UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)  
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended September 30, 2017
   
  OR
   
o 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. o Yes þ 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). þ Yes o 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 o   Accelerated filer þ   Non accelerated filer o  

Smaller reporting company o

 

Emerging growth company o

 

    (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. o

 

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

 

As of October 26, 2017, there were 46,636,924 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 September 30, 2017 and December 31, 2016 3
  Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited) for the three and nine months ended September 30, 2017 and 2016 4
  Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2017 5
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2017 and 2016 6
  Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Item 4. Controls and Procedures 39
Part II. OTHER INFORMATION  
Item 1. Legal Proceedings 39
Item 1A. Risk Factors 40
Item 5 Other Information 40
Item 6. Exhibits 41
SIGNATURES 42
INDEX TO EXHIBITS 43

 

 

 

 

 

 

 

 2 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

SUCAMPO PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

    September 30,
2017
(unaudited)
 

December 31,
2016

 

ASSETS                
Current assets:                
Cash and cash equivalents   $ 75,041     $ 198,308  
Product royalties receivable     23,015       26,261  
Accounts receivable, net     33,098       42,998  
Restricted cash     -       213  
Inventories, net     24,176       23,468  
Prepaid expenses and other current assets     34,731       15,984  
Total current assets     190,061       307,232  
Investments, non-current     10,698       5,495  
Property and equipment, net     5,690       6,216  
Intangible assets, net     107,875       128,134  
Goodwill     73,022       73,022  
Other assets     798       752  
Total assets   $ 388,144     $ 520,851  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
Accounts payable   $ 6,245     $ 9,190  
Accrued expenses     12,239       12,389  
Accrued interest     2,888       129  
Deferred revenue, current     319       1,315  
Income tax payable     9,666       7,153  
Other current liabilities     5,821       2,175  
Total current liabilities     37,178       32,351  
Notes payable, non-current     291,945       290,516  
Deferred revenue, non-current     2,625       805  
Deferred tax liability, net     7,345       21,289  
Other liabilities     9,417       8,791  
Total liabilities     348,510       353,752  
                 
Commitments and contingencies (note 13)                
                 
Stockholders' equity:                
Preferred stock, $0.01 par value; 5,000,000 shares authorized at September 30, 2017 and December 31, 2016; no shares issued and outstanding at September 30, 2017 and December 31, 2016     -       -  
Class A common stock, $0.01 par value; 270,000,000 shares authorized at September 30, 2017 and December 31, 2016; 46,636,924 and 46,415,749 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively     466       464  
Class B common stock, $0.01 par value; 75,000,000 shares authorized at September 30, 2017 and December 31, 2016; no shares issued and outstanding at September 30, 2017 and December 31, 2016     -       -  
Additional paid-in capital     130,101       120,251  
Accumulated other comprehensive income     54,457       54,527  
Treasury stock, at cost; 227,266 and 3,009,942 shares at September 30, 2017 and December 31, 2016, respectively     (4,018 )     (46,269 )
(Accumulated deficit) retained earnings     (141,372 )     38,126  
Total stockholders' equity     39,634       167,099  
Total liabilities and stockholders' equity   $ 388,144     $ 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 September 30,   Nine Months Ended September 30,
    2017   2016   2017   2016
Revenues:                
Product royalty revenue   $ 23,024     $ 20,771     $ 62,021     $ 56,222  
Product sales revenue     35,815       31,554       104,206       86,538  
Research and development revenue     2,381       3,172       10,880       9,971  
Contract and collaboration revenue     46       2,376       338       4,301  
Total revenues     61,266       57,873       177,445       157,032  
                                 
Costs and expenses:                                
Costs of goods sold     17,436       15,586       51,354       59,278  
Research and development     10,133       9,976       39,564       35,580  
Acquired in-process research and development     -       -       186,603       -  
Impairment of in-process research and development     -       7,286       -       7,286  
General and administrative     9,972       11,061       39,246       32,411  
Selling and marketing     2,525       696       4,452       2,094  
Total costs and expenses     40,066       44,605       321,219       136,649  
                                 
Income (loss) from operations     21,200       13,268       (143,774 )     20,383  
Non-operating income (expense):                                
Interest income     10       31       38       67  
Interest expense     (2,956 )     (5,899 )     (8,762 )     (18,141 )
Other income (expense), net     (683 )     8,102       (948 )     5,216  
Total non-operating income (expense), net     (3,629 )     2,234       (9,672 )     (12,858 )
                                 
Income (loss) before income taxes     17,571       15,502       (153,446 )     7,525  
Income tax provision     (7,204 )     (7,410 )     (12,729 )     (4,321 )
Net income (loss)   $ 10,367     $ 8,092     $ (166,175 )   $ 3,204  
                                 
Net income (loss) per share:                                
Basic   $ 0.22     $ 0.19     $ (3.67 )   $ 0.08  
Diluted   $ 0.19     $ 0.19     $ (3.67 )   $ 0.07  
Weighted average common shares outstanding:                                
Basic     46,344       42,813       45,338       42,704  
Diluted     65,083       43,443       45,338       43,334  
                                 
Comprehensive income (loss) :                                
Net income (loss)   $ 10,367     $ 8,092     $ (166,175 )   $ 3,204  
Other comprehensive income (expense):                                
Unrealized gain on pension benefit obligation, net of tax     23       12       7       37  
Foreign currency translation gain (loss), net of tax     -       4,635       (77 )     40,890  
Comprehensive income (loss)   $ 10,390     $ 12,739     $ (166,245 )   $ 44,131  

 

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)

 

                Accumulated           Retained    
    Class A   Additional   Other           Earnings   Total
    Common Stock   Paid-In   Comprehensive   Treasury Stock   (Accumulated   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  
Share-based compensation expense     -       -       8,067       -       -       -       -       8,067  
Stock issued in connection with equity incentive plan     195,972       2       596       -       -       -       -       598  
Stock issued under employee stock purchase plan     25,203       -       229       -       -       -       -       229  
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     -       -       -       7       -       -       -       7  
Foreign currency translation, net of tax     -       -       -       (77 )     -       -       -       (77 )
Cumulative-effect adjustment from adoption of ASU 2016-09     -       -       1,072       -                       (1,072 )     -  
Net loss     -       -       -       -       -       -       (166,175 )     (166,175 )
Balance at September 30, 2017     46,636,924     $ 466     $ 130,101     $ 54,457       227,266     $ (4,018 )   $ (141,372 )   $ 39,634  

 

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)

 

    Nine Months Ended September 30,
    2017   2016
Cash flows from operating activities:                
Net (loss) income   $ (166,175 )   $ 3,204  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
Depreciation and amortization     22,354       37,873  
Loss on disposal of property and equipment     -       535  
Deferred tax (benefit) provision     (331 )     (16,571 )
Stock-based compensation     8,067       5,444  
Acquired in-process research and development     186,603       -  
Impairment of in-process research and development     -       7,286  
Unrealized currency translations     206       9,811  
Forgiveness of AMED deferred grant     -       (9,258 )
Shortfall from stock-based compensation     -       (25 )
Windfall benefit from stock-based compensation     (384 )     (460 )
Changes in operating assets and liabilities:                
Product royalties receivable     3,247       2,021  
Accounts receivable     10,154       3,526  
Inventory     (708 )     (2,000 )
Prepaid and income taxes receivable and payable, net     (14,512 )     (607 )
Accounts payable     (4,468 )     (4,094 )
Accrued expenses     12       (2,414 )
Accrued interest payable     2,760       (55 )
Deferred revenue     824       (38 )
Collaboration obligation     -       (4,185 )
Other assets and liabilities, net     3,292       755  
Net cash provided by operating activities     50,941       30,748  
Cash flows from investing activities:                
Convertible note receivable     (5,000 )     (5,000 )
Changes in restricted cash     -       12,302  
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     (403 )     (1,219 )
Purchase of investment     -       (250 )
Net cash used in investing activities     (175,068 )     (1,835 )
Cash flows from financing activities:                
Payments of notes payable     -       (36,332 )
Changes in restricted cash     213       17,676  
Proceeds from exercise of stock options     598       1,662  
Proceeds from employee stock purchase plan     229       174  
Tax payment upon settlement of stock awards     (114 )     -  
Net cash provided by (used in) financing activities     926       (16,820 )
Effect of exchange rates on cash and cash equivalents     (66 )     8,088  
Net (decrease) increase in cash and cash equivalents     (123,267 )     20,181  
Cash and cash equivalents at beginning of period     198,308       108,284  
Cash and cash equivalents at end of period   $ 75,041     $ 128,465  

 

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, autoimmune, inflammatory, neurological and oncology disorders.

 

The Company currently generates revenue mainly from product royalties, development 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 in the United States 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 currently required to provide a minimum annual commercial investment under the North America Takeda Agreement and may reduce the minimum annual commercial investment on a specified date, or earlier if 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 is developing an alternate formulation of lubiprostone for both adult and pediatric patients. Takeda has agreed to fund 100% of the costs, up to a cap, of this alternate formulation work. The Company recently completed a Phase 3 study to evaluate the bioequivalence of the alternate “sprinkle” and capsule formulations of lubiprostone as compared to placebo in adult subjects with CIC. The results of the study did not show bioequivalence between the formulations, although clinical activity was observed and treatment was well tolerated. The Company’s focus continues to be on the potential approval of the pediatric indication; however, the Company has announced that it will not be moving forward with an NDA submission for the sprinkle formulation in adults.

 

 8 

 

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, which has been accepted with priority review. 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 agreed to fund 70% of the costs, up to a cap, and then 50% of the costs thereafter, of this pediatric functional constipation program. In June 2017, the Company reached the spending cap; accordingly, Takeda is now responsible for reimbursing 50% of the pediatric research and development costs.

 

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 in 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 nine months ended September 30, 2017. In September 2017, the Company made a further $5.0 million investment in CPP, in the form of a convertible note, pursuant to its license arrangement with CPP.

 

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 the acquired 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 September 30, 2017 and for the three and nine months ended September 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 September 30, 2017 and December 31, 2016, approximately $1.1 million, or 1.5%, 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 63.0% and  65.7% of the Company’s total revenues for the three months ended September 30, 2017 and 2016, respectively, and 62.6% and 65.6% of the Company’s total revenues for the nine months ended September 30, 2017 and 2016, respectively. Accounts receivable and product royalties receivable from Takeda accounted for 69.0% and 69.6% of the Company’s total accounts receivable and product royalties receivable at September 30, 2017 and December 31, 2016, respectively.

 

Revenues from another unrelated party, Mylan, accounted for 33.5% and 30.1% of the Company’s total revenues for the three months ended September 30, 2017 and 2016, respectively, and 33.3% and 29.6% of the Company’s total revenues for the nine months ended September 30, 2017 and 2016, respectively. Accounts receivable from Mylan accounted for 27.1% and 30.1% of the Company’s total accounts receivable and product royalties receivable at September 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 September 30, 2017 based on the available market data as of September 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 September 30, 2017 and December 31, 2016, CPP, in which the Company held a variable interest, was determined to be a VIE. However, as described in Note 8, 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 nine months ended September 30, 2016 resulted in an increase of $460,000 to net cash provided by operating activities and a decrease of $460,000 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 requires an entity to record an 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 nine months ended September 30, 2017.

 

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.

 

 11 

 

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 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.

 

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 Company plans to adopt the new standard effective January 1, 2018, applying the modified retrospective method. The adoption of ASU No. 2014-09 will at least impact the timing of certain product sales revenues that are currently being recognized using the sell-through method.  We anticipate that the adoption of ASU 2014-09 will result in earlier recognition of these product sales revenues and will create an adjustment to the Company’s accumulated deficit balance.

 

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.

 

 12 

 

3. Net Income (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.

 

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

 

    Three Months Ended September 30,   Nine Months Ended September 30,
(In thousands, except per share data)   2017   2016   2017   2016
Basic net income (loss) per share:                                
Net income (loss)   $ 10,367     $ 8,092     $ (166,175 )   $ 3,204  
Weighted-average number of common shares-basic     46,344       42,813       45,338       42,704  
                                 
Basic net income (loss) per share   $ 0.22     $ 0.19     $ (3.67 )   $ 0.08  
                                 
Diluted net income (loss) per share:                                
Net income (loss)   $ 10,367     $ 8,092     $ (166,175 )   $ 3,204  
Interest expense applicable to convertible debt, net of tax     1,450       -       -       -  
Amortization of debt issuance costs, net of tax     289       -       -       -  
Net income (loss) for calculation of diluted net income (loss) per share   $ 12,106     $ 8,092     $ (166,175 )   $ 3,204  
                                 
Weighted-average number of common shares-basic     46,344       42,813       45,338       42,704  
Assumed exercise of stock options under the treasury stock method     660       630       -       630  
Assumed shares from Convertible Notes under if-converted method     18,079       -       -       -  
Weighted-average number of common shares-diluted     65,083       43,443       45,338       43,334  
                                 
Diluted net income (loss) per share   $ 0.19     $ 0.19     $ (3.67 )   $ 0.07  

 

The outstanding options to purchase common stock and the shares issuable under the Convertible Note utilizing the if-converted method were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive for the periods presented below:

 

    Three Months Ended September 30,   Nine Months Ended September 30,
(In thousands)   2017   2016   2017   2016
Employee stock options     3,885       2,410       6,435       2,410  
Convertible Notes, assumed shares if-converted     -       -       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.

 

 13 

 

Product Category Information

 

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

 

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. Product royalty revenue represents royalty revenue earned on the net sales of AMITIZA in North America. 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 were as follows:

 

    Three Months Ended September 30,   Nine Months Ended September 30,
(In thousands)   2017   2016   2017   2016
Product sales revenue - AMITIZA   $ 33,652     $ 29,132     $ 97,124     $ 79,253  
Product sales revenue - RESCULA     2,163       2,422       7,082       7,285  
Product royalty revenue     23,024       20,771       62,021       56,222  
Research and development revenue     2,381       3,172       10,880       9,971  
Contract and collaboration revenue     46       2,376       338       4,301  
Total   $ 61,266     $ 57,873     $ 177,445     $ 157,032  

 

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 were as follows:

 

    Three Months Ended September 30,   Nine Months Ended September 30,
(In thousands)   2017   2016   2017   2016
United States   $ 38,572     $ 34,911     $ 110,903     $ 98,073  
Japan     22,694       19,839       66,309       54,004  
Rest of the world     -       3,123       233       4,955  
Total   $ 61,266     $ 57,873     $ 177,445     $ 157,032  

 

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

 

(In thousands)  

September 30,

2017

 

December 31,

2016

United States   $ 2,646     $ 3,065  
Japan     3,020       3,119  
Rest of the world     24       32  
Total   $ 5,690     $ 6,216  

 

 

5. Asset Acquisition

 

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

 

 14 

 

 
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 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 a pediatric review voucher, which the Company expects to be granted in connection with U.S regulatory approval of VTS-270. Of the $212.0 million consideration, the Company made a cash payment of $182.0 million and issued $30.0 million of Treasury Stock, in the form of 2,782,678 Class A common shares, based upon the closing price of $10.78 on April 3, 2017, to former Vtesse stockholders.

 

The following summarizes the preliminary purchase price allocation:

 

(In thousands)    
Total purchase price   $ 211,996  
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.

 

 15 

 

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 September 30, 2017, the estimated fair value of the investment in CPP was $10.4 million. For the three months ended September 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 the Company’s long-term debt at September 30, 2017 was $309.0 million, was classified as Level 2, and was based on available market data as of September 30, 2017.

 

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 September 30, 2017 and December 31, 2016, there were no financial instruments measured at fair value on a non-recurring basis.

 

7. Inventory

 

Inventories are stated at the lower of cost and net realizable value with cost being determined using a standard cost method, which approximates average cost. 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 September 30, 2017 and December 31, 2016:

 

(In thousands)  

September 30,

2017

 

December 31,

2016

Raw materials   $ 787     $ 1,414  
Work in process     21,722       18,045  
Finished goods     1,667       4,009  
Total   $ 24,176     $ 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 Option 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 in January 2016 and $5.0 million in September 2017 to CPP in exchange for convertible notes. Both convertible notes bear interest at the rate of 5% per annum. The January 2016 and the September 2017 convertible notes mature on January 31, 2019 and September 6, 2020, respectively, unless earlier converted or prepaid.

 

Under the terms of the CPP Option Agreement, CPP granted the Company the sole option to acquire an exclusive license to commercialize CPP-1X/Sulindac combination product in North America. 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 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. Pursuant to the Company’s agreement with CPP, the Company made a $4.5 million payment for the second option fee tranche, which was recorded as research and development expense for the nine months ended September 30, 2017.

 

CPP is considered to be a VIE with respect to the Company. Following the $4.5 million license option tranche payment and $5.0 million investment, the Company reassessed whether it is the primary beneficiary of CPP. The Company concluded that the power to direct the activities that most significantly impact CPP’s economic performance continues to be held by the board of directors and management of CPP. The Company does not have a voting representative on CPP’s board and does not have the right to appoint or elect such a voting representative. Therefore, the Company is not the primary beneficiary of CPP, and the entity is not consolidated with the financial statements of the Company.

 

 16 

 

The Company’s maximum exposure to loss as a result of its involvement with CPP was $10.4 million and $5.2 million as of September 30, 2017, and December 31, 2016, respectively.

 

The Company has elected the fair value option on the convertible notes received from CPP due to the financial characteristics of the investment. As of September 30, 2017 and December 31, 2016, the fair value of the convertible notes were $10.4 million and $5.2 million, respectively.

 

9. Intangible Assets

 

Intangible assets, net consisted of the following as of September 30, 2017 and December 31, 2016:

 

    September 30, 2017   December 31, 2016
    Weighted average life
(in months)
  Carrying amount   Weighted average life
(in months)
  Carrying amount
Carrying amount (in thousands)                
Patent and license rights   51   $ 10,513     60   $ 10,513  
Manufacturing know-how   59     134,600     65     134,600  
Accumulated amortization         (54,401 )         (34,142 )
Impairment losses         (5,651 )         (5,651 )
Foreign currency translation adjustments         22,814           22,814  
Total intangible assets, net       $ 107,875         $ 128,134  

 

For each of the three months ended September 30, 2017 and 2016, the Company recorded amortization expense of $6.7 million. For the nine months ended September 30, 2017 and 2016, the Company recorded amortization expense of $20.3 million and $18.9 million, respectively.

 

10. Accrued Expenses and Other Current Liabilities

 

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

 

(In thousands)  

September 30,

2017

 

December 31,

2016

Research and development costs   $ 3,645     $ 3,030  
Employee compensation     5,473       7,513  
Legal and accounting fees     1,005       622  
Selling and marketing     958       -  
Information technology     444       -  
Restructuring     -       163  
Other accrued expenses     714       1,061  
Total   $ 12,239     $ 12,389  

 

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

 

(In thousands)   September 30,
2017
  December 31,
2016
Indirect taxes payable   $ 5,203     $ 1,756  
Squeeze out liability for non-tendering R-Tech shareholders     150       155  
Other current liabilities     468       264  
Total   $ 5,821     $ 2,175  

 

 17 

 

11. Other Liabilities

 

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

 

(In thousands)   September 30,
2017
  December 31,
2016
Deferred grants   $ 750     $ 750  
Unrecognized tax benefits     4,342       4,060  
Deferred leasehold incentive     1,458       1,582  
Defined benefit obligation     855       818  
Lease liability     1,594       1,183  
Other     418       398  
Total   $ 9,417     $ 8,791  

 

12. Debt

 

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 September 30, 2017, the Company was in compliance 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 September 30, 2017 and December 31, 2016 was $309.0 million and $319.5 million, respectively.

 

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

 

(In thousands)   Year Ending
December 31,
2017   $ 2,458  
2018     9,750  
2019     9,750  
2020     9,752  
2021     309,323  
Total minimum interest and debt principal payments   $ 341,033  

 

On October 31, 2017, the Company, as borrower, entered into a credit agreement, (Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders, providing for (i) a three-year, $100 million revolving loan facility and (ii) an uncommitted accordion facility subject to the satisfaction of certain conditions (collectively, the Facility). The Facility includes a $50 million multicurrency subfacility, a $5 million letter of credit subfacility and a $5 million swing line loan subfacility. Loans under the Facility bear interest, at the Company’s option, at a rate equal to either (a) the LIBOR rate, plus an applicable margin ranging from 2.50% to 3.50% per annum, based upon the total net leverage ratio, or (b) the prime lending rate, plus an applicable margin ranging from 1.50% to 2.50% per annum, based upon the total net leverage ratio. Any borrowings of the Facility through the end of 2018 will be fixed to an interest rate of LIBOR plus 300 basis points.

 

The Company can borrow under the Facility through October 31, 2020, at which time the Facility expires and all outstanding principal amounts will be due and payable. The Facility is secured by all tangible and intangible assets of the Company and certain of its subsidiaries, except for certain customary excluded assets, and 65% of the capital stock of certain of the Company’s foreign subsidiaries. Any undrawn amount of the Facility will accrue a commitment fee of 0.50% through the end of 2018. The commitment fee for any undrawn amount of the Facility after 2018 may fluctuate based on the Company’s total net leverage ratio for the remainder of the term. The Facility requires the Company to comply with financial covenants, including a maximum senior secured net leverage ratio, minimum liquidity and minimum EBITDA covenants. There was no outstanding balance under the Facility as of the date of issuance of these financial statements.

 

 18 

 

13. 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 as of September 30, 2017 were as follows:

 

(In thousands)   Year Ending
December 31,
2017   $ 579  
2018     2,173  
2019     1,672  
2020     1,426  
2021     1,328  
Total minimum lease payments   $ 7,178  

 

Rent expense for all operating leases was $0.4 million and $0.7 million for the three months ended September 30, 2017 and September 30, 2016, respectively and $1.2 million and $2.0 million for the nine months ended September 30, 2017 and 2016, respectively.

 

CPP

 

As described in Note 8, under the terms of the CPP Option Agreement, CPP granted the Company the sole option to acquire an exclusive license to commercialize CPP-1X/Sulindac combination product in North America.

 

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 execution of the definitive license agreement, the Company could be obligated to pay CPP up to an aggregate of $190.0 million of specified license fees and clinical development and sales milestones. The first such payment to CPP would be due upon the execution of the license agreement; the amount of the license fee will be $5.0 million if the Company’s option is exercised prior to the completion of the CPP FAP-310 trial or $10.0 million if the license agreement is exercised after such completion. Under the terms of the license, the Company and CPP would share equally in net profits from the sale of licensed products.

 

14. Stock Option Plans

 

A summary of employee stock option activity for the nine months ended September 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     4,642,399     $ 10.86                  
Options granted     -       -                  
Options exercised     (119,995 )     4.98                  
Options forfeited     (468,770 )     10.91                  
Options expired     (12,599 )     9.60                  
Options outstanding, September 30, 2017     4,041,035       11.03       6.9     $ 8,765,785  
Options exercisable, September 30, 2017     2,425,729       10.05       6.2     $ 6,984,532  
Options vested and expected to vest, September 30, 2017     4,041,035       11.03       6.9     $ 8,765,785  

 

 19 

 

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

 

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     1,993,694       11.36                  
Options exercised     -       -                  
Options forfeited     (91,557 )     11.85                  
Options expired     (36,700 )     13.97                  
Options outstanding, September 30, 2017     1,940,187       11.33       7.8     $ 1,315,226  
Options exercisable, September 30, 2017     377,153       11.36       0.6     $ 539,950  
Options vested and expected to vest, September 30, 2017     1,940,187       11.33       7.8     $ 1,315,226  

 

The weighted average grant date fair value of options granted during the nine months ended September 30, 2017 was $5.33.

 

A summary of employee restricted stock units activity for the nine months ended September 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       11.77  
Restricted Stock Units vested     (86,900 )     12.17  
Restricted Stock Units forfeited     (15,729 )     11.85  
Outstanding Restricted Stock Units, September 30, 2017     448,525       11.76  

 

Employee Stock Purchase Plan

 

The following table summarizes the activity under the Company’s Amended and Restated 2006 Employee Stock Purchase Plan for the nine months ended September 30, 2017 and 2016:

 

    Nine Months Ended September 30,
(In thousands, except share amounts)   2017   2016
Shares issued under the ESPP     25,203       18,719  
Cash received by the Company under the ESPP   $ 229,537     $ 174,572  

 

 20 

 

 

Accumulated Other Comprehensive Income

 

The following table details the accumulated other comprehensive income (loss) activity for the nine months ended September 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     40,890       -       37       40,927  
Amounts reclassified from accumulated other comprehensive loss     -       -       -       -  
Balance September 30, 2016   $ 55,133     $ 42     $ (836 )   $ 54,339  
                                 
Balance January 1, 2017   $ 55,119     $ 42     $ (634 )   $ 54,527  
Other comprehensive loss before reclassifications     (77 )     -       7       (70 )
Amounts reclassified from accumulated other comprehensive loss     -       -       -       -  
Balance September 30, 2017   $ 55,042     $ 42     $ (627 )   $ 54,457  

 

15. 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 September 30, 2017 and 2016, the actual effective tax rates were 41% and 47.8%, respectively, and for the nine months ended September 30, 2017 and 2016, the actual effective tax rates were (8.3%) and 57.4%, respectively. The decrease in the effective tax rate for the three months ended September 30, 2017 and September 30, 2016 was due to a decrease in current U.S. income inclusions for activities captured in the Company’s controlled foreign corporations. The decrease in the effective tax rate for the nine months ended September 30, 2017 and September 30, 2016 was primarily due to the non-deductibility of the acquired in-process research and development expense during 2017. Tax expense for the three months ended September 30, 2017 decreased compared to the three months ended September 30, 2016 due to the lower effective tax rate described above. Tax expense for the nine months ended September 30, 2017 increased compared to the nine months ended September 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 September 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. On October 18, 2017, the Company was informed its Japanese subsidiaries’ 2013 through 2017 Japanese income tax returns are under audit by the  Japan Tax Authority (Regional Taxation Bureau).

 

 21 

 

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 sales, product royalties, development milestone payments, 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 currently required to provide a minimum annual commercial investment under the North America Takeda Agreement and may reduce the minimum annual commercial investment on a specified date, or earlier if a generic equivalent enters the market. In October 2015, Health Canada approved AMITIZA for CIC in adults. In October 2014, we signed amendments (Takeda Amendments) 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 products.

 

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.

 

 22 

 

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).

 

 23 

 

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 Phase 4 post-marketing study on higher dosage (and with additional male subjects) pending
  U.S. Commercial Opioid-induced constipation (OIC) in patients with chronic non-cancer pain Marketed _____
  U.S. &
European Union (EU)
Clinical Pediatric functional constipation
(6 months - 6 years)
Phase 3 Phase 3
  U.S. Clinical Pediatric IBS-C
(6 years - 17 years)
Phase 3 Phase 3
  U.S. & EU Clinical Pediatric functional constipation
(6 years - 17 years)
sNDA submitted Regulatory review for market approval
  Japan Commercial Chronic constipation Marketed _____
  Japan Clinical CIC adults, 2x12mcg capsule sNDA submitted 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 _____
  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

 

 24 

 

  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 Phase 3 completed Regulatory review for market approval
  Mexico Clinical IBS-C - adult women Phase 3 completed Regulatory review for market approval
  Mexico Clinical OIC in patients with chronic non-cancer pain Phase 3 completed 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 NDA filed Regulatory review for market approval
  South Korea Clinical CIC-adults of all ages Phase 3 completed Regulatory review for market approval
  South Korea Clinical IBS-C - adult women Phase 3 completed Regulatory review for market approval
  South Korea Clinical OIC in patients with chronic non-cancer pain Phase 3 completed 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
  Singapore Commercial CIC Approved _____
  Singapore Commercial OIC Approved _____
  Singapore Commercial IBS-C - expanded to women and men Approved _____
Unoprostone isopropyl (RESCULA®)    
  Japan 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

 

 25 

 

Our Clinical Development Programs

 

Lubiprostone

 

Alternate Formulation

 

We are developing an alternate formulation of lubiprostone for both adult and pediatric patients. Takeda has agreed to fund 100% of the costs, up to a cap, of this alternate formulation work. We recently completed a Phase 3 study to evaluate the bioequivalence of the alternate “sprinkle” and capsule formulations of lubiprostone as compared to placebo in adult subjects with CIC. The results of the study did not show bioequivalence between the formulations, although clinical activity was observed and treatment was well tolerated. Our focus continues to be on the potential approval of the pediatric indication; however, we have announced that we will not be moving forward with an NDA submission for the sprinkle formulation in adults.

 

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, which has been accepted with priority review. 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 agreed to fund 70% of the costs, up to a cap, and then 50% of the costs thereafter, of this pediatric functional constipation program. In June 2017, we reached the spending cap; accordingly, Takeda is now responsible for reimbursing 50% of the pediatric research and development costs.

 

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 in 2018. Pursuant to our agreement with CPP, we made the $4.5 million payment for the second option fee tranche in July 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.

 

 26 

 

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) intangible impairment, (iii) legal settlement, (iv) inventory step-up adjustment, (v) research and development license option expense, (vi) restructuring costs, (vii) one-time severance payments (viii) acquisition and integration-related expenses, (ix) acquired in-process research and development, (x) amortization of debt financing costs, (xi) foreign currency effect, and (xii) tax effect of aforementioned adjustments based on statutory tax rates;
  · 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, (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, (vii) legal settlement, and (viii) 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 nine months ended September 30, 2017 and 2016.

 

Non-GAAP Financial Metrics                
    Three Months Ended September 30,   Nine Months Ended September 30,
(In thousands, except per share amounts)   2017   2016   2017   2016
Non-GAAP adjusted net income                                
GAAP net income (loss)   $ 10,367     $ 8,092     $ (166,175 )   $ 3,204  
Amortization of acquired intangibles     6,753       6,677       20,258       18,922  
Intangible impairment     -       7,286       -       7,286  
Legal settlement     -       (9,260 )     -       (9,260 )
Inventory step-up adjustment     -       -       -       15,235  
R&D license option expense     -       -       4,500       3,000  
Restructuring costs     -       208       554       1,895  
One-time severance payments     -       -       1,460       -  
Acquisition and integration-related expenses     54       605       8,175       2,237  
Acquired in-process research and development     -       -       186,603       -  
Amortization of debt financing costs     489       875       1,438       2,686  
Foreign currency effect     797       1,199       1,114       4,208  
Tax effect of adjustments     (2,627 )     (2,794 )     (12,655 )     (16,454 )
Non-GAAP adjusted net income   $ 15,833     $ 12,888     $ 45,272     $ 32,959  
                                 
Non-GAAP adjusted EPS - diluted   $ 0.27     $ 0.30     $ 0.78     $ 0.76  

 

 27 

 

(In thousands)                
Non-GAAP EBITDA                
GAAP net income (loss)   $ 10,367     $ 8,092     $ (166,175 )   $ 3,204  
Income taxes     7,204       7,410       12,729       4,321  
Interest expense     2,956       5,899       8,762       18,141  
Interest income     (10 )     (31 )     (38 )     (67 )
Depreciation     204       223       624       687  
Amortization of acquired intangibles     6,753       6,677       20,258       18,922  
Intangible impairment             7,286       -       7,286  
Inventory step-up adjustment     -       -       -       15,235  
EBITDA   $ 27,474     $ 35,556     $ (123,840 )   $ 67,729  

 

(In thousands)                
Non-GAAP adjusted EBITDA                
EBITDA   $ 27,474     $ 35,556     $ (123,840 )   $ 67,729  
Share-based compensation expense     2,502       1,722       7,626       5,420  
Restructuring costs     -       208       554       1,895  
One-time severance payments     -       -       1,460       -  
Acquired in-process research and development     -       -       186,603       -  
Acquisition and integration-related expenses     54       605       8,175       2,237  
R&D license option expense     -       -       4,500       3,000  
Legal settlement             (9,260 )     -       (9,260 )
Foreign currency effect     797       1,199       1,114       4,208  
Adjusted EBITDA   $ 30,827     $ 30,030     $ 86,192     $ 75,229  

 

Results of Operations

 

Comparison of Three Months Ended September 30, 2017 and 2016

 

Revenues

 

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

 

    Three Months Ended
    September 30,
(In thousands)   2017   2016
Product sales revenue - AMITIZA   $ 33,652     $ 29,132  
Product sales revenue - RESCULA     2,163       2,422  
Product royalty revenue     23,024       20,771  
Research and development revenue     2,381       3,172  
Contract and collaboration revenue     46       2,376  
Total   $ 61,266     $ 57,873  

 

Total revenues were $61.3 million for the three months ended September 30, 2017, compared to $57.9 million for the three months ended September 30, 2016, an increase of $3.4 million or 6%.

 

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 $33.7 million for the three months ended September 30, 2017 compared to $29.1 million for the three months ended September 30, 2016, an increase of $4.6 million or 16%. The increase was primarily attributable to increased AMITIZA sales in Japan under the Japan Mylan Agreement and North America under the North America Takeda Agreement driven by an increase in both volume and price. RESCULA product sales revenue was $2.2 million for the three months ended September 30, 2017 compared to $2.4 million for the three months ended September 30, 2016, a decrease of $0.2 million.

 

 28 

 

Product royalty revenue

Product royalty revenue primarily represents royalty revenue earned on Takeda net sales of AMITIZA in North America and was $23.0 million for the three months ended September 30, 2017 compared to $20.8 million for the three months ended September 30, 2016, an increase of $2.2 million or 11%. The increase was primarily due to higher Takeda reported AMITIZA net sales which were driven by a mix of price and volume increases and placed us into a higher royalty tier earlier in the third quarter 2017 compared to the third quarter of 2016.

 

Research and development revenue

Research and development revenue was $2.4 million for the three months ended September 30, 2017 compared to $3.2 million for the three months ended September 30, 2016. The decrease was primarily due to reduced work on pediatric and alternative formulation studies for lubiprostone, which are reimbursed under the Takeda North American Agreement.

 

Contract and collaboration revenue

Under the Global Takeda Agreement, we received an upfront payment from Takeda of $14.0 million in 2014, of which we were obligated to reimburse Takeda for the first $6.0 million in developmental expenses incurred by Takeda. Contract and collaboration revenue was $46,000 for the three months ended September 30, 2017 compared to $2.4 million for the three months ended September 30, 2016, a decrease of $2.3 million or 98%. The decrease was primarily due to the release of the collaboration obligation under the Global Takeda Agreement in the third quarter of 2016.

 

Costs of Goods Sold

 

Costs of goods sold were $17.4 million for the three months ended September 30, 2017 compared to $15.6 million for the three months ended September 30, 2016, an increase of $1.8 million or 12%. The increase was primarily due to the 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 September 30, 2017 and 2016:

 

    Three Months Ended
    September 30,
(In thousands)   2017   2016
Direct costs:                
Lubiprostone   $ 3,302     $ 6,787  
Cobiprostone     -       697  
CPP-1X     20       14  
RTU-1096     -       383  
VTS-270     4,933       -  
Other     726       1,023  
      8,981       8,904  
Indirect costs     1,152       1,072  
Total   $ 10,133     $ 9,976  

 

Total research and development expenses for the three months ended September 30, 2017 were $10.1 million compared to $10.0 million for the three months ended September 30, 2016, an increase of $0.1 million. Although the total research and development expense was flat between the periods, the mix of research and development projects has shifted away from lubiprostone and to a new focus on the recently acquired VTS-270 product candidate.

 

Impairment of In-Process Research and Development

 

During the quarter ended September 30, 2016, we discontinued our VAP-1 Inhibitor RTU-1096 development program and changed the indication for our VAP-1 Inhibitor RTU-009 program. We considered the discontinuance and change in indication as a potential indicator of impairment of the related in-process research and development (IPR&D) asset. Accordingly, we performed an interim assessment, and as a result, recorded an impairment charge of $7.3 million during the quarter ended September 30, 2016, which represented the entire carrying value of the IPR&D asset. This charge is classified in our statement of operations as impairment of in-process research and development.

 

 29 

 

General and Administrative Expenses

 

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

 

    Three Months Ended
    September 30,
(In thousands)   2017   2016
Salaries, benefits and related costs   $ 3,376     $ 2,588  
Legal, consulting and other professional expenses     2,596       4,262  
Share-based compensation expenses     1,818       1,172  
Rent and facilities     312       502  
Pharmacovigilance     157       440  
Restructuring costs     -       208  
R-Tech integration and acquisition costs     -       605  
Other expenses     1,713       1,284  
Total   $ 9,972     $ 11,061  

 

General and administrative expenses were $10.0 million for the three months ended September 30, 2017, compared to $11.1 million for the three months ended September 30, 2016, a decrease of $1.1 million or 10%. The decrease was primarily due to $1.7 million in legal and professional costs that occurred in the third quarter of 2016 but did not occur in the third quarter of 2017, partially offset by an increase in personnel costs, including share-based compensation, as a result of the Vtesse acquisition in April 2017.

 

Selling and Marketing Expenses

 

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

 

    Three Months Ended
    September 30,
(In thousands)   2017   2016
Salaries, benefits and related costs   $ 961     $ 100  
Consulting and other professional expenses     474       11  
Data purchases     36       43  
Promotional materials & programs     181       498  
Other expenses     873       44  
Total   $ 2,525     $ 696  

 

Selling and marketing expenses were $2.5 million for the three months ended September 30, 2017, compared to $0.7 million for the three months ended September 30, 2016, an increase of $1.8 million or 263%. The increase was primarily due to the creation of a commercial function to support VTS-270 during the three months ended September 30, 2017.

 

Non-Operating Income and Expense

 

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

 

 30 

 

    Three Months Ended
    September 30,
(In thousands)   2017   2016
Interest income   $ 10     $ 31  
Interest expense     (2,956 )     (5,899 )
Other (expense) income, net     (683 )     8,102  
Total   $ (3,629 )   $ 2,234  

 

Interest expense was $3.0 million for the three months ended September 30, 2017, compared to $5.9 million for the three months ended September 30, 2016, a decrease of $2.9 million or 50%. This decrease resulted from interest rates on notes payable decreasing from 8.4% to 3.25% as a result of refinancing our debt in December 2016. The benefit from the lower interest rates was partially offset by a higher average principal balance.

 

Other income (expense), net was $(0.7) million for the three months ended September 30, 2017, compared to $8.1 million for the three months ended September 30, 2016, a change of $8.8 million, all of which was primarily attributable to the recognition of $9.3 million in other income from the forgiveness of the Japan Agency for Medical Research & Development (AMED) deferred grant that was a non-recurring event in the three months ended September 30, 2016.

 

Income Taxes

 

We recorded an income tax expense of $7.2 million and $7.4 million for the three months ended September 30, 2017 and 2016, respectively. The decrease in the tax provision for the three months ended September 30, 2017 primarily pertained to a decrease in the effective tax rate noted below, partially offset by increased pretax earnings in 2017 as compared to 2016.

 

The effective tax rate (ETR) for the three months ended September 30, 2017 was 41.0% compared to 47.8% 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 for the three months ended September 30, 2017 and September 30, 2016 was due to a decrease in current U.S. income inclusions for activities captured in our controlled foreign corporations.

 

Comparison of Nine Months Ended September 30, 2017 and 2016

 

Revenues

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

 

    Nine Months Ended
    September 30,
(In thousands)   2017   2016
Product sales revenue - AMITIZA   $ 97,124     $ 79,253  
Product sales revenue - RESCULA     7,082       7,285  
Product royalty revenue     62,021       56,222  
Research and development revenue     10,880       9,971  
Contract and collaboration revenue     338       4,301  
Total   $ 177,445     $ 157,032  

 

Total revenues were $177.4 million for the nine months ended September 30, 2017, compared to $157.0 million for the nine months ended September 30, 2016, an increase of $20.4 million or 13%.

 

Product sales revenue

AMITIZA product sales revenue was $97.1 million for the nine months ended September 30, 2017 compared to $79.3 million for the nine months ended September 30, 2016, an increase of $17.8 million or 22%. 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 $7.1 million and $7.3 million for the nine months ended September 30, 2017 and 2016, respectively.

 

 31 

 

Product royalty revenue

Product royalty revenue primarily represents royalty revenue earned on Takeda net sales of AMITIZA in North America and was $62.0 million for the nine months ended September 30, 2017 compared to $56.2 million for the nine months ended September 30, 2016, an increase of $5.8 million or 10%. The increase was primarily due to higher Takeda reported AMITIZA net sales which were driven by a mix of price and volume increases and placed us into a higher royalty tier earlier in 2017 compared to 2016.

 

Research and development revenue

Research and development revenue was $10.9 million for the nine months ended September 30, 2017 compared to $10.0 million for the nine months ended September 30, 2016, an increase of $0.9 million or 9%. The increase was due to increased activity on the pediatric and alternative formulation studies for lubiprostone during the nine months ended September 30, 2017, which are reimbursed under the Takeda North American Agreement.

 

Contract and collaboration revenue

Under the Global Takeda Agreement, we received an upfront payment from Takeda of $14.0 million in 2014, of which we were obligated to reimburse Takeda for the first $6.0 million in developmental expenses incurred by Takeda. Contract and collaboration revenue was $0.3 million for the nine months ended September 30, 2017 compared to $4.3 million for the nine months ended September 30, 2016, a decrease of $4.0 million or 93%. The decrease was primarily attributable to the release of the collaboration obligation under the Global Takeda Agreement in the third quarter of 2016.

 

Costs of Goods Sold

 

Costs of goods sold were $51.4 million for the nine months ended September 30, 2017 compared to $59.3 million for the same period in 2016, an decrease of $7.9 million or 13%. 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 nine months ended September 30, 2017 and 2016:

 

    Nine Months Ended
    September 30,
(In thousands)   2017   2016
Direct costs:                
Lubiprostone   $ 18,649     $ 18,139  
Cobiprostone     -       5,736  
CPP-1X     4,538       2,942  
RTU-1096     -       2,530  
VTS-270     9,681       -  
Other     2,969       2,884  
      35,837       32,231  
Indirect costs     3,727       3,349  
Total   $ 39,564     $ 35,580  

 

Total research and development expenses for the nine months ended September 30, 2017 were $39.6 million compared to $35.6 million for the nine months ended September 30, 2016, an increase of $4.0 million or 11%. The increase was primarily due to research and development activity related to our VTS-270 product candidate and the option fee related to the positive result from CPP’s futility analysis, partially offset by the discontinuation of certain research and development programs.

 

 32 

 

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 benefits of the acquisition were that the purchased IPR&D further diversified our pipeline through the acquisition of a late-stage program, increased our focus on a specialized area of high unmet need, and is expected to be accretive beginning in 2019. Under the terms of the agreement, we paid upfront consideration of $212.0 million and agreed to pay 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 a pediatric review voucher, which we expect to be granted in connection with the U.S. regulatory approval of VTS-270. Of the $212.0 million consideration, we made a cash payment of $182.0 million and re-issued $30.0 million of Treasury Stock, in the form of 2,782,678 Class A common shares, based upon the closing price of $10.78 on April 3, 2017, to former Vtesse stockholders.

 

The following summarizes the preliminary purchase price allocation:

 

(In thousands)    
Total purchase price   $ 211,996  
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 operations for the nine months ended September 30, 2017. The following summary shows the impact of IPR&D expense on our net loss per share:

 

 

    Nine Months Ended
    September 30,
(In thousands, except per share data)   2017
Net loss   $ (166,175 )
Weighted average Class A Common shares outstanding - basic and diluted     45,338  
Net loss per share - Basic and diluted   $ (3.67 )
         
Net loss adjustments:        
Add: Acquired in-process research and development   $ 186,603  
Add: Remaining adjusted net income (loss) items     24,844  
Non-GAAP adjusted net income   $ 45,272  
         
Add back: Accrued interest expense on convertible debt, net of tax   $ 4,362  
         
Adjustment to weighted average shares outstanding:        
Assumed exercise of options under treasury stock method     553  
Assumed shares if-converted     18,079  
Weighted average Class A Common shares outstanding- diluted     63,970  
Impact of IPR&D per share - diluted   $ 2.92  
Impact of other adjusted net income (loss) items - diluted   $ 0.39  
Non-GAAP adjusted EPS - diluted   $ 0.78  

 

 33 

 

General and Administrative Expenses

 

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

 

    Nine Months Ended
    September 30,
(In thousands)   2017   2016
Salaries, benefits and related costs   $ 11,236     $ 8,407  
Legal, consulting and other professional expenses     16,025       9,555  
Stock-based compensation expenses     5,211       3,843  
Rent and facilities     947       1,657  
Insurance     759       688  
Pharmacovigilance     705       1,311  
Restructuring costs     365       1,895  
R-Tech integration and acquisition costs     -       2,206  
Other expenses     3,998       2,849  
Total   $ 39,246     $ 32,411  

 

General and administrative expenses were $39.2 million for the nine months ended September 30, 2017, compared to $32.4 million for the nine months ended September 30, 2016, an increase of $6.8 million or 21%. The increase was primarily due to a $6.4 million increase in legal, consulting and other professional expenses related to the initiation of our patent litigations against Amneal and Teva (as discussed under “Legal Proceedings” below), as well as the acquisition of Vtesse and subsequent inclusion of Vtesse administrative costs, partially offset by lower restructuring costs and R-Tech integration and acquisition costs for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

 

Selling and Marketing Expenses

 

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

 

    Nine Months Ended
    September 30,
(In thousands)   2017   2016
Salaries, benefits and related costs   $ 1,822       434  
Consulting and other professional expenses     592       67  
Data purchases     112       133  
Promotional materials & programs     398       1,295  
Other expenses     1,528       165  
Total   $ 4,452     $ 2,094  

 

Selling and marketing expenses were $4.5 million for the nine months ended September 30, 2017, compared to $2.1 million for the nine months ended September 30, 2016, an increase of $2.4 million or 114%. The increase was primarily due to creation of a commercial function to support VTS-270, partially offset by the reduction in our RESCULA sales and marketing efforts in Japan.

 

Non-Operating Income and Expense

 

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

 

    Nine Months Ended
    September 30,
(In thousands)   2017   2016
Interest income   $ 38     $ 67  
Interest expense     (8,762 )     (18,141 )
Other (expense) income, net     (948 )     5,216  
Total   $ (9,672 )   $ (12,858 )

 

 34 

 

Interest expense was $8.8 million for the nine months ended September 30, 2017, compared to $18.1 million for the nine months ended September 30, 2016, an decrease of $9.3 million or 52%. This decrease resulted from interest rates on notes payable decreasing from 8.4% to 3.25% as a result of refinancing our debt in December 2016. The benefit from the lower interest rates was partially offset by a higher average principal balance.

 

Other (expense) income, net was $(0.9) million for the nine months ended September 30, 2017, compared to $5.2 million for the nine months ended September 30, 2016, a change of $6.1 million. The change was primarily attributable to the recognition of $9.3 million in other income from the forgiveness of the AMED deferred grant that was a non-recurring event in the three months ended September 30, 2016, partially offset by foreign currency exchange rate fluctuations.

 

Income Taxes

 

We recorded an income tax expense of $12.7 million and $4.3 million for the nine months ended September 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 nine months ended September 30, 2016. This increase in earnings (before in-process research and development charge from Vtesse), 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 nine months ended September 30, 2017 was (8.3%) compared to 57.4% in the same period of 2016. The ETR for the nine-month period 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.

 

Reportable Operating Segments

 

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

 

 35 

 

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, development milestone payments and research and development expense reimbursements received from Takeda, Mylan and other parties.

 

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

 

    September 30,   December 31,
(In thousands)   2017   2016
Cash and cash equivalents   $ 75,041     $ 198,308  
Restricted cash, current     -       213  
Total   $ 75,041     $ 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. Our restricted cash, which was released in July 2017, 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.

 

On October 31, 2017, we, as borrower, entered into a credit agreement, (Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders, providing for (i) a three-year, $100 million revolving loan facility and (ii) an uncommitted accordion facility subject to the satisfaction of certain conditions (collectively, the Facility). The Facility includes a $50 million multicurrency subfacility, a $5 million letter of credit subfacility and a $5 million swing line loan subfacility. Loans under the Facility bear interest, at our option, at a rate equal to either (a) the LIBOR rate, plus an applicable margin ranging from 2.50% to 3.50% per annum, based upon the total net leverage ratio (as defined in the Credit Agreement), or (b) the prime lending rate, plus an applicable margin ranging from 1.50% to 2.50% per annum, based upon the total net leverage ratio. Any borrowings of the Facility through the end of 2018 will be fixed to an interest rate of LIBOR plus 300 basis points.

 

We can borrow under the Facility through October 31, 2020, at which time the Facility expires and all outstanding principal amounts will be due and payable. The Facility is secured by all tangible and intangible assets of the Company and certain of its subsidiaries, except for certain customary excluded assets, and 65% of the capital stock of certain foreign subsidiaries of ours. Any undrawn amount of the Facility will accrue a commitment fee of 0.50% through the end of 2018. The commitment fee for any undrawn amount of the Facility after 2018 may fluctuate based on the Company’s total net leverage ratio for the remainder of the term. The Facility requires us to comply with financial covenants, including a maximum senior secured net leverage ratio, minimum liquidity and minimum EBITDA covenants. There was no outstanding balance under the Facility as of the date of this report..

 

Cash Flows

 

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

 

    Nine Months Ended Sept 30,
(In thousands)   2017   2016
Cash provided by (used in):                
Operating activities   $ 50,941     $ 30,748  
Investing activities     (175,068 )     (1,835 )
Financing activities     926       (16,820 )
Effect of exchange rates     (66 )     8,088  
Net (decrease) increase in cash and cash equivalents   $ (123,267 )   $ 20,181  

 

 36 

 

Nine months ended September 30, 2017

 

Net cash provided by operating activities was $50.9 million for the nine months ended September 30, 2017. This was primarily due to net loss of $166.2 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 $22.4 million and stock-based compensation expense of $8.1 million, as well as $0.6 million from changes in operating assets and liabilities, consisting primarily of a $13.4 million decrease in accounts receivable and product royalties receivable, a $2.8 million increase in accrued interest payable and a $3.3 million decrease in other assets and liabilities, net, offset by a $14.5 million increase in prepaid and income taxes receivable and payable, net, and a $4.5 million decrease in accounts payable.

 

Net cash used in investing activities was $175.1 million for the nine months ended September 30, 2017, consisting of $182.0 million of cash used to purchase in-process research and development from Vtesse, net of $12.3 million cash acquired, an investment in a convertible note receivable from CPP of $5.0 million and $0.4 million of purchases of property and equipment.

 

Net cash provided by financing activities was $0.9 million for the nine months ended September 30, 2017, consisting primarily of $0.6 million from the exercise of options and $0.2 million from purchases through the employee stock purchase plan.

 

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

 

Nine months ended September 30, 2016

 

Net cash provided by operating activities was $30.3 million for the nine months ended September 30, 2016. This was primarily due to net income of $3.2 million, adjustments to reconcile net income to net cash consisting of depreciation and amortization of $37.9 million, unrealized currency translation losses of $9.8 million, non-cash impairment of in-process research and development of $7.3 million, and stock-based compensation expense of $5.4 million, offset by a deferred tax provision decrease of $16.6 million and the Japan Agency for Medical Research & Development deferred grant forgiveness of $9.3 million. Additional cash provided by operating activities consisted of decreases in receivables of $5.5 million, and changes in other assets and liabilities, net of $0.8 million. Partially offsetting these items were an increase in inventory of $2.0 million, increases in prepaid and income taxes payable and receivable, net of $1.1 million, and decreases in payables of $10.7 million.

 

Net cash used in investing activities was $1.8 million for the nine months ended September 30, 2016. This was primarily due to the payment of the squeeze-out liability for non-tendering R-Tech shareholders of $7.7 million, investment in a convertible note receivable of $5.0 million, purchases of property and equipment of $1.2 million, partially offset by a decrease in restricted cash of $12.3 million.

 

Net cash used in financing activities was $16.8 million for the nine months ended September 30, 2016. This was primarily due to repayments of notes payable (net of restricted cash) of $18.7 million, partially offset by $1.7 million received upon the exercise of options and $0.2 million from purchases through the employee stock purchase plan.

 

The effect of exchange rates on the cash balances of currencies held in foreign denominations for the nine months ended September 30, 2016 was an increase of $8.1 million.

 

Off-Balance Sheet Arrangements

 

As of September 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;

 

 37 

 

  · 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 and amounts due under the Facility.

 

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 public offerings or private placements of our equity securities, 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 September 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.

 

 38 

 

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 our $10.0 million investment in CPP.

 

As of September 30, 2017 and December 31, 2016, 1.5% and less than 1.0%, respectively, 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.

 

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 September 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 September 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 September 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 appealed to the Supreme Court of Japan; this final appeal was dismissed on September 13, 2017.

 

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.

 

 39 

 

On August 14, 2017, we received a Notice Letter regarding an ANDA submitted to the FDA by Teva Pharmaceuticals USA, Inc. (“Teva”) 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, Teva alleges that certain patents covering compositions, formulations and methods of using AMITIZA, are invalid, unenforceable and/or will not be infringed by Teva’s manufacture, use or sale of the product described in its ANDA. On September 25, 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 Teva and Teva Pharmaceutical Industries Ltd. related to the ANDA filed by Teva. The lawsuit claims infringement of nine 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 Teva’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.

 

Item 5. Other Information.

 

On October 31, 2017, the Company, as borrower, entered into a credit agreement, (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto (the “Lenders”), providing for (i) a three-year, $100 million revolving loan facility (the “Revolving Credit Facility”) and (ii) an uncommitted accordion facility subject to the satisfaction of certain conditions (collectively, the “Senior Secured Credit Facility”). The Revolving Credit Facility includes a $50 million multicurrency subfacility, a $5 million letter of credit subfacility and a $5 million swing line loan subfacility.

 

Loans under the Revolving Credit Facility bear interest, at the Company’s option, at a rate equal to either (a) the LIBOR rate, plus an applicable margin ranging from 2.50% to 3.50% per annum, based upon the total net leverage ratio (as defined in the Credit Agreement), or (b) the prime lending rate, plus an applicable margin ranging from 1.50% to 2.50% per annum, based upon the total net leverage ratio (as defined in the Credit Agreement).

 

The obligations under the Credit Agreement and any swap obligations and banking services obligations owing to a Lender (or an affiliate of a Lender) thereunder are and will be guaranteed by the Company and each of the Company’s existing and subsequently acquired or organized direct and indirect domestic subsidiaries (other than certain immaterial domestic subsidiaries, certain domestic subsidiaries that hold no assets other than equity interests of foreign subsidiaries (“Domestic Foreign Holding Companies”) and certain domestic subsidiaries whose equity interests are owned directly or indirectly by certain foreign subsidiaries ) (collectively, the “Loan Parties”). The obligations under the Credit Agreement and any such swap and banking services obligations are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in (i) all tangible and intangible assets of the Loan Parties, except for certain customary excluded assets, and (ii) all of the capital stock owned by the Loan Parties thereunder (limited, in the case of the stock of certain non-U.S. subsidiaries of the Company and Domestic Foreign Holding Companies, to 65% of the capital stock of such subsidiaries). The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions. Under the terms of the Credit Agreement, the Company is required to comply with a maximum senior secured net leverage ratio, minimum liquidity and minimum EBITDA covenants.

 

 40 

 

Events of default under the Credit Agreement include: (i) the failure by the Company to timely make payments due under the Credit Agreement; (ii) material misrepresentations or misstatements in any representation or warranty by any Loan Party when made; (iii) failure by any Loan Party to comply with the covenants under the Credit Agreement and other related agreements; (iv) certain defaults under a specified amount of other indebtedness of the Company or its subsidiaries; (v) insolvency or bankruptcy-related events with respect to the Company or any of its material subsidiaries; (vi) certain undischarged judgments against the Company or any of its subsidiaries; (vii) certain ERISA-related events reasonably expected to have a material adverse effect on the Company and its subsidiaries taken as a whole; (viii) any collateral document failing to create a valid and perfected first priority security interest except as permitted by the terms of the Credit Agreement and the other loan documents; (ix) any material provision of any loan document ceasing to be, or being asserted by any Loan Party not to be, in full force and effect; and (x) the occurrence of a change of control. If one or more events of default (other than an insolvency or bankruptcy default with respect to the Company) occurs and continues beyond any applicable cure period, the administrative agent may, with the consent of the Lenders holding a majority of the loans and commitments under the facilities, or will, at the request of such Lenders, terminate the commitments of the Lenders to make further loans and declare all of the obligations of the Loan Parties under the Credit Agreement to be immediately due and payable. If an insolvency or bankruptcy default occurs with respect to the Company and continues beyond any applicable cure period, the commitments will be terminated and the obligations of the Loan Parties under the Credit Agreement will be immediately due and payable, without presentment, demand, protest or other notice.

 

The representations, warranties and covenants contained in the Credit Agreement were made only for purposes of the Credit Agreement, are solely for the benefit of the parties (except as specifically set forth therein), may be made for the purpose of allocating contractual risk between the parties instead of establishing matters as facts, and may be subject to standards of materiality and knowledge applicable to the contracting parties that differ from those applicable to the investors generally. Investors should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts or condition of the Company.

 

The foregoing summary of the Credit Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Credit Agreement, a copy of which will be filed with the Registrant’s Annual Report on Form 10-K for the year ending December 31, 2017.

 

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 3.1 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 Second Amendment to Office Lease Agreement, dated as of September 5, 2017, by and between the Registrant and Four Irvington Centre Associates, LLC. 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.

           

 

 41 

 

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.

 

 

 

 

November 1, 2017 By:   /s/  PETER GREENLEAF
      Peter Greenleaf
      Chief Executive Officer
      (Principal Executive Officer)
       
November 1, 2017 By:   /s/  PETER PFREUNDSCHUH
      Peter Pfreundschuh
      Chief Financial Officer
      (Principal Financial Officer)

 

 

 

 

 

 

 

 

 42 

 

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 3.1 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 Second Amendment to Office Lease Agreement, dated as of September 5, 2017, by and between the Registrant and Four Irvington Centre Associates, LLC. 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.

 

 

  

 

 

  

43