SUPERNUS PHARMACEUTICALS, INC. quarterly report, Q2 FY2013

Supernus Pharmaceuticals, Inc. — Q2 2013 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2013. Unaudited. Amounts below are in millions of dollars unless otherwise noted. Supernus is a CNS-focused specialty pharmaceutical company commercializing Oxtellar XR and preparing to launch Trokendi XR.

Financial performance and position

MetricQ2 2013Q2 2012Six months 2013Six months 2012
Total revenue$0.281$0.091$0.428$0.299
Operating loss$(15.479)$(9.257)$(33.388)$(17.136)
Net loss$(27.357)$(10.013)$(45.771)$(19.288)
Loss per share, basic and diluted$(0.89)$(0.61)$(1.48)$(2.21)
Research and development expense$3.542$4.703$8.065$10.061
Selling, general and administrative expense$12.214$4.645$25.747$7.374

Q2 product sales were $0.154 million, based on 529 Oxtellar XR prescriptions filled in Q1; the company had not yet recognized revenue for Q2 prescriptions. Licensing revenue was $0.127 million. Product-sales gross margin is not meaningful at this early commercial stage: reported cost of product sales was $0.004 million, while revenue recognition was constrained by the company’s inability to estimate returns and deductions reliably.

At June 30, 2013, cash and cash equivalents were $33.907 million, marketable securities were $68.725 million, and long-term investments were $16.072 million. The company reported unrestricted cash, cash equivalents and marketable securities of $118.7 million, working capital of $94.7 million, and total assets of $132.0 million. Cash declined from $40.302 million at year-end 2012; marketable securities increased from $48.206 million.

Six-month cash flows were $(32.978) million from operations, $(37.628) million from investing, and $64.211 million from financing, resulting in a $6.395 million decrease in cash. Operating cash use reflected ongoing losses and launch spending; investing outflows largely reflected purchases of marketable securities.

On May 3, 2013, Supernus issued $90.0 million principal amount of 7.50% convertible senior secured notes due 2019, receiving approximately $86.5 million net proceeds and using approximately $19.6 million to repay and terminate its prior secured credit facility. Notes had a $59.1 million carrying value and $115.0 million estimated fair value at June 30. Total liabilities were $96.1 million. The notes are secured by a first-priority lien on substantially all company and domestic-subsidiary assets.

Material changes versus the prior comparable period

  • Revenue rose to $0.281 million in Q2 from $0.091 million; six-month revenue increased to $0.428 million from $0.299 million. The new product-sales contribution remained small and was reported with a quarter lag.
  • Q2 SG&A increased by $7.569 million year over year, mainly due to sales-force hiring and marketing for Oxtellar XR and planned Trokendi XR commercialization. Six-month SG&A rose by $18.373 million.
  • Six-month R&D fell by $1.996 million, primarily reflecting lower SPN-810 clinical-trial costs after its Phase IIb trial was completed in 2012.
  • Net loss widened substantially, including an $8.540 million noncash charge from derivative fair-value changes and a $1.162 million loss on extinguishing the prior credit facility. The derivative charge was attributed mainly to an increase in the company’s stock price.

Outlook, commentary and risks

  • Management expected final FDA approval and commercial launch of Trokendi XR in Q3 2013; approval was pending at the filing date. Trokendi had received tentative approval, and inventory included approximately $3.0 million related to the product.
  • Management estimated available funds would support operations through the end of 2014, when it projected cash-flow break-even. This outlook depends on management’s operating assumptions. The 2012 auditor’s report had included a going-concern explanatory paragraph citing substantial doubt; the current interim statements were prepared on a going-concern basis.
  • The company expected significant 2013 sales and marketing spending and continued R&D spending, particularly for SPN-810 and SPN-812. SPN-810 next steps depended on further analysis and FDA discussions; SPN-812’s extended-release program was being developed following a June 2013 pre-IND meeting.
  • Oxtellar XR prescription activity reported by IMS-NPA rose from 529 in Q1 to 3,648 in Q2, a reported 590% quarter-over-quarter increase. The company stated that Q2 prescriptions had not yet been reflected in recognized product revenue.
  • On August 7, 2013, after quarter-end, Supernus filed suit alleging that Watson infringed two Oxtellar XR patents after Watson submitted an ANDA for a generic product. The patents expire April 13, 2027; a timely complaint provides an automatic 30-month stay on FDA approval of Watson’s ANDA. Litigation outcome is uncertain.
  • The notes create interest and repayment obligations, restrict certain actions, and may dilute shareholders. Their conversion rate equates to an initial conversion price of about $5.30 per share; approximately 16.98 million common shares were reserved for conversion. The company stated it was not obligated to seek stockholder approval for conversion terms.
  • Revenue estimates remain sensitive to rebates, chargebacks, discounts and returns. The company said sufficient historical product data might be available by year-end to support recognizing revenue on wholesaler shipments; actual timing and estimates could differ.

Important facts for investors to verify

  • Whether Trokendi XR received final FDA approval and launched as projected, and whether its inventory was recoverable through sales.
  • Subsequent Oxtellar XR prescription trends, the timing of revenue recognition, and the adequacy of estimated rebates, chargebacks and other sales deductions.
  • Cash burn, commercial-launch costs, and whether management’s projected funding runway through year-end 2014 and cash-flow break-even remain achievable.
  • Convertible-note terms, interest and potential cash requirements, conversion dilution, collateral restrictions, and the company’s capacity to service the debt.
  • Progress and outcome of the Watson patent litigation and any effect on Oxtellar XR’s commercial prospects.
  • The impact of future changes in the fair value of derivative liabilities, which produced a material noncash expense in the period.