Supernus Pharmaceuticals, Inc. — Q1 2013 10-Q
Reporting period: Three months ended March 31, 2013. Supernus is a CNS-focused specialty pharmaceutical company developing and commercializing epilepsy and ADHD treatments. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial results and liquidity
- Revenue: $0.147 million, down from $0.208 million in Q1 2012. The company recognized no product revenue from Oxtellar XR; wholesaler shipments were recorded as deferred revenue because returns and sales deductions could not yet be estimated reliably. Revenue included no milestone payment, versus approximately $0.15 million in Q1 2012.
- Expenses and loss: R&D was $4.522 million, down 16% from $5.358 million. SG&A rose to $13.533 million from $2.728 million, primarily due to sales-force hiring and launch-related spending. Operating loss was $17.908 million versus $7.878 million; net loss was $18.414 million versus $9.277 million. Basic and diluted loss per share was $0.60 versus $6.05; the share-count comparison is affected by the 2012 IPO and preferred-stock conversion.
- Margins: A meaningful product gross margin is not provided; product revenue and related product costs were deferred.
- Cash flow: Operating cash use was $17.223 million, compared with $10.068 million. Investing cash use was $3.149 million, compared with $21.553 million, largely reflecting the timing of marketable-security purchases and maturities. Financing cash use was $1.021 million. Cash declined $21.393 million to $18.909 million.
- Liquidity: Cash and cash equivalents plus marketable securities totaled approximately $69.9 million at quarter-end. Working capital was $49.3 million, down from $68.5 million at December 31, 2012.
- Debt: At March 31, the balance sheet showed approximately $20.1 million of secured notes payable, bearing 11% interest. After quarter-end, the company issued $90 million of 7.50% convertible senior secured notes due 2019, receiving approximately $86.4 million net and using about $19.6 million to repay and terminate the prior credit facility. The notes are convertible at an initial price of approximately $5.30 per share.
- Other balance-sheet changes: Accounts receivable rose from zero to $1.650 million and inventory increased from $1.152 million to $3.113 million, reflecting commercial launch activity and inventory preparation.
Material changes and operating developments
- Oxtellar XR launched on February 4, 2013. The filing reports 579 prescriptions written in February and March; shipments to wholesalers had not yet generated recognized product revenue.
- Trokendi XR had tentative FDA approval. The company said final approval and a commercial launch in Q3 2013 were expected, subject to FDA approval and the timing of pediatric exclusivity associated with Topamax.
- SG&A growth and higher operating cash use reflect the transition from development toward commercialization. Lower R&D spending mainly reflected completion of the SPN-810 Phase IIb trial, partly offset by additional compensation and stock-based compensation.
- Q1 net other expense improved to $0.506 million from $1.399 million, including a favorable change in warrant fair value and higher interest income; interest expense declined to $0.727 million from $0.962 million.
Outlook, risks, and contingencies
- Management expected the May 2013 notes proceeds and available working capital to fund operations through the end of 2014, when it expected to reach cash-flow break-even. The company also expected significant 2013 commercialization and R&D spending.
- Pipeline plans included further FDA discussions and development planning for SPN-810, and development of an extended-release SPN-812 formulation ahead of a planned pre-IND meeting.
- The auditor’s 2012 opinion included a going-concern explanatory paragraph. The Q1 statements use the going-concern basis; management’s funding outlook is an estimate, not a guarantee.
- Key risks include Trokendi XR’s pending final FDA approval, early-stage launch and revenue-estimation uncertainty, continued losses and cash burn, substantial secured debt and debt-service obligations, and potential dilution. The notes could result in issuance of up to approximately 16.98 million shares at the initial conversion rate, before any adjustments.
- Product rebates, chargebacks, discounts, co-pay assistance, and returns may affect the timing and amount of revenue once it can be recognized. The company also disclosed unhedged euro exposure; a hypothetical 10% euro appreciation would have increased Q1 net loss by approximately $0.294 million.
- Management said disclosure controls were effective as of March 31, 2013 and reported no significant changes in internal control over financial reporting. It did not believe ordinary-course legal matters would have a material adverse impact.
Important facts for investors to verify
- Whether and when Trokendi XR received final FDA approval and launched, and whether Oxtellar XR prescription growth converted into recognized revenue and cash collections.
- Actual quarterly revenue, product deductions, returns, gross margin, and deferred-revenue recognition as the company gained sales history.
- Cash burn versus management’s stated funding runway and cash-flow break-even expectation.
- The effect of the convertible notes’ interest, covenants, repayment or fundamental-change provisions, and potential conversion dilution.
- Whether inventory for Trokendi XR remains recoverable if approval or launch is delayed.