STRONGBRIDGE BIOPHARMA The following discussion and analysis should be read in conjunction with our interim unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on 10-Q (this "Quarterly Report") and the audited financial statements and related notes for the year endedDecember 31, 2020 and related Management's Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 (the "2020 Annual Report") filed with theSecurities and Exchange Commission ("SEC") onMarch 3, 2021 . As used in this Quarterly Report, unless the context suggests otherwise, "we," "us," "our," or "Strongbridge" refer toStrongbridge Biopharma plc . 16
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Special Note Regarding Forward-Looking Statements
This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, prospective products, size of market or patient population, plans, objectives of management, expected market growth and the anticipated effects of the coronavirus (COVID-19) pandemic (and any COVID-19 variants) on our business, operating results and financial condition are forward-looking statements. The words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "target," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and healthcare, regulatory and scientific developments and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our 2020 Annual Report and Part II, Item 1A of this Quarterly Report, in each case under the heading "Risk Factors." In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report except as required by law. You should read carefully the factors described in the "Risk Factors" section of our 2020 Annual Report and this Quarterly Report to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.
Overview
We are a global, commercial-stage biopharmaceutical company focused on the development and commercialization of therapies for rare diseases with significant unmet needs.
Our first commercial product is Keveyis (dichlorphenamide), the first and only treatment approved by theU.S. Food and Drug Administration (the "FDA") for hyperkalemic, hypokalemic, and related variants of primary periodic paralysis ("PPP"), a group of rare hereditary disorders that cause episodes of muscle weakness or paralysis. We have two clinical-stage product candidates for rare endocrine diseases, Recorlev and veldoreotide. Recorlev (levoketoconazole), the pure 2S,4R enantiomer of the enantiomeric pair comprising ketoconazole, is a next-generation steroidogenesis inhibitor being investigated as a chronic therapy for adults with endogenous Cushing's syndrome. Veldoreotide is a next-generation somatostatin analog being investigated for potential applications in conditions amenable to somatostatin receptor activation. Both levoketoconazole and veldoreotide have received orphan designation from the FDA and theEuropean Medicines Agency ("EMA"). 17 Table of Contents Recent Developments
Transaction Agreement with Xeris Pharmaceuticals, Inc.
OnMay 24, 2021 , we announced that we had signed an agreement to be acquired by Xeris. Upon close of the transaction, the businesses of Xeris and Strongbridge will be combined under a new entity to be calledXeris Biopharma Holdings, Inc. The agreement, including the maximum aggregate amount payable under the CVRs, values Strongbridge at approximately$267 million based on the closing price of Xeris common stock of$3.47 onMay 21, 2021 , and Strongbridge's fully diluted share capital. Under the terms of the agreement, at closing, Strongbridge shareholders will receive a fixed exchange ratio of 0.7840 shares ofXeris Biopharma Holdings common stock for each Strongbridge ordinary share they own. Based on the closing price of Xeris common stock onMay 21, 2021 , this represents approximately$2.72 per Strongbridge ordinary share and a 12.9% premium to the closing price of Strongbridge ordinary shares onMay 21, 2021 . Strongbridge shareholders will also receive 1 non-tradeable CVR for each Strongbridge ordinary share they own, worth up to an additional$1.00 payable in cash orXeris Biopharma Holdings common stock, or a combination of cash and additionalXeris Biopharma Holdings common stock (atXeris Biopharma Holdings' sole election) upon achievement of the following milestones: (i)$0.25 per CVR upon the first listing of at least one issued patent for Keveyis in theU.S. Food & Drug Administration's Orange Book by the end of 2023 or the first achievement of at least$40 million in Keveyis annual net sales in 2023, (ii)$0.25 per CVR upon the first achievement of at least$40 million in Recorlev annual net sales in 2023, and (iii)$0.50 per CVR upon the first achievement of at least$80 million in Recorlev annual net sales in 2024. The minimum payment on the CVR per Strongbridge ordinary share is zero and the maximum payment is$1.00 in cash orXeris Biopharma Holdings common stock, or a combination of cash and additionalXeris Biopharma Holdings common stock atXeris Biopharma Holdings' sole election. The transaction is expected to close early in the fourth quarter of 2021, subject to the satisfaction of closing conditions.
In connection with this transaction, we have incurred, and will continue to
incur, transaction-related costs. For the six months ended
Intellectual Property and Regulatory Developments
OnJune 3, 2021 , The United States Patent and Trademark Office (USPTO) has issued to Strongbridge for RecorlevU.S. Patent No. 11,020,393 entitled, "Methods of Treating Disease with Levoketoconazole" which covers a method of treating Cushing's syndrome patients with RECORLEV® (levoketoconazole)who also take metformin for Type 2 diabetes. The term of theU.S. patent will expire onMarch 2, 2040 .
On
Loan Amendment
OnJuly 23, 2021 , Strongbridge , its subsidiary,Strongbridge U.S. Inc. , andAvenue Venture Opportunities Fund, L.P. ("Avenue") entered into an amendment (the "Loan Amendment") to the Term Loan Agreement, datedMay 19, 2020 (the "Loan Agreement"), among Strongbridge, certain of its subsidiaries and Avenue. Under the Loan Agreement, Strongbridge granted to Avenue an option to convert up to$3 million of the aggregate principal amount of any loans outstanding under the Loan Agreement into Strongbridge ordinary shares (the "Conversion Option"). The Loan Amendment amends the Conversion Option such that$10 million of the aggregate 18 Table of Contents principal amount of any loans outstanding under the Loan Agreement will automatically convert into Strongbridge ordinary shares immediately prior to the completion of the acquisition of Strongbridge by Xeris Pharmaceuticals, Inc. The conversion price remains unchanged at$2.24 per share.
COVID-19 (and related variants)
OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic, and onMarch 13, 2020 ,the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in the financial markets. Although we are seeing the number of COVID-19 cases decline in certain regions, other regions are experiencing a resurgence of COVID-19 cases. In addition, the emergence of COVID-19 variants, the variable and gradual process of vaccine distribution in some countries, and the concern over further waves of infections are causing continued unpredictability and uncertainty. While the COVID-19 pandemic did not have a material impact on our business, financial condition, or results of operations for the six months endedJune 30, 2021 , we have experienced operational business disruptions as a result of the pandemic. For example, most of our corporate employees are currently working remotely from home, and we did suspend all commercial air and train travel for business for a period of time. In addition, our field teams have had limited access to physicians. As ofJune 1, 2021 , we allowed commercial air and train travel for business and as ofJuly 1, 2021 , we have re-opened the office for those employeeswho choose to work from the office. We continue to monitor the impacts of COVID-19 (including the new COVID-19 variants) on the global economy and on our business operations. However, at this time, it is difficult to predict how long the potential operational impacts of the pandemic will last or to what degree further disruption might impact our operations and financial results. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition, as well as our ability to execute our business strategies and initiatives in their respective expected time frames.
Financial Operations Overview
The following discussion sets forth certain components of our statements of operations as well as factors that impact those items.
Product Sales, net
We sell Keveyis to one specialty pharmacy provider (the "Customer"),who is the exclusive specialty pharmacy for Keveyis inthe United States . The Customer subsequently dispenses Keveyis to patients, most of whom are covered by payors that may provide for government-mandated or privately negotiated rebates with respect to the purchase of Keveyis. Revenues from sales of Keveyis are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and that result from rebates, co-pay assistance and other allowances that are offered by us and the patients' payors. Cost of Sales
Cost of sales includes third-party acquisition costs, third-party warehousing and product distribution charges.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include personnel costs, costs for
outside professional services and other allocated expenses. Personnel costs
consist of salaries, bonuses, benefits, travel and stock-based compensation.
Outside professional services consist of legal, accounting and audit services,
commercial evaluation and strategy services, sales, market access, marketing,
investor relations, public relations, recruiting and other consulting services.
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Research and Development Expenses
We expense all research and development costs as incurred. Our research and development expenses consist primarily of costs incurred in connection with the development of our product candidates, including:
? personnel-related costs, such as salaries, bonuses, benefits, travel and other
related expenses, including stock-based compensation;
expenses incurred under our agreements with contract research organizations
(CROs), clinical sites, contract laboratories, medical institutions and
consultants that plan and conduct our preclinical studies and clinical trials.
? We recognize costs for each grant project, preclinical study or clinical trial
that we conduct based on our evaluation of the progress to completion,
including the use of information and data provided to us by our external
research and development vendors and clinical sites;
? costs associated with regulatory filings; and
? costs of acquiring preclinical study and clinical trial materials, and costs
associated with formulation, process development and statistical analysis.
We do not allocate personnel-related research and development costs, including stock-based compensation or other indirect costs, to specific programs, as they are deployed across multiple projects under development.
We do track our external research and development cost by project, and currently over 99% of the costs are related to our development of Recorlev.
Amortization of Intangible Asset
Amortization of intangible asset relates to the amortization of our product rights to Keveyis. This intangible asset is being amortized over an eight-year period using the straight-line method.
Interest Expense
Interest expense represents interest paid to our lender, amortization of our debt discount, and issuance costs associated with loan and security agreements.
Other Expense, Net
Other expense, net, consists of unrealized loss or gain on the remeasurement of the fair value of the warrant liability, interest income generated from our cash, cash equivalents and marketable securities, foreign exchange gains and losses and gains and losses on investments.
Critical Accounting Policies and Significant Judgments and Estimates
This management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other 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. Actual results may differ from these estimates under different assumptions or conditions.
We believe there have been no significant changes in our critical accounting policies and significant judgments and estimates as discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Annual Report.
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Results of Operations
Comparison of the Three and Six Months Ended
The following table sets forth our results of operations for the three and six
months ended
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 $ 2021 2020 $
(in thousands) (in thousands)Revenues:
Net product sales$ 10,042 $ 7,760 $ 2,282
Cost and operating expenses: Cost of sales (excluding amortization of intangible asset) 467 393 74 878 1,362 (484) Selling, general and administrative 15,988 9,638 6,350 26,934 20,041 6,893 Research and development 5,397 6,152 (755) 11,235 13,704 (2,469)
Amortization of intangible asset 1,255 1,255 - 2,511 2,511 - Total cost and expenses 23,107 17,438 5,669 41,558 37,618 3,940 Operating loss (13,065) (9,678) (3,387) (23,134) (23,184) 50 Other expense, net (175) (7,594) 7,419 (1,920) (6,786) 4,866 Loss before income taxes (13,240) (17,272) 4,032 (25,054) (29,970) 4,916 Income tax expense (1) - (1)
(1) - (1)
Net loss $ (13,241) $ (17,272) $ 4,031 $ (25,055) $ (29,970) $ 4,915 Revenues and cost of sales
Net product sales were$10.0 million for the three months endedJune 30, 2021 , an increase of$2.3 million compared to the three months endedJune 30, 2020 . Product sales from Keveyis increased primarily due to an increase in the number of patients on Keveyis and an increase in the price of Keveyis. Of the total increase in product sales,$1.9 million was due to the increase in the number of patients on Keveyis and$0.8 million from an increase in the price of Keveyis, which were offset by an increase of$0.4 million in our sales allowances. Cost of sales increased due to the increase in sales volume for the three months endedJune 30, 2021 . Net product sales were$18.4 million for the six months endedJune 30, 2021 , an increase of$4.0 million compared to the six months endedJune 30, 2020 . Product sales from Keveyis increased primarily due to an increase in the number of patients on Keveyis and an increase in the price of Keveyis. Of the total increase in product sales,$2.9 million was due to the increase in the number of patients on Keveyis and$1.4 million from an increase in the price of Keveyis, which were offset by an increase of$0.3 million in our sales allowances. Cost of sales decreased due to changes in the assumptions underlying our purchase forecast which affects the allocation of cost between the purchase price of our inventory and the supply agreement. As a result of our ongoing efforts to evaluate and update our sales forecast for Keveyis based on actual sales, we reduced our inventory purchase forecast to better align with this updated sales forecast and inventory on-hand. This adjustment to the purchase forecast has resulted in a lower amount of the cost of each inventory batch being allocated to inventory and correspondingly a higher amount of the cost of each inventory batch being allocated to reduce the supply agreement liability. As a result of the reduction in the allocated cost to inventory, our cost of sales has correspondingly decreased on a per unit level. 21 Table of Contents
Selling, General and Administrative Expenses
The following table summarizes our selling, general and administrative expenses
during the three and six months ended
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 $ 2021 2020 $
(in thousands) (in thousands)
Compensation and other personnel
costs $ 5,468 $ 3,669 $ 1,799 $ 10,674 $ 7,448 $ 3,226
Outside professional and
consulting services 8,775 4,516 4,259 12,623 9,701 2,922
Stock-based compensation expense 1,586 1,280 306 3,305 2,550 755
Facility costs 159 173 (14) 332 342 (10)
Total selling, general and
administrative expenses $ 15,988 $ 9,638 $ 6,350 $ 26,934 $ 20,041 $ 6,893 Selling, general and administrative expenses were$16.0 million for the three months endedJune 30, 2021 , an increase of$6.4 million compared to the three months endedJune 30, 2020 . The increase is primarily due to an increase in compensation costs and an increase in our outside professional fees, mostly due to investment banking fees and legal expenses related to our proposed business combination transaction with Xeris. Selling, general and administrative expenses were$26.9 million for the six months endedJune 30, 2021 , an increase of$6.9 million compared to the six months endedJune 30, 2020 . The increase is primarily due to an increase in compensation costs and an increase in our outside professional fees, mostly due to investment banking fees and legal expenses related to our proposed business combination transaction with Xeris.
Research and Development Expenses
The following table summarizes our research and development expenses during the
three and six months ended
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 $ 2021 2020 $
(in thousands) (in thousands)
Product development and supporting
activities $ 3,471 $ 4,195 $ (724) $ 7,343 $ 9,732 $ (2,389)
Compensation and other personnel
costs 1,430 1,464 (34) 2,838 2,998 (160)
Stock-based compensation expense 496 493 3 1,054 974 80
Total research and development
expenses $ 5,397 $ 6,152 $ (755) $ 11,235 $ 13,704 $ (2,469)
Research and development expenses were $5.4 million for the three months ended
June 30, 2021 , a decrease of $0.8 million compared to the three months ended
June 30, 2020 . The decrease was primarily due to decreases in the costs
associated with our LOGICS and OPTICS trials during the three months ended June
30, 2021 .
Research and development expenses were $11.2 million for the six months ended
June 30, 2021 , a decrease of $2.5 million compared to the six months ended June
30, 2020 . The decrease was primarily due to decreases in the costs associated
with our LOGICS and OPTICS trials partially offset by increases in regulatory
costs associated with our NDA submission during the six months ended June 30,
2021 .
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Amortization of Intangible Asset
Amortization of intangible asset was
Other Expense, Net
The following table summarizes our other income, net, during the three and six
months ended
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 $ 2021 2020 $
(in thousands) (in thousands)
Unrealized gain (loss) on fair
value of warrants $ 680 $ (7,367) 8,047 $ (95) $ (6,787) $ 6,692
Interest expense (810) (253) (557) (1,592) (253) (1,339)
Other (expense) income, net (45) 26 (71) (233) 254 (487) Total other expense, net$ (175) $ (7,594) $ 7,419 $ (1,920) $ (6,786) $ 4,866 Total other expense, net was$0.2 million in for the three months endedJune 30, 2021 , compared to other expense, net of$7.6 million in 2020. This$7.4 million decrease was largely due to the net$8.0 million impact from the revaluation of the fair value of our warrant liability mostly due to the change in our volatility and stock price and an additional$0.6 million in interest expense on our Term Loan Agreement which we entered into inMay 2020 . Total other expense, net was$1.9 million in for the six months endedJune 30, 2021 , compared to other expense, net of$6.8 million in 2020. This$4.9 million decrease was largely due to the net$6.7 million impact from the revaluation of the fair value of our warrant liability mostly due to the change in our volatility and stock price and an additional$1.3 million in interest expense on our Term Loan Agreement which we entered into inMay 2020 .
Income Tax
We recorded income tax expense of$1,000 for the three and six months endedJune 30, 2021 and did not record an expense for the three and six months endedJune 30, 2020 Cash Flows
Comparison for the Six Months Ended
Six Months Ended
June 30
2021 2020
(in thousands)
Net cash (used in) provided by:
Operating activities $ (23,220) $ (27,375)
Investing activities (10) 21,122
Financing activities (518) 9,130
Net (decrease) increase in cash and cash equivalents
Operating Activities Net cash used in operating activities was$23.2 million for the six months endedJune 30, 2021 , compared to$27.4 million for the six months endedJune 30, 2020 . The decrease in net cash used in operating activities resulted primarily from an increase of$4.0 million in net revenues. 23 Table of Contents Investing Activities
Net cash used in investing activities was insignificant for the six months endedJune 30, 2021 compared to proceeds of$21.1 million for the six months endedJune 30, 2020 . The decrease is due to the sale of marketable securities during the 2020 period. We did not hold marketable securities during the 2021 period.
Financing Activities
The change in net cash used in financing activities was due to payments related to tax withholding of net share settled equity awards offset by stock option exercises and sales of shares under our ATM facility. In addition, the prior period had$9.5 million provided by financing activities due to the proceeds received under our Term Loan Agreement withAvenue Venture Opportunities Fund L.P.
Liquidity and Capital Resources
We continuously and critically review our liquidity and anticipated capital requirements in light of our clinical trial activities and the significant uncertainty created by the COVID-19 global pandemic and the recent emergence of COVID-19 variants.
We believe that our cash and cash equivalents of$63.8 million atJune 30, 2021 , will be sufficient to allow us to fund planned operations for at least 12 months beyond the issuance date of the unaudited consolidated financial statements. Cash used to fund operating expenses is affected by the timing of when we make payments to our vendors, as reflected in the change in our outstanding accounts payable and accrued expenses set forth in the consolidated financial statements, included in this Quarterly Report.
Our future funding requirements will depend on many factors, including the following:
? the amount of revenue that we receive from sales of Keveyis;
? the cost and timing of establishing sales, marketing, distribution and
administrative capabilities;
the scope, rate of progress, results and cost of our clinical trials testing
? and other related activities for Recorlev and veldoreotide and our ability to
obtain the necessary regulatory approval of our Recorlev NDA;
? the number and characteristics of product candidates that we pursue, including
any additional product candidates we may in-license or acquire;
? the cost of filing, prosecuting, defending and enforcing our patent claims and
other intellectual property rights;
the cost of defending potential intellectual property disputes, including
? patent infringement actions brought by third parties against us or our product
candidates;
? the cost, timing and outcomes of regulatory approvals, including product
labeling;
? adequate reimbursement from payors for Keveyis and Recorlev (if approved) on a
timely basis;
the terms and timing of any collaborative, licensing and other arrangements
? that we may establish, including any required milestone and royalty payments
thereunder;
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? the emergence of competing technologies and their achieving commercial success
before we do or other adverse market developments;
? the cost, timing and outcome of our anticipated business combination
transaction with Xeris Pharmaceuticals, Inc.; and
? any extended impact of COVID-19 (and related variants).
We may never achieve profitability, and unless and until we do, we will continue to need to raise additional capital. We plan to continue to fund our operations and capital funding needs through equity or debt financing along with revenues from Keveyis. There can be no assurances, however, that additional funding will be available on terms acceptable to us.
Long-term Debt
OnMay 19, 2020 , we entered into the$30 million Loan Agreement withAvenue Venture Opportunities Fund L.P. ("Avenue"), as administrative agent and collateral agent, and the lenders named therein and from time to time a party thereto (the "Lenders"). Pursuant to the terms of the Loan Agreement, our wholly-owned subsidiary,Strongbridge U.S. Inc. , borrowed$10 million from the Lenders at closing. As a result of achieving positive top-line data for Recorlev in our Phase 3 LOGICS clinical trial inSeptember 2020 , we were eligible to and did borrow an additional$10 million under the Loan Agreement onDecember 30, 2020 . The remaining$10 million tranche will become available to us betweenOctober 1, 2021 , andMarch 31, 2022 , if we achieve FDA approval of Recorlev and subject to Avenue's investment committee approval.
At-The-Market Facility
We entered into an equity distribution agreement withJefferies LLC ("Jefferies") onMarch 25, 2021 , pursuant to which we may sell, at our option, from time to time, up to an aggregate of$50 million of our ordinary shares through Jefferies, as sales agent. We will pay Jefferies a commission equal to 3% of the gross proceeds from the sale of our ordinary shares under this at-the-market ("ATM") facility. Pursuant to the terms of the equity distribution agreement, we reimbursed Jefferies for certain out-of-pocket expenses, including the fees and disbursements of counsel to Jefferies, incurred in connection with establishing the ATM facility and have provided Jefferies with customary indemnification rights. For the period endedJune 30, 2021 , we did not sell any shares under this agreement.
Off-Balance Sheet Arrangements
We do not have variable interests in variable interest entities or any off-balance sheet arrangements.
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