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 March  31, 2018

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 April 30, 2018,  106,054,094 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 March  31, 2018 and December 31, 2017

3

 

Condensed Consolidated Statements of Operations for the Three Months Ended March  31, 2018 and 2017

4

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March  31, 2018 and 2017

4

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2 

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

20

Item 3 

Quantitative and Qualitative Disclosures about Market Risk

30

Item 4 

Controls and Procedures

31

 

 

 

 

PART II  — OTHER INFORMATION

32

 

 

 

Item 1 

Legal Proceedings

32

Item 1A 

Risk Factors

33

Item 2 

Unregistered Sales of Equity Securities and Use of Proceeds

68

Item 3 

Defaults Upon Senior Securities

68

Item 4 

Mine Safety Disclosures

68

Item 5 

Other Information

68

Item 6 

Exhibits

68

 

Signatures

71

 

 

2


 

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)

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

2018

 

2017

ASSETS

 

Unaudited

    

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

76,805

 

$

66,392

Available-for-sale securities

 

132,320

 

 

159,943

Accounts receivable, net

 

11,291

 

 

12,187

Inventories

 

21,006

 

 

17,712

Prepaid expenses and other current assets

 

6,447

 

 

7,178

Total current assets

 

247,869

 

 

263,412

Property and equipment, net

 

510

 

 

542

Non-current assets

 

924

 

 

1,014

Total assets

$

249,303

 

$

264,968

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

4,786

 

$

10,072

Accrued and other liabilities

 

20,788

 

 

21,475

Deferred revenue

 

2,179

 

 

2,075

Current portion of long-term debt

 

836

 

 

5,147

Total current liabilities

 

28,589

 

 

38,769

Long-term debt, net of current portion

 

235,671

 

 

230,536

Deferred revenue, net of current portion

 

4,279

 

 

4,674

Non-current accrued and other liabilities

 

307

 

 

327

Total liabilities

 

268,846

 

 

274,306

Commitments and contingencies

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

Preferred stock; $1.00 par value; 5,000 shares authorized; no shares issued and outstanding at March 31, 2018 and December 31, 2017

 

 —

 

 

 —

Common stock; $.001 par value; 200,000 shares authorized; 106,041 and 105,977 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

106

 

 

105

Additional paid-in capital

 

835,654

 

 

834,730

Accumulated other comprehensive loss

 

(1,085)

 

 

(608)

Accumulated deficit

 

(854,218)

 

 

(843,565)

Total stockholders’ deficit

 

(19,543)

 

 

(9,338)

Total liabilities and stockholders’ deficit

$

249,303

 

$

264,968

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

Table of Contents

VIVUS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31, 

 

2018

    

2017

Revenue:

 

    

    

 

    

Qsymia product revenue, net

$

9,632

 

$

17,620

License and milestone revenue

 

 —

 

 

5,000

Supply revenue

 

1,683

 

 

3,812

Royalty revenue

 

585

 

 

580

Total revenue

 

11,900

 

 

27,012

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Cost of goods sold

 

2,721

 

 

6,167

Selling, general and administrative

 

10,068

 

 

11,431

Research and development

 

1,403

 

 

2,180

Total operating expenses

 

14,192

 

 

19,778

 

 

 

 

 

 

(Loss) income from operations

 

(2,292)

 

 

7,234

 

 

 

 

 

 

Interest expense and other expense, net

 

8,349

 

 

8,302

Loss before income taxes

 

(10,641)

 

 

(1,068)

Provision for (benefit from) income taxes

 

12

 

 

(12)

Net loss

$

(10,653)

 

$

(1,056)

 

 

 

 

 

 

Basic and diluted net loss per share:

$

(0.10)

 

$

(0.01)

Shares used in per share computation:

 

 

 

 

 

Basic and diluted

 

106,014

 

 

105,479

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31, 

 

2018

 

2017

Net loss

$

(10,653)

 

$

(1,056)

Unrealized (loss) gain on securities, net of taxes

 

(477)

 

 

125

Comprehensive loss

$

(11,130)

 

$

(931)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

Table of Contents

VIVUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31, 

 

2018

 

2017

Cash flows from operating activities:

 

    

    

 

    

Net loss

$

(10,653)

 

$

(1,056)

Adjustments to reconcile net loss to net cash used for operating activities:

 

 

 

 

 

Depreciation and amortization

 

157

 

 

252

Amortization of debt issuance costs and discounts

 

5,414

 

 

4,935

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

 

121

 

 

245

Share-based compensation expense

 

925

 

 

727

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

896

 

 

(1,965)

Inventories

 

(3,294)

 

 

(1,004)

Prepaid expenses and other assets

 

730

 

 

3,740

Accounts payable

 

(5,286)

 

 

200

Accrued and other liabilities

 

(707)

 

 

4,740

Deferred revenue

 

(291)

 

 

(17,886)

Net cash used for by operating activities

 

(11,988)

 

 

(7,072)

Cash flows from investing activities:

 

 

 

 

 

Property and equipment purchases

 

(34)

 

 

(21)

Purchases of available-for-sale securities

 

(7,604)

 

 

(20,915)

Proceeds from maturity of available-for-sale securities

 

28,336

 

 

12,234

Proceeds from sales of available-for-sale securities

 

6,293

 

 

820

Net cash provided by (used for) investing activities

 

26,991

 

 

(7,882)

Cash flows from financing activities:

 

 

 

 

 

Repayments of notes payable

 

(4,590)

 

 

(2,076)

Net cash used for financing activities

 

(4,590)

 

 

(2,076)

Net increase (decrease) in cash and cash equivalents

 

10,413

 

 

(17,030)

Cash and cash equivalents:

 

 

 

 

 

Beginning of year

 

66,392

 

 

84,783

End of period

$

76,805

 

$

67,753

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

Table of Contents

VIVUS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH  31, 2018

 

1. BASIS OF PRESENTATION

VIVUS is a specialty pharmaceutical company developing and commercializing innovative, next-generation therapies to address unmet medical needs in human health. The Company has 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. STENDRA® (avanafil) is approved by FDA for erectile dysfunction, or ED, and by the European Commission, or EC, under the trade name SPEDRA, for the treatment of ED in the EU. Tacrolimus is in active clinical development and is being studied in patients with pulmonary arterial hypertension, or PAH.

In May 2018, the Company announced it had entered into an agreement to acquire the U.S. and Canadian commercial rights for PANCREAZE® (pancrelipase). The closing of this acquisition is subject to governmental reviews and is expected to close before the end of the second quarter of 2018. PANCREAZE is indicated for the treatment of exocrine pancreatic insufficiency due to cystic fibrosis or other conditions.

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. primarily through a small sales force supported by an internal commercial team, 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 months ended March  31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. Management has evaluated all events and transactions that occurred after March  31, 2018 through the date these unaudited condensed consolidated financial statements were filed. Other than those disclosed in Note 17, there were no events or transactions during this period that require recognition or disclosure in these unaudited condensed consolidated financial statements. The December 31, 2017 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, 2017 as filed on March 14, 2018 with the Securities and Exchange Commission, or SEC, and as amended by the Form 10-K/A filed on April 26, 2018 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

6


 

Table of Contents

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.

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, 2017 with the exception of its revenue recognition policy. See Note 2.

Recent Accounting Pronouncement Adopted

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 supersedes most previously-existing revenue recognition guidance. The Company adopted this standard in the first quarter of 2018 using the modified retrospective basis. See Note 2.

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 Company adopted this standard in the first quarter of 2018, and it had no impact on its consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

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, although it has numerous smaller leases, 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.

 

2. REVENUES

On January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, or Topic 606. Topic 606 supersedes the revenue recognition requirements in Topic 605 Revenue Recognition, or Topic 605, and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.

The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. Revenue amounts as reported for the first quarter of 2017 under Topic 605 are approximately the same as they would have been under Topic 606. Due in large part to the change in accounting estimate made by the Company in the first quarter of 2017, there was no cumulative impact of adopting Topic 606 and the Company did not record a change to its opening retained earnings as of January 1, 2018.

7


 

Table of Contents

Revenue Recognition

For all revenue transactions, the Company evaluates its contracts with its customers to determine revenue recognition using the following five-step model:

1)The Company identifies the contract(s) with a customer

2)The Company identifies the performance obligations in the contract

3)The Company determines the transaction price

4)The Company allocates the transaction price to the identified performance obligations

5)The Company recognizes revenue when (or as) the entity satisfies a performance obligation

Product Revenue:

Product revenue is recognized at the time of shipment at which time the Company has satisfied its performance obligation. 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 a reserve for estimated product returns, 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 date at which the related revenue is recognized. 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. See Note 9 for product reserve balances.

Change in Accounting Estimate in 2017

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, which was required by the accounting literature at the time, and therefore recognized revenue when units were dispensed to patients through prescriptions, at which point the product was 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 believed that it had sufficient data and experience from selling Qsymia to reliably estimate expected returns. Therefore, beginning in the first quarter of 2017, under the then relevant accounting literature, 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, in the first quarter of 2017 the Company recognized a one-time adjustment relating to products that had been previously shipped, consisting of $17.9 million of gross revenues, adjusted for an expected returns reserve of $5.7 million and estimated gross-to-net charges of $4.9 million, for a net impact of $7.3 million in revenues. The Company also recorded increased cost of goods sold of $0.6 million and marketing expense of $0.7 million associated with the change in accounting estimate. The increase in net product revenue resulted in a decrease in net loss of $6.0 million or $0.06 per share for the three months ended March 31, 2017.

Supply Revenue:

The Company produces STENDRA/SPEDRA through a contract manufacturing partner and then sells it to its commercialization partners. The Company is the primary responsible party in the commercial supply

8


 

Table of Contents

arrangements and bears significant risk in the fulfillment of the obligations, including risks associated with manufacturing, regulatory compliance and quality assurance, as well as inventory, financial and credit loss. As such, the Company recognizes supply revenue on a gross basis as the principal party in the arrangements. The Company recognizes supply revenue at the time of shipment and, in the unusual case where the product does not meet contractually-specified product dating criteria at the time of shipment to the partner, the Company records a reserve for estimated product returns. There are no such reserves as of March 31, 2018.

License and Milestone Revenue

License and milestone revenues related to arrangements, usually license and/or supply agreements, entered into by the Company are recognized by following the five-step process outlined above. The allocation and timing of recognition of such revenue will be determined by that process and the amounts recognized and the timing of that recognition may not exactly follow the wording of the agreement as the amount allocated following the accounting analysis of the agreement may differ and the timing of recognition of a significant performance obligation may predate the contractual date.

Royalty Revenue

The Company relies on data provided by its collaboration partner in determining its contractually-based royalty revenue. Such data includes accounting estimates and reports for various discounts and allowances, including product returns. The Company records royalty revenues based on the best data available and makes any adjustments to such revenues as such information becomes available.

Revenue by Source and Geography

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

2018

 

2017

 

U.S.

 

ROW

 

Total

 

U.S.

 

ROW

 

Total

Qsymia—Product revenue, net

$

9,632

 

$

 —

 

$

9,632

 

$

17,620

 

$

 —

 

$

17,620

Qsymia—License revenue

 

 —

 

 

 —

 

 

 —

 

 

5,000

 

 

 —

 

 

5,000

STENDRA/SPEDRA—Supply revenue

 

547

 

 

1,136

 

 

1,683

 

 

3,775

 

 

37

 

 

3,812

STENDRA/SPEDRA—Royalty revenue

 

 —

 

 

585

 

 

585

 

 

 —

 

 

580

 

 

580

Total revenue

$

10,179

 

$

1,721

(1)

$

11,900

 

$

26,395

 

$

617

(2)

$

27,012

 


(1)

$1.7 million of which was attributable to Germany.

(2)

$0.6 million of which was attributable to Germany.

 

 

 

3. 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

 

March 31, 

 

2018

   

2017

Cost of goods sold

$

13

 

$

14

Selling, general and administrative

 

832

 

 

628

Research and development

 

80

 

 

85

Total share-based compensation expense

$

925

 

$

727

Share-based compensation costs capitalized as part of the cost of inventory were $1,000 and $4,000 for the three months ended March  31, 2018 and 2017, respectively.

9


 

Table of Contents

4. 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 March 31, 2018

 

 

 

 

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

$

76,805

 

$

 —

 

$

 —

 

$

76,805

U.S. Treasury securities

 

15,066

 

 

 —

 

 

(178)

 

 

14,888

Corporate debt securities

 

118,339

 

 

15

 

 

(922)

 

 

117,432

Total

 

210,210

 

 

15

 

 

(1,100)

 

 

209,125

Less amounts classified as cash and cash equivalents

 

(76,805)

 

 

 —

 

 

 —

 

 

(76,805)

Total available-for-sale securities

$

133,405

 

$

15

 

$

(1,100)

 

$

132,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 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

$

66,392

 

$

 —

 

$

 —

 

$

66,392

U.S. Treasury securities

 

21,070

 

 

 1

 

 

(139)

 

 

20,932

Corporate debt securities

 

139,481

 

 

16

 

 

(486)

 

 

139,011

Total

 

226,943

 

 

17

 

 

(625)

 

 

226,335

Less amounts classified as cash and cash equivalents

 

(66,392)

 

 

 —

 

 

 —

 

 

(66,392)

Total available-for-sale securities

$

160,551

 

$

17

 

$

(625)

 

$

159,943

As of March 31, 2018, 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 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.

10


 

Table of Contents

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 March 31, 2018

 

Level 1

     

Level 2

     

Level 3

     

Total

Cash and money market funds

$

76,805

 

$

 —

 

$

 —

 

$

76,805

U.S. Treasury securities

 

14,888

 

 

 —

 

 

 —

 

 

14,888

Corporate debt securities

 

 —

 

 

117,432

 

 

 —

 

 

117,432

Total

$

91,693

 

$

117,432

 

$

 —

 

$

209,125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

Level 1

     

Level 2

     

Level 3

     

Total

Cash and money market funds

$

66,392

 

$

 —

 

$

 —

 

$

66,392

U.S. Treasury securities

 

20,932

 

 

 —

 

 

 —

 

 

20,932

Corporate debt securities

 

 —

 

 

139,011

 

 

 —

 

 

139,011

Total

$

87,324

 

$

139,011

 

$

 —

 

$

226,335

 

 

 

5. ACCOUNTS RECEIVABLE

Accounts receivable consist of the following (in thousands):

 

 

 

 

 

 

 

Balance as of

 

March 31, 

 

December 31, 

 

2018

 

2017

Qsymia

$

9,119

 

$

10,400

STENDRA/SPEDRA

 

2,353

 

 

1,982

 

 

11,472

 

 

12,382

Qsymia allowance for cash discounts

 

(181)

 

 

(195)

Net

$

11,291

 

$

12,187

 

 

6. INVENTORIES

Inventories consist of the following (in thousands):

 

 

 

 

 

 

 

Balance as of

 

March 31, 

 

December 31, 

 

2018

 

2017

Raw materials

$

16,802

    

$

13,663

Work-in-process

 

1,796

 

 

2,264

Finished goods

 

2,408

 

 

1,785

Inventories

$

21,006

 

$

17,712

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 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.

11


 

Table of Contents

7.  PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

 

 

 

 

 

 

 

Balance as of

 

March 31, 

 

December 31, 

 

2018

 

2017

Prepaid sales and marketing expenses

$

1,617

 

$

1,538

Taxes receivable

 

2,133

 

 

1,222

Prepaid insurance

 

797

 

 

1,124

Other prepaid expenses and assets

 

1,900

 

 

3,294

Total

$

6,447

 

$

7,178

 

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.

 

8. NON-CURRENT ASSETS

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

 

9.  ACCRUED AND OTHER LIABILITIES

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

 

 

 

 

 

 

 

Balance as of

 

March 31, 

 

December 31, 

 

2018

 

2017

Accrued employee compensation and benefits

$

2,123

    

$

3,642

Reserve for product returns (see Note 2)

 

7,857

 

 

7,854

Product-related accruals (see Note 2)

 

5,353

 

 

5,751

Accrued interest on debt (see Note 13)

 

2,123

 

 

410

Accrued manufacturing costs

 

948

 

 

1,238

Other accrued liabilities

 

2,384

 

 

2,580

Total

$

20,788

 

$

21,475

 

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.

 

10. NON-CURRENT ACCRUED AND OTHER LIABILITIES

Non-current accrued and other liabilities were $0.3 million and $0.3 million at March  31, 2018 and December 31, 2017, respectively, and were primarily comprised of deferred rent and security deposits.

 

 

 

11. DEFERRED REVENUE

Deferred revenue relates to a prepayment for future royalties on sales of SPEDRA. In the first quarter of 2018, the Company recorded $0.3 million of revenues which had been deferred as of December 31, 2017.

12


 

Table of Contents

 

12. LICENSE, COMMERCIALIZATION AND SUPPLY AGREEMENTS

MTPC

In January 2001, the Company entered into an exclusive development, license and clinical trial and commercial supply agreement with Tanabe Seiyaku Co., Ltd., now Mitsubishi Tanabe Pharma Corporation, or MTPC, for the development and commercialization of avanafil. Under the terms of the agreement, MTPC agreed to grant an exclusive license to the Company for products containing avanafil outside of Japan, North Korea, South Korea, China, Taiwan, Singapore, Indonesia, Malaysia, Thailand, Vietnam and the Philippines. The Company agreed to grant MTPC an exclusive, royalty free license within those countries for oral products that we develop containing avanafil. The MTPC agreement contains a number of milestone payments to be made by us based on various triggering events. The term of the MTPC agreement is based on a country by country and on a product by product basis. In August 2012, the Company entered into an amendment to the agreement with MTPC that permitted the Company to manufacture the active pharmaceutical ingredient, or API, and tablets for STENDRA by itself or through third parties. In 2015, the Company transferred the manufacturing of the API and tablets for STENDRA to Sanofi. The Company maintains royalty obligations to MTPC which have been passed through to our commercialization partners.

Menarini

In July 2013, the Company entered into a license and commercialization agreement, or the Menarini License Agreement, and a supply agreement, or the Menarini Supply Agreement, with the Menarini Group through its subsidiary Berlin Chemie AG, or Menarini. Under the terms of the Menarini License Agreement, Menarini received an exclusive license to commercialize and promote SPEDRA for the treatment of ED in over 40 countries, including the EU, plus Australia and New Zealand. Additionally, the Company transferred to Menarini ownership of the marketing authorization for SPEDRA in the EU for the treatment of ED, which was granted by the EC in June 2013. Under the Menarini License Agreement, the Company has and is entitled to receive potential milestone payments based on certain net sales targets, plus royalties on SPEDRA sales. Under the terms of the Menarini Supply Agreement, the Company will supply Menarini with STENDRA drug product until December 31, 2018. Menarini also has the right to manufacture STENDRA independently, provided that it continues to satisfy certain minimum purchase obligations to the Company. Following the expiration of the Menarini Supply Agreement, Menarini will be responsible for its own supply of STENDRA. Either party may terminate the Menarini Supply Agreement for the other party’s uncured material breach or bankruptcy, or upon the termination of the Menarini License Agreement.

Sanofi

In December 2013, the Company entered into a license and commercialization agreement, or the Sanofi License Agreement, with Sanofi. Under the terms of the Sanofi License Agreement, Sanofi received an exclusive license to commercialize and promote avanafil for therapeutic use in humans in Africa, the Middle East—Turkey and Commonwealth of Independent States, including Russia, or the Sanofi Territory. In July 2013, the Company entered into a Commercial Supply Agreement with Sanofi Chimie to manufacture and supply the API for avanafil on an exclusive basis in the United States and other territories and on a semi-exclusive basis in Europe, including the EU, Latin America and other territories. In November 2013, the Company entered into a Manufacturing and Supply Agreement with Sanofi Winthrop Industrie to manufacture and supply the avanafil tablets on an exclusive basis in the United States and other territories and on a semi exclusive basis in Europe, including the EU, Latin America and other territories. The Company has minimum annual purchase commitments under these agreements for at least the initial five-year terms.

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 Sanofi License Agreement 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

13


 

Table of Contents

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.

Metuchen

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 MTPC.

Metuchen will obtain STENDRA exclusively from the Company for a mutually agreed term pursuant to the Metuchen Supply Agreement. Metuchen may elect to transfer the control of the supply chain for STENDRA for the Metuchen Territory to itself or its designee by assigning to Metuchen the Company’s agreements with the contract manufacturer. For 2016 and each subsequent 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.

Alvogen

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

14


 

Table of Contents

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 months ended March  31, 2018, total interest expense related to the Convertible Notes was $8.4 million, including amortization of $5.1 million of the debt discount and amortization of $273,000 of deferred financing costs. For the three months ended March 31, 2017, total interest expense related to the Convertible Notes was $7.9 million, including amortization of $4.7 million of the debt discount and amortization of $247,000 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 months ended March 31, 2018, the interest expense related to the Senior Secured Notes was $0.1 million, including amortization of deferred financing costs of $7,000. For the three months ended March 31, 2017, the interest expense related to the Senior Secured Notes was $1.0 million, including amortization of deferred financing costs of $38,000.

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

 

 

 

 

March 31, 

 

2018

Convertible Senior Notes due 2020

$

250,000

Senior Secured Notes due 2018

 

1,597

 

 

251,597

Less: Debt issuance costs

 

(761)

Less: Discount on convertible senior notes

 

(14,329)

 

 

236,507

Less: Current portion

 

(836)

Long-term debt, net of current portion

$

235,671

 

 

 

    Future estimated payments as of March 31, 2018 are as follows:

 

 

 

 

 

2018

$

12,950

2019

 

11,250

2020

 

256,250

Total

 

280,450

Less: Interest portion

 

(28,853)

Senior Secured Notes

$

251,597

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.

15


 

Table of Contents

 

 

 

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 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-month periods ended March 31, 2018 and 2017, 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 16,729,000 and 12,731,000, respectively, for the three months ended March 31, 2018 and 2017.

 

15. INCOME TAXES

For the three months ended March 31, 2018, the Company recorded a provision for income taxes of $12,000. For the three months ended March 31, 2017, the Company recorded a benefit from taxes of $12,000. 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 March  31, 2018. 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 March 31, 2018, 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 $121,000. 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.

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other changes is an interest expense deduction limitation effective January 1, 2018. Under the guidance of Staff Accounting Bulletin 118, the Company has estimated an additional $12.1 million non-deductible accrued interest expense in the forecasted taxable income computation, for which the accounting is incomplete but a reasonable estimate can be determined. Due to the overall taxable loss and valuation allowance position, there would be no material provision impact.

 

16


 

Table of Contents

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. 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. The Ninth Circuit issued a decision on January 16, 2018, affirming the district court’s dismissal of the action. The deadlines for Plaintiffs to seek rehearing in the Ninth Circuit and to file a petition for certiorari in the Supreme Court have now expired and the matter is concluded.

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. The initial notice alleged that six patents listed for Qsymia in the FDA Orange Book at the time the notice was received 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. Additional patents covering Qsymia have been issued since May 2014 and after receiving Paragraph IV certification notices from Actavis with respect to those patents, the Company filed additional lawsuits against Actavis to include these additional patents in the litigation. On August 17, 2015, the 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 patents listed for Qsymia in the Orange Book at the time of the notice 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. A second Paragraph IV certification notice was received from Teva with respect to patents covering Qsymia that issued after March 2015, and the Company filed an additional lawsuit against Teva to include these additional patents in the litigation. The 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 lawsuits.

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

17


 

Table of Contents

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 settlements resolve all patent litigation brought by VIVUS against generic pharmaceutical companies that have filed ANDAs seeking approval to market generic versions of Qsymia. The settlement agreement with Actavis will permit Actavis to begin selling a generic version of Qsymia on December 1, 2024, or earlier under certain circumstances. The settlement with DRL will permit DRL to begin selling a generic version of Qsymia on June 1, 2025, or earlier under certain circumstances.

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 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. SUBSEQUENT EVENTS

In April 2018, the Company entered into a stock purchase agreement with Willow Biopharma Inc., or Willow, and its shareholders, under which the Company agreed to acquire all of the equity interest of Willow in exchange for warrants to purchase up to 3.57 million shares of the Company’s common stock with a per share exercise price of $0.37, the closing price of the Company’s common stock on the date of grant. With this acquisition, the Company announced the addition of three new members to its senior leadership team. John Amos, who previously served as the Executive Chairman of Willow, has been named the new Chief Executive Officer of VIVUS and a member of the VIVUS Board of Directors. Kenneth Suh will remain as President and Chief Executive Officer of Willow. M. Scott Oehrlein, who served as Chief Operations Officer of Willow, has been named to the newly created position of Chief Operations Officer of VIVUS.

In April 2018, the Company entered into an asset purchase agreement with Jansen Pharmaceuticals, Inc.  to acquire all product rights for PANCREAZE® (pancrelipase) in the United States and PANCREASE® MT in Canada for $135 million in cash. PANCREAZE is a pancreatic enzyme preparation specifically indicated for the treatment of exocrine pancreatic insufficiency due to cystic fibrosis or other conditions. The transaction is expected to close before the end of the second quarter of 2018, pending expiration or earlier termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the satisfaction of other customary closing conditions.

Also in April 2018, the Company entered into a note purchase agreement with affiliates of Athyrium Capital Management for the issuance and sale of up to $110 million of 10.375% senior secured notes due 2024 to be issued substantially concurrently with the consummation of the PANCREAZE acquisition, or the Note Purchase Agreement. The Note Purchase Agreement also allows up to an additional $10 million of 10.375% senior secured notes due 2024 to be issued at the Company’s option within 12 months of the initial issue date, subject to certain conditions. Additionally, the Note Purchase Agreement provides for the issuance of warrants to purchase up to 3.3 million shares of the Company’s common stock, to be issued concurrently with the issuance of the initial notes. The Note Purchase Agreement contains customary representations, warranties, covenants, conditions and indemnities. Concurrently with the issuance of the senior secured notes, the Company will repurchase Convertible Notes held by

18


 

Table of Contents

Athyrium, with a face value of $60 million, for $51 million plus accrued interest. The issuance of the notes and the warrants is conditioned upon, among other things, the satisfaction of the closing conditions under the PANCREAZE Asset Purchase Agreement or the consummation of the transactions contemplated thereunder.

19


 

Table of Contents

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:

Risks and uncertainties related to Qsymia® (phentermine and topiramate extended release):

·

the timing of initiation and completion of the post-approval clinical studies required as part of the approval of Qsymia by the U.S. Food and Drug Administration, or FDA;

·

the response from FDA to any data and/or information relating to post-approval clinical studies required for Qsymia;

·

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

·

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

·

our ability to sell through the Qsymia retail pharmacy 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 dialog with the European Medicines Agency, or EMA, relating to the U.S.-based 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 any required CVOT, the assessment by the EMA of the application for marketing authorization, and their agreement with the data from any required CVOT;

·

our, or our current or potential partners’, ability to successfully seek and gain approval for Qsymia in 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 current or potential partners’, 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 ensure that the entire supply chain for Qsymia efficiently and consistently delivers Qsymia to our customers and partners;

·

our ability to accurately forecast Qsymia demand;

·

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;

20


 

Table of Contents

Risks and uncertainties related to STENDRA® (avanafil) or SPEDRA™ (avanafil):

·

our ability to manage the supply chain for STENDRA/SPEDRA for our current or potential collaborators;

·

risks and uncertainties related to the timing, strategy, tactics and success of the launches and commercialization of STENDRA/SPEDRA by our current or potential collaborators;

·

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 manufacture avanafil active pharmaceutical ingredient and Sanofi Winthrop Industrie’s ability to manufacture avanafil tablets;

·

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

Risks and uncertainties related to our business:

·

our history of losses and variable quarterly results;

·

substantial competition;

·

our ability to minimize expenses that are not essential to expanding the use of STENDRA/SPEDRA and Qsymia or that are not related to product development;

·

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 initiating our clinical development process;

·

our ability to identify and acquire development and cash flow generating assets;

·

risks related to the failure to obtain or retain federal or state-controlled substances registrations and noncompliance with Drug Enforcement Administration, or DEA, or state controlled substances regulations;

·

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 and 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 balance of the $250 million of convertible notes due in 2020;

·

our ability to complete the PANCREAZE® acquisition;

·

the impact of recent changes to our Board of Directors and senior management team;

·

our ability to successfully integrate the new senior 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.”

 

21


 

Table of Contents

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 months ended March 31, 2018 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, 2017, as filed with the SEC on March 14, 2018 and as amended by the Form 10-K/A filed with the SEC on April 26, 2018, 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 specialty pharmaceutical company 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. STENDRA® (avanafil) is approved by FDA for erectile dysfunction, or ED, and by the EC under the trade name SPEDRA, for the treatment of ED in the EU.  Tacrolimus is in active clinical development and is being studied in patients with pulmonary arterial hypertension, or PAH.  

In April 2018, we  entered into an agreement to acquire the U.S. and Canadian commercial rights for PANCREAZE® (pancrelipase). The closing of this acquisition is subject to governmental reviews and is expected to close before the end of the second quarter of 2018. PANCREAZE is indicated for the treatment of exocrine pancreatic insufficiency due to cystic fibrosis or other conditions.

Business Strategy Review

In 2016, we initiated a business strategy review to maximize long-term stockholder value. The result of this review was for us to focus our efforts in three areas moving forward: (i) build our portfolio of development and cash flow generating assets, (ii) maximize the value of and monetizing our legacy assets (Qsymia and STENDRA/SPEDRA), and (iii) identify opportunities to address our outstanding debt balances.

In 2017, we acquired tacrolimus and ascomycin, both compounds to be utilized for the treatment of PAH, we licensed Qsymia in South Korea, and we reacquired the rights for SPEDRA in Africa, the Middle East, Turkey, and the Commonwealth of Independent States, or CIS, including Russia.

Early in 2018, we announced that we would focus our strategy on building a portfolio of cash flow generating assets to leverage our expertise in commercializing specialty pharma assets. In May 2018, we announced the first acquisition under this strategy as we entered into an asset purchase agreement with Jansen Pharmaceuticals, Inc.  to acquire all product rights for PANCREAZE® (pancrelipase) in the United States and PANCREASE® MT in Canada for $135 million in cash. PANCREAZE is a pancreatic enzyme preparation consisting of pancrelipase, an extract derived from porcine pancreatic glands, as well as other enzyme classes, including porcine-derived lipases, proteases, and amylases. The pancreatic enzymes in PANCREAZE act like digestive enzymes physiologically secreted by the pancreas. PANCREAZE is specifically indicated for the treatment of exocrine pancreatic insufficiency due to cystic fibrosis or other conditions. We believe we can support PANCREAZE in the U.S. market with a focused selling effort that leverages our existing U.S. field force and internal commercial infrastructure.  We expect to build a small commercial presence in Canada to support PANCREASE MT, the trade name for pancrelipase in Canada. We expect to close this transaction before the end of the second quarter of 2018, pending expiration or earlier termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the satisfaction of other customary closing conditions.

Another key strategy for 2018 was the recruitment and hiring of a permanent full-time CEO. In April 2018, we announced the acquisition of Willow Biopharma Inc., or Willow. With this acquisition, we announced the addition of three new members of our senior leadership team. John Amos has been named our new Chief Executive Officer and a member of the VIVUS Board of Directors. Kenneth Suh will continue as President and Chief Executive Officer of Willow. M. Scott Oehrlein has been named to the newly created position of Chief Operations 

22


 

Table of Contents

Officer of VIVUS. These three individuals have a strong track record of building successful cash-flow positive businesses through product acquisition. In combination with the current members of the senior leadership team, we believe that we are well positioned to continue to successfully execute on our 2018 business plan.

In April 2018, we entered into a note purchase agreement with affiliates of Athyrium Capital Management for the issuance and sale of up to $110 million of 10.375% senior secured notes due 2024 to be issued substantially concurrently with the consummation of the PANCREAZE acquisition, or the Note Purchase Agreement. The Note Purchase Agreement also allows up to an additional $10 million of 10.375% senior secured notes due 2024 to be issued at our option within 12 months of the initial issue date, subject to certain conditions. Additionally, the Note Purchase Agreement provides for the issuance of warrants to purchase up to 3.3 million shares of our common stock, to be issued concurrently with the issuance of the initial notes. The Note Purchase Agreement contains customary representations, warranties, covenants, conditions and indemnities. Concurrently with the issuance of the senior secured notes, we will repurchase Convertible Notes held by Athyrium, with a face value of $60 million, at a discount to par plus accrued interest. The issuance of the notes and the warrants is conditioned upon, among other things, the satisfaction of the closing conditions under the PANCREAZE Asset Purchase Agreement or the consummation of the transactions contemplated thereunder. We continue our evaluation of alternatives for addressing our remaining convertible notes due in May 2020, which will total $190 million upon closing of the repurchase from Athyrium.

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 the 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 small specialty sales force who promote Qsymia to physicians. Our sales efforts are focused on maintaining a commercial presence with high volume prescribers of anti-obesity products. 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.

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.

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

23


 

Table of Contents

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, Menarini licensed rights directly from MTPC to commercialize avanafil in certain Asian territories. 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. Menarini obtains SPEDRA exclusively from us.

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. Metuchen will reimburse us for payments made to cover royalty and milestone obligations to MTPC during the term of the Metuchen License Agreement, but will otherwise owe us no future royalties. Metuchen obtains STENDRA exclusively from us.

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 pathologic proliferation of epithelial and vascular smooth muscle cells in the lining of these blood vessels and excess vasoconstriction. 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, we paid Selten an upfront payment of $1.0 million, and we will pay additional 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

24


 

Table of Contents

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.

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. We are focusing on the development of a proprietary oral formulation of tacrolimus to be used in a clinical development program and for commercial use. We anticipate filing an IND with FDA and completing the development of our proprietary formulation of tacrolimus in 2018.

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 14, 2018. There has been one significant change in our critical accounting policies during the three months ended March 31, 2018, as outlined below:

Revenue Recognition

For all revenue transactions, we evaluate our contracts with our customers to determine revenue recognition using the following five-step model:

1)We identify the contract(s) with a customer

2)We identify the performance obligations in the contract

3)We determine the transaction price

4)We allocate the transaction price to the identified performance obligations

5)We recognize revenue when (or as) the entity satisfies a performance obligation

Product Revenue:

Product revenue is recognized at the time of shipment at which time we have satisfied our performance obligation. Product revenue is recognized net of consideration paid to our 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 a reserve for estimated product returns, 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 date at which the related revenue is recognized. 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

25


 

Table of Contents

adjusted when trends or significant events indicate that adjustment is appropriate and to reflect actual experience. See Note 9 for product reserve balances.

Change in Accounting Estimate in 2017

We ship units of Qsymia through a distribution network that includes certified retail pharmacies. We began shipping Qsymia in September 2012 and grant rights to our 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 we had no previous experience in selling Qsymia and given the lengthy return period, we were not initially able to reliably estimate expected returns of Qsymia at the time of shipment, which was required by the accounting literature at the time,  and therefore recognized revenue when units were dispensed to patients through prescriptions, at which point the product was not subject to return, or when the expiration period had ended.

Beginning in the first quarter of 2017, with 48 months of returns experience, we believed that we had sufficient data and experience from selling Qsymia to reliably estimate expected returns. Therefore, beginning in the first quarter of 2017, under the then relevant accounting literature,  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, in the first quarter of 2017 we recognized a one-time adjustment relating to products that had been previously shipped, consisting of $17.9 million of gross revenues, adjusted for an expected returns reserve of $5.7 million and estimated gross-to-net charges of $4.9 million, for a net impact of $7.3 million in revenues. We also recorded increased cost of goods sold of $0.6 million and marketing expense of $0.7 million associated with the change in accounting estimate. The increase in net product revenue resulted in a decrease in net loss of $6.0 million or $0.06 per share in the first quarter of 2017.

Supply Revenue:

We produce STENDRA or SPEDRA through a contract manufacturing partner and then sell it to our commercialization partners. We are the primary responsible party in the commercial supply arrangements and bear significant risk in the fulfillment of the obligations, including risks associated with manufacturing, regulatory compliance and quality assurance, as well as inventory, financial and credit loss. As such, we recognize supply revenue on a gross basis as the principal party in the arrangements. We recognize supply revenue at the time of shipment and, in the unusual case where the product does not meet contractually-specified product dating criteria at the time of shipment to the partner, we record a reserve for estimated product returns. There are no such reserves as of March 31, 2018.

License and Milestone Revenue

License and milestone revenues related to arrangements, usually license and/or supply agreements, entered into by us are recognized by following the five-step process outlined above. The allocation and timing of recognition of such revenue will be determined by that process and the amounts recognized and the timing of that recognition may not exactly follow the wording of the agreement as the amount allocated following the accounting analysis of the agreement may differ and the timing of recognition of a significant performance obligation may predate the contractual date.

Royalty Revenue

We rely on data provided by our collaboration partners in determining our contractually-based royalty revenue. Such data includes accounting estimates and reports for various discounts and allowances, including product returns. We record royalty revenues based on the best data available and make any adjustments to such revenues as such information becomes available.

 

26


 

Table of Contents

RESULTS OF OPERATIONS

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

Three Months Ended March 31, 

 

Increase/ (Decrease)

 

(in thousands, except for percentages)

2018

 

2017

    

2018 vs 2017

 

Revenue:

 

 

 

 

 

 

 

 

Net product revenue

$

9,632

 

$

17,620

 

(45)

%

License and milestone revenue

 

 —

 

 

5,000

 

(100)

%

Supply revenue

 

1,683

 

 

3,812

 

(56)

%

Royalty revenue

 

585

 

 

580

 

 1

%

Total revenue

$

11,900

 

$

27,012

 

(56)

%

 

Net product revenue

Net product revenue for the three months ended March 31, 2017 includes a one-time adjustment of $7.3 million related to shipments, which had previously been deferred due to our change to the “sell-in” revenue recognition methodology.  In the first quarters of 2018 and 2017, we shipped approximately 83,000 units and 89,000 units, respectively, of Qsymia to wholesalers, excluding the one-time adjustment for the change in accounting estimate in the first quarter of 2017. Approximately 92,000 and 102,000 Qsymia prescriptions were dispensed in the first quarters of 2018 and 2017, respectively.  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 2018 to decrease from 2017 levels due to market conditions.

License and milestone revenue

There was no license and milestone revenue for the three months ended March 31, 2018. License and milestone revenue for the three months ended March 31, 2017 consisted of a one-time $5.0 million payment received for a license to certain clinical and non-clinical data related to phentermine. 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 decrease in supply revenue in 2018 as compared to 2017 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/SPEDRA based on reports provided by our partners. We expect royalty revenue in 2018 to remain relatively constant from 2017 levels.

Cost of goods sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

Three Months Ended March 31, 

 

Increase/ (Decrease)

 

 

2018

 

2017

 

2018 vs 2017

 

 

(In thousands, except percentages)

Qsymia cost of goods sold

$

1,135

    

$

2,665

    

(57)

%

STENDRA/SPEDRA cost of goods sold

 

1,586

 

 

3,502

 

(55)

%

Total cost of goods sold

$

2,721

 

$

6,167

 

(56)

%

Cost of goods sold for Qsymia dispensed to patients includes the inventory costs of API, third party contract manufacturing and packaging and distribution costs, royalties, cargo insurance, freight, shipping, handling and storage costs, and overhead costs of the employees involved with production. Cost of goods sold for STENDRA/SPEDRA shipped to our commercialization partners includes the inventory costs of API and tableting.

27


 

Table of Contents

Cost of goods sold decreased overall in 2018 as compared to 2017 due primarily to decreased Qsymia product revenue and STENDRA/SPEDRA supply revenue. The change in cost of goods sold as a percentage of net product and supply revenue was due primarily to the sales mix between Qsymia and STENDRA/SPEDRA during the periods.

Selling, general and administrative expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

Three Months Ended March 31, 

 

Increase/ (Decrease)

 

 

2018

 

2017

 

2018 vs 2017

 

 

(In thousands, except percentages)

Selling and marketing

$

4,279

    

$

5,459

    

(22)

%

General and administrative

 

5,789

 

 

5,972

 

(3)

%

Total selling, general and administrative expenses

$

10,068

 

$

11,431

 

(12)

%

The decrease in selling and marketing expenses for the three months ended March  31, 2018, compared to the same period in 2017, was due primarily to lower employee costs as a result of the reduction of the size of our sales force in 2017, partially offset by increased spending for marketing programs. Selling and marketing expenses are expected to stay flat or decrease in the remainder of 2018 as compared to the first quarter of 2018.

The decrease in general and administrative expenses in the three months ended March  31, 2018 compared to the same period in 2017 was primarily due to lower spending for corporate activities. General and administrative expenses could fluctuate significantly due to the timing of activities within our business strategy review.

Research and development expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

Three Months Ended March 31, 

 

Increase/(Decrease)

 

Drug Indication/Description

2018

 

2017

 

2018 vs 2017

 

 

(In thousands, except percentages)

Qsymia

$

19

    

$

108

    

(82)

%

STENDRA

 

49

 

 

 2

 

2,350

%

Tacrolimus - PAH

 

561

 

 

1,186

 

(53)

%

Share-based compensation

 

81

 

 

85

 

(5)

%

Overhead costs*

 

693

 

 

799

 

(13)

%

Total research and development expenses

$

1,403

 

$

2,180

 

(36)

%


*Overhead costs include compensation and related expenses, consulting, legal and other professional services fees relating to research and development activities, which we do not allocate to specific projects.

The decrease in total research and development expenses in the three months ended March  31, 2018 as compared to the same period in 2017 was primarily due to lower spending for the development of tacrolimus for the treatment of PAH, as the spending in 2017 included the license fees paid to Selten. We expect that our research and development expenses will increase over the remaining nine months in 2018 as we continue to complete our post-marketing requirements for Qsymia, specifically an adolescent safety and efficacy trial, and increase development activities for tacrolimus for the treatment of PAH.

Interest expense and other expense, net

Interest expense and other expense, net was $8.3 million for each of the three months ended March 31, 2018 and 2017. Interest expense and other expense, net consists primarily of interest expense and the amortization of issuance costs from our Convertible Notes and Senior Secured Notes and the amortization of the debt discount on the Convertible Notes. Other expense and income were not significant. We expect interest and other expense (income) for the remainder of 2018 to remain relatively consistent with first quarter levels.

(Benefit from) provision for income taxes

For the three months ended March 31, 2018, we recorded a provision for income taxes of $12,000, compared to a benefit of $12,000 for the three months ended March 31, 2017. The benefit and provision for income taxes for both of the periods is primarily comprised of state taxes during the period.

We periodically evaluate the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on our ability to generate

28


 

Table of Contents

sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. We weighed both positive and negative evidence and determined that there is a continued need for a full valuation allowance on our deferred tax assets in the U.S. as of March  31, 2018.

LIQUIDITY AND CAPITAL RESOURCES

Cash. Cash, cash equivalents and available-for-sale securities totaled $209.1 million at March  31, 2018, as compared to $226.3 million at December 31, 2017. The decrease was primarily due to net cash used for operating activities and debt service obligations during the period.

We invest our excess cash balances in money market, U.S. government securities and corporate debt securities in accordance with our investment policy. Our investment policy has the primary investment objectives of preservation of principal; however, there may be times when certain of the securities in our portfolio will fall below the credit ratings required in the policy. If those securities are downgraded or impaired, we would experience realized or unrealized losses in the value of our portfolio, which would have an adverse effect on our results of operations, liquidity and financial condition. From time to time, the Company may also invest its cash to retire or purchase its outstanding debt in open market purchases, privately negotiated transactions or otherwise. Investment securities are exposed to various risks, such as interest rate, market and credit. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is possible that changes in these risk factors in the near term could have an adverse material impact on our results of operations or stockholders’ equity.

Accounts Receivable.  We extend credit to our customers for product sales resulting in accounts receivable. Customer accounts are monitored for past due amounts. Past due accounts receivable, determined to be uncollectible, are written off against the allowance for doubtful accounts. Allowances for doubtful accounts are estimated based upon past due amounts, historical losses and existing economic factors, and are adjusted periodically. Historically, we have had no significant uncollectable accounts receivable. We offer cash discounts to our customers, generally 2% of the sales price as an incentive for prompt payment.

Accounts receivable (net of allowance for cash discounts) at March  31, 2018, was $11.3 million, as compared to $12.2 million at December 31, 2017. Currently, we do not have any significant concerns related to accounts receivable or collections.

Summary Cash Flows

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

2018

    

2017

 

(in thousands)

Cash provided by (used for):

 

 

 

 

 

Operating activities

$

(11,988)

 

$

(7,072)

Investing activities

 

26,991

 

 

(7,882)

Financing activities

 

(4,590)

 

 

(2,076)

Operating Activities.  For the three months ended March 31, 2018, cash used for operating activities resulted from our net loss as adjusted for non-cash items, including the decrease in deferred revenue, in addition to an increase in inventories and a decrease in accounts payable.  For the three months ended March 31, 2017, cash used for operating activities resulted from our net loss as adjusted for non-cash items. Additional decreases were due to increases in accounts receivable, partially offset by decreases in prepaid expenses and increases in accrued liabilities.

Investing Activities.  Cash used or provided by investing activities primarily relates to the purchases and maturities of investment securities. The fluctuations from period to period are due primarily to the timing of purchases, sales and maturities of these investment securities.

Financing Activities.    Cash used for financing activities for the three months ended March 31, 2018 and 2017 primarily related to our repayments of $4.6 million and $2.1 million, respectively, under the Senior Secured Notes.

We anticipate that our existing capital resources combined with anticipated future cash flows will be sufficient to support our operating needs at least for the next twelve months. However, we anticipate that we may require additional funding to evaluate commercial opportunities, which could come in the form of an asset

29


 

Table of Contents

acquisition, such as our acquisition of PANCREAZE, a license, a co-development agreement, a merger or acquisition or other form, create a pathway for centralized approval of the marketing authorization application for Qsiva in the EU, conduct post-approval clinical studies for Qsymia, conduct non-clinical and clinical research and development work to support regulatory submissions and applications for our current and future investigational drug candidates, finance the costs involved in filing and prosecuting patent applications and enforcing or defending our patent claims, if any, to fund operating expenses and manufacture quantities of our investigational drug candidates and to make payments under our existing license agreements and supply agreements.

If we require additional capital, we may seek any required additional funding through collaborations, public and private equity or debt financings, capital lease transactions or other available financing sources. Additional financing may not be available on acceptable terms, or at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our commercialization or development programs or obtain funds through collaborations with others that are on unfavorable terms or that may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop on our own.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet financing arrangements and have not established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Commitments and Contingencies

We indemnify our officers and directors for certain events or occurrences pursuant to indemnification agreements, subject to certain limits. We may be subject to contingencies that may arise from matters such as product liability claims, legal proceedings, stockholder suits and tax matters and as such, we are unable to estimate the potential exposure related to these indemnification agreements. We have not recognized any liabilities relating to these agreements as of March  31, 2018.

Contractual Obligations

During the three months ended March 31, 2018, there were no material changes to our contractual obligations described under Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2017, filed with the SEC on March 14, 2018, and as amended by the Form 10-K/A filed on April 26, 2018 with the SEC, other than the fulfillment of existing obligations in the ordinary course of business.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market and Interest Rate Risk

In the normal course of business, our financial position is subject to a variety of risks, including market risk associated with interest rate movements and foreign currency exchange risk. Our cash, cash equivalents and available-for-sale securities as of March  31, 2018, consisted primarily of money market funds, U.S. Treasury securities and corporate debt securities. Our cash is invested in accordance with an investment policy approved by our Board of Directors that specifies the categories (money market funds, U.S. Treasury securities and debt securities of U.S. government agencies, corporate bonds, asset-backed securities, and other securities), allocations, and ratings of securities we may consider for investment. Currently, we have focused on investing in U.S. Treasuries until market conditions improve.

Our market risk associated with interest rate movements is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term marketable debt securities. The primary objective of our investment activities is to preserve principal. Some of the securities that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of our investment may decline. A hypothetical 100 basis point increase in interest rates would reduce the fair value of our available-for-sale securities at March 31, 2018, by approximately $1.0 

30


 

Table of Contents

million. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

A portion of our operations consist of revenues from outside of the United States, some of which are denominated in Euros, and, as such, we have foreign currency exchange exposure for these revenues and associated accounts receivable. Future fluctuations in the Euro exchange rate may impact our revenues and cash flows.

 

ITEM 4. CONTROLS AND PROCEDURES

(a.) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the timelines specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), our management carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of VIVUS’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective.

(b.) Changes in internal controls. There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

31


 

Table of Contents

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

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. 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. The Ninth Circuit issued a decision on January 16, 2018, affirming the district court’s dismissal of the action. The deadlines for Plaintiffs to seek rehearing in the Ninth Circuit and to file a petition for certiorari in the Supreme Court have now expired and the matter is concluded.

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. The initial notice alleged that six patents listed for Qsymia in the FDA Orange Book at the time the notice was received 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. Additional patents covering Qsymia have been issued since May 2014 and after receiving Paragraph IV certification notices from Actavis with respect to those patents, the Company filed additional lawsuits against Actavis to include these additional patents in the litigation. On August 17, 2015, the 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 patents listed for Qsymia in the Orange Book at the time of the notice 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. A second Paragraph IV certification notice was received from Teva with respect to patents covering Qsymia that issued after March 2015, and the Company filed an additional lawsuit against Teva to include these additional patents in the litigation. The 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.

32


 

Table of Contents

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 settlements resolve all patent litigation brought by VIVUS against generic pharmaceutical companies that have filed ANDAs seeking approval to market generic versions of Qsymia. The settlement agreement with Actavis will permit Actavis to begin selling a generic version of Qsymia on December 1, 2024, or earlier under certain circumstances. The settlement with DRL will permit DRL to begin selling a generic version of Qsymia on June 1, 2025, or earlier under certain circumstances.

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 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.

ITEM 1A. RISK FACTORS

Set forth below and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. These are not the only risks and uncertainties facing VIVUS. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks Relating to our Business

We may not be able to successfully close the transaction to acquire the product rights to PANCREAZE for the U.S. and Canada in a timely fashion or at all.

In May 2018, we announced that we had entered into an agreement to acquire all product rights for PANCREAZE® (pancrelipase) for the U.S. and Canada from Janssen Pharmaceuticals, Inc. for an aggregate payment of $135 million. We expect to close this transaction before the end of the second quarter of 2018, pending successfully completion of the U.S. merger review process. The process begins by filing Hart-Scott-Rodino notification forms with the Department of Justice, or DOJ, and Federal Trade Commission, or FTC,  and paying the required filing fee. This begins a 30-day period in which the DOJ and FTC work together to determine whether they will further investigate the proposed transaction. If the DOJ and FTC do not decide to further investigate the transaction, then the transaction can close at the end of the 30-day period. We cannot guarantee that the DOJ and the FTC will allow the transaction to go forward or whether they will conduct an investigation. Such investigations can be costly and time-consuming. If we are not able to successfully close the transaction in a timely fashion or at all, it could have a materially adverse impact on our financial position.

33


 

Table of Contents

We may not be able to successfully close the note purchase transaction with Athyrium Capital Management in a timely fashion or at all.

In April 2018, we entered into a note purchase agreement with Athyrium Capital Management for the issuance and sale of up to $110 million of 10.375% senior secured notes due 2024 to be issued substantially concurrently with the consummation of the PANCREAZE acquisition described above, up to $10 million of 10.375% senior secured notes due 2024 to be issued subsequently at our option within 12 months of the initial note issue date, and warrants for up to 3.3 million shares of our common stock to be issued concurrently with the issuance of the initial notes. The note purchase transaction is subject to customary representations, warranties, covenants, conditions and indemnities, including the closing of the PANCREAZE transaction. As previously disclosed, we intend to use a portion of the net proceeds to finance a portion of the PANCREAZE transaction and to repurchase $60 million of our outstanding Convertible Notes. If we are not able to successfully close the transaction in a timely fashion or at all, it would have a materially adverse impact on our financial position.

Our success will depend on our ability and that of our current or future collaborators to effectively and profitably commercialize Qsymia® and STENDRA/SPEDRA.

Our success will depend on our ability and that of our current or future collaborators to effectively and profitably commercialize Qsymia and STENDRA/SPEDRA, which will include our ability to:

·

expand the use of Qsymia through targeted patient and physician education;

·

obtain marketing authorization by the EC for Qsiva™ in the EU;

·

manage our alliances with MTPC, Menarini and Metuchen to help ensure the commercial success of avanafil;

·

manage costs;

·

improve third-party payor coverage, lower out-of-pocket costs to patients with discount programs, and obtain coverage for obesity under Medicare Part D;

·

create market demand for Qsymia through patient and physician education, marketing and sales activities;

·

achieve market acceptance and generate product sales;

·

comply with the post-marketing requirements established by FDA, including Qsymia’s Risk Evaluation and Mitigation Strategy, or REMS, any future changes to the REMS, and any other requirements established by FDA in the future;

·

efficiently conduct the post-marketing studies required by FDA;

·

comply with other healthcare regulatory requirements;

·

comply with state and federal controlled substances requirements;

·

maintain and defend our patents, if challenged;

·

ensure that the active pharmaceutical ingredients, or APIs, for Qsymia and STENDRA/SPEDRA and the finished products are manufactured in sufficient quantities and in compliance with requirements of FDA and DEA and similar foreign regulatory agencies and with an acceptable quality and pricing level in order to meet commercial demand;

·

ensure that the entire supply chain for Qsymia and STENDRA/SPEDRA, from APIs to finished products, efficiently and consistently delivers Qsymia and STENDRA/SPEDRA to customers; and

·

effectively and efficiently manage our sales force and commercial team for the promotion of Qsymia.

If we are unable to successfully commercialize Qsymia and STENDRA/SPEDRA, our ability to generate product sales will be severely limited, which will have a material adverse impact on our business, financial condition, and results of operations.

34


 

Table of Contents

We have a new management team which may cause disruption in our business, and which could have a materially adverse effect on our results of operations.

In connection with the Willow acquisition, former executives of Willow Biopharma Inc. have joined our management team, including John Amos who has joined us as our new Chief Executive Officer, M. Scott Oehrlein as our new Chief Operations Officer and Kenneth Suh as the President and CEO of Willow Biopharma Inc., now our wholly-owned subsidiary. If we are unable to successfully retain and integrate the new management team, our business could be harmed.

We may not be able to successfully develop, launch and commercialize tacrolimus or any other potential future development programs.

We may not be able to effectively develop and profitably launch and commercialize tacrolimus or any other potential future development programs which we may undertake, which will include our ability to:

·

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

·

effectively conduct phase 2 and phase 3 clinical testing on tacrolimus, which could be delayed by slow patient enrollment, long treatment time required to demonstrate effectiveness, disruption of operations at clinical trial sites, adverse medical events or side effects in treated patients, failure of patients taking the placebo to continue to participate in the clinical trials, and insufficient clinical trial data to support effectiveness of tacrolimus;

·

obtain regulatory approval and market authorization for tacrolimus in the U.S., EU and other territories;

·

develop, validate and maintain a commercially viable manufacturing process that is compliant with cGMP;

·

establish and effectively manage a supply chain for tacrolimus and future development programs to ensure that the API and the finished products are manufactured in sufficient quantities and in compliance with regulatory requirements and with acceptable quality and pricing in order to meet commercial demand;

·

effectively determine and manage the appropriate commercialization strategy;

·

manage costs;

·

achieve market acceptance by patients, the medical community and third-party payors and generate product sales;

·

effectively compete with other therapies;

·

maintain a continued acceptable safety profile for tacrolimus following approval;

·

comply with healthcare regulatory requirements; and

·

maintain and defend our patents, if challenged.

If we are unable to successfully develop, launch and commercialize tacrolimus, our ability to generate product sales will be severely limited, which will have a material adverse impact on our business, financial condition, and results of operations.

Changes to our strategic business plan may cause uncertainty regarding the future of our business, and may adversely impact employee hiring and retention, our stock price, and our revenue, operating results, and financial condition.

In 2016, we initiated a business strategy review with an outside advisor. These changes, and the potential for additional changes to our management, organizational structure and strategic business plan, may cause

35


 

Table of Contents

speculation and uncertainty regarding our future business strategy and direction. These changes may cause or result in:

·

disruption of our business or distraction of our employees and management;

·

difficulty in recruiting, hiring, motivating and retaining talented and skilled personnel;

·

stock price volatility; and

·

difficulty in negotiating, maintaining or consummating business or strategic relationships or transactions.

If we are unable to mitigate these or other potential risks, our revenue, operating results and financial condition may be adversely impacted.

We depend on our collaboration partners to gain or maintain approval, market, and sell Qsymia and STENDRA/SPEDRA in their respective licensed territories.

We rely on our collaboration partners, including Alvogen, MTPC, Menarini and Metuchen, to successfully commercialize Qsymia and STENDRA/SPEDRA in their respective territories, including obtaining any necessary approvals and we cannot assure you that they will be successful. Our dependence on our collaborative arrangements for the commercialization of Qsymia and STENDRA/SPEDRA, including our license agreements with Alvogen, MTPC, Menarini and Metuchen, subject us to a number of risks, including the following:

·

we may not be able to control the commercialization of our drug products in the relevant territories, including the amount, timing and quality of resources that our collaborators may devote to our drug products;

·

our collaborators may experience financial, regulatory or operational difficulties, which may impair their ability to commercialize our drug products;

·

our collaborators may be required under the laws of the relevant territories to disclose our confidential information or may fail to protect our confidential information;

·

as a requirement of the collaborative arrangement, we may be required to relinquish important rights with respect to our drug products, such as marketing and distribution rights;

·

business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s willingness or ability to satisfactorily complete its commercialization or other obligations under any collaborative arrangement;

·

legal disputes or disagreements may occur with one or more of our collaborators;

·

a collaborator could independently move forward with a competing investigational drug candidate developed either independently or in collaboration with others, including with one of our competitors; and

·

a collaborator could terminate the collaborative arrangement, which could negatively impact the continued commercialization of our drug products. For example, in September 2016, Auxilium terminated its agreement with us to commercialize STENDRA in the U.S. and Canada and, in March 2017, Sanofi terminated its agreement with us to commercialize STENDRA/SPEDRA in Africa, the Middle East, Turkey, and the CIS, including Russia.

In addition, under our license agreement with MTPC, we are obligated to ensure that Menarini, Metuchen, and any future sublicensees comply with the terms and conditions of our license agreement with MTPC, and MTPC has the right to terminate our license rights to avanafil upon any uncured material breach. Consequently, failure by Menarini, Metuchen, or any future sublicensees to comply with these terms and conditions could result in the termination of our license rights to avanafil on a worldwide basis, which would delay, impair, or preclude our ability to commercialize avanafil.

If any of our collaboration partners fail to successfully commercialize Qsymia or STENDRA/SPEDRA, our business may be negatively affected and we may receive limited or no revenues under our agreements with them.

36


 

Table of Contents

There have been substantial changes to the Internal Revenue Code, some of which could have an adverse effect on our business.

The Tax Cuts and Jobs Act made substantial changes to the Internal Revenue Code, effective January 1, 2018, some of which could have an adverse effect on our business. In addition to reducing the top corporate income tax rate, changes that could impact our business in the future include (i) eliminating the ability to utilize net operating losses, or NOLs, to reduce income in prior tax years and limiting the utilization of NOLs generated after December 31, 2017 to 80% of future taxable income, which could affect the timing of our ability to utilize NOLs, and (ii) limiting the amount of business interest expenses that can be deducted to 30% of earnings before interest, taxes, depreciation and amortization.

We currently rely on reports from our commercialization partners in determining our royalty revenues, and these reports may be subject to adjustment or restatement, which may materially affect our financial results.

We have royalty and milestone-bearing license and commercialization agreements for STENDRA/SPEDRA with Menarini and, prior to October 1, 2016, with Auxilium. In determining our royalty revenue from such agreements, we rely on our collaboration partners to provide accounting estimates and reports for various discounts and allowances, including product returns. As a result of fluctuations in inventory, allowances and buying patterns, actual sales and product returns of STENDRA/SPEDRA in particular reporting periods may be affected, resulting in the need for our commercialization partners to adjust or restate their accounting estimates set forth in the reports provided to us. For example, in April 2015, we were informed by Endo, upon their purchase of Auxilium, that Endo had revised its accounting estimate for STENDRA return reserve related to sales made in 2014. Under the terms of our license and commercialization agreement, adjustments to the return reserve can be deducted from reported net revenue. As a result, in the year ended December 31, 2015, we recorded an adjustment of $1.2 million to reduce our royalty revenue on net sales of STENDRA. The reduction in royalty revenue resulted in an increase to net loss of $1.2 million, or $0.01 per share, for the year ended December 31, 2015. Such adjustments or restatements may materially and negatively affect our financial position and results of operations. Beginning October 1, 2016, we ceased earning royalty revenue from U.S. sales as a result of the termination of our license and commercialization agreement with Auxilium. Our new license agreement with Metuchen is royalty-free as to us.

If we are unable to enter into agreements with collaborators for the territories that are not covered by our existing commercialization agreements, our ability to commercialize STENDRA/SPEDRA in these territories may be impaired.

We intend to enter into collaborative arrangements or a strategic alliance with one or more pharmaceutical partners or others to commercialize STENDRA/SPEDRA in territories that are not covered by our current commercial collaboration agreements, such as Africa, the Middle East, Turkey, the CIS, Mexico and Central America. We may be unable to enter into agreements with third parties for STENDRA/SPEDRA for these territories on favorable terms or at all, which could delay, impair, or preclude our ability to commercialize STENDRA/SPEDRA in these territories.

Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.

In order to market products in many foreign jurisdictions, we, or our partners, must obtain separate regulatory approvals. Approval by FDA in the U.S. does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries. For example, while our drug STENDRA/SPEDRA has been approved in both the U.S. and the EU, our drug Qsymia has been approved in the U.S. but Qsiva (the intended trade name for Qsymia in the EU) was denied a marketing authorization by the EC due to concerns over the potential cardiovascular and central nervous system effects associated with long-term use, teratogenic potential and use by patients for whom Qsiva would not have been indicated. We intend to seek approval, either directly or through our collaboration partners, for Qsymia and STENDRA in other territories outside the U.S. and the EU. However, we have had limited interactions with foreign regulatory authorities, and the approval procedures vary among countries and can involve additional testing. Foreign regulatory approvals may not be obtained, by us or our collaboration partners responsible for

37


 

Table of Contents

obtaining approval, on a timely basis, or at all, for any of our products. The failure to receive regulatory approvals in a foreign country would prevent us from marketing and commercializing our products in that country, which could have a material adverse effect on our business, financial condition and results of operations.

We, together with Alvogen, Menarini, Metuchen and any potential future collaborators in certain territories, intend to market Qsymia and STENDRA/SPEDRA outside the U.S., which will subject us to risks related to conducting business internationally.

We, through Alvogen, Menarini, Metuchen and any potential future collaborators in certain territories, intend to manufacture, market, and distribute Qsymia and STENDRA/SPEDRA outside the U.S. We expect that we will be subject to additional risks related to conducting business internationally, including:

·

different regulatory requirements for drug approvals in foreign countries;

·

differing U.S. and foreign drug import and export rules;

·

reduced protection for intellectual property rights in some foreign countries;

·

unexpected changes in tariffs, trade barriers and regulatory requirements;

·

different reimbursement systems;

·

economic weakness, including inflation, or political instability in particular foreign economies and markets;

·

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

·

foreign taxes, including withholding of payroll taxes;

·

foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incidental to doing business in another country;

·

workforce uncertainty in countries where labor unrest is more common than in the U.S.;

·

production shortages resulting from events affecting raw material supply or manufacturing capabilities abroad;

·

potential liability resulting from development work conducted by these distributors; and

·

business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.

We have significant inventories on hand and, for the year ended December 31, 2015, we recorded inventory impairment and commitment fees totaling $29.5 million, primarily to write off excess inventory related to Qsymia.

We maintain significant inventories and evaluate these inventories on a periodic basis for potential excess and obsolescence. During the year ended December 31, 2015, we recognized total charges of $29.5 million, primarily for Qsymia inventories on hand in excess of projected demand. The inventory impairment charges were based on our analysis of the then-current Qsymia inventory on hand and remaining shelf life, in relation to our projected demand for the product. The current FDA-approved commercial product shelf life for Qsymia is 36 months. STENDRA is approved in the U.S. and SPEDRA is approved in the EU for 48 months of commercial product shelf life.

Our write-down for excess and obsolete inventory is subjective and requires forecasting of the future market demand for our products. Forecasting demand for Qsymia, a drug in the obesity market in which there had been no new FDA-approved medications in over a decade prior to 2012, and for which reimbursement from third-party payors had previously been non-existent, has been difficult. Forecasting demand for STENDRA/SPEDRA, a drug that is new to a crowded and competitive market and has limited sales history, is also difficult. We will continue to evaluate our inventories on a periodic basis. The value of our inventories could be impacted if actual sales differ significantly from our estimates of future demand or if any significant unanticipated changes in future

38