COLLEGIUM PHARMACEUTICAL, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Form 10-K. The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Form 10-K, including those set forth under "Forward-looking Statements" and "Risk Factors", as revised and supplemented by those risks described from time to time in other reports which we file with theSEC .
Overview
We are a specialty pharmaceutical company committed to being the leader in responsible pain management. Our first product, Xtampza ER, is an abuse-deterrent, extended-release, oral formulation of oxycodone. InApril 2016 , the FDA, approved our NDA for Xtampza ER for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. InJune 2016 , we announced the commercial launch of Xtampza ER. Our product portfolio also includes the Nucynta Products. InDecember 2017 , we entered into the Nucynta Commercialization Agreement with Assertio, pursuant to which we licensed the right to commercialize the Nucynta Products inthe United States . Nucynta ER is an extended-release formulation of tapentadol that is indicated for the management of pain severe enough to require daily, around the clock, long-term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy in adults, and for which alternate treatment options are inadequate. Nucynta IR is an immediate-release formulation of tapentadol that is indicated for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate in adults. We closed the transactions contemplated by the Nucynta Commercialization Agreement, as amended, onJanuary 9, 2018 , and we began marketing and commercially selling the Nucynta Products inFebruary 2018 . OnFebruary 13, 2020 , we closed our acquisition of certain assets related to the Nucynta Products, including the right to commercialize the Nucynta Products inthe United States and certain regulatory and supply chain assets (the "Nucynta Acquisition"), from Assertio for an aggregate purchase price of$375.0 million , subject to certain adjustments as set forth in that certain Asset Purchase Agreement, dated as ofFebruary 6, 2020 , by and between us and Assertio (the "Nucynta Purchase Agreement").
For the fiscal year ended
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Outlook
We expect to continue to incur significant commercialization expenses related to
marketing, manufacturing, distribution, selling and reimbursement activities. We
are promoting Xtampza ER to approximately 11,000 health care professionals who
write approximately 65% of the branded extended-release oral opioid
prescriptions in the United States with a sales team of approximately 150 sales
representatives and managers. We are promoting the Nucynta Products to the same
health care professionals to whom we promote Xtampza ER, leveraging our existing
sales organization. We have historically paid royalty to Assertio on all
revenues from the sale of Nucynta Products based on certain net sales
thresholds.
We have never been profitable and have incurred net losses in each year since
inception. We incurred net losses of $22.7 million , $39.1 million and $74.9
million for the years ended December 31, 2019 , 2018 and 2017, respectively. As
of December 31, 2019 , we had an accumulated deficit of $359.9 million .
Substantially all of our net losses resulted from costs incurred in connection
with selling, general and administrative costs associated with our operations
and research and development programs.
We believe that our cash and cash equivalents at December 31, 2019 together with
expected cash inflows from the commercialization of our products, will enable us
to fund our operating expenses, debt service and capital expenditure
requirements under our current business plan for the foreseeable future.
Financial Operations Overview
Product Revenues
Product revenue through the year endedDecember 31, 2019 has been generated from product sales of Xtampza ER and the Nucynta Products. In accordance with Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, product sales are recorded net of a provision for estimated chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns upon delivery of products to customers.
Cost of Product Revenues
Cost of product revenues include amortization of the intangible asset acquired
in connection with the Nucynta Commercialization Agreement ("Nucynta Intangible
Asset"), royalty expense, the cost of active pharmaceutical ingredient, the cost
of producing finished goods that correspond with revenue for the reporting
period, as well as certain period costs related to freight, packaging, stability
and quality testing. Please refer to Note 4, License Agreements, and Note 9,
Intangible Assets, for further detail around the Nucynta Intangible Asset and
royalty expense.
Research and Development Expenses
Research and development expenses consist of development costs associated with our products, product platform technology and development of our product candidates. These costs are expensed as incurred and include:
? compensation and employee-related costs, including stock-based compensation;
costs associated with conducting our preclinical, clinical and regulatory
? activities, including fees paid to third-party professional consultants and
service providers;
? costs incurred under clinical trial agreements;
? costs for laboratory supplies;
? costs to acquire, develop and manufacture preclinical study and clinical trial
materials; and
? facilities, depreciation and other expenses including allocated expenses for
rent and maintenance of facilities.
We cannot determine with certainty the timing of initiation, the duration or the
completion costs of future preclinical studies and clinical trials. At this
time, due to the inherently unpredictable nature of preclinical and clinical
development, we are unable to estimate with any certainty the costs we will
incur and the timelines required for our products. Clinical and preclinical
development timelines, the probability of success and development costs can
differ materially from expectations. In addition, we cannot forecast which
products may be subject to future collaborations, when such arrangements will be
secured, if at all, and to what degree such arrangements would affect our
development plans and capital requirements.
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Our research and development has been focused primarily on developing our DETERx platform technology and Xtampza ER. Accordingly, historically we have not tracked research and development costs by project. In addition, we use our employee and infrastructure resources across multiple research and development projects.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation and travel expenses for our employees in executive, finance, sales and marketing and administrative functions. Other selling, general and administrative expenses include facility-related costs and professional fees for directors, accounting and legal services, and expenses associated with obtaining and maintaining patents. As we continue to invest in the commercialization of our products, we expect our selling, general and administrative expenses to be substantial for the foreseeable future. Interest Expense Interest expense consists primarily of non-cash interest costs related to our Nucynta Commercialization Agreement and cash interest costs from the Loan and Security Agreement withSilicon Valley Bank ("SVB"). Interest Income
Interest income consists of interest earned on our cash and cash equivalents.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles inthe United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. Estimates include revenue recognition, including the estimates of product returns, units prescribed, discounts and allowances related to commercial sales of our products, estimates utilized in the valuation of inventory, estimates of useful lives with respect to intangible assets, accounting for stock-based compensation, contingencies, intangible assets and tax valuation reserves. We base our estimates and assumptions on historical experience when available and on various factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements appearing elsewhere in this on Form 10-K, we believe the following accounting policies to be most critical to the significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our accounting policy for revenue recognition will have a substantial impact on reported results and relies on certain estimates. Estimates are based on historical experience, current conditions and various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amounts of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.
Product Revenue
Our only source of revenue to date has been generated by sales of our products,
which are primarily sold to distributors ("customers"), which in turn sell the
product to pharmacies for the treatment of patients ("end users"). For the year
ended December 31, 2019 , in accordance with ASC Topic 606, Revenue from
Contracts with Customers ("ASC 606"), revenue for product sales is recognized
when a customer obtains control of promised goods or services, in an amount that
reflects the consideration which the entity expects to receive in exchange for
those goods or services. This generally
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occurs upon delivery; when estimated provisions for chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns are reasonably determinable. Therefore, product sales are recorded upon delivery net of estimated chargebacks, rebates, sales incentives and allowances, distribution service fees, as well as estimated product returns. Prior to the adoption of ASC 606 onJanuary 1, 2018 , we recognized revenue in accordance with ASC Topic 605, Revenue Recognition ("legacy GAAP"), or when there was persuasive evidence of an arrangement; when title and risk of loss had passed to the customer; when estimated provisions for chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns were reasonably determinable; and when collectability was reasonably assured. The satisfaction of these criteria generally occurred upon delivery of products to customers, or the sell-in method of revenue recognition under legacy GAAP. In addition, we recognized the transaction price net of estimated chargebacks, rebates, sales incentives and allowance. Given that timing of recognition for product sales under legacy GAAP and ASC 606 occurred on the delivery of products to customers and there were no differences in transaction price under legacy GAAP and ASC 606, the adoption of Topic 606 did not have a material impact on our consolidated financial position, results of operations, equity or cash flows for the year endedDecember 31, 2018 . Prior to the third quarter of 2017, we recognized revenue when products were dispensed to end users, or the sell-through method of revenue recognition under legacy GAAP, as we did not have sufficient experience with product sales to estimate returns at the time product was sold to customers. In the third quarter of 2017, we transitioned to the sell-in method of revenue recognition and recorded a cumulative one-time$4.4 million increase to revenues. Sales Deductions Sales deductions consist primarily of provisions for (1) rebates and incentives, including managed care rebates, government rebates, co-pay program incentives, and sales incentives and allowances; (2) product returns, including return estimates for both the Nucynta Products and Xtampza ER; and (3) trade allowances and chargebacks, including fees for distribution service fees, prompt pay discounts, and chargebacks. We estimate the amount of variable consideration that should be included in revenue under the expected value method for all sales deductions other than trade allowances, which are estimated under the most likely amount method. These provisions reflect our best estimates of the amount of revenue to which we are entitled based on the terms of our contracts. Provisions for rebates and incentives are based on the estimated amount of rebates and incentives to be claimed on the related sales from the period. As our rebates and incentives are based on products dispensed to patients, we are required to estimate the expected value of claims at the time of product delivery to distributors. Given that distributors sell the product to pharmacies, which in turn dispense the product to patients, claims can be submitted significantly after the related sales are recognized. Our estimates of these claims are based on the historical experience of existing or similar programs, including current contractual and statutory requirements, specific known market events and trends, industry data, and estimated distribution channel inventory levels. Accruals and related reserves required for rebates and incentives are adjusted as new information becomes available, including actual claims. If actual results vary, we may need to adjust these estimates, which could have an effect on earnings in the period of the adjustment. Provisions for product returns are based on product-level historical trends, as well as relevant market events and other factors. For the Nucynta Products, estimates of product returns are primarily based on historical trends as the Nucynta Products have been commercially sold for a number of years. For Xtampza ER, since the product has only been commercially sold sinceJune 2016 , estimates of product returns are based on a combination of historical returns processed to date, taking into consideration the expiration date of product upon delivery to customers, as well as forecasted customer buying patterns, shipment and prescription trends, channel inventory levels, and other specifically known market events and trends.
Provisions for trade allowances and chargebacks are primarily based on customer-level contractual terms. Accruals and related reserves are adjusted as new information becomes available, which generally consists of actual trade allowances and chargebacks processed relating to sales recognized in the period.
Intangible Assets
We record the fair value of finite-lived intangible assets as of the transaction
date. Intangible assets are then amortized over their estimated useful lives
using either the straight-line method, or if reliably determinable, based on the
pattern in
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which the economic benefit of the asset is expected to be utilized. We test intangible assets for potential impairment whenever triggering events or circumstances present an indication of impairment. If the sum of expected undiscounted future cash flows of the intangible assets is less than the carrying amount of such assets, the intangible assets would be written down to the estimated fair value, calculated based on the present value of expected future cash flows.
As of
Results of Operations
Comparison of the Years Ended
The following table summarizes the results of our operations for the years ended
Years ended December 31,
2019 2018 2017
(in thousands)
Product revenues, net $ 296,701 $ 280,413 $ 28,476
Costs and expenses
Cost of product revenues 193,660 165,677 2,595
Research and development 10,340 8,661 8,572
Selling, general and administrative 116,449 126,760 92,756
Total costs and expenses 320,449 301,098 103,923
Loss from operations (23,748) (20,685) (75,447)
Interest expense (909) (20,130) -
Interest income 1,935 1,687 582
Net loss $ (22,722) $ (39,128) $ (74,865) Comparison of the Years Ended
Product revenues, net were$296.7 million for the year endedDecember 31, 2019 ("2019"), compared to$280.4 million for the year endedDecember 31, 2018 ("2018"). The$16.3 million increase related to an increase in revenue for Xtampza ER of$35.6 million , offset by a decrease in revenue for the Nucynta Products of$19.3 million . For 2019, Xtampza ER product revenues, net were$105.0 million , compared to$69.4 million for 2018. The increase in revenue for Xtampza ER was primarily related to an increase in sales volume due to increasing demand. For 2019, Nucynta IR and ER product revenues, net were$117.7 million and$74.0 million , respectively, compared to$129.9 million and$81.1 million , respectively, for 2018. The decrease in revenue for the Nucynta Products was primarily related to lower sales volume, partially offset by an increase in price. Cost of product revenues was$193.7 million for 2019, compared to$165.7 million for 2018. The$28.0 million increase was primarily related to the recognition of royalty expense for the Nucynta Products, as royalty expense in 2019 was recognized as incurred under the terms of the Nucynta Commercialization Agreement as amended inNovember 2018 , while the expense for 2018 was recognized on a straight-line basis through the amortization of the Nucynta Intangible Asset. Research and development expenses were$10.3 million for 2019, compared to$8.7 million for 2018. The$1.6 million increase was primarily related to an increase in salaries, wages and benefits, including stock-based compensation expense.
Selling, general and administrative expenses were
a decrease in sales, marketing and consulting costs of
? due to higher one-time costs incurred in 2018 to commercialize the Nucynta
Products;
? a decrease in salaries, wages and benefits of
lower incentive compensation expense and lower average employee headcount;
? a decrease in fees and permits, including post-marketing requirements, of$1.3 million ; offset by 64 Table of Contents
an increase in rent expense of
? possession of our new corporate headquarters in mid-2018 and entering into
vehicle leases for our field-based employees starting in 2019; and
? an increase in other fees of
recently enacting excise taxes on the sale of opioids.
Interest expense was$909,000 for 2019, compared to$20.1 million for 2018. The decrease was primarily due to$19.3 million of interest expense recognized in 2018 associated with the minimum royalty payments related to the Nucynta Commercialization Agreement. InNovember 2018 , the minimum royalty payments were eliminated upon the execution of the Third Amendment to the Nucynta Commercialization Agreement. Interest income was$1.9 million for 2019, compared to$1.7 million for 2018. The$248,000 increase was primarily due to higher interest rates earned on
money market funds.
Comparison of the Years Ended
Product revenues, net were$280.4 million for 2018, compared to$28.5 million for the year endedDecember 2017 ("2017"). The$251.9 million increase was primarily related to sales of the Nucynta Products pursuant to the Nucynta Commercialization Agreement consummated inJanuary 2018 . For 2018, the Nucynta Products product revenues, net were$211.0 million . In addition, Xtampza ER product revenues, net were$69.4 million for 2018, which represents a$40.9 million increase compared 2017. The increase in Xtampza ER product revenues, net was primarily due to an increase in sales volume due to increasing demand. Cost of product revenues was$165.7 million for 2018, compared to$2.6 million for 2017. The$163.1 million increase was primarily related to$109.8 million of amortization expenses associated with the intangible asset related to the Nucynta Commercialization Agreement. The remaining increase was primarily related to volume of product sales in 2018. Research and development expenses were$8.7 million for 2018, compared to$8.6 million for 2017. The$89,000 increase was primarily related to an increase in salaries, wages and benefits of$1.0 million , primarily due to increases in employee headcount and stock-based compensation expense. This was partially offset by a$670,000 decrease in development manufacturing expenses following the termination of the Onsolis License and Development Agreement in 2017.
Selling, general and administrative expenses were
an increase in salaries, wages and benefits of
? increases in employee headcount, including an increase in stock-based
compensation expense of
? an increase in sales and marketing costs of
the Nucynta Products and continued support of Xtampza ER;
? an increase in PDUFA related expenses of
acquisition of the Nucynta Products;
? an increase in audit, legal, and other professional fees of
? an increase in regulatory costs, including consulting and subscriptions, of
? an increase in consulting fees of
? an increase in insurance expense of
in product liability insurance; offset by
? a decrease of
termination of the Onsolis License and Development Agreement with BDSI in 2017.
Interest expense was
Interest income was$1.7 million for 2018, compared to$582,000 for 2017. The$1.1 million increase was primarily due to higher interest rates on money market funds. 65 Table of Contents
Liquidity and Capital Resources
Sources of liquidity
We have incurred net losses and negative cash flows from operations since inception. Historically, we have funded our operations primarily through the private placements of our preferred stock and convertible notes, public offerings of common stock, and commercial bank debt. As ofDecember 31, 2019 , we had$170.0 million in cash and cash equivalents. Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents as ofDecember 31, 2019 together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future.
Equity Financing
InMarch 2017 , we entered into a Controlled Equity Offering Sales Agreement (the "ATM Sales Agreement") withCantor Fitzgerald & Co. , as sales agent, pursuant to which we may issue and sell, from time to time, shares of our common stock having an aggregate offering price of up to$60.0 million . During the year endedDecember 31, 2017 , we sold an aggregate of 3,126,998 shares of common stock under the ATM Sales Agreement at an average gross sales price of$11.36 per share, generating net proceeds of$34.3 million after deduction of underwriting discounts and commissions and expenses payable by us. No shares were sold under the ATM Sales Agreement during the years endedDecember 31, 2019 or 2018. The ATM Sales Agreement expired inOctober 2019 .
Silicon Valley Bank Term Loan Facility
FromAugust 2012 untilFebruary 2020 , we maintained a term loan facility with SVB, which was amended in connection with, and as a condition to, consummation of the transactions contemplated by the Nucynta Commercialization Agreement. Under the amended term loan ("Consent and Amendment"), we had a term loan facility in an amount of$11.5 million , which replaced our previously existing term loan facility. The proceeds of the Consent and Amendment were used to finance certain payment obligations under the Nucynta Commercialization Agreement and to repay the balance of the previously existing term loan. The Consent and Amendment also provided SVB's consent with respect to the Nucynta Commercialization Agreement.
The Consent and Amendment bore interest at a rate per annum of 0.75% above the prime rate (as defined in the agreement governing the Consent and Amendment). We were eligible to repay the Consent and Amendment in equal consecutive monthly installments of principal plus monthly payments of accrued interest, commencing inJanuary 2020 . All outstanding principal and accrued and unpaid interest under the Consent and Amendment, and all other outstanding obligations with respect to the Consent and Amendment, were due and payable in full inDecember 2022 . We were eligible to prepay the Consent and Amendment, in full but not in part, with a prepayment fee of (i) 3.0% of the outstanding principal balance prior toJanuary 2019 , (ii) 2.0% of the outstanding principal balance followingJanuary 2019 and prior toJanuary 2020 and (iii) 1.0% of the outstanding principal balance followingJanuary 2020 , plus, in each case, a final payment fee of$719,000 . InNovember 2018 , we entered into an amended and restated Loan and Security Agreement with SVB ("Amended Term Loan") that superseded our original loan agreement and subsequent amendments with SVB. The Amended Term Loan updated the loan documentation between us and SVB, and modified the minimum liquidity ratio to be at least 1.5 to 1.0, along with other non-material changes. The Amended Term Loan did not modify our borrowings, interest rates, or repayment terms. Any amounts outstanding during the continuance of any event of default under the Amended Term Loan will bear additional interest at the per annum rate of 5.0%. InJanuary 2020 , and in anticipation of consummation of the Nucynta Acquisition and related financing activities, we repaid all of our outstanding indebtedness under the Amended Term Loan. 66 Table of Contents
Financing Relating to the Nucynta Acquisition
2020 Term Loan
OnFebruary 6, 2020 , in connection with the execution of the Nucynta Purchase Agreement, we, together with our subsidiary,Collegium Securities Corporation , entered into a Loan Agreement with BioPharma Credit PLC, as collateral agent and lender; andBioPharma Credit Investments V (Master) LP , as lender (the "2020 Loan Agreement"). The 2020 Loan Agreement provides for a$200.0 million secured term loan (the "2020 Term Loan"), the proceeds of which were used to finance a portion of the purchase price paid pursuant to the Nucynta Purchase Agreement. The 2020 Term Loan will mature on the 48-month anniversary of the closing of the Nucynta Acquisition, and is guaranteed by our material domestic subsidiaries and is also secured by substantially all of our material domestic assets. The 2020 Term Loan will bear interest at a rate based upon LIBOR (subject to a LIBOR floor of 2.0%), plus a margin of 7.5% per annum. We are required to repay the 2020 Term Loan by making equal quarterly payments. The 2020 Loan Agreement contains certain covenants and obligations of the parties, including, without limitation, covenants that require us to maintain$200.0 million in annual net sales and covenants that limit our ability to incur additional indebtedness or liens, make acquisitions or other investments or dispose of assets outside the ordinary course of business. Failure to comply with these covenants would constitute an event of default under the 2020 Loan Agreement, notwithstanding our ability to meet its debt service obligations. The 2020 Loan Agreement also includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the 2020 Loan Agreement and execution upon the collateral securing obligations under the 2020 Loan Agreement.
2026 Convertible Notes
OnFebruary 13, 2020 , we issued 2.625% convertible senior notes due 2026 (the "convertible notes"), in the aggregate principal amount of$143.8 million , in a public offering registered under the Securities Act of 1933, as amended. The convertible notes are senior, unsecured obligations and will accrue interest at a rate of 2.625% per annum, payable semi-annually in arrears onFebruary 15 andAugust 15 of each year, beginning onAugust 15, 2020 . The notes will mature onFebruary 15, 2026 , unless earlier repurchased, redeemed or converted. BeforeAugust 15, 2025 , noteholders will have the right to convert their notes only upon the occurrence of certain events. From and afterAugust 15, 2025 , noteholders may convert their notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. We will settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The initial conversion rate is 34.2618 shares of common stock per$1,000 principal amount of notes, which represents an initial conversion price of approximately$29.19 per share of common stock. The initial conversion price represents a premium of approximately 35% over the last reported sale of$21.62 per share of our common stock onFebruary 10, 2020 . The conversion rate and conversion price will be subject to adjustment upon the occurrence of certain events. 67 Table of Contents Cash flows Years ended December 31, 2019 2018 2017 Net cash provided by (used in) operating activities$ 27,783 $ 169,390 $
(67,018)
Net cash used in investing activities (6,438) (24,354)
(990)
Net cash provided by (used in) financing activities 2,041 (117,197)
33,480
Net increase in cash, cash equivalents and restricted cash$ 23,386 $ 27,839 $ (34,528) Operating activities. Cash provided by operating activities was$27.8 million in 2019, compared to cash provided by operating activities of$169.4 million in 2018. The$141.6 million decrease was primarily due to lower non-cash adjustments related to the Nucynta Commercialization Agreement, as in 2018 we were required to make guaranteed minimum royalty payments which were classified as outflows from financing activities, while in 2019 royalty payments were conditional on net sales and therefore classified as outflows from operating activities. Further, there was lower amortization from the Nucynta Intangible Asset in 2019 compared to 2018 as a result of the Third Amendment to the Nucynta Commercialization Agreement and non-cash interest was reduced to zero. In addition, cash provided by operating activities decreased due to changes in the working capital accounts, partially offset by a benefit from the change in net loss. Cash provided by operating activities was$169.4 million in 2018, compared to cash used by operating activities of$67.0 million in 2017. The$236.4 million increase in cash provided by operating activities was primarily due to the non-cash adjustments related to the Nucynta Commercialization Agreement. While payments made for guaranteed minimum royalties are classified as financing activities, the amortization from the Nucynta Intangible Asset of$109.8 million and the non-cash interest expense related to the guaranteed minimum royalties of$19.3 million are classified as adjustments to cash provided by operating activities. In addition, cash provided by operating activities increased due to a benefit from changes in the working capital accounts and due to a benefit from the change in net loss. The benefit from the change in the working capital accounts was primarily driven by a benefit from accrued rebates, returns and discounts of$106.6 million , partially offset by the change in accounts receivable$68.2 million . These changes are directly related to the significant increase in product revenues in 2018, as the provisions for rebates, returns and discounts are recognized in the same period in which product is delivered to wholesalers, while payment for rebates, returns and discounts is generally based on prescriptions and actual returned product. Investing activities. Cash used in investing activities was$6.4 million in 2019 and$24.4 million in 2018. The$18.0 million decrease in cash used in investing activities was primarily related to the Nucynta Commercialization Agreement, as in 2018 we made a one-time upfront payment of$18.9 million to Assertio to consummate the Nucynta Commercialization Agreement. This decrease was offset by an increase of$961,000 paid for purchases of property, plant, and equipment primarily for the dedicated production suite at our contract manufacturing organization in 2019.
Cash used in investing activities was
Financing activities. Cash provided by financing activities was$2.0 million in 2019, compared to cash used in financing activities of$117.2 million in 2018. The$119.2 million increase in cash provided by financing activities was primarily related to the Nucynta Commercialization Agreement. In 2018 we were required to make guaranteed minimum royalty payments which were classified as outflows from financing activities, while in 2019, royalty payments were conditional on net sales and therefore classified as outflows from operating activities. The guaranteed minimum royalty payments paid in 2018 were partially offset by term loan proceeds of$10.0 million . The remaining change is primarily related to changes in proceeds from the issuance of shares under our employee stock purchase plan and proceeds from exercises of stock options, offset by payments made for employee restricted stock tax withholdings. 68
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Cash used in financing activities was$117.2 million in 2018, compared to cash provided by financing activities of$33.5 million in 2017. The increase in cash used by financing activities was primarily due to an increase in cash used in the repayment of minimum royalty payments associated with the Nucynta Commercialization Agreement for the Nucynta Products of$132.0 million , offset by proceeds received from our term loan of$10.0 million , and proceeds received from the exercise of stock options of$4.3 million . The remaining change is primarily due to higher payments made for employee restricted stock tax withholdings.
Funding requirements
We believe that our cash and cash equivalents atDecember 31, 2019 together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future. However, we are subject to all the risks common to the commercialization and development of new pharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Certain economic or strategic considerations may cause us to seek additional cash through private or public debt or equity offerings. Such funds may not be available when needed, or, we may not be able to obtain funding on favorable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our products. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing shareholders, increased fixed payment obligations and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects. Our forecast that our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. The amount and timing of future funding requirements, both near- and long-term, will depend on many factors, including:
? the generation of reasonable levels of revenue from products sales;
? the cost of growing and maintaining sales, marketing and distribution
capabilities for our products;
the cost of patent infringement litigation, including our litigation with each
? of Purdue and Teva, relating to Xtampza ER and the Nucynta Products, which may
be expensive to defend;
? the cost of litigation related to opioid marketing and distribution practices;
? the timing and costs associated with manufacturing our products, for commercial
sale and clinical trials
? our need to expand our regulatory and compliance functions; and
? the effect of competing technological and market developments.
If we cannot capitalize on our business opportunities because we lack sufficient
capital, our business, financial condition and results of operations could be
materially adversely affected.
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Contractual Obligations
The following table summarizes our contractual obligations as of
Less than More than
Total 1 year 1 - 3 years 3 - 5 years 5 years
(in thousands)
Operating lease obligations (1) $ 13,498 $ 1,252 $ 2,618 $ 2,770 $ 6,858
Debt 11,500 3,833 7,667 - -
Purchase obligations (2) 9,000 3,000 6,000 - -
Total $ 33,998 $ 8,085 $ 16,285 $ 2,770 $ 6,858 Operating lease obligations represent future minimum lease payments under our
(1) non-cancelable operating lease in effect as of
remaining lease payments for space at our current headquarters in
Massachusetts .
Purchase obligations represent the minimum purchase obligations of up to
disclosed amounts represent the maximum amount that could be payable under
the minimum purchase obligations.
We also have employment agreements with executive officers that would require us
to make severance payments to them if we terminate their employment without
cause or the executives resign for good cause. These payments are contingent
upon the occurrence of various future events, and the amounts payable under
these provisions depend upon the level of compensation at the time of
termination of employment, are therefore not calculable at this time, and, as a
result, we have not included any such amounts in the table above.
Nucynta Commercialization Agreement
As more fully described in Note 4, License Agreements, and Note 9, Intangible Assets, to the consolidated financial statements inJanuary 2018 , we closed the Nucynta Commercialization Agreement with Assertio, which initially required us to make annual minimum royalty payments of$537.0 million , which consisted of scheduled payments of$132.0 million in 2018,$135.0 million in 2019,$135.0 million in 2020, and$135.0 million in 2021. The guaranteed minimum royalty payments were a contractual obligation incurred at the closing of the transaction and were included as a component of the accumulated cost of the acquired intangible asset. As a result, we included the present value of the guaranteed minimum royalty payments as a component of the Nucynta Intangible Asset recognized upon closing and recorded a corresponding asset acquisition obligation of$482.3 million . InNovember 2018 , we entered into an amendment to the Commercialization Agreement to adjust the royalty structure, as well as other changes more fully described in Note 4, License Agreements, and Note 9, Intangible Assets, to the consolidated financial statements. The amendment eliminated the guaranteed minimum royalty payments in years 2019, 2020, and 2021, and instead added a conditional obligation to make royalty payments based on net sales for years 2019, 2020, and 2021. As such, we remeasured the guaranteed minimum royalty obligation as of the amendment date. This remeasurement resulted in a$369.6 million decrease to the asset acquisition obligation and a corresponding reduction to the Nucynta Intangible Asset. In the year endedDecember 31, 2018 , we paid the$132.0 million of guaranteed minimum royalty payments owed for 2018 and classified such payments as financing outflows in our statement of cash flows. Cost of product revenues recognized in the year endedDecember 31, 2018 included$109.8 million of amortization expense related to the Nucynta Intangible Asset. In addition, in the year endedDecember 31, 2018 , we recognized$19.3 million of non-cash interest expense related to the guaranteed minimum royalty payments. In the year endedDecember 31, 2019 , royalties paid under the Commercialization Agreement were classified as operating outflows in our statement of cash flows as such payments were conditional upon net sales. We also recognized such royalties as a component of costs of product revenues in our statement of operations, in addition to$14.8 million of ongoing amortization expense related to the remeasured Nucynta Intangible Asset. We expect amortization expense for the Nucynta Intangible Asset for the years endedDecember 31, 2020 , and 2021 to be$14.8 million , and$14.8 million , respectively. OnFebruary 13, 2020 , we closed the Nucynta Acquisition in accordance with the Nucynta Purchase Agreement. Upon the closing of the transactions contemplated by the Nucynta Purchase Agreement, the Commercialization Agreement terminated with the exception of certain provisions thereof which survive pursuant to the terms of the Nucynta Purchase Agreement, and our payment obligations to Assertio
thereunder ceased.
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Nucynta Purchase Agreement
On February 6, 2020 , we entered into the Nucynta Purchase Agreement with
Assertio, pursuant to which we agreed to acquire from Assertio certain assets
related to the Nucynta franchise for an aggregate purchase price of $375.0
million (the "Purchase Price"), subject to certain closing and post-closing
adjustments as described in the Nucynta Purchase Agreement. In connection with
the Nucynta Acquisition, we also agreed to assume certain contracts, liabilities
and obligations related to the Nucynta Products.
From and after the closing of the Nucynta Purchase Agreement, we will pay
royalties directly to Grünenthal GmbH at a rate of 14% of net sales of the
Products; such royalty payment obligation will replace our previous obligation
to pay a royalty rate of 14% of net sales of the Nucynta Products to Grünenthal,
subject to a guaranteed royalty of $34.0 million when net sales are between
$180.0 million and $243.0 million .
The Nucynta Purchase Agreement contains customary representations, warranties
and covenants, and indemnification provisions subject to specified limitations.
We closed the transactions contemplated by the Nucynta Purchase Agreement on
February 13, 2020 .
Non-GAAP Financial Measures
To supplement our financial results presented on a GAAP basis, we have included
information about non-GAAP adjusted income/loss. We internally use this non-GAAP
financial measure to understand, manage and evaluate the Company as we believe
it represents the performance of our core business. Because this non-GAAP
financial measure is an important internal measure for the Company, we believe
that the presentation of the non-GAAP financial measure provides analysts,
investors and lenders insight into management's view and assessment of the
Company's ongoing operating performance. In addition, we believe that the
presentation of this non-GAAP financial measure, when viewed with our results
under GAAP and the accompanying reconciliation, provides supplementary
information that may be useful to analysts, investors, lenders, and other third
parties in assessing the Company's performance and results from period to
period. We report this non-GAAP financial measure in order to portray the
results of our major operations - commercializing innovative, differentiated
products for people suffering from pain - prior to considering certain income
statement elements. This non-GAAP financial measure should be considered in
addition to, and not a substitute for, or superior to, net income or other
financial measures calculated in accordance with GAAP. The Non-GAAP financial
measure is not based on any standardized methodology prescribed by GAAP and
represents GAAP net income/loss adjusted to exclude stock-based compensation
expense, amortization expense for the Nucynta intangible asset, non-cash
interest expense recognized on the Nucynta minimum royalty payments, and minimum
royalty payments due and payable in connection with the Nucynta
Commercialization Agreement. Any non-GAAP financial measures used by us may be
calculated differently from, and therefore may not be comparable to, a non-GAAP
measure used by other companies.
Three months ended
December 31, Years ended December 31,
2019 2018 2019 2018
GAAP net (loss) income $ (2,201) $ 9,086 $ (22,722) $ (39,128)
Non-GAAP adjustments:Stock-based compensation expense 3,966 3,598 16,528
13,778
Nucynta related amortization expense (1) 3,688 15,494 14,752
109,834
Nucynta non-cash interest expense (2) - 2,169 -
19,281
Nucynta minimum royalty payment due (3) - (33,750) -
(132,000)
Total non-GAAP adjustments
$ 10,893 Non-GAAP adjusted income (loss)$ 5,453 $ (3,403) $ 8,558
$ (28,235) 71 Table of Contents First Quarter Second Quarter Third Quarter Fourth Quarter 2019 2019 2019 2019 GAAP net loss$ (9,700) $ (4,712) $ (6,109) $ (2,201) Non-GAAP adjustments: Stock-based compensation 4,263 4,162 4,137 3,966 expense Nucynta related amortization 3,688 3,688 3,688 3,688 expense (1)
Total non-GAAP adjustments $ 7,951 $ 7,850 $
7,825 $ 7,654
Non-GAAP adjusted income (loss) $ (1,749) $ 3,138 $
1,716 $ 5,453
First Quarter Second Quarter Third Quarter
Fourth Quarter
2018 2018 2018 2018
GAAP net income (loss) $ (18,652) $ (13,060) $ (16,502) $ 9,086
Non-GAAP adjustments:
Stock-based compensation expense 2,728 3,526 3,926 3,598
Nucynta related amortization expense (1) 29,526 32,407 32,407 15,494
Nucynta non-cash interest expense (2) 5,528 5,943 5,641 2,169
Nucynta minimum royalty payment due (3) (30,750) (33,750) (33,750) (33,750)
Total non-GAAP adjustments $ 7,032 $ 8,126 $ 8,224 $ (12,489)
Non-GAAP adjusted loss $ (11,620) $ (4,934) $ (8,278) $ (3,403)
(1) Represents amortization expense of the Nucynta Intangible Asset. (2) Represents non-cash interest expense associated with the minimum royalty payments of the Nucynta Commercialization Agreement. (3) Represents minimum royalty payment due and payable in connection with the Nucynta Commercialization Agreement.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during the periods presented,
as defined under
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