ACADIA PHARMACEUTICALS INC. The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. Past operating results are not necessarily indicative of results that may occur in future periods. This discussion contains forward-looking statements, which involve a number of risks and uncertainties. Such forward-looking statements include statements about the benefits to be derived from NUPLAZID® (pimavanserin), trofinetide and from our drug candidates, the potential market opportunities for pimavanserin and our drug candidates, our strategy for the commercialization of NUPLAZID, our plans for exploring and developing pimavanserin for indications other than Parkinson's disease psychosis, our plans and timing with respect to seeking regulatory approvals, the potential commercialization of any of our drug candidates that receive regulatory approval, the progress, timing, results or implications of clinical trials and other development activities involving pimavanserin and our drug candidates, our strategy for discovering, developing and, if approved, commercializing drug candidates, our existing and potential future collaborations, our estimates of future payments, revenues and profitability, our estimates regarding our capital requirements, future expenses and need for additional financing, possible changes in legislation, and other statements that are not historical facts, including statements which may be preceded by the words "believes," "expects," "hopes," "may," "will," "plans," "intends," "estimates," "could," "should," "would," "continues," "seeks," "aims," "projects," "predicts," "pro forma," "anticipates," "potential" or similar words. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain. For forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise publicly any forward-looking statements. Forward-looking statements are not guarantees of performance. Actual results or events may differ materially from those anticipated in our forward-looking statements as a result of various factors, including those set forth under the section captioned "Risk Factors" elsewhere in this report. Information in the following discussion for a yearly period means for the year endedDecember 31 of the indicated year.
Overview
Background
We are a biopharmaceutical company focused on the development and commercialization of innovative medicines to address unmet medical needs in central nervous system disorders. We have a portfolio of product opportunities led by our novel drug, NUPLAZID (pimavanserin), which was approved by the FDA, inApril 2016 for the treatment of hallucinations and delusions associated with PDP. We hold worldwide commercialization rights to pimavanserin. NUPLAZID is available in 34 mg capsules and 10 mg tablets. We have advanced our business and clinical studies through the following events in 2020: • InJune 2020 , we submitted an sNDA for NUPLAZID for the treatment of
hallucinations and delusions associated with DRP. In
notified us of the filing of our sNDA with a PDUFA target action date of
• In the third quarter of 2020, we initiated a second pivotal study,
ADVANCE-2. The Phase 3 study will evaluate the efficacy of pimavanserin 34
mg once daily compared to placebo in approximately 386 patients with
predominantly negative symptoms of schizophrenia who have achieved
adequate control of positive symptoms with their existing antipsychotic
treatment.
59
--------------------------------------------------------------------------------
• In
CerSci as the surviving corporation and our wholly owned subsidiary.
CerSci's lead product candidate, ACP-044, is a unique Reactive Species
Decomposition Accelerant, a non-opioid product candidate focused on
interrupting pathways that sensitize neurons to pain. ACP-044 has shown
promising results in animal models evaluating incisional, inflammatory,
and neuropathic pain, as well as favorable tolerability and
pharmacokinetic properties in Phase 1 trials. In the first quarter of
2021, we will be initiating an acute pain Phase 2 study ACP-044 compared
to placebo for patients undergoing bunionectomy surgery. In addition, we
plan to initiate a Phase 2 study for patients suffering from chronic
osteoarthritis pain in the second quarter of 2021.
• In
commercialize novel drug candidates targeting PAMs of the muscarinic M1
receptor with the potential to treat cognition in dementia and psychotic
symptoms in schizophrenia, from
includes a portfolio of candidates, with molecules at various stages of
testing, including the lead compound, ACP-319, in Phase 1 testing, and
several additional compounds in preclinical development as well as any
additional compounds generated in an ongoing discovery program.
We have incurred substantial operating losses since our inception due in large
part to expenditures for our research and development activities and more
recently for our sales and marketing activities related to the commercialization
of NUPLAZID. As of December 31, 2020 , we had an accumulated deficit of $2.0
billion . We expect to continue to incur operating losses for the next few years
as we advance our programs and incur significant development and
commercialization costs.
Impact of COVID-19 on our Business
OnMarch 11, 2020 , theWorld Health Organization declared a pandemic resulting from the disease known as COVID-19 caused by a novel strain of coronavirus, SARS-CoV-2. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close all businesses not deemed "essential," isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. In certain countries, and in certain states withinthe United States , such orders have been lifted, although recent trends in COVID-19 infections have led to the reinstatement of such orders in various jurisdictions. Many states inthe United States , such asNew York , have imposed quarantine requirements on residents of other states travelling to such states, and onJuly 1, 2020 , theEuropean Union banned entry by nonessential travelers fromthe United States . Additionally, as a result of the pandemic, there have been changes in the practice of medical care and medical education. For example, initially an increased number of health care providers expanded their utilization of telemedicine to conduct patient visits and in many regions withinthe United States the ability of our commercial and medical field teams to call upon medical clinics, hospitals, long-term care facilities and skilled nursing facilities was restricted or converted to remote access. Currently, health care providers are conducting patient visits in-person and through telemedicine and our sales force has been able to call upon medical clinics, hospitals, long-term care facilities and skilled nursing facilities either in person in accordance with applicable regulatory guidance and local policies or virtually. Most medical congresses, an important means for medical education are continuing to be conducted virtually and enrollment in clinical trials is being assessed based on local COVID-19 conditions and regional regulation and public health guidance. In an effort to protect the health and safety of our employees and our stakeholders, we adopted recommended policies applicable to office-based employees such as working from home, limiting the number of employees on site, and limiting business travel. For our field-based commercial and medical affairs personnel, we have instituted a protocol to assess the safety of employees to conduct in-person interactions on a localized basis in accordance with applicable regulatory guidance and local policies. Since the beginning of the pandemic, we have been able to provide an uninterrupted supply of NUPLAZID to patients. We are monitoring our supply chain closely and do not anticipate disruptions in our ability to continue delivering NUPLAZID to patients. Although we did not see a significant impact on NUPLAZID net sales throughout 2020, the duration and ultimate effect of the COVID-19 pandemic on our business, results of operations, financial condition and prospects are difficult to assess or predict at this time. For example, we sell NUPLAZID to long-term care facilities and these facilities have been impacted during the ongoing COVID-19 pandemic with a sustained reduction in their census numbers. In addition, although we have re-initiated enrollment in clinical studies that were temporarily paused due to COVID-19 on a study-by-study and site-by-site basis, it is possible that future enrollment in these studies, or enrollment in future studies, could be impacted due to COVID-19. We are continuing to actively monitor the situation and may take further actions affecting our business 60 --------------------------------------------------------------------------------
operations as we deem necessary and in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities.
Financial Operations Overview
Product and Collaborative Revenues
Net product sales consist of sales of NUPLAZID, our first and only commercial product to date. The FDA approved NUPLAZID inApril 2016 and we launched the product inthe United States inMay 2016 .
Cost of Product Sales
Cost of product sales consists of third-party manufacturing costs, freight, and indirect overhead costs associated with sales of NUPLAZID. Cost of product sales may also include period costs related to certain inventory manufacturing services, excess or obsolete inventory adjustment charges, unabsorbed manufacturing and overhead costs, and manufacturing variances.
License Fees and Royalties
License fees and royalties consist of milestone payments expensed or capitalized and subsequently amortized under our 2006 license agreement with the Ipsen Group. License fees and royalties also include royalties of 2% due to the Ipsen Group based upon net sales of NUPLAZID.
Research and Development Expenses
Our research and development expenses have consisted primarily of fees paid to external service providers, salaries and related personnel expenses, facilities and equipment expenses, and other costs incurred related to pre-commercial product candidates. We charge all research and development expenses to operations as incurred. Our research and development activities have primarily focused on NUPLAZID (pimavanserin) which was approved by the FDA for the treatment of hallucinations and delusions associated with PDP inApril 2016 . We currently are responsible for all costs incurred in the ongoing development of pimavanserin and we expect to continue to make substantial investments in clinical studies of pimavanserin for indications other than PDP, including schizophrenia. While the FDA notified us of acceptance of our sNDA with a filing date ofAugust 2, 2020 and a PDUFA target action date ofApril 3, 2021 , at this time, due to the risks in the regulatory and approval processes, we are unable to estimate with any certainty the costs we will incur for the continued development of pimavanserin for DRP, including work necessary to support the review of the sNDA. Additionally, in connection with the FDA approval of NUPLAZID, we committed to conduct post-marketing studies, including a randomized, placebo-controlled withdrawal study in patients treated with NUPLAZID and a randomized, placebo-controlled eight-week study or studies in predominantly frail and elderly patients that would add to the NUPLAZID safety database by exposing an aggregate of at least 500 patients to NUPLAZID. We will be responsible for all costs incurred for these post-marketing studies. We expect to incur increased research and development expenses as a result of our development of trofinetide under the exclusive North American license granted to us by Neuren, including the costs of the Phase 3 LAVENDER study and a long-term extension study. We currently are responsible for all costs incurred in the development of trofinetide, as well as milestone payments subject to achievement of development milestones. We expect to incur increased research and development expenses as a result of our recently executed exclusive worldwide license agreement for the M1 PAM program, including ACP-319, and the research collaboration withVanderbilt University , as well as our recent acquisition of CerSci and its ACP-044 product candidate and preclinical programs. We currently are responsible for all costs incurred in the development of ACP-044, ACP-319 and the M1 PAM program, as well as milestone payments subject to achievement of development milestones. We use external service providers to manufacture our product candidates and for the majority of the services performed in connection with the preclinical and clinical development of pimavanserin, trofinetide, ACP-044 and ACP-319. Historically, we have used our internal research and development resources, including our employees and discovery infrastructure, across several projects and many of our costs have not been attributable to a specific project. Accordingly, we have not reported our internal research and development costs on a project basis. To the extent that external expenses are not attributable to a specific project, they are included in other early stage programs. 61 --------------------------------------------------------------------------------
The following table summarizes our research and development expenses for the
years ended
Years Ended December 31,
2020 2019 2018
Costs of external service providers:
NUPLAZID (pimavanserin) $ 96,705 $ 124,749 $ 94,697
Trofinetide 47,614 27,947 $ 2,083
Early stage programs 14,691 4,714 $ 5,207
Upfront and milestone payments* 72,666 1,375 $ 10,000
Subtotal 231,676 158,785 $ 111,987
Internal costs 56,140 49,067 $ 43,138
Stock-based compensation 31,314 32,533 $ 32,038
Total research and development expenses
_____________________
* Includes upfront and milestone consideration as well as transaction costs
associated with acquired in-process research and development.
Although NUPLAZID was approved by the FDA for the treatment of hallucinations and delusions associated with PDP, at this time, due to the risks inherent in clinical development, we are unable to estimate with certainty the costs we will incur for the ongoing development of pimavanserin in additional indications, including those within schizophrenia, and the development of trofinetide, ACP-044 and ACP-319. Due to these same factors, we are unable to determine with any certainty the anticipated completion dates for our current research and development programs. Clinical development and regulatory approval timelines, probability of success, and development costs vary widely. While our current development efforts are primarily focused on advancing the development of pimavanserin in additional indications other than PDP, we anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, as well as an ongoing assessment of the commercial potential of each opportunity and our financial position. We cannot forecast with any degree of certainty which product opportunities will be subject to future collaborative or licensing arrangements, when such arrangements will be secured, if at all, and to what degree any such arrangements would affect our development plans and capital requirements. Similarly, we are unable to estimate with certainty the costs we will incur for post-marketing studies that we committed to conduct in connection with FDA approval of NUPLAZID. We expect our research and development expenses to increase and continue to be substantial as we conduct studies pursuant to our post-marketing commitments and pursue the development of pimavanserin in additional indications other than PDP, including our studies within schizophrenia, and the development of trofinetide in Rett syndrome, the development of ACP-044 for pain management, and the development of ACP-319. The lengthy process of completing clinical trials and supporting development activities and seeking regulatory approval for our product opportunities requires the expenditure of substantial resources. Any failure by us or delay in completing clinical trials, or in obtaining regulatory approvals, could cause our research and development expenses to increase and, in turn, have a material adverse effect on our results of operations.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of salaries and other related costs, including stock-based compensation expense, for our commercial personnel, including our specialty sales force, our medical education professionals, and our personnel serving in executive, finance, business development, and business operations functions. Also included in selling, general and administrative expenses are fees paid to external service providers to support our commercial activities associated with NUPLAZID, professional fees associated with legal and accounting services, costs associated with patents and patent applications for our intellectual property and charitable donations to independent charitable foundations that support Parkinson's disease patients generally. We expect our selling, general and administrative expenses to increase in future periods. For example, in preparation for a potentialU.S. launch of pimavanserin in DRP, we plan to increase ourU.S. sales force significantly, and expand additional commercial, medical affairs and general and administrative support functions. 62 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements. We have identified the accounting policies that we believe require application of management's most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our actual results may differ substantially from these estimates under different assumptions or conditions.
Revenue Recognition
Product Sales, Net
We accounts for contracts with our customers in accordance with Revenue from Contracts with Customers (Topic 606), and applied all the related amendments to all of the contracts using the modified-retrospective method. Under Topic 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within such contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Payment terms differ by customer, but typically range from 31 to 35 days from the date of shipment. Revenue for our product sales has not been adjusted for the effects of a financing component as we expect, at contract inception, that the period between when we transfer control of the product and when we receive payment will be one year or less. Our net product sales consist ofU.S. sales of NUPLAZID. NUPLAZID was approved by the FDA inApril 2016 and we commenced shipments of NUPLAZID to specialty pharmacies (SPs), and specialty distributors (SDs), in lateMay 2016 . SPs dispense product to a patient based on the fulfillment of a prescription and SDs sell product to government facilities, long-term care pharmacies, or in-patient hospital pharmacies. Product shipping and handling costs are included in cost of product sales. We recognize revenue from product sales at the net sales price (the "transaction price") which includes estimates of variable consideration for which reserves are established and reflects each of these as either a reduction to the related account receivable or as an accrued liability, depending on how the amount payable is settled. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from estimates, we may need to adjust our estimates, which would affect net revenue in the period of adjustment. The following represent our significant categories of sales discounts and allowances:
Distribution Fees: Distribution fees include distribution service fees paid to our SPs and SDs based on a contractually fixed percentage of the wholesale acquisition cost (WAC), fees for data, and prompt payment discounts. Distribution fees are recorded as an offset to revenue based on contractual terms at the time revenue from the sale is recognized.
Rebates: Allowances for rebates include mandated discounts under the Medicaid
Drug Rebate Program and the Medicare Part D prescription drug benefit. Rebates
are amounts owed after the final dispensing of the product to a benefit plan
participant and are based upon contractual agreements with, or statutory
requirements pertaining to, Medicaid and Medicare benefit providers. The
allowance for rebates is based on statutory discount rates and expected
utilization. Our estimates for expected utilization of rebates is based on
historical data received from the SPs and SDs since product launch. Rebates are
generally invoiced and paid in arrears so that the accrual balance consists of
an estimate of the amount expected to be incurred for the current quarter's
activity, plus an accrual balance for prior quarters' unpaid rebates still
estimated to be incurred.
63
--------------------------------------------------------------------------------
Chargebacks: Chargebacks are discounts and fees that relate to contracts with
government and other entities purchasing from the SDs at a discounted price. The
SDs charge back to us the difference between the price initially paid by the SDs
and the discounted price paid to the SDs by these entities. We also incur group
purchasing organization fees for transactions through certain purchasing
organizations. We estimate sales with these entities and accrue for anticipated
chargebacks and organization fees, based on the applicable contractual terms.
Co-Payment Assistance: We offer co-payment assistance to commercially insured patients meeting certain eligibility requirements. Co-payment assistance is accrued for based on actual program participation and estimates of program redemption using data provided by third-party administrators.
Product Returns: Consistent with industry practice, we offer the SPs and SDs limited product return rights for damages, shipment errors, and expiring product; provided that the return is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. We do not allow product returns for product that has been dispensed to a patient. As we receive inventory reports from the SPs and SDs and have the ability to control the amount of product that is sold to the SPs and SDs, we are able to make a reasonable estimate of future potential product returns based on this on-hand channel inventory data and sell-through data obtained from the SPs and SDs. In arriving at our estimate, we also consider historical product returns, the underlying product demand, and industry data specific to the specialty pharmaceutical distribution industry.
Research and Development Accruals
We estimate certain costs and expenses and accrue for these liabilities as part of our process of preparing financial statements. Examples of areas in which subjective judgments may be required include, among other things, costs associated with services provided by contract organizations for preclinical development, manufacturing of our product candidates and clinical trials, and personnel related expenses. We accrue for costs incurred as the services are being provided by monitoring the status of the trial or services provided, and the invoices received from our external service providers. In the case of clinical trials, a portion of the estimated cost normally relates to the projected cost to treat a patient in the trials, and this cost is recognized based on the number of patients enrolled in the trial. Other indirect costs are generally recognized on a straight-line basis over the estimated period of the study. As actual costs become known to us, we adjust our accruals. To date, our estimates have not differed materially from the actual costs incurred. However, subsequent changes in estimates may result in a material change in our accruals, which could also materially affect our balance sheet and results of operations.
Stock-Based Compensation
The fair value of each employee stock option and each employee stock purchase plan right granted is estimated on the grant date under the fair value method using the Black-Scholes valuation model, which requires us to make a number of assumptions including the estimated expected life of the award and related volatility. The fair value of restricted stock units is estimated based on the market price of our common stock on the date of grant. The estimated fair values of stock options, purchase plan rights, and restricted stock units are then expensed over the vesting period. Performance-based stock awards vest upon the achievement of certain pre-defined company-specific performance-based criteria. Expense related to these performance-based stock awards is generally recognized ratably over the expected performance period once the pre-defined performance-based criteria for vesting becomes probable.
Results of Operations
Fluctuations in Operating Results
Our results of operations have fluctuated significantly from period to period in
the past and are likely to continue to do so in the future. We anticipate that
our quarterly and annual results of operations will be impacted for the
foreseeable future by several factors, including the progress and timing of
expenditures related to our commercial activities associated with NUPLAZID and
the extent to which we generate revenue from product sales, our development of
pimavanserin in additional indications other than PDP, our development of
trofinetide, ACP-044, ACP-319, and the M1 PAM program, and the progress and
timing of expenditures related to studies of NUPLAZID in PDP pursuant to our
post-marketing commitments. Further, we expect our sales allowances to vary from
quarter to quarter due to fluctuations in our Medicare Part D Coverage Gap
liability and the volume of purchases eligible for government mandated discounts
and rebates, as well as changes in discount percentages that may be impacted by
potential future price increases and other factors. We cannot predict with
certainty what the full impact of the COVID-19 pandemic may have on our
business, results of operations, financial condition and
64
--------------------------------------------------------------------------------prospects. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results are not a good indication of our future performance.
Comparison of the Years Ended
Product Sales, Net
Net product sales, comprised of NUPLAZID, were$441.8 million and$339.1 million in 2020 and 2019, respectively. Net product sales for the year endedDecember 31, 2020 increased as compared to the year endedDecember 31, 2019 primarily due to growth in NUPLAZID unit sales of approximately 18% in 2020 as compared to 2019. Also contributing to the increase was a higher average gross selling price of NUPLAZID in 2020 as compared to 2019. The following table provides a summary of activity with respect to our sales allowances and accruals for the year endedDecember 31, 2020 (in thousands): Distribution Fees, Discounts & Co-Pay Rebates, Data Chargebacks Assistance Fees & Returns Total Balance at December 31, 2019$ 2,576 $ 316 $ 11,326$ 14,218 Provision related to current period sales 51,684 1,759 36,745 90,188 Credits/payments for current period sales (47,463 ) (1,911 ) (22,629 ) (72,003 ) Credits/payments for prior period sales (2,576 ) (316 ) (11,326 ) (14,218 ) Balance at December 31, 2020$ 4,221 $ (152 ) $ 14,116$ 18,185 Cost of Product Sales Cost of product sales was$10.2 million and$11.3 million in 2020 and 2019, respectively, or approximately 2% and 3% of net product sales. The cost of product sales as a percentage of net sales decreased during 2020 as compared to 2019 due to higher manufacturing levels, resulting in higher inventory cost absorption and increased sales volume at a higher average gross selling price in 2020. License Fees and Royalties License fees and royalties were$10.3 million and$8.3 million in 2020 and 2019, respectively, and include royalties due to the Ipsen Group of two percent of net sales of NUPLAZID and amortization related to the milestone paid to the Ipsen Group upon FDA approval of NUPLAZID in 2016. The increase in license fees and royalties was primary due to the increase in sales volume during 2020.
Research and Development Expenses
Research and development expenses increased to$319.1 million in 2020, including$31.3 million in stock-based compensation, from$240.4 million in 2019, including$32.5 million in stock-based compensation. The increase in research and development expenses was due to an increase of$72.9 million in external costs and an increase of$5.8 million in personnel and related costs. The increase in external costs was primarily due to the$52.8 million in upfront consideration and transaction costs paid for the acquisition of CerSci and$10.0 million upfront payment toVanderbilt University for the M1 PAM program.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to$388.7 million in 2020, including$50.5 million in stock-based compensation, from$325.6 million in 2019, including$46.8 million in stock-based compensation. The increase in selling, general and administrative expenses was due to an increase of$38.0 million in external costs and an increase of$25.1 million in personnel and related costs, including an increase of$3.7 million in stock compensation expense. The increase during the year endDecember 31, 2020 as compared to 2019 was primarily due to increased advertising and promotional costs, dementia-related psychosis launch preparation expenses, as well as an increase in personnel and related costs. 65 --------------------------------------------------------------------------------
Comparison of the Years Ended
Product Sales, Net
Net product sales, comprised of NUPLAZID, were$339.1 million and$223.8 million in 2019 and 2018, respectively. Net product sales for the year endedDecember 31, 2019 increased as compared to the year endedDecember 31, 2018 due to continued growth in NUPLAZID unit sales of approximately 33% in 2019 compared to 2018. Also contributing to the increase was a higher average gross selling price of NUPLAZID in 2019 as compared to 2018 as well as a$3.3 million benefit resulting from a change in estimate of our Medicare accrual. The following table provides a summary of activity with respect to our sales allowances and accruals for the year endedDecember 31, 2019 (in thousands): Distribution Fees, Discounts & Co-Pay Rebates, Data Chargebacks Assistance Fees & Returns Total Balance at December 31, 2018$ 1,840 $ 30 $ 5,849 7,719 Provision related to current period sales 33,827 1,631 27,065 62,523 Credits/payments for current period sales (31,251 ) (1,315 ) (15,739 ) (48,305 ) Credits/payments for prior period sales (1,840 ) (30 ) (5,849 ) (7,719 ) Balance at December 31, 2019$ 2,576 $ 316 $ 11,326$ 14,218 Cost of Product Sales Cost of product sales was$11.3 million and$12.4 million in 2019 and 2018, respectively, or approximately 3% and 6% of net product sales. The cost of product sales as a percentage of net sales decreased during 2019 as compared to 2018 due to higher manufacturing levels, resulting in higher inventory cost absorption, increased sales volume at a higher average gross selling price in 2019, and decreased charges to reduce certain finished goods and work in process inventory to its net realizable value.
License Fees and Royalties
License fees and royalties were$8.3 million and$6.0 million in 2019 and 2018, respectively, and include amortization related to the milestone paid to the Ipsen Group upon FDA approval of NUPLAZID in 2016 and royalties due to the Ipsen Group of two percent of net sales of NUPLAZID. The increase in license fees and royalties was due to the increase in sales volume during 2019.
Research and Development Expenses
Research and development expenses increased to$240.4 million in 2019, including$32.5 million in stock-based compensation, from$187.2 million in 2018, including$32.0 million in stock-based compensation. The increase in research and development expense was due to an increase of$46.8 million in external costs and an increase of$6.4 million in personnel and related costs, including an increase of$0.5 million in stock compensation expense. The increase in external costs was primarily due to increased clinical costs associated with the development of trofinetide in Rett syndrome and pimavanserin in indications other than PDP.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to$325.6 million in 2019, including$46.8 million in stock-based compensation, from$265.8 million in 2018, including$45.6 million in stock-based compensation. The increase in selling, general and administrative expenses was due to an increase of$40.9 million in external costs and an increase of$18.9 million in personnel and related costs, including an increase of$1.2 million in stock compensation expense. The increase in external costs was primarily due to increased charitable contributions and legal fees during the year endedDecember 31, 2019 as compared to 2018. The increase in personnel and related costs includes the insourcing of a commercial support function that had previously been outsourced. 66 --------------------------------------------------------------------------------
Liquidity and Capital Resources
We have funded our operations primarily through sales of our equity securities, payments received under our collaboration agreements, debt financings, interest income, and, since 2016, with revenues from sales of NUPLAZID. InAugust 2020 , we issued common stock with a value of approximately$44.3 million to CerSci's former equity holders. InSeptember 2019 , we raised net proceeds of approximately$271.5 million in a follow-on public offering of our common stock. InNovember 2018 , we raised net proceeds of approximately$298.5 million in a follow-on public offering of our common stock. In January andAugust 2016 , we raised total net proceeds of approximately$497.5 million in follow-on public offerings of our common stock, and in 2014 we raised net proceeds of$196.8 million in a public offering of our common stock. We anticipate that the level of cash used in our operations will increase in future periods in order to fund our ongoing and planned commercial activities for NUPLAZID, our ongoing and planned development activities for pimavanserin in additional indications other than PDP, studies to be conducted pursuant to our post-marketing commitments and our ongoing and planned development activities for trofinetide for the treatment of Rett syndrome, ACP-044 for pain management, and for various M1 PAM compounds, including ACP-319, under the agreement withVanderbilt University . We expect that our cash, cash equivalents, and investment securities will be sufficient to fund our planned operations through at least the next 12 months.
We may require significant additional financing in the future to fund our operations. Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including:
• the progress in, and the costs of, our ongoing and planned development
activities for pimavanserin, post-marketing studies for NUPLAZID to be
conducted over the next several years, and ongoing and planned commercial
activities for NUPLAZID;
• the costs of our development activities for trofinetide;
• the costs of our development activities for ACP-044;
• the costs of our development activities for ACP-319 and the M1 PAM program;
• the costs of maintaining and developing our sales and marketing
capabilities for NUPLAZID;
• the costs of establishing, or contracting for, sales and marketing
capabilities for other product candidates;
• the amount of U.S. product sales from NUPLAZID;
• the costs of preparing applications for regulatory approvals for NUPLAZID
in jurisdictions other than
indications other than PDP and for other product candidates, as well as
the costs required to support review of such applications;
• the costs of manufacturing and distributing NUPLAZID for commercial use
in
• our ability to obtain regulatory approval for, and subsequently generate
product sales from, NUPLAZID in jurisdictions other than the United
States or in additional indications other than PDP, or from trofinetide,
ACP-044, ACP-319 and other product candidates;
• the costs of acquiring additional product candidates or research and
development programs;
• the scope, prioritization and number of our research and development
programs;
• the ability of our collaborators and us to reach the milestones and other
events or developments triggering payments under our collaboration or
license agreements, or our collaborators' ability to make payments under
these agreements;
• our ability to enter into new collaboration and license agreements;
• the extent to which we are obligated to reimburse collaborators or
collaborators are obligated to reimburse us for costs under collaboration
agreements;
• the costs involved in filing, prosecuting, enforcing, and defending
patent claims and other intellectual property rights;
67
--------------------------------------------------------------------------------
• the costs of maintaining or securing manufacturing arrangements for
clinical or commercial production of pimavanserin, trofinetide or other
product candidates; and
• the costs associated with litigation, including the costs incurred in
defending against any product liability claims that may be brought
against us related to NUPLAZID.
Unless and until we can generate significant cash from our operations, we expect to satisfy our future cash needs through our existing cash, cash equivalents and investment securities, public or private sales of our securities, debt financings, strategic collaborations, or by licensing all or a portion of our product candidates or technology. In the past, periods of turmoil and volatility in the financial markets have adversely affected the market capitalizations of many biotechnology companies, and generally made equity and debt financing more difficult to obtain. For example, due to the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility and disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. These events, coupled with other factors, may limit our access to additional financing in the future. We cannot be certain that additional funding will be available to us on acceptable terms, or at all. If adequate funds are not available when needed, we will be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or our commercialization efforts. We also may be required to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Additional funding, if obtained, may significantly dilute existing stockholders and could negatively impact the price of our stock. We have invested a substantial portion of our available cash in money market funds,U.S. treasury notes, and high quality, marketable debt instruments of corporations and government sponsored enterprises in accordance with our investment policy. Our investment policy defines allowable investments and establishes guidelines relating to credit quality, diversification, and maturities of our investments to preserve principal and maintain liquidity. All investment securities have a credit rating of at least A3/A- or better, or P-1/A-1 or better, as determined by Moody's Investors Service orStandard & Poor's . Our investment portfolio has not been adversely impacted by the disruptions in the credit markets that have occurred in the past. However, if there are future disruptions in the credit markets, there can be no assurance that our investment portfolio will not be adversely affected. AtDecember 31, 2020 , we had$632.0 million in cash, cash equivalents, and investment securities, compared to$697.4 million atDecember 31, 2019 . This$65.4 million decrease in cash, cash equivalents, and investment securities during 2020 was primarily due to net cash used in operating activities, offset in part by cash proceeds from the exercise of employee stock options. Net cash used in operating activities decreased to$136.2 million in 2020 compared to$151.1 million in 2019 and$167.5 million in 2018. The decrease in net cash used in operating activities in 2020 relative to 2019 was due to an increase in our net revenues, partially offset by additional research and development costs, including the upfront license fees and payments and upfront and closing costs paid for the acquisition of CerSci, and sales and marketing costs. The decrease in net cash used in operating activities in 2019 relative to 2018 was due to an increase in our net revenues, partially offset by additional clinical study activities and increased charitable contributions. Net cash provided by investing activities totaled$192.5 million in 2020 compared to net cash used in investing activities of$165.8 million in 2019 and$71.5 million in 2018. The increase in net cash provided by investing activities in 2020 compared to 2019 was primarily due to increased net maturities of investment securities. The increase in net cash used in investing activities in 2019 compared to 2018 was primarily due to an increase in net purchases of investment securities attributable to an increase in proceeds from the exercise of employee stock options that contributed approximately$91.6 million more proceeds available for investment. Net cash provided by financing activities decreased to$81.0 million in 2020 compared to$371.8 million in 2019 and$306.6 million in 2018. The decrease in net cash provided by financing activities in 2020 relative to 2019 was attributable primarily to the follow-on public offering inSeptember 2019 , which resulted in net proceeds of$271.5 million . The increase in net cash provided by financing activities in 2019 relative to 2018 was primarily due to an increase of$91.6 million in proceeds resulting from the exercise of employee stock options. 68
--------------------------------------------------------------------------------
Contractual Obligations
The following is a summary of our long-term contractual obligations as of
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Operating leases $ 61,193 $ 5,284 $ 13,828 $ 12,319 $ 29,762
Other long-term contractual obligations 3,470 1,235 2,235 - -
Total $ 64,663 $ 6,519 $ 16,063 $ 12,319 $ 29,762
In addition to operating leases, we enter into certain other long-term
commitments for goods and services that are outstanding for periods greater than
one year. To the extent these long-term commitments are noncancelable, they are
reflected in the above table. We also enter into short-term agreements with
various vendors and suppliers of goods and services in the normal course of
operations through purchase orders or other documentation, or that are
undocumented except for an invoice. Such short-term agreements are generally
outstanding for periods less than a year and are settled by cash payments upon
delivery of goods and services. The nature of the work being conducted under
these agreements is such that, in most cases, the services may be stopped on
short notice. In such event, we would not be liable for the full amount of the
agreement and therefore these amounts are not reflected in the above table.
Pursuant to the terms of our 2006 license agreement with the Ipsen Group, we are
required to make royalty payments based upon net sales of NUPLAZID of 2%.
Royalty payments are contingent upon net product sales and accordingly these
amounts are not included in the above table.
In addition, we have entered into various collaboration, licensing and merger
agreements which generally include upfront license fees, development and
commercial milestone payments upon achievement of certain clinical and
commercial development and annual net sales milestones, as well as royalties
calculated as a percentage of product revenues, with rates that vary by
agreement. As of December 31, 2020 , we may be required to make milestone
payments up to $2.2 billion in the aggregate. These payments are contingent upon
achieving future development, regulatory and commercial milestones, and
accordingly these amounts are not included in the above table.
Off-Balance Sheet Arrangements
To date, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Recent Accounting Pronouncements
See Item 15 of Part IV, "Notes to Consolidated Financial Statements-Note 2-Summary of Significant Accounting Policies."
© Edgar Online, source
