SUPERNUS PHARMACEUTICALS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and the financial condition ofSupernus Pharmaceuticals, Inc. (the Company, we, us, or our). The interim condensed consolidated financial statements included in this report and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and notes thereto for the year endedDecember 31, 2020 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K, filed with theSecurities and Exchange Commission onMarch 8, 2021 . In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. These forward-looking statements may include declarations regarding the Company's belief or current expectations of management, such as statements including the words "budgeted," "anticipate," "project," "forecast," "estimate," "expect," "may," "believe," "potential," and similar statements or expressions, which are intended to be among the statements that are forward-looking statements, as such statements reflect the reality of risk and uncertainty that is inherent in our business. Actual results may differ materially from those expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of the date this report was filed with theSecurities and Exchange Commission . Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under the "Risk Factors" section of our Annual Report on Form 10-K and elsewhere in this report as well as in other reports and documents we file with theSecurities and Exchange Commission from time to time. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. Solely for convenience, in this Quarterly Report on Form 10-Q, the trade names are referred to without the TM symbols and the trademark registrations are referred to without the circled R, but such references should not be construed as any indicator that the Company will not assert, to the fullest extent under applicable law, our rights thereto. 27
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Overview
We are a biopharmaceutical company focused on developing and commercializing products for the treatment of central nervous system (CNS) diseases. Our diverse neuroscience portfolio includes approved treatments for epilepsy, migraine, attention-deficit hyperactivity disorder (ADHD), hypomobility in Parkinson's Disease (PD), cervical dystonia, and chronic sialorrhea. We are also developing a broad range of novel CNS product candidates including new potential treatments for ADHD, hypomobility in PD, epilepsy, depression, and rare CNS disorders. OnOctober 10, 2021 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Adamas Pharmaceuticals, Inc. ("Adamas") andSupernus Reef, Inc. , aDelaware corporation and a wholly owned subsidiary of the Company ("Purchaser"). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, the Company has agreed to cause Purchaser to commence a tender offer (the "Offer") to purchase all of the outstanding shares of common stock of Adamas, par value$0.001 per share (the "Shares" and each, a "Share"), at an offer price of (i)$8.10 per Share, in cash, less any applicable withholding taxes and without interest (the "Cash Amount"; an aggregate of approximately$400 million ), plus (ii) two contingent value rights per Share (each, a "CVR"; an aggregate of approximately$50 million ), which represents the right to receive$0.50 per CVR, which CVRs will be governed by the terms of a contingent value rights agreement to be entered into between the Company and a rights agent mutually agreeable to the Company and Adamas, in cash, less any applicable withholding taxes and without interest (the Cash Amount plus two CVRs, collectively, or any higher amount per Share paid pursuant to the Offer, the "Offer Price"). Following the consummation of the Offer and subject to the terms and conditions of the Merger Agreement, Purchaser will be merged with and into Adamas (the "Merger") pursuant to Section 251(h) of the General Corporation Law of theState of Delaware (the "DGCL"), with Adamas continuing as the surviving corporation in the Merger and a wholly owned subsidiary of the Company. OnOctober 25, 2021 , the Purchaser commenced the Offer. At or prior to the time at which Purchaser accepts the Shares tendered in the Offer for purchase, the Company and a rights agent mutually agreeable to the Company and Adamas shall enter into a CVR Agreement to allow for the payment of the milestones pursuant to each CVR. Subject to the terms of the CVR Agreement, one CVR issued in respect of a Share shall become payable upon the first occurrence of achievement of aggregate worldwide net sales of a specified product in excess of$150 million during any consecutive 12-month period ending on or beforeDecember 31, 2024 . Subject to the terms of the CVR Agreement, the second CVR issued in respect of each Share shall become payable upon the first occurrence of aggregate worldwide net sales of a specified product in excess of$225 million during any consecutive 12-month period ending on or beforeDecember 31, 2025 . Each milestone with respect to a CVR may only be achieved one time. The maximum amount payable with respect to the CVRs issued in respect to each Share is$1.00 . The transaction is expected to close in late fourth quarter 2021 or in early first quarter 2022 and is subject to customary conditions. Adamas is a commercial-stage pharmaceutical company with a portfolio of therapies to address a range of neurological diseases. Adamas' commercialized medicine, GOCOVRI® (amantadine) extended-release capsules, is the first and only FDA-approved medication indicated for the treatment of both "off" episodes and dyskinesia in patients with Parkinson's disease receiving levodopa-based therapy. InApril 2021 , theU.S. Food and Drug Administration (FDA) approved Qelbree (SPN-812) for the treatment of ADHD in pediatric patients 6 to 17 years of age. InMay 2021 , we launched Qelbree in theU.S. OnSeptember 2, 2021 , the FDA has acknowledged it has received the supplemental new drug application (sNDA) for SPN-812 for adult patients with ADHD and assigned a user fee goal date (PDUFA date) ofApril 29, 2022 . OnApril 28, 2020 , we entered into a Sale and Purchase Agreement withUS WorldMeds Partners, LLC to acquire the CNS portfolio ofUSWM Enterprises, LLC (USWM Enterprises ) (USWM Acquisition). With the acquisition, completed onJune 9, 2020 , the Company added three established commercial products and a product candidate in late-stage development to its portfolio. These commercial products, APOKYN, XADAGO, and MYOBLOC, are primarily for the treatment of PD. In the second quarter of 2021 and within one year from the Closing Date, the Company finalized its accounting for the business combination, including the purchase price allocation. OnApril 21, 2020 , we entered into a Development and Option Agreement (Development Agreement) withNavitor Pharmaceuticals, Inc. (Navitor Inc. ) and also acquired an ownership position inNavitor Inc. Under the terms of the Development Agreement, the Company andNavitor Inc. will jointly conduct a Phase II clinical program for NV-5138 (SPN-820) in treatment resistant depression (TRD). InMarch 2021 ,Navitor Inc. underwent a legal restructuring wherebyNavitor Inc. became a wholly owned subsidiary of a newly formed limited liability company,Navitor Pharmaceuticals, LLC (Navitor LLC ) (Navitor Restructuring). 28
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We have a portfolio of commercial products and product candidates. Commercial Products •Trokendi XR® (topiramate) is the first once-daily extended release topiramate product indicated for the treatment of epilepsy inthe United States (U.S.) market. It is also indicated for the prophylaxis of migraine headache. •Oxtellar XR® (oxcarbazepine) is indicated as therapy for partial onset seizures in adults and children 6 years to 17 years of age and is the first once-daily extended-release oxcarbazepine product indicated for the treatment of epilepsy in theU.S. •QelbreeTM (viloxazine extended-release capsules) is a novel non-stimulant product indicated for the treatment of ADHD in pediatric patients 6 to 17 years of age. •APOKYN® (apomorphine hydrochloride injection) is a product indicated for the acute, intermittent treatment of hypomobility or "off" episodes ("end-of-dose wearing off" and unpredictable "on-off" episodes) in patients with advanced PD. •MYOBLOC® (rimabotulinumtoxinB) is a product indicated for the treatment of cervical dystonia and sialorrhea in adults, and it is the only Type B toxin available on the market. •XADAGO® (safinamide) is a once-daily product indicated as adjunctive treatment to levodopa/carbidopa in patients with PD experiencing "off" episodes. Product Candidates •Qelbree (viloxazine, extended-release capsules; SPN-812) is a novel non-stimulant product candidate for the treatment of ADHD in adult patients. •SPN-830 (Apomorphine Infusion Pump) is a late-stage drug/device combination product candidate for the continuous prevention of "off" episodes in PD. •SPN-817 is a novel product candidate for the treatment of severe epilepsy. •SPN-820 is a first-in-class product candidate for TRD. It is an orally active small molecule that directly activates brain mechanistic target of rapamycin complex 1 (mTORC1). COVID-19 Impact While the impact of the ongoing COVID-19 pandemic did not have a material adverse effect on our financial position or results of operations for the three and nine months endedSeptember 30, 2021 , we continue to closely monitor the events and circumstances surrounding the COVID-19 pandemic and its impact on all aspects of our business operations. Since the situation surrounding the COVID-19 pandemic remains fluid and the duration uncertain, the long-term nature and extent of the impacts of the pandemic on our business operations and financial position cannot be reasonably estimated at this time. See "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for additional information on risk factors that could impact our business and our results. Operational Highlights Qelbree Launch Update •Qelbree's growth has accelerated with the arrival of the "back to school" season in the third quarter of 2021, reaching total monthly prescriptions in September of 7,132, an increase of 37% compared to August and up 118% compared to the monthly average during the previous three months period. The latest weekly prescriptions data shows 2,248 prescriptions, an increase of 51% compared to the weekly average over the prior 12-week period. •In addition, Qelbree's base of prescribers' has grown by 340% during the third quarter of 2021 compared to the second quarter of 2021, with more than 3,470 physicians prescribing the product. 29
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Product Pipeline Update Qelbree (viloxazine, extended-release capsules) - Novel non-stimulant for the treatment of ADHD in adults •TheU.S. Food and Drug Administration (FDA) acknowledged it has received the supplemental new drug application (sNDA) for Qelbree for the treatment of ADHD in adult patients. The sNDA has a user fee goal date (PDUFA date) ofApril 29, 2022 . SPN-830 (apomorphine infusion pump) - Continuous treatment of motor fluctuations ("on-off" episodes) in Parkinson's disease (PD) •We expect to resubmit the SPN-830 NDA to the FDA inNovember 2021 . SPN-820 - Novel first-in-class activator of mTORC1 •An Investigational New Drug (IND) application was submitted to the FDA inSeptember 2021 . Consequently, the randomized Phase II clinical study in treatment-resistant depression is on track and expected to start by the end of 2021. SPN-817 - A novel product candidate for the treatment of epilepsy •A randomized Phase II clinical study for the treatment of focal seizures is expected to start in the second half of 2022. SPN-443 and SPN-446 - Two novel CNS drug candidates nominated for development •Our internal research and development discovery program generated several new chemical entities including SPN-443 and SPN-446 that were nominated for development across various CNS indications including ADHD. Critical Accounting Policies and the Use of Estimates Our condensed consolidated financial statements are prepared in accordance withU.S. generally accepted accounting principles (U.S. GAAP), requiring us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and other related disclosures. Some judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. We believe the judgments, estimates, and assumptions associated with the following critical accounting policies have the greatest potential impact on our condensed consolidated financial statements: •Revenue recognition; •Business combination accounting and valuation of acquired assets, including goodwill and intangible assets; and •Income taxes. There were no changes to the disclosures with respect to the above listed critical accounting policies in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . A summary of our significant accounting policies appears in the notes to our audited consolidated financial statements included in the Annual Report on Form 10-K for the year endedDecember 31, 2020 . 30
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Results of Operations Comparison of the Three and Nine Months endedSeptember 30, 2021 and 2020 Revenues Revenues consist primarily of net product sales of our commercial products in theU.S. , supplemented by royalty revenues from our collaborative licensing arrangements. The following table provides information regarding our revenues during the three and nine months endedSeptember 30, 2021 and 2020 (dollars in thousands): Three Months ended Change Nine Months ended Change September 30, September 30, 2021 2020 Amount Percent 2021 2020 Amount Percent Net product sales Trokendi XR$ 80,935 $ 82,906 $ (1,971) (2)%$ 231,531 $ 241,131 $ (9,600) (4)% Oxtellar XR 29,728 28,364 1,364 5% 82,120 75,983 6,137 8% APOKYN 24,627 34,482 (9,855) (29)% 73,338 43,082 30,256 70% MYOBLOC (1) 4,596 4,050 546 13% 13,477 5,279 8,198 ** XADAGO 3,276 2,331 945 41% 9,390 3,132 6,258 ** Qelbree 2,370 - 2,370 ** 2,685 - 2,685 ** Total net product sales$ 145,532 $ 152,133 $ (6,601) (4)%$ 412,541 $ 368,607 $ 43,934 12% Royalty revenues 2,932 3,002 (70) (2)% 8,184 8,233 (49) ** Total revenues$ 148,464 $ 155,135 $ (6,671) (4)%$ 420,725 $ 376,840 $ 43,885 12%
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(1) InApril 2021 , we notified theEuropean Medicines Agency that we will cease the marketing of rimabotulinumtoxinB in European countries where it has been marketed as NeuroBloc. The$6.6 million and 4% decrease in net product sales for the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to a$9.9 million and$2.0 million decrease in net product sales of APOKYN and Trokendi XR, respectively. Offsetting these decreases were increases primarily from net product sales of Oxtellar XR and Qelbree, which was launched in second quarter of 2021. The$43.9 million and 12% increase in net product sales for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to a$44.7 million increase in net product sales of the acquired commercial products,$6.1 million increase in net product sales of Oxtellar XR and net product sales from the recently launched Qelbree. Partially offsetting this increase was$9.6 million decrease in net product sales of Trokendi XR for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. Trokendi XR net product sales decreased by 2% to$80.9 million for the three months endedSeptember 30, 2021 as compared to the same period in 2020. Trokendi XR net product sales decreased by 4% to$231.5 million for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. This decrease was attributable to a decline in unit demand partially offset by the favorable impact of the price increase taken inJanuary 2021 and favorable improvements in sales deductions. Oxtellar XR net product sales increased by 5% to$29.7 million for the three months endedSeptember 30, 2021 as compared to the same period in 2020. Oxtellar XR net product sales increased by 8% to$82.1 million for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. This increase was primarily attributable to the favorable impact of both unit demand and a price increase inJanuary 2021 . 31
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Net product sales of the acquired commercial products decreased to$32.5 million from$40.9 million for the three months endedSeptember 30, 2021 as compared to the same period in 2020. The decrease was primarily due to a decrease in net product sales of APOKYN. APOKYN net product sales decreased by 29% to$24.6 million for the three months endedSeptember 30, 2021 as compared to the same period in 2020. This decrease was due partially to higher level of channel inventory as well as increased market competition. Net product sales of the acquired commercial products increased to$96.2 million from$51.5 million for the nine months endedSeptember 30, 2021 . The increase for the nine month period was due primarily to the timing of the USWM Acquisition, which was completed onJune 9, 2020 . Sales Deductions and Related Accruals We record accrued product rebates and accrued product returns as current liabilities in Accrued product returns and rebates, on our condensed consolidated balance sheets. We record sales discounts as a reduction against Accounts receivable on the condensed consolidated balance sheets. Both amounts are generally affected by changes in gross product sales, changes in the provision for net product sales deductions, and the timing of payments/credits. The following table provides a summary of activity with respect to sales deductions and related accruals during the periods indicated (dollars in thousands): Accrued Product Returns and Rebates Reduction to Accounts Product Product Receivable for Rebates Returns Sales Discounts Total Balance at December 31, 2020$ 96,589 $ 29,603 $ 11,404$ 137,596
Provision
Provision for current year sales 275,352 9,945 51,472 336,769 Adjustments relating to prior year sales 1,334 (1,525) 19 (172) Total provision$ 276,686 $ 8,420 $ 51,491$ 336,597 Less: Actual payments/credits (274,639) (4,611) (51,677) (330,927) Balance at September 30, 2021$ 98,636 $ 33,412 $ 11,218$ 143,266 Balance at December 31, 2019$ 88,811 $ 18,818 $ 11,013$ 118,642 USWM Acquisition liabilities assumed 5,112 3,072 293 8,477
Provision
Provision for current year sales 254,338 8,709 49,987 313,034 Adjustments relating to prior year sales 3,633 9,008 147 12,788 Total provision$ 257,971 $ 17,717 $ 50,134$ 325,822 Less: Actual payments/credits (241,351) (13,177) (50,342) (304,870) Balance at September 30, 2020$ 110,543 $ 26,430 $ 11,098$ 148,071 Accrued Product Returns and Rebates Balances The accrued product rebates balance decreased from$110.5 million as ofSeptember 30, 2020 to$98.6 million as ofSeptember 30, 2021 due to the timing of payments which more than offsets the increase in the provision. The accrued product returns balance increased from$26.4 million as ofSeptember 30, 2020 to$33.4 million as ofSeptember 30, 2021 due to timing of related return activity offset by a decrease in the provision for product returns. Provisions for Returns and Rebates The provision for product rebates increased to$276.7 million for the nine months endedSeptember 30, 2021 compared to$258.0 million for the same period in prior year. This increase was primarily attributable to greater utilization of our patient co-payment programs, as well as higher per patient payments under both Medicaid and commercial managed care programs. The provision for product returns of$8.4 million for the nine months endedSeptember 30, 2021 was lower compared to$17.7 million for the nine months endedSeptember 30, 2020 . This decrease was primarily due to the unfavorable actual returns experienced in the first quarter of 2020 for discontinued Trokendi XR commercial blister pack configurations, for which all production and distribution ceased in 2017. 32
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Royalty Revenues Royalty revenues were$2.9 million and$3.0 million for the three months endedSeptember 30, 2021 and 2020, respectively. Royalty revenues were$8.2 million for both the nine months endedSeptember 30, 2021 and 2020, respectively. Royalty revenues include a royalty from net product sales of Mydayis, a product ofTakeda Pharmaceuticals Company Ltd. , and noncash royalty revenue pursuant to our agreement withHealthcare Royalty Partners III, L.P. (HC Royalty). HC Royalty receives royalty payments from United Therapeutics Corporation (United Therapeutics) based on net product sales of United Therapeutics' product Orenitram. Cost of Goods Sold Cost of goods sold was$18.1 million and$21.4 million for the three months endedSeptember 30, 2021 and 2020, respectively. Cost of goods sold was$58.1 million and$33.9 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Royalty payments associated with the acquired commercial products, APOKYN and XADAGO, made up the majority of the cost of goods sold. The decline in cost of goods sold for the three months period was primarily due to lower royalties as a result of decreased APOKYN net product sales, partially offset by additional costs of$1.3 million for rejected MYOBLOC inventory lots in connection with the minimum purchase commitments. The increase in cost of goods sold for the nine months period was primarily due to higher cost recorded in 2021 for the acquired commercial products which is attributable to the timing of the USWM Acquisition that was completed onJune 9, 2020 , costs of$7.0 million for rejected MYOBLOC inventory lots, partially offset by lower royalties in the current year. Refer to Part I, Item 1, Unaudited Condensed Financial Statements, Note 15, Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements for discussion regarding annual minimum purchase quantity requirements of MYOBLOC. Also included in cost of goods sold for the three and nine months endedSeptember 30, 2021 are de minimis costs for Qelbree inventory sold. We manufacture Qelbree inventory for commercial sale and for use in our samples program. Manufacturing costs related to Qelbree inventory build-up incurred before FDA approval and prior to first quarter of 2020, when the Company began capitalizing pre-launch inventory, were expensed to research and development expense. The manufactured Qelbree inventory prior to FDA approval consisted of$8.6 million raw materials inventory, which was expensed as research and development expense in 2019. Therefore, cost of goods sold for Qelbree for the three and nine months endedSeptember 30, 2021 does not include raw material cost that was previously expensed. We expect our cost of goods sold to increase in the future as this inventory is sold, which will have a negative impact on our operating earnings. The time period over which reduced-cost Qelbree inventory is consumed will depend on a number of factors, including the amount of future Qelbree sales, the ultimate use of this inventory in either commercial sales, clinical development or other research activities, and the ability to utilize inventory prior to its expiration date. At this time, we expect to sell as commercial inventory or consume as samples substantially all of the reduced-cost inventory by the first half of 2022. 33
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Research and Development Expenses
The following table provides information regarding our research and development
(R&D) expenses during the periods indicated (dollars in thousands):
Three Months ended Nine Months ended
September 30, Change September 30, Change
2021 2020 Amount Percent 2021 2020 Amount Percent
Direct Project Costs (1)
SPN-812 $ 2,570 $ 5,048 $ (2,478) (49)% $ 7,658 $ 16,752 $ (9,094) (54)%
SPN-830 322 577 (255) (44)% 560 865 (305) (35)%
SPN-820 2,527 3,537 (1,010) (29)% 7,642 4,402 3,240 74%
SPN-860 2,481 243 2,238 ** 5,096 277 4,819 **
Others 1,967 1,360 607 45% 6,762 7,694 (932) (12)%
9,867 10,765 (898) (8)% 27,718 29,990 (2,272) (8)%
Other R&D expense - - - ** 15,000 10,000 5,000 50%
Indirect Project Costs (1)
Share-based compensation 615 777 (162) (21)% 1,909 2,276 (367) (16)%
Other indirect overhead 9,172 5,297 3,875 73% 24,762 15,757 9,005 57%
9,787 6,074 3,713 61% 26,671 18,033 8,638 48%
Research and development
expense $ 19,654 $ 16,839 $ 2,815 17% $ 69,389 $ 58,023 $ 11,366 20%
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(1) Direct costs, which include personnel costs and related benefits, are recorded on a project-by-project basis. Many of our R&D costs are not attributable to any individual project because we share resources across several development projects. Indirect costs that support a number of our R&D activities are recorded in the aggregate, including stock-based compensation. R&D expenses were$19.7 million and$16.8 million for the three months endedSeptember 30, 2021 and 2020, respectively. The$2.8 million increase was primarily due to higher regulatory activities related to the acquired products from the USWM Acquisition and Qelbree, increase in costs associated with MYOBLOC post-marketing commitment studies (SPN-860), offset by reduced spending on SPN-812 (Qelbree) Phase III programs. Qelbree for treatment of ADHD in pediatric patients was launched inMay 2021 and the NDA for Qelbree for adults was submitted in the first half of 2021. R&D expenses were$69.4 million and$58.0 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The$11.4 million increase was primarily due to the$15 million write-down of the investment inNavitor LLC ; increased spending on SPN-820, which has advanced to a Phase II clinical program, and on MYOBLOC post-marketing commitment studies; and higher regulatory activities related to the acquired products. These increases are partially offset by reduced spending on SPN-812 (Qelbree) Phase III programs and the$10 million option fee paid in 2020. Refer to Part I, Item 1, Unaudited Condensed Consolidated Financial Statements, Note 5, Investments, in the Notes to the Condensed Consolidated Financial Statements, for further discussion of the write-down of the investment inNavitor LLC in 2021 and the option fee payment in 2020. 34
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Selling, General and Administrative Expenses
The following table provides information regarding our selling, general and
administrative (SG&A) expenses during the periods indicated (dollars in
thousands):
Three Months ended Nine Months ended
September 30, Change September 30, Change
2021 2020 Amount Percent 2021 2020 Amount Percent
Selling and marketing $ 50,704 $ 38,127 $ 12,577 33% $ 137,531 $ 95,005 $ 42,526 45%
General and administrative 21,328 16,333 4,995 31% 65,493 49,172 16,321 33%
Total $ 72,032 $ 54,460 $ 17,572 32% $ 203,024 $ 144,177 $ 58,847 41%
Selling and Marketing
Selling and marketing expenses were $50.7 million and $38.1 million for the
three months ended September 30, 2021 and 2020, respectively. Selling and
marketing expenses were $137.5 million and $95.0 million for the nine months
ended September 30, 2021 and 2020, respectively. The increases in both periods
were primarily attributable to increased marketing expenses and professional
consulting spend for the launch of Qelbree and the acquired commercial products
from the USWM Acquisition. In addition, employee-related expenses also increased
due to higher headcount to support the launch of Qelbree.
In addition, the reduced-cost Qelbree samples were included in selling and
marketing expenses for the three and nine months ended September 30, 2021 . At
full cost, these Qelbree samples would have resulted in $0.8 million and $4.0
million higher SG&A for the three months ended and nine months ended September
30, 2021 , respectively. At this time, we expect to sell as commercial inventory
or consume as samples the reduced-cost Qelbree inventory by the first half of
2022.
General and Administrative
General and administrative expenses were $21.3 million and $16.3 million for the
three months ended September 30, 2021 and 2020, respectively. General and
administrative expenses were $65.5 million and $49.2 million for the nine months
ended September 30, 2021 and 2020, respectively. The increases in both periods
were primarily attributable to increased professional consulting spend and
increased headcount to support the integration of the MDD operations.
Amortization of Intangible Assets
Amortization of intangible assets was $6.0 million and $6.1 million for the
three months ended September 30, 2021 and 2020, respectively. Amortization of
intangible assets was $18.0 million and $9.8 million for the nine months ended
September 30, 2021 and 2020, respectively. The increase for nine month period
was primarily due to timing of the USWM acquisition, which was completed on June
9, 2020 .
Contingent Consideration Expense (Gain)
The change in the fair value of the contingent consideration liabilities
associated with the USWM Acquisition was an expense of $0.1 million for the
three months ended September 30, 2021 and a gain of $7.7 million for the nine
months ended September 30, 2021 . The contingent consideration gain was primarily
due to the reduction of the sales based contingent consideration liabilities
recorded in the second quarter of 2021 offset by an increase in the estimated
fair value of regulatory and developmental milestones due to passage of time.
The Company assessed that these sales-based milestones will not be achieved
based on the revised net sales projections.
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Other Income (Expense)
Three Months ended Nine Months ended
September 30, Change September 30, Change
2021 2020 Amount Percent 2021 2020 Dollar Percent
Interest and other income,
net 2,281 2,659 (378) (14) % 8,682 15,913 $ (7,231) (45) %
Interest expense (5,033) (4,945) (88) 2 % (14,593) (14,430) $ (163) 1 %
Interest expense on
nonrecourse liability
related to sale of future
royalties (892) (1,143) 251 (22) % (2,896) (3,228) 332 (10) %
Total $ (3,644) $ (3,429) $ (215) 6 % $ (8,807) $ (1,745) $ (7,062) **
Other expense was $3.6 million and $3.4 million for the three months ended
September 30, 2021 and 2020, respectively. Other expense increased to $8.8
million for the nine months ended September 30, 2021 from $1.7 million for the
same period in 2020 primarily due to lower interest income on marketable
securities holdings in 2021 and gains generated from sales of our marketable
securities in 2020. Specifically, in the second quarter of 2020, we sold
securities at a gain of $3.6 million to finance the up-front cash payment of
approximately $300 million for the USWM Acquisition.
Income Tax Expense
Three Months ended Nine Months ended
September 30, Change September 30, Change
2021 2020 Dollar Percent 2021 2020 Dollar Percent
Income tax expense $ 7,398 $ 12,714 $ (5,316) (42) % $ 20,142 $ 32,773 $ (12,631) (39) %
Effective tax rate 25.5 % 24.1 % 28.3 % 25.4 %
Income tax expense was $7.4 million and $12.7 million for the three months ended
September 30, 2021 and 2020, respectively. Income tax expense was $20.1 million
and $32.8 million for the nine months ended September 30, 2021 and 2020
respectively. The decreases in both periods were mainly due to lower earnings
before taxes in 2021.
The effective income tax rate was 25.5% and 24.1% for the three months ended
September 30, 2021 and 2020, respectively. The effective income tax rate was
lower in 2020 primarily due to a greater research and development credit benefit
recognized in 2020. The effective income tax rate was 28.3% and 25.4% for the
nine months ended September 30, 2021 and 2020, respectively. The effective
income tax rate increase was mainly due to changes in the effective state tax
rates as a result of the transfer of workforce between legal entities in the
first quarter of 2021.
Liquidity and Capital Resources
We have financed our operations primarily with cash generated from product
sales, supplemented by cash generated by revenue from royalty and licensing
arrangements, as well as proceeds from the sale of equity and debt securities.
Continued cash generation is highly dependent on the continued commercial
success of our commercial products as well as the potential commercial success
of our product candidates, if approved by the FDA.
While we expect continued profitability in future years, we anticipate there may
be significant variability from year to year in the level of our profits
particularly due to the commercial launch of Qelbree in May 2021 , future
commercial launch of Qelbree for treatment of ADHD in adults and SPN-830
(Apomorphine Infusion Pump), if both are approved by the FDA, continued market
and payor pressures for our commercial products and the likely unfavorable
impact of the upcoming loss of exclusivity for Trokendi XR in January 2023 , or
sooner under certain conditions.
We believe our existing cash and cash equivalents, marketable securities, and
cash received from product sales will be sufficient to finance ongoing
operations, develop and launch our new products, and fund label expansions for
existing products. To continue to grow our business over the long-term, we plan
to commit substantial resources to: product development and clinical trials of
product candidates; business development, including acquisition and product
in-licensing; and supportive functions such as compliance, finance, management
of our intellectual property portfolio, information technology systems, and
personnel. In each case, spending would be commensurate with the growth and
needs of the business.
We may, from time to time, consider raising additional capital through: new
collaborative arrangements; strategic alliances; additional equity and/or debt
financings; or financing from other sources, especially in conjunction with
opportunistic business development initiatives. We will continue to actively
manage our capital structure and to consider all financing
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opportunities that could strengthen our long-term financial profile. Any such
capital raises may or may not be similar to transactions in which we have
engaged in the past. There can be no assurance that any such financing
opportunities will be available on acceptable terms, if at all.
Financial Condition
Cash and cash equivalents, marketable securities, and long term marketable
securities as of the periods presented below, are as follows (dollars in
thousands):
September 30, December 31, Change
2021 2020 Amount Percent
Cash and cash equivalents $ 215,281 $ 288,640 $ (73,359) (25)%
Marketable securities 228,571 133,893 94,678 71%
Long term marketable securities 405,479 350,359 55,120 16%
Total $ 849,331 $ 772,892 $ 76,439 10%
Total cash and cash equivalents, marketable securities and long term marketable
securities increased by $76.4 million in the first nine months of 2021,
primarily due to cash generated from ongoing operations.
As of September 30, 2021 and December 31, 2020 , the outstanding principal on our
0.625% Convertible Senior Notes Due 2023 (2023 Notes) was $402.5 million . No
2023 Notes have been converted as of September 30, 2021 . There were no changes
to the separate convertible note hedge transactions (collectively, the
Convertible Note Hedge Transactions) and separate warrant transactions (the
Warrant Transactions). Refer to Part I, Item 1, Unaudited Condensed Financial
Statements, Note 8, Convertible Senior Notes Due 2023, in the Notes to the
Condensed Consolidated Financial Statements, for further discussion of the 2023
Notes and our other indebtedness.
Summary of Cash Flows
The following table summarizes the major sources and uses of cash for the
periods set forth below (dollars in thousands):
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