VIVUS, INC. All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the year endedDecember 31, 2019 , are not necessarily indicative of the results that may be expected for future fiscal years. The following discussion and analysis should be read in conjunction with our historical financial statements and the notes to those financial statements that are included in Item 8 of Part II of this Form 10K.
Reverse Stock Split
OnSeptember 10, 2018 , we effected a one-for-10 reverse stock split of our common stock. As a result of the reverse stock split, every 10 shares of our pre-reverse split common stock issued and outstanding was combined and converted into one issued and outstanding share of post-reverse split common stock without any change in the par value of the shares. Accordingly, an amount equal to the par value of the decreased shares resulting from the reverse stock split was reclassified from "Common stock" to "Additional paid-in capital." No fractional shares were issued as a result of the reverse stock split; any fractional shares that would have resulted were rounded up to the nearest whole share. Proportionate voting rights and other rights of stockholders were not affected by the reverse stock split, other than as a result of the rounding up of potential fractional shares. All stock options, warrants and restricted stock units outstanding and common stock reserved for issuance under our equity incentive plans immediately prior to the reverse stock split were adjusted by dividing the number of affected shares of common stock by 10 and, where applicable, multiplying the exercise price by 10. All share and per share amounts related to common stock, stock options, warrants and restricted stock units have been restated for all periods to give retroactive effect to the reverse stock split.
Overview
VIVUS is a specialty pharmaceutical company with three approved therapies and one product candidate in clinical development. Qsymia® (phentermine and topiramate extended release) is approved by FDA for chronic weight management. InJune 2018 , we acquired theU.S. and Canadian commercial rights for PANCREAZE®/PANCREASE® MT (pancrelipase), which is indicated for the treatment of exocrine pancreatic insufficiency ("EPI") due to cystic fibrosis or other conditions. STENDRA® (avanafil) is approved by FDA for erectile dysfunction ("ED") and by the EC under the trade name SPEDRA, for the treatment of ED in the EU. VI-0106 (tacrolimus) is in clinical development and is being studied in patients with pulmonary arterial hypertension ("PAH"). 75 Table of Contents Business Strategy InApril 2018 , we addedJohn Amos as our new Chief Executive Officer and a member of the VIVUS Board of Directors. With the addition ofMr. Amos , we announced a turnaround plan of building a portfolio of cash flow generating assets to leverage our expertise in commercializing specialty pharmaceutical assets. InJune 2018 , we completed the first acquisition under this strategy as we acquired all product rights for PANCREAZE (pancrelipase) inthe United States and PANCREASE MT inCanada for$135.0 million in cash fromJanssen Pharmaceuticals . PANCREAZE/PANCREASE MT is a prescription medicine used to treat people who cannot digest food normally because their pancreas does not make enough enzymes due to cystic fibrosis or other conditions. We are supporting PANCREAZE in the U.S. market by leveraging our existing commercial infrastructure and 10 sales representatives in theU.S. focused on gastro-intestinal and cystic fibrosis physicians. In June of 2018, we issued$110.0 million of 10.375% 2024 Notes ("2024 Notes") with affiliates ofAthyrium Capital Management ("Athyrium"). Concurrent with the issuance of the 2024 Notes, we issued warrants to purchase 0.3 million shares of our common stock to the note holders. Additionally, concurrent with the issuance of the 2024 Notes, we repurchased Convertible Notes held by Athyrium, with a face value of$60.0 million , at a discount to par plus accrued interest. InOctober 2018 , we settled a purchase of approximately$8.6 million outstanding principal amount of our Convertible Notes for approximately$7.1 million plus accrued interest. InSeptember 2019 , we repurchased$48.6 million aggregate principal amount of our 2024 Notes plus prepayment premiums of an aggregate of$6.4 million . As ofDecember 31, 2019 , we had a total of$241.7 million of outstanding debt,$181.4 million of which is due inMay 2020 . We do not currently have sufficient cash and/or credit facilities in place to address the debt dueMay 2020 and thus are actively pursuing funding, which may come through public or private debt or equity financings, collaborations or other available financing sources. Such funding may not be available on acceptable terms, or at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If adequate funds are not available, we will not be able to continue our operations at our current level and may be required to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop on our own. We might also be required to delay, reduce the scope of or eliminate one or more of our commercialization or development programs or obtain funds through collaborations with others that are on unfavorable terms or restructure VIVUS in other ways that may not be favorable. Even if adequate funds become available, we may need to raise additional funds in the near future to finance operations and pursue development and commercial opportunities. Commercial Products Qsymia FDA approved Qsymia inJuly 2012 as an adjunct to a reduced calorie diet and increased physical activity for chronic weight management in adult obese or overweight patients in the presence of at least one weight related comorbidity, such as hypertension, type 2 diabetes mellitus or high cholesterol, or dyslipidemia. Qsymia incorporates a proprietary formulation combining low doses of the active ingredients from two approved drugs, phentermine and topiramate. Although the exact mechanism of action is unknown, Qsymia is believed to suppress appetite and increase satiety, or the feeling of being full, the two main mechanisms that impact eating behavior. We commercialize Qsymia in theU.S. through a specialty sales force who promote Qsymia to physicians. Our sales efforts are focused on maintaining a commercial presence with high volume prescribers of anti-obesity products. Our marketing efforts have focused on rolling out unique programs to encourage targeted prescribers to gain more experience with Qsymia with their obese or overweight patient population. In 2019, we introduced the Qsymia Advantage program to reach more of our intended patient population. The Qsymia Advantage program includes patient education resources and access to a home delivery in addition to new pricing. We continue to invest in digital media in order to amplify our messaging to information-seeking consumers. The digital messaging encourages those consumers most likely to take action to speak with their physicians about obesity treatment options. We believe our enhanced digital strategies deliver clear and compelling communications to potential patients. We utilize a patient savings plan to further drive Qsymia brand preference at the point of prescription and to encourage long-term use of the brand. 76 Table of Contents InSeptember 2017 , we entered into a license and commercialization agreement (the "Alvogen License Agreement") and a commercial supply agreement (the "Alvogen Supply Agreement") withAlvogen Malta Operations (ROW) Ltd ("Alvogen"). Under the terms of the Alvogen License Agreement, Alvogen is solely responsible for obtaining and maintaining regulatory approvals for all sales and marketing activities for Qsymia inSouth Korea . We received an upfront payment of$2.5 million inSeptember 2017 and a payment of$2.5 million inSeptember 2019 upon achieving marketing authorization. We are eligible to receive additional payments upon Alvogen achieving commercial launch and reaching a sales milestone. Additionally, we will receive a royalty on Alvogen's Qsymia net sales inSouth Korea . Under the Alvogen Supply Agreement, we will supply product to Alvogen on an exclusive basis. InOctober 2019 , we announced that European regulatory agencies inSweden ,Denmark ,Finland ,Iceland ,Norway , andPoland (the "Concerned Member States") have accepted the Marketing Authorization Application (the "MAA") for Qsymia on a decentralized basis, withSweden acting as the lead. Under the decentralized MAA procedure, the regulatory authorities in each of the Concerned Member States may simultaneously provide Marketing Authorization for use of a product within those specific countries. Based on the decentralized MAA procedure timelines, we anticipate the completion of the MAA assessment in the second half of 2020. InDecember 2019 , we announced the results of a pharmacokinetic and pharmacodynamic study demonstrating that Qsymia capsules CIV has favorable pharmacokinetic, efficacy, and safety/tolerability profiles when used for eight weeks to treat adolescents with obesity. The study was conducted in order to establish dosing levels for the ongoing Phase 4 post-marketing study of Qsymia in obese adolescents. The primary objective of the study was to describe the pharmacokinetic profiles of Qsymia after administration in adolescents with obesity.
PANCREAZE/PANCREASE MT
InJune 2018 , we acquired the commercial rights to PANCREAZE and PANCREASE MT in theU.S. andCanada . Prior to the acquisition, PANCREAZE/PANCREASE MT had been commercialized by Janssen. In connection with the acquisition of PANCREAZE/PANCREASE MT, we and Janssen also entered into transition services agreements pursuant to which Janssen and a Canadian affiliate of Janssen provided certain transition services to us in theU.S. andCanada as we transitioned to full control over the PANCREAZE/PANCREASE MT supply chain, which was completed in the first quarter of 2019. In the first quarter of 2019, we relaunched PANCREAZE in theU.S. by leveraging our existing commercial infrastructure and expanding it to include 10 additional contract sales representatives in theU.S. focused on gastro-intestinal and cystic fibrosis physicians. We also introduced the PANCREAZE Advantage program, which is intended to enhance patient access and improve the patient experience with patient and physician educational materials, a patient support program, and patient and payment assistance. We transitioned to direct sales inCanada in the third quarter of 2019. We have also prioritized supply chain improvement, working capital management and moving PANCREAZE/PANCREASE MT back into the view of the medical community. InFebruary 2020 , FDA approved the supplemental New Drug Application for an improved formulation of PANCREAZE that extends the shelf life to 36 months across all PANCREAZE dosages. Approved in 2010, PANCREAZE/PANCREASE MT is a pancreatic enzyme preparation consisting of pancrelipase, an extract derived from porcine pancreatic glands, as well as other enzyme classes, including porcine-derived lipases, proteases and amylases. PANCREAZE/PANCREASE MT is specifically indicated for the treatment of exocrine pancreatic insufficiency ("EPI"). EPI is a condition that results from a deficiency in the production and/or secretion of pancreatic enzymes. It is associated with cystic fibrosis, chronic pancreatitis, pancreatic cancer and other conditions, and affects approximately 85 percent of cystic fibrosis patients. There is no cure for EPI and pancreatic enzyme replacement therapy is the primary treatment for the condition.
STENDRA/SPEDRA
STENDRA is an oral phosphodiesterase type 5 ("PDE5") inhibitor that we have
licensed from Mitsubishi Tanabe Pharma Corporation ("MTPC"). FDA approved
STENDRA in
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The Menarini Group , through its subsidiary Berlin Chemie AG ("Menarini"), is our
exclusive licensee for the commercialization and promotion of SPEDRA for the
treatment of ED in over 40 countries, including the EU Member States. In
addition, Menarini licensed rights directly from MTPC to commercialize avanafil
in certain Asian territories. We receive royalties from Menarini based on SPEDRA
net sales and are entitled to receive future milestone payments based on certain
net sales targets. Menarini will also reimburse us for payments made to cover
various obligations to MTPC during the term of the Menarini License Agreement.
Menarini obtains SPEDRA exclusively from us.
Metuchen Pharmaceuticals LLC ("Metuchen") is our exclusive licensee for the
development, commercialization and promotion of STENDRA in the United States ,
Canada , South America and India . Metuchen reimburses us for payments made to
cover royalty and milestone obligations to MTPC, but otherwise owes us no future
royalties. Metuchen obtains STENDRA exclusively from us. On September 30, 2019 ,
Metuchen provided a written notice of termination of our supply agreement with
them effective September 30, 2021 .
We are currently in discussions with potential collaboration partners to
develop, market and sell STENDRA/SPEDRA for territories in which we do not
currently have a commercial collaboration, including
Product Development Pipeline and Life Cycle Management
VI-0106 - Pulmonary Arterial Hypertension
PAH is a chronic, life-threatening disease characterized by elevated blood
pressure in the pulmonary arteries, which are the arteries between the heart and
lungs, due to pathologic proliferation of epithelial and vascular smooth muscle
cells in the lining of these blood vessels and excess vasoconstriction.
Pulmonary blood pressure is normally between 8 and 20 mmHg at rest as measured
by right heart catheterization. In patients with PAH, the pressure in the
pulmonary artery is greater than 25 mmHg at rest or 30 mmHg during physical
activity. These high pressures make it difficult for the heart to pump blood
through the lungs to be oxygenated.
The current medical therapies for PAH involve endothelin receptor antagonists,
PDE5 inhibitors, prostacyclin analogues, selective prostaglandin I2 receptor
agonists, and soluble guanate cyclase stimulators, all of which have been shown
to effectively dilate arterioles in the pulmonary circulation, to reduce
symptoms and improve quality of life. While currently approved products treat
the symptoms of PAH, they do little to address the pathologic cell proliferation
that is the underlying cause of the disease. We believe that tacrolimus can be
used to enhance bone morphogenetic protein receptor type 2 ("BMPR2") signaling.
BMPR2 signaling has been shown to be reduced in PAH patients, and this
reduction in signaling is an important factor leading to cell proliferation
within the pulmonary arteries. By restoring BMPR2 signaling, tacrolimus may
therefore address a fundamental cause of PAH.
The prevalence of PAH varies among specific populations, but it is estimated at
between 15 and 50 cases per million adults. PAH usually develops between the
ages of 20 and 60 but can occur at any age, with a mean age of diagnosis around
45 years. Idiopathic PAH is the most common type, constituting approximately 40%
of the total diagnosed PAH cases, and occurs two to four times more frequently
in females.
On January 6, 2017 , we acquired the exclusive, worldwide rights for the
development and commercialization of BMPR2 activators for the treatment of PAH
and related vascular diseases from Selten Pharma, Inc. ("Selten"). Selten
assigned to us its license to a group of patents owned by the Board of Trustees
of the Leland Stanford Junior University ("Stanford") which cover uses of
tacrolimus and ascomycin to treat PAH. We paid Selten an upfront payment of $1.0
million , and we will pay additional milestone payments based on global
development status and future sales milestones, as well as tiered royalty
payments on future sales of these compounds. The total potential milestone
payments are $39.0 million to Selten . We have assumed full responsibility for
the development and commercialization of the licensed compounds for the
treatment of PAH and related vascular diseases.
In October 2017 , we held a pre-IND meeting with FDA for VI-0106, our proprietary
formulation of tacrolimus for the treatment of PAH. FDA addressed our questions
related to preclinical, nonclinical and clinical data and the planned design of
clinical trials of tacrolimus in class 3 and 4 PAH patients, and clarified the
requirements needed to file an IND to initiate a clinical trial in this
indication. As discussed with FDA, we currently intend to design and conduct
clinical trials that could qualify for Fast Track and/or Breakthrough Therapy
designation.
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Tacrolimus for the treatment of PAH has received Orphan Drug Designation from
FDA in the U.S. and the EU on the basis of a scientific opinion adopted by the
Committee for Orphan Medicinal Products of the European Medicines Agency in the
EU. We are focusing on the development of a proprietary oral formulation of
tacrolimus to be used in a clinical development program and, if approved, for
commercial use. If we are successful in our development efforts, we anticipate
filing an IND with FDA and completing the development of our proprietary
formulation of tacrolimus in the second half of 2020. We are currently seeking
alternatives for financing the development of tacrolimus.
Qsymia for Additional Indications
We are currently considering further development of Qsymia for the treatment of various diseases, including obstructive sleep apnea and nonalcoholic steatohepatitis ("NASH").
NOL Rights Plan
OnDecember 30, 2019 , our Board of Directors adopted a new stockholder rights plan to replace the Company's stockholder rights plan that expired onNovember 9, 2019 . Under the new rights plan, we issued a dividend of one right for each share of our common stock held by stockholders of record as of the close of business onJanuary 13, 2020 . The new rights plan is designed to protect stockholder value by mitigating the likelihood of an "ownership change" that would result in significant limitations to our ability to use our net operating losses or other tax attributes to offset future income. The new rights plan is similar to rights plans adopted by other public companies with significant net operating loss carryforwards The new rights plan provides, subject to certain exceptions, that if any person or group acquires 4.9% or more of the Company's outstanding common stock, there would be a triggering event potentially resulting in significant dilution in the voting power and economic ownership of that person or group. Existing stockholders who hold 4.9% or more of the Company's outstanding common stock as of the date of the new rights plan will trigger a dilutive event only if they acquire an additional 1% of the outstanding shares of VIVUS common stock. The new rights plan will continue in effect untilDecember 30, 2022 , unless earlier terminated or the rights are earlier exchanged or redeemed by the Board of Directors. We expect to submit the new rights plan to a vote at our 2020 annual meeting of stockholders. If stockholders do not approve the plan at the 2020 annual meeting, it will expire at the close of business on the following day.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to availableforsale securities, research and development expenses, income taxes, inventories, revenues, including revenues from multipleelement arrangements, contingencies and litigation and sharebased compensation. We base our estimates on historical experience, information received from third parties and on various market specific and other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates under different assumptions or conditions. Our significant accounting policies are more fully described in Note 1 to our Consolidated Financial Statements included elsewhere in this report.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
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Revenue Recognition
For all revenue transactions, we evaluate our contracts with our customers to determine revenue recognition using the following five-step model:
1)We identify the contract(s) with a customer;
2)We identify the performance obligations in the contract;
3)We determine the transaction price;
4)We allocate the transaction price to the identified performance obligations; and
5)We recognize revenue when (or as) the entity satisfies a performance obligation.
Product Revenue
Product revenue is recognized at the time of shipment at which time we have satisfied our performance obligation. Product revenue is recognized net of consideration paid to our customers, wholesalers and certified pharmacies. Such consideration is for services rendered by the wholesalers and pharmacies in accordance with the wholesalers and certified pharmacy services network agreements, and includes a fixed rate per prescription shipped and monthly program management and data fees. These services are not deemed sufficiently separable from the customers' purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition. Other product revenue allowances include a reserve for estimated product returns, certain prompt pay discounts and allowances offered to our customers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue at the date at which the related revenue is recognized. We also offer discount programs to patients. Calculating certain of these items involves estimates and judgments based on sales or invoice data, contractual terms, utilization rates, new information regarding changes in these programs' regulations and guidelines that would impact the amount of the actual rebates or chargebacks. We review the adequacy of product revenue allowances on a quarterly basis. Amounts accrued for product revenue allowances are adjusted when trends or significant events indicate that adjustment is appropriate and to reflect actual experience. See Note 9 to our consolidated financial statements for product reserve balances.
Change in Accounting Estimate in 2017
We ship units of Qsymia through a distribution network that includes certified retail pharmacies. We began shipping Qsymia inSeptember 2012 , and we grant rights to our customers to return unsold product from six months prior to and up to 12 months subsequent to product expiration. This has resulted in a potential return period of from 24 to 36 months depending on the ship date of the product. As we had no previous experience in selling Qsymia and given the lengthy return period, we were not initially able to reliably estimate expected returns of Qsymia at the time of shipment, which was required by the accounting literature at the time, and we therefore recognized revenue when units were dispensed to patients through prescriptions, at which point the product was not subject to return, or when the expiration period had ended. Beginning in the first quarter of 2017, with 48 months of returns experience, we believed that we had sufficient data and experience from selling Qsymia to reliably estimate expected returns. Therefore, beginning in the first quarter of 2017, under the then relevant accounting literature, we began recognizing revenue from the sales of Qsymia upon shipment and recording reserves for expected returns, discounts and fees at the time of shipment. In accordance with this change in accounting estimate, in the first quarter of 2017 we recognized a one-time adjustment relating to products that had been previously shipped, consisting of$17.9 million of gross revenues, adjusted for an expected returns reserve of$5.7 million and estimated gross-to-net charges of$4.9 million , for a net impact of$7.3 million in revenues. We also recorded increased cost of goods sold of$0.6 million and marketing expense of$0.7 million associated with the change in accounting estimate. The increase in net product revenue resulted in a decrease in net loss of$6.0 million or$0.57 per share in 2017. 80 Table of Contents
The following table summarizes the activity in the accounts related to Qsymia and PANCREAZE product revenue allowances (in thousands):
Wholesaler/
Product Discount Pharmacy Cash Rebates/
Returns Programs Fees Discounts Chargebacks Total
Balance at January 1, 2017 $ - $ (1,007) $ (1,280) $ (213) $ (101) $ (2,601)
Current provision related to sales
made during current period* (9,251) (20,806) (6,673) (1,344) (1,174) (39,248)
Payments 1,397 17,429 6,870 1,362 991 28,049
Balance at December 31, 2017 (7,854) (4,384) (1,083) (195) (284) (13,800)
Current provision related to sales
made during current period* (11,428) (13,908) (6,937) (1,327) (6,001) (39,601)
Payments 4,404 15,991 7,017 1,370 1,317 30,099
Balance at December 31, 2018 (14,878) (2,301) (1,003) (152) (4,968) (23,302) Current provision related to sales made during current period*
(11,787) (11,726) (9,510) (1,966) (9,719) (44,708) Payments
11,791 11,537 9,122 1,866 11,905 46,221
Balance at
--------------------------------------------------------------------------------
*Current provision related to sales made during current period includes$44.4 million ,$39.1 million and$38.7 million for product revenue allowances related to revenue recognized during the years endedDecember 31, 2019 , 2018 and 2017, respectively. The remaining amounts for the respective years were recorded on the consolidated balance sheets as deferred revenue at the end of each period.
Supply Revenue
We produce STENDRA or SPEDRA through a contract manufacturing partner and then sell it to our commercialization partners. We are the primary responsible party in the commercial supply arrangements and bear significant risk in the fulfillment of the obligations, including risks associated with manufacturing, regulatory compliance and quality assurance, as well as inventory, financial and credit loss. As such, we recognize supply revenue on a gross basis as the principal party in the arrangements. We recognize supply revenue at the time of shipment and, in the unusual case where the product does not meet contractually specified product dating criteria at the time of shipment to the partner, we record a reserve for estimated product returns. There are no such reserves as ofDecember 31, 2019 .
License and Milestone Revenue
License and milestone revenues related to arrangements, usually license and/or supply agreements, entered into by us are recognized by following the five-step process outlined above. The allocation and timing of recognition of such revenue will be determined by that process and the amounts recognized and the timing of that recognition may not exactly follow the wording of the agreement as the amount allocated following the accounting analysis of the agreement may differ and the timing of recognition of a significant performance obligation may predate the contractual date.
Royalty Revenue
We rely on data provided by our collaboration partners in determining our contractually based royalty revenue. Such data includes accounting estimates and reports for various discounts and allowances, including product returns. We record royalty revenues based on the best data available and make any adjustments to such revenues as such information becomes available.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is
determined using the first in, first out method using a weighted average cost
method calculated for each production batch. Inventory includes the cost of the
active pharmaceutical ingredients ("API"), raw materials and third-party
contract manufacturing and packaging services.
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Indirect overhead costs associated with production and distribution are
allocated to the appropriate cost pool and then absorbed into inventory based on
the units produced or distributed, assuming normal capacity, in the applicable
period.
Inventory costs of product shipped to customers, but not yet recognized as revenue, are recorded within inventories on the consolidated balance sheets and are subsequently recognized to cost of goods sold when revenue recognition criteria have been met.
Our policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on our estimates of future demand for a particular product. If the estimate of future demand is inaccurate based on lower actual sales, we may increase the write down for excess inventory for that product and record a charge to inventory impairment.
Research and Development Expenses
Research and development ("R&D") expenses include license fees, related
compensation, consultants' fees, facilities costs, administrative expenses
related to R&D activities and clinical trial costs incurred by clinical research
organizations or CROs, and research institutions under agreements that are
generally cancelable, among other related R&D costs. We also record accruals for
estimated ongoing clinical trial costs. Clinical trial costs represent costs
incurred by CRO and clinical sites and include advertising for clinical trials
and patient recruitment costs. These costs are recorded as a component of R&D
expenses and are expensed as incurred. Under our agreements, progress payments
are typically made to investigators, clinical sites and CROs. We analyze the
progress of the clinical trials, including levels of patient enrollment,
invoices received and contracted costs when evaluating the adequacy of accrued
liabilities. Significant judgments and estimates must be made and used in
determining the accrued balance in any accounting period. Actual results could
differ from those estimates under different assumptions. Revisions are charged
to expense in the period in which the facts that give rise to the revision
become known.
In addition, we have obtained rights to patented intellectual properties under
several licensing agreements for use in research and development activities.
Non-refundable licensing payments made for intellectual properties that have no
alternative future uses are expensed to research and development as incurred.
ShareBased Payments
Compensation expense is recognized for share-based payments, including stock options, restricted stock units and shares issued under the employee stock purchase plan, using a fair value based method. We estimate the fair value of share based payment awards on the date of the grant using the Black Scholes option pricing model, which requires us to estimate the expected term of the award, the expected volatility, the risk-free interest rate and the expected dividends. The expected term, which represents the period of time that options granted are expected to be outstanding, is derived by analyzing the historical experience of similar awards, giving consideration to the contractual terms of the share based awards, vesting schedules and expectations of future employee behavior. Expected volatilities are estimated using the historical share price performance over the expected term of the option, which are adjusted as necessary for any other factors which may reasonably affect the volatility of VIVUS's stock in the future. The risk-free interest rate is based on theU.S. Treasury yield in effect at the time of the grant for the expected term of the award. We do not anticipate paying any dividends in the near future. We develop pre-vesting forfeiture assumptions based on an analysis of historical data. Sharebased compensation expense is allocated among cost of goods sold, research and development and selling, general and administrative expenses, or included in the inventory carrying value and absorbed into inventory, based on the function of the related employee. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Three levels of inputs are used to measure fair value. The three levels are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs in which little or no market data exists. 82 Table of Contents Our financial instruments include cash equivalents, available for sale securities, accounts receivable, accounts payable, accrued liabilities and debt. Available-for-sale securities are carried at fair value. The carrying value of cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the relatively short-term nature of these instruments. Debt instruments are initially recorded at face value, with stated interest and amortization of debt issuance discounts and costs recognized as interest expense. Our convertible notes contain a conversion option that is classified as equity. We determined the fair value of the liability component of the debt instrument and allocated the excess amount of$95.3 million from the initial proceeds to the conversion option in additional paid-in capital. The fair value of the debt component was determined by estimating a risk adjusted interest rate, or market yield, at the time of issuance for similar notes that do not include the conversion feature. This excess is reported as a debt discount and is amortized as non-cash interest expense, using the effective-interest method, over the expected life of the convertible notes. The convertible notes are recorded in the balance sheet as a component of long-term debt. Issuance costs related to the conversion feature of the convertible notes were charged to additional paid in capital. The portion of the issuance costs related to the debt component is being amortized and recorded as additional interest expense over the expected life of the convertible notes. In connection with the issuance of the convertible notes, we entered into capped call transactions with certain counterparties affiliated with the underwriters. The fair value of the purchased capped calls of$34.7 million was recorded to additional paid-in capital.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, available for sale securities, and accounts receivable. We have established guidelines to limit its exposure to credit risk by placing investments in high credit quality money market funds,U.S. Treasury securities or corporate debt securities and by placing investments with maturities that maintain safety and liquidity within our liquidity needs. We have also established guidelines for the issuance of credit to existing and potential customers.
Accounts Receivable, Allowances for Doubtful Accounts and Cash Discounts
We extend credit to our customers for product sales resulting in accounts receivable. Customer accounts are monitored for past due amounts. Amounts that are determined to be uncollectible are written off against the allowance for doubtful accounts. Allowances for doubtful accounts are estimated based upon past due amounts, historical losses and existing economic factors, and are adjusted periodically. Historically, we have not had any significant uncollected accounts. We offer cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. The estimate of cash discounts is recorded at the time of sale. We account for the cash discounts by reducing revenue and accounts receivable by the amount of the discounts it expects the customers to take. The accounts receivable are reported in the consolidated balance sheets, net of the allowances for doubtful accounts and cash discounts. There was no allowance for doubtful accounts atDecember 31, 2019 or 2018. Income Taxes We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If it is not more likely than not that we will recover its deferred tax assets, we will increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately 83 Table of Contents be recoverable. As a result of our analysis of all available evidence, both positive and negative, as ofDecember 31, 2019 , it was considered more likely than not that our deferred tax assets would not be realized. However, should there be a change in our ability to recover its deferred tax assets, we would recognize a benefit to our tax provision in the period in which we determine that it is more likely than not that we will recover its deferred tax assets.
We recognize interest and penalties accrued on any unrecognized tax benefits as a component of our provision for income taxes.
Contingencies and Litigation
We are periodically involved in disputes and litigation related to a variety of
matters. When it is probable that we will experience a loss, and that loss is
quantifiable, we record appropriate reserves. We record legal fees and costs as
an expense when incurred.
RESULTS OF OPERATIONS
Revenues
Years Ended December 31 , Increase/(Decrease)(in thousands, except for percentages) 2019 2018 2017
2019 vs 2018 2018 vs 2017
Qsymia-Net product revenue $ 37,750 $ 40,558 $ 44,983 (7) % (10) %
PANCREAZE/PANCREASE MT-Net product revenue 21,299 16,226 - 31 %
N/A
License and milestone revenue 2,500 - 7,500 N/A (100) %
Qsymia-Supply revenue 1,186 - - N/A N/A
STENDRA/SPEDRA-Supply revenue 3,448 4,863 10,407 (29) % (53) %
STENDRA/SPEDRA-Royalty revenue 2,020 2,307 2,483 (12) % (7) %
PANCREASE MT-Royalty revenue 1,557 1,108 - 41 % N/A
Total revenue $ 69,760 $ 65,062 $ 65,373 7 % (0) %
Net product revenue
In the first quarter of 2017, we began recognizing revenue from the sales of
Qsymia upon shipment and recording reserves for expected returns, discounts and
fees at the time of shipment. Revenue for 2017 includes gross Qsymia product
revenue of $17.9 million and net Qsymia product revenue of $7.3 million related
to shipments which had previously been deferred. Excluding this one-time
adjustment, Qsymia net product revenue for 2017 was $37.6 million .
The following table reconciles gross Qsymia product revenue to net Qsymia product revenue (in thousands):
Year Ended December 31,
2019 2018 2017
Gross Qsymia product revenue $ 63,197 $ 66,513 $ 85,044
Returns & allowances (1,082) (2,967) (9,251)
Discount programs (15,849) (13,703) (20,129)
Wholesaler/Pharmacy fees (6,063) (6,704) (7,728)
Cash discounts (1,062) (1,327) (1,697)
Rebates/Chargebacks (1,391) (1,254) (1,256)
Net Qsymia product revenue $ 37,750 $ 40,558 $ 44,983
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The following table reconciles gross PANCREAZE/PANCREASE MT product revenue to net PANCREAZE/PANCREASE MT product revenue (in thousands):
Year Ended December 31,
2019 2018 2017
Gross PANCREAZE/PANCREASE MT product revenue $ 45,231 $ 30,717 $ -
Returns & allowances (10,704) (8,460) -
Discount programs (23) - -
Wholesaler/Pharmacy fees (3,974) (381) -
Cash discounts (903) (604) -
Rebates/Chargebacks (8,328) (5,046) -
Net PANCREAZE/PANCREASE MT product revenue $ 21,299 $ 16,226 $ -
Prescriptions are as follows:
Year Ended December 31,
2019 2018 2017
Qsymia units shipped (in thousands) 331 349 441
Qsymia prescriptions dispensed (in thousands) 337 360 395
PANCREAZE/PANCREASE MT units shipped (in thousands) 115 73 -
Units shipped represent our direct shipments into the sales channel. We expect
net Qsymia product revenue in 2020 to be consistent with or increase from 2019
levels due to new marketing and distribution efforts. We anticipate that future
PANCREAZE/PANCREASE MT product revenue will increase from 2019 levels but will
fluctuate from period to period based on our wholesalers' management of the
supply chain and the impact of our relaunch efforts. Also, we anticipate that
future PANCREAZE/PANCREASE MT net product revenue will continue to be negatively
impacted by potential future promotional strategies, including coupon programs.
License and milestone revenue
License and milestone revenue for 2019 related to contractual payments due to us upon Alvogen receiving marketing authorization inSouth Korea . License and milestone revenue for 2017 consisted of a one-time$5.0 million payment earned for a license to certain clinical data related to phentermine and$2.5 million of license fees earned under the Alvogen License Agreement for commercial rights to Qsymia inSouth Korea . License and milestone revenues are dependent on the timing of entering into new collaborations and the timing of our collaborators meeting certain milestone events. As a result, our license and milestone revenue will fluctuate materially between periods. Supply revenue We supply Qsymia and STENDRA/SPEDRA to our collaboration partners on a cost-plus basis. The variations in supply revenue are a result of the timing of orders placed by our partners and may or may not reflect end user demand. The timing of purchases by our commercialization partners will be affected by, among other items, their minimum purchase commitments, end user demand, and distributor inventory levels. As a result, supply revenue has and will continue to fluctuate materially between reporting periods.
Royalty revenue
We record royalty revenue related to sales of STENDRA/SPEDRA and Canadian sales
of PANCREASE MT based on reports provided by our partners. Upon taking over
operations for Canadian sales for PANCREASE MT, including ownership of the
Canadian inventory in the third quarter of 2019, net sales of PANCREASE MT began
to be recorded as net product revenue with costs recorded as cost of goods sold.
We expect STENDRA/SPEDRA royalty revenue in 2019 to remain relatively consistent
with current levels.
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Cost of goods sold and Amortization of intangible assets
Year Ended
PANCREAZE/ PANCREASE
(In thousands, except percentages) Qsymia MT STENDRA/ SPEDRA Total
Net product revenue $ 37,750 $ 21,299 $ - $ 59,049
Supply revenue 1,186 - 3,448 4,634
Total product and supply revenue 38,936 100%
3,448 100%
Cost of goods sold (excluding amortization) 5,775 15%$ 6,460 30%$ 3,436 100%$ 15,671 25% Amortization of intangible assets 362 1% 14,190 67% - 0% 14,552 23% Total cost of goods sold 6,137 16%$ 20,650 97% $
3,436 100%
Product and supply gross margins
12 0% $ 33,460 53%
Year Ended December 31, 2018
PANCREAZE/ PANCREASE
Qsymia MT STENDRA/ SPEDRA Total
Net product revenue $ 40,558 $ 16,226 $ - $ 56,784
Supply revenue - - 4,863 4,863
Total product and supply revenue
4,863 100%
Cost of goods sold (excluding amortization)$ 4,693 12%$ 5,156 32%$ 4,764 98%$ 14,613 24% Amortization of intangible assets$ 363 1%$ 8,277 51% $ - 0%$ 8,640 14% Total cost of goods sold$ 5,056 12%$ 13,433 83% $
4,764 98%
Product and supply gross margins
99 2% $ 38,394 62%
Year Ended December 31, 2017
PANCREAZE/ PANCREASE
Qsymia MT STENDRA/ SPEDRA Total
Net product revenue $ 44,983 $ - $ - $ 44,983
Supply revenue - - 10,407 10,407
Total product and supply revenue $ 44,983 100% $ - $
10,407 100%
Cost of goods sold (excluding amortization)$ 6,993 16% $ -$ 9,650 93%$ 16,643 30% Amortization of intangible assets$ 544 1% $ - $ - 0%$ 544 1% Total cost of goods sold$ 7,537 17% $ - $
9,650 93%
Product and supply gross margins$ 37,446 83% $ -$ 757 7%$ 38,203 69% Cost of goods sold for Qsymia includes the inventory costs of API, third party contract manufacturing and packaging and distribution costs, royalties, cargo insurance, freight, shipping, handling and storage costs, and overhead costs of the employees involved with production. Cost of goods sold for PANCREAZE/PANCREASE MT includes third party contract manufacturing costs, amortization of the PANCREAZE/PANCREASE MT license, service fees, royalties, insurance, and overhead costs. Cost of goods sold for STENDRA/SPEDRA shipped to our commercialization partners includes the inventory costs of API and tableting. Fluctuations in the cost of goods sold as a percentage of net product and supply revenue over the periods was primarily due to the sales mix among Qsymia, STENDRA/SPEDRA and PANCREAZE/PANCREASE MT. 86 Table of Contents
Selling, general and administrative
Years Ended December 31 , Increase/(Decrease)
(In thousands, except percentages) 2019 2018 2017 2019 vs 2018 2018 vs 2017 Selling and marketing$ 17,968 $ 13,970 $ 16,638 29 % (16) % General and administrative 22,071 23,971 23,492 (8) % 2 % Total selling, general and administrative expenses$ 40,039 $ 37,941 $ 40,130 6 % (5) % The increase in selling and marketing expenses in 2019 compared to 2018 was due primarily to commercialization efforts for PANCREAZE, including additions to our sales force to support the relaunch in the first quarter of 2019 and related promotional activities. The decrease in selling and marketing expenses in 2018 compared to 2017 was due primarily to the reduction of the size of our sales force in 2017 and cost saving efforts to reduce marketing programs, partially offset by the addition of PANCREAZE marketing expenses. Selling and marketing expenses for our current products are expected to remain stable in future quarters. The decrease in general and administrative expenses in 2019 compared to 2018 and the increase in 2018 compared to 2017 was due primarily to approximately$2.0 million in one-time expenses related to the PANCREAZE and Willow Biopharma acquisitions in 2018. In addition, we had reductions in legal spending due to the settlement of our Qsymia litigation in 2017, partially offsetting the one-time expenses in 2018. We expect general and administrative expenses to fluctuate significantly on a quarterly basis due to the timing of activities within our business development and financing activities. Research and development Years Ended December 31, Increase/(Decrease) Drug Indication/Description 2019 2018 2017 2019 vs 2018 2018 vs 2017 (In thousands, except percentages) Qsymia$ 2,678 $ 1,120 $ 31 139 % 3,513 % STENDRA/SPEDRA 282 172 127 64 % 35 % PANCREAZE/PANCREASE MT 3,753 878 - 327 % N/A VI-0106 247 1,999 2,189 (88) % (9) % Share-based compensation 207 312 345 (34) % (10) % Overhead costs* 3,300 2,866 2,571 15 % 11 %
Total research and development expenses
42 % 40 %
--------------------------------------------------------------------------------
*Overhead costs include compensation and related expenses, consulting, legal and other professional services fees relating to research and development activities, which we do not allocate to specific projects.
The increase in total research and development expenses in 2019 as compared to 2018 was primarily due to increased spending related to post marketing requirements assumed as part of the acquisition of PANCREAZE.PANCREASE MT inJune 2018 , in addition to spending on our Qsymia adolescent safety and efficacy study (OB-403) as we enrolled our first patients across multiple sites and started monitoring visits. Our spending to develop VI-0106 for the treatment of PAH experienced a decrease due to the timing of development activities.
The increase in total research and development expenses in 2018 as compared to 2017 was primarily due to increased spending for Qsymia post-marketing requirements and spending for PANCREAZE product improvements.
We expect research and development expenses will vary based on enrollment of the
OB-0403 clinical trial and development efforts related to our VI-0106 product
candidate.
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Interest and other expense, net
Interest expense, net consists primarily of interest expense and the
amortization of issuance costs from our Convertible Notes and 2024 Notes and the
amortization of the debt discount on the Convertible Notes. Other expense and
income were not significant. Interest expense for 2019 included prepayment
premiums of $6.4 million related to the repurchase of $48.6 million aggregate
principal amount of our 2024 Notes. Exclusive of those payments, the decrease in
2019 is due to the paydown of debt in 2018 and the loss of its associated
discounts, partially offset by the additional debt issued in June 2018 . We
expect interest and other expense (income) for 2020 exclusive of any possible
refinancing of our convertible debt to remain consistent with levels at the end
of 2019.
Provision for (Benefit from) income taxes
The tax provisions for all years are the result of certain state tax liabilities. We periodically evaluate the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on our ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. We weighed both positive and negative evidence and determined that there is a continued need for a full valuation allowance on our deferred tax assets in theU.S. as ofDecember 31, 2019 . We will continue to assess such evidence on a quarterly basis in 2020 to determine whether we will need to reverse all or a portion of the valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Cash. Cash, cash equivalents and availableforsale securities totaled$32.6 million atDecember 31, 2019 , as compared to$111.2 million atDecember 31, 2018 . The decrease was primarily due to the$55.0 million payment to repurchase$48.6 million aggregate principal amount of debt, plus prepayment premiums, net cash used for operating activities and other debt servicing during the period. We invest our excess cash balances in money market,U.S. government securities and corporate debt securities in accordance with our investment policy. Our investment policy has the primary investment objectives of preservation of principal; however, there may be times when certain of the securities in our portfolio will fall below the credit ratings required in the policy. If those securities are downgraded or impaired, we would experience realized or unrealized losses in the value of our portfolio, which would have an adverse effect on our results of operations, liquidity and financial condition. From time to time, the Company may also invest its cash to retire or purchase its outstanding debt, make asset acquisitions, conduct research and development or expand the Company. Investment securities are exposed to various risks, such as interest rate, market and credit. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is possible that changes in these risk factors in the near term could have an adverse material impact on our results of operations or stockholders' deficit. Accounts Receivable. We extend credit to our customers for product sales resulting in accounts receivable. Customer accounts are monitored for past due amounts. Past due accounts receivable, determined to be uncollectible, are written off against the allowance for doubtful accounts. Allowances for doubtful accounts are estimated based upon past due amounts, historical losses and existing economic factors, and are adjusted periodically. Historically, we have had no significant uncollectable accounts receivable. We offer cash discounts to our customers, generally 2% of the sales price as an incentive for prompt payment. Accounts receivable (net of allowance for doubtful accounts and cash discounts) atDecember 31, 2019 , was$22.3 million , as compared to$25.6 million atDecember 31, 2018 . As ofFebruary 29, 2020 , we had collected 62% of the accounts receivable outstanding atDecember 31, 2019 .
Liabilities. Total liabilities were
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Summary Cash Flows
Years Ended December 31,
2019 2018 2017
Cash provided by (used for): (in thousands)
Operating activities
Investing activities 81,569 (56,150) 24,012
Financing activities (48,821) 43,776 (26,039)
Operating Activities. Cash used for operating activities in 2019 resulted
from our net loss as adjusted for non-cash items, in addition to the increase in
inventories and decreases in accounts payable and deferred revenue, partially
offset by decreases in accounts receivable and prepaid expenses and an increase
in accrued liabilities. Cash used for operating activities in 2018 primarily
consisted of our operating losses, adjusted for non-cash items, in addition to
increases in accounts receivable and inventory due to the addition of PANCREAZE,
partially offset by an increase in accrued and other liabilities, primarily due
to product reserves for PANCREAZE. Cash used for operating activities in 2017
primarily consisted of our operating losses adjusted for non-cash items, in
addition to increases in accounts receivable and inventory and a decrease in our
deferred revenue balances due to our switch to the sell-in model for Qsymia
product revenue. These were partially offset by increases in accounts payable
and accrued liability balances, mostly due to timing.
Investing Activities. Cash provided by investing activities in 2019 resulted
primarily from sales and maturities of our investment securities used for the
paydown of a portion of our debt and for operating uses. Cash used for investing
activities in 2018 primarily related to cash paid for the acquisition of the
PANCREAZE license, partially offset by net proceeds from sales and maturities of
our investment securities. Cash provided by or used for investing activities in
2017 primarily related to the net maturities of investment securities.
Financing Activities. Cash used by financing activities in 2019 were
primarily due to the repayment of $48.6 million of our Senior Secured Notes due
2024, in addition to principal payments on financing leases, partially offset by
proceeds from our employee stock purchase plan. Cash provided by financing
activities in 2018 resulted from the net proceeds of $108.0 million from the
issuance of our Senior Secured Notes due 2024, partially offset by the use of a
total of $58.1 million to repurchase a combined total of $68.6 million of face
value of our Convertible Notes and the repayment of $6.2 million of our Senior
Secured Notes due 2018. Cash used in financing activities for 2017 consisted
primarily of our repayments of $26.1 million under our Senior Secured Notes due
2018.
We do not currently have sufficient cash and/or credit facilities in place to
pay the debt due May 1, 2020 and thus are actively pursuing funding, which may
come through public or private debt or equity financings, collaborations or
other available financing sources. Such funding may not be available on
acceptable terms, or at all. If additional funds are raised by issuing equity
securities, substantial dilution to existing stockholders may result. If
adequate funds are not available, we will not be able to continue our operations
at our current level and may be required to relinquish rights to certain of our
technologies, product candidates or products that we would otherwise seek to
develop on our own. We might also be required to delay, reduce the scope of or
eliminate one or more of our commercialization or development programs or obtain
funds through collaborations with others that are on unfavorable terms or
restructure VIVUS in other ways that may not be favorable. Even if adequate
funds become available, we may need to raise additional funds in the near future
to finance operations and pursue development and commercial opportunities.
Our consolidated financial statements have been prepared assuming that we will
continue as a going concern. Our coming debt maturities as well as our negative
cash flow from operations and accumulated deficit raise substantial doubt about
our ability to continue as a going concern. Our consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2019 ,
excluding amounts already recorded on our consolidated balance sheet as accounts
payable or accrued liabilities, and the effect such obligations are expected to
have on our liquidity and cash flow in future fiscal years. This table includes
our enforceable, noncancelable, and legally binding obligations and future
commitments as of December 31, 2019 . The amounts below
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do not include contingent milestone payments or royalties, and assume the agreements and commitments will run through the end of terms, as such no early termination fees or penalties are included herein:
Payments Due by PeriodContractual obligations Total 2020 2021 - 2023 2024 - 2025 Thereafter
(in thousands)
Operating leases $ 1,513 $ 834 $ 679 $ - $ -
Purchase obligations 134,328 16,219 47,287 22,908 47,914
Notes payable 242,778 181,426 51,898 9,454 -
Interest payable 23,635 10,901 12,366 368 -
Total contractual obligations
Operating Leases We have a lease of 13,981 square feet of office space at900 East Hamilton Avenue ,Campbell, California (the "Campbell Lease"). The Campbell Lease has an initial term of approximately 58 months, commencing onDecember 27, 2016 , with a beginning annual rental rate of$3.10 per rentable square foot, subject to agreed-upon increases. We received an abatement of the monthly rent for the first four months on the lease term. We have one option to extend the lease term for two years at the fair market rental rate then prevailing as detailed in the Campbell Lease. Purchase Obligations Purchase obligations consist of agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The API and the tablets for STENDRA/SPEDRA (avanafil) are currently manufactured by Sanofi. OnDecember 7, 2018 , we entered into an amendment to the Commercial Supply Agreement withSanofi Chimie , pursuant to which certain amendments were made to the Commercial Supply Agreement, which include: (i) beginningJanuary 1, 2019 ,Sanofi Chimie will manufacture and supply API for avanafil on an exclusive basis in all countries where we have the right to sell avanafil; (ii) beginningJanuary 1, 2019 , the yearly minimum quantities of API that we must purchase fromSanofi Chimie will be adjusted, as well as adjustments to the associated pricing and payment terms; and (iii) with the initial five year term of the Commercial Supply Agreement expiring onDecember 31, 2018 , we andSanofi Chimie have agreed to extend the term of the Commercial Supply Agreement untilDecember 31, 2023 unless either party makes a timely election to terminate the agreement and that thereafter the Commercial Supply Agreement will auto-renew for successive one year terms unless either party makes a timely election not to renew. We have minimum purchase commitments with Sanofi to purchase API materials and tablets through 2023. Our minimum purchase commitments with Sanofi totaled approximately$18.9 million as ofDecember 31, 2019 . PANCREAZE is currently manufactured by Nordmark. Our minimum purchase commitments to Nordmark totaled approximately$113.0 million atDecember 31, 2019 . Our minimum purchase commitments for Qsymia totaled approximately$1.6 million atDecember 31, 2019 .
Notes Payable and Interest Payable
Convertible Senior Notes Due 2020
OnMay 21, 2013 , we closed an offering of$220.0 million in 4.5% Convertible Senior Notes dueMay 1, 2020 (the "Convertible Notes"). The Convertible Notes are governed by an indenture, dated as ofMay 21, 2013 , between the Company andDeutsche Bank National Trust Company , as trustee. OnMay 29, 2013 , we closed on an additional$30.0 million of Convertible Notes upon exercise of an option by the initial purchasers of the Convertible Notes. Total net proceeds from the Convertible Notes were approximately$241.8 million . The Convertible Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately precedingNovember 1, 2019 . Subject to certain limitations, we will settle conversions of the Convertible Notes by paying or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The current conversion rate of the Convertible Notes is$148.58 per share. In 2018, we repurchased a total of$68.6 million of face value of the Convertible notes for a total of$58.1 million in cash. 90 Table of Contents
Senior Secured Notes Due 2024
InJune 2018 , we entered into an indenture (the "Indenture") withU.S. Bank National Association as trustee and collateral agent regarding the purchase agreement entered into with affiliates ofAthyrium Capital Management (collectively, the "Purchasers") for the issuance and sale of (i)$110.0 million of 10.375% senior secured notes due 2024 (the "Notes"), (ii) up to an additional$10.0 million of 10.375% senior secured notes due 2024 to be issued subsequently at our option within 12 months of the Notes issue date, subject to certain conditions, and (iii) a warrant for 330,000 shares issued concurrently with the issuance of the Notes. The Notes were issued at a purchase price equal to 99% of the principal amount. The Notes contain customary representations, warranties, covenants, conditions and indemnities. Payments on the Notes are interest-only for the first 3 months; thereafter, the Notes will be repaid in 36 equal monthly payments. InSeptember 2019 , the Company repurchased$48.6 million aggregate principal amount of the 2024 Notes plus prepayment premiums of an aggregate of$6.4 million .
Additional Contingent Payments
We have entered into development, license and supply agreements that contain provisions for payments upon completion of certain development, regulatory and sales milestones. Due to the uncertainty concerning when and if these milestones may be completed or other payments are due, we have not included these potential future obligations in the above table.
OnJanuary 6, 2017 , we entered into a Patent Assignment Agreement withSelten , whereby we received exclusive, worldwide rights for the development and commercialization of BMPR2 activators for the treatment of PAH and related vascular diseases. As part of the agreement,Selten assigned to us its license to a group of patents owned byStanford , which cover uses of tacrolimus and ascomycin to treat PAH. We are responsible for future financial obligations toStanford under that license. We have also assumed full responsibility for the development and commercialization of the licensed compounds for the treatment of PAH and related vascular diseases. We paidSelten an upfront payment of$1.0 million , and we will pay additional milestone payments based on global development status and future sales milestones, as well as tiered royalty payments on future sales of these compounds. The total potential milestone payments are$39.0 million toSelten and$550,000 toStanford . The majority of the milestone payments toSelten may be paid, at our sole option, either in cash or our common stock, provided that in no event shall the payment of common stock exceed fifty percent of the aggregate amount of such milestone payments.
Mitsubishi Tanabe Pharma Corporation
InJanuary 2001 , we entered into an exclusive development, license and clinical trial and commercial supply agreement with MTPC for the development and commercialization of avanafil. Under the terms of the agreement, MTPC agreed to grant an exclusive license to us for products containing avanafil outside ofJapan ,North Korea ,South Korea ,China ,Taiwan ,Singapore ,Indonesia ,Malaysia ,Thailand ,Vietnam andthe Philippines . The MTPC agreement contains a number of milestone payments to be made by us based on various triggering events. We have made and expect to make substantial milestone payments to MTPC in accordance with this agreement as we continue to develop avanafil in our territories outside ofthe United States and, if approved for sale, commercialize avanafil for the oral treatment of male sexual dysfunction in those territories. Potential future milestone payments include$6.0 million upon achievement of$250.0 million or more in worldwide net sales during any calendar year. The term of the MTPC agreement is based on a countrybycountry and on a productbyproduct basis. The term shall continue until the later of 10 years after the date of the first sale for a particular product or the expiration of the lasttoexpire patents within the MTPC patents covering such product in such country. InAugust 2012 , we entered into an amendment to our agreement with MTPC that permits us to manufacture the API and tablets for STENDRA ourselves or through third parties. OnJuly 31, 2013 , we entered into a Commercial Supply Agreement withSanofi Chimie to manufacture and supply the API for avanafil on an exclusive basis inthe United States and other territories and on a semi exclusive basis inEurope , including the EU Member States, Latin 91 Table of Contents America and other territories. OnDecember 7, 2018 , we entered into an amendment to the Commercial Supply Agreement withSanofi Chimie , pursuant to which certain amendments were made to the Commercial Supply Agreement, which include: (i) beginningJanuary 1, 2019 ,Sanofi Chimie will manufacture and supply API for avanafil on an exclusive basis in all countries where we have the right to sell avanafil; (ii) beginningJanuary 1, 2019 , the yearly minimum quantities of API that we must purchase fromSanofi Chimie will be adjusted, as well as adjustments to the associated pricing and payment terms; and (iii) with the initial five year term of the Commercial Supply Agreement expiring onDecember 31, 2018 , we andSanofi Chimie have agreed to extend the term of the Commercial Supply Agreement untilDecember 31, 2023 unless either party makes a timely election to terminate the agreement and that thereafter the Commercial Supply Agreement will auto-renew for successive one year terms unless either party makes a timely election not to renew. OnNovember 18, 2013 , we entered into a Manufacturing and Supply Agreement withSanofi Winthrop Industrie to manufacture and supply the avanafil tablets on an exclusive basis inthe United States and other territories and on a semi exclusive basis inEurope , including the EU,Latin America and other territories. We have obtained approval from FDA and the EMA forSanofi Chimie to be a qualified supplier of avanafil API and ofSanofi Winthrop Industrie as a qualified supplier of the avanafil tablets. InMay 2019 , we entered into Amendment N°1 to the Manufacturing and Supply Agreement withSanofi Winthrop Industrie effective as ofMarch 18, 2019 , pursuant to which certain amendments were made to the Manufacturing and Supply Agreement, which include: (i)Sanofi Winthrop Industrie will manufacture and supply the tablets for our drug avanafil on an exclusive basis in all countries where we or our sublicensees and/or Menarini have the right to sell avanafil; (ii) the yearly minimum quantities of tablets that we must purchase fromSanofi Winthrop Industrie and the price of such tablets were adjusted; and (iii) with the initial term of the Manufacturing and Supply Agreement expiring onJanuary 16, 2021 , we andSanofi Winthrop Industrie have agreed to extend the term of the Manufacturing and Supply Agreement untilDecember 31, 2023 unless either party makes a timely election to terminate the agreement and that thereafter the Manufacturing and Supply Agreement will auto-renew for successive one year terms unless either party makes a timely election not to renew. OnFebruary 21, 2013 , we entered into the third amendment to our agreement with MTPC which, among other things, expands our rights, or those of our sublicensees, to enforce the patents licensed under the MTPC agreement against alleged infringement, and clarifies the rights and duties of the parties and our sublicensees upon termination of the MTPC agreement. In addition, we were obligated to use our best commercial efforts to market STENDRA in theU.S. byDecember 31, 2013 , which was achieved by our commercialization partner,Auxilium .
On
Other
InOctober 2001 , we entered into the Assignment Agreement withThomas Najarian , M.D., for the Combination Therapy, that has since been the focus of our investigational drug candidate development program for Qsymia for the treatment of obesity, obstructive sleep apnea and diabetes. The Combination Therapy and all the related Patents were transferred to us with worldwide rights to develop and commercialize the Combination Therapy and exploit the Patents. The Assignment Agreement requires us to pay royalties on worldwide net sales of a product for the treatment of obesity that is based upon the Combination Therapy and the Patents until the lasttoexpire of the assigned Patents. To the extent that we decide not to commercially exploit the Patents, the Assignment Agreement will terminate, and the Combination Therapy and Patents will be assigned back toDr. Najarian .
OffBalance Sheet Arrangements
We have not entered into any offbalance sheet financing arrangements and have not established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on nonfinancial assets.
Indemnifications
In the normal course of business, we provide indemnifications of varying scope
to certain customers against claims of intellectual property infringement made
by third parties arising from the use of its products and to its clinical
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research organizations and investigator sites against liabilities incurred in
connection with any thirdparty claim arising from the work performed on behalf
of the Company, among others. Historically, costs related to these
indemnification provisions have not been significant and we are unable to
estimate the maximum potential impact of these indemnification provisions on our
future results of operations.
To the extent permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or occurrences while the
officer or director is, or was, serving at our request in such capacity. The
indemnification period covers all pertinent events and occurrences during the
officer's or director's lifetime. The maximum potential amount of future
payments we could be required to make under these indemnification agreements is
unlimited; however, we maintain director and officer insurance coverage that
reduces our exposure and enables us to recover a portion of any future amounts
paid. We believe the estimated fair value of these indemnification agreements in
excess of applicable insurance coverage is minimal.
Recent Accounting Pronouncements
The information on recent account pronouncements is incorporated by reference to Note 1 to our Consolidated Financial Statements included elsewhere in this report.
Dividend Policy
We have not paid any dividends since our inception and do not intend to declare or pay any dividends on our common stock in the foreseeable future. Declaration or payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results and current and anticipated cash needs and applicable contractual restrictions.
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