Supernus Pharmaceuticals, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Amounts are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.
Business context
Supernus develops and commercializes central nervous system medicines. It launched Oxtellar XR, an extended-release epilepsy treatment, in February 2013 and launched Trokendi XR in the third quarter. Its development pipeline includes SPN-810 and SPN-812 for ADHD-related indications.
Financial results and liquidity
- Q3 revenue: $1.257 million, versus $91,000 in Q3 2012. Product sales were $1.130 million and licensing revenue was $127,000. Reported product sales principally reflect Oxtellar XR prescriptions filled in Q2, not Q3.
- Nine-month revenue: $1.684 million, versus $391,000 in 2012; product sales were $1.283 million and licensing revenue was $401,000.
- Q3 net loss: $24.096 million, compared with $13.482 million; loss per share was $0.78 versus $0.55. Nine-month net loss: $69.867 million, compared with $32.771 million; loss per share was $2.26 versus $2.36.
- Operating loss: $17.175 million in Q3 and $50.563 million for the first nine months, versus $12.290 million and $29.426 million, respectively, in 2012. SG&A rose to $14.620 million in Q3 and $40.366 million year to date, largely reflecting commercial launch investment. R&D declined to $3.779 million and $11.844 million, respectively.
- Other expenses: Q3 interest expense was $2.870 million and the noncash derivative fair-value charge was $4.153 million. For nine months, these were $5.742 million and $12.692 million; the period also included a $1.162 million debt-extinguishment loss.
- Cash flow: Operating activities used $48.528 million in the first nine months; investing activities used $33.022 million; financing activities provided $64.193 million. Cash and cash equivalents declined by $17.357 million to $22.945 million.
- Liquidity: Current assets were $102.862 million and current liabilities $25.071 million, for working capital of $77.7 million. Cash, cash equivalents, marketable securities and long-term investments totaled approximately $102.5 million unrestricted at September 30.
- Debt and equity: The company issued $90 million of 7.50% convertible senior secured notes due 2019, receiving approximately $86.5 million net proceeds and using about $19.6 million to repay its prior credit facility. Notes had a $60.175 million carrying value at September 30 after accounting discounts; the company reported a $134.1 million estimated fair value. Stockholders’ equity was $12.453 million.
Changes, outlook and material matters
- Product sales began in 2013, but the company deferred wholesaler shipments as revenue because it lacked sufficient history to estimate returns and sales deductions. It recognized revenue based on pharmacy prescriptions on an approximately one-quarter lag. Q3 prescriptions—7,596 for Oxtellar XR and 1,434 for Trokendi XR—were expected to be recognized in Q4. Management said sufficient Oxtellar XR data might be available by year-end to permit recognition based on wholesaler shipments.
- Oxtellar XR prescriptions grew approximately 108% quarter over quarter in Q3. The company reported 11,773 Oxtellar XR prescriptions from launch through September 30.
- Management projected existing working capital and note proceeds would fund operations through the end of 2014, when it projected cash-flow break-even. It expected continued significant launch, sales and marketing expenses and substantial development spending on SPN-810 and SPN-812. These are projections, not guarantees.
- Following an FDA meeting in September, Supernus planned to advance SPN-810 toward a Phase III trial under a Special Protocol Assessment. It expected a multi-dose pharmacokinetic study for SPN-812 in the first half of 2014 to select a formulation for a Phase IIb trial.
- Supernus sued Watson after receiving a Paragraph IV notice challenging Oxtellar XR patents. The suit sought to protect patents expiring in 2027; an automatic 30-month stay applied to FDA approval of Watson’s ANDA. Watson denied the allegations and asserted non-infringement and invalidity counterclaims. The litigation was in early stages.
- The company disclosed that its independent auditor’s 2012 opinion included a going-concern explanatory paragraph. The 2013 interim statements were prepared on a going-concern basis; management’s funding and break-even expectations are subject to business and financing risks.
- After quarter-end, approximately $17.1 million principal amount of notes was converted, resulting in approximately 3.2 million common shares; the company also issued 0.6 million additional shares and paid about $0.8 million cash under the interest make-whole provision.
Important facts for investors to verify
- Whether prescription growth and commercial uptake translate into recognized net sales and cash collections, given the quarter-lag revenue policy and estimated rebates, chargebacks, discounts and returns.
- Whether cash burn, launch costs and pipeline spending remain consistent with management’s projection of funding through end-2014 and cash-flow break-even.
- The dilution and cash implications of note conversions, conversion terms, make-whole provisions, and the substantial collateral securing the notes.
- Developments in the Oxtellar XR patent litigation and the timing and outcome of Watson’s generic application.
- Progress, trial design and funding requirements for SPN-810 and SPN-812.