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
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six 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.