UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended June 30, 2017
   
  OR
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from          to          

 

Commission File Number: 001-33609

 

SUCAMPO PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   30-0520478
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
805 King Farm Boulevard, Suite 550   20850
Rockville, MD   (Zip Code)
(Address of principal executive offices)    
     
(301) 961-3400
(Registrant’s telephone number,
including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☐ Yes ☒ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☒   Non accelerated filer ☐   Smaller reporting company ☐   Emerging growth company ☐
                 
        (Do not check if a smaller reporting company)    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

 

As of July 26, 2017, there were 46,552,462 shares of the registrant’s class A common stock outstanding.

1 

 

Sucampo Pharmaceuticals, Inc.

 

Form 10-Q Index

 

  Page
Part I. FINANCIAL INFORMATION  
Item 1. Financial Statements 3
  Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2017 and December 31, 2016 3
  Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited) for the three and six months ended June 30, 2017 and 2016 4
  Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the six months ended June 30, 2017 5
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2017 and 2016 6
  Notes to Condensed Consolidated Financial Statements (Unaudited)  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
Item 4. Controls and Procedures 42
Part II. OTHER INFORMATION  
Item 1. Legal Proceedings 42
Item 1A. Risk Factors 42
Item 6. Exhibits 43
SIGNATURES 44
INDEX TO EXHIBITS 45
       

2 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

   June 30,
2017
  December 31,
2016
   (unaudited)   
ASSETS      
Current assets:          
Cash and cash equivalents  $84,734   $198,308 
Product royalties receivable   20,552    26,261 
Accounts receivable, net   19,812    42,998 
Restricted cash   213    213 
Inventories, net   23,098    23,468 
Prepaid expenses and other current assets   16,726    15,984 
Total current assets   165,135    307,232 
Investments, non-current   5,619    5,495 
Property and equipment, net   5,880    6,216 
Intangible assets, net   114,629    128,134 
Goodwill   73,022    73,022 
Other assets   798    752 
Total assets  $365,083   $520,851 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $11,171   $9,190 
Accrued expenses   12,265    12,389 
Accrued interest   425    129 
Deferred revenue, current   177    1,315 
Income tax payable   4,381    7,153 
Other current liabilities   3,692    2,175 
Total current liabilities   32,111    32,351 
Notes payable, non-current   291,456    290,516 
Deferred revenue, non-current   2,783    805 
Deferred tax liability, net   2,995    21,289 
Other liabilities   9,390    8,791 
Total liabilities   338,735    353,752 
           
Commitments and contingencies (note 14)          
           
Stockholders' equity:          
Preferred stock, $0.01 par value; 5,000,000 shares authorized at June 30, 2017 and December 31, 2016; no shares issued and outstanding at June 30, 2017 and December 31, 2016   -    - 
Class A common stock, $0.01 par value; 270,000,000 shares authorized at June 30, 2017 and December 31, 2016; 46,552,462 and 46,415,749 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively   464    464 
Class B common stock, $0.01 par value; 75,000,000 shares authorized at June 30, 2017 and December 31, 2016; no shares issued and outstanding at June 30, 2017 and December 31, 2016   -    - 
Additional paid-in capital   127,208    120,251 
Accumulated other comprehensive income   54,434    54,527 
Treasury stock, at cost; 227,266 and 3,009,942 shares at June 30, 2017 and December 31, 2016, respectively   (4,018)   (46,269)
(Accumulated deficit) retained earnings   (151,740)   38,126 
Total stockholders' equity   26,348    167,099 
Total liabilities and stockholders' equity  $365,083   $520,851 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

3 

 

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited)

(In thousands, except per share data)

 

   Three Months Ended June 30,  Six Months Ended June 30,
   2017  2016  2017  2016
Revenues:            
Product royalty revenue  $20,562   $18,735   $38,997   $35,451 
Product sales revenue   34,237    28,389    68,391    54,984 
Research and development revenue   5,051    3,369    8,499    6,799 
Contract and collaboration revenue   46    1,458    292    1,925 
Total revenues   59,896    51,951    116,179    99,159 
                     
Costs and expenses:                    
Costs of goods sold   17,035    20,354    33,918    43,692 
Research and development   19,099    10,933    29,432    25,604 
Acquired in-process research and development   186,603    -    186,603    - 
General and administrative   11,583    12,423    29,274    21,350 
Selling and marketing   1,411    623    1,927    1,398 
Total costs and expenses   235,731    44,333    281,154    92,044 
                     
(Loss) income from operations   (175,835)   7,618    (164,975)   7,115 
Non-operating income (expense):                    
Interest income   -    10    28    35 
Interest expense   (2,916)   (5,972)   (5,806)   (12,242)
Other expense, net   (476)   (2,539)   (265)   (2,886)
Total non-operating expense, net   (3,392)   (8,501)   (6,043)   (15,093)
                     
Loss before income taxes   (179,227)   (883)   (171,018)   (7,978)
Income tax (provision) benefit   (1,940)   51    (5,525)   3,089 
Net loss  $(181,167)  $(832)  $(176,543)  $(4,889)
                     
Net loss per share:                    
Basic and diluted  $(3.92)  $(0.02)  $(3.94)  $(0.11)
Weighted average common shares outstanding:                    
Basic and diluted   46,195    42,759    44,826    42,649 
                     
Comprehensive (loss) income:                    
Net loss  $(181,167)  $(832)  $(176,543)  $(4,889)
Other comprehensive income (expense):                    
Unrealized (loss) gain on pension benefit obligation, net of tax   (16)   33    (16)   25 
Foreign currency translation gain (loss), net of tax   -    20,700    (77)   36,255 
Comprehensive (loss) income  $(181,183)  $19,901   $(176,636)  $31,391 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 

4 

 

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except share data)

 

   Class A
Common Stock
  Additional
Paid-In
  Accumulated
Other
Comprehensive
  Treasury Stock  Retained
Earnings
(Accumulated
  Total
Stockholders'
   Shares  Amount  Capital  Income  Shares  Amount  Deficit)  Equity
Balance at December 31, 2016   46,415,749   $464   $120,251   $54,527    3,009,942   $(46,269)  $38,126   $167,099 
Stock-based compensation expense   -    -    5,566    -    -    -    -    5,566 
Stock issued in connection with employee stock plan   120,224    -    283    -    -    -    -    283 
Stock issued under employee stock purchase plan   16,489    -    150    -    -    -    -    150 
Stock withheld to cover employee taxes   -    -    (114)   -    -    -         (114)
Treasury stock issued for Vtesse acquisition   -    -    -         (2,782,676)   42,251    (12,251)   30,000 
Unrealized loss  on pension benefit obligation, net of tax   -    -    -    (16)   -    -    -    (16)
Foreign currency translation, net of tax   -    -    -    (77)   -    -    -    (77)
Cumulative-effect adjustment from adoption of ASU 2016-09   -    -    1,072    -              (1,072)   - 
Net loss   -    -    -    -    -    -    (176,543)   (176,543)
Balance at June 30, 2017   46,552,462   $464   $127,208   $54,434    227,266   $(4,018)  $(151,740)  $26,348 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 

5 

 

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   Six Months Ended June 30,
   2017  2016
Cash flows from operating activities:          
Net loss  $(176,543)  $(4,889)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation and amortization   14,880    30,098 
Loss on disposal of property and equipment   -    533 
Deferred tax (benefit) provision   (4,681)   4,960 
Stock-based compensation   5,566    3,723 
Acquired in-process research and development   186,603    - 
Unrealized currency translations   221    9,123 
Shortfall from stock-based compensation   143    (25)
Windfall benefit from stock-based compensation   (151)   (455)
Changes in operating assets and liabilities:          
Product royalties receivable   5,709    4,048 
Accounts receivable   23,443    5,866 
Inventory   370    309 
Prepaid and income taxes receivable and payable, net   (2,764)   (18,221)
Accounts payable   458    (5,296)
Accrued expenses   49    (3,466)
Accrued interest payable   296    (70)
Deferred revenue   840    119 
Collaboration obligation   -    (1,826)
Other assets and liabilities, net   1,753    1,754 
Net cash provided by operating activities   56,192    26,285 
Cash flows from investing activities:          
Convertible note receivable   -    (5,000)
Changes in restricted cash   -    10,598 
Payment of squeeze-out liability for non-tendering R-Tech shareholders   -    (7,668)
Purchase of in-process research and development, net of cash acquired   (169,665)   - 
Purchases of property and equipment   (354)   (823)
Net cash used in investing activities   (170,019)   (2,893)
Cash flows from financing activities:          
Payments of notes payable   -    (30,082)
Changes in restricted cash   -    17,676 
Proceeds from exercise of stock options   283    1,643 
Proceeds from employee stock purchase plan   150    128 
Tax payment upon settlement of stock awards   (114)   - 
Net cash provided by (used in) financing activities   319    (10,635)
Effect of exchange rates on cash and cash equivalents   (66)   6,940 
Net (decrease) increase in cash and cash equivalents   (113,574)   19,697 
Cash and cash equivalents at beginning of period   198,308    108,284 
Cash and cash equivalents at end of period  $84,734   $127,981 

 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

 

6 

 

1. Business Organization and Basis of Presentation

 

Description of the Business

 

Sucampo Pharmaceuticals, Inc., (Company) is a global biopharmaceutical company focused on developing, identifying, acquiring and bringing to market innovative medicines that meet unmet medical needs. The Company’s primary focus areas are medicines that treat gastrointestinal, ophthalmic, neurological, and oncology disorders.

 

The Company currently generates revenue mainly from product royalties, upfront and milestone payments, product sales and reimbursements for development activities. The Company expects to continue to incur significant expenses for the next several years as it continues its research and development activities, seeks additional regulatory approvals and additional indications for approved products and other compounds, and seeks strategic opportunities for acquiring new products and product candidates.

 

AMITIZA® (lubiprostone) is being marketed for three gastrointestinal indications under the collaboration and license agreement (as amended in October 2014, the North America Takeda Agreement) with Takeda Pharmaceutical Company Limited (Takeda). These indications are chronic idiopathic constipation (CIC) in adults, irritable bowel syndrome with constipation (IBS-C) in adult women and opioid-induced constipation (OIC) in adults suffering from chronic non-cancer related pain. Under the North America Takeda Agreement, the Company is primarily responsible for clinical development activities, while Takeda is responsible for commercialization of AMITIZA in the United States (U.S.) and Canada. The Company and Takeda initiated commercial sales of AMITIZA in the U.S. for the treatment of CIC in April 2006, for the treatment of IBS-C in May 2008 and for the treatment of OIC in May 2013. Takeda is required to provide a minimum annual commercial investment during the current term of the North America Takeda Agreement and may reduce the minimum annual commercial investment when a generic equivalent enters the market. In October 2015, Health Canada approved AMITIZA for CIC in adults. In October 2014, the Company and Takeda executed amendments to the North America Takeda Agreement which, among other things, extended the term of the North America Takeda Agreement beyond December 2020. During the extended term beginning in January 2021, Takeda and the Company will share the annual net sales revenue of the branded AMITIZA products.

 

The Company has also partnered with Par Pharmaceuticals, Inc. (Par) and Dr. Reddy’s Laboratories, Ltd. (Dr. Reddy’s) in connection with the settlement of patent litigation in the U.S. related to the Company’s AMITIZA 8 mcg and 24 mcg soft gelatin capsule products. Under the Company’s agreement with Par, the Company granted Par a non-exclusive license to market Par’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the indications approved for AMITIZA beginning January 1, 2021, or earlier under certain circumstances. Beginning on January 1, 2021, Par will split with the Company the gross profits of the licensed products sold during the term of the agreement, which continues until each of the Company’s related patents has expired. Under the Company’s agreement with Dr. Reddy’s, the Company granted Dr. Reddy’s a non-exclusive license to market Dr. Reddy’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the indications approved for AMITIZA. This license does not begin until more than six years from November 9, 2016, or earlier under certain circumstances. Dr. Reddy’s will pay to the Company a share of net profits of generic lubiprostone products sold during the term of the agreement, which decreases over time and ends when all of the Company’s related patents have expired. In the event that either Par or Dr. Reddy’s elect to launch an authorized generic form of lubiprostone, the Company has agreed to supply such product under the terms of a manufacturing and supply agreement at a negotiated price.

 

In Japan, AMITIZA is marketed under a license, commercialization and supply agreement (the Japan Mylan Agreement) that was transferred to Mylan, Inc. (Mylan) from Abbott Laboratories, Inc. (Abbott), as of February 2015, as part of Mylan’s acquisition of a product portfolio from Abbott. The Company received approval of its new drug application (NDA) for AMITIZA for the treatment of chronic constipation (CC), excluding constipation caused by organic diseases, from Japan’s Ministry of Health, Labour and Welfare in June 2012 and pricing approval in November 2012. AMITIZA is the only prescription medicine for CC approved in Japan. The Company did not experience any significant changes in the commercialization of AMITIZA in Japan as a result of the transfer of the Japan Mylan Agreement from Abbott to Mylan.

 

In May 2015, the Company entered into an exclusive license, development, commercialization and supply agreement (the China Gloria Agreement) with Harbin Gloria Pharmaceuticals Co., Ltd. (Gloria) for AMITIZA in the People’s Republic of China. Under the China Gloria Agreement, Gloria is responsible for all development activities and costs, as well as commercialization and regulatory activities, for AMITIZA in the People’s Republic of China. The Company will be the exclusive supplier of AMITIZA to Gloria at an agreed upon supply price. Upon entering into the China Gloria Agreement, the Company received an upfront payment of $1.0 million. In June 2015, the China Food and Drug Administration accepted an Investigational New Drug (IND) application for a pivotal trial of AMITIZA in patients with CIC; as a result, the Company received an additional payment of $500,000 from Gloria. In addition to the $1.5 million in payments received and recognized as revenue through June 2015, the Company is eligible to receive an additional payment in the amount of $1.5 million upon the occurrence of a specified regulatory or commercial milestone event.

 

7 

 

In October 2014, the Company entered into an exclusive license, development, commercialization and supply agreement (the Global Takeda Agreement) for lubiprostone with Takeda, through which Takeda has the exclusive rights to further develop and commercialize AMITIZA in all global markets, except the U.S., Canada, Japan and the People’s Republic of China. Takeda became the marketing authorization holder in Switzerland in April 2015, as well as in the United Kingdom (U.K.), Austria, Belgium, Germany, Netherlands, Ireland, Italy, Luxembourg and Spain during 2016.

 

Before the execution of the Global Takeda Agreement, the Company retained full rights to develop and commercialize AMITIZA for the rest of the world’s markets outside of the U.S., Canada and Japan. In the U.K., the Company received approval in September 2012 from the Medicines and Healthcare Products Regulatory Agency (MHRA) for the use of AMITIZA to treat CIC. The Company made AMITIZA available in the U.K. in the fourth quarter of 2013. In July 2014, National Institute of Health and Care Excellence (NICE) published the technology appraisal guidance recommending the use of AMITIZA in the treatment of CIC and associated symptoms in adults who have failed laxatives. In January 2015, the Company successfully completed the European mutual recognition procedure (MRP) for AMITIZA for the treatment of CIC in select European countries, resulting in marketing authorizations in these countries.

 

In Switzerland, AMITIZA was approved to treat CIC in 2009. In 2012, the Company reached an agreement with the Bundesamt fur Gesundheit, (BAG), the Federal Office of Public Health in Switzerland, on a reimbursement price for AMITIZA in Switzerland, and began active marketing in the first quarter of 2013. In February 2014, the Company announced that the BAG revised several reimbursement limitations with which AMITIZA was first approved for reimbursement and inclusion in the Spezialitätenliste (SL) to allow all Swiss physicians to prescribe AMITIZA to patients who have failed previous treatments with at least two laxatives over a nine-month period. In July 2014, AMITIZA was approved for the treatment of OIC in chronic, non-cancer adult patients by the Swissmedic, the Swiss Agency for Therapeutic Products, and in October 2015, the BAG added this indication to the SL.

 

In October 2015, Takeda obtained approval of the clinical trial application (CTA) for AMITIZA for the treatment of CIC and IBS-C in Russia that was submitted in June 2015. In December 2015, a CTA was filed for AMITIZA for the treatment of CIC, IBS-C and OIC in Mexico and South Korea. Takeda initiated Phase 3 registration trials in Russia in March 2016 and in South Korea and Mexico in May 2016. An NDA for the treatment of CIC, IBS-C, and OIC was submitted in Israel in June 2015, and approved in July 2016. An NDA for the treatment of CIC, IBS-C and OIC was approved in Kazakhstan in December 2015. Additional NDA submissions have been made by Takeda in Singapore in May 2016, and in South Africa and Indonesia in June 2016, and are planned in various other markets in 2017 and future years.

 

In the U.S., the Company ceased marketing RESCULA (unoprostone isopropyl), an ophthalmology product, in the fourth quarter of 2014 and no product was made available after the March 2015 expiration date. In May 2015, the Company returned all licenses for unoprostone isopropyl to R-Tech Ueno, Ltd. (R-Tech). As part of the acquisition of R-Tech in October 2015, the Company acquired all rights to RESCULA. RESCULA is being commercialized by Santen Pharmaceutical Co., Ltd. in Japan, and Zuellig Pharma Inc. in Taiwan.

 

The Company’s clinical development programs include the following:

 

Lubiprostone Alternate Formulation

 

The Company has been developing an alternate formulation of lubiprostone for both adult and pediatric patients who are unable to take or tolerate capsules and for naso-gastric tube fed patients. Takeda has agreed to fund 100% of the costs, up to a cap, of this alternate formulation work. The Company initiated the Phase 3 program of the alternate formulation of lubiprostone in adults in the second half of 2016 and, if the program is successful, the Company intends to file an NDA in the U.S. for the alternate formulation for adults in the second half of 2017.

 

Lubiprostone for Pediatric Functional Constipation

 

A Phase 3 program required to support an application for marketing authorization of lubiprostone for pediatric functional constipation comprises four clinical trials. The first two trials, one of which was completed in late 2016, test the soft gelatin capsule formulation of lubiprostone in patients 6 to 17 years of age. The first of these trials was a pivotal 12-week, randomized, placebo-controlled trial which was initiated in December 2013 and completed enrollment in April 2016. The second trial is a follow-on, long-term safety extension trial that was initiated in March 2014. In November 2016, the Company announced that the Phase 3 trial of AMITIZA in pediatric functional constipation in children 6 to 17 years of age failed to achieve its primary endpoint of overall spontaneous bowel movement (SBM), response. The trial achieved statistical significance for some secondary endpoints, notably overall SBM frequency, straining, and stool consistency. In addition, in this study lubiprostone was well tolerated. The Company has entered into a process with the U.S. Food and Drug Administration (FDA) and other constituencies, and as a result of initial discussion with the FDA submitted a supplemental NDA on July 28, 2017. Additionally, after further consultations with the FDA to better determine the doses and endpoints that should be studied, we expect the Phase 3 program for the alternate formulation of lubiprostone described above will be followed in mid-2018 with a Phase 3 program in patients 6 months to likely 6 years of age using the alternate formulation. Takeda has agreed to fund 70% of the costs up to a cap, and then 50% of the costs thereafter, of this pediatric functional constipation program.

 

8 

 

CPP 1-X/Sulindac Combination Product

 

In January 2016, the Company entered into an option and collaboration agreement under which Cancer Prevention Pharmaceuticals, Inc. (CPP) granted the Company the sole option to acquire an exclusive license to commercialize CPP-1X/sulindac combination product in North America. This product is currently in a Phase 3 clinical trial, which is being conducted by CPP for the treatment of familial adenomatous polyposis (FAP). Under the agreement with CPP, the Company has the exclusive option to license this product in North America. There are currently no approved treatments for FAP.  The ongoing Phase 3 study, known as CPP FAP-310, is a 150-patient, three-arm, double-blind, randomized trial of the combination agent and the single agent comparators.  On June 7, 2017, CPP informed the Company that an Independent Data Monitoring Committee (IDMC), following a planned interim futility analysis, found no reason to discontinue the Phase 3 study, CPP FAP-310, evaluating CPP-1X/sulindac for adults with FAP. Results from the clinical trial are expected by the end of 2018. Pursuant to the Company’s agreement with CPP, the Company made the $4.5 million payment for the second option fee tranche in July 2017, which was recorded in research and development expense for the three and six months ended June 30, 2017.

 

VTS-270 for Niemann-Pick Disease Type C1 (NPC-1)

 

On March 31, 2017, the Company entered into an Agreement and Plan of Merger with Vtesse Inc. (Vtesse), a privately-held rare disease company. The Company acquired Vtesse’s lead product candidate, known as VTS-270, upon closing the acquisition on April 3, 2017. VTS-270 is a well-characterized mixture of 2-hydroxypropyl-ß-cyclodextrins (HPßCD) with a specific compositional fingerprint that distinguishes it from other HPßCD mixtures. It is administered by an intrathecal infusion to directly address the neurological manifestations of disease. Preclinical and early clinical studies suggest that the administration of VTS-270 may slow or stop certain indicators of NPC-1, an ultra-orphan, progressive and fatal disease caused by a defect in lipid transport within the cell. VTS-270, which is currently in a fully-enrolled pivotal Phase 2b/3 trial, has been granted breakthrough therapy designation in the U.S. and orphan designation in both the U.S. and EU. Effective treatment of NPC-1 remains a high unmet need, with no approved products for patients in the U.S. Results from the pivotal trial are expected in mid-2018.

 

The Company accounted for the transaction as an asset acquisition and incurred an acquired in-process research and development charge of $186.6 million (and no related current tax benefit) in the second quarter of 2017. Additionally, the Company recorded a deferred tax asset of $13.6 million related to Vtesse’s net operating loss.

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) and the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s Consolidated Financial Statements as of and for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 8, 2017. The financial information as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 is unaudited. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of the Company’s management, all adjustments, consisting only of normal recurring adjustments or accruals, considered necessary for a fair statement of the results of these interim periods have been included. The results of the Company’s operations for any interim period are not necessarily indicative of the results that may be expected for any other interim period or for a full fiscal year.

 

9 

 

The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries: Sucampo AG (SAG) and Sucampo Acquisitions GmbH (SAQ) based in Zug, Switzerland and Vtesse Europe Ltd., based in the United Kingdom, through which the Company conducts certain of its worldwide and European operations; Sucampo Pharma, LLC (SPL) based in Tokyo, Japan, through which the Company conducts its Asian operations, manufacturing and certain development operations; and Sucampo Pharma Americas LLC (SPA) and Vtesse Inc., based in Rockville, Maryland, through which the Company conducts its North American operations. All inter-company balances and transactions have been eliminated.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

2. Summary of Significant Accounting Policies

 

Certain Risks, Concentrations and Uncertainties

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents, restricted cash and receivables. The Company places its cash, cash equivalents and restricted cash with highly rated financial institutions. As of June 30, 2017 and December 31, 2016, approximately $1.3 million or 1%, and $1.2 million, or less than 1%, respectively, of the Company’s cash, cash equivalents, and restricted cash were issued or insured by the U.S. government or other government agencies. The Company has not experienced any losses on these accounts related to amounts in excess of insured limits.

 

Revenues from Takeda, an unrelated party, accounted for 65.4% and  69.3% of the Company’s total revenues for the three months ended June 30, 2017 and 2016, respectively, and 62.3% and 65.5% of the Company’s total revenues for the six months ended June 30, 2017 and 2016, respectively. Accounts receivable and product royalties receivable from Takeda accounted for 80.9% and 69.6% of the Company’s total accounts receivable and product royalties receivable at June 30, 2017 and December 31, 2016, respectively.

 

Revenues from another unrelated party, Mylan, accounted for 31.1% and 28.2% of the Company’s total revenues for the three months ended June 30, 2017 and 2016, respectively, and 33.3% and 29.3% of the Company’s total revenues for the six months ended June 30, 2017 and 2016, respectively. Accounts receivable from Mylan accounted for 14.5% and 30.1% of the Company’s total accounts receivable and product royalties receivable at June 30, 2017 and December 31, 2016, respectively.

 

The Company depends significantly upon collaborations with Takeda and Mylan, and its activities may be impacted if these relationships are disrupted.

 

Fair Value of Financial Instruments

 

The carrying values of the Company’s financial instruments approximate their fair values due to their short maturities, independent valuations or internal assessments. The Company’s financial instruments include cash and cash equivalents, restricted cash, receivables, accounts payable and other accrued liabilities. The Company’s investment in CPP is measured at fair value on a recurring basis, and the Company estimated the fair value of its long-term debt as of June 30, 2017 based on the available market data as of June 30, 2017.

 

Variable Interest Entities

 

The Company performs initial and on-going evaluations of the entities with which it has variable interests, such as equity ownership, in order to identify entities (i) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support or (ii) in which the equity investors lack an essential characteristic of a controlling financial interest. Such entities are classified as variable interest entities (VIEs). If an entity is identified as a VIE, the Company performs an assessment to determine whether the Company has both (i) the power to direct activities that most significantly impact the VIE’s economic performance and (ii) have the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. If both of these criteria are satisfied, the Company is identified as the primary beneficiary of the VIE. As of June 30, 2017 and December 31, 2016, CPP, in which the Company held a variable interest, was determined to be a VIE; however, the Company does not have the power to direct CPP’s economic performance and, as a result, the Company is not the primary beneficiary of CPP and the entity is not consolidated with the financial statements of the Company.

 

10 

 

Recently Adopted Accounting Pronouncements

 

In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." ASU No. 2015-11 applies only to inventory for which cost is determined by methods other than last in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this standard on January 1, 2017. The adoption of this standard had no impact on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the statement of operations when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the statement of cash flows, and provides an accounting policy election to account for forfeitures as they occur. The new standard is effective for the Company’s calendar year beginning January 1, 2017. On January 1, 2017, as a result of adopting ASU No. 2016-09, the Company recorded a cumulative-effect adjustment of $1.1 million between retained earnings and additional paid in capital as the Company elected to recognize forfeitures as they occur. Additionally, a retrospective adjustment to the Company’s statement of cash flows for the six months ended June 30, 2016 resulted in an increase of $455,000 to net cash provided by operating activities and a decrease of $455,000 to net cash provided by financing activities.

 

In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business.” This definition, as defined in ASC 805, is used in determining whether acquisitions are accounted for as business combinations or as the acquisition of assets. This standard modifies the definition of a business, including providing a screen to determine when an acquired set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The standard also makes other modifications to clarify what must be included in an acquired set for it to be a business and how to evaluate the set to determine whether it is a business. The Company’s acquisitions subsequent to December 31, 2016, such as the acquisition of Vtesse, are subject to the application of the modified definition.

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the test for goodwill impairment.” ASU No. 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 in the quantitative test and record an requires an entity to record impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 will be applied prospectively and is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019. The new standard is effective for the Company for its fiscal 2021 fourth quarter goodwill impairment test. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company elected to early adopt ASU No. 2017-04 on January 1, 2017. The adoption had no impact on the Company’s consolidated financial statements as of and for the three and six months ended June 30, 2017.

 

Accounting Pronouncements Not Yet Adopted 

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which will replace numerous requirements in U.S. GAAP, including industry-specific requirements. This guidance provides a five-step model to be applied to all contracts with customers, with an underlying principle that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.  The FASB has issued several amendments to the standard including clarification on accounting for licenses of intellectual property, identifying performance obligations, and most recently, technical corrections on the interpretation of the new guidance. ASU No. 2014-09 requires extensive quantitative and qualitative disclosures covering the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including disclosures on significant judgments made when applying the guidance. This guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods therein. An entity can elect to apply the guidance under one of the following two methods: (i) retrospectively to each prior reporting period presented – referred to as the full retrospective method or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earning – referred to as the modified retrospective method.

 

11 

 

The Company has established a project team in order to analyze the effect of the standard on its revenue streams by reviewing its current accounting policies and practices to identify potential differences which would result from applying the requirements of the new standard to its revenue contracts. The Company has identified each revenue stream and is nearing the completion of its assessment of all potential effects of the standard. The Company continues to evaluate the impact of adoption, the implementation approach to be used and the applicable disclosure requirements, which the Company expects will be significant and comprehensive. The Company plans to adopt the new standard effective January 1, 2018, anticipates using the full retrospective method, and will continue to monitor additional changes, modifications, clarifications or interpretations by the FASB, which may impact the Company’s current conclusions.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” that requires lessees to recognize assets and liabilities on the balance sheet for most leases including operating leases. Lessees now classify leases as either finance or operating leases and lessors classify all leases as sales-type, direct financing or operating leases. The statement of operations presentation and expense recognition for lessees for finance leases is similar to that of capital leases under Accounting Standards Codification (ASC) 840 with separate interest and amortization expense with higher periodic expense in the earlier periods of a lease. For operating leases, the statement of operations presentation and expense recognition is similar to that of operating leases under ASC 840 with single lease cost recognized on a straight-line basis. This guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements and is effective for annual periods beginning after December 15, 2018 and interim periods therein. Early adoption is permitted. The Company is currently evaluating the effect ASU No. 2016-02 may have on its condensed consolidated financial statements and related disclosures, but expects recognizing the lease liability and related right-of-use asset will impact its consolidated balance sheet.

 

In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU No. 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments in this ASU No. 2017-07 also allow only the service cost component to be eligible for capitalization when applicable. The amendments in ASU No. 2017-07 are effective for public business entities for annual periods beginning after December 15, 2017 and are to be applied retrospectively, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company is currently analyzing the impact of ASU No. 2017-07, and is currently unable to determine the impact of the new standard, if any, on the Company’s consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and 3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendment in ASU No. 2017-09 is effective for public business entities for annual periods beginning after December 15, 2017 and is to be applied prospectively. Early adoption is permitted, including adoption in any interim period. The Company adopted ASU No. 2017-09 on July 1, 2017.

 

3. Net Loss per Share

 

Basic net loss per share is computed by dividing net loss by the weighted average common shares outstanding. Diluted net loss per share is computed by dividing net loss by the weighted average common shares outstanding without the impact of potential dilutive common shares outstanding because they would have an anti-dilutive impact on diluted net loss per share. The treasury-stock method is used to determine the dilutive effect of the Company’s stock option grants, and the if-converted method is used to determine the dilutive effect of the Company’s convertible notes.

 

12 

 

The computation of net loss per share for the three and six months ended June 30, 2017 and 2016 is shown below.

 

   Three Months Ended June 30,  Six Months Ended June 30,
(In thousands, except per share data)  2017  2016  2017  2016
Basic net loss per share:                    
Net loss  $(181,167)  $(832)  $(176,543)  $(4,889)
Weighted-average number of common shares-basic and diluted   46,195    42,759    44,826    42,649 
                     
Basic and diluted net loss per share  $(3.92)  $(0.02)  $(3.94)  $(0.11)

 

The Company is excluding both the shares from the convertible note under the if-converted method and the outstanding options to purchase common stock from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect:

 

   Three Months Ended June 30,  Six Months Ended June 30,
(In thousands)  2017  2016  2017  2016
Employee stock options   6,579    5,382    6,579    5,382 
Convertible note, assumed shares if-converted   18,079    -    18,079    - 

 

4. Segment Information

 

The Company has one operating segment which is the development and commercialization of pharmaceutical products. Summarized product category and geographic information is shown in the tables below.

 

Product Category Information

 

Revenues for product categories are attributed based on the following categories.

 

Product royalty revenue represents royalty revenue earned on the net sales of AMITIZA in North America. Product sales revenue represents drug product net sales of AMITIZA in North America, Japan and Europe and drug product net sales of RESCULA in Japan. Research and development revenue represents funded development work primarily related to AMITIZA. Contract and collaboration revenue represents the amortization of up-front payments under the North America Takeda Agreement and release of the collaboration obligation under the Global Takeda Agreement.

 

Company revenues by product category for the three and six months ended June 30, 2017 and 2016 were as follows:

 

   Three Months Ended June 30,  Six Months Ended June 30,
(In thousands)  2017  2016  2017  2016
Product royalty revenue  $20,562   $18,735   $38,997   $35,451 
Product sales revenue - AMITIZA   32,131    27,001    63,471    50,121 
Product sales revenue - RESCULA   2,106    1,388    4,920    4,863 
Research and development revenue   5,051    3,369    8,499    6,799 
Contract and collaboration revenue   46    1,458    292    1,925 
Total  $59,896   $51,951   $116,179   $99,159 

 

13 

 

Geographical Information

 

Revenues are attributable to countries based on the location of the customer. The Company operates a manufacturing facility in Japan that supplies products to customers as well as the Company’s subsidiaries in other countries. The sales from the manufacturing operations to other countries are included in the net sales of the country in which the manufacturing location is based. All intercompany sales are excluded to derive consolidated revenues. The Company’s country of domicile is the United States.

 

Company revenues by geographic location for the three and six months ended June 30, 2017 and 2016 were as follows:

 

   Three Months Ended June 30,  Six Months Ended June 30,
(In thousands)  2017  2016  2017  2016
United States  $39,133   $34,529   $72,331   $63,162 
Japan   20,730    16,011    43,615    34,165 
Rest of the world   33    1,411    233    1,832 
Total  $59,896   $51,951   $116,179   $99,159 

 

The Company’s property and equipment, net by geographic location where located on June 30, 2017 and December 31, 2016 were as follows:

 

(In thousands)  June 30,
2017
  December 31,
2016
United States  $2,768   $3,065 
Japan   3,086    3,119 
Rest of the world   26    32 
Total  $5,880   $6,216 

 

5. Asset Acquisition

 

The following table and narrative summarizes the Company’s asset acquisition during the three months ended June 30, 2017.

 

Counterparty  Compound(s) or Therapy  Acquisition
Month
  Phase of
Development (1)
 

Acquired IPR&D Expense

(In thousands)

Vtesse Inc  VTS-270 - 2-hydroxypropyl-ß-cyclodextrins (HPßCD)  April 2017  Phase 2b / 3  $186,603 

 

(1)The phase of development presented is as of the date of the arrangement.

 

In April 2017, the Company acquired Vtesse, including its Phase 2b/3 product candidate, VTS-270 (the IPR&D asset), a well-characterized mixture of HPßCD with a specific compositional fingerprint that distinguishes it from other HPßCD mixtures, for the treatment of NPC-1, an ultra-orphan, progressive and fatal disease. Under the terms of the agreement, the Company acquired Vtesse for upfront consideration of $212.0 million, and agreed to pay Vtesse stockholders contingent consideration based on mid-single digit to double-digit royalties on global net sales of the product based on increasing net sales levels, and a share of net proceeds that may be generated from the monetization of the  pediatric review voucher, which is expected to be granted in connection with the approval of the product in the U.S. Of the $212.0 million consideration, the Company made a cash payment of $182.0 million and re-issued $30.0 million of Treasury Stock, 2,782,678 Class A common shares, based upon the closing price of $10.78 on April 3, 2017, to Vtesse stockholders.

 

14 

 

The preliminary purchase price allocation was determined as follows:

 

   April 3,
2017
 
Total purchase price  $211,996   
(In thousands)       
Total fair value of tangible assets acquired and liabilities assumed       
        
Deferred Tax Assets   (13,613)  
Net Assets   (11,780)  
Total IPR&D asset  $186,603   

 

Vtesse did not meet the definition of a business under ASC 805 as substantially all of the fair value of Vtesse was attributable to the VTS-270 IPR&D asset. Based on the asset acquisition method of accounting, the consideration paid was allocated primarily to the IPR&D asset acquired of $186.6 million, which was immediately expensed as the IPR&D asset has no other alternate use. The balance was allocated to the remaining assets and liabilities based on their estimated fair values. The acquired IPR&D expense is not tax deductible.

 

6. Fair Value Measurements

 

The Company performs fair value measurements in accordance with the FASB’s guidance for fair value measurements and disclosures, which defines fair value as the exchange price that would be received for selling 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. A fair value hierarchy is established which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company classifies its assets and liabilities into the following categories based on the three levels of inputs used to measure fair value:

 

Level 1: Observable inputs, such as quoted prices in active markets for identical assets or liabilities;

Level 2: Inputs, other than the quoted price in active markets, that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, product royalties receivable, accounts payable and other accrued liabilities, approximate their fair values due to their short maturities.

 

The Company has elected the fair value option on its investment in CPP; as such, it is measured at fair value on a recurring basis and was classified as Level 2. At June 30, 2017, the estimated fair value of the investment in CPP was $5.4 million. For the three months ended June 30, 2017, the Company recorded $0.1 million in other income due to the increase in fair value of the investment in CPP.

 

The estimated fair value of long term debt at June 30, 2017 was $292.1 million, was classified as Level 2, and was based on the available market data as of June 30, 2017.

 

15 

 

The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future. As of June 30, 2017 and December 31, 2016, there were no financial instruments measured at fair value on a non-recurring basis.

 

7. Inventory

 

Inventories are valued under a standard costing method and are stated at the lower of cost or net realizable value. Inventories consist of raw materials, work-in-process and finished goods. The Company’s inventories include the direct purchase cost of materials and supplies and manufacturing overhead costs.

 

Inventory consisted of the following at June 30, 2017 and December 31, 2016:

 

(In thousands)  June 30,
2017
  December 31,
2016
Raw materials  $3,658   $1,414 
Work in process   19,405    18,045 
Finished goods   35    4,009 
Total  $23,098   $23,468 

 

8. Investments, Non-Current

 

Investment in CPP

 

In 2016, the Company entered into a Securities Purchase Agreement (CPP Securities Agreement) and an Option and Collaboration Agreement (CPP Agreement) with CPP for the development and commercialization of CPP-1X/sulindac combination.

 

Under the terms of the CPP Securities Agreement, the Company provided $5.0 million to CPP in exchange for a convertible note. The convertible note bears interest at the rate of 5% per annum and matures on January 31, 2019 unless earlier converted or prepaid. Under the terms of the CPP Agreement, CPP granted the Company the sole option to acquire an exclusive license to commercialize CPP-1X/sulindac combination product in North America.

 

Under the terms of an Option and Collaboration Agreement, CPP granted the Company the sole option to acquire an exclusive license to commercialize CPP-1X/Sulindac combination product in North America and granted the rest of world rights for CPP-1X/Sulindac to a third party, who is operating under a similar option and license agreement. CPP-1X/Sulindac is currently in a Phase 3 clinical trial for the treatment of FAP. Target enrollment in the study was achieved in April of 2016 and the trial is expected to conclude in 2018. The Company agreed to pay CPP an option fee of $7.5 million, payable in two tranches. The first tranche of $3.0 million was paid in January 2016 upon signing.  On June 7, 2017, CPP informed the Company that an IDMC, following a planned interim futility analysis, found no reason to discontinue the Phase 3 study, CPP FAP-310, evaluating CPP-1X/sulindac for adults with FAP. Pursuant to the Company’s agreement with CPP, the Company made the $4.5 million payment for the second option fee tranche, which was recorded in research and development expense for the three and six months ended June 30, 2017. CPP will complete the ongoing Phase 3 trial under the oversight of a joint steering committee between CPP and the Company.

 

CPP is considered to be a VIE with respect to the Company and, as a result of the $4.5 million tranche payment, continues to conclude the power to direct the activities that most significantly impact CPP’s economic performance is held by the board of directors of CPP. The Company does not have a representative on CPP’s board and does not have the right to appoint or elect such a representative. Therefore, the Company is not the primary beneficiary of CPP, and the entity is not consolidated with the financial statements of the Company.

 

The Company’s maximum exposure to loss as a result of its involvement with CPP was $5.4 million and $5.2 million as of June 30, 2017, and December 31, 2016, respectively.

 

16 

 

The Company has elected the fair value option on the convertible note received from CPP due to the nature of the financial characteristics of the investment. As of June 30, 2017 and December 31, 2016, the fair value of the convertible note was $5.4 million and $5.2 million, respectively.

 

9. Intangible Assets and Goodwill

 

Intangible assets by major class consisted of the following as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017  December 31, 2016
(In thousands)  Weighted
average life
(in months)
  Carrying
amount
  Weighted
average life
(in months)
  Carrying
amount
Amortized intangible assets                    
Patent and license rights   54   $10,513    60   $10,513 
Manufacturing know-how   61    134,600    65    134,600 
Accumulated amortization        (47,647)        (34,142)
Impairment losses        (5,651)        (5,651)
Foreign currency translation adjustments        22,814         22,814 
Total amortized intangible assets       $114,629        $128,134 
                     
Unamortized intangible assets                    
Goodwill       $73,022        $73,022 
Total unamortized intangible assets       $73,022        $73,022 
                     
Total intangible assets       $187,651        $201,156 

 

The changes in intangible assets for the six months ended June 30, 2017 are as follows:

 

(In thousands)  Amortized intangibles  Goodwill
Balance at December 31, 2016  $128,134   $73,022 
Amortization   (13,505)   - 
Balance at June 30, 2017  $114,629   $73,022 

 

10. Accrued Expenses and Other Current Liabilities

 

Accrued expenses consisted of the following at June 30, 2017 and December 31, 2016:

 

(In thousands)  June 30,
2017
  December 31,
2016
Research and development costs  $4,605   $3,030 
Employee compensation   5,123    7,513 
Legal and accounting fees   1,091    622 
Restructuring   187    163 
Other accrued expenses   1,259    1,061 
Total  $12,265   $12,389 

 

17 

 

Other current liabilities consisted of the following at June 30, 2017 and December 31, 2016:

 

(In thousands)  June 30,
2017
  December 31,
2016
Indirect taxes payable  $3,267   $1,756 
Squeeze out liability for non-tendering R-Tech shareholders   150    155 
Other current liabilities   275    264 
Total  $3,692   $2,175 

 

11. Restructuring

 

In December 2015, the Company adopted a plan to restructure certain of its operations and to consolidate certain functions in the Company’s corporate headquarters located in Rockville, Maryland and in the Company’s Japanese subsidiary. In connection with these restructuring activities, the Company recorded restructuring charges of $0.4 million and $1.7 million for the six months ended June 30, 2017 and 2016, respectively. These costs are reflected within general and administrative expenses and consisted primarily of termination benefits.

 

No restructuring charges were recorded under this plan for the three months ended June 30, 2017, and the Company does not expect to record any additional restructuring charges under this plan. The Company has incurred total restructuring charges under this plan of $3.7 million through June 30, 2017.

 

In June 2017, the Company adopted a separate plan to restructure certain research and development operations at the Company’s Japan subsidiary. This restructuring plan includes a headcount reduction following the discontinuance of the VAP-1 Inhibitor RTU-1096 development program and VAP-1 Inhibitor RTU-009 programs and back up programs, the ending of the AMITZIA clinical studies, and the recognition of further synergies in the manufacturing process.

 

As of June 30, 2017, the expected amount of the restructuring accrual of $0.2 million for termination benefits was included in accrued liabilities.

 

The changes in accrued restructuring costs for the six months ended June 30, 2017 are as follows:

 

(In thousands)  Accrued
Restructuring
 
Balance at December 31, 2016  $163   
Expenses incurred   552   
Amounts paid   (528)  
Balance at June 30, 2017  $187   

 

18 

 

12. Other Liabilities

 

Other liabilities consisted of the following at June 30, 2017 and December 31, 2016:

 

(In thousands)  June 30,
2017
  December 31,
2016
Deferred grants  $750   $750 
Unrecognized tax benefits   4,261    4,060 
Deferred leasehold incentive   1,500    1,582 
Defined benefit obligation   870    818 
Lease liability   1,591    1,183 
Other   418    398 
Total  $9,390   $8,791 

 

13. Convertible Notes Payable

 

On December 27, 2016, the Company issued $300.0 million aggregate principal amount of its 3.25% Convertible Senior Notes due in 2021 (the Convertible Notes). Interest is payable semi-annually in cash in arrears on June 15 and December 15 of each year, beginning on June 15, 2017, at a rate of 3.25% per year. The Convertible Notes mature on December 15, 2021 unless earlier converted or repurchased, are not redeemable prior to the maturity date and no sinking fund is provided for the Convertible Notes.

 

As of June 30, 2017, the Company was compliant with all covenants and conditions under the Convertible Notes.

 

The Convertible Notes are subject to the fair value disclosure requirements as discussed in Note 6 and are classified as a Level 2 instrument. The estimated fair value of the Convertible Notes at June 30, 2017 and December 31, 2016 was $292.1 million and $319.5 million, respectively.

 

Total future interest and debt repayment obligations related to the Convertible Notes were as follows as of June 30, 2017:

 

(In thousands)  June 30,
2017
 
2017  $4,915   
2018   9,750   
2019   9,750   
2020   9,752   
2021   309,323   
Total minimum interest and debt payments  $343,490   

 

14. Commitments and Contingencies

 

Operating Leases

 

The Company leases office space in the United States, Switzerland and Japan under operating leases through 2027. Total future minimum, non-cancelable lease payments under operating leases are as follows:

 

(In thousands)  June 30,
2017
 
2017  $1,161   
2018   2,043   
2019   1,516   
2020   1,103   
2021   997   
Total minimum lease payments  $6,820   

 

19 

 

Rent expense for all operating leases was $0.4 million and $0.7 million for the three months ended June 30, 2017 and June 30, 2016, respectively and $0.8 million and $1.3 million for the six months ended June 30, 2017 and 2016, respectively.

 

CPP

 

Under the terms of an Option and Collaboration Agreement, CPP granted the Company the sole option to acquire an exclusive license to commercialize CPP-1X/Sulindac combination product in North America. This product is currently in a Phase 3 clinical trial for the treatment of FAP Target enrollment in the study was achieved in April 2016 and the trial is expected to conclude in 2018. The Company agreed to pay CPP an option fee of $7.5 million, payable in two tranches. The first tranche of $3.0 million was paid in January 2016 and expensed as research and development expense. On June 7, 2017, CPP informed the Company that an IDMC, following a planned interim futility analysis, found no reason to discontinue the Phase 3 study, CPP FAP-310, evaluating CPP-1X/sulindac for adults with FAP. Pursuant to the Company’s agreement with CPP, the Company made the $4.5 million payment for the second option fee tranche, which was recorded in research and development expense for the three and six months ended June 30, 2017. CPP will complete the ongoing Phase 3 trial under the oversight of a joint steering committee between CPP and the Company.

 

Upon exercise of its exclusive option, the Company would acquire the rights to negotiate an exclusive license to develop and commercialize the product in North America for all indications. In connection with the exercise and finalization of the license right, the Company would be obligated to pay CPP up to an aggregate of $190.0 million of specified clinical development and sales milestones. Under the terms of the license, the Company and CPP would share equally in net profits from the sale of licensed products.

 

Under the CPP Securities Agreement, the successful completion of the Phase 3 futility analysis, as described above, gave CPP the right to secure an additional investment of $5.0 million from the Company in exchange for a convertible note in such principal amount, on substantially the same terms as the Company’s initial such investment in CPP. CPP has notified the Company of its desire to receive this additional investment, though the timing and mechanics thereof are still under discussion.

 

15. Stock Option Plans

 

A summary of employee stock option activity for the six months ended June 30, 2017 under the Company’s Amended and Restated 2006 Stock Incentive Plan is presented below:

 

2006 Stock Incentive Plan  Shares  Weighted
Average
Exercise
Price Per
Share
  Weighted
Average
Remaining
Contractual
Term
(Years)
  Aggregate
Intrinsic
Value
Options outstanding, December 31, 2016   4,648,549   $10.86           
Options granted   -    -           
Options exercised   (49,147)  $5.78           
Options forfeited   (310,094)  $11.26           
Options expired   (12,599)  $9.60           
Options outstanding, June 30, 2017   4,276,709   $10.90    7.3   $6,805,827 
Options exercisable, June 30, 2017   2,387,102   $9.96    6.6   $5,031,285 
Options vested and expected to vest, June 30, 2017   4,276,709   $10.90    7.3   $6,805,827 

 

20 

 

A summary of employee stock option activity for the six months ended June 30, 2017 under the Company’s 2016 Equity Incentive Plan (the “2016 Plan”) is presented below:

 

The weighted average grant date fair value of options granted during the six months ended June 30, 2017 was $5.28.

 

2016 Equity Incentive Plan  Shares  Weighted
Average
Exercise
Price Per
Share
  Weighted
Average
Remaining
Contractual
Term
(Years)
  Aggregate
Intrinsic
Value
Options outstanding, December 31, 2016   74,750   $12.66           
Options granted   1,857,844   $11.38           
Options exercised   -    -           
Options forfeited   (63,000)  $11.85           
Options expired   (36,700)  $13.97           
Options outstanding, June 30, 2017   1,832,894   $11.37    7.9   $340,600 
Options exercisable, June 30, 2017   364,275   $11.39    0.5   $325,500 
Options vested and expected to vest, June 30, 2017   1,832,894   $11.37    7.9   $340,600 

 

A summary of employee restricted stock units activity for the six months ended June 30, 2017 under the Company’s 2016 Plan is presented below:

 

2016 Equity Incentive Plan  Shares  Weighted
Average
Grant Date
Fair Value
Outstanding Restricted Stock Units, December 31, 2016   63,700   $12.29 
Restricted Stock Units granted   487,454   $11.66 
Restricted Stock Units vested   (82,000)  $11.47 
Restricted Stock Units forfeited   -    - 
Outstanding Restricted Stock Units, June 30, 2017   469,154   $11.77 

 

Employee Stock Purchase Plan

 

The following table summarizes the Company’s 2006 Employee Stock Purchase Plan activity for the six months ended June 30, 2017 and 2016:

 

   Six Months Ended June 30,
(In thousands, except share amounts)  2017  2016
Shares issued under the ESPP   16,489    7,502 
Cash received under the ESPP  $150,283   $69,919 

 

21 

 

Accumulated Other Comprehensive Income

 

The following table details the accumulated other comprehensive income (loss) activity for the six months ended June 30, 2017 and 2016:

 

(In thousands)  Foreign Currency Translation Adjustments  Unrealized Income on Investments, Net of Tax Effect  Unrealized Gain (Loss) on Pension Benefit Obligation  Accumulated Other Comprehensive Income
Balance January 1, 2016  $14,243   $42   $(873)  $13,412 
Other comprehensive income (loss) before reclassifications   36,255    -    25    36,280 
Amounts reclassified from accumulated other comprehensive loss   -    -    -    - 
Balance June 30, 2016  $50,498   $42   $(848)  $49,692 
                     
Balance January 1, 2017  $55,119   $42   $(634)  $54,527 
Other comprehensive loss before reclassifications   (77)   -    (27)   (104)
Amounts reclassified from accumulated other comprehensive loss   -    -    11    11 
Balance June 30, 2017  $55,042   $42   $(650)  $54,434 

 

16. Income Taxes

 

The provision for income taxes is based upon the estimated annual effective tax rates for the year applied to the current period income before tax plus the tax effect of any significant unusual items, discrete events or changes in tax law. The Company’s operating subsidiaries are exposed to effective tax rates ranging from zero to approximately 40%. Fluctuations in the distribution of pre-tax income among the Company’s operating subsidiaries can lead to fluctuations of the effective tax rate in the condensed consolidated financial statements. In the three months ended June 30, 2017 and 2016, the actual effective tax rates were (1.1%) and 5.8%, respectively, and for the six months ended June 30, 2017 and 2016, the actual effective tax rates were (3.2%) and 38.7%, respectively. The decrease in the effective tax rate for both the three and six months ended June 30, 2017 and June 30, 2016 was primarily due to the non-deductibility of the acquired in-process research and development expense during 2017. Tax expense for both the three and six months ended June 30, 2017 increased compared to the three and six months ended June 30, 2016 primarily due an increase in earnings with no tax benefit available for the acquired in-process research and development in 2017 from Vtesse.

 

The Company assesses uncertain tax positions in accordance with ASC 740 (ASC 740-10 Accounting for Uncertainties in Tax). As of June 30, 2017, the Company’s net unrecognized tax benefits totaled $3.2 million, excluding interest and penalties. Of this balance, $1.7 million would favorably impact the Company’s effective tax rate in the periods if they are recognized. Management has not identified any material uncertain tax positions that are reasonably likely to be released during the next 12 months due to lapse of statutes of limitations or settlements with tax authorities.

 

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S., Switzerland and Japan, as well as in various other state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. Currently tax years 2012 to 2016 remain open and subject to examination in the major tax jurisdictions in which tax returns are filed. The tax years 2009-2011 were examined by the U.S. tax authorities and resulted in no tax adjustments.

 

22 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This Quarterly Report on Form 10-Q contains forward-looking statements regarding Sucampo Pharmaceuticals, Inc. and our business, financial condition, results of operations and prospects within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments to differ materially from those expressed or implied in such statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our other filings with the Securities and Exchange Commission (SEC) including our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which we filed with the SEC on March 8, 2017. Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Form 10-Q and with our consolidated financial statements and related notes for the year ended December 31, 2016 which are included in our Annual Report on Form 10-K.

 

Overview

 

We are a global biopharmaceutical company focused on innovative research and development of proprietary drugs to treat gastrointestinal, ophthalmic, autoimmune, inflammatory, neurological and oncology disorders.

 

We currently generate revenue mainly from product royalties, development milestone payments, product sales and reimbursements for clinical development activities. We expect to continue to incur significant expenses for the next several years as we continue our research and development activities, seek additional regulatory approvals and additional indications for our approved products and other compounds and seek strategic opportunities for acquiring new products and product candidates.

 

Our operations are conducted through subsidiaries based in the United States (U.S.), Japan, Switzerland, and the United Kingdom (U.K.). We operate as one segment, which focuses on the development and commercialization of pharmaceutical products.

 

AMITIZA (lubiprostone)

 

United States and Canada

 

AMITIZA is marketed in the U.S. for three gastrointestinal indications under a collaboration and license agreement (North America Takeda Agreement) with Takeda Pharmaceutical Company Limited (Takeda). These indications are chronic idiopathic constipation (CIC) in adults, irritable bowel syndrome with constipation (IBS-C) in adult women, and opioid-induced constipation (OIC) in adults suffering from chronic non-cancer related pain. Under the North America Takeda Agreement, we are primarily responsible for clinical development activities, while Takeda is responsible for commercialization of AMITIZA in the U.S. and Canada. Takeda is required to provide a minimum annual commercial investment during the current term of the North America Takeda Agreement and may reduce the minimum annual commercial investment when a generic equivalent enters the market. In October 2015, Health Canada approved AMITIZA for CIC in adults. In October 2014, we signed an amendment (Takeda Amendment) to the North America Takeda Agreement which, among other things, extended the term of the North American Takeda Agreement beyond December 2020. During the extended term beginning in January 2021, we will share with Takeda the net sales revenue on branded AMITIZA sales.

 

We have also partnered with Par Pharmaceuticals, Inc. (Par) and Dr. Reddy’s Laboratories, Ltd. (Dr. Reddy’s), in connection with the settlement of patent litigation in the U.S. related to our AMITIZA 8 mcg and 24 mcg soft gelatin capsule products. Under our agreement with Par, we granted Par a non-exclusive license to market Par’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the indications approved for AMITIZA beginning January 1, 2021, or earlier under certain circumstances. Beginning on January 1, 2021, Par will split with us the gross profits of the licensed products sold during the term of the agreement, which continues until each of our related patents has expired. Under our agreement with Dr. Reddy’s, we granted Dr. Reddy’s a non-exclusive license to market Dr. Reddy’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the indications approved for AMITIZA. This license does not begin until more than six years from November 9, 2016, or earlier under certain circumstances. Dr. Reddy’s will pay to us a share of net profits of generic lubiprostone products sold during the term of the agreement, which decreases over time and ends when all of our related patents have expired. In the event that either Par or Dr. Reddy’s elect to launch an authorized generic form of lubiprostone, we have agreed to supply such product under the terms of a manufacturing and supply agreement at a negotiated price.

 

23 

 

Japan

 

In Japan, AMITIZA is the only prescription medicine for chronic constipation, excluding constipation caused by organic diseases, and is marketed under a license, commercialization and supply agreement (Japan Mylan Agreement) originally entered into with Abbott Laboratories, Inc. (Abbott). In February 2015, Mylan, Inc. (Mylan) purchased Abbott’s non-U.S. developed markets specialty and branded generics business, as a result of which Mylan acquired the rights to commercialize AMITIZA in Japan. We did not experience any significant changes in the commercialization of AMITIZA in Japan as a result of the transfer of the Japan Mylan Agreement from Abbott to Mylan.

 

People’s Republic of China

 

In May 2015, we entered into an exclusive license, development, commercialization and supply agreement (China Gloria Agreement) with Harbin Gloria Pharmaceuticals Co., Ltd. (Gloria) for AMITIZA in the People’s Republic of China. We will be the exclusive supplier of AMITIZA to Gloria at an agreed upon supply price. Under the China Gloria Agreement, Gloria is responsible for all development activities and costs, as well as commercialization and regulatory activities, for AMITIZA in the People’s Republic of China. Upon entering into the China Gloria Agreement, we received an upfront payment of $1.0 million. In June 2015, the China Food and Drug Administration accepted an Investigational New Drug (IND) application for a pivotal trial of AMITIZA in patients with CIC, as a result of which we received an additional payment of $500,000 from Gloria. In addition to the $1.5 million in payments received and recognized as revenue through June 2015, we are eligible to receive an additional payment in the amount of $1.5 million upon the occurrence of a specified regulatory or commercial milestone event.

 

Other Global Markets

 

In October 2014, we entered into an exclusive license, development, commercialization and supply agreement (Global Takeda Agreement) for lubiprostone with Takeda. Under the Global Takeda Agreement, Takeda develops and markets AMITIZA globally except in the U.S., Canada, Japan and the People’s Republic of China. We supply Takeda with the clinical and commercial product at a negotiated price. Takeda currently markets AMITIZA for CIC and OIC in Switzerland, and for CIC in the U.K.

 

In January 2016, we received notification from the Medicines and Healthcare Products Regulatory Agency of the U.K. that our appeal for the OIC indication was not approved. In January 2015, we successfully completed the European mutual recognition procedure for AMITIZA for the treatment of CIC in Austria, Belgium, Germany, Italy, Ireland, Luxembourg, Netherlands and Spain, resulting marketing authorizations in these markets. Takeda became the marketing authorization holder in Switzerland in April 2015, as well as in the U.K., Austria, Belgium, Germany, Netherlands, Ireland, Italy, Luxembourg and Spain during 2016.

 

In October 2015, Takeda obtained approval of the clinical trial application (CTA) for AMITIZA for the treatment of CIC and IBS-C in Russia that was submitted in June 2015. In December 2015, a CTA was filed for AMITIZA for the treatment of CIC, IBS-C and OIC in Mexico and South Korea. Takeda initiated Phase 3 registration trials in Russia in March 2016 and in South Korea and Mexico in May 2016. A new drug application (NDA) for the treatment of CIC, IBS-C, and OIC was submitted in Israel in June 2015, and approved in July 2016. An NDA for the treatment of CIC, IBS-C and OIC was[approved] in Kazakhstan in December 2015. Additional NDA submissions have been made by Takeda in Singapore in May 2016, and in South Africa and Indonesia in June 2016, and are planned in various other markets in 2017 and future years.

 

RESCULA (unoprostone isopropyl)

 

As part of the acquisition of R-Tech Ueno, Ltd. (R-Tech) in October 2015, we acquired global rights to RESCULA, an ophthalmology product used to lower intraocular pressure (IOP).

 

24 

 

In the fourth quarter of 2014 we ceased marketing RESCULA in the United States and no product was made available after the March 2015 expiration date. In May 2015, we returned all licenses for unoprostone isopropyl to R-Tech. In June 2016, we completed the withdrawal of the marketing authorization for RESCULA in the U.S.

 

In Japan, RESCULA was approved by the Ministry of Health, Labour and Welfare in 1994 for the treatment of glaucoma and ocular hypertension. In Japan, RESCULA is no longer protected by regulatory or intellectual property exclusivity. In March 2012, R-Tech signed a distribution agreement (Japan Santen Agreement) with Santen Pharmaceutical Co., Ltd. (Santen) to commercialize RESCULA in Japan. As part of the acquisition of R-Tech in 2015, we acquired R-Tech’s rights and obligations under the Japan Santen Agreement.

 

In Taiwan, R-Tech signed a manufacturing and supply agreement with Sinphar Pharmaceutical, Co., Ltd. and also executed the distribution agreement with Zuellig Pharma, Inc. in April 2013.

 

In February 2017, the import license for RESCULA in South Korea was withdrawn by Dong-A ST Co., Ltd., our local distributor.

 

Product Pipeline

 

The table below summarizes the development status of our marketed products and key product candidates. The commercialization rights to lubiprostone have been licensed to Takeda on a global basis other than Japan and the People’s Republic of China, to Mylan for Japan, and to Gloria for the People’s Republic of China. Commercialization of each product candidate may occur after successful completion of clinical trials and approval from competent regulatory agencies. For CPP-1X/sulindac, we have an option to acquire an exclusive license to commercialize in North America.

 

 

  Country Program Type Target Indication Development Phase Next Milestone
 Lubiprostone (AMITIZA ®)    
  U.S. Commercial Chronic idiopathic constipation (CIC) adults of all ages Marketed _____
  U.S. Commercial Irritable bowel syndrome with constipation (adult women) (IBS-C) Marketed Initiate Phase 4 study on higher dosage and with additional male subjects
  U.S. Commercial Opioid-induced constipation (OIC) in patients with chronic non-cancer pain Marketed _____
  U.S. Clinical Alternate (Sprinkle) formulation - adults of all ages In development submit NDA
  U.S. &
European Union (EU)
Clinical Pediatric functional constipation
(6 months - 6 years)
Alternate (Sprinkle) formulation in development Initiate Phase 3 program
  U.S. Clinical Pediatric IBS-C
(6 years - 17 years)
Alternate (Sprinkle) formulation in development Initiate Phase 3 program
  U.S. & EU Clinical Pediatric functional constipation
(6 years - 17 years)
submit sNDA Regulatory review for market approval.
  Japan Commercial Chronic constipation Marketed _____
  Japan Clinical CIC adults, 2x12mcg capsule Submit SNDA Regulatory review for market approval.
  Switzerland Commercial CIC-adults of all ages Marketed _____
  Switzerland Commercial OIC in patients with chronic non-cancer pain Marketed _____
  U.K. Commercial CIC-adults of all ages Marketed _____

 

25 

 

 

  Canada Clinical CIC-adults of all ages Received approval from Health Canada Determine launch feasibility and plans
  China Clinical CIC-adults of all ages IND accepted Initiate CIC study
  European Union Clinical CIC-adults of all ages Received national marketing approvals in Ireland, Germany, Austria, Belgium, the Netherlands, Luxembourg, Italy and Spain (where product is not yet launched) Launch feasibility and planning under evaluation
  Israel Commercial CIC-adults of all ages Approved and marketed _____
  Israel Commercial IBS-C - adult women Approved and marketed _____
  Israel Commercial OIC in patients with chronic non-cancer pain Approved and marketed _____
  Mexico Clinical CIC-adults of all ages CTA Approved Regulatory review for market approval
  Mexico Clinical IBS-C - adult women CTA Approved Regulatory review for market approval
  Mexico Clinical OIC in patients with chronic non-cancer pain CTA Approved Regulatory review for market approval
  Russia Clinical CIC-adults of all ages Phase 3 completed Regulatory review for market approval
  Russia Clinical IBS-C - adult women Phase 3 completed Regulatory review for market approval
  South Korea Clinical CIC-adults of all ages CTA Approved Regulatory review for market approval
  South Korea Clinical IBS-C - adult women CTA Approved Regulatory review for market approval
  South Korea Clinical OIC in patients with chronic non-cancer pain CTA Approved Regulatory filing for market approval
  Kazhakstan Commercial CIC-adults of all ages Registered Determine launch feasibility and plans
  Kazhakstan Commercial IBS-C - adult women Registered Determine launch feasibility and plans
  Kazhakstan Commercial OIC in patients with chronic non-cancer pain Registered Determine launch feasibility and plans
Unoprostone isopropyl (RESCULA®)    
  Japan
Taiwan
Commercial Glaucoma and ocular hypertension Marketed _____
CPP-1X/sulindac combination product    
  U.S. Clinical and Option Familial adenomatous polyposis (FAP) - adults of all ages Phase 3 Complete Phase 3 trial
VTS-270 for Niemann-Pick disease type C1 product    
  U.S. & EU (and rest of world) Clinical Niemann-Pick disease type C1 Phase 2b/3 Complete Phase 2b/3 trial

 

26 

 

Our Clinical Development Programs

 

Lubiprostone

 

Alternate Formulation

 

We are developing an alternate formulation of lubiprostone for both adult and pediatric patients who are unable to take or tolerate capsules and for naso-gastric tube fed patients. Takeda has agreed to fund 100% of the costs, up to a cap, of this alternate formulation work. We initiated the Phase 3 program of the alternate formulation of lubiprostone in adults in the second half of 2016 and, if the program is successful, we intend to file an NDA in the U.S. for the alternate formulation for adults in the second half of 2017.

 

Pediatric Functional Constipation

 

A Phase 3 program required to support an application for marketing authorization of lubiprostone for pediatric functional constipation comprises four clinical trials. The first two trials, one of which was recently completed, test the soft gelatin capsule formulation of lubiprostone in patients 6 to 17 years of age. The first of these trials was a pivotal 12-week, randomized, placebo-controlled trial which was initiated in December 2013 and completed enrollment in April 2016. The second trial is a follow-on, long-term safety extension trial that was initiated in March 2014. In November 2016, we announced that the Phase 3 trial of AMITIZA in pediatric functional constipation in children 6 to 17 years of age failed to achieve its primary endpoint of overall spontaneous bowel movement (SBM) response. The trial achieved statistical significance for some secondary endpoints, notably overall SBM frequency, straining, and stool consistency. In addition, in this study lubiprostone was well tolerated. We have entered into a process with the U.S. Food and Drug Administration (FDA) and other constituencies, and as a result of initial discussion with the FDA we submitted an sNDA on July 28, 2017. Additionally, after further consultations with the FDA to better determine the doses and endpoints that should be studied, following the Phase 3 program for the alternate formulation of lubiprostone described above, we plan to initiate in mid-2018 a Phase 3 program in patients 6 months to likely 6 years of age using the alternate formulation. Takeda has agreed to fund 70% of the costs, up to a cap, and then 50% of the costs thereafter, of this pediatric functional constipation program.

 

CPP 1-X/Sulindac Combination Product

 

In January 2016, we entered into an option and collaboration agreement under which Cancer Prevention Pharmaceuticals, Inc. (CPP) has granted us the sole option to acquire an exclusive license to commercialize CPP-1X/sulindac combination product in North America. This product is currently in a Phase 3 clinical trial, conducted by CPP for the treatment of familial adenomatous polyposis (FAP). Under our agreement with CPP, we have the exclusive option to license this product for North America. There are currently no approved treatments for FAP.  The ongoing Phase 3 study, known as CPP FAP-310, is a 150-patient, three-arm, double-blind, randomized trial of the combination agent and the single agent comparators.  Enrollment in the study has completed. On June 7, 2017 CPP informed us that an independent Data Monitoring Committee, following a planned interim futility analysis, found no reason to discontinue the Phase 3 study. Results from the clinical trial are expected at the end of 2018. Pursuant to our agreement with CPP, we made the $4.5 million payment for the second option fee tranche in July 2017, which we recorded in research and development expense for the three and six months ended June 30, 2017.

 

VTS-270 for Niemann-Pick Disease Type C1 (NPC-1)

 

On March 31, 2017, we entered into an Agreement and Plan of Merger with Vtesse Inc. (Vtesse) a privately-held rare disease company. Following the closing of this acquisition on April 3, 2017, we acquired Vtesse’s lead product candidate, known as VTS-270. VTS-270 is a well-characterized mixture of 2-hydroxypropyl-ß-cyclodextrins (HPßCD) with a specific compositional fingerprint that distinguishes it from other HPßCD mixtures. It is administered by an intrathecal infusion to directly address the neurological manifestations of disease. Preclinical and early clinical studies suggest that the administration of VTS-270 may slow or stop certain indicators of NPC-1, an ultra-orphan, progressive and fatal disease caused by a defect in lipid transport within the cell. VTS-270, which is currently in a fully-enrolled pivotal Phase 2b/3 trial, has been granted breakthrough therapy designation in the U.S. and orphan designation in both the U.S. and EU. Effective treatment of NPC-1 remains a high unmet need, with no approved products for patients in the U.S. Results from the pivotal trial are expected in mid-2018.

 

27 

 

Non-GAAP Financial Metrics

 

In addition to disclosing financial results that are determined in accordance with GAAP, we also use the following non-GAAP financial metrics to understand and evaluate our operating performance:

 

·Adjusted net income, which is GAAP net income (loss) adjusted to exclude the tax-effected impact of (i) amortization of acquired intangibles, (ii) inventory step-up adjustment, (iii) research and development license option expense, (iv) restructuring costs, (v) one-time severance payments (vi) acquisition and integration related expenses, (vii) acquired in-process research and development, (viii) amortization of debt financing costs, and (ix) foreign currency effect;
·Adjusted EPS-diluted, which is adjusted net income as defined above expressed on a diluted per share basis;
·EBITDA, which is GAAP net income adjusted to exclude (i) taxes, (ii) interest expense, (iii) interest income, (iv) depreciation and amortization, (v) amortization of acquired intangibles, and (vi) inventory step-up adjustment;
·Adjusted EBITDA, which is EBITDA as defined above further adjusted to exclude (i) share-based compensation expense, (ii) restructuring costs, (iii) one-time severance payments, (iv) acquired in-process research and development, (v) acquisition and integration related expenses, (vi) research and development license option expense, and (vii) foreign currency effect.

 

We believe that providing this additional information is useful to the reader to better assess and understand our operating performance, primarily because management typically monitors the business adjusted for these items in addition to GAAP results. These non-GAAP financial metrics should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. Our definition of these non-GAAP metrics may differ from similarly titled metrics used by others. We view these non-GAAP financial metrics as a means to facilitate our financial and operational decision-making, including evaluation of our historical operating results and comparison to competitors’ operating results. These non-GAAP financial metrics reflect an additional way of viewing aspects of our operations that, when viewed with GAAP results may provide a more complete understanding of factors and trends affecting our business. The determination of the amounts that are excluded from these non-GAAP financial metrics is a matter of management judgment and depends upon, among other factors, the nature of the underlying expense or income amounts. Because non-GAAP financial metrics exclude the effect of items that will increase or decrease our reported results of operations, we strongly encourage investors to review our consolidated financial statements and periodic reports in their entirety.

 

The following tables present reconciliations of these non-GAAP financial metrics to the most directly comparable GAAP financial measure for the three and six months ended June 30, 2017 and 2016.

 

Non-GAAP Financial Metrics

 

   Three Months Ended June 30,  Six Months Ended June 30,
(In thousands, except per share amounts)  2017  2016  2017  2016
Non-GAAP adjusted net income                    
GAAP net loss  $(181,167)  $(832)  $(176,543)  $(4,889)
Amortization of acquired intangibles   6,753    6,334    13,506    12,245 
Inventory step-up adjustment   -    6,303    -    15,235 
R&D license option expense   4,500    -    4,500    3,000 
Restructuring costs   189    1,504    554    1,687 
One-time severance payments   984    -    1,460    - 
Acquisition and integration related expenses   1,111    1,105    8,121    1,632 
Acquired in-process research and development   186,603    -    186,603    - 
Amortization of debt financing costs   477    889    949    1,811 
Foreign currency effect   511    2,658    317    3,009 
Tax effect of adjustments   (3,500)   (7,641)  $(10,028)  $(13,660)
Non-GAAP adjusted net income  $16,461   $10,320   $29,439   $20,070 
                     
Non-GAAP adjusted EPS - diluted  $0.28   $0.24   $0.51   $0.47 
                     
(In thousands)                    
Non-GAAP EBITDA                    
GAAP net loss  $(181,167)  $(832)  $(176,543)  $(4,889)
Taxes   1,940    (51)   5,525    (3,089)
Interest expense   2,916    5,972    5,806    12,242 
Interest income   -    (10)   (28)   (35)
Depreciation   222    205    420    464 
Amortization of acquired intangibles   6,753    6,334    13,506    12,245 
Inventory step-up adjustment   -    6,303    -    15,235 
EBITDA  $(169,336)  $17,921   $(151,314)  $32,173 
                     
(In thousands)                    
Non-GAAP adjusted EBITDA                    
EBITDA  $(169,336)  $17,921    (151,314)   32,173 
Share-based compensation expense   2,849    1,783    5,124    3,698 
Restructuring costs   189    1,504    554    1,687 
One-time severance payments   984    -    1,460    - 
Acquired in-process research and development   186,603    -    186,603    - 
Acquisition and integration related expenses   1,111    1,105    8,121    1,632 
R&D license option expense   4,500    -    4,500    3,000 
Foreign currency effect   511    2,658    317    3,009 
Adjusted EBITDA  $27,411   $24,971   $55,365   $45,199 

 

 

28 

 

Results of Operations

 

Comparison of Three Months Ended June 30, 2017 and 2016

 

Revenues

 

The following table summarizes our revenues for the three months ended June 30, 2017 and 2016:

 

   Three Months Ended June 30,
(In thousands)  2017  2016
Product royalty revenue  $20,562   $18,735 
Product sales revenue - AMITIZA   32,132    27,001 
Product sales revenue - RESCULA   2,105    1,388 
Research and development revenue   5,051    3,369 
Contract and collaboration revenue   46    1,458 
Total  $59,896   $51,951 

 

Total revenues were $59.9 million for the three months ended June 30, 2017, compared to $52.0 million for the three months ended June 30, 2016, an increase of $7.9 million or 15.3%.

 

Product royalty revenue

Product royalty revenue primarily represents royalty revenue earned on Takeda net sales of AMITIZA in North America and was $20.6 million for the three months ended June 30, 2017 compared to $18.7 million for the three months ended June 30, 2016, an increase of $1.8 million or 9.8%. The increase was due to higher Takeda reported AMITIZA net sales which were primarily driven by price and volume increases.

 

29 

 

Product sales revenue

Product sales revenue represents drug product sales of AMITIZA in North America, Japan and Europe, and drug product sales of RESCULA in Japan. AMITIZA product sales revenue was $32.1 million for the three months ended June 30, 2017 compared to $27.0 million for the three months ended June 30, 2016, an increase of $5.1 million or 19.0%. The increase was primarily attributable to increased AMITIZA sales in Japan under the Japan Mylan Agreement. RESCULA product sales revenue was $2.1 million for the three months ended June 30, 2017 compared to $1.4 million for the three months ended June 30, 2016, an increase of $0.7 million.

 

Research and development revenue

Research and development revenue was $5.1 million for the three months ended June 30, 2017 compared to $3.4 million for the three months ended June 30, 2016. The increase was primarily due to increases in pediatric and alternative formulation studies.

 

Contract and collaboration revenue

Contract and collaboration revenue was $46,000 for the three months ended June 30, 2017 compared to $1.5 million for the three months ended June 30, 2016, a decrease of $1.4 million or 96.8%. The decrease was primarily due to the release of the collaboration obligation under the Global Takeda Agreement in the second quarter of 2016.

 

Costs of Goods Sold

 

Costs of goods sold were $17.0 million for the three months ended June 30, 2017 compared to $20.4 million for the three months ended June 30, 2016, a decrease of $3.4 million or 16.3%. The decrease was primarily due to a $6.3 million decrease in amortization of R-Tech inventory step up, partially offset by an increased cost of goods related to higher volume of AMITIZA product sales and changes in foreign currency exchange rates.

 

Research and Development Expenses

 

The following table summarizes our research and development expenses for the three months ended June 30, 2017 and 2016:

 

   Three Months Ended
   June 30,
(In thousands)  2017  2016
Direct costs:          
Lubiprostone  $7,382   $5,726 
Cobiprostone   -    2,930 
CPP-1X   4,518    (61)
RTU-1096   -    1,227 
VTS270   4,748    - 
Other   1,188    442 
    17,836    10,264 
Indirect costs   1,263    669 
Total  $19,099   $10,933 

 

Total research and development expenses for the three months ended June 30, 2017 were $19.1 million compared to $10.9 million for the three months ended June 30, 2016, an increase of $8.2 million or 74.7%. The increase was primarily due to research and development activity related to the newly acquired VTS-270 and the option fee related to the positive result from CPP’s futility analysis, partially offset by discontinuing certain research and development programs.

 

Acquisition

 

In April 2017, we acquired Vtesse, including its Phase 2b/3 product candidate known as VTS-270 (the IPR&D asset), a well-characterized mixture of 2-hydroxypropyl-ß-cyclodextrins (HPßCD) with a specific compositional fingerprint that distinguishes it from other HPßCD mixtures, for the treatment of Niemann-Pick Disease Type C1 (NPC-1), an ultra-orphan, progressive and fatal disease. Among the significant strategic benfits of the acquisition are that the purchased IPR&D further diversified our pipeline through the acquisition of a late-stage program, increased the Company’s focus on specialized area of high unmet need, and is expected to be accretive beginning in 2019. Under the terms of the agreement, the Company acquired Vtesse for upfront consideration of $212.0 million, and agreed to pay Vtesse shareholders contingent consideration based on mid-single digit to double-digit royalties on global net sales of the product based on increasing net sales levels, and a share of net proceeds that may be generated from the monetization of the  pediatric review voucher, which is expected to be granted in connection with the approval of the product in the U.S. Of the $212.0 million consideration, the Company made a cash payment of $182.0 million and re-issued $30.0 million of Treasury Stock, 2,782,678 Class A common shares, based upon the closing price of $10.78 on April 3, 2017, to Vtesse stockholders.

 

30 

 

The preliminary purchase price allocation was determined as follows:

 

   April 3,  
   2017  
Total purchase price  $211,996   
(In thousands)       
Total fair value of tangible assets acquired and liabilities assumed       
        
Deferred Tax Assets   (13,613)  
Net Assets   (11,780)  
Total IPR&D asset  $186,603   

 

Vtesse did not meet the definition of a business under ASC 805 as substantially all of the fair value of Vtesse was attributable to the VTS-270 IPR&D asset. Based on the asset acquisition method of accounting, the consideration paid was allocated primarily to the IPR&D asset acquired of $186.6 million, which was immediately expensed as the IPR&D asset has no other alternate use. The balance was allocated to the remaining assets and liabilities based on their estimated fair values. The acquired IPR&D expense is not tax deductible.

 

The acquisition of the IPR&D asset and related expense had a significant impact on our results of operation for the three month ended June 30, 2017. The following summary shows the impact of IPR&D expense on our net loss per share:

 

   Three Months Ended
   June 30,
   2017
(In thousands, except per share data)     
Net loss  $(181,167)
Weighted average Common Class A shares outstanding - basic and diluted   46,195 
Net loss per share - Basic and diluted  $(3.92)
      
Net loss adjustments:     
Add: Acquired in-process research and development  $186,603 
Add: Remaining adjusted net income (loss) items   11,025 
Non-GAAP adjusted net income  $16,461 
      
Add back: Accrued interest expense on convertible debt, net of tax  $1,454 
      
Diluted Earnings Per Share:     
Assumed exercise of options under treasury stock method   424 
Assumed shares if-converted   18,079 
Weighted average Common Class A shares outstanding- Diluted   64,698 
      
Impact of IPR&D per share - diluted  $2.88 
      
Impact of other adjusted net income (loss) items - diluted  $0.17 
      
Non-GAAP adjusted EPS - diluted  $0.28 

 

31 

 

General and Administrative Expenses

 

The following table summarizes our general and administrative expenses for the three months ended June 30, 2017 and 2016:

 

   Three Months Ended
   June 30,
(In thousands)  2017  2016
Salaries, benefits and related costs  $4,166   $2,877 
Legal, consulting and other professional expenses   3,228    2,834 
Stock-based compensation expenses   1,785    1,284 
Pharmacovigilance   388    443 
Restructuring costs   -    1,504 
R-Tech opportunity costs   -    1,105 
Other expenses   2,016    2,376 
Total  $11,583   $12,423 

 

General and administrative expenses were $11.6 million for the three months ended June 30, 2017, compared to $12.4 million for the three months ended June 30, 2016, an decrease of $0.8 million or 6.8%. The decrease was primarily due to a $2.6 million in restructuring and R-Tech acquisition costs that occurred in the second quarter of 2016 but did not occur in the second quarter 2017, partially offset by the Vtesse acquisition and inclusion of Vtesse administrative costs and personnel costs related to severance of multiple executives.

 

Selling and Marketing Expenses

 

The following table summarizes our selling and marketing expenses for the three months ended June 30, 2017 and 2016:

 

   Three Months Ended
   June 30,
(In thousands)  2017  2016
Salaries, benefits and related costs  $622   $107 
Consulting and other professional expenses   48    21 
Data purchases   37    43 
Promotional materials & programs   150    796 
Other expenses   554    (344)
Total  $1,411   $623 

 

32 

 

Selling and marketing expenses were $1.4 million for the three months ended June 30, 2017, compared to $0.6 million for the three months ended June 30, 2016, an increase of $0.8 million or 126.5%. The increase was primarily due to the creation of a commercial function to support VTS-270 during the three months ended June 30, 2017.

 

Non-Operating Income and Expense

 

The following table summarizes our non-operating income and expense for the three months ended June 30, 2017 and 2016:

 

   Three Months Ended
   June 30,
(In thousands)  2017  2016
Interest income  $-   $10 
Interest expense   (2,916)   (5,972)
Other expense, net   (476)   (2,539)
Total  $(3,392)  $(8,501)

 

Interest expense was $2.9 million for the three months ended June 30, 2017, compared to $6.0 million for the three months ended June 30, 2016, a decrease of $3.1 million or 51.2%. This decrease resulted from interest rates on notes payable decreasing from 8.4% to 3.3% as a result of refinancing our debt. The benefit from the lower interest rates was partially offset by higher principal balance.

 

Other expense, net was $0.5 million for the three months ended June 30, 2017, compared to $2.5 million for the three months ended June 30, 2016, a change of $2.0 million, substantially all of which was attributable to a decrease in foreign currency exchange losses.

 

Income Taxes

 

We recorded an income tax expense of $1.9 million and benefit of $0.1 million for the three months ended June 30, 2017 and 2016, respectively. In 2017, earnings (prior to considering the expense recognized for acquired in-process research and development) exceeded the pre-tax earnings for the three months ended June 30, 2016. This increase in earnings, along with no tax benefit available for the acquired in-process research and development from Vtesse, were the primary drivers of increase in tax expense.

 

The effective tax rate (ETR) for the three months ended June 30, 2017 was (1.1)%, compared to 5.8% in the same period of 2016. The ETR for the quarter was based on a projection of the full year rate. The decrease in the ETR was primarily due to the non-deductibility of the acquired in-process research and development expense.

 

Comparison of Six Months Ended June 30, 2017 and 2016

 

Revenues

The following table summarizes our revenues for the six months ended June 30, 2017 and 2016:

 

   Six Months Ended
   June 30,
(In thousands)  2017  2016
Product royalty revenue  $38,997   $35,451 
Product sales revenue - AMITIZA   63,472    50,121 
Product sales revenue - RESCULA   4,919    4,863 
Research and development revenue   8,499    6,799 
Contract and collaboration revenue   292    1,925 
Total  $116,179   $99,159 

 

33 

 

Total revenues were $116.2 million for the six months ended June 30, 2017, compared to $99.2 million for the six months ended June 30, 2016, an increase of $17.0 million or 17.2%.

 

Product royalty revenue

Product royalty revenue primarily represents royalty revenue earned on Takeda net sales of AMITIZA in North America and was $39.0 million for the six months ended June 30, 2017 compared to $35.5 million for the six months ended June 30, 2016, an increase of $3.6 million or 10.0%. The increase was primarily due to higher Takeda reported AMITIZA net sales which were driven by a mix of price and volume increases.

 

Product sales revenue

AMITIZA product sales revenue was $63.5 million for the six months ended June 30, 2017 compared to $50.1 million for the six months ended June 30, 2016, an increase of $13.4 million or 26.6%. The increase was primarily due to increased volumes of AMITIZA sold to Mylan in Japan and Takeda in North America. RESCULA product sales revenue was $4.9 million for both the six months ended June 30, 2017 and the six months ended June 30, 2016.

 

Research and development revenue

Research and development revenue was $8.5 million for the six months ended June 30, 2017 compared to $6.8 million for the six months ended June 30, 2016, an increase of $1.7 million or 25.0%. The increase was due to increased activity on the advancement of pediatric and alternative formulation studies for the six months ended June 30, 2016, for which we receive reimbursement from Takeda.

 

Contract and collaboration revenue

Contract and collaboration revenue was $0.3 million for the six months ended June 30, 2017 compared to $1.9 million for the six months ended June 30, 2016, a decrease of $1.6 million or 84.8%. The decrease was primarily attributable to the release of the collaboration obligation under the Global Takeda Agreement in the six months ended June 30, 2017.

 

Costs of Goods Sold

 

Costs of goods sold were $33.9 million for the six months ended June 30, 2017 compared to $43.7 million for the same period in 2016, an decrease of $9.8 million or 22.4%. The decrease was primarily due to the release of inventory step up of $15.2 million in 2016 that did not recur in 2017, partially offset by an increased cost of goods related to higher volume of AMITIZA product sales and foreign currency fluctuations.

 

Research and Development Expenses

The following table summarizes our research and development expenses for the six months ended June 30, 2017 and 2016:

 

   Six Months Ended
   June 30,
(In thousands)  2017  2016
Direct costs:          
Lubiprostone  $15,347   $11,352 
Cobiprostone   -    5,039 
CPP-1X   4,518    2,928 
RTU-1096   -    2,147 
VTS270   4,748    - 
Other   2,244    1,861 
    26,857    23,327 
Indirect costs   2,575    2,277 
Total  $29,432   $25,604 

 

34 

 

Total research and development expenses for the six months ended June 30, 2017 were $29.4 million compared to $25.6 million for the six months ended June 30, 2016, an increase of $3.8 million or 15.0%. The increase was primarily due to research and development activity related to the newly acquired VTS-270 product candidate and the option fee related to the positive result from CPP’s futility analysis, partially offset by discontinuing certain research and development programs.

 

Acquisition

 

In April 2017, we acquired Vtesse, including its Phase 2b/3 product candidate known as VTS-270 (the IPR&D asset), a well-characterized mixture of 2-hydroxypropyl-ß-cyclodextrins (HPßCD) with a specific compositional fingerprint that distinguishes it from other HPßCD mixtures, for the treatment of Niemann-Pick Disease Type C1 (NPC-1), an ultra-orphan, progressive and fatal disease. Among the significant strategic benfits of the acquisition are that the purchased IPR&D further diversified our pipeline through the acquisition of a late-stage program, increased the Company’s focus on specialized area of high unmet need, and is expected to be accretive beginning in 2019. Under the terms of the agreement, the Company acquired Vtesse for upfront consideration of $212.0 million, and agreed to pay Vtesse shareholders contingent consideration based on mid-single digit to double-digit royalties on global net sales of the product based on increasing net sales levels, and a share of net proceeds that may be generated from the monetization of the  pediatric review voucher, which is expected to be granted in connection with the approval of the product in the U.S. Of the $212.0 million consideration, the Company made a cash payment of $182.0 million and re-issued $30.0 million of Treasury Stock, 2,782,678 Class A common shares, based upon the closing price of $10.78 on April 3, 2017, to Vtesse stockholders.

 

The preliminary purchase price allocation was determined as follows:

 

   April 3,  
   2017  
Total purchase price  $211,996   
(In thousands)       
Total fair value of tangible assets acquired and liabilities assumed       
        
Deferred Tax Assets   (13,613)  
Net Assets   (11,780)  
Total IPR&D asset  $186,603   

 

Vtesse did not meet the definition of a business under ASC 805 as substantially all of the fair value of Vtesse was attributable to the VTS-270 IPR&D asset. Based on the asset acquisition method of accounting, the consideration paid was allocated primarily to the IPR&D asset acquired of $186.6 million, which was immediately expensed as the IPR&D asset has no other alternate use. The balance was allocated to the remaining assets and liabilities based on their estimated fair values. The acquired IPR&D expense is not tax deductible.

 

The acquisition of the IPR&D asset and related expense had a significant impact on our results of operation for the three month ended June 30, 2017. The following summary shows the impact of IPR&D expense on our net loss per share:

 

35 

 

   Six Months Ended
   June 30,
   2017
    
(In thousands, except per share data)     
Net loss  $(176,543)
Weighted average Common Class A shares outstanding - basic and diluted   44,826 
Net loss per share - Basic and diluted  $(3.94)
      
Net loss adjustments:     
Add: Acquired in-process research and development  $186,603 
Add: Remaining adjusted net income (loss) items   19,378 
Non-GAAP adjusted net income  $29,439 
      
Add back: Accrued interest expense on convertible debt, net of tax  $2,892 
      
Assumed exercise of options under treasury stock method   511 
Assumed shares if-converted   18,079 
Weighted average Common Class A shares outstanding- Diluted   63,416 
      
Impact of IPR&D per share - diluted  $2.94 
      
Impact of other adjusted net income (loss) items - diluted  $0.31 
      
Non-GAAP adjusted EPS - diluted  $0.51 

 

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the six months ended June 30, 2017 and 2016:

 

   Six Months Ended
   June 30,
(In thousands)  2017  2016
Salaries, benefits and related costs  $7,860   $5,924 
Legal, consulting and other professional expenses   12,974    4,990 
Stock-based compensation expenses   3,393    2,671 
Pharmacovigilance   548    871 
Restructuring costs   365    1,633 
R-Tech opportunity costs   -    1,687 
Other expenses   4,134    3,574 
Total  $29,274   $21,350 

 

36 

 

General and administrative expenses were $29.3 million for the six months ended June 30, 2017, compared to $21.4 million for the six months ended June 30, 2016, an increase of $7.9 million or 37.1%. The increase was primarily due to a $8.1 million increase in legal, consulting and other professional expenses related to the initiation of our patent litigation against Amneal (as discussed under “Legal Proceedings” below) and the acquisition of Vtesse and subsequent inclusion of Vtesse administrative costs, partially offset by lower restructuring costs and R-Tech opportunity costs for the six months ended June 30, 2017 compared to the six months ended June 30, 2016.

 

Selling and Marketing Expenses

 

The following table summarizes our selling and marketing expenses for the six months ended June 30, 2017 and 2016:

 

   Six Months Ended
   June 30,
(In thousands)  2017  2016
Salaries, benefits and related costs  $861    334 
Consulting and other professional expenses   118    56 
Data purchases   77    89 
Promotional materials & programs   217    797 
Other expenses   654    122 
Total  $1,927   $1,398 

 

Selling and marketing expenses were $1.9 million for the six months ended June 30, 2017, compared to $1.4 million for the six months ended June 30, 2016, an increase of $0.5 million or 37.8%. The increase was primarily due to creation of a commercial function to support VTS-270, partially offset by reduction in RESCULA sales and marketing effort in Japan.

 

Non-Operating Income and Expense

The following table summarizes our non-operating income and expense for the six months ended June 30, 2017 and 2016:

 

   Six Months Ended
   June 30,
(In thousands)  2017  2016
Interest income  $28   $35 
Interest expense   (5,806)   (12,242)
Other expense, net   (265)   (2,886)
Total  $(6,043)  $(15,093)

 

Interest expense was $5.8 million for the six months ended June 30, 2017, compared to $12.2 million for the six months ended June 30, 2016, a decrease of $6.4 million or 52.6%. This decrease resulted from interest rates on notes payable decreasing from 8.4% to 3.3% as a result of refinancing our debt. The benefit from the lower interest rates was partially offset by higher principal balances.

 

Other expense, net was $0.3 million expense for the six months ended June 30, 2017, compared to $2.9 million expense for the six months ended June 30, 2016, a positive change of $2.7 million. The change was primarily attributable to foreign currency exchange rate fluctuations.

 

37 

 

Income Taxes

We recorded an income tax expense of $5.5 million and income tax benefit of $3.1 million for the six months ended June 30, 2017 and 2016, respectively. In 2017, the year to date earnings (prior to considering the expense recognized for acquired in-process research and development) exceeded the pre-tax earnings for the six months ended June 30, 2016. This increase in earnings, along with no tax benefit available for the acquired in-process research and development from Vtesse, were the primary drivers of increase in tax expense.

 

The effective tax rate (ETR) for the six months ended June 30, 2017 was (3.2%) compared to 38.7% in the same period of 2016. The ETR for the quarter was based on a projection of the full year rate. The decrease in the ETR was was primarily due to the non-deductibility of the acquired in-process research and development expense.

 

Reportable Operating Segments

 

We have one operating segment which is the development and commercialization of pharmaceutical products.

 

 

38 

 

Financial Condition, Liquidity and Capital Resources

 

Financial Condition

 

Sources of Liquidity

 

We finance our operations principally from cash generated from revenues, cash and cash equivalents on hand, debt and to a lesser extent, from cash generated from the issuance and sale of our class A common stock and through the exercise of employee stock options. Revenues generated from operations principally consist of a combination of royalty payments, product sales, upfront and milestone payments, and research and development expense reimbursements received from Takeda, Mylan and other parties.

 

Our cash, cash equivalents and restricted cash consist of the following as of June 30, 2017 and December 31, 2016:

 

   June 30,  December 31,
(In thousands)  2017  2016
Cash and cash equivalents  $84,734   $198,308 
Restricted cash, current   213    213 
Total  $84,947   $198,521 

 

Our cash and cash equivalents are deposited in operating accounts and highly liquid investments with an original maturity at time of purchase of 90 days or less. As of June 30, 2017, and December 31, 2016, our restricted cash consisted of a certificate of deposit pledged to support an operating lease for our former office facility in Bethesda, Maryland.

 

On April 3, 2017, we acquired Vtesse for upfront consideration of $212.0 million. The acquisition was funded through the issuance of 2,782,676 shares of our Class A common stock and $182.0 million of cash on hand. Substantially all of the fair value of Vtesse is related to VTS-270, its only significant asset. VTS-270 is an investigational drug in a pivotal Phase 2b/3 study for the treatment of NPC-1, an ultra-orphan, progressive and fatal disease.

 

Cash Flows

 

The following table summarizes our cash flows for the six months ended June 30, 2017 and 2016:

 

   Six Months Ended June 30,
(In thousands)  2017  2016
Cash provided by (used in):          
Operating activities  $56,192   $26,285 
Investing activities   (170,019)   (2,893)
Financing activities   319    (10,635)
Effect of exchange rates   (66)   6,940 
Net (decrease) increase in cash and cash equivalents  $(113,574)  $19,697 

 

Six months ended June 30, 2017

 

Net cash provided by operating activities was $56.2 million for the six months ended June 30, 2017. This was primarily due to net loss of $176.5 million plus adjustments to reconcile net income to net cash provided by operating activities consisting of acquired in-process research and development of $186.6 million, depreciation and amortization of $14.9 million, stock-based compensation expense of $5.6 million, less deferred tax provision of $4.7 million, as well as changes in operating assets and liabilities consisting of a increase in accounts receivable and product royalties receivable, net of $29.2 million.

 

39 

 

Net cash used in investing activities was $170.0 million for the six months ended June 30, 2017 due to the $182.0 million of cash used to purchase in-process research and development from Vtesse, net of $12.3 million cash acquired.

 

Net cash provided by financing activities was $0.3 million for the six months ended June 30, 2017. The cash received was primarily the result issuing Class A common stock upon the exercise of options and purchases through the employee stock purchase plan.

 

The effect of exchange rates on the cash balances of currencies held in foreign denominations for six months ended June 30, 2017 was a decrease of $66,000.

 

Six months ended June 30, 2016

 

Net cash provided by operating activities was $26.3 million for the six months ended June 30, 2016. This was primarily due to adjustments to reconcile net loss to net cash consisting of depreciation and amortization of $30.1 million, unrealized currency translation losses of $9.1 million, deferred tax provision increase of $5.0 million, and stock-based compensation expense of $3.7 million. Additional cash provided by operating activities consisted of decreases in receivables of $9.9 million and changes in other assets and liabilities, net of $1.3 million. Partially offsetting these items were increases in prepaid and income taxes payable and receivable, net of $18.2 million, decreases in payables of $11.1 million and a net loss of $4.9 million.

 

Net cash used in investing activities was $2.9 million for the six months ended June 30, 2016. This was primarily due to the payment of the squeeze-out liability for non-tendering R-Tech shareholders of $7.7 million and investment in a convertible note receivable of $5.0 million, partially offset by a decrease in restricted cash of $10.6 million.

 

Net cash used in financing activities was $10.2 million for the six months ended June 30, 2016. This was primarily due to repayments of notes payable (net of restricted cash) of $12.4 million, partially offset by the issuance of Class A common stock upon the exercise of options.

 

The effect of exchange rates on the cash balances of currencies held in foreign denominations for the six months ended June 30, 2016 was an increase of $6.9 million.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2017, we did not have any off-balance sheet arrangements, as such term is defined in Item 303(a)(4) of Regulation S-K under the Securities Act of 1933, as amended.

 

Funding Requirements and Capital Resources

 

We may need substantial amounts of capital to continue growing our business. We may require this capital, among other things, to fund:

·our share of the on-going development program of AMITIZA;
·research, development, manufacturing, regulatory and marketing efforts for VTS-270 and other potential product candidates;
·the costs involved in obtaining and maintaining proprietary protection for our products, technology and know-how, including litigation costs and the results of such litigation;
·activities to resolve our on-going and potential legal matters;
·any option and milestone payments under general option and licensing ventures, including our exclusive option and collaboration agreement with CPP;
·other business development activities, including partnerships, alliances and investments in or acquisitions of other businesses, products and technologies;
·the expansion of our commercialization activities including the purchase of inventory; and
·the payment of principal and interest under our Convertible Notes.

 

40 

 

The timing of these funding requirements is difficult to predict due to many factors, including the outcomes of our preclinical and clinical research and development programs and when those outcomes are determined, the timing of obtaining regulatory approvals and the presence and status of competing products. Our capital needs may exceed the capital available from our future operations, collaborative and licensing arrangements and existing liquid assets. Our future capital requirements and liquidity will depend on many factors, including, but not limited to:

 

·the cost and time involved to pursue our research and development programs;
·our ability to establish collaborative arrangements and to enter into licensing agreements and contractual arrangements with others; and
·any future change in our business strategy.

 

To the extent that our capital resources may be insufficient to meet our future capital requirements, we may need to finance our future cash needs through at-the-market sales, public or private equity offerings, further debt financings or corporate collaboration and licensing arrangements.

 

Based upon our current business plan, we believe our future cash flows from operating activities and our existing capital resources will be sufficient to meet our cash requirements for at least the next 12 months.

 

Effects of Foreign Currency

 

We currently receive a portion of our revenue, incur a portion of our operating expenses, and have assets and liabilities denominated in currencies other than the U.S. Dollar, the reporting currency for our consolidated financial statements. As such, the results of our operations could be adversely affected by changes in exchange rates either due to transaction losses, which are recognized in the statement of operations, or translation losses, which are recognized in comprehensive income. We currently do not hedge foreign exchange rate exposure via derivative instruments.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Our market risks during the three months ended June 30, 2017 have not materially changed from those discussed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on March 8, 2017.

 

Foreign Currency Exchange Rate Risk

 

We are subject to foreign exchange risk for revenues and expenses denominated in foreign currencies. Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the U.S. Dollar. We do not currently hedge our foreign currency transactions via derivative instruments.

 

Interest Rate Risk

 

Our exposure to market risks associated with changes in interest rates relates to both (i) the amount of interest income earned on our investment portfolio, and (ii) the amount of interest payable by us on the Convertible Notes. As our investment portfolio is immaterial at this time and the interest rate on our Convertible Notes is fixed at 3.25% through 2021, we believe that our exposure to market risks associated with changes in interest rates is nominal.

 

Credit Risk

 

Our exposure to cr edit risk generally consists of cash and cash equivalents, restricted cash, investments and receivables. We place our cash, cash equivalents and restricted cash with what we believe to be highly rated financial institutions and invest the excess cash in highly rated investments. Our investment policy limits investments to certain types of debt and money market instruments issued by institutions primarily with investment grade credit ratings and places restrictions on maturities and concentrations by asset class and issuer.

 

Our exposure to credit risk also extends to strategic investments made as part of our ongoing business development activities, such as the $5.0 million investment in CPP made in January 2016.

 

As of June 30, 2017 and December 31, 2016, less than 1.0% of our cash, cash equivalents, restricted cash and investments are issued or insured by the federal government or government agencies. We have not experienced any losses on these accounts related to amounts in excess of insured limits.

 

 

41 

 

Item 4. Controls and Procedures.

 

a) Evaluation of Disclosure Controls and Procedures

 

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of June 30, 2017. In designing and evaluating such controls, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based upon the evaluation we carried out, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2017, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified under the applicable rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

 

b) Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

Part II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On December 28, 2015, in connection with our acquisition of R-Tech, three non-tendering stockholders of R-Tech submitted complaints to the Tokyo District Court alleging that the purchase price of R-Tech’s shares was unfair, and demanding an appraisal of the fair value of the shares. The number of shares subject to these proceedings is minimal. On November 11, 2016, the Court (i) dismissed the petitions with respect to all shares purchased by the complainants after the public notice of the acquisition and (ii) with respect to shares purchase prior to such public notice, determined that the tender offer price was fair. One of the petitioners appealed this ruling; however, the appellate proceeding was dismissed on February 15, 2017. The petitioner has appealed to the Supreme Court of Japan; this final appeal remains ongoing as of the date of this report.

 

On March 2, 2017, we received a Paragraph IV certification notice letter (“Notice Letter”) regarding an Abbreviated New Drug Application (“ANDA”) submitted to the FDA by Amneal Pharmaceuticals, LLC (“Amneal”) requesting approval to market, sell and use a generic version of the 8 mcg and 24 mcg AMITIZA® (lubiprostone) soft gelatin capsule products. In its Notice Letter, Amneal alleges that certain patents covering compositions, formulations and methods of using AMITIZA, are invalid, unenforceable and/or will not be infringed by Amneal’s manufacture, use or sale of the product described in its ANDA. On April 13, 2017, we, Takeda, and certain affiliates of Takeda filed a patent infringement lawsuit in the U.S. District Court for the District of New Jersey against Amneal related to the ANDA filed by Amneal. The lawsuit claims infringement of five patents that are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (the Orange Book), with the latest expiring in 2027. Under the Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, as a result of the patent infringement lawsuit, final FDA approval of Amneal’s ANDA will be stayed up to 30 months from the date of receipt of the notice letter. This litigation remains ongoing as of the date of this report.

 

Item 1A. Risk Factors.

 

Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our common stock. For a discussion of these risks, please refer to the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed by us with the SEC on March 8, 2017. There have not been any material changes from the risk factors as previously disclosed in our Form 10-K for the fiscal year ended December 31, 2016.

 

 

42 

 

Item 6. Exhibits

 

Exhibit          
Number Description Form File No. Exhibit Filing Date
3.1 Certificate of Incorporation 8-K 001-33609 3.1 12/29/2008
3.2 Certificate of Amendment 8-K 001-33609 3.2 12/29/2008
3.3 Amended and Restated Bylaws 8-K 001-33609 3.3 8/2/2013
4.1 Specimen Stock Certificate evidencing the shares of class A common stock S-1/A 333-135133 4.1 2/1/2007
10.1^ Separation Agreement, dated as of May 17, 2017, between the Company and Andrew Smith Included herewith      
10.2^ Separation Agreement, dated as of June 6, 2017, between the Company and Matthias Alder Included herewith      
10.3^ Executive Employment Agreement, dated as of March 7, 2017, between the Company and Jones Woodrow Bryan, Jr. Included herewith      
12.1 Ratio of earnings to fixed charges Included herewith      
31.1 Certification of the Principal Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 Included herewith      
31.2 Certification of the Principal Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 Included herewith      
32.1* Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Included herewith      
32.2* Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Included herewith      
101.[INS] XBRL Instance Document Included herewith      
101.[SCH] XBRL Taxonomy Extension Schema Document Included herewith      
101.[CAL] XBRL Taxonomy Extension Calculation Linkbase Document Included herewith      
101.[DEF] XBRL Taxonomy Extension Definition Linkbase Document Included herewith      
101.[LAB] XBRL Taxonomy Extension Label Linkbase Document Included herewith      
101.[PRE] XBRL Taxonomy Extension Presentation Linkbase Document Included herewith      
* These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
 
^ Compensatory plan, contract or arrangement.
The exhibits filed as part of this Form 10-Q are set forth on the Exhibit Index immediately preceding such exhibits, and are incorporated herein by reference.


 

 

 

43 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

  Sucampo Pharmaceuticals, Inc.
   
   
       
       
August 2, 2017 By:   /s/  PETER GREENLEAF
      Peter Greenleaf
      Chief Executive Officer
      (Principal Executive Officer)
       
August 2, 2017 By:   /s/  PETER PFREUNDSCHUH
      Peter Pfreundschuh
      Chief Financial Officer
      (Principal Financial Officer)

 

44 

 

Sucampo Pharmaceuticals, Inc.

Exhibit Index

 

 

Exhibit          
Number Description Form File No. Exhibit Filing Date
3.1 Certificate of Incorporation 8-K 001-33609 3.1 12/29/2008
3.2 Certificate of Amendment 8-K 001-33609 3.2 12/29/2008
3.3 Amended and Restated Bylaws 8-K 001-33609 3.3 8/2/2013
4.1 Specimen Stock Certificate evidencing the shares of class A common stock S-1/A 333-135133 4.1 2/1/2007
10.1^ Separation Agreement, dated as of May 17, 2017, between the Company and Andrew Smith Included herewith      
10.2^ Separation Agreement, dated as of June 6, 2017, between the Company and Matthias Alder Included herewith      
10.3^ Executive Employment Agreement, dated as of March 7, 2017, between the Company and Jones Woodrow Bryan, Jr. Included herewith      
12.1 Ratio of earnings to fixed charges Included herewith      
31.1 Certification of the Principal Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 Included herewith      
31.2 Certification of the Principal Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 Included herewith      
32.1* Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Included herewith      
32.2* Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Included herewith      
101.[INS] XBRL Instance Document Included herewith      
101.[SCH] XBRL Taxonomy Extension Schema Document Included herewith      
101.[CAL] XBRL Taxonomy Extension Calculation Linkbase Document Included herewith      
101.[DEF] XBRL Taxonomy Extension Definition Linkbase Document Included herewith      
101.[LAB] XBRL Taxonomy Extension Label Linkbase Document Included herewith      
101.[PRE] XBRL Taxonomy Extension Presentation Linkbase Document Included herewith      
* These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
 
^ Compensatory plan, contract or arrangement.
The exhibits filed as part of this Form 10-Q are set forth on the Exhibit Index immediately preceding such exhibits, and are incorporated herein by reference.

 

 

 

45