.

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Tacrolimus for the treatment of PAH has received Orphan Drug Designation from FDA in the United States and the European Medicines Agency in the EU. In 2017, we are focusing on the development of a proprietary formulation of tacrolimus to be used in a clinical development program and for commercial use and filing an IND with FDA.

Business Strategy Review

In 2016, we initiated a business strategy review with an outside advisor. The first announcement was the licensing of STENDRA to Metuchen for the U.S., Canada, South America, and India, followed by the in-licensing of tacrolimus and ascomycin from Selten, as discussed above.  We will continue this process to evaluate strategies for maximizing our current assets as well as to evaluate development and commercial opportunities to utilize our cash resources, which could come in the form of a license, a co-development agreement, a merger or acquisition or other form. We will also look for opportunities to restructure our existing debt, including repayment or restructuring the outstanding balances.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to available-for-sale securities, research and development expenses, income taxes, inventories, revenues, including revenues from multiple-element arrangements, contingencies and litigation and share-based compensation. We base our estimates on historical experience, information received from third parties and on various market specific and other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates under different assumptions or conditions.

Our significant accounting policies are more fully described in Note 1 to our audited consolidated financial statements and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” contained in our Annual Report on Form 10-K, or our Annual Report, as filed with the SEC on March 8, 2017. There has been one significant change in our critical accounting policies during the nine months ended September 30, 2017, as outlined below:

Revenue Recognition

Product Revenue

We recognize product revenue when:

(i)

persuasive evidence that an arrangement exists,

(ii)

delivery has occurred and title has passed,

(iii)

the price is fixed or determinable, and

(iv)

collectability is reasonably assured.

Revenue from sales transactions where the customer has the right to return the product is recognized at the time of sale only if: (i) our price to the customer is substantially fixed or determinable at the date of sale, (ii) the customer has paid us, or the customer is obligated to pay us and the obligation is not contingent on resale of the product, (iii) the customer’s obligation to us would not be changed in the event of theft or physical destruction or damage of the product, (iv) the customer acquiring the product for resale has economic substance apart from that provided by us, (v) we do not have significant obligations for future performance to directly bring about resale of the product by the customer, and (vi) the amount of future returns can be reasonably estimated.

Product Revenue Allowances

Product revenue is recognized net of consideration paid to our customers, wholesalers and certified pharmacies for services rendered by the wholesalers and pharmacies in accordance with the wholesalers and certified pharmacy services network agreements, and includes a fixed rate per prescription shipped and monthly

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program management and data fees. These services are not deemed sufficiently separable from the customers’ purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition.

Other product revenue allowances include certain prompt pay discounts and allowances offered to our customers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue at the later of the date at which the related revenue is recognized or the date at which the allowance is offered. We also offer discount programs to patients. Calculating certain of these items involves estimates and judgments based on sales or invoice data, contractual terms, utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates or chargebacks. We review the adequacy of product revenue allowances on a quarterly basis. Amounts accrued for product revenue allowances are adjusted when trends or significant events indicate that adjustment is appropriate and to reflect actual experience.

We ship units of Qsymia through a distribution network that includes certified retail pharmacies. Qsymia has a 36–month shelf life and we grant rights to our customers to return unsold product six months prior to and up to 12 months after product expiration and issue credits that may be applied against existing or future invoices. Given our limited history of selling Qsymia and the duration of the return period, in the past, we have not had sufficient information to reliably estimate expected returns of Qsymia at the time of shipment, and therefore revenue was recognized when units were dispensed to patients through prescriptions, at which point, the product is not subject to return.

Beginning in the first quarter of 2017, with 48 months of returns experience, we believe that we have sufficient data and experience from selling Qsymia to reliably estimate expected returns. Therefore, beginning in the first quarter of 2017, we began recognizing revenue from the sales of Qsymia upon shipment and recording a reserve for expected returns at the time of shipment.

In accordance with this change in accounting estimate, we recognized a one-time adjustment of $7.3 million of revenues, net of expected returns reserve and gross-to-net charges, in the first quarter of 2017 relating to products that had been previously shipped.

 

RESULTS OF OPERATIONS

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

 

 

 

 

 

 

% Change

 

 

 

Three Months Ended September 30, 

 

Increase/ (Decrease)

 

 

Nine Months Ended September 30, 

 

Increase/ (Decrease)

 

(in thousands, except for percentages)

 

2017

 

2016

    

2017 vs 2016

 

    

2017

 

2016

    

2017 vs 2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product revenue

 

$

9,911

 

$

12,294

 

(19)

%

 

$

36,049

 

$

37,455

 

(4)

%

License and milestone revenue

 

 

2,500

 

 

 —

 

N/A

 

 

 

7,500

 

 

 —

 

N/A

 

Supply revenue

 

 

2,133

 

 

 —

 

N/A

 

 

 

8,064

 

 

1,526

 

428

%

Royalty revenue

 

 

649

 

 

1,059

 

(39)

%

 

 

1,819

 

 

3,472

 

(48)

%

Total revenue

 

$

15,193

 

$

13,353

 

14

%

 

$

53,432

 

$

42,453

 

26

%

 

Net product revenue

Net product revenue for 2016 was recognized when units were dispensed to patients through prescriptions. Beginning in the first quarter of 2017, we began recognizing revenue from the sales of Qsymia upon shipment and recording a reserve for expected returns at the time of shipment. Net product revenue for the nine months ended September 30, 2017 includes a one-time adjustment of $7.3 million related to shipments which had previously been deferred. For the three and nine months ended September 30, 2017, there were approximately 97,000 and 304,000 Qsymia prescriptions dispensed, respectively and, for the three and nine months ended September 30, 2016, there were approximately 109,000 and 342,000 Qsymia prescriptions dispensed, respectively. Due to the change in the timing when we recognize revenue on Qsymia shipments, net product revenue on a go-forward basis will be based on units shipped to the wholesaler rather than prescriptions dispensed in a given period. In the three and nine months ended September 30, 2017, we shipped approximately 92,000 units and 265,000 units, respectively, of Qsymia to

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the wholesalers. The change in the timing of when we recognize revenue could result in higher volatility of Qsymia sales compared to those historically reported. We expect Qsymia net product revenue in 2017 to decrease from 2016 levels due to market conditions.

License and milestone revenue

License and milestone revenue for the three and nine months ended September 30, 2017 consisted of the upfront payment of $2.5 million under the Alvogen License Agreement in the third quarter and a one-time $5.0 million payment received for a license to certain clinical data related to phentermine in the first quarter.  There was no license and milestone revenue for the three and nine months ended September 30, 2016. License and milestone revenues are dependent on the timing of entering into new collaborations and the timing of our collaborators meeting certain milestone events. As a result, our license and milestone revenue will fluctuate materially between periods.

Supply revenue

The increase in supply revenue in 2017 as compared to 2016 is due to the timing of orders from our commercialization partners. We supply STENDRA/SPEDRA to our collaborations partners on a cost-plus basis. The variations in supply revenue are a result of the timing of orders placed by our partners and may or may not reflect end user demand for STENDRA/SPEDRA. The timing of purchases by our commercialization partners will be affected by, among other items, their minimum purchase commitments, end user demand, and distributor inventory levels. As a result, supply revenue has and will continue to fluctuate materially between reporting periods.

Royalty revenue

We record royalty revenue related to STENDRA based on reports provided by our partners.  One of our partners, Auxilium, returned the U.S. and Canadian commercial rights for STENDRA to us on September 30, 2016. Also, on September 30, 2016, we entered into the Metuchen License Agreement and the Metuchen Supply Agreement, providing Metuchen with, among other rights, commercial rights to sell STENDRA/SPEDRA in the U.S., Canada, South America, and India. The Metuchen License Agreement does not include future royalties to us on the sales of STENDRA/SPENDRA in the Metuchen Territory. We expect royalty revenue to decrease in 2017 from 2016 levels, as beginning in the fourth quarter of 2016 we no longer receive royalty revenue from net sales of STENDRA in the U.S.

Cost of goods sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

 

 

 

 

 

 

% Change

 

 

Three Months Ended September 30, 

 

Increase/ (Decrease)

 

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