We have invested and continue to invest a significant portion of our efforts and financial resources in the development, approval and now commercialization of GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications. The success of GOCOVRI will depend on numerous factors, including:
are heavily dependent on third-party logistics, pharmacy and distribution partners. If they are unable to perform effectively or if they do not provide efficient distribution of the medicine to patients, our business will suffer. Also, if we are unable to effectively market and sell GOCOVRI for any reason, including ineffective training of our sales force or equipping them with ineffective materials, including medical and sales literature to help them inform and educate potential customers about the benefits and risks of GOCOVRI and its proper administration, our efforts to successfully commercialize could be put in jeopardy.
Failure to successfully obtain coverage and reimbursement for GOCOVRI in the United States, or the availability of coverage and reimbursement only at limited levels, would diminish our ability to generate product revenue.
Our ability to commercialize GOCOVRI successfully in the United States will depend in part on the extent to which we obtain and maintain coverage and reimbursement for GOCOVRI becomes available from third-party payers, including government health administration authorities, such as those that administer the Medicare and Medicaid programs, and private health insurers. Patients who are prescribed medicine for the treatment of their conditions generally rely on third-party payers to reimburse all or part of the costs associated with their prescription drugs. Coverage and reimbursement discussions are currently ongoing with payers. Coverage and adequate reimbursement from both governmental healthcare programs, such as Medicare and Medicaid, and commercial payers are critical to GOCOVRI’s commercial success. Coverage and reimbursement decisions may depend upon clinical and economic standards that disfavor newnewer drug products when more established or cheaper therapeutic alternatives are already available or subsequently become available. For example, although no payer has done so to date, a payer may determine to require patients to useeven though other formulationsversions of amantadine for dyskinesia (even though it isare not approved for dyskinesia, some payers have asked physicians if patients have had prior experience with such versions or required that indication)physicians actually prescribe such versions prior to receivingproviding reimbursement for GOCOVRI.
Even if we obtain coverage for GOCOVRI, the resulting reimbursement rates might not be adequate or may require co-payments or co-insurance payments that patients find unacceptably high. Coverage and reimbursement determinations by third-party payers willcan impact the demand for GOCOVRI and therefore our revenues. Patients may choose not to use GOCOVRI if coverage is not provided or reimbursement is inadequate to cover a significant portion of its cost. If coverage and reimbursement are not available or are available only to limited levels, we may notour business could be able to successfully commercialize GOCOVRI.
We face substantial competition in the commercialization of GOCOVRI.
Many of our competitors, including a number of large pharmaceutical companies that compete directly with us, have significantly greater financial resources and expertise commercializing approved products than we do. Also, many of our competitors are large pharmaceutical companies that will have a greater ability to reduce prices for their competing drugs in an effort to gain market share and undermine the value proposition that we might otherwise be able to offer to payers.
If manufacturers obtain approval for generic versions of GOCOVRI, or of products with which we compete, our business may suffer.
The marketing and promotion of GOCOVRI willmust be limited to the approved indication for use and the information and clinical data included in or consistent with the approved prescribing information. If we want to expand the marketing and promotion of GOCOVRI beyond the approved indication or with information not consistent with the approved prescribing information, we will need to obtain additional regulatory approvals, which may not be granted.
With the August 2017 approval of GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications, we currently are permitted to market or promote it, consistent with the information and data in its approved prescribing information, only for the treatment of dyskinesia and not for other uses. We are developing ADS-5102, the formulation in GOCOVRI for at least one additional indication, treatment of walking impairment in patients with multiple sclerosis, and potentially others. In order tosclerosis.To market and promote GOCOVRI for thesethis additional indications,indication, we willmay need to conduct an additional clinical trialstrial to obtain regulatory approval for such use that will likely be time-consuming and expensive to obtain regulatory approval for such uses. Additionally, ourexpensive. Our current marketing and promotional efforts will beis limited to the use of information included in or deemed to be consistent with the approved prescribing information for GOCOVRI for the treatment of dyskinesia, including the clinical data and results reflected in the prescribing information. To use information not consistent with the approved prescribing information will require additional regulatory approvals.
If we are found to have improperly promoted unapproved uses of GOCOVRI, or if physicians misuse it, we may be subject to restrictions on the sale or marketing of GOCOVRI and significant fines, penalties, sanctions and product liability claims, and our image and reputation within the industry and marketplace could be harmed.
The FDA and other regulatory agencies, including regulatory authorities outside the United States, strictly regulate the marketing and promotional claims that are made about drug products, such as GOCOVRI. In particular, promotion forof a product must be consistent with its labeling approved by the FDA or by regulatory agencies in other countries. For example, in the case of GOCOVRI, for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications, we cannot prevent physicians from prescribing GOCOVRI for indications or uses that are inconsistent with the approved label. If, however, we are found to have promoted such unapproved uses prior to the FDA’s approval for an additional indication, we may, among other consequences, receive untitled or warning letters and become subject to significant liability, which would materially harm our business. Both the U.S. federal government and foreign regulatory authorities have levied significant civil and criminal fines against companies and individuals for alleged improper promotion and have entered into settlement agreements with pharmaceutical companies to limit inappropriate promotional activities. If we become the target of such an investigation or prosecution based on our marketing and promotional practices, we could face similar sanctions, which would materially harm our business. In addition, management’s attention could be diverted from our business operations, significant legal expenses could be incurred, and our reputation could be damaged.
Physicians’Physicians prescribing of our products for unapproved uses may also subject us to product liability claims, to the extent such uses lead to adverse events, side effects, or injury. Product liability claims could divert management’s attention from our core business, be expensive to defend, and result in sizable damage awards against us that may not be covered by insurance. Furthermore, the use of our products for indications other than those approved by the FDA or regulatory authorities outside the United States may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients. Any of these events could harm our business and results of operations and cause our stock price to decline.
If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate Program or other governmental pricing programs in the United States, we could be subject to additional reimbursement requirements, fines, sanctions and exposure under other laws which could have a material adverse effect on our business, results of operations and financial condition.
We will participate in the Medicaid Drug Rebate Program, as administered by the Centers for Medicare and Medicaid Services, or CMS, and other federal and state government pricing programs in the United States, and we may participate in additional government pricing programs in the future. These programs generally require us to pay rebates or otherwise provide discounts to government payers in connection with drugs that are dispensed to beneficiaries/recipients of these programs. In some cases, such as with the Medicaid Drug Rebate Program, the rebates are based on pricing that we report on a monthly and quarterly basis to the government agencies that administer the programs. Pricing requirements and rebate/discount calculations are complex, vary among products and programs, and are often subject to interpretation by governmental or regulatory agencies and the courts. The requirements of these programs, including, by
way of example, their respective terms and scope, change frequently. Responding to current and future changes may increase our costs, and the complexity of compliance will be time consuming. Invoicing for rebates is provided in arrears, and there is frequently a time lag of up to several months between the sales to which rebate notices relate and our receipt of those notices, which further complicates our ability to accurately estimate and accrue for rebates related to the Medicaid program as implemented by individual states. Thus, there can be no assurance that we will be able to identify all factors that may cause our discount and rebate payment obligations to vary from period to period, and our actual results may differ significantly from our estimated allowances for discounts and rebates. Changes in estimates and assumptions may have a material adverse effect on our business, results of operations and financial condition.
In addition, the Office of Inspector General of the Department of Health and Human Services and other Congressional enforcement and administrative bodies have recently increased their focus on pricing requirements for products,
including, but not limited to the methodologies used by manufacturers to calculate average manufacturer price, or AMP, and best price, or BP, for compliance with reporting requirements under the Medicaid Drug Rebate Program. We are liable for errors associated with our submission of pricing data and for any overcharging of government payers. For example, failure to submit monthly/quarterly AMP and BP data on a timely basis could result in asignificant civil monetary penalty of $18,107 per daypenalties for each day the submission is late beyond the due date. Failure to make necessary disclosures and/or to identify overpayments could result in allegations against us under the Federal False Claims Act and other laws and regulations. Any required refunds to the U.S. government or responding to a government investigation or enforcement action would be expensive and time consuming and could have a material adverse effect on our business, results of operations and financial condition. In addition, in the event that CMS were to terminate our rebate agreement, no federal payments would be available under Medicaid or Medicare for our covered outpatient drugs.
GOCOVRI is complex to manufacture, and manufacturing disruptions may occur that could cause us to experience disruptions in the supply of GOCOVRI.
GOCOVRI is ana high-dose, extended release versionamantadine taken once-daily at bedtime that delivers high levels of amantadine.amantadine in the morning upon waking and throughout the day. The manufacture of extended release versions of drugs is more complex than the manufacture of the immediate release versions of drugs. Notwithstanding the fact that we have validated our process, manufacturing disruptions may occur. Such problems may prevent the production of lots that meet the specifications required for sale of the product and may be difficult and expensive to resolve. If any such issues were to arise with respect to GOCOVRI, or our future product candidates, our business, financial results, or stock price could be adversely affected.
Risks related to our product candidates in clinical development
Our success depends on the timely clinical development, approval and successful commercialization of our product candidates. If we are unable to do anymaintain orphan exclusivity for GOCOVRI for the treatment of thesedyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications, our product candidatesbusiness may be substantially harmed.
When GOCOVRI was approved for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications, GOCOVRI earned seven years of orphan drug exclusivity under the Orphan Drug Act. Even so, the FDA could still subsequently approve the same drug with the same active moiety for the same indication if the FDA concludes that the later drug is safer or more effective or makes a major contribution to patient care, or if we experience significant delays in doing so,are unable to assure that sufficient quantities of medicine are available to meet patient needs. If we are unable to maintain orphan drug exclusivity for GOCOVRI for the treatment of dyskinesia, our business willwould be materiallysubstantially harmed.
We have invested a significant portion of our efforts and financial resources into the
Risks related to ADS-5102 in clinical development and potential commercialization ofany other product candidates
Our ability to benefit from our product candidates, includinginvestment in ADS-5102 for the treatment of walking impairment in patients with multiple sclerosis depends on the timely clinical development, approval and potentially other indications, as well as ADS-4101successful commercialization of ADS-5102 for this indication.
We have invested significant effort and financial resources into the development and potential commercialization of ADS-5102 for the treatment of partial onset seizureswalking impairment in epilepsy.patients with multiple sclerosis. Our ability to generate product revenue from this product in development will depend heavily on the successful development, regulatory approval, and commercialization of our other product candidates.ADS-5102 for this indication. The success of our product candidatesADS-5102 for the treatment of walking impairment in patients with multiple sclerosis will depend on numerous factors, including:
•successfully engaging with the FDA and developing a regulatory pathway for ADS-5102 based on data from the INROADS trial;
•successfully completing the development program for our product candidates in a timely manner;
•receiving marketing approval for our product candidates from the FDA in a timely manner;
•successfully establishing and maintaining commercial manufacturing with third parties;
•commercializing our product candidates,products, if approved, including marketing, sales, and distribution of the product independently or in partnership with another company;
•acceptance by the medical community and patients of the approved product;
•coverage and adequate reimbursement by third-party payers;
the pricing•willingness and placementability of our product candidates on payers’ formulary tiers and the reimbursement rates establishedpatients to pay out of pocket for the approved products;
•effectively competing with other approved or used medicines and future compounds in development;
•continued demonstration of an acceptable safety profile of the approved products following approval; and
•obtaining, maintaining, enforcing, and defending intellectual property rights and claims.
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates,ADS-5102 for the treatment of walking impairment in patients with multiple sclerosis, which would materially harmcause us not to realize on our business.investment in ADS-5102 for this indication. In addition, if we determine to pursue development of ADS-5102 for additional indications other than for the treatment of walking impairment in patients with multiple sclerosis, we will face many of these factors for those additional indications.
We will face risks in the development of ADS-5102 (GOCOVRI) for additional indications, ADS-4101 and other product candidates.indications.
There are risks associated with pursuing clinical trials in other indications for ADS-5102, (GOCOVRI), ADS-4101 and other product candidates,including for the treatment of walking impairment in patients with multiple sclerosis, as we may experience numerous unforeseen events during, or as a result, of clinical studies that could harm our ability to commercialize such products and candidates or to receive regulatory approval, including that:
•clinical studies may produce negative or inconclusive results or raise significant safety concerns, and we may decide, or regulators may require us, to conduct additional clinical studies or abandon product development programs;
•even if clinical studies demonstrate statistically significant efficacy and acceptable safety, the FDA or similar authorities outside the United States may not consider the results of our studies to be sufficient for approval;
•our clinical sites and clinical investigators may fail to comply with, or inconsistently apply, the trial protocols, regulatory requirements including Good Clinical Practices, contractual obligations, and the rating assessments;
•our third-party vendors, including our Contract Research Organizations, or CROs, and contract manufacturing organizations, or CMOs, may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
•we might have to suspend or terminate clinical studies for various reasons, including a finding that our product candidatesproducts have unanticipated serious side effects or other unexpected characteristics or that the patients are being exposed to unacceptable health risks;
•regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;
•the supply or quality of ADS-5102 ADS-4101, or other materials necessary to conduct clinical studies may be insufficient or inadequate; and
•our new product discovery or research program may not be successful or warrant clinical development.
With respect to the development of additional indications for GOCOVRI, although the safety profile of amantadine, the active pharmaceutical ingredient in GOCOVRI, is already characterized in the approved label for amantadine (i.e., Symmetrel®) and in the GOCOVRI clinical trial data in the dyskinesia population, there can be no assurance that our clinical development program for ADS-5102 (GOCOVRI) for multiple sclerosis walking impairment or future studies in other indications will not reveal additional safety or tolerability issues that could lead to changes in the GOCOVRI prescribing information. In such an event, our ability to commercialize GOCOVRI for dyskinesia and/or expand our business could be compromised.
If we are forced to delay or abandon development of our product candidates,products, our business, results of operations, and financial condition will be materially and adversely harmed.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidatesproducts or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we have chosen to focus on research programs and product candidatesproducts for specific indications. As a result, we may forego or delay pursuit of opportunities with otherour product candidatescandidate or other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our investment in current and future research and development programs and product candidates for specific indications may not yield any commercially viable products.products for us or future partners.
If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing, or other royalty arrangements in cases in which it would have been advantageous for us to retain sole development and commercialization rights.
Failure to gain approval of or successfully commercialize our product candidatesADS-5102 in additional indications in the United States could substantially harm our business.
Our product candidatesWe will face the same or similar challenges in obtaining FDA approval and in commercialization and manufacturing ADS-5102 as GOCOVRI, as outlined above, including but not limited to market acceptance by physicians and patients, and coverage and reimbursement by third party payers.payers, and manufacturing issues.
FailureIf we resume development of ADS-4101, or seek to obtaindevelop additional product candidates that we may develop or acquire, we will face the same regulatory approvalsand development risks that we face with the development of ADS-5102 for the treatment of walking impairment in foreign jurisdictions would prevent us from marketing our products internationally.patients with multiple sclerosis.
Although we have placed the development program for ADS-4101 (lacosamide) modified release capsules for the treatment of partial onset seizures in patients with epilepsy on hold, if we determine to resume development of ADS-4101, or develop or acquire other potential product candidates and seek to develop them, we will face the same regulatory and other development risks that we face with the development of ADS-5102 for the treatment of walking impairment in patients with multiple sclerosis discussed above.
We may in the future seek to acquire additional product candidates, which may subject us to additional risks and expense.
In the future in seeking to diversify our product candidate portfolio we may seek to identify and acquire or in-license novel product candidates. We may fail to identify and acquire or in-license product candidates, including for reasons discussed in these risk factors, and also:
•the process by which we identify and decide to seek marketing authorizations to commercialize GOCOVRI, ADS-4101, and other futureacquire product candidates outside of the United States. To market our future products in the European Union, or EU, and many other foreign jurisdictions, we must obtain separate regulatory approvals. Specifically, in the EU, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA.
Before granting an MA, the European Medicines Agency, or EMA, or the competent authorities of the member states of the EU make an assessment of the risk-benefit balance of the product on the basis of a Common Technical Document including, among other information, scientific criteria concerning its quality, safety, and efficacy.
Similar to the United States, both MA holders and manufacturers of medicinal products are subject to comprehensive regulatory oversight by the EMA and the competent authorities of the individual EU member states both before and after grant of the manufacturing and Marketing Authorizations. This includes control of compliance with current good manufacturing practices, or cGMP, rules, which govern quality control of the manufacturing process and require documentation policies and procedures. We and our third-party manufacturers are required to ensure that all of our processes, methods, and equipment are compliant with cGMP. Failure by us or by any of our third-party partners, including suppliers, manufacturers, and distributors, to comply with EU laws and the related national laws of individual EU member states governing the conduct of clinical trials, manufacturing approval, marketing authorization of medicinal products, both before and after grant of marketing authorization, and marketing of such products following grant of authorization may result in administrative, civil, or criminal penalties. These penalties could include delays in or refusal to authorize the conduct of clinical trials or to grant Marketing Authorization, product withdrawals and recalls, product seizures, suspension, or variation of the marketing authorization, total or partial suspension of production, distribution, manufacturing, or clinical trials, operating restrictions, injunctions, suspension of licenses, fines, and criminal penalties.
We have had limited interactions with foreign regulatory authorities. The approval procedures vary among countries and can involve additional clinical testing, and the time required to obtain approval may differ from and be longer than that required to obtain FDA approval. Clinical studies conducted in one country may not be accepted by regulatory authorities insuccessful;
•the competition to acquire or in-license promising product candidates is fierce and many of our competitors are large, multinational pharmaceutical, biotechnology and medical device companies with considerably more financial, development and commercialization resources and experience than we have;
•potential product candidates may, upon further study during or after the acquisition process, fail to demonstrate clinical efficacy, be shown to have harmful side effects or other countries. Approval by the FDA does not ensurecharacteristics that indicate that they are unlikely to be products that will receive marketing approval by regulatory authorities in other countries,or achieve market acceptance; and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country
may have a negative effect on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval as well as additional, different risks.
There is no assurance that we will be able to obtain marketing authorizations in foreign countries on a timely basis, if at all. We•potential product candidates may not be able to file for foreign regulatory approvals, and eveneffective in treating their targeted diseases.
In addition, if we filedo acquire additional product candidates and they prove to be unsuccessful, we maywill have spent significant amounts of resources in acquiring and pursuing these product candidates, and not receive necessary approvals to commercializeany return on our products in any market. If we are unable to obtain non-U.S. regulatory approval to market ourinvestments. Further, time and resources spent searching for, identifying, acquiring, and developing potential product candidates in other countries, we may not be able to achieve the financial results we project anddistract management’s attention from our stock price could decline.existing business.
Risks related to our reliance on third parties
We rely on third-party contract manufacturing organizations to manufacture, serializesupply, and supplydistribute GOCOVRI and our product candidates.ADS-5102. If one of our suppliers or manufacturersthese organizations fails to perform adequately or fulfill our needs, we may be required to incur significant costs and devote significant efforts to find new suppliers third party vendors and/or manufacturers and qualify them. We may also face delays in the development, commercialization and supply of GOCOVRI or our product candidates.ADS-5102.
We currently have limited experience in, and we do not own facilities for clinical and commercial manufacturing of GOCOVRI or our product candidates,ADS-5102, and we rely upon third-party contract manufacturing organizations to manufacture, serialize and supply drug product for our clinical studies and to meet potential commercial demand. The manufacture of pharmaceutical products in compliance with the FDA’s cGMP requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products oftenIf our manufacturers were to encounter difficulties in production, including difficulties with production costs and yields, quality control, including stability of the product candidateGOCOVRI or ADS-5102 and quality assurance testing, shortages of qualified personnel, as well as complianceor fail to comply with strictly enforced cGMP requirements, other federal and state regulatory requirements, and foreign regulations. If our manufacturers were to encounter any of these difficulties or otherwise fail to comply with their obligations to us or under applicable regulations, our commercial supply of GOCOVRI or product candidatesADS-5102 in our clinical trials could be jeopardized. We have little control over our manufacturers’ operations or their compliance with applicable regulations and standards. Any delay or interruption in the supply of clinical study materials or commercial product could cause delays in our clinical programs, harm our ability to gain approval from regulatory authorities, and potentially disrupt patient access to our approved products. These events would substantially harm our business, reputation and stock price.
We also rely on a single specialty pharmacy to distribute and provide access to GOCOVRI for the vast majority of our patients. Accordingly, this specialty pharmacy is the Company’s largest customer representing approximately 98% of the Company’s product revenue. If this specialty pharmacy fails to perform, it could materially harm our business.
All third-party manufacturers of our products product candidates and ingredients thereof must comply with cGMP requirements enforced by the FDA through its facilities inspection program. These requirements include, among other things, quality control, quality assurance, and the maintenance of records and documentation. Manufacturers of our products and product candidates may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. The FDA or similar foreign regulatory agencies may also implement new standards at any time, or change their interpretation and enforcement of existing standards for manufacture, packaging, or testing of products. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any product supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products or product candidates and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay of clinical studies, regulatory submissions, approvals, commercialization or supply of our products, or product candidates, entail higher costs, impair our reputation, and potentially disrupt patient access or our approved products.
We rely on a single source third-party contract manufacturing organization for the manufacture and supply ofour drug substances and drug product for GOCOVRI and our other product candidates.ADS-5102.
WeAlthough we have supply agreements with two drug substance suppliers, only one is currently manufacturing at commercial scales required for GOCOVRI. In addition, we also currently rely on a single source suppliers for our drug substancesproduct manufacturer for GOCOVRI and our other product candidates.ADS-5102. We continue to seek additional long-term supply agreements with suppliers and supplier qualifications. A failure of our single source manufacturer or drug substance supplier or our failure to qualify at least one other manufacturer organization on a timely basis and validate the manufacturing process employed at that manufacturer or supplier could delay or harm commercialization of GOCOVRI or our product candidates.ADS-5102. Although we believe
alternative sources of supply exist, the number of third-party suppliers with the necessary manufacturing and regulatory expertise and facilities is limited, and it could be expensive and take a significant amount of time to arrange and negotiate acceptable long-term contracts and obtain regulatory approvals and qualifications, which would adversely affect our business. New suppliers of any product candidatedrug substance would be required to be qualified under applicable regulatory requirements including demonstration of bioequivalence of the product made at the new supplier, and would need to have sufficient rights under applicable intellectual property laws to the method of manufacturing the product candidate.product. Obtaining the necessary FDA approvals or other qualifications under applicable regulatory requirements and ensuring non-infringement of third-party intellectual property rights could result in a significant interruption of supply and could require the new manufacturer to bear significant additional costs, which may be passed on to us. Qualifying and negotiating long-term contracts with manufacturers and providers of packaging services is a lengthy process. If at any time, one or more of our qualified contract manufacturing organizations were not able to manufacture our drug substance
or drug product or provide the requisite services, our business and financial condition would be materially adversely affected.
In our existing or any future potential collaborations or partnerships, we will likely not be able to control all aspects of the development andcommercialization ofour products or product candidates. This lack ofcontrolcould subject us to additional risks that could harm our business.
Collaborations or license agreements involving our current or future products are subject to numerous risks, which may include that:
partners have significant discretion in determining the efforts and resources that they will apply to collaborations;
partners may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical study results, changes in their strategic focus due to the acquisition of competitive products, availability of funding, or other external factors, such as a business combination that diverts resources or creates competing priorities;
partners may delay clinical studies, provide insufficient funding for a clinical study program, stop a clinical study, abandon a product candidate, repeat or conduct new clinical studies, or require a new formulation of a product candidate for clinical testing;
partners could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates;
a partner with marketing, manufacturing, and distribution rights to one or more products may not commit sufficient resources to or otherwise not perform satisfactorily in carrying out these activities;
we could grant exclusive rights to our partners that would prevent us from collaborating with others;
Allergan and future partners may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability;
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• | Allergan and future partners may not aggressively or adequately pursue litigation against ANDA filers or may settle such litigation on unfavorable terms, and as Allergan substantially controls the current ANDA litigation and terms of settlement and has different economic interests than ours, Allergan may grant licenses to generic manufacturers that permit them to make and sell generic versions of Namenda XRand Namzaric, which would negatively impact any royalties we may receive under our license with Allergan;
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disputes may arise between us and a partner that causes the delay or termination of the research, development, or commercialization of our current or future products or that results in costly litigation or arbitration that diverts management attention and resources;
agreements may be terminated, sometimes at-will, without penalty, and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable current or future products;
partners may own or co-own intellectual property covering our products that results from our collaborating with them, and in such cases, we would not have the exclusive right to commercialize such intellectual property; and
a partner’s sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal proceedings.
We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of these trials.
We do not independently conduct clinical studies of our product candidates.products. Instead, we rely on third parties, such as CROs, clinical data management organizations, medical institutions, and clinical investigators to perform this function. Our reliance on these third parties for clinical development activities reduces our control over these activities, but does not relieve us of our responsibilities. For example, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practice, for conducting, recording, and reporting the results of clinical studies to assure that data and reported results are credible and accurate and that the rights, integrity, and confidentiality of patients in clinical studies are protected, even though we are not in control of these processes. These third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines, or conduct our clinical studies in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidatesproducts and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.products.
We also rely on other third parties to store and distribute supplies for our clinical studies. Any performance failure on the part of our existing or future distributors could delay clinical development or regulatory approval of our product candidatesproducts or commercialization of our products, producing additional losses and depriving us of potential product revenue.
Risks related to government regulation
The regulatory approval process is expensive, time consuming, and uncertain and may prevent us or our collaboration partners from obtaining approvals for the commercialization of some or all of our product candidates.
The research, development, manufacturing, quality control, labeling, approval, safety, effectiveness, storage, record keeping, reporting, selling, import, export, advertising, promotion, marketing, and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States, and by regulatory authorities in other countries, with different regulations from country to country. Neither we nor our collaboration partners are permitted to market our product candidates in the United States or other countries until we receive FDA approval of an NDA. In August 2017, GOCOVRI was FDA-approved for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications. The FDA will need to approve supplemental NDAs for GOCOVRI before we can market the drug for other indications, such as multiple sclerosis walking impairment.
To receive approval to commercialize any of our product candidates in the United States, we and our collaboration partners must demonstrate with substantial evidence from adequate and well-controlled clinical studies, and to the satisfaction of the FDA, that such product candidates are safe and effective for their intended uses. Results from preclinical studies and clinical studies can be interpreted in different ways. Even if we and our collaboration partners believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA. Administering any of our product candidates to humans may produce undesirable side effects, which could interrupt, delay, or cause suspension of clinical studies of our product candidates and result in the denial of approval of our product candidates for any or all targeted indications.
FDA approval of an NDA is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantial discretion in the approval process. Despite the time and expense we invest, failure can occur at any stage, and we could encounter problems that require us to repeat clinical studies, perform additional preclinical studies and clinical studies, or abandon development and commercialization of a product candidate altogether. The number of preclinical studies and clinical studies that will be required for FDA approval varies depending on, among other factors, the product candidate, the disease or condition that the product candidate is designed to address, and the regulations applicable to any particular product candidate. The FDA can delay, limit, or deny approval of a product candidate for many reasons, including, but not limited to:
disagreement with the design or implementation of our clinical trials;
failure of clinical trials to show the level of statistical significance or clinical meaningfulness needed for approval;
failure to demonstrate that a product candidate is safe or effective;
insufficient data from preclinical and clinical studies to support an application;
a finding by an institutional review board, or IRB, Data Safety Monitoring Board, or DSMB, Data Monitoring Committee, or DMC, or the FDA that the clinical trial exposes subjects or patients to an unacceptable health risk;
disapproval of our or our third-party manufacturer’s processes or facilities; or
changes to FDA’s approval policies or regulations.
If any of our product candidates fails to demonstrate safety and efficacy in clinical studies or does not gain regulatory approval, our business and results of operations will be materially and adversely harmed.
If the FDA concludes that our product candidates do not satisfy the requirements for approval under the Section 505(b)(2) regulatory approval pathway, or if the requirements for approval under Section 505(b)(2) are not as we expect, the approval pathway for our products will likely take significantly longer, cost significantly more, and entail significantly greater complications and risks than anticipated, and in any case may not be successful. Similar obstacles may arise in other countries.
Similar to the approval pathway for GOCOVRI, we are developing our current and future product candidates, with the expectation that they will be eligible for approval through the Section 505(b)(2) regulatory pathway. Section 505(b)(2) of the FDCA allows an NDA to rely in part on the FDA’s prior conclusions regarding the safety and effectiveness of an approved drug product, or reference listed drug, or RLD. Use of the Section 505(b)(2) regulatory pathway could reduce the time required for the development programs of our product candidates by, for example, potentially decreasing the amount of preclinical and/or clinical data specific to a product candidate that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for product approval. If this were to occur, the time and financial resources required to obtain FDA approval for our product candidates, and the complications and risks associated with regulatory approval would likely substantially increase. Moreover, our inability to pursue the Section 505(b)(2) regulatory pathway may result in competitive products reaching the market more quickly than our product candidates, which would adversely impact our competitive position and prospects. Even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee that utilizing this pathway will ultimately lead to faster product development or earlier approval for any product candidate that we may attempt to develop and commercialize.
An NDA submitted through the Section 505(b)(2) regulatory pathway for a drug product with an active moiety that has been previously approved in another product (e.g., amantadine) may be entitled to three years of regulatory exclusivity if the NDA contains data from clinical investigations (other than bioavailability or bioequivalence studies) conducted by or for the sponsor and deemed essential to FDA’s approval of the NDA. This regulatory exclusivity precludes, among other things, approval of another 505(b)(2) NDA for a product with the same conditions of approval. Although obtaining such exclusivity for our product candidates could provide a competitive benefit for us, the
availability of such exclusivity to competitors, if their products were to be approved before our product candidates, presents a risk. If a competing product were approved in our target indication and granted three years of exclusivity, and if the FDA were to find that our product candidate does not differ with respect to the relevant conditions of approval of the approved competing product, then approval of the 505(b)(2) NDA for our product candidate in the target indication may be delayed for as long as the competitor has exclusivity.
With a Section 505(b)(2) NDA, we also must certify to the FDA concerning any patents listed for the RLD in the Orange Book. A certification that our product candidate does not infringe the RLD’s Orange Book-listed patents, or that such patents are invalid (known as a paragraph iv certification) would require providing notice of that certification to the patent holder and the sponsor of the RLD NDA, and we could then be challenged in court by the patent owner or the holder of the approved NDA for the RLD. If such a lawsuit were to be filed within a specified timeframe, it would lead to a 30-month period during which FDA would be precluded from approving our NDA.
With the approval of GOCOVRI, we will continue to be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense and subject us to penalties if we fail to comply with applicable regulatory requirements.
With the approval of GOCOVRI, the manufacturing, marketing, and further development of the approved product are subject to continual review by the FDA and/or analogous non-U.S. regulatory authorities. Any regulatory approval that we or our collaboration partners receive for our product candidates will be subject to limitations on the indicated uses for which the product may be marketed, and may be subject to requirements for potentially costly post-marketing follow-up studies to monitor the safety and efficacy of the product. In addition, if the FDA and/or analogous non-U.S. regulatory authorities approve any of our product candidates, we will be subject to extensive and ongoing regulatory requirements with regard to the labeling, packaging, adverse event reporting, storage, distribution, advertising, promotion, tracking, recordkeeping, and periodic reporting for our products. Further, we and our contract manufacturers of our drug products are required to comply with cGMP regulations, which include requirements related to quality control and quality assurance and maintenance of records and documentation. Regulatory authorities must approve manufacturing facilities before they can be used to manufacture our drug products, and these facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations. Certain changes to the manufacturing processes for our product candidates, if approved, would also be subject to pre-approval by regulatory authorities. In addition, if we or a third party discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory authority may impose restrictions on that product, its manufacturer, or us, including but not limited to requiring withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with regulatory requirements of the FDA and/or applicable non-U.S. regulatory authorities, we could be subject to administrative or other sanctions, including:
warning letters or untitled letters;
civil or criminal penalties and fines;
injunctions;
suspension, variation, or withdrawal of regulatory approval;
suspension of ongoing clinical studies;
voluntary or mandatory product recalls;
requirements for dissemination of corrective information or modifications to promotional materials;
refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications filed by us;
refusal to permit import or export of our products;
restrictions on operations, including costly new manufacturing requirements; or
seizure or detention of our products.
Regulatory requirements and policies may change, and we may need to comply with additional laws and regulations that are enacted. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or in other countries. If we are not able to maintain regulatory compliance, we may not be permitted to market, or continue to market, our future products and our business may suffer.
Changes in healthcare law and implementing regulations, including government restrictions on pricing and reimbursement, as well as healthcare policy and other healthcare payer cost-containment initiatives and current societal pressures regarding pharmaceutical product pricing, may negatively impact our ability to generate revenues from or could limit or prevent our product candidates’products’ commercial success.
In the United States, there have been and we expect there will continue to be a number of legislative and regulatory changes to the healthcare system that could affect our future revenue and profitability and the future revenue and profitability of our potential customers. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. For example, in March 2010, the Patient Protection and Affordable Care Act (“PPACA”) was passed, which has substantially changed how healthcare is financed by both governmental and private insurers, and has significantly impacted the U.S. pharmaceutical industry. Details of healthcare regulations, including changes under the PPACA, are discussed in the business heading “Other healthcare regulations” in Part I, Item 1, of this Annual Report on Form 10-K.
Some of the provisions of the PPACA have yet to be fully implemented, and there have been legal and political challenges to certain aspects of the PPACA. Since January 2017, President Trump has signed two executive orders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the PPACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the PPACA. While Congress has not passed repeal legislation, two bills affecting the implementation of certain taxes under the PPACA have been signed into law. The Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, on January 23, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain PPACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices.
Other legislative changes have been proposed and adopted since the PPACA was enacted. These changes include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year pursuant to the Budget Control Act of 2011, which began in 2013 and will remain in effect through 2025 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers, increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Additional changes that may affect our business include the expansion of new programs such as Medicare payment for performance initiatives for physicians under the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, which will be fully implemented in 2019. At this time it is unclear how the introduction of the Medicare quality payment program will impact overall physician reimbursement.
In addition, there have also been proposals to impose federal rebates on Medicare Part D drugs, requiring federally-mandated rebates on all drugs dispensed to Medicare Part D enrollees or on only those drugs dispensed to certain groups of lower income beneficiaries. If any of these proposals are adopted, they could result in our owing additional rebates, which could have a negative impact on revenues from sales of our products.
Also, there has been heightened governmental scrutiny recently over pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to
product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. At the federal level, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, have been designed to encourage importation from other countries and bulk purchasing.
We expect that the PPACA, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry generally and on our ability to maintain or increase sales of our existing products.
The continuing efforts of the government, insurance companies, managed care organizations, other payers of healthcare services, and patient and political groups to contain or reduce costs of healthcare may, among other things, adversely affect:
•our ability to set a price we believe is fair for our products;
•the reputation of our company;
•our ability to generate revenue and achieve or maintain profitability; and
•the availability of capital.
Our ability to commercialize our products successfully, and to attract commercialization partners for our
products, will depend in significant part on the availability of adequate financial coverage and reimbursement from third-party payers, including, in the United States, governmental payers such as the Medicare and Medicaid programs, managed care organizations and private health insurers. Details of these considerations are discussed in the business heading “Other healthcare regulations” in Part I, Item 1, of this Annual Report on Form 10-K.
We are subject to ongoing regulatory obligations and regulatory review, which may result in significant additional expense and subject us to penalties if we fail to comply with applicable regulatory requirements.
The manufacturing, marketing, and further development of GOCOVRI are subject to continual review by the FDA and/or analogous non-U.S. regulatory authorities. In addition, we are and will be subject to extensive and ongoing regulatory requirements with regard to the labeling, packaging, adverse event reporting, storage, distribution, advertising, promotion, tracking, recordkeeping, and periodic reporting for our products. Further, we and our contract manufacturers of our drug products are required to comply with cGMP regulations, which include requirements related to quality control and quality assurance and maintenance of records and documentation. Regulatory authorities must approve manufacturing facilities before they can be used to manufacture our drug products, and these facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations. Certain changes to the manufacturing processes would also be subject to pre-approval by regulatory authorities. In addition, if we or a third party discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory authority may impose restrictions on that product, its manufacturer, or us, including but not limited to requiring withdrawal of the product from the market or suspension of manufacturing. If we, our products or the manufacturing facilities for our products fail to comply with regulatory requirements of the FDA and/or applicable non-U.S. regulatory authorities, we could be subject to administrative or other sanctions, including:
•warning letters or untitled letters;
•civil or criminal penalties and fines;
•injunctions;
•suspension, variation, or withdrawal of regulatory approval;
•suspension of ongoing clinical studies;
•voluntary or mandatory product recalls;
•requirements for dissemination of corrective information or modifications to promotional materials;
•refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications filed by us;
•refusal to permit import or export of our products;
•restrictions on operations, including costly new manufacturing requirements; or
•seizure or detention of our products.
Regulatory requirements and policies may change, and we may need to comply with additional laws and regulations that are enacted. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or in other countries. If we are not able to maintain regulatory compliance, we may not be permitted to market, or continue to market, our future products and our business may suffer.
If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations, and financial condition could be adversely affected.
Healthcare providers, physicians, distributors, and third-party payers play a primary role in the distribution, recommendation, and prescription of any pharmaceutical product for which we obtain marketing approval. Our
arrangements with third-party payers and customers expose us to broadly applicable federal and state fraud and abuse and other laws and regulations that may constrain the business or financial arrangements through which we market, sell and distribute GOCOVRI and other products for which we may obtain marketing approval. The laws and regulations that may affect our ability to operate include:
•the federal healthcare program Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order, lease, arrangement or recommendation of, any good, facility, item, or service for which payment may be made, in whole or in part, under federal healthcare programs, such as the Medicare and Medicaid programs. Liability under the Anti-Kickback Statute may be established without a person or entity having actual knowledge of the statute or specific intent to violate it. In addition, the government may assert that a claim including items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act;
•the federal civil and criminal false claims laws, including the federal civil False Claims Act and civil monetary penalties laws, which prohibits individuals or entities from, among other things, knowingly presenting, or causing to be presented, false or fraudulent claims for payment of government funds, or knowingly using false records or statements, to obtain payment from the federal government. In recent years, several pharmaceutical and other health care companies have faced enforcement actions under the False Claims Act for, among other things, allegedly submitting false or misleading pricing information to government healthcare programs, providing free product to customers with the expectation that the customers would bill federal programs, product and patient assistance programs, including reimbursement services, and marketing products for off-label or unapproved uses;
•the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payer (e.g., public or private) and knowingly and willfully falsifying, concealing, or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items, or services relating to healthcare matters;
•HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which impose obligations on HIPAA covered entities and their business associates, including mandatory contractual terms and required implementation of administrative, physical and technical safeguards to maintain the privacy and security of individually identifiable health information;
•the federal Physician Payments Sunshine Act, being implemented as the Open Payments Program, which requires manufacturers of drugs, devices, biologicals, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (with certain exceptions) to report annually to the federal government information related to payments and other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors) and teaching hospitals, as well as certain ownership and investment interests held by physicians and their immediate family members; and
•analogous state laws and regulations, such as anti-kickback, and false claims laws, which may be broader in scope and apply to items or services reimbursed by any third-party payer, including commercial insurers. Several states also require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing-relating activities, including the provision of gifts, meals, or other items to certain health care providers. Some states require pricing reporting with respect to certain drug products. Certain state and localities also require the
registration of pharmaceutical sales representatives. In addition, several states require pharmaceutical companies to implement compliance programs or marketing codes.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including significant civil, criminal and/or administrative penalties, damages, fines, disgorgement, possible exclusion from participation in Medicare, Medicaid, and other federal healthcare programs, imprisonment, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these or other laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security, and fraud laws may prove costly. In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. Moreover, the requirements governing drug pricing and reimbursement vary widely from country to country.
Health Technology Assessment, or HTA, of medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures, and most European Union member states now have an HTA system. The HTA process in the European Union member states is governed by the national laws of these countries. HTA is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of the use of a given medicinal product in the national healthcare systems of the individual country is conducted. HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost-effectiveness of individual medicinal products as well as their potential implications for the national healthcare system. Those elements of medicinal products are compared with other treatment options available on the market.
The outcome of HTA may influence the pricing and reimbursement status for specific medicinal products within individual European Union member states. The extent to which pricing and reimbursement decisions are influenced by the HTA of a specific medicinal product vary between the European Union member states.
In 2011, Directive 2011/24/EU was adopted at European Union level. This Directive concerns the application of patients’ rights in cross-border healthcare. The Directive is intended to establish rules for facilitating access to safe and high-quality cross-border healthcare in the European Union. Pursuant to Directive 2011/24/EU, a voluntary network of national authorities or bodies responsible for HTA in the individual EU member states was established. The purpose of the network is to facilitate and support the cooperation between national authorities or bodies and the exchange of information concerning HTAs. This could lead to greater harmonization between European Union member states of the criteria taken into account in the conduct of HTA in pricing and reimbursement decisions.
If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs that we may join if we successfully commercialize any of our product candidates, we could be subject to additional reimbursement requirements, penalties, sanctions and fines, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We intend to participate in and then will have certain price reporting obligations to the Medicaid Drug Rebate program and other governmental pricing programs.
Under the Medicaid Drug Rebate program, a manufacturer is required to pay a rebate to each state Medicaid program for its covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made available to the states for our drugs under Medicaid and Medicare Part B. Those rebates are based on pricing data reported by the manufacturer on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid Drug Rebate program. These data include the average manufacturer price and, in the case of innovator products, the best price for each drug which, in general, represents the lowest price available from the manufacturer to any entity in the United States in any pricing structure, calculated to include all sales and associated rebates, discounts and other price concessions.
The PPACA made significant changes to the Medicaid Drug Rebate program, as discussed under the heading “Other healthcare regulations” in Part I, Item 1, of this Annual Report on Form 10-K. On February 1, 2016, CMS issued
final regulations to implement the changes to the Medicaid Drug Rebate program under the PPACA. These regulations became effective on April 1, 2016. The issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program may increase our costs and the complexity of compliance and could have a material adverse effect on our results of operations if we participate in the Medicaid Drug Rebate Program if and when we successfully commercialize any of our product candidates.
Federal law requires that any company that participates in the Medicaid Drug Rebate program also participate in the Public Health Service’s 340B drug pricing program in order for federal funds to be available for the manufacturer’s
drugs under Medicaid and Medicare Part B. The 340B program requires participating manufacturers to agree to charge no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs to a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients. The PPACA expanded the list of covered entities to include certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, but exempts “orphan drugs” from the ceiling price requirements for these covered entities. The 340B ceiling price is calculated using a statutory formula based on the average manufacturer price and rebate amount for the covered outpatient drug as calculated under the Medicaid Drug Rebate program. Changes to the definition of average manufacturer price and the Medicaid rebate amount under the Healthcare Reform Act and CMS’s final regulations implementing those changes also could affect the 340B ceiling price calculations for any of our product candidates that we successfully commercialize and could negatively impact our results of operations.
The PPACA obligates the Secretary of the HHS to update the agreement that manufacturers must sign to participate in the 340B program to obligate a manufacturer to offer the 340B price to covered entities if the manufacturer makes the drug available to any other purchaser at any price and to report to the government the ceiling prices for its drugs. The Health Resources and Services Administration, or HRSA, recently initiated the process of updating the agreement with participating manufacturers. The PPACA also obligates the Secretary of the HHS to create regulations and processes to improve the integrity of the 340B program. In 2015, HRSA issued proposed omnibus guidance that addresses many aspects of the 340B program, and in August 2016, HRSA issued a proposed regulation regarding an administrative dispute resolution process for the 340B program. It is unclear when or whether the guidance or regulation will be released in final form underAfter implementation delays directed by the Trump Administration. On January 5, 2017,Administration, on November 30, 2018, HRSA issued apublished its final regulationrule regarding the calculation of 340B ceiling price and the imposition of civil monetary penalties on manufacturers thatfor knowingly and intentionally overchargeovercharging covered entities.entities, which became effective on January 1, 2019. The March 6, 2017 effective date of this regulation is subject to a temporary delay directed by the Trump Administration, and the regulation could be subject to further delay or other modification by the Trump Administration. Implementation of this final rule and the issuance of any other final regulations and guidance could affect our obligations under the 340B program in ways we cannot anticipate, if and when we successfully commercialize any of our product candidates and if we participate in the 340B program. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in an inpatient setting.
Pricing and rebate calculations vary across products and programs, are complex, and are often subject to interpretation by the reporting manufacturer, governmental or regulatory agencies and the courts. In the case of Medicaid pricing data, if we join the Medicaid Drug Rebate Program and become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data, we will be obligated to resubmit the corrected data for up to three years after those data originally were due. Such restatements and recalculations would increase our costs for complying with the laws and regulations governing the Medicaid Drug Rebate program and could result in an overage or underage in our rebate liability for past quarters. Price recalculations also may affect the ceiling price at which we would be required to offer any of our product candidates that we successfully commercialize under the 340B drug discount program.
We will be liable for errors associated with any submission of pricing data. In addition to retroactive rebates and the potential for 340B program refunds, if we are found to have knowingly submitted any false price information to the government, we may be liable for significant civil monetary penalties in the amount of $178,156 per item of false information. Our failure to submit the required price data on a timely basis could result in asignificant civil monetary penalty of $17,816 per daypenalties for each day the information is late beyond the due date. Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we will participate in the Medicaid program if we join the program if and when we successfully commercialize any of our product candidates. In the event that CMS terminates our rebate agreement, federal payments may not be available under Medicaid or Medicare Part B for any of our product candidates that we successfully commercialize.
CMS and the OIG have pursued manufacturers that were alleged to have failed to report these data to the government in a timely manner. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. We
cannot assure you that our submissions, if we participate in the federal programs if and when we successfully commercialize any of our product candidates, will not be found by CMS to be incomplete or incorrect.
In order to be eligible to have any of our product candidates that we successfully commercialize paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by the Department of Veterans Affairs, or VA, Department of Defense, Public Health Service, and Coast Guard, referred to collectively as the Big Four agencies, and certain federal grantees, we are required to participate in the VA Federal Supply Schedule, or FSS, pricing program, established under Section 603 of the Veterans Health Care Act of 1992. Under this program, we are obligated to make any of our product candidates that we successfully commercialize that meet the statutory definition of “covered drug” (biologics and single and innovator multiple source drugs) available for procurement on an FSS contract and charge a price to the Big Four agencies that is no higher than the Federal Ceiling Price, or FCP, which is a price calculated pursuant to a statutory formula. The FCP is derived from a calculated price point called the “non-federal average manufacturer price,” or Non-FAMP, which we will be required to calculate and report to the VA on a quarterly and annual basis. Pursuant to applicable law, knowing provision of false information in connection with a Non-FAMP filing can subject a manufacturer to significant penalties of $178,156 for each item of false information. The FSS contract also contains extensive disclosure and certification requirements.
Under Section 703 of the National Defense Authorization Act for FY 2008, we will be required to pay quarterly rebates on utilization of innovator products that are dispensed through the Tricare network pharmacies to Tricare beneficiaries. The rebates are calculated as the difference between the annual Non-FAMP and FCP. If we overcharge the government in connection with the FSS contract or Tricare Retail Pharmacy Rebate Program, whether due to a misstated FCP or otherwise, we are required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under the False Claims Act and other laws and regulations. Unexpected refunds to the government, and any response to government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations, and growth prospects if we successfully commercialize any of our product candidates.
If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations, and financial condition could be adversely affected.
Healthcare providers, physicians, distributors, and third-party payers play a primary role in the distribution, recommendation, and prescription of any pharmaceutical product for which we obtain marketing approval. Our arrangements with third-party payers and customers expose us to broadly applicable federal and state fraud and abuse and other laws and regulations that may constrain the business or financial arrangements through which we market, sell and distribute GOCOVRI and other products for which we may obtain marketing approval. The laws and regulations that may affect our ability to operate include:
the federal healthcare program Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order, lease, arrangement or recommendation of, any good, facility, item, or service for which payment may be made, in whole or in part, under federal healthcare programs, such as the Medicare and Medicaid programs. Liability under the Anti-Kickback Statute may be established without a person or entity having actual knowledge of the statute or specific intent to violate it. In addition, the government may assert that a claim including items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act;
the federal civil and criminal false claims laws, and civil monetary penalties laws, including the federal civil False Claims Act, which prohibits individuals or entities from, among other things, knowingly presenting, or causing to be presented, false or fraudulent claims for payment of government funds, or knowingly using false records or statements, to obtain payment from the federal government. In recent years, several pharmaceutical and other health care companies have faced enforcement actions under the False Claims Act for, among other things, allegedly submitting false or misleading pricing information to government healthcare programs, providing free product to customers with the expectation that the customers would bill federal programs, product and patient assistance programs, including reimbursement services, and marketing products for off-label or unapproved uses;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payer (e.g., public or private) and knowingly and willfully falsifying, concealing, or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items, or services relating to healthcare matters.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which impose obligations on HIPAA covered entities and their business associates, including mandatory contractual terms and required implementation of administrative, physical and technical safeguards to maintain the privacy and security of individually identifiable health information;
the federal Physician Payments Sunshine Act, being implemented as the Open Payments Program, which requires manufacturers of drugs, devices, biologicals, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (with certain exceptions) to report annually to the federal government information related to payments and other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors) and teaching hospitals, as well as certain ownership and investment interests held by physicians and their immediate family members; and
analogous state laws and regulations, such as anti-kickback, and false claims laws, which may be broader in scope and apply to items or services reimbursed by any third-party payer, including commercial insurers. Several states also require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing-relating activities, including the provision of gifts, meals, or other items to certain health care providers. In addition, several states require pharmaceutical companies to implement compliance programs or marketing codes.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil, criminal and/or administrative penalties, damages, fines, disgorgement, possible exclusion from participation in Medicare, Medicaid, and other federal healthcare programs, individual imprisonment, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these or other laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security, and fraud laws may prove costly.
In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. Moreover, the requirements governing drug pricing and reimbursement vary widely from country to country. For example, in the European Union the sole legal instrument at the European Union level governing the pricing and reimbursement of medicinal products is Council Directive 89/105/EEC (the Price Transparency Directive). The aim of the Price Transparency Directive is to ensure that pricing and reimbursement mechanisms established in European Union member states are transparent and objective, do not hinder the free movement and trade of medicinal products in the European Union, and do not hinder, prevent or distort competition on the market. The Price Transparency Directive does not, however, provide any guidance concerning the specific criteria on the basis of which pricing and reimbursement decisions are to be made in individual European Union member states. The national authorities of the individual European Union member states are free to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices and/or reimbursement of medicinal products for human use. Some individual European Union member states adopt policies according to which a specific price or level of reimbursement is approved for the medicinal product. Other European Union member states adopt a system of reference pricing, basing the price or reimbursement level in their territory either, on the pricing and reimbursement
levels in other countries, or on the pricing and reimbursement levels of medicinal products intended for the same therapeutic indication. Furthermore, some European Union member states impose direct or indirect controls on the profitability of the company placing the medicinal product on the market.
Health Technology Assessment, or HTA, of medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures in some European Union member states. These countries include the United Kingdom, France, Germany, and Sweden. The HTA process in the European Union member states is governed by the national laws of these countries. HTA is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of the use of a given medicinal product in the national healthcare systems of the individual country is conducted. HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost-effectiveness of individual medicinal products as well as their potential implications for the national healthcare system. Those elements of medicinal products are compared with other treatment options available on the market.
The outcome of HTA may influence the pricing and reimbursement status for specific medicinal products within individual European Union member states. The extent to which pricing and reimbursement decisions are influenced by the HTA of a specific medicinal product vary between the European Union member states.
In 2011, Directive 2011/24/EU was adopted at European Union level. This Directive concerns the application of patients’ rights in cross-border healthcare. The Directive is intended to establish rules for facilitating access to safe and high-quality cross-border healthcare in the European Union. Pursuant to Directive 2011/24/EU, a voluntary network of national authorities or bodies responsible for HTA in the individual EU member states was established. The purpose of the network is to facilitate and support the exchange of scientific information concerning HTAs. This could lead to harmonization between European Union member states of the criteria taken into account in the conduct of HTA in pricing and reimbursement decisions and negatively impact price in at least some European Union member states.
If we fail to comply with data protection laws and regulations, we could be subject to government enforcement actions (which could include civil or criminal penalties), private litigation, increased compliance costs and/or adverse publicity, which could negatively affect our operating results and business.
We are subject to data protection laws and regulations (i.e., laws and regulations that address privacy and data security). In the United States, numerous federal and state laws and regulations, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), govern the collection, use, disclosure, and protection of health-related and other personal information. Failure to comply with data protection laws and regulations could result in government enforcement actions and create liability for us, including civil and/or criminal penalties, private litigation and/or adverse publicity that could negatively affect our operating results and business. In addition, we may obtain health information from third parties (e.g., healthcare providers who prescribe our products) that are subject to privacy and security requirements under HIPAA, as amended by HITECH. Although we are not directly subject to HIPAA—other than potentially with respect to providing certain employee benefits—we could be subject to criminal penalties if we knowingly obtain or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA. HIPAA generally requires that healthcare providers and other covered entities obtain written authorizations from patients prior to disclosing protected health information of the patient (unless an exception to the authorization requirement applies). If authorization is required and the patient fails to execute an authorization or the authorization fails to contain all required provisions, then we may not be allowed access to and use of the patient’s information and our research efforts could be delayed. Furthermore, use of protected health information that is provided to us pursuant to a valid patient authorization is subject to the limits set forth in the authorization (e.g., for use in research and in submissions to regulatory authorities for product approvals). In addition, HIPAA does not replace federal, state, international or other laws that may grant individuals even greater privacy protections.
On June 28, 2018, California enacted the California Consumer Privacy Act (CCPA), which took effect on January 1, 2020. The CCPA gives California residents expanded rights to access and other jurisdictions where we operatedelete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability. Some observers have adopted data protection lawsnoted that the CCPA could mark the beginning of a trend toward more stringent state privacy legislation in the U.S., which could increase our potential liability and regulations, which impose significant compliance obligations. For example,adversely affect our business.
In the EU, Data Protection Directive imposes strict obligations and restrictions on the ability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event reporting. Switzerland has adopted similar restrictions. Data protection authorities from the different EU member states may interpret the applicable laws differently, and guidance on implementation and compliance practices are often updated or otherwise revised, which adds to the complexity of processing personal data in
the EU. Although there are legal mechanisms to allow for the transfer of personal data from the EU to the U.S., the decision of the European Court of Justice in the Schrems case (Case C-362/14 Maximillian Schrems v. Data Protection Commissioner) invalidated the Safe Harbor framework and increased uncertainty around compliance with European Union restrictions on cross-border data transfers. As a result of the decision, it was no longer possible to rely on safe harbor certification as a legal basis for the transfer of personal data from the EU to entities in the U.S. On February 29, 2016, however, the European Commission announced an agreement with the United States Department of Commerce (“DOC”) to replace the invalidated Safe Harbor framework with a new EU-U.S. “Privacy Shield.” On July 12, 2016, the European Commission adopted a decision on the adequacy of the protection provided by the Privacy Shield. The Privacy Shield is intended to address the requirements set out by the European Court of Justice in its ruling by imposing more stringent obligations on companies, providing stronger monitoring and enforcement by the DOC and Federal Trade Commission, and making commitments on the part of public authorities regarding access to information. U.S. companies have been able to certify to the U.S. DOC their compliance with the privacy principles of the Privacy Shield since August 1, 2016. On September 16, 2016, the Irish privacy advocacy group Digital Rights Ireland brought an action for annulment of the European Commission decision on the adequacy of the Privacy Shield before the European Court of Justice (Case T-670/16). Case T-670/16 is still pending. If, however, the European Court of Justice invalidates the Privacy Shield, it will no longer be possible to rely on the Privacy Shield certification to support transfer of personal data from the European Union to entities in the US. Adherence to the Privacy Shield is not, however, mandatory. U.S.-based companies are permitted to rely either on their adherence to the EU-US Privacy Shield or on the other authorized means and procedures to transfer personal data provided by the EU Data Protection Directive.
In December 2015, a proposal for an EU General Data Protection Regulation intended to replace the current EU Data Protection Directive,(GDPR) took effect on May 25, 2018, introducing sweeping new data protection requirements inthat carry potential fines of up to the EU, as well as substantial fines for breachesgreater of the data protection rules, was agreed between the European Parliament, the Council20 million Euros or 4% of the European Union, and the European Commission.annual global revenue. The EU General Data Protection Regulation entered into force on May 24, 2016 and will apply from May 25, 2018. The EU Data Protection RegulationGDPR will increase our responsibility and potential liability in relation to personal data that we process, expose us to substantial potential fines in the event of violations, increase our compliance costs and could restrict our operations in Europe.
The regulatory approval process is expensive, time consuming, and uncertain and may prevent us from obtaining approvals for the commercialization of some or all of our product candidates.
The research, development, manufacturing, quality control, labeling, approval, safety, effectiveness, storage, record keeping, reporting, selling, import, export, advertising, promotion, marketing, and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States, and by regulatory authorities in other countries, with different regulations from country to country. We are not permitted to market our products in the United States or other countries until we receive regulatory approvals. In August 2017, GOCOVRI was FDA-approved for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications. The FDA will need to approve supplemental NDAs for GOCOVRI before we can market the drug for other indications, such as multiple sclerosis walking impairment.
To receive approval to commercialize any of our product candidates in the United States, we must demonstrate with substantial evidence from adequate and well-controlled clinical studies, and to the satisfaction of the FDA, that such product candidates are safe and effective for their intended uses. Results from preclinical studies and clinical studies can be interpreted in different ways. Even if we believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA. Administering any of our product candidates to humans may produce undesirable side effects, which could interrupt, delay, or cause suspension of clinical studies of our product candidates and result in the denial of approval of our product candidates for any or all targeted indications.
FDA approval of an NDA is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantial discretion in the approval process. Despite the time and expense we invest, failure can occur at any stage, and we could encounter problems that require us to repeat clinical studies, perform additional preclinical studies and clinical studies, or abandon development and commercialization of a product candidate altogether. The number of preclinical studies and clinical studies that will also face substantial finesbe required for breachesFDA approval varies depending on, among other factors, the product candidate, the disease or condition that the product candidate is designed to address, and the regulations applicable to any particular product candidate. The FDA can delay, limit, or deny approval of a product candidate for many reasons, including, but not limited to:
•disagreement with the design or implementation of our clinical trials;
•failure of clinical trials to show the level of statistical significance or clinical meaningfulness needed for approval;
•failure to demonstrate that a product candidate is safe or effective;
•insufficient data from preclinical and clinical studies to support an application;
•a finding by an institutional review board, or IRB, Data Safety Monitoring Board, or DSMB, Data Monitoring Committee, or DMC, or the FDA that the clinical trial exposes subjects or patients to an unacceptable health risk;
•disapproval of our or our third-party manufacturer’s processes or facilities; or
•changes to FDA’s approval policies or regulations.
If any of our product candidates fails to demonstrate safety and efficacy in clinical studies or does not gain regulatory approval, our business and results of operations will be materially and adversely harmed.
If the requirements for approval of ADS-5102 under Section 505(b)(2) are not as we expect, approval will likely take significantly longer, cost significantly more, and entail significantly greater complications and risks than anticipated, and in any case may not be successful. Similar obstacles may arise in other countries.
Similar to the approval pathway for GOCOVRI, we are developing ADS-5102, with the expectation that it will be eligible for approval through the Section 505(b)(2) regulatory pathway. Section 505(b)(2) of the FDCA allows an NDA to rely in part on the FDA’s prior conclusions regarding the safety and effectiveness of an approved drug product, or reference listed drug, or RLD. Use of the Section 505(b)(2) regulatory pathway could potentially decrease the amount of preclinical and/or clinical data protection rules. Wethat we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may beneed to conduct additional clinical trials, provide additional data and information, and meet additional standards for product approval. If this were to occur, the time and financial resources required to putobtain FDA approval, and the complications and risks associated with regulatory approval would likely substantially increase. Moreover, our inability to pursue the Section 505(b)(2) regulatory pathway may result in place additional mechanisms ensuring compliance withcompetitive products reaching the new EU data protection rules. Furthermore,market more quickly, which would adversely impact our competitive position and prospects. Even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is a growth towards the public disclosure of clinical trial data in the European Union which addsno guarantee that utilizing this pathway will ultimately lead to the complexity of processing health data from clinical trials.faster product development or earlier approval for any product that we may attempt to develop and commercialize.
If we or our vendors fail to comply with applicable data privacy laws, or if the legal mechanisms we or our vendors rely upon to allow for the transfer of personal data from the EU or Switzerland to the U.S. (or other countries not considered by the European Commission to provide an adequate level of data protection) are not considered adequate, we could be subject to government enforcement actions and significant penalties against us, and our business could be adversely impacted if our ability to transfer personal data outside of the European Union or Switzerland is restricted.
Risks related to intellectual property
Our ability to successfully commercialize GOCOVRI, ADS-5102, and ourany product candidates may be materially adversely affected if we are unable to obtain and maintain effective intellectual property rights for our products and product candidates.
Our success depends in large part on our ability to obtain and maintain patentexclusivity, patent(s), and other intellectual property protection in the United States and in other countries with respect to GOCOVRI, andADS-5102, our product candidates.candidates, and any in- and out-licensed programs. We have sought to protect GOCOVRI, ADS-5102, and our product candidatescandidate(s) by filing patent applications in the United States and abroad related to our novel discoveries, technologies, and products that are important to our business. This process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. In addition, we may not pursue or obtain patent protection in all relevant markets. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. Our pending and future patent applications may not result in patents being issued which protect our technology or products, in whole or in part. In addition, our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from using our discoveries or technologies or from developing competing products and technologies.
The patent position of pharmaceutical and biotechnology companies generally is highly uncertain and involves complex legal and factual questions for which many legal principles remain unresolved. In recent years, patent rights have been the subject of significant litigation. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued in the United States or in other jurisdictions which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions. In addition, the United States Patent and Trademark Office, or USPTO, might require that the term of a patent issuing from
a pending patent application be disclaimed and limited to the term of another patent that is commonly owned or names a common inventor. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights is highly uncertain.
Recent or futureThe United States has enacted and implemented wide-ranging patent reform legislation could increaselegislation. The United States Supreme Court has ruled on several patent cases in recent years, either narrowing the uncertainties and costs surroundingscope of patent protection available in certain circumstances or weakening the prosecutionrights of patent owners in certain situations. In addition to increasing uncertainty with regard to our patent applications andability to obtain patents in the enforcement or defensefuture, this combination of our issued patents. In March 2013, underevents has created uncertainty with respect to the Leahy-Smith America Invents Act, or America Invents Act,value of patents, once obtained. Depending on actions by the United States moved from a “firstCongress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to invent”obtain new patents or to a “first-to-file” system. Under a “first-to-file” system, assumingenforce patents that we have licensed or that we might obtain in the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to a patent on the invention regardless of whether another inventor had made the invention earlier. The America Invents Act includes a number of other significantfuture. Similarly, changes to U.S.in patent law including provisionsand regulations in other countries or jurisdictions or changes in the governmental bodies that affectenforce them or changes in how the wayrelevant governmental authority enforces patent applications are prosecuted, redefine prior art and establish alaws or regulations may weaken our ability to obtain new post-grant review system. The effects of these changes are currently unclear and/patents or uncertain, asto enforce patents that we have licensed or that we may obtain in the USPTO only recently developed new regulations and procedures in connection with the America Invents Act and many of the substantive changes to patent law, including the “first-to-file��� provisions, only became effective in March 2013. In addition, the courts have only recently started to address these provisions such that the law is still developing, and the applicability of the act and new regulations on specific patents discussed herein have not been determined and would need to be reviewed. However, the America Invents Act and its continued implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.future.
From time to time, we may become involved in opposition, interference, derivation, inter partes review, post-grant review, or other proceedings challenging our patent rights or the patent rights of others, and the outcome of any proceedings are highly uncertain. An adverse determination in any such proceeding could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us or Allergan, without payment to us.
Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us, or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is not conclusive as to its scope, validity, or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in the patent claims of our owned or licensed patents being narrowed, invalidated, or held unenforceable, which could limit our ability to stop or prevent us from stopping others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing, and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours or otherwise provide us with a competitive advantage.
For our partnered assets, like Namzaric, we may not have the right to control the prosecution of patent application,applications, or to maintain or enforce the patent, covering our products or product candidates that we license to third parties or that we may license from third parties. Therefore, we cannot be certain that these patents and applications will
be prosecuted and enforced in a manner consistent with the best interests of our business. In addition, if third parties who license patents to us or from us fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting, and defending patents on all of our products and product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection but where enforcement is not as strong as in the United States. These products may compete with our products and product candidates in jurisdictions where we do not have any issued patents, and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing. Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products against third parties in violation of our proprietary rights generally. The initiation of proceedings by third parties to enforce our patent
rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
Obtaining and maintaining our patent protection depends upon compliance with various procedural, document submission, fee payment, and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other provisions during the patent prosecution process and following the issuance of a patent. Our failure to comply with such requirements could result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Injurisdiction.In such an event, competitors might be able to enter the market earlier than would otherwise have been the case if our patent were in force.
We may become involved in lawsuits or other proceedings to protect or enforce our patents or other intellectual property, which could be expensive, time-consuming, and if unsuccessful could materially harm our business.
Competitors may infringe or otherwise violate our patents, trademarks, copyrights or other intellectual property for GOCOVRI and ADS-5102, our partnered products, any product candidates, and our product candidates.any in- and out-licensed programs. To counter infringement or unauthorized use, we or our licensees may be required to file infringement claims, which can be expensive and time-consuming. For example, we, Forest, Forest Laboratories, Inc., Merz Pharma GmbH & Co. KGaA,on February 16, 2018, Osmotica Pharmaceuticals LLC and MerzVertical Pharmaceuticals GmbHLLC (“Osmotica”) filed patent infringement lawsuits under Forest’s patentsan action against us in U.S. District Court for the state of Delaware, requesting a declaratory judgment that Osmotica’s newly-approved product Osmolex ER™ (amantadine) extended release tablets does not infringe certain of our patents. For further information, see Litigation and patents owned by usOther Legal Proceedings in “Note 9 - Commitments and licensedContingencies” in the accompanying “Notes to Forest, against several manufacturers of generic pharmaceuticals that have filed ANDAs with the FDA seeking approval to manufacture and sell generic versions of Namzaric and Namenda XR. Consolidated Financial Statements” in this Annual Report.
We anticipate that the prosecution of theany lawsuits related to our partnered products and any lawsuits related to GOCOVRI willmay require a significant amount of time and attention offrom our chief executive officersenior executives and other senior executives.management. In addition, in a patent infringement proceeding, a court may decide that a patent of ours (or a patent we license) is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the product in question. An adverse result in any litigations or proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Such a result could limit our ability to prevent others from using or commercializing similar or identical products, limit our ability to prevent others from launching generic versions of our products and could limit the duration of patent protection for our products, all of which could have a material adverse effect on our business. Also, a successful challenge to our patents could reduce or eliminate our right to receive royalties from Forest.Allergan under our license agreement with Allergan. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.
Third parties may initiate legal proceedings alleging that we or our partners are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Our commercial success depends upon our ability and the ability of our partners to develop, manufacture, market, and sell our products and product candidates and to use our proprietary discoveries and technologies without infringing, misappropriating, or otherwise violating the proprietary rights or intellectual property of third parties. We or our partners may become party to, or be threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference, derivation, re-examination, inter partes review, post-grant review, opposition, or similar proceedings before the USPTO and its foreign counterparts. The costs of these proceedings could be substantial, and the proceedings may result in a loss of such intellectual property rights. Some of our competitors may be able to sustain the costs of complex patent disputes and litigation more effectively than we can, because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any disputes or litigation could adversely affect our ability to raise the funds necessary to continue our operations. Third parties may assert infringement claims against us or our partners based on existing patents or patents that may be granted in the future. Under our license agreement with Allergan we are obliged to indemnify Allergan under certain circumstances and our royalty entitlements may also be reduced. Our
indemnification obligation to Allergan, while subject to customary limitations, has no monetary cap, and our right to receive royalties from Allergan may be eliminated in any calendar quarter in which certain third party generic competition exists. If we or our partners are found to infringe a third-party’s intellectual property rights, we could be required to obtain a license from such third-party to continue developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages. A finding of infringement could prevent us from commercializing our products and product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.
We may be unable to protect the confidentiality of our trade secrets, thus harming our business and competitive position.
In addition to our patented technology and products, we rely upon trade secrets, including unpatented know-how, technology, and other proprietary information, to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees, our partners, and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to us. However, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute such agreements, we may be unsuccessful in executing such an agreement with each party who in fact conceives or develops intellectual property that we regard as our own. In addition, it is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement.
While to our knowledge the confidentiality of our trade secrets has not been compromised, if the employees, consultants or partners that are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could be disclosed, misappropriated, or otherwise become known or be independently discovered by our competitors. In addition, intellectual property laws in foreign countries may not protect our intellectual property to the same extent as the laws of the United States. If our trade secrets are disclosed or misappropriated, it would harm our ability to protect our rights and adversely affect our business.
Risks related to Namzaric®
Under our license agreement with Allergan, if Allergan fails to successfully commercialize Namzaric for any reason or if the license agreement with Allergan is terminated, the potential royalties we are eligible to receive under our license agreement with Allergan may not occur or may be minimal, and would have a negative impact on our revenue potential and harm our business.
In November 2012, we entered into a license agreement with Allergan pursuant to which we granted Allergan a right to develop and commercialize Namenda XR and Namzaric in the United States. Under that agreement, we expect to receive future royalties from Allergan on the net sales of Namzaric, starting in May 2020. If for any reason Allergan fails to successfully commercialize Namzaric, on which we are eligible to receive royalties in the low double digits percentage royalties,to mid-teens, we may not receive such future royalties or receive minimal amounts, and our business willmay be harmed. We are also eligible toEven if we do receive royalties, based on 2019 net sales of Namzaric, we expect the tiered royalty to be in the low double digits through the term of the agreement.
We are the subject of litigation claiming violation of Federal and state false claims acts in connection with the commercialization of Namenda XR beginning in June 2018, but we do not expect to receive such royalties, due to the potential entry of generic versions Namenda XR.
Under the license agreement, we are reliant onand Namzaric by Allergan, to commercialize Namzaric and in that capacity Allergan has the discretion to:
determine the efforts and resources that they apply towards commercialization;
market, manufacture, and distribute the licensed products or to otherwise not perform satisfactorily in carrying out these activities; and
to terminate the agreement without penalty and, such termination, may result in a need for additional capital to pursue further development or commercialization of the applicable current or future products.
Under the license agreement,Allergansubstantially controls the intellectual property rights subject to the agreementandthe current ANDA litigation andpotentialsettlement thereof, and has economic interests different from ours. Accordingly,Allergan may manage the litigation and settlements on terms which may have a material and negative impact on our business.
WeOn April 1, 2019, we were served with a complaint against us and several Allergan are currently involvedentities alleging violations of Federal and state false claims acts (“FCA”) in ANDA litigation to enforce our intellectual property rights against generic manufacturers, who are seeking to bring generic versionsconnection with the commercialization of Namenda XR and Namzaric to the market. See by Allergan, as further described in Litigation and Other Legal Proceedings in “Note 89 - Commitments and Contingencies” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report. UnderThe complaint alleges that patents held by Allergan and us covering Namenda XR and Namzaric were procured through fraud on the terms of
United States Patent and Trademark Office and that license agreement, Allergan has the right to enforce such intellectual property rights and control such litigation. Specifically, Allergan has the discretion to:
maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us tothese patents were asserted against potential liability; and
not adequately pursue litigation against ANDA filers or settle such litigation on unfavorable terms, and as Allergan substantially controls the current ANDA litigation and terms of settlement and has different economic interests than ours, Allergan may grant licenses to generic manufacturers that permit them to make and sell generic versions of Namenda XR and Namzaric which would negatively impact the royalties we receive under our license with Allergan.
We have a right to participate in, but not control, such litigations. If Allergan decides not to enforce the intellectual property rights licensed under the agreement or the litigation is resolved in favor ofprevent the generic manufacturers or iffrom entering the FDA approvesmarket, thereby wrongfully excluding generic competition resulting in artificially high price being charged to government payors. The complaint includes a claim for damages of “potentially more than $2.5 billion dollars,” treble damages and statutory penalties. We are in the ANDA filed by the generic manufacturers, such manufacturersearly stages of this litigation. Defending this litigation may be ablecostly, divert time and attention of our management from the conduct of our business, and if we are unable to marketprevail in this litigation it may result in substantial damages, each of which could have a material and sell the generic form of the branded drug in competition with Namenda XR and Namzaric. This could harmnegative impact on our business. Based on adverse trial and appellate court rulings to date with respect to Namenda XR, we do not expect to receive royalties on net sales of Namenda XR due to the potential entry of generic versions Namenda XR. The pending ANDA litigation with respect to Namzaric is at a very early stage.
Risks related to our financial condition and need for additional capital
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations.
Our quarterly and annual operating results may fluctuate significantly in the future, which makes it difficult for us to predict our future operating results. Any future revenue will depend on our ability to market and sell GOCOVRI, ADS-5102 and our product candidate, the payment of royalties to us from Allergan under terms of our licensing agreement regarding Namzaric, or the establishment of potential future collaboration and license agreements, if any, and the achievement of any upfront or milestone payments provided thereunder. Furthermore, our operating results may fluctuate due to a variety of other factors, many of which are outside of our control and may be difficult to predict, including:
•the level of demand for our products, which may vary significantly as they are launched and compete for position in the marketplace;
•pricing and reimbursement policies with respect to GOCOVRI, ADS-5102 and our product candidate, if approved, and the competitive response from existing and potential future therapeutic approaches that compete with our products and product candidate;
•the cost of manufacturing our products and product candidate, which may vary due to a number of factors, including the terms of our agreements with contract manufacturing organizations, or CMOs;
•the timing, cost, level of investment, and success or failure of research and development activities relating to our products and product candidate, which may change from time to time;
•expenditures that we may incur to acquire and develop additional product candidates and technologies;
•the timing and success or failure of clinical studies for competing product candidates, or any other change in the competitive landscape of our industry, including consolidation among our competitors or partners;
•the timing and magnitude of upfront and milestone payments under any potential future collaboration and licensing agreements;
•future accounting pronouncements or changes in our accounting policies; and
•changing or volatile U.S., European, and global economic environments.
The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated operating results and/or earnings guidance that we may provide.
If we donot have adequate funds to cover all of our development and commercial activities, we may have toraise additional capital orcurtail or cease operations.
We have just begunbegan to commercialize GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications, in January 2018, and it will require substantial funds to be successful.continue to commercialize GOCOVRI. In addition, funds are required for the continued operation of our business, as we seek to advance additional product candidates through the research and clinical development to regulatory approval and commercialization. In May 2017, webusiness. We have entered into a Sales Agreement with Cowen and Company, LLC under which we may offer and sell our common stock having aggregate sales proceeds of up to $50 million from time to time through Cowen and Company, LLC as our sales agent. As of December 31, 2017,2019, we have not made any sales under this facility. As of December 31, 2017,2019, we had approximately $176.4$132.6 million in cash, cash equivalents, and investments. In January 2018, we raised an additional $134.1 million in net proceeds from the sale of 3,450,000 shares of common stock. We believe that our available cash, cash equivalents, and investments will be sufficient to fund our anticipated level of operations for at least the next 12 months, but there can be no assurance that this will be the case.
We have financed our operations primarily through proceeds from our license agreement with Allergan, public and private equity offerings, our Royalty-Backed Loan with HealthCare Royalty Partners III, L.P., or HCRP, since 2017 with sales of GOCOVRI, and, to a lesser extent, government grants, venture debt, and benefits from tax credits made available under a federal stimulus program supporting drug development. We have devoted substantially all of our efforts to research and development, including clinical studies, of our product candidates, including GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease. We anticipate that our cash requirements will increase substantiallybe substantial as we:
enhance operational, financial, and information management systems and hire more personnel, including personnel to support development of our product candidates and, our commercial operations;
•commercialize GOCOVRI, including establishing distribution, marketing, and sales capabilities;
•manufacture GOCOVRI for commercial use;
•investigate ADS-5102 (GOCOVRI) in preclinical and clinical trials for the treatment of walking impairment in patients with MS, and potentially other indications;
conduct preclinical and clinical trials of ADS-4101 for the treatment of epilepsy (partial onset seizures);
•seek regulatory approvals for our products and any product candidates that successfully complete clinical studies;
•continue the research, development, and manufacture of our current products and product candidates;candidate; and
•seek to discover or in-license additional product candidates.
If we do not have adequate funds to support these activities, our business opportunities could be hindered.
If we need additional funds to operate our business andif we cannot raise additional capital when needed, or if additional capital is not available to us on favorable terms, our stockholders may be adversely affected or our business may be harmed.
If we need additional funds to support our business and additional funding is not available under our royalty-backed loan with HCRP, or from new funding sources on favorable terms or at all, we may need to delay or reduce the scope of our research and clinical development programs or commercialization efforts. We do not have any committed external source of funds or other support for our development efforts other than under our royalty-backed loan with HCRP, or from new funding sources or under our license agreement with Allergan, which may be terminated by Allergan upon delivery of notice.efforts. We expect to finance future cash needs through a combination of public or private equity offerings, debt financings, royalty financings, collaborations, strategic alliances, licensing arrangements, asset sales, and other marketing and distribution arrangements. Additional financing may not be available to us when we need it or it may not be available on favorable terms. If we raise additional capital through debt financings, royalty financings, collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish certain
valuable rights to our products and product candidates,candidate, technologies, future revenue streams, or research programs or grant licenses on terms that may not be favorable to us. If we raise additional capital through equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, in addition to the repayment of principal and interest on negotiated terms, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of, or suspend one or more of our clinical studies or research and development programs or our commercialization efforts.
We have outstanding debt backed by two of our principal assets, GOCOVRI and royalties we may receive on Namzaric, and failure by us or our royalty subsidiary to fulfill our obligations under the applicable loan agreements may cause the repayment obligations to accelerate.
In May 2017, we, through a newly formed wholly-owned subsidiary, entered into a royalty-backed note arrangement with HCRP, pursuant to which we initially borrowed $35 million and then borrowed an additional $65 million upon FDA approval and FDA’s recognition in the Orange Book of the seven-year orphan drug exclusivity that GOCOVRI earned upon approval in August 2017, for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications.
Interest and principal on the loan will be payable from the proceeds of royalty on U.S. net sales of GOCOVRI and up to $15 million of our annual royalties from Allergan on U.S. net sales of Namzaric starting in May 2020. The HCRP notes mature in December 2026, if not earlier repaid.
We secured the loan with rights to GOCOVRI (ADS-5102) and rights to certain payment amounts on Namzaric and the loan documents further provide for assignment into our subsidiary holding these rights to any future intellectual property, licenses, assets and agreements with respect to the manufacture, development, supply, distribution, sale and commercialization of GOCOVRI. The loan documents contain customary events of default permitting HCRP to accelerate and require mandatory prepayment of outstanding principal and interest, including: failure to timely pay principal and interest when due and payable; failure to perform specified covenants with respect to maintenance of the collateral and prohibitions on liens with respect to the collateral; limitations on payments of dividends, additional loans, acquisition or merger transactions not in accordance with the arrangement. Upon the occurrence, an event of default under the loan documents, we could be required to prepay the entire loan and, if we are not able to do so, we may lose control over certain rights and payments to GOCOVRI and royalty payments with respect to Namzaric, either of which would seriously harm our business.
Our operating results may fluctuate significantly, which makes our future operating results difficult to predictWe are and could cause our operating results to fall below expectations.
Our quarterly and annual operating results may fluctuate significantly in the future may be subject to securities litigation, which makesmay be expensive and could divert management attention.
Our share price is volatile, and in the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have become the target of this type of litigation and in May 2019 a putative class action lawsuit alleging violations of the federal securities laws was filed against us and certain of our current and former directors and officers alleging violations of the securities laws by us and certain of our current and former directors and officers in connection with our January 2018 secondary public offering of common stock. In addition, in December 2019, another putative class action lawsuit was filed against us and certain former officers alleging violations of the Securities Act of 1934. For more information, please see Litigation and Other Legal Proceedings in “Note 9 - Commitments and Contingencies.” Lawsuits such as this one can be expensive to defend and could divert our management’s attention from the conduct of our business, which could have an adverse effect on our business.
Risks related to ownership of our common stock
Our stock price may be volatile, and purchasers of our common stock could incur substantial losses.
Our stock price has fluctuated in the past and may be volatile in the future. The stock market in general and the market for securities of pharmaceutical and biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may experience losses on their investments in our stock.
In addition, the clinical development stage of our operations may make it difficult for usinvestors to predictevaluate the success of our business to date and to assess our future operating results. Any future revenue will depend onviability. The market price for our common stock may be influenced by many factors, including:
•our success in commercializing GOCOVRI for the successful commercialization and salestreatment of GOCOVRI anddyskinesia in patients with Parkinson’s disease;
•the availability of reimbursement by third-party payers at acceptable levels, or at all, for GOCOVRI;
•the success of competitive products or technologies;
•results of clinical studies of our product candidates the payment of royalties to us from Allergan under termsor those of our licensing agreement regarding Namenda XRcompetitors;
•introductions and Namzaric,announcements of new products and product candidates by us, our commercialization partners, or the establishment of potential future collaboration and license agreements, if any,our competitors, and the achievementtiming of any upfrontthese introductions or milestone payments provided thereunder. Furthermore, our operating results may fluctuate due to a variety of other factors, many of which are outside of our control and may be difficult to predict, including: announcements;
the level of demand for our products, which may vary significantly as they are launched and compete for position in the marketplace;
pricing and reimbursement policies•actions taken by regulatory agencies with respect to GOCOVRI andour or our competitors’ products, product candidates, if approved,clinical studies, manufacturing process, or sales and marketing terms;
•variations in our financial results or those of companies that are perceived to be comparable to us;
•our revenue performance, both in absolute terms and relative to analyst and shareholder expectations;
•the success of our efforts to acquire or in-license additional products or product candidates;
•developments concerning our collaborations, including but not limited to those with our sources of manufacturing and our commercialization partners;
•announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, or capital commitments;
•developments or disputes concerning patents or other proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our current or future products;
•our ability or inability to raise additional capital and the competitive response from existingterms on which we raise it;
•the recruitment or departure of key personnel;
•changes in the structure of healthcare reimbursement systems;
•regulatory or legal developments in the United States and potential future therapeutic approaches that compete with our product candidates;
the cost of manufacturing our product candidates, which may vary due to a number of factors, including the terms of our agreements with contract manufacturing organizations,other countries, especially changes in laws or CMOs;
the timing, cost, level of investment, and success or failure of research and development activities relatingregulations applicable to our preclinical and clinical-stage product candidates, which may change from time to time;current or future products;
expenditures that we may incur to acquire and develop additional product candidates and technologies;
the timing and success or failure of clinical studies for competing product candidates, or any other change•market conditions in the competitive landscape of our industry, including consolidation among our competitorspharmaceutical and biotechnology sectors;
•actual or partners;
the timing and magnitude of upfront and milestone payments under any potential future collaboration and licensing agreements;
future accounting pronouncementsanticipated changes in revenue forecasts, earnings estimates or changes in stock market analyst recommendations regarding our accounting policies; andcommon stock, other comparable companies or our industry generally;
changing or volatile U.S., European, and global economic environments.
The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication•trading volume of our future performance. This variabilitycommon stock;
•sales of our common stock by us or our stockholders;
•general economic, industry, and unpredictability could also resultmarket conditions; and
•the other risks described in our failing to meetthis “Risk Factors” section.
These broad market and industry factors may seriously harm the expectations of industry or financial analysts or investors for any period. If our operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock, could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated operating results and/or earnings guidance that we may provide.
Risks related to the operationregardless of our operating performance. Additionally, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations, and growth prospects.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.
OurProvisions in our corporate charter and our bylaws may discourage, delay, or prevent a merger, acquisition, or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be
willing to pay in the future success depends onfor shares of our abilitycommon stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to retainreplace or remove our chief executive officer and other key executives andcurrent management by making it more difficult for stockholders to attract, retain, and motivate qualified personnel.
We are highly dependent on our chief executive officer and the otherreplace members of our executiveboard of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions include that:
•our board of directors is divided into three classes with staggered three-year terms, which may delay or prevent a change of our management or a change in control;
•our board of directors has the right to change the size of our board of directors and scientific teams. Our executives may terminate their employment with us at any time. The lossto elect directors to fill a vacancy created by the expansion of the servicesboard of anydirectors or the resignation, death or removal of these people could impede the achievementa director, which prevents stockholders from being able to fill vacancies on our board of directors;
•our stockholders may not act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling a majority of our research, development, and commercialization objectives.
Recruiting and retaining qualified scientific, clinical, manufacturing, and commercial personnel will also be critical to our success. We maycapital stock would not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategies. Our consultants and advisors may be employed by employerstake certain actions other than usat annual stockholders’ meetings or special stockholders’ meetings called by the board of directors or the chairman of the board and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. chief executive officer;
We expect to expand •our development and sales and marketing capabilities, and, as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
Ascertificate of December 31, 2017, we had 147 full-time equivalent employees. Over the next several years, we expect to experience significant growthincorporation prohibits cumulative voting in the numberelection of directors, which limits the ability of minority stockholders to elect director candidates;
•stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our employeescompany; and
•our board of directors may issue, without stockholder approval, shares of undesignated preferred stock, and the scopeability to issue undesignated preferred stock makes it possible for our board of our operations, particularlydirectors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.
Moreover, because we are incorporated in sales and marketing. To manage our anticipated future growth,Delaware, we must continue to implement and improve our managerial, operational, informational, and financial systems, expand our facilities, and continue to recruit and train additional qualified personnel. Due to our limited financial resources andare governed by the limited experienceprovisions of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.
On December 22, 2017, President Trump signed into law new legislation that significantly revises the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reductionSection 203 of the corporate tax rate fromDelaware General Corporation Law, which prohibits a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain, and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. Investors should consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.
Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictionsperson who owns in excess of accrued amounts.
We are subject to taxation in numerous U.S. states and territories. As15% of our outstanding voting stock from merging or combining with us for a result, our effective tax rate is derived from a combinationperiod of applicable tax rates inthree years after the various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places. Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including passagedate of the newly enacted federal income tax law, changestransaction in which the mix of our profitability from state to state, the results of examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligationsperson acquired in excess of amounts accrued15% of our outstanding voting stock, unless the merger or combination is approved in our financial statements.a prescribed manner.
Other Risks
Our ability to use net operating losses to offset future taxable income may be subject to limitations.
As of December 31, 2017,2019, we had federal and state net operating loss carryforwards of $163.3$354.4 million and $131.3$325.8 million, respectively. The federal net operating loss carryforwards will begin to expire, if not utilized, beginning in 2025, and the state net operating loss carryforwards began to expirecarryforward begins expiring in 2016.2028. These net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the newly enacted federal income tax law, federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. It is still uncertain if and to what extent various states will conform to the newly enacted federal tax law. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. It is possible that we have experienced an ownership change limitation. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our net operating loss
carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations.
We are an “emerging growth company,”a “smaller reporting company” and we cannot be certain whether the reduced reporting requirements applicable to emerging growthsmaller reporting companies will make our common stock less attractive to investors.
We are an “emerging growth company,”a “smaller reporting company” and, as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, which was enacted in April 2012. For as long as we continue to be an emerging growth company,such, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growthsmaller reporting companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of our initial public offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may suffer or be more volatile.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our operations could be subject to earthquakes, power shortages, telecommunications failures, floods, hurricanes, fires, extreme weather conditions, medical epidemics, and other natural or manmade disasters or business interruptions. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. Our corporate headquarters is located in California and certain clinical sites for our product candidates, operations of our existing and future partners, and suppliers are or will be located near major earthquake faults and fire zones. The ultimate impact on us, our significant partners, suppliers, and our general infrastructure of being located near major earthquake faults and fire zones and being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire, or other natural or manmade disaster.
Any future operations or business arrangements with entities outside the United States present risks that could materially adversely affect our business.
If we obtain approval to commercialize any approved products or utilize CMOs outside of the United States, a variety of risks associated with international operations could materially adversely affect our business. If any product or product candidates that we may develop are approved for commercialization outside the United States, we will be subject to additional risks related to entering into international business relationships, including:
•different regulatory requirements for drug approvals in foreign countries;
•reduced protection for intellectual property rights;
•unexpected changes in tariffs, trade barriers, and regulatory requirements;
•different payer reimbursement regimes, governmental payers or patient self-pay systems and price controls;
•economic weakness, including inflation or political instability in particular foreign economies and markets;
•difficulties in assuring compliance with foreign corrupt practices laws;
•compliance with tax, employment, immigration, and labor laws for employees living or traveling abroad;
•foreign taxes, including withholding of payroll taxes;
•foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;
•workforce uncertainty in countries where labor unrest is more common than in the United States;
•compliance with privacy laws;
•production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
•business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters, including earthquakes, hurricanes or typhoons, floods, and fires.
Our internal computer systems, or those of our CROs, CMOs, CSO, or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our business.
Despite the implementation of security measures, our internal computer systems and those of our CROs, CMOs, specialty pharmacy, distributors, and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failures. While we are not aware of any suchmaterial system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs or commercialization efforts. For example, the loss of clinical study data from completed or ongoing clinical studies for any of our products or product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. While we back-up our internal computer systems periodically and store such data off-site or in the cloud, we can offer no assurance that such off-site storage of data will allow us to continue our business without interruptions to our operations, which could result in a material disruption of our drug development programs or commercialization efforts. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our products and product candidates could be delayed.
Risks generally associated with a company-wide implementation of information systems, including an enterprise resource planning (ERP) system, may adversely affect our business and results of operations or the effectiveness of our internal controls over financial reporting.
In support of our anticipated growth and future commercial-stage operations, we have selected and implemented a number of company-wide information systems, and may select and implement additional systems in the future, including adding new functionality to our enterprise resource planning, or ERP, and other similar systems. Many of these systems are complex and their successful and timely implementation is not assured, requires significant capital expenditures, and can be disruptive to our business operations. We recently implemented a new ERP system in addition to a new human resource information system, or HRIS. These projects required and may continue to require investment of capital and human resources and the attention of many employees who would otherwise be focused on other aspects of our business. Any deficiencies in the design and implementation of the new ERP and HRIS system could result in potentially much higher costs than we had incurred and could adversely affect our ability to develop and launch solutions, provide services, fulfill contractual obligations, file reports with the SEC in a timely manner, operate our business, or otherwise affect our controls environment. Any of these consequences could have an adverse effect on our results of operations and financial condition.
Risks related to ownership of our common stock
Our stock price may be volatile, and purchasers of our common stock could incur substantial losses.
Our stock price has fluctuated in the past and may be volatile in the future. The stock market in general and the market for securities of pharmaceutical and biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may experience losses on their investments in our stock.
In addition, the clinical development stage of our operations may make it difficult for investors to evaluate the success of our business to date and to assess our future viability. The market price for our common stock may be influenced by many factors, including:
our success in commercializing GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease;
the availability of reimbursement by payers at acceptable levels, or at all, for GOCOVRI;
the success of competitive products or technologies;
results of clinical studies of our product candidates or those of our competitors;
introductions and announcements of new products and product candidates by us, our commercialization partners, or our competitors, and the timing of these introductions or announcements;
actions taken by regulatory agencies with respect to our or our competitors’ products, product candidates, clinical studies, manufacturing process, or sales and marketing terms;
variations in our financial results or those of companies that are perceived to be comparable to us;
our revenue performance, both in absolute terms and relative to analyst and shareholder expectations;
the success of our efforts to acquire or in-license additional products or product candidates;
developments concerning our collaborations, including but not limited to those with our sources of manufacturing and our commercialization partners;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, or capital commitments;
developments or disputes concerning patents or other proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our current or future products;
our ability or inability to raise additional capital and the terms on which we raise it;
the recruitment or departure of key personnel;
changes in the structure of healthcare reimbursement systems;
regulatory or legal developments in the United States and other countries, especially changes in laws or regulations applicable to our current or future products;
market conditions in the pharmaceutical and biotechnology sectors;
actual or anticipated changes in revenue forecasts, earnings estimates or changes in stock market analyst recommendations regarding our common stock, other comparable companies or our industry generally;
trading volume of our common stock;
sales of our common stock by us or our stockholders;
general economic, industry, and market conditions; and
the other risks described in this “Risk Factors” section.
These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. Additionally, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations, and growth prospects.
Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.
Concentration of ownership of our common stock among our existing executive officers, directors, and principal stockholders may prevent new investors from influencing significant corporate decisions.
Our executive officers, directors and current beneficial owners of 5% or more of our common stock, in the aggregate, beneficially own a significant percentage of our outstanding common stock. These persons, acting together, will be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with the interests of other stockholders.
We will continue to incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, and we could fail to successfully improve our systems, procedures, and controls, which could affect our operating results.
As a public company, we will continue to incur legal, accounting and other expenses associated with reporting requirements and corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as new rules implemented by the SEC and the Nasdaq Stock Market LLC. We expect that we will need to continue to improve existing, and implement new operational, financial, and information management systems, procedures, and controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures, or controls may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective.
An active trading market for our common stock may not be maintained.
Our stock is currently traded on Nasdaq, but we can provide no assurance that we will be able to maintain an active trading market on Nasdaq or any other exchange in the future or that the daily trading volume will be adequate to allow orderly purchases or sales of our common stock without significantly impacting the price per share. If an active market for our common stock is not maintained, it may be difficult for our stockholders to sell shares without depressing the market price for the shares or at all.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about us or our business, our stock price and trading volume could decline.
The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts may cease to publish research on our company at any time in their discretion. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline. In addition, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If our operating results fail to meet the forecast of analysts, our stock price will likely decline.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our corporate charter and our bylaws may discourage, delay, or prevent a merger, acquisition, or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions include that:
our board of directors is divided into three classes with staggered three-year terms, which may delay or prevent a change of our management or a change in control;
our board of directors has the right to change the size of our board of directors and to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
our stockholders may not act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings called by the board of directors or the chairman of the board and chief executive officer;
our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and
our board of directors may issue, without stockholder approval, shares of undesignated preferred stock, and the ability to issue undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be our stockholders’ sole source of gain.
We have never declared or paid cash dividends on our common stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of existing or any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be our stockholders’ sole source of gain for the foreseeable future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease approximately 18,50037,626 square feet of office space in Emeryville, California. On January 16, 2018, we amended ourCalifornia, under an operating lease agreement to relocate within the current building and increase our leased space to approximately 37,626 square feet. The relocation is expected to occur no later than the second quarter of 2018. The amended lease agreementthat expires April 30, 2025. We believe that the expandedour existing facility will be sufficient for our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
For information regarding legal proceedings, refer to Litigation and Other Legal Proceedings in “Note 89 - Commitments and Contingencies” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report, which information is incorporated by reference here.
ITEM 4. MINE SAFETY DISCLOSURES
The disclosure required by this item is not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCKMarket Information
Our common stock has beenis listed on the Nasdaq Global Market under the symbol “ADMS” since April 10, 2014. Prior to that date, there was no public trading market for our common stock. The following table sets forth for the periods indicated the high and low sales prices per share of our common stock as reported on the Nasdaq Global Market:.
|
| | | | | | | |
| Low | | High |
Fiscal Year ended December 31, 2016 | | | |
First Quarter | $ | 12.02 |
| | $ | 28.23 |
|
Second Quarter | $ | 13.94 |
| | $ | 19.15 |
|
Third Quarter | $ | 12.81 |
| | $ | 19.50 |
|
Fourth Quarter | $ | 12.10 |
| | $ | 17.74 |
|
| | | |
Fiscal Year ended December 31, 2017 | |
| | |
|
First Quarter | $ | 14.23 |
| | $ | 19.50 |
|
Second Quarter | $ | 14.59 |
| | $ | 18.00 |
|
Third Quarter | $ | 13.50 |
| | $ | 23.84 |
|
Fourth Quarter | $ | 17.68 |
| | $ | 38.22 |
|
On February 15, 2018, the last reported sale price of our common stock as reported on the Nasdaq Global Market was $34.43 per share.Holders
As of February 15, 2018,14, 2020, there were 26,807,221 shares of our common stock issued and outstanding with 2619 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
STOCK PRICE PERFORMANCE GRAPH
The following stock performance graph compares our total stock return with the total return for (i) the Nasdaq Composite Index and the (ii) the Nasdaq Biotechnology Index for the period from April 10, 2014 (the date our common stock commenced trading on the Nasdaq Global Market) through December 31, 2017. The figures represented below assume an investment of $100 in our common stock at the closing price of $14.01 on April 10, 2014 and in the Nasdaq Composite Index and the Nasdaq Biotechnology Index on April 10, 2014 and the reinvestment of dividends into shares of common stock. The comparisons in the table are required by the Securities and Exchange Commission, or SEC, and are not intended to forecast or be indicative of possible future performance of our common stock. This graph shall not be deemed “soliciting material” or be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
DIVIDEND POLICYDividends
We have never declared or paid, and do not anticipate declaring, or paying in the foreseeable future, any cash dividends on our capital stock. Future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our operating results, financial conditions, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial data together with the section of this report entitledtitled “Management’s discussion and analysis of financial condition and results of operations” and our financial statements and the related notes included in this report. The statement of operations data for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, and the balance sheet data as of December 31, 20172019 and 2016,2018, are derived from our audited financial statements included elsewhere in this report. Statement of operations data for the yearyears ended December 31, 20142016 and 2013,2015, and balance sheet data as of December 31, 2015, 2014,2017, 2016, and 2013,2015, are derived from our audited financial statements not included herein. Our historical results are not necessarily indicative of the results to be expected in the future.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (in thousands, except per share data) | | | | | | | | |
Consolidated Statement of Operations data: | | | | | | | | | |
Revenues: | | | | | | | | | |
Product sales | $ | 54,637 | | | $ | 34,046 | | | $ | 568 | | | $ | — | | | $ | — | |
License and grant revenue | — | | | — | | | 3 | | | 572 | | | 1,916 | |
Total revenues | 54,637 | | | 34,046 | | | 571 | | | 572 | | | 1,916 | |
Costs and operating expenses: | | | | | | | | | |
Cost of product sales | 2,469 | | | 633 | | | 17 | | | — | | | — | |
Research and development | 30,034 | | | 39,300 | | | 27,168 | | | 31,230 | | | 35,895 | |
Selling, general and administrative, net | 114,369 | | | 109,135 | | | 61,312 | | | 30,326 | | | 23,458 | |
Total costs and operating expenses | 146,872 | | | 149,068 | | | 88,497 | | | 61,556 | | | 59,353 | |
Loss from operations | (92,235) | | | (115,022) | | | (87,926) | | | (60,984) | | | (57,437) | |
Interest and other income, net | 2,093 | | | 3,115 | | | 1,351 | | | 811 | | | 363 | |
Interest expense | (15,044) | | | (19,092) | | | (4,645) | | | — | | | — | |
Loss before income taxes | (105,186) | | | (130,999) | | | (91,220) | | | (60,173) | | | (57,074) | |
Benefit for income taxes | — | | | — | | | (1,730) | | | (115) | | | (5,272) | |
Net loss | $ | (105,186) | | | $ | (130,999) | | | $ | (89,490) | | | $ | (60,058) | | | $ | (51,802) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net loss per share, basic and diluted | $ | (3.80) | | | $ | (4.87) | | | $ | (3.97) | | | $ | (2.77) | | | $ | (2.86) | |
| | | | | | | | | |
| | | | | | | | | |
Weighted average shares used in computing net loss per share, basic and diluted | 27,677 | | | 26,886 | | | 22,558 | | | 21,711 | | | 18,111 | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (in thousands, except per share data) |
Consolidated Statement of Operations data: | | | | | | | | | |
Revenues: | | | | | | | | | |
Product sales, net | $ | 568 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
License and grant revenue | 3 |
| | 572 |
| | 1,916 |
| | 55,846 |
| | 71,095 |
|
Total net revenues | 571 |
| | 572 |
| | 1,916 |
| | 55,846 |
| | 71,095 |
|
Costs and operating expenses: | | | | | | | | | |
Cost of product sales | 17 |
| | — |
| | — |
| | — |
| | — |
|
Research and development | 27,168 |
| | 31,230 |
| | 35,895 |
| | 21,860 |
| | 7,410 |
|
Selling, general and administrative, net | 61,312 |
| | 30,326 |
| | 23,458 |
| | 15,472 |
| | 6,667 |
|
Total costs and operating expenses | 88,497 |
| | 61,556 |
| | 59,353 |
| | 37,332 |
| | 14,077 |
|
Income (loss) from operations | (87,926 | ) | | (60,984 | ) | | (57,437 | ) | | 18,514 |
| | 57,018 |
|
Interest and other income (expense), net | 1,351 |
| | 811 |
| | 363 |
| | (917 | ) | | (4,906 | ) |
Interest expense | (4,645 | ) | | — |
| | — |
| | — |
| | — |
|
Income (loss) before income taxes | (91,220 | ) | | (60,173 | ) | | (57,074 | ) | | 17,597 |
| | 52,112 |
|
Provision (benefit) for income taxes | (1,730 | ) | | (115 | ) | | (5,272 | ) | | 7,374 |
| | 1,191 |
|
Net income (loss) | $ | (89,490 | ) | | $ | (60,058 | ) | | $ | (51,802 | ) | | $ | 10,223 |
| | $ | 50,921 |
|
Net income (loss) attributable to common stockholders: | | | | | | | | | |
Basic | $ | (89,490 | ) | | $ | (60,058 | ) | | $ | (51,802 | ) | | $ | 8,968 |
| | $ | 33,068 |
|
Diluted | $ | (89,490 | ) | | $ | (60,058 | ) | | $ | (51,802 | ) | | $ | 9,069 |
| | $ | 35,353 |
|
Net income (loss) per share attributable to common stockholders: | | | | | | | | | |
Basic | $ | (3.97 | ) | | $ | (2.77 | ) | | $ | (2.86 | ) | | $ | 0.60 |
| | $ | 3.48 |
|
Diluted | $ | (3.97 | ) | | $ | (2.77 | ) | | $ | (2.86 | ) | | $ | 0.53 |
| | $ | 2.99 |
|
Weighted average number of shares used in computing net income (loss) attributable to common stockholders: | | | | | | | | | |
Basic | 22,558 |
| | 21,711 |
| | 18,111 |
| | 14,837 |
| | 9,506 |
|
Diluted | 22,558 |
| | 21,711 |
| | 18,111 |
| | 17,107 |
| | 11,806 |
|
Revenue in the years ended December 31, 2014 and 2013 includes recognition of revenue relating to upfront and milestone payments called for within our license agreement with Forest Laboratories Holdings Limited (“Forest”), an indirect wholly-owned subsidiary of Allergan plc (collectively, “Allergan”), effective November 13, 2012, of $55.0 million and $69.6 million, respectively. See the section of this report entitled “Management’s discussion and analysis of financial condition and results of operations—Financial operations overview—Revenue” for a more detailed description of our revenue recognition with respect to these agreements. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, | | | | | | | | |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (in thousands) | | | | | | | | |
Balance Sheet Data: | | | | | | | | | |
Cash, cash equivalents, and available-for-sale securities | $ | 132,607 | | | $ | 210,870 | | | $ | 176,433 | | | $ | 135,944 | | | $ | 119,960 | |
Working capital | 123,372 | | | 204,097 | | | 162,568 | | | 107,244 | | | 101,380 | |
Total assets | 162,158 | | | 234,814 | | | 186,176 | | | 142,473 | | | 128,743 | |
Long-term debt | 125,674 | | | 117,457 | | | 102,647 | | | — | | | — | |
| | | | | | | | | |
Total liabilities | 163,051 | | | 144,929 | | | 120,050 | | | 10,290 | | | 12,556 | |
| | | | | | | | | |
Total stockholders’ equity (deficit) | (893) | | | 89,885 | | | 66,126 | | | 132,183 | | | 116,187 | |
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (in thousands) |
Balance Sheet Data: | | | | | | | | | |
Cash, cash equivalents, and available-for-sale securities | $ | 176,433 |
| | $ | 135,944 |
| | $ | 119,960 |
| | $ | 158,722 |
| | $ | 85,612 |
|
Working capital | 162,568 |
| | 107,244 |
| | 101,380 |
| | 110,982 |
| | 81,790 |
|
Total assets | 186,176 |
| | 142,473 |
| | 128,743 |
| | 161,189 |
| | 86,216 |
|
Long-term debt | 102,647 |
| | — |
| | — |
| | — |
| | — |
|
Warrant liability | — |
| | — |
| | — |
| | — |
| | 6,232 |
|
Total liabilities | 120,050 |
| | 10,290 |
| | 12,556 |
| | 14,115 |
| | 10,462 |
|
Convertible preferred stock | — |
| | — |
| | — |
| | — |
| | 19,149 |
|
Total stockholders’ equity | 66,126 |
| | 132,183 |
| | 116,187 |
| | 147,074 |
| | 56,605 |
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the section of this report entitledtitled “Selected financial data” and our financial statements and related notes included elsewhere in this report. This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitledtitled “Risk factors.”
Overview
At Adamas Pharmaceuticals, Inc., we seekour purpose is to redefine the treatment experiencemake everyday life significantly better for patients suffering from chronicpeople affected by neurological diseases. Our vision is grand,We are turning this purpose into reality by combining our goal bold:proven expertise in discovery, development and commercialization with our passion for improving lives. We believe our medicines should be clinically differentiated and provide a meaningful benefit to createpatients. With one partnered product and commercialize a new generationcommercial medicine, we are focused on growing a portfolio of medicines intendedtherapies to lessenreduce the burden of diseaseneurological diseases on patients, caregivers, and society. With a new commercial medicine and robust pipeline of investigational programs focused on meaningfully differentiated treatment options for patients, we believe we are well on our way. Our therapeutic targets include a broad range of neurologic diseases, including Parkinson’s disease, multiple sclerosis, epilepsy and Alzheimer’s disease.
Our treatment innovations stem from a deep scientific understanding of time-dependent biology–the deliberate mapping of disease patterns and drug activity–along with a goal to meaningfully increase the efficacy of known molecules without compromising tolerability. This approach is designed to ensure that our medicines fit within, rather than define, people’s daily lives. Our goal is to develop medicines that are timed for the benefit of patients.
Our understanding of time-dependent biological processes informs our every innovation, targeting advancement in treatment of chronic neurologic disorders. Our expanding portfolio includes:
Approved Product:
| |
• | GOCOVRITM (amantadine) extended release capsules, formerly referred to as ADS-5102, for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications. GOCOVRI was approved for marketing by the U.S. Food and Drug Administration, or FDA, on August 24, 2017, with seven years of orphan exclusivity and additional patent protections, and we fully launched GOCOVRI with a deployed sales force in January 2018.•GOCOVRI® (amantadine) extended release capsules, is the first and only FDA-approved medication indicated for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications. It is also the only medicine clinically proven to reduce both dyskinesia and OFF in that population. GOCOVRI was approved for marketing by the U.S. Food and Drug Administration, or FDA, on August 24, 2017, with seven years of orphan exclusivity and additional patent protections out to 2034.On January 2, 2020, we announced we had granted Sandoz Inc. a license for its generic version of GOCOVRI as of March 4, 2030, or earlier in certain circumstances typical for such agreements. |
Potential Additional IndicationsIndication for GOCOVRI (amantadine) Extended Release Capsules (ADS-5102):
•ADS-5102 in development for the treatment of walking impairment in patients with multiple sclerosis.sclerosis (“MSW”). We expectannounced the starttopline results from INROADS Phase III trial of our Phase 3 pivotalADS-5102 on December 17, 2019.The study in this supplemental indicationmet its primary endpoint, showing a potential benefit for patients with walking impairment. We plan to occur earlycomplete additional analyses of the data from the INROADS trial to fully characterize the profile of ADS-5102 and evaluate the value and potential for the program in the second quarterfirst half of 2018.
ADS-5102 in research and potential development for additional indications, including the treatment of wearing OFF and delaying motor complications in Parkinson’s disease, tardive dyskinesia, Huntington’s chorea, Tourette syndrome, and non-motor disorders, including depression, and anti-psychotic induced weight gain. We expect to select additional indications for ADS-5102 by first quarter 2019.2020.
Product Candidates:Candidate:
•ADS-4101 (lacosamide) modified release capsules in development for the treatment of partial onset seizures in patients with epilepsy. We have requestedIn 2019, we placed the development program on hold to focus on other priorities and are currently evaluating the potential value and options for a meeting withpath forward for the FDAcandidate.
Partnered Product:
•Namzaric® (memantine hydrochloride extended release and donepezil hydrochloride) capsules for the treatment of moderate to severe dementia of an Alzheimer’s type, marketed in the first halfUnited States by Allergan plc under an exclusive license agreement between us and Forest Laboratories Holdings Limited (“Forest”), an indirect, wholly-owned subsidiary of 2018, with the start of a Phase 3 pivotal study planned for 2019, depending on FDA feedback.Allergan plc (collectively, “Allergan”).
Additional product candidates in research based on potential new discoveries in Parkinson’s disease, multiple sclerosis, epilepsy, as well as new research programs in psychiatry.
Partnered Products:
| |
• | Namzaric® (memantine hydrochloride extended release and donepezil hydrochloride) capsules for the treatment of moderate to severe dementia of an Alzheimer’s type, marketed in the United States by Allergan plc under an exclusive license agreement between us and Forest Laboratories Holdings Limited (“Forest”), an indirect wholly-owned subsidiary of Allergan plc.
|
| |
• | Namenda XR® (memantine hydrochloride) extended release capsules for the treatment of moderate to severe dementia of an Alzheimer’s type, marketed in the United States by Allergan plc under the Forest license agreement.
|
Products in our wholly-owned, non-partnered portfolio, potential additional indications for these products, and our product candidates,candidate, are protected by an array of intellectual property, including robust and diversified patent claims, and regulatory exclusivities. For example, GOCOVRI is protected by seven-year orphan drug exclusivity, three-year new product exclusivity, and issued patents and pending patent applications out to at least 2035.
Financial operations overview
Summary
Net product sales consist of sales of GOCOVRI, which the FDA approved on August 24, 2017, and made available for physician and patient use in the fourth quarter of 2017; however, the full commercial launch of GOCOVRI did not occur until deployment of our sales team in January 2018. Prior to the generation of product sales from GOCOVRI, our revenue had been generated primarily from license, milestone, and reimbursement for research and development expenses and full-time equivalents assigned under our license agreement with Allergan. There are no further milestone payments to be earned under our license agreement with Allergan. As of December 31, 2017,2019, we had an accumulated deficitcash, cash equivalents, and available-for-sale securities of $211.7$132.6 million. We expect to incur significant losses as we support the commercialization of GOCOVRI and advance our product candidates into later stages of development and commercialization.
We are commercializing GOCOVRI through our deployed sales force targeting neurologists and movement disorder specialists in the United States, and may possibly commercialize GOCOVRI through partnership agreements with pharmaceutical companies outside the United States. Consequently,As of December 31, 2019, we expect selling, general and administrative expenses to increase as a resulthad an accumulated deficit of the launch of the full product commercialization of GOCOVRI in January 2018. In addition, we expect to continue to incur significant research and development expenses as we continue to advance our product candidates through pre-clinical and clinical development. Because of the numerous risks and uncertainties associated with drug development and commercialization, we are unable to predict the timing or amount of expenses incurred or when, or if, we will be able to achieve or maintain profitability.
Under our agreement with Allergan, beginning in May 2020, we are entitled to receive tiered royalties in the low to mid-teens as a percent of net sales of Namzaric in the United States. We are also entitled to receive tiered royalties in the low to mid-single digits, as a percent of net sales, from Allergan for net sales of Namenda XR in the United States beginning in June 2018; however, we do not expect to receive royalties on net sales of Namenda XRbecause of the potential entry of generic versions of Namenda XR. Pursuant to the agreement, we received a non-refundable upfront license fee of $65.0 million in 2012, which we recognized on a straight-line basis from November 2012 to February 2013. We also earned and received additional cash payments totaling $95.0 million upon achievement by Allergan of certain development and regulatory milestones, which we recognized in 2013 and 2014.$447.9 million.
Prior to 2015,2017, we raised an aggregate of approximately $130.8$202.3 million in sales of equity securities. In June 2015,May 2017, we entered into a Controlled Equity Offering Sales Agreement, pursuant to whichroyalty-backed loan agreement (“Royalty-Backed Loan”) with HealthCare Royalty Partners (“HCRP”), whereby we issued 509,741 sharesborrowed a total of common stock and raised net proceeds of $9.7 million, prior to the termination of the agreement in November 2016.$100.0 million. In January 2016,2018, we raised $61.8$134.3 million in net proceeds from the sale of 2,875,0003,450,000 shares of common stock in a follow-on public offering. In May 2017,November 2019, we entered into a sales agreement with Cowen and Company, LLC, pursuant to which we may, from time to time, issue and sell shares of common stock having an aggregate offering value of up the $50.0 million. As of February 15, 2018, no2020, we have not sold any shares had been sold under the sales agreement. Also in May 2017, we entered into a royalty-backed loan agreement (“Royalty-Backed Loan”) with HealthCare Royalty Partners (“HCRP”), whereby we initially
Revenue
borrowed $35.0 million, followed by an additional $65.0 million received inThe following table summarizes the fourth quartersources of 2017 upon FDA’s recognition inour revenue for the Orange Book of the seven-year orphan drug exclusivity for GOCOVRI.
As ofyears ended December 31, 2019, 2018, and 2017 we had cash, cash equivalents, and available-for-sale securities of $176.4 million. In January 2018, we raised an additional $134.1 million in net proceeds from the sale of 3,450,000 shares of common stock.(in thousands):
Revenue | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
Product sales | $ | 54,637 | | | $ | 34,046 | | | $ | 568 | |
| | | | | |
Allergan reimbursement of development costs | — | | | — | | | 3 | |
| | | | | |
Total revenues | $ | 54,637 | | | $ | 34,046 | | | $ | 571 | |
Net productProduct sales consist of sales of GOCOVRI, which was approved by the FDA on August 24, 2017. We began commercial sales of GOCOVRI in the fourth quarter of 2017, and initiated the full commercial launch via the deployment of our sales team in January 2018.
Prior to the generation of product sales from GOCOVRI, our revenue had been generated primarily from payments under our license agreement with Allergan for non-refundable upfront license payments, milestone payments reimbursements for research and development expenses and full-time equivalents assigned under our license agreement with Allergan, and to a lesser degree reimbursement for research and development expenses from NIH grants and government contracts.
The following table summarizes the sources of our revenue for the years ended December 31, 2017, 2016, and 2015 (in thousands):
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Product sales, net | $ | 568 |
| | $ | — |
| | $ | — |
|
Allergan reimbursement of development costs | 3 |
| | 317 |
| | 1,434 |
|
NIH grants and government contracts | — |
| | 255 |
| | 482 |
|
Total revenue | $ | 571 |
| | $ | 572 |
| | $ | 1,916 |
|
Pursuant to our license agreement with Allergan, we recognized revenue from Allergan of $3,000, $0.3 million, and $1.4 million in reimbursements for research and development expenses for full-time equivalent employees assigned to the years ended December 31, 2017, 2016, and 2015, respectively. We do not expect to recognize anylicense agreement. There are no further milestone payments to be earned under our license agreement with Allergan, and we expect reimbursements for full-time equivalents assigned to the license agreement to be inconsequential in future periods. Beginning in May 2020, we will beare entitled to receive tiered royalties from Allergan in the low double digits to mid-teens, as a percent of sales, from Allergan for net sales of Namzaric in the United States. We are also entitledBased on 2019 net sales of Namzaric, we expect the tiered royalty to receive tiered royaltiesbe in the low to mid-singledouble digits as a percent of sales, from Allergan for net sales of Namenda XR inthrough the United States beginning in June 2018; however, we do not expect to receive such royalties becauseterm of the potential entry of generic versions of Namenda XR. We were also awarded a continuation of an NIH grant for $1.0 million in August 2014 that terminated in July 2016, which we administered, but conducted through subcontractors.agreement.
Cost of product sales
Cost of product sales consistconsists primarily of direct and indirect costs related to the manufacturing of GOCOVRI products sold, including third-party manufacturing costs, packaging services, freight, and allocation of overhead costs, in addition toand inventory adjustment charges. We began capitalizing inventory manufactured at the FDA approved locationlocations upon FDA approval of GOCOVRI in August 2017.and upon FDA approval of a supplemental NDA for a second manufacturing site with our current third-party manufacturer. We recorded inventory acquired prior to the regulatory approvalapprovals as research and development expense.
Research and development expenses
Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our wholly-owned product candidates. We recognize all research and development costs as they are incurred.
Research and development expenses consist of:
•fees paid to clinical investigators, clinical trial sites, consultants, and vendors, including contract research organizations, or CROs, in conjunction with implementing, conducting, and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work, and statistical compilation and analysis;
•expenses related to production of clinical supplies, including fees paid to contract manufacturing organizations, or CMOs;
•expenses related to establishment and validation of manufacturing capabilities for commercial supply;
•expenses related to the buildup of commercial supply to support commercial launch, prior to FDA approval;
•expenses related to compliance with regulatory requirements;
•other consulting fees paid to third parties; and
•employee-related expenses, which include salaries, benefits, and stock-based compensation.
The following table summarizes our research and development expenses incurred during the years ended December 31, 2017, 2016,2019, 2018, and 20152017 (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
GOCOVRI(1) | | $ | 23,448 | | | $ | 27,441 | | | $ | 20,174 | |
| | | | | |
ADS-4101(2) | 2,516 | | | 5,451 | | | 5,202 | |
Other research and development expenses | | 4,070 | | | 6,408 | | | 1,792 | |
Total research and development expenses | $ | 30,034 | | | $ | 39,300 | | | $ | 27,168 | |
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
ADS-5102(1) | $ | 20,174 |
| | $ | 25,223 |
| | $ | 32,231 |
|
ADS-4101 | 5,202 |
| | 1,659 |
| | — |
|
Other research and development expenses | 1,792 |
| | 4,348 |
| | 3,664 |
|
Total research and development expenses | $ | 27,168 |
| | $ | 31,230 |
| | $ | 35,895 |
|
(1)Includes program costs we incurred for GOCOVRI (formerly referred to as ADS-5102) for the treatment of dyskinesia in patients with Parkinson’s disease, and ADS-5102 (GOCOVRI) for additional potential CNS indications, including for the treatment of walking impairment in patients with multiple sclerosis. | |
(1) | Includes program costs we incurred for GOCOVRI (formerly referred to as ADS-5102) for the treatment of dyskinesia in patients with Parkinson’s disease, and ADS-5102 (GOCOVRI) for additional potential CNS indications, including for the treatment of walking impairment in patients with multiple sclerosis. |
(2)We reduced investments in ADS-4101 in the quarter ended June 30, 2019.
The program-specific expenses summarized in the table above include costs directly attributable to our product candidates. Other research and development expenses include costs for early stage programs and costs not allocated to a specific program. We allocate research and development salaries, benefits, stock-based compensation, and indirect costs to our product candidates on a program-specific basis, and we include these costs in the program-specific expenses. We begin to track and report program-specific expenses for early stage programs once they have been nominated and selected for further development and clinical-stage work has commenced.
Our investment in research and development activities, including the clinical development of our product candidates, has historically represented a significant portion of our total operating expenses. We anticipate incurring significanthave concluded the two-year Phase 3 open-label study of GOCOVRI and suspended investment in the development of ADS-4101. Our research and development expenses as we continue to support: clinical trialsefforts are focused on completing activities for ADS-5102 (GOCOVRI) in indications beyond dyskinesia in patients with Parkinson’s disease,for MSW, including but not limited to: walking impairment in patients with multiple sclerosis, or MS Walking,additional analyses of the data from the INROADS trial and other Parkinson’s disease indications earlier incontinuing the Parkinson’s disease treatment journey; ADS-4101open-label extension study through the end of 2020. As a result, we expect research and development costs to decrease from 2019 levels for the treatment of partial onset seizures in patients with epilepsy; and potentially additional clinical-stage programs in more indications or forforeseeable future, product candidates. based on this focused strategy.
The process of conducting the necessary clinical research to obtain FDA approval is costly and time consuming. We consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and clinical program may be affected by a variety of factors, including but not limited to, the quality of the product candidate, early clinical data, investment in the program, competition, manufacturing capability, and commercial viability. Furthermore, in the past we have entered into licensing arrangements with other pharmaceutical companies to develop and commercialize our product candidates, and we may enter into additional licensing arrangements or collaborations in the future. In situations in which third parties have
control over the clinical development of a product candidate, the estimated completion dates are largely under the control of such third parties and not under our control. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to future licensing or collaboration arrangements or how such arrangements would affect our development plans or capital requirements. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
Selling, general and administrative expenses, net
Selling, general and administrative expenses, net, consist primarily of personnel and related benefit costs, including stock-based compensation, facilities, professional services, insurance, and public company related expenses, charitable contribution expenses, as well as increasingly the costs associated with establishing commercial capabilities in support ofsupporting the commercialization of GOCOVRI, reduced to a small degree by reimbursement from Allergan for external costs related to supporting prosecution and litigation of intellectual property rights under our license agreement. We anticipate our selling, general and administrative expenses will remain significant and may increase significantly as we continue to support the commercialization of GOCOVRI.
Interest and other income, (expense), net
Interest and other income, (expense), net, consists primarily of changes in fair value of the embedded derivative liability related to our Royalty-Backed Loan with HCRP, in addition to interest received on our investments.
Interest expense
Interest expense consists of accrued interest pursuant to our Royalty-Backed Loan and amortization of debt issuance costs. Interest expense accrues using the effective interest rate method over the estimated period the debt is expected to be repaid. Interest expense over the life of the Royalty-Backed Loan includes an annual interest rate of 11% on the outstanding principal, a royalty rate of 6.25% on net sales of GOCOVRI after the principal amount is paid, and amortization of the debt discount.discount, until a maximum aggregate repayment amount has been reached.
Critical accounting policies and significant judgments and estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. OurWe base our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We have discussed the development, selection, and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 of our financial statements included in this Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We recognize revenue when all four ofin accordance with Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers (“ASC606”), which we adopted on January 1, 2018, using the following criteria have been met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.full retrospective transition method. We recognize revenue under license arrangements based onupon transfer of control of promised products or services to customers in an amount that reflects the performance requirementsconsideration we expect to receive in exchange for those products or services. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the contract. We make determinations of whether persuasive evidence of an arrangement exists and whether delivery has occurredasset that we would have recognized is one year or services have been rendered based on management’s judgments regarding the fixed nature of the fees charged for deliverables and the collectability of those fees. Should changes in conditions cause management to determine that these criteria are not met for any new or modified transactions, revenue recognized could be adversely affected.less.
Product sales net
Our product sales net, consist of U.S. sales of GOCOVRI, which we recognize once all four revenue recognition criteria described above have been met.GOCOVRI. GOCOVRI was approved by the FDA on August 24, 2017, and we commenced shipments of GOCOVRI to a specialty pharmacy (SP) during October 2017. We sell our products principally to a specialty pharmacy and certain specialty distributors (each a “Customer” or collectively our “Customers”). The SPCustomer subsequently dispenses product directly to a patient based on the fulfillment of a prescription. Our agreement with the SP provides for transfer of title to the product at the time the product is delivered to the SP.patient. In addition, except for limited circumstances, the SPCustomer has no right of product return to us. We have determined we can reasonably estimate our allowances for rebates and returns at the time title and
risk of loss transfers to the SP. Therefore, we record revenue when the product is delivered to the SP, which is an approach frequently referred to as the “sell-in” revenue recognition model.
We recognize revenue from product sales netwhen the Customer obtains control of our product, which occurs at a point in time, typically upon delivery to the Customer. We record revenue from product sales after considering the impact of the following allowancesvariable consideration amounts at the time of revenue recognition:
Distribution fees: Distribution fees include fees paid to the SPour Customers for data and prompt payment discounts. We record distribution fees as an offset to revenue based on contractual terms.
Rebates: Rebates include mandated discounts under the Medicaid Drug Rebate Program, Medicare Part D Prescription Drug Benefit Program, and TRICARE Retail Pharmacy Refunds Program (TRICARE)., and commercial contracts. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or statutory requirements with benefit providers. We estimate the allowance for rebates based on statutory discount rates and expected utilization at the time of sale.utilization. We estimate for expected utilization of rebates based on data received from the SP.specialty pharmacy and specialty distributor. We adjustuse the allowanceexpected-value method for estimating rebates and estimates are adjusted quarterly to reflect actual experience.
Chargebacks: Chargebacks are discounts that occur when Healthcare Providers purchase directly from our Customer. Healthcare Providers, which currently consist of Public Health Service institutions, non-profit clinics, government entities, group purchasing organizations, and health maintenance organizations, generally purchase the product at a discounted price. Our Customer, in turn, charges back to us the difference between the price initially paid by our Customer and the discounted price paid by the Healthcare Providers to our Customer. The allowance for chargebacks is based on an estimate of sales through to Healthcare Providers from our Customer.
Product Returns:Returns: Consistent with industry practice, we offer limited product return rights. Werights and generally allow for the return of product that is damaged or defective, and within a few months prior to and up to a few months after the product expiration date. We do not allow product returns for product that has been dispensed to a patient. We consider several factors in the estimation of potential product returns, including, expiration dates of the product shipped, the limited product return rights, third-party data in monitoring channel inventory levels, shelf life of the product, prescription trends, and other relevant factors. Product returns have been insignificant to date and are expected to be immaterial in the future.
Medicare Part D coverage gap: Medicare Part D coverage gap is a federal program to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States, which mandates manufacturers to fund a portion of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Funding of the coverage gap is generally invoiced and paid in arrears. The impact of the Medicare Part D coverage gap is accrued atestimated using the time of saleexpected-value method based on an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters and is adjusted quarterly based on actual experience.
Co-payment assistance: We provide co-payment assistance to patients who have commercial insurance and meet certain eligibility requirements. We accrueestimate co-payment assistance using the expected-value method based on actualhistorical program participation and estimates of program redemption using data provided by third-party administrators.
Each of the above adjustmentsitems are recordedvariable consideration, which we record at the time of revenue recognition, resulting in a reduction in product sales, net, and an increase in accrued expenses or a reduction in accounts receivable, net. The above adjustments require significant estimates, judgment and information obtained from external sources. If management'smanagement’s estimates differ from actuals, we will record adjustments that would affect product sales net in the period of adjustment.
License agreement revenue50
We generate revenue from collaboration
The following table summarizes activity with respect to our sales allowances and license agreementsaccruals for the developmentyears ended December 31, 2019, 2018, and commercialization of products. Collaboration and license agreements may include non-refundable upfront license fees, partial or complete reimbursement of research and development costs, contingent consideration payments based on the achievement of defined objectives, and royalties on sales of commercialized products. Our performance obligations under the collaboration and license agreements may include the license or transfer of intellectual property rights, obligations to provide research and development services and related materials, and obligations to participate on certain development and/or commercialization committees with the partners.2017 (in thousands):
For revenue agreements with multiple-element arrangements, we allocate revenue to each non-contingent element based on the relative-selling-price of each element in an arrangement. When applying the relative-selling-price method, we determine the selling price for each deliverable using the following estimation hierarchy: (i) vendor-specific objective evidence of fair value of the deliverable, if it exists, (ii) third-party evidence of selling price, if vendor-specific objective evidence is not available or (iii) the vendor’s best estimate of selling price, if neither vendor-specific nor third-party evidence is available. We recognize revenue allocated when the four basic revenue recognition criteria, mentioned above, are met for each element.
We recognize payments that are contingent upon achievement of a substantive milestone in their entirety in the period in which the milestone is achieved. Milestones are defined as events that can only be achieved based on our performance and there is substantive uncertainty about whether the event will be achieved at the inception of the arrangement. We do not consider events that are contingent only on the passage of time or only on counterparty performance to be milestones subject to this guidance. Further, the amounts received must relate solely to prior performance, be reasonable relative to all of the deliverables and payment terms within the agreement and commensurate with our performance to achieve the milestone after commencement of the agreement.
We recognize amounts related to research and development funding and full-time equivalents assigned to the license agreement with Allergan as the related services or activities are performed, in accordance with the contract terms. | | | | | | | | | | | | | | | | | |
| Government rebates, chargebacks and co-payment assistance | | Data fees, cash discounts and returns | | Total |
Balances at December 31, 2016 | $ | — | | | $ | — | | | $ | — | |
Provision related to current period sales | 86 | | | 42 | | | 128 | |
Credit or payments made during the period | (8) | | | (22) | | | (30) | |
Balances at December 31, 2017 | 78 | | | 20 | | | 98 | |
Provision related to current period sales | 3,655 | | | 919 | | | 4,574 | |
Credit or payments made during the period | (2,707) | | | (799) | | | (3,506) | |
Balances at December 31, 2018 | 1,026 | | | 140 | | | 1,166 | |
Provision related to current period sales | 6,716 | | | 1,409 | | | 8,125 | |
Credit or payments made during the period | (5,954) | | | (1,322) | | | (7,276) | |
Balances at December 31, 2019 | $ | 1,788 | | | $ | 227 | | | $ | 2,015 | |
Stock-Based Compensation
We account for stock-based compensation of stock options granted to employees and directors and for employee stock purchase plan shares by estimating the fair value of stock-based awards using the Black-Scholes option-pricing model. We account for stock-based compensation of restricted stock units granted to employees based on the closing price of our common stock on the date of grant. We recognize and amortize the fair value of stock-based awards, net of estimated forfeitures, over the applicable vesting period. We account for all stock options awarded to non-employees at the fair value of the consideration received or the fair value of the equity instrument issued, as calculated using the Black-Scholes model. We subject stock options granted to non-employees to periodic revaluation at each reporting date as the underlying equity instruments vest.
To estimate the value of share-based awards, we use the Black-Scholes model which requires the use of certain subjective assumptions. The most significant subjective assumptions are management’s estimates of the expected volatility and the expected term of the award. In addition, judgmentWe account for stock-based compensation of restricted stock units granted to employees based on the closing price of our common stock on the date of grant.
We recognize and amortize the fair value of stock-based awards, net of estimated forfeitures, over the applicable vesting period. Judgment is also required in estimating the amount of share-based awards that we expect to be forfeited. If actual results differ significantly from any of these estimates, stock-based compensation expense and our results of operations could be materially impacted.
Clinical Trial Accruals
OurWe base our clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites, as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations (“CROs”)CROs that conduct and manage clinical trials on our behalf.
We estimate clinical trial expenses based on the services performed pursuant to contracts with research institutions and CROs that conduct and manage clinical trials on our behalf.these contracts. In accruing service fees, we obtain the reported level of patient enrollment at each site and estimate the time periodtime-period over which services will be performed and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. We record payments made to third parties under these arrangements in advance of the receipt of the related services as prepaid expenses until the services are rendered.
Long-Term Debt
Long-term debt consists of our loan agreementRoyalty-Backed Loan with HealthCare Royalty Partners (“HCRP”). WeHCRP, accounted for the loan agreement as a debt financing arrangement. We accrue interest expense using the effective interest rate method over the estimated period we expect the debt willto be repaid. Debt issuance costs have been recorded as a debt discount in our consolidated balance sheets and are being amortized and recorded as interest expense throughout the life of the loan using the effective interest rate method. We must make certain assumptions and estimates, including future royalties and net product sales, in determining the expected repayment term, and amortization period of the debt discount, and accretion of interest expense, as well as the classification between current and long-term portions. We will base payment amounts to HCRP on actual royalties and net product sales. We periodically assess theseour assumptions and estimates, and adjust the liabilities accordingly.
Embedded Derivatives Related to Debt Instruments
EmbeddedWe evaluate and value embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the debt instrument. Under our loan agreement with HCRP, upon the occurrence of a default or a change in control, we may be required to make mandatory prepayments of the borrowings. The prepayment premium is considered an embedded derivative, as the holder of the loans may exercise the option to require prepayment by us.
Further, in the event of a regulatory change that results in a material adverse effect on HCRP’s rate of return, we shall pay directly to HCRP an amount that compensates HCRP for such reduction. We present the embedded derivative as a component of other non-current liabilities. We will remeasure the embedded derivatives each reporting period and report changes in the estimated fair value as gains or losses in interest and other income, net, in the condensedour consolidated statement of operations.
The model used in valuing the embedded derivative as a result of a change in control requires the use of significant estimates and assumptions including but not limited to: 1) expected cash flows we expect to receive on U.S. net sales of GOCOVRI and on royalties from Allergan on U.S. net sales of Namzaric; 2) our risk adjusted discount rates; and 3) the probability of a change in control occurring during the term of the note based on the percentage of similar companies that were acquired over the previous five year period. We evaluated the embedded derivative value as a result of an event of default and the value as a result of increased costs due to a regulatory change and considered both to have no material value based on current assessment of probability, but could become material in future periods if a specified event of default or regulatory change became more probable than is currently estimated. Results of operations
Fluctuations in Operating Results
Our results of operations have fluctuated from period to period in the past and are likely to continue to do so in the future. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including fluctuations in product sales due to variances in the number of paid prescriptions from period to period, conversions from our free drug trial program to paid prescriptions, and fluctuations in our Medicare Part D Coverage Gap liability and the volume of purchases eligible for government mandated discounts and rebates, as well as changes in discount percentages that may be impacted by potential future price increases and other factors. Further, we expect the timing of expenditures related to our commercial activities associated with GOCOVRI to vary from period to period, as well our development of ADS-5102 in additional indications and potential development of additional product candidates. Due to these fluctuations, we believe that the period to period comparisons of our operating results are not necessarily a good indication of our future performance.
Comparison of the years endedDecember 31, 20172019and20162018
The following table summarizes our results of operations for the years ended December 31, 20172019 and 20162018 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | Increase/ | | % Increase/ |
| 2019 | | 2018 | | (Decrease) | | (Decrease) |
Product sales | $ | 54,637 | | | $ | 34,046 | | | $ | 20,591 | | | 60 | % |
| | | | | | | |
Cost of product sales | 2,469 | | | 633 | | | 1,836 | | | 290 | % |
Research and development expenses | 30,034 | | | 39,300 | | | (9,266) | | | (24) | % |
Selling, general and administrative expenses, net | 114,369 | | | 109,135 | | | 5,234 | | | 5 | % |
Interest and other income, net | 2,093 | | | 3,115 | | | (1,022) | | | (33) | % |
Interest expense | 15,044 | | | 19,092 | | | (4,048) | | | (21) | % |
|
| | | | | | | | | | | | | | |
| December 31, | | Increase/ | | % Increase/ |
| 2017 | | 2016 | | (Decrease) | | (Decrease) |
Product sales, net | $ | 568 |
| | $ | — |
| | $ | 568 |
| | NM |
|
License and grant revenue | 3 |
| | 572 |
| | (569 | ) | | (99 | )% |
Cost of product sales | 17 |
| | — |
| | 17 |
| | NM |
|
Research and development expenses | 27,168 |
| | 31,230 |
| | (4,062 | ) | | (13 | )% |
Selling, general and administrative expenses, net | 61,312 |
| | 30,326 |
| | 30,986 |
| | 102 | % |
Interest and other income, net | 1,351 |
| | 811 |
| | 540 |
| | 67 | % |
Interest expense | 4,645 |
| | — |
| | 4,645 |
| | NM |
|
NM - Not meaningful.Product sales
Product sales net
Product sales, net, of $0.6increased by $20.6 million, or 60%, to $54.6 million for the year ended December 31, 2017, consists of sales of GOCOVRI, which was approved by the FDA on August 24, 2017. We commenced shipments of GOCOVRI during October 2017; however, we did not fully launch GOCOVRI with a deployed sales force until January 2018.
License and grant revenue
License and grant revenue decreased by $0.6 million, or 99%, to $3,000 for the year ended December 31, 20172019 from $0.6$34.0 million for the year ended December 31, 2016. Revenue2018, due to growth in sales of GOCOVRI since its launch, in addition to a 7.7% price increase that went into effect in January 2019. The approximate number of total paid prescriptions increased by 10,280, or 66%, to 25,780 for both periods presentedthe year ended December 31, 2019, from 15,500 for the year ended December 31, 2018.
The approximate number of total paid prescriptions in the first quarter of 2019 was primarily related to reimbursement5,820, in the second quarter of certain expenses as provided for2019 was 6,160, an increase of approximately 6% over the preceding quarter, in our license agreement with Allergan, as well as from government contractsthe third quarter of 2019 was 6,640, an increase of approximately 8% over the preceding quarter, and in 2016.the fourth quarter of 2019 was 7,160, an increase of approximately 8% over the preceding quarter.
Cost of product sales
Cost of product sales increased by $1.8 million to $2.5 million, or 5% of $17,000product sales, for the year ended December 31, 2017,2019, from $0.6 million, or 2% of product sales, for the year ended December 31, 2018. Included in cost of product sales for the year ended December 31, 2019, is a provision for the write-down of inventory, in addition to a one-time charge related to certain fill finish costs incurred after FDA approval related to the cost of GOCOVRI products sold. Prior to receivingamending our agreement with our CMO. We received regulatory approval for GOCOVRI from the FDA in August 2017,2017. Prior to receiving FDA approval, we recorded all inventory costs incurred in the manufacture of GOCOVRI to be sold upon commercialization as research and development expense. We expect to use inventory previously expensed to research and development over approximatelyby the next two years, and accordingly weend of the second quarter of 2020. We do not expect our cost of product sales of GOCOVRI to increase as a percentage of netproduct sales into exceed 6% for the foreseeable future, periods as we produce and then sell inventory that reflects the full cost of manufacturing the product.excluding potential unknown one-time charges.
Research and development expenses
Research and development expenses decreased by $4.1$9.3 million, or 13%24%, to $27.2$30.0 million for the year ended December 31, 2017,2019, from $31.2$39.3 million for the year ended December 31, 2016.2018. The decrease in research and development expenses was mainly attributable toto: decreased costs associated with the clinical development of GOCOVRI (formerly ADS-5102), which decreased by $5.0 million, or 20%, to $20.2 million from $25.2 million for the years ended December 31, 2017 and 2016, respectively, due to the conclusion of two Phase 3 clinical trials assessing GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease due to the conclusion of the two-year open-label study in the fourth quarter of 2018; in addition to decreased costs associated with the ongoing open-label safety study. The decrease was offset in part by increased activity related to clinical work associated with
the decision during the second quarter of 2019 to defer additional investment in the development of our product candidate ADS-4101 for the treatment of partial onset seizures in patients with epilepsy. Included in research and development expenses was stock-based compensation expense, which was $3.6$1.7 million compared to $2.9$2.8 million for the years ended December 31, 20172019 and 2016,2018, respectively.
Selling, general and administrative expenses, net
Selling, general and administrative expenses, net, increased by $31.0$5.2 million, or 102%5%, to $114.4 million for the year ended December 31, 2019, from $109.1 million for the year ended December 31, 2018, primarily due to increased costs of approximately $13.5 million for legal fees to defend our intellectual property, personnel related costs, other professional services, and general corporate expense. Included in this increase is a one-time recognition of approximately $4.0 million, consisting of $2.1 million of stock-based compensation and $1.9 million of termination benefits, related to a consulting agreement with our former Chief Executive Office. The increase was offset in part by a decrease of approximately $8.3 million for GOCOVRI related promotional costs, market research and other external service costs compared to the same period in the prior year in which we experienced higher costs associated with the full commercial launch of GOCOVRI.
Interest and other income, net
Interest and other income, net, decreased by $1.0 million, or 33%, to $2.1 million for the year ended December 31, 2019, from $3.1 million for the year ended December 31, 2018. The decrease in interest and other income, net, in the year ended 2019 was primarily driven by lower interest income earned on lower cash and investment balances.
Interest expense
Interest expense decreased by $4.0 million, or 21% to $15.0 million for the year ended December 31, 2019, compared to $19.1 million in the year ended December 31, 2018. The decrease in interest expense is mainly related to a lower estimated effective interest rate on our Royalty-Backed Loan with HCRP.
Comparison of the years endedDecember 31, 2018and 2017
The following table summarizes our results of operations for the years ended December 31, 2018 and 2017 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | Increase/ | | % Increase/ |
| 2018 | | 2017 | | (Decrease) | | (Decrease) |
Product sales, net | $ | 34,046 | | | $ | 568 | | | $ | 33,478 | | | NM | |
| | | | | | | |
Cost of product sales | 633 | | | 17 | | | 616 | | | NM | |
Research and development expenses | 39,300 | | | 27,168 | | | 12,132 | | | 45 | % |
Selling, general and administrative expenses, net | 109,135 | | | 61,312 | | | 47,823 | | | 78 | % |
Interest and other income, net | 3,115 | | | 1,351 | | | 1,764 | | | 131 | % |
Interest expense | 19,092 | | | 4,645 | | | 14,447 | | | 311 | % |
NM - Not meaningful.
Product sales
Product sales consist of sales of GOCOVRI, which the FDA approved on August 24, 2017. We commenced shipments of GOCOVRI during October 2017 and fully launched with a deployed sales force in January 2018. Product sales increased by $33.5 million to $34.0 million for the year ended December 31, 2018 from $0.6 million for the year ended December 31, 2017, due to growth in sales of GOCOVRI since its launch and recognizing a full fiscal year of sales.
Cost of product sales
Cost of product sales increased by $0.6 million to $0.6 million, or 2% of product sales, for the year ended December 31, 2018, from $17,000, or 3% of product sales, for the year ended December 31, 2017. We received regulatory approval for GOCOVRI from the FDA in August 2017 and cost of product sales were not incurred for the entire fiscal year 2017. Cost of product sales consists of certain fill finish costs incurred after FDA approval related to the cost of GOCOVRI products sold, in addition to certain distribution and overhead costs. Prior to receiving FDA approval, we recorded all inventory costs incurred in the manufacture of GOCOVRI to be sold upon commercialization as research and development expense.
Research and development expenses
Research and development expenses increased by $12.1 million, or 45%, to $39.3 million for the year ended December 31, 2018, from $27.2 million for the year ended December 31, 2017. The increase in research and development expenses was mainly attributable to our Phase 3 study in support of ADS-5102 for the treatment of walking impairment in patients with multiple sclerosis. In addition, we incurred increased costs related to early stage programs. The increase was offset in part by decreased costs associated with GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease related to lower manufacturing costs, due to our policy of expensing such costs prior to regulatory approval and capitalizing such costs thereafter, in addition to lower clinical costs due to the conclusion of the two-year Phase 3 open-label study of GOCOVRI. Included in research and development expenses was stock-based compensation expense, which was $2.8 million compared to $3.6 million for the years ended December 31, 2018 and 2017, respectively.
Selling, general and administrative expenses, net
Selling, general and administrative expenses, net, increased by $47.8 million, or 78%, to $109.1 million for the year ended December 31, 2018, from $61.3 million for the year ended December 31, 2017, from $30.3 million for the year ended December 31, 2016. The increase in selling, general and administrative expenses, net, was primarily due to increased costs associated with the commercialization of GOCOVRI, which we made available for physician and patient use in the fourth quarter of 2017 although weand commenced the full commercial launch in January 2018. The overall increase consists of a $10.2$17.7 million increase for personnel related costs, including $2.1$3.2 million for stock-based compensation expense, mainly due to additional headcount, and a $20.8$30.1 million increase for expenses including GOCOVRI launch preparationpromotional costs, market research, legal fees to defend our intellectual property, and other professional services.
Interest and other income, net
Interest and other income, net, increased by $0.5$1.8 million, or 67%131%, to $3.1 million for the year ended December 31, 2018, from $1.4 million for the year ended December 31, 2017, from $0.8 million for the year ended December 31, 2016.2017. The increase in interest and other income, net, in the year ended 20172018 was primarily due to interest income earned on investments as a result of investing the cash from our follow-on public offering that occurred in January 2018, offset in part by a change in fair value of the embedded derivative liability related to our Royalty-Backed Loan with HCRP. Also included in interest and other income, net, is interest income earned on investments.
Interest expense
The increase in interestInterest expense of $4.6increased by $14.4 million, or 311%, to $19.1 million for the year ended December 31, 2017,2018, compared to zero$4.6 million in the year ended December 31, 2016, was2017, due to the interest expense incurred on the $100 million Royalty-Backed Loan entered into in May 2017 and borrowed in two tranches: $35 million in May 2017 and $65 million in December 2017.
Comparison of the years endedDecember 31, 2016and 2015
The following table summarizes our results of operations for the years ended December 31, 2016 and 2015 (in thousands, except percentages):
|
| | | | | | | | | | | | | | |
| December 31, | | Increase/ | | % Increase/ |
| 2016 | | 2015 | | (Decrease) | | (Decrease) |
License and grant revenue | $ | 572 |
| | $ | 1,916 |
| | $ | (1,344 | ) | | (70 | )% |
Research and development expenses | 31,230 |
| | 35,895 |
| | (4,665 | ) | | (13 | )% |
Selling, general and administrative expenses, net | 30,326 |
| | 23,458 |
| | 6,868 |
| | 29 | % |
Interest and other income, net | 811 |
| | 363 |
| | 448 |
| | (123 | )% |
License and grant revenue
License and grant revenue decreased by $1.3 million, or 70%, to $0.6 million for the year ended December 31, 2016, from $1.9 million for the year ended December 31, 2015. Revenue for both periods in 2016 and 2015 was primarily related to reimbursement of certain expenses as provided for in our license agreement with Allergan, as well as from government contracts.
Research and development expenses
Research and development expenses decreased by $4.7 million, or 13%, to $31.2 million for the year ended December 31, 2016 from $35.9 million for the year ended December 31, 2015. The decrease in research and development expenses was mainly attributable to costs associated with the clinical development of GOCOVRI (formerly ADS-5102), which decreased by $7.0 million, or 22%, to $25.2 million from $32.2 million for the years ended December 31, 2016 and 2015, respectively, due to the conclusion of two Phase 3 clinical trials assessing GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease. The decrease was offset in part by increased efforts to support the preparation of the new drug application for GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease, in addition to increased expenses related to preclinical and clinical work associated with ADS-4101 for the treatment of partial onset seizures in patients with epilepsy in 2016 over the prior year period. Research and
development expenses associated with other indications of ADS-5102 were flat year over year when comparing 2016 to 2015. Included in research and development expenses was stock-based compensation expense, which was $2.9 million compared to $3.2 million for the years ended December 31, 2016 and 2015, respectively.
We began capitalizing inventory manufactured at the FDA approved location upon FDA approval of GOCOVRI in August 2017. Inventory acquired prior to the regulatory approval was recorded as research and development expense. We expect to use inventory expensed to research and development over approximately the next two years, and accordingly we would expect our cost of GOCOVRI product sales to increase as a percentage of net sales of GOCOVRI in future periods.
Selling, general and administrative expenses, net
Selling, general and administrative expenses, net, increased by $6.9 million, or 29%, to $30.3 million for the year ended December 31, 2016 from $23.5 million for the year ended December 31, 2015. The increase in selling, general and administrative expenses was primarily due to increased costs associated with establishing commercial capabilities in anticipation of the commercial launch of GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease, including an increase in headcount-related expenses. Selling, general and administrative expenses also included stock-based compensation expense of $7.7 million compared to $6.8 million for the years ended December 31, 2016 and 2015, respectively.
Interest and other income, net
Interest and other income, net, increased by $0.4 million or 123%, to $0.8 million for the year ended December 31, 2016 from $0.4 million for the year ended December 31, 2015. Net interest income is primarily due to interest income earned on investments.the two tranches of the Royalty-Backed Loan being outstanding for the full year 2018 as compared to only portions of 2017.
Liquidity capital resources and plan of operationCapital Resources
During the last three fiscal years, we have funded our operations primarily through sales of our common stock, our Royalty-Backed Loan with HCRP, and to a lesser extent through our license agreement with Allergan.sales of GOCOVRI. In June 2015,May 2017, we entered into a Controlled Equity Offering Sales Agreement, pursuant to whichRoyalty-Backed Loan with HCRP, whereby we issued 509,741 shares of common stock and raised net proceeds of $9.7initially borrowed $35.0 million, prior tofollowed by an additional $65.0 million received in the termination of the agreement in November 2016.fourth quarter 2017. In January 2016,2018, we completed a follow-on public offering of 2,875,000 shares ofour common stock from which includes the exercise in full by the underwriters of their option to purchase 375,000 shares of common stock, at an offering price of $23.00 per share. Proceeds from the follow-on public offeringproceeds raised were approximately $61.8$134.3 million, net of underwriting discounts, commissions, and offering-related transaction costs.
In May 2017,November 2019, we entered into a sales agreement with Cowen and Company, LLC, pursuant to which we may, from time to time, issue and sell shares of common stock having an aggregate offering value of up theto $50.0 million. As of December 31, 2017,2019, no shares had been sold under the sales agreement. Also in May 2017, we entered into a Royalty-Backed Loan with HCRP, whereby we initially borrowed $35.0 million, followed by an additional $65.0 million received in the fourth quarter 2017 upon FDA approval and FDA’s recognition in the Orange Book of the seven-year orphan drug exclusivity that GOCOVRI earned upon approval on August 24, 2017, for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications.
In January 2018, we completed a follow-on public offering of 3,450,000 shares of our common stock, which includes the exercise in full by the underwriters of their option to purchase 450,000 shares of common stock, at an offering price of $41.50 per share. Proceeds from the follow-on public offering were approximately $134.1 million, net of underwriting discounts, commissions, and offering-related transaction costs.
We made GOCOVRI available for physician and patient use in the fourth quarter of 2017, with a full commercial launch via the deployment of our sales team in January 2018. Prior to the generation of revenue from GOCOVRI, we had not generated any commercial revenue from the sale of our products. We expect to incur substantial and increasing losses for the foreseeable future. Our principal sources of liquidity were our cash, cash equivalents, and investments, which totaled $176.4$132.6 million and $135.9$210.9 million at December 31, 20172019 and 2016,2018, respectively.
We believe our existing cash, cash equivalents, and investments will be sufficient to fund our projected operating requirements, including operations related to the continued development of our product candidates and commercialization of GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease and operations related to the continued development of ADS-5102 for other indications including MSW, for at least 12 months from the issuance of this annual report on Form 10-K. However, it is possible that we will not achieve the progress that we expect, because revenues from GOCOVRI may be less than anticipated and the actual costs and timing of drug development, particularly clinical studies, and regulatory approvals are difficult to predict, subject to substantial risks and delays, and often vary depending on the particular indication and development strategy. Moreover, the costs associated with commercializing drugs are high and market acceptance is uncertain.
We expect to incur substantial expenses and operating losses for the foreseeable future. We expect to continue significant spending in connection with the development and commercialization of GOCOVRI and our product candidates, particularly for the commercialization of GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease, as well as the development of ADS-5102 for other indications, the development of ADS-4101 for indications in epilepsy, for which Phase 3 clinical trials are expected to be initiated in 2019, and potential development of additional product candidates.To continue these activities, we may decide to raise additional funds through a combination of public or private equity offerings, debt financings, royalty financings, collaborations, strategic alliances, licensing arrangements, asset sales, and other marketing and distribution arrangements. Sufficient additional funding may not be available on acceptable terms, or at all. If adequate funds are not available in the future, we may need to delay, reduce the scope of, or put on hold our clinical studies, research and development programs, or commercialization efforts.
The following table summarizes our cash flows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
Net cash (used in) provided by: | | | | | |
Operating activities | $ | (80,779) | | | $ | (104,223) | | | $ | (66,827) | |
Investing activities | 88,863 | | | (69,338) | | | 25,565 | |
Financing activities | 1,085 | | | 138,850 | | | 108,843 | |
Net increase (decrease) in cash and cash equivalents | $ | 9,169 | | | $ | (34,711) | | | $ | 67,581 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Net cash (used in) provided by: | | | | | |
Operating activities | $ | (66,827 | ) | | $ | (48,068 | ) | | $ | (47,210 | ) |
Investing activities | 25,565 |
| | (26,709 | ) | | 8,058 |
|
Financing activities | 108,843 |
| | 65,408 |
| | 10,810 |
|
Net increase (decrease) in cash and cash equivalents | $ | 67,581 |
| | $ | (9,369 | ) | | $ | (28,342 | ) |
Net Cash Used In Operating Activities
Net cash used in operating activities was $80.8 million for the year ended December 31, 2019 and consisted primarily of our net loss of $105.2 million less non-cash adjustments of $29.6 million, mainly for stock-based compensation of $12.9 million and interest expense of $15.0 million, in addition to payments related to our Royalty-Backed Loan with HCRP of $6.5 million.
Net cash used in operating activities was $104.2 million for the year ended December 31, 2018. Net loss of $131.0 million for the year ended December 31, 2018, included net non-cash adjustments of $36.5 million, which consisted primarily of stock-based compensation of $15.8 million and interest expense of $19.1 million. The use of cash for the year ended December 31, 2018, was primarily related to commercialization activities for GOCOVRI. Additionally, we used cash to fund research and development programs, including the development of ADS-5102 for the treatment of walking impairment in patients with multiple sclerosis and ADS-4101 for indications in epilepsy.
Net cash used in operating activities was $66.8 million for the year ended December 31, 2017. Net loss of $89.5 million for the year ended December 31, 2017, included net non-cash adjustments of $19.4 million, which consisted primarily of stock-based compensation of $13.4 million and non-cash interest expense of $4.6 million. The primary use of cash for the year ended December 31, 2017, was to fund activities in support of the NDA and pre-commercial activities in preparation for the commercialization of GOCOVRI. Additionally, we used cash to fund development of ADS-4101 for indications in epilepsy.
Net Cash Provided By (Used In) Investing Activities
Net cash used in operatingprovided by investing activities was $48.1$88.9 million for the year ended December 31, 2016. 2019, primarily as a result of net maturities of available-for-sale securities.
Net loss of $60.1cash used in investing activities was $69.3 million for the year ended December 31, 2016, included2018, as a result of net non-cash adjustmentspurchases of $11.1available-for-sale securities of $68.3 million primarily related to $10.6 millionand purchases of stock-based compensation. The primary useproperty and equipment of cash for the year ended December 31, 2016, was to fund the ongoing clinical studies and product development activities related to GOCOVRI.
Net cash used in operating activities was $47.2 million for the year ended December 31, 2015. Net loss of $51.8 million for the year ended December 31, 2015, included net non-cash adjustments of $11.3 million, which consisted primarily of stock-based compensation of $10.0$1.1 million. The primary use of cash was to fund the ongoing clinical studies and product development activities related to GOCOVRI.
Net Cash Provided By (Used In) Investing Activities
Net cash provided by investing activities was $25.6 million for the year ended December 31, 2017. In the year ended December 31, 2017, we received $26.8 million as a result of net maturities of available-for-sale securities, offset in part by $1.3 million in purchases of property and equipment.
Net cash used in investing activities was $26.7 million for the year ended December 31, 2016. Net cash used in investing activities for the year ended December 31, 2016 was a result of $25.1 million in net purchases of available-for-sale securities as a result of investing the cash from our follow-on public offering that occurred in January 2016, and $1.6 million in purchases of property and equipment.
Net cash provided by investing activities was $8.1 million for the year ended December 31, 2015. Net cash provided by investing activities for the year ended 2015 was a result of $9.5 million in net maturities of available-for-sale securities and $1.4 million in purchases of property and equipment.
Net Cash Provided By Financing Activities
Net cash provided by financing activities was $108.8$1.1 million for the year ended December 31, 2017. In the year ended December 31, 2017, we received net proceeds2019, as a result of $99.6 million from the issuance of long-term debt and received cash proceeds of $9.9 million related to the exercise of stock options and purchases of common stock under the Employee Stock Purchase Plan (ESPP).
Net cash provided by financing activities was $65.4$138.9 million for the year ended December 31, 2016.2018. In the year ended December 31, 2016,2018, we received net cash proceeds of $61.8$134.3 million related to the sale of common stock under a follow-on public offering, coupled with $3.6offering; in addition, we received cash proceeds of $4.6 million related to the exercise of stock options and purchases of common stock under the ESPP.
Net cash provided by financing activities was $10.8$108.8 million for the year ended December 31, 2015.2017. In the year ended December 31, 20152017, we received net cash proceeds of $9.7$99.6 million related tofrom the saleissuance of common stock under a controlled equity offering coupled with $1.2long-term debt and $9.9 million related to the exercise of stock options and from purchases of common stock under the ESPP.
Off-balance sheet arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities, or variable interest entities.
Contractual obligations
Our future non-cancelable contractual obligations at December 31, 2017,2019, were as follows (in thousands):
| | | | | | | | | | | | | | | | Payments Due by Period | |
| | | Payments Due by Period | | Total | | Less than 1 year | | 2 - 3 years | | 4 - 5 years | | More than 5 years |
| Total | | Less than 1 Year | | 2 - 3 Years | | 4 - 5 Years | | More than 5 Years | |
Contractual obligations: | | | | | | | | | | |
Operating lease obligations | $ | 1,510 |
| | $ | 633 |
| | $ | 877 |
| | $ | — |
| | $ | — |
| Operating lease obligations | $ | 12,836 | | | $ | 2,603 | | | $ | 5,041 | | | $ | 4,428 | | | $ | 764 | |
Purchase commitments | 4,882 |
| | 3,149 |
| | 1,733 |
| | — |
| | — |
| Purchase commitments | 3,990 | | | 3,990 | | | — | | | — | | | — | |
Long-term debt | | Long-term debt | 190,932 | | | 2,041 | | | — | | | — | | | 188,891 | |
Total contractual obligations | $ | 6,392 |
| | $ | 3,782 |
| | $ | 2,610 |
| | $ | — |
| | $ | — |
| Total contractual obligations | $ | 207,758 | | | $ | 8,634 | | | $ | 5,041 | | | $ | 4,428 | | | $ | 189,655 | |
Operating Lease Obligations
Operating lease obligations in the table above relates toinclude our office facilities. We lease approximately 18,500 square feet offacilities, vehicles, and office space in Emeryville, California under a lease that expires April 30, 2020. On January 16, 2018, we amended our lease agreement to relocate within the current building and increase our leased space to approximately 37,626 square feet. The amended lease agreement expires April 30, 2025. We expect to relocate the company no later than the second quarter of 2018.equipment.
Purchase Commitments
We enter into certain other long-term commitments for the supply of API, the manufacture of commercial supply of GOCOVRI, and other agreements for the provision of services, including services related to data access and packaging. To the extent these long-term commitments are non-cancelable, they are reflected in the above table. We also
enter into contracts in the normal course of business that generally provide for termination upon notice, and therefore are not reflected in the table above.
Long-term debt consists of our Royalty-Backed Loan with HCRP. Under the terms of the Royalty-Backed Loan, our principal payments are entirely variable, with no fixed minimums, payable based on U.S. net sales of GOCOVRI and based on royalties from Allergan on U.S. net sales of Namzaric. See “Note 10 - Long-Term Debt” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report for additional information on our Royalty-Backed Loan. Total payment obligations, including both principal and interest, are included in the above table. The long-term portion is included based on the contractual loan maturity date of December 2026.
Recent Accounting Pronouncements
For a discussion of new accounting pronouncements, see “Note 2 - Basis of Presentation and Summary of Significant Accounting Policies” in the accompanying “Notes to Consolidated Financial Statements” in this annual report.Annual Report.
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objectiveWe are a smaller reporting company as defined by Rule 12b-2 of our investment activities isthe Securities Exchange Act of 1934 and are not required to preserve our capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. As of December 31, 2017, we had cash, cash equivalents, and investments of $176.4 million, consisting of cash and cash equivalents, as well as short and long-term investment grade available-for-sale securities. In January 2018, we raised an additional $134.1 million fromprovide the sale of 3,450,000 shares of common stock. A portion of our investments may be subject to interest rate risk and could fall in value if market interest rates increase. However, because our investments are primarily short-term in duration and our holdings in US government bonds and corporate debt securities mature prior to our expected need for liquidity, we believe that our exposure to interest rate risk is not significant and, as a consequence, a 1% movement in market interest rates would not have a significant impact on the total value of our portfolio. We actively monitor changes in interest rates.information under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ADAMAS PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Consolidated Financial Statements | |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Adamas Pharmaceuticals, Inc.
Opinion
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Adamas Pharmaceuticals, Inc. and its subsidiaries (the “Company”) as of December 31, 20172019 and December 31, 2016,2018, and the related consolidated statements of operations, of comprehensive loss, of stockholders’ equity (deficit), and of cash flows for each of the three years in the period ended December 31, 2017,2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and December 31, 2016,2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for OpinionOpinions
TheseThe Company’s management is responsible for these consolidated financial statements, are the responsibilityfor maintaining effective internal control over financial reporting, and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinionopinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding offraud, and whether effective internal control over financial reporting but not for the purpose of expressing an opinion on the effectivenesswas maintained in all material respects.
Our audits of the Company's internal control overconsolidated financial reporting. Accordingly, we express no such opinion.
Our auditsstatements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 22, 201825, 2020
We have served as the Company’s auditor since 2007.
ADAMAS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | | December 31, | | December 31, | |
| 2017 | | 2016 | | 2019 | | 2018 |
Assets | | | | Assets | | | |
Current assets | | | | Current assets | | | |
Cash and cash equivalents | $ | 91,316 |
| | $ | 23,735 |
| Cash and cash equivalents | $ | 65,774 | | | $ | 56,605 | |
Available-for-sale securities | 82,126 |
| | 89,917 |
| Available-for-sale securities | 66,833 | | | 154,265 | |
Accounts receivable, net | 367 |
| | 794 |
| Accounts receivable, net | 5,770 | | | 5,511 | |
Inventory | 1,704 |
| | — |
| Inventory | 5,267 | | | 5,121 | |
Prepaid expenses and other current assets | 3,662 |
| | 2,541 |
| Prepaid expenses and other current assets | 6,676 | | | 6,871 | |
Total current assets | 179,175 |
| | 116,987 |
| Total current assets | 150,320 | | | 228,373 | |
Property and equipment, net | 3,132 |
| | 3,156 |
| Property and equipment, net | 2,449 | | | 3,652 | |
Available-for-sale securities, non-current | 2,991 |
| | 22,292 |
| |
Other assets | 878 |
| | 38 |
| |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 8,048 | | | — | |
| Prepaid expenses and other non-current assets | | Prepaid expenses and other non-current assets | 1,341 | | | 2,789 | |
Total assets | $ | 186,176 |
| | $ | 142,473 |
| Total assets | $ | 162,158 | | | $ | 234,814 | |
Liabilities and stockholders’ equity | | | | |
Liabilities and stockholders’ equity (deficit) | | Liabilities and stockholders’ equity (deficit) | | | |
Current liabilities | | | | Current liabilities | | | |
Accounts payable | $ | 3,878 |
| | $ | 3,589 |
| Accounts payable | $ | 6,932 | | | $ | 6,570 | |
Accrued liabilities | 12,385 |
| | 5,867 |
| Accrued liabilities | 16,117 | | | 15,530 | |
Current portion of long-term debt | | Current portion of long-term debt | 2,041 | | | 1,664 | |
Other current liabilities | 344 |
| | 287 |
| Other current liabilities | 1,858 | | | 512 | |
Total current liabilities | 16,607 |
| | 9,743 |
| Total current liabilities | 26,948 | | | 24,276 | |
Long-term debt | 102,647 |
| | — |
| Long-term debt | 125,674 | | | 117,457 | |
Long-term portion of operating lease liabilities | | Long-term portion of operating lease liabilities | 8,272 | | | — | |
Other non-current liabilities | 796 |
| | 547 |
| Other non-current liabilities | 2,157 | | | 3,196 | |
Total liabilities | 120,050 |
| | 10,290 |
| Total liabilities | 163,051 | | | 144,929 | |
Commitments and Contingencies (Note 8) |
| |
| |
Stockholders’ equity | | | | |
Preferred stock, $0.001 par value — 5,000,000 shares authorized, and zero shares issued and outstanding at December 31, 2017 and December 31, 2016 | — |
| | — |
| |
Common stock, $0.001 par value — 100,000,000 shares authorized, 23,320,551 and 22,013,644 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively | 28 |
| | 27 |
| |
Commitments and Contingencies (Note 9) | | Commitments and Contingencies (Note 9) | | | |
Stockholders’ equity (deficit) | | Stockholders’ equity (deficit) | |
Preferred stock, $0.001 par value — 5,000,000 shares authorized, and 0 shares issued and outstanding at December 31, 2019 and December 31, 2018 | | Preferred stock, $0.001 par value — 5,000,000 shares authorized, and 0 shares issued and outstanding at December 31, 2019 and December 31, 2018 | — | | | — | |
Common stock, $0.001 par value — 100,000,000 shares authorized, 27,964,778 and 27,434,358 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively | | Common stock, $0.001 par value — 100,000,000 shares authorized, 27,964,778 and 27,434,358 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively | 33 | | | 32 | |
Additional paid-in capital | 277,964 |
| | 254,558 |
| Additional paid-in capital | 446,942 | | | 432,815 | |
Accumulated other comprehensive loss | (167 | ) | | (193 | ) | |
Accumulated other comprehensive gain (loss) | | Accumulated other comprehensive gain (loss) | 16 | | | (264) | |
Accumulated deficit | (211,699 | ) | | (122,209 | ) | Accumulated deficit | (447,884) | | | (342,698) | |
Total stockholders’ equity | 66,126 |
| | 132,183 |
| |
Total liabilities and stockholders’ equity | $ | 186,176 |
| | $ | 142,473 |
| |
Total stockholders’ equity (deficit) | | Total stockholders’ equity (deficit) | (893) | | | 89,885 | |
Total liabilities and stockholders’ equity (deficit) | | Total liabilities and stockholders’ equity (deficit) | $ | 162,158 | | | $ | 234,814 | |
The accompanying notes are an integral part of these consolidated financial statements.
ADAMAS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | Years Ended December 31, | | Years Ended December 31, | |
| 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Revenues: | | | | | | Revenues: | | | | | |
Product sales, net | $ | 568 |
| | $ | — |
| | $ | — |
| |
Product sales | | Product sales | $ | 54,637 | | | $ | 34,046 | | | $ | 568 | |
License and grant revenue | 3 |
| | 572 |
| | 1,916 |
| License and grant revenue | — | | | — | | | 3 | |
Total net revenues | 571 |
| | 572 |
| | 1,916 |
| |
Total revenues | | Total revenues | 54,637 | | | 34,046 | | | 571 | |
Costs and operating expenses: | | | | | | Costs and operating expenses: | | | | | |
Cost of product sales | 17 |
| | — |
| | — |
| Cost of product sales | 2,469 | | | 633 | | | 17 | |
Research and development | 27,168 |
| | 31,230 |
| | 35,895 |
| Research and development | 30,034 | | | 39,300 | | | 27,168 | |
Selling, general and administrative, net | 61,312 |
| | 30,326 |
| | 23,458 |
| Selling, general and administrative, net | 114,369 | | | 109,135 | | | 61,312 | |
Total costs and operating expenses | 88,497 |
| | 61,556 |
| | 59,353 |
| Total costs and operating expenses | 146,872 | | | 149,068 | | | 88,497 | |
Loss from operations | (87,926 | ) | | (60,984 | ) | | (57,437 | ) | Loss from operations | (92,235) | | | (115,022) | | | (87,926) | |
Interest and other income, net | 1,351 |
| | 811 |
| | 363 |
| Interest and other income, net | 2,093 | | | 3,115 | | | 1,351 | |
Interest expense | (4,645 | ) | | — |
| | — |
| Interest expense | (15,044) | | | (19,092) | | | (4,645) | |
Loss before income taxes | (91,220 | ) | | (60,173 | ) | | (57,074 | ) | Loss before income taxes | (105,186) | | | (130,999) | | | (91,220) | |
Benefit for income taxes | (1,730 | ) | | (115 | ) | | (5,272 | ) | Benefit for income taxes | — | | | — | | | (1,730) | |
Net loss | $ | (89,490 | ) | | $ | (60,058 | ) | | $ | (51,802 | ) | Net loss | $ | (105,186) | | | $ | (130,999) | | | $ | (89,490) | |
| Net loss per share, basic and diluted | $ | (3.97 | ) | | $ | (2.77 | ) | | $ | (2.86 | ) | Net loss per share, basic and diluted | $ | (3.80) | | | $ | (4.87) | | | $ | (3.97) | |
| Weighted average shares used in computing net loss per share, basic and diluted | 22,558 |
| | 21,711 |
| | 18,111 |
| Weighted average shares used in computing net loss per share, basic and diluted | 27,677 | | | 26,886 | | | 22,558 | |
|
The accompanying notes are an integral part of these consolidated financial statements.
ADAMAS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OFCOMPREHENSIVE LOSS
(in thousands)
| | | Years Ended December 31, | | Years Ended December 31, | |
| 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Net loss | $ | (89,490 | ) | | $ | (60,058 | ) | | $ | (51,802 | ) | Net loss | $ | (105,186) | | | $ | (130,999) | | | $ | (89,490) | |
Unrealized gain (loss) on available-for-sale securities | 26 |
| | (35 | ) | | 22 |
| Unrealized gain (loss) on available-for-sale securities | 280 | | | (97) | | | 26 | |
Comprehensive loss | $ | (89,464 | ) | | $ | (60,093 | ) | | $ | (51,780 | ) | Comprehensive loss | $ | (104,906) | | | $ | (131,096) | | | $ | (89,464) | |
The accompanying notes are an integral part of these consolidated financial statements.
ADAMAS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)
| | | | | | | | | | | | | | | Common Stock | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Gain (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders’ Equity | | Shares | | Amount | | | | | | | | |
| Shares | | Amount | | |
Balances at December 31, 2014 | 17,551,375 |
| | $ | 22 |
| | $ | 157,581 |
| | $ | (180 | ) | | $ | (10,349 | ) | | $ | 147,074 |
| |
Exercise of stock options | 409,683 |
| | — |
| | 761 |
| | — |
| | — |
| | 761 |
| |
Vesting of common stock | — |
| | — |
| | 112 |
| | — |
| | — |
| | 112 |
| |
Issuance of common stock in conjunction with Controlled Equity Offering, net of commissions and issuance costs | 509,741 |
| | 1 |
| | 9,656 |
| | — |
| | — |
| | 9,657 |
| |
Issuance of common stock in conjunction with warrant exercises | 3,484 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Net unrealized gain on available-for-sale securities | — |
| | — |
| | — |
| | 22 |
| | — |
| | 22 |
| |
Stock issued under employee stock purchase plan | 31,179 |
| | — |
| | 407 |
| | — |
| | — |
| | 407 |
| |
Stock-based compensation | — |
| | — |
| | 9,956 |
| | — |
| | — |
| | 9,956 |
| |
Net loss | — |
| | — |
| | — |
| | — |
| | (51,802 | ) | | (51,802 | ) | |
Balances at December 31, 2015 | 18,505,462 |
| | $ | 23 |
| | $ | 178,473 |
| | $ | (158 | ) | | $ | (62,151 | ) | | $ | 116,187 |
| |
Exercise of stock options | 586,956 |
| | 1 |
| | 3,041 |
| | — |
| | — |
| | 3,042 |
| |
Vesting of common stock | — |
| | — |
| | 34 |
| | — |
| | — |
| | 34 |
| |
Issuance of common stock in conjunction with Secondary Offering, net of commissions and issuance costs | 2,875,000 |
| | 3 |
| | 61,819 |
| | — |
| | — |
| | 61,822 |
| |
Net unrealized loss on available-for-sale securities | — |
| | — |
| | — |
| | (35 | ) | | — |
| | (35 | ) | |
Stock issued under employee stock purchase plan | 46,226 |
| | — |
| | 620 |
| | — |
| | — |
| | 620 |
| |
Stock-based compensation | — |
| | — |
| | 10,571 |
| | — |
| | — |
| | 10,571 |
| |
Net loss | — |
| | — |
| | — |
| | — |
| | (60,058 | ) | | (60,058 | ) | |
| Balances at December 31, 2016 | 22,013,644 |
| | $ | 27 |
| | $ | 254,558 |
| | $ | (193 | ) | | $ | (122,209 | ) | | $ | 132,183 |
| Balances at December 31, 2016 | 22,013,644 | | | $ | 27 | | | $ | 254,558 | | | $ | (193) | | | $ | (122,209) | | | $ | 132,183 | |
Exercise of stock options | 1,183,353 |
| | 1 |
| | 9,033 |
| | — |
| | — |
| | 9,034 |
| Exercise of stock options | 1,183,353 | | | 1 | | | 9,033 | | | — | | | — | | | 9,034 | |
Restricted stock units vested | 64,471 |
| | — |
| | 201 |
| | — |
| | — |
| | 201 |
| Restricted stock units vested | 64,471 | | | — | | | 201 | | | — | | | — | | | 201 | |
Stock issued under employee stock purchase plan | 59,083 |
| | — |
| | 766 |
| | — |
| | — |
| | 766 |
| Stock issued under employee stock purchase plan | 59,083 | | | — | | | 766 | | | — | | | — | | | 766 | |
Net unrealized gain on available-for-sale securities | — |
| | — |
| | — |
| | 26 |
| | — |
| | 26 |
| Net unrealized gain on available-for-sale securities | — | | | — | | | — | | | 26 | | | — | | | 26 | |
Stock-based compensation | — |
| | — |
| | 13,406 |
| | — |
| | — |
| | 13,406 |
| Stock-based compensation | — | | | — | | | 13,406 | | | — | | | — | | | 13,406 | |
Net loss | — |
| | — |
| | — |
| | — |
| | (89,490 | ) | | (89,490 | ) | Net loss | — | | | — | | | — | | | — | | | (89,490) | | | (89,490) | |
Balances at December 31, 2017 | 23,320,551 |
| | $ | 28 |
| | $ | 277,964 |
| | $ | (167 | ) | | $ | (211,699 | ) | | $ | 66,126 |
| Balances at December 31, 2017 | 23,320,551 | | | $ | 28 | | | $ | 277,964 | | | $ | (167) | | | $ | (211,699) | | | $ | 66,126 | |
Issuance of common stock in conjunction with Secondary Offering, net of commissions and issuance costs | | Issuance of common stock in conjunction with Secondary Offering, net of commissions and issuance costs | 3,450,000 | | | 4 | | | 134,264 | | | — | | | — | | | 134,268 | |
Exercise of stock options | | Exercise of stock options | 478,454 | | | — | | | 3,362 | | | — | | | — | | | 3,362 | |
Restricted stock units vested | | Restricted stock units vested | 105,396 | | | — | | | — | | | — | | | — | | | — | |
Stock issued under employee stock purchase plan | | Stock issued under employee stock purchase plan | 79,957 | | | — | | | 1,237 | | | — | | | — | | | 1,237 | |
Net unrealized loss on available-for-sale securities | | Net unrealized loss on available-for-sale securities | — | | | — | | | — | | | (97) | | | — | | | (97) | |
Stock-based compensation | | Stock-based compensation | — | | | — | | | 15,988 | | | — | | | — | | | 15,988 | |
Net loss | | Net loss | — | | | — | | | — | | | — | | | (130,999) | | | (130,999) | |
Balances at December 31, 2018 | | Balances at December 31, 2018 | 27,434,358 | | | $ | 32 | | | $ | 432,815 | | | $ | (264) | | | $ | (342,698) | | | $ | 89,885 | |
Exercise of stock options | | Exercise of stock options | 184,626 | | | — | | | 293 | | | — | | | — | | | 293 | |
Restricted stock units vested | | Restricted stock units vested | 151,288 | | | — | | | — | | | — | | | — | | | — | |
Stock issued under employee stock purchase plan | | Stock issued under employee stock purchase plan | 194,506 | | | 1 | | | 774 | | | — | | | — | | | 775 | |
Net unrealized gain on available-for-sale securities | | Net unrealized gain on available-for-sale securities | — | | | — | | | — | | | 280 | | | — | | | 280 | |
Stock-based compensation | | Stock-based compensation | — | | | — | | | 13,060 | | | — | | | — | | | 13,060 | |
Net loss | | Net loss | — | | | — | | | — | | | — | | | (105,186) | | | (105,186) | |
Balances at December 31, 2019 | | Balances at December 31, 2019 | 27,964,778 | | | $ | 33 | | | $ | 446,942 | | | $ | 16 | | | $ | (447,884) | | | $ | (893) | |
The accompanying notes are an integral part of these consolidated financial statements.
ADAMAS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | Years Ended December 31, | | Years Ended December 31, | |
| 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Cash flows from operating activities | | | | | | Cash flows from operating activities | | | | | |
Net loss | $ | (89,490 | ) | | $ | (60,058 | ) | | $ | (51,802 | ) | Net loss | $ | (105,186) | | | $ | (130,999) | | | $ | (89,490) | |
Adjustments to reconcile net loss to net cash used in operating activities | | | | | | Adjustments to reconcile net loss to net cash used in operating activities | | | | | |
Depreciation | 1,194 |
| | 808 |
| | 435 |
| Depreciation | 1,214 | | | 1,460 | | | 1,194 | |
Stock-based compensation | 13,367 |
| | 10,571 |
| | 9,956 |
| Stock-based compensation | 12,852 | | | 15,786 | | | 13,367 | |
Non-cash interest expense | 4,645 |
| | — |
| | — |
| |
Accretion of interest expense | | Accretion of interest expense | 15,044 | | | 19,092 | | | 4,645 | |
Change in fair value of embedded derivative liability | (294 | ) | | — |
| | — |
| Change in fair value of embedded derivative liability | 805 | | | 882 | | | (294) | |
| Net accretion of discounts and amortization of premiums of available-for-sale securities | 456 |
| | (301 | ) | | 875 |
| Net accretion of discounts and amortization of premiums of available-for-sale securities | (1,219) | | | (1,045) | | | 456 | |
Loss on disposal of fixed assets | | Loss on disposal of fixed assets | — | | | 123 | | | — | |
Provision for write-down of inventory | | Provision for write-down of inventory | 884 | | | 232 | | | — | |
Changes in assets and liabilities | | | | | | Changes in assets and liabilities | |
Accrued interest of available-for-sale securities | (161 | ) | | (2 | ) | | 110 |
| Accrued interest of available-for-sale securities | 50 | | | 74 | | | (161) | |
Accounts receivable, net | | Accounts receivable, net | (259) | | | (5,144) | | | 427 | |
Inventory | (1,646 | ) | | — |
| | — |
| Inventory | (970) | | | (3,273) | | | (1,646) | |
Prepaid expenses and other assets | (2,036 | ) | | 2,643 |
| | (4,416 | ) | Prepaid expenses and other assets | 1,560 | | | (5,036) | | | (2,036) | |
Accounts receivable, net | 427 |
| | 490 |
| | (760 | ) | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 1,008 | | | — | | | — | |
Accounts payable | 333 |
| | 502 |
| | (788 | ) | Accounts payable | 398 | | | 2,759 | | | 333 | |
Current portion of long-term debt | | Current portion of long-term debt | (6,450) | | | (2,618) | | | — | |
Long-term portion of operating lease liabilities | | Long-term portion of operating lease liabilities | (1,188) | | | — | | | — | |
Accrued liabilities and other liabilities | 6,378 |
| | (2,721 | ) | | (820 | ) | Accrued liabilities and other liabilities | 678 | | | 3,484 | | | 6,378 | |
Net cash used in operating activities | (66,827 | ) | | (48,068 | ) | | (47,210 | ) | Net cash used in operating activities | (80,779) | | | (104,223) | | | (66,827) | |
Cash flows from investing activities | | | | | | Cash flows from investing activities | | | | | |
Purchases of property and equipment | (1,258 | ) | | (1,624 | ) | | (1,399 | ) | Purchases of property and equipment | (18) | | | (1,064) | | | (1,258) | |
Purchases of available-for-sale securities | (62,510 | ) | | (103,528 | ) | | (59,828 | ) | Purchases of available-for-sale securities | (93,869) | | | (200,354) | | | (62,510) | |
Maturities of available-for-sale securities | 89,333 |
| | 78,443 |
| | 69,285 |
| Maturities of available-for-sale securities | 182,750 | | | 132,080 | | | 89,333 | |
Net cash provided by (used in) investing activities | 25,565 |
| | (26,709 | ) | | 8,058 |
| Net cash provided by (used in) investing activities | 88,863 | | | (69,338) | | | 25,565 | |
Cash flows from financing activities | | | | | | Cash flows from financing activities | | | | | |
Proceeds from public offerings, net of offering costs | | Proceeds from public offerings, net of offering costs | — | | | 134,268 | | | — | |
Proceeds from issuance of long-term debt | 99,600 |
| | — |
| | — |
| Proceeds from issuance of long-term debt | — | | | — | | | 99,600 | |
Proceeds from public offerings, net of offering costs | — |
| | 61,822 |
| | 9,657 |
| |
Payment of debt issuance costs | (633 | ) | | — |
| | — |
| Payment of debt issuance costs | — | | | — | | | (633) | |
Proceeds from issuance of common stock upon exercise of stock options | 9,110 |
| | 2,966 |
| | 746 |
| Proceeds from issuance of common stock upon exercise of stock options | 310 | | | 3,345 | | | 9,110 | |
Proceeds from employee stock purchase plan | 766 |
| | 620 |
| | 407 |
| Proceeds from employee stock purchase plan | 775 | | | 1,237 | | | 766 | |
| Net cash provided by financing activities | 108,843 |
| | 65,408 |
| | 10,810 |
| Net cash provided by financing activities | 1,085 | | | 138,850 | | | 108,843 | |
Net increase (decrease) in cash and cash equivalents | 67,581 |
| | (9,369 | ) | | (28,342 | ) | Net increase (decrease) in cash and cash equivalents | 9,169 | | | (34,711) | | | 67,581 | |
Cash and cash equivalents at beginning of period | 23,735 |
| | 33,104 |
| | 61,446 |
| Cash and cash equivalents at beginning of period | 56,605 | | | 91,316 | | | 23,735 | |
Cash and cash equivalents at end of period | $ | 91,316 |
| | $ | 23,735 |
| | $ | 33,104 |
| Cash and cash equivalents at end of period | $ | 65,774 | | | $ | 56,605 | | | $ | 91,316 | |
Supplemental disclosure | | | | | | Supplemental disclosure | | | | | |
Cash paid for income taxes | $ | — |
| | $ | — |
| | $ | 4,691 |
| |
Supplemental disclosure of noncash investing and financing activities | | | | | | |
Purchases of property and equipment in accounts payable and accrued expense | $ | 61 |
| | $ | 148 |
| | $ | 161 |
| |
| Cash paid for interest | | Cash paid for interest | $ | 6,450 | | | $ | 2,618 | | | $ | — | |
Supplemental disclosure of noncash activities | | Supplemental disclosure of noncash activities | | | | | |
| Right-of-use assets obtained in exchange for operating lease liabilities | | Right-of-use assets obtained in exchange for operating lease liabilities | $ | 9,056 | | | $ | — | | | $ | — | |
Property and equipment in accounts payable and accrued expense | | Property and equipment in accounts payable and accrued expense | $ | — | | | $ | 7 | | | $ | 61 | |
Stock-based compensation capitalized in inventory | $ | 39 |
| | $ | — |
| | $ | — |
| Stock-based compensation capitalized in inventory | $ | 208 | | | $ | 202 | | | $ | 39 | |
Stock option exercise settled after period end | $ | — |
| | $ | 76 |
| | $ | — |
| Stock option exercise settled after period end | $ | — | | | $ | 17 | | | $ | — | |
Property and equipment acquired through tenant improvement allowance | | Property and equipment acquired through tenant improvement allowance | $ | — | | | $ | 1,129 | | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
At Adamas Pharmaceuticals, Inc. (the “Company”) focuses, its purpose is to make everyday life significantly better for people affected by neurological diseases. With one partnered product and a commercial medicine, the Company is focused on time-dependent biologygrowing a portfolio of therapies to redefinereduce the treatment experience forburden of neurological diseases on patients, suffering from chronic neurological diseases.caregivers, and society. In August 2017, the U.S. Food and Drug Administration (FDA) approved GOCOVRI™GOCOVRI® (amantadine) extended release capsules, (previously ADS-5102), the first and only FDA-approved medicinemedication indicated for the treatment of dyskinesia in patients with Parkinson'sParkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications. The Company is also advancing its pipeline of differentiated investigational programs, which includes ADS-5102 in development for the treatment of multiple sclerosis walking impairment; and ADS-4101, a high-dose, modified-release lacosamide in development for the treatment of partial onset seizures in patients with epilepsy. The Company’s goal is to create and commercialize a new generation of medicines intended to lessen the burden of disease on patients, caregivers and society.
The Company was incorporated in the State of Delaware on November 15, 2000, and operates as one1 segment. The Company’s headquarters and operations are located in Emeryville, California.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in the consolidated financial statements and the accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition and variable consideration, lease assets and liabilities, clinical trial accruals, fair value of assets and liabilities including short-term and long-term classification, embedded derivatives, income taxes, inventory, and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates.
Liquidity
During the last three fiscal years, the Company has funded its operations primarily through a Royalty-Backed Loan with HealthCare Royalty Partners (“HCRP”), sales of GOCOVRI, and Financial Condition
To date, a significant portion of the Company’s resources have been dedicated to the research and developmentsales of its products.common stock. In 2017, the Company entered into a Royalty-Backed Loan with HCRP, whereby the Company borrowed a total of $100.0 million. The Company made GOCOVRI available for physician and patient use in the fourth quarter of 2017, with a full commercial launch via the deployment of the Company’s sales team in January 2018. In January 2018, the Company completed a follow-on public offering of its common stock from which proceeds raised were approximately $134.3 million, net of underwriting discounts, commissions, and offering-related transaction costs. Prior to the generation of revenue from GOCOVRI, the Company had not generated any commercial revenue from the sale of its products.
Based upon the current statusAs of and plans for, its product development and commercialization,December 31, 2019, the Company believes that the existinghad $132.6 million of cash, cash equivalents, and investments, of $176.4 million as of December 31, 2017,which management believes will be adequatesufficient to satisfyfund its projected operating requirements, including commercialization of GOCOVRI for the Company’s capital needs throughtreatment of dyskinesia in patients with Parkinson’s disease and operations related to the continued development of ADS-5102 for other indications including MSW, for at least the next twelve12 months from the issuance of this annual report on Form 10-K. However, it is possible that the processCompany will not achieve the progress it expects, because revenues from GOCOVRI may be less than anticipated and the actual costs and timing of developingdrug development, particularly clinical studies, and commercializing products requires significant researchregulatory approvals are difficult to predict, subject to substantial risks and delays, and often vary depending on the particular indication and development preclinical testing and clinical trials, manufacturing arrangements, as well as regulatory approvals. These activities, together with the Company’s selling, general and administrative expenses, are expected to result in significant operating losses until the commercialization of the Company’s products or license agreements generate sufficient revenue to offset expenses. Under its license agreement with Allergan, the Company received the final milestone payment in 2014, and is not entitled to receive any royalties for net sales of Namzaric® until mid-2020. Although the Company is eligible to receive royalties on net sales of Namenda XR® in mid-2018, it does not expect to receive such royalties because of the potential entry of generic versions of Namenda XR.
strategy.
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Reclassification
In January 2018,Certain prior period amounts in the Company completed a follow-on public offering of 3,450,000 shares of its common stock, which includes the exercise in full by the underwriters of their optionaccompanying consolidated financial statements have been reclassified to purchase 450,000 shares of common stock, at an offering price of $41.50 per share. Proceeds from the follow-on public offering were approximately $134.1 million, net of underwriting discounts, commissions, and offering-related transaction costs.conform to current period presentation
Inventory
Inventory is stated at the lower of cost or estimated net realizable value with cost determined under the first-in first-out method. Inventory consists of raw materials, work-in-process, and GOCOVRI finished goods. Raw materials and work-in-process that may be utilized for both commercial and clinical programs are identical and, as a result, the inventory has an “alternative future use” as defined in authoritative guidance and are included in inventory. Amounts in inventory associated with clinical development programs are charged to research and development expense when the product enters the research and development process and can no longer be used for commercial purposes and, therefore, does not have “alternative future use”. Costs include active pharmaceutical ingredient (API), third-party contract manufacturing, third-party packaging services, freight, labor costs for personnel involved in the manufacturing process, and indirect overhead costs. If the Company identifies excess, obsolete or unsalable product, the Company will write down its inventory to its net realizable value in the period it is identified. To date,During 2019 and 2018, the Company has determined thatrecorded a reserve for potentially excess, obsolete or unsalable$0.9 million and $0.2 million write-down of GOCOVRI inventory, is not required.respectively. NaN such charges were recorded in 2017.
The Company begins capitalizing costs as inventory when the product candidate receives regulatory approval. Prior to regulatory approval, inventory costs related to product candidates are recorded as research and development expense. The Company received FDA approval for GOCOVRI on August 24, 2017, and began capitalizing inventory manufactured at the FDA approved location, after FDA approval.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities, when purchased, of less than three months.
Investments
The Company classifies its investments as “available-for-sale.” In general, these investments are free of trading restrictions. The Company carries these investments at fair value, based on quoted market prices or other readily available market information. Quoted market prices for U.S. government and corporate bonds include both principal and accrued interest components. Unrealized gains and losses are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in its Consolidated Balance Sheets. Gains and losses are recognized when realized in its Consolidated Statements of Income.Operations. When the Company determines that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. Gains and losses are determined using the specific identification method. The Company considers all marketable debt securities with a maturity of less than one year to be short-term investments, with all others considered to be long-term investments.
All of the Company’s available-for-sale securities are subject to a periodic impairment review. The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Factors considered in determining whether a loss is temporary include the length of time and extent to which the investments’ fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, extent of the loss related to credit of the issuer, the expected cash flows from the security, its intent to sell or hold the security, and whether or not the Company will be required to sell the security before the recovery of its amortized cost.
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly ownedwholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
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Segments
In accordance with ASC 280-10-50, Segment Reporting, operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company operates in one1 reportable segment: the development and commercialization of therapeutics targeting chronic disorders of the central nervous system. All revenues for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 were generated in the United States.
Revenue Recognition
Effective January 1, 2018, the Company adopted Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, using the full retrospective transition method. The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company expenses incremental costs of obtaining a contract as and when all fourincurred if the expected amortization period of the asset that the Company would have recognized is one year or less.
To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following criteria have been met:five steps: (i) persuasive evidence of an arrangement exists,identify the contract(s) with a customer; (ii) delivery has occurredidentify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services have been rendered, (iii)it transfers to the feecustomer. At contract inception, once the contract is fixed or determinable, and (iv) collectability is reasonably assured. Revenue under license arrangements is recognized based ondetermined to be within the performance requirementsscope of Topic 606, the contract. Determinations of whether persuasive evidence of an arrangement exists and whether delivery has occurredCompany assesses the goods or services have been renderedpromised within each contract, determines those that are based on management’s judgments regarding the fixed nature of the fees charged for deliverablesperformance obligations, and the collectability of those fees. Should changes in conditions cause management to determine that these criteria are not met for any newassesses whether each promised good or modified transactions, revenue recognized could be adversely affected.service is distinct.
Product sales net
The Company’s product sales net, consist of U.S. sales of GOCOVRI and is recognized once all four revenue recognition criteria described above have been met.GOCOVRI. GOCOVRI was approved by the FDA on August 24, 2017, and the Company commenced shipments of GOCOVRI to a specialty pharmacy (SP) during October 2017. The SP dispenses productCompany sells its products principally to a patient based on the fulfillment ofspecialty pharmacy and certain specialty distributors (each a prescription. The Company’s agreement“Customer” or collectively its “Customers”). These agreements with its SP providesCustomers provide for transfer of title to the product at the time the product ishas been delivered to and accepted by the SP.Customer. The Customer subsequently dispenses product directly to a patient. In addition, except for limited circumstances, the SPCustomer has no right of product return to the Company.
The Company has determined it can reasonably estimate its allowances for rebates and returns at the time title and risk of loss transfers to the SP. Therefore, the Company records revenue when the product is delivered to the SP, which is an approach frequently referred to as the “sell-in” revenue recognition model.
The Company recognizes revenue on product sales when the Customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the Customer. The Company has determined that the delivery of its product to Customers constitutes a single performance obligation as there are no other promises to deliver goods or services. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. The Company has assessed the existence of a significant financing component in the agreements with its Customers. The trade payment terms with its Customers do not exceed one year and therefore the Company has elected to apply the practical expedient and no amount of consideration has been allocated as a financing component.
The Company considers the effects of items which can decrease the transaction price such as variable consideration and consideration payable to a Customer or payer. Amounts related to such items are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. The amount of variable consideration may be constrained and is included in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Revenue from product sales netis recorded after considering the impact of the following allowancesvariable consideration amounts at the time of revenue recognition:
Distribution feesFees: Distribution fees include fees paid to the SPCompany’s Customers for data and prompt payment discounts. Distribution fees are recorded as an offset to revenue based on contractual terms.
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Rebates: Rebates include mandated discounts under the Medicaid Drug Rebate Program, Medicare Part D Prescription Drug Benefit Program, and TRICARE Retail Pharmacy Refunds Program (TRICARE)., and commercial contracts. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or statutory requirements with benefit providers. The allowance for rebates isRebates are estimated based on statutory discount rates and expected utilization at the time of sale.utilization. The Company estimates for expected utilization of rebates is estimated based on data received from the SP.specialty pharmacy and specialty distributor. The allowanceCompany uses the expected-value method for estimating rebates isand estimates are adjusted quarterly to reflect actual experience.
Chargebacks: Chargebacks are discounts that occur when Healthcare Providers purchase directly from a Customer. Healthcare Providers, which currently consist of Public Health Service institutions, non-profit clinics, government entities, group purchasing organizations, and health maintenance organizations, generally purchase the product at a discounted price. The Customer, in turn, charges back to the Company the difference between the price initially paid by the Customer and the discounted price paid by the Healthcare Providers to the Customer. The allowance for chargebacks is based on an estimate of sales through to Healthcare Providers from the Customer.
Product Returns: Consistent with industry practice, the Company offers limited product return rights. The Companyrights and generally allows for the return of product that is damaged or defective, and within a few months prior to and up to a few months after the product expiration date. The Company does not allow product returns for product that has been dispensed to a patient. The Company considers several factors in the estimation of potential product returns, including expiration dates of the product shipped, the limited product return rights, third-party data in monitoring channel inventory levels, shelf life of the product, prescription trends, and other relevant factors. Product returns have been insignificant to date and are expected to be immaterial in the future.
Medicare Part D coverage gapCoverage Gap: Medicare Part D coverage gap is a federal program to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States, which mandates manufacturers to fund a portion of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Funding of the coverage gap is generally invoiced and paid in arrears. The impact of the Medicare Part D coverage gap is accrued atestimated using the time of saleexpected-value method based on an estimate
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of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters and is adjusted quarterly based on actual experience.
Co-payment assistanceAssistance: The Company provides co-payment assistance to patients who have commercial insurance and meet certain eligibility requirements. Co-payment assistance is accruedestimated using the expected-value method based on actualhistorical program participation and estimates of program redemption using data provided by third-party administrators.
Each of the above adjustmentsitems are variable consideration, are recorded at the time of revenue recognition, resulting in a reduction in product sales, net, and an increase in accrued expenses or a reduction in accounts receivable, net. The above adjustments require significant estimates, judgment and information obtained from external sources. The Company determined a significant reversal of revenue would not occur in a future period for the estimates of variable consideration detailed above and, therefore, the transaction price was not reduced during the periods presented. If management'smanagement’s estimates differ from actuals,actual results, the Company will record adjustments that would affect product sales net in the period of adjustment.
License agreement revenue
The Company generates revenue from collaboration and license agreements for the development and commercialization of products. Collaboration and license agreements may include non-refundable upfront license fees, partial or complete reimbursement of research and development costs, contingent consideration milestone payments based on the achievement of defined objectives, and royalties on sales of commercialized products. Such agreements may contain various promises to customers which are generally capable of being distinct and accounted for as separate performance obligations. The Company’s performance obligationsduties and responsibilities under the collaboration and license agreements maytypically include the license or transfer of intellectual property rights, obligations to provide research and development services and related materials, and obligations to participate on certain development and/or commercialization committees with the partners. These promises may be regarded as separate performance obligations, or bundled as a single performance obligation, depending upon the nature of the arrangement.
For revenue agreements with multiple-element arrangements,multiple performance obligations, the Company allocates estimated revenue to each non-contingent elementperformance obligation at contract inception based on the relative-selling-priceestimated relative standalone selling price (SSP) of each element
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performance obligation in anthe arrangement. When applying the relative-selling-price method, the Company determines the selling price forRevenue allocated to each deliverable using the following estimation hierarchy: (i) vendor-specific objective evidence of fair value of the deliverable, if it exists, (ii) third-party evidence of selling price, if vendor-specific objective evidence is not available, or (iii) the vendor’s best estimate of selling price, if neither vendor-specific nor third-party evidence is available. Revenue allocatedperformance obligation is then recognized when the four basicentity satisfies the performance obligation by transferring control of the promised good or service to the customer.
Licenses for Intellectual Property (IP): If the Company determines that the license for IP is distinct from the other performance obligations identified in the arrangement, revenue recognition criteria, mentioned above,from non-refundable, up-front fees allocated to the license is recognized when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are metbundled with other promises, judgment is applied to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for each element.
purposes of recognizing revenue from non-refundable, up-front fees. The Company recognizesevaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Milestone Payments: For contracts with customers that contain payments that are contingent upon achievement of a substantive milestone, in their entirety in the period in which the milestone is achieved. Milestones are defined as events that can only be achieved based on the Company’s performance and there is substantive uncertainty about whether the event will be achieved at the inception of each arrangement that includes development milestone payments, the arrangement. EventsCompany evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are contingent only onnot within the passagecontrol of timethe Company or only on counterparty performancethe licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative SSP basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones subject to this guidance. Further, the amounts received must relate solely to prior performance, be reasonable relative to alland any related constraint, and if necessary, adjusts its estimate of the deliverablesoverall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and payment terms withinother revenues and earnings in the agreementperiod of adjustment.
Reimbursement of Research and commensurate with the Company’s performance to achieve the milestone after commencement of the agreement.
Development Costs: Amounts related to research and development funding and full-time equivalent employees assigned to the license agreement are recognized over time as the related services or activities are performed, in accordance with the contract terms.
Royalties: For arrangements that include sales-based royalties, and the licensed IP is deemed to be the predominant item to which the royalties relate, the Company recognizes the related royalty revenue at the later of (i) when the related sales occur, or (ii) the satisfaction or partial satisfaction of the performance obligation to which the royalty relates.
Cost of Product Sales
Cost of product sales consists primarily of direct and indirect costs related to the manufacturing of GOCOVRI products sold, including third-party manufacturing costs, packaging services, freight, and allocation of overhead costs. Cost of product sales may also include period costs related to certain inventory manufacturing services, inventory adjustment charges, as well as manufacturing variances. In connection with the FDA approval of GOCOVRI on August 24, 2017, the Company began capitalizing inventory manufactured at the FDA approved location starting in August 2017. Prior to receiving regulatory approval for GOCOVRI from the FDA, the Company expensed all costs incurred in the manufacture of GOCOVRI as research and development.
Concentration of Risk
Credit Risk
Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and short and long-term investments. Cash, cash equivalents, and investments are deposited with financial institutions or invested in security issuers that management believes are credit worthy. Deposits may, at times, exceed the
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amount of insurance provided on such deposits. To date, the Company has not experienced any losses on investedRisks associated with cash, cash equivalents, and cash equivalents.
Risk and Uncertainties
The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affectinvestments are mitigated by the Company’s future operating resultsinvestment policy which defines allowable investments and cause actual resultsestablishes guidelines relating to vary materially from expectations include, but are not limitedcredit quality, diversification, and maturities of its investments to rapid technological change, uncertainty of results of clinical trialspreserve principal and reaching milestones, uncertainty of market acceptance of the Company’s products, competition from substitute products and larger companies, protection of proprietary technology, strategic relationships, and dependence on key individuals.maintain liquidity.
Products developed by the Company require approvals from the U.S. Food and Drug Administration (“FDA”) or other international regulatory agencies prior to commercial sales. There can be no assurance that the products will receive the necessary approvals. If the Company is denied approval, approval is delayed, or the Company is unable to maintain approval, it could have a materially adverse impact on the Company.
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Major Customers
The Company has expendedentered into distribution agreements with a specialty pharmacy and will continue to expend substantial funds to conduct research, development,certain limited specialty distributors. For the years ended December 31, 2019 and clinical testing2018, the Company’s largest customer represented approximately 98% and 99% of the Company’s product revenue, respectively, and approximately 96% and 99% of the Company’s accounts receivable balance at December 31, 2019 and 2018, respectively.
Major Suppliers
The Company does not currently have any of its own manufacturing facilities, and therefore it depends on an outsourced manufacturing strategy for the production of GOCOVRI for commercial use and for the production of its product candidates.candidates for clinical trials. The Company also willhas contracts in place with one third-party manufacturer that is approved for the commercial production of GOCOVRI and one third-party supplier that is approved for GOCOVRI’s active pharmaceutical ingredient. Although there are potential sources of supply other than the Company’s existing manufacturers and suppliers, any new supplier would be required to expend additional funds to establish commercial-scale manufacturing arrangements and to provide for the marketing and distribution of products that receivequalify under applicable regulatory approval. The Company may require additional funds to conduct research and development activities and commercialize its products. Additional funds may not be available on acceptable terms, if at all. If adequate funds are unavailable on a timely basis from operations or additional sources of financing, the Company may have to delay, reduce the scope of or eliminate one or more of its research or development programs or alter its product commercialization plans, which may materially and adversely affect its business, financial condition, and operations.requirements.
Accounts Receivable, net
The Company’s accounts receivable balance consists of amounts due from sales of GOCOVRI and amounts due from Allergan, in accordance with the contract terms of the license agreement.GOCOVRI. Receivables from sales of GOCOVRI are recorded net of allowances which generally include chargebacks, distribution fees, doubtful accounts, and discounts. Allergan receivables are for research and development funding and full-time equivalent employees assigned to the Allergan license agreement, as well as for reimbursement of external costs, recorded as contra-expense, associated with supporting prosecution and litigation of intellectual property rights.
The Company’s estimate of the allowance for doubtful accounts is based on an evaluation of the aging of its receivables. Accounts receivable balances are written off against the allowance when it is probable that the receivable will not be collected. To date,Given the nature and historical collectability of the Company’s accounts receivable, the Company has determined that an allowance for doubtful accounts iswas not required.required at December 31, 2019.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the consolidated balance sheet and any resulting gain or loss is reflected in operations in the period realized.
Estimated useful lives by major asset category are as follows:
|
| | | | |
| Useful Lives |
Computer equipment and software | 3 years |
Equipment | 5 years |
Furniture and fixtures | 10 years |
Leases
The Company determines if an arrangement is, or contains, a lease at inception. An arrangement is, or contains, a lease if it conveys the right to control the use of identified property, plant or equipment (i.e., an identified asset) for a period of time in exchange for consideration. The Company’s arrangements determined to be or contain a lease include explicitly or implicitly identified assets where the Company has the right to substantially all of the economic benefits of the assets and has the ability to direct how and for what purpose the assets are used during the lease term. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on its consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term and any amounts probable of being owed under a residual value guarantee (if applicable). In determining
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Leases
At the inceptionincremental borrowing rate used to calculate the present value of a lease payments, the Company evaluatesuses the interest rate specified in the lease. If the rate is not readily determinable, which is generally the case for the Company, the Company uses its incremental borrowing rate based on the information available at the commencement date. The operating lease ROU assets also include any lease payments made (including any prepaid rents and initial direct costs) and excludes lease incentives. The lease terms may include options to extend or terminate the lease agreement to determine whether the leasewhen it is an operating, capital or build-to-suit lease using the criteria in ASC 840, “Leases.” Certain lease agreements also requirereasonably certain that the Company to make additionalwill exercise any such options. Lease expense for lease payments for taxes, insurance, and other operating expenses incurred during the lease period, which are expensed as incurred. For operating leases, the Company recognizes rent expenseis recognized on a straight-line basis over the expected lease termterm. The Company has lease agreements with lease components and recordsnon-lease components. For its facility and office equipment lease, the difference between cashCompany accounts for the lease and non-lease components separately. For its vehicle leases, the Company elected the practical expedient to not separate lease components, such as base rent payments, and the recognition of rent expense as a deferred liability. Where lease agreements contain rent escalation clauses, rent abatements and/or concessions,non-lease components, such as rent holidaysinterest, and tenant improvement allowances,also applies a portfolio approach to effectively account for the Company applies themoperating lease ROU assets and liabilities, given the volume of individual leases involved in the determination of straight-line expense over the lease term.overall arrangement.
Accounting for Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by the comparison of the carrying amount to the future net cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. There have been no such impairments of long-lived assets as of December 31, 2017.2019.
Clinical Trial Accruals
The Company’s clinical trial accruals are based on estimates of patient enrollment and related costsactivities at clinical investigator sites, as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations (“CROs”) that conduct and manage clinical trials on the Company’s behalf.
The Company estimates clinical trial expenses based on the estimated services performed pursuant to these contracts, with research institutionsas provided by the CRO. These estimates are reviewed for reasonableness by the Company’s internal clinical personnel. The Company monitors patient enrollment levels and CROs that conduct and manage clinical trials on its behalf. In accruing service fees,related activities using available information; however, if the Company obtainsunderestimates activity levels associated with various studies at a given point in time, the reportedCompany could be required to record significant additional R&D expenses in future periods when the actual activity level of patient enrollment at each site and estimates the time period over which services are to be performed and activity expended in each period.becomes known. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.
Research and Development
Research and development (“R&D”) expenses include salaries and related compensation, contractor and consultant fees, external clinical trial expenses performed by CROs, licensing fees, acquired intellectual property with no alternative future use, and facility and administrative expense allocations. In addition, the Company funds R&D at research institutions under agreements that are generally cancelable at its option. Research costs typically consist of applied research and preclinical and toxicology work. Pharmaceutical manufacturing development costs consist of pre-approval inventory purchases, product formulation, chemical analysis, and the transfer and scale-up of manufacturing at facilities operated by the Company’s contract manufacturers. Clinical development costs include the costs of Phase 1, Phase 2, and Phase 3 clinical trials. These costs are a significant component of the Company’s research and development expenses.
The Company accrues costs for clinical trial activities performed by CROs and other third parties based upon the estimated amount of work completed on each study as provided by the CRO. These estimates are reviewed for reasonableness by the Company’s internal clinical personnel, and the Company aims to match the accrual to actual services performed by the organizations as determined by patient enrollment levels and related activities. The Company monitors patient enrollment levels and related activities using available information; however, if the Company underestimates activity levels associated with various studies at a given point in time, the Company could be required to record significant additional R&D expenses in future periods when the actual activity level becomes known. The Company charges all such costs to R&D expenses. Non-refundable advance payments are capitalized and expensed as the related goods are delivered or services are performed.
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Long-Term Debt
Long-term debt consists of the Company’s loan agreement with HealthCare Royalty Partners (“HCRP”).HCRP. The Company accounted for the loan agreement as a debt financing arrangement. Interest expense is accrued using the effective interest rate method over the estimated period the debt will be repaid. Debt issuance costs have been recorded as a debt discount in the Company’s consolidated balance sheets and are being amortized and recorded as interest expense throughout the life of the loan using the effective interest rate method. The Company must make certain assumptions and estimates, including future royalties and net product sales, in determining the expected repayment term, and amortization period of the debt discount, accretion of interest expense, as well as the classification between current and long-term portions. The Company periodically assesses these assumptions and estimates, and adjusts the liabilities accordingly. Under the terms of the loan,
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HCRP has recourse to Adamas Pharma, LLC, not the Company. See Note 910 - Long-Term Debt, for further details of the Company’s long-term debt.
Embedded Derivatives Related to Debt Instruments
Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the debt instrument. Under the Company’s loan agreement with HCRP, upon the occurrence of a default or a change in control, the Company may be required to make mandatory prepayments of the borrowings. The prepayment premium is considered an embedded derivative, as the holder of the loans may exercise the option to require prepayment by the Company. Further, in the event of a regulatory change that results in a material adverse effect on HCRP’s rate of return, the Company shall pay directly to HCRP an amount that compensates HCRP for such reduction. The embedded derivative is presented as a component of other non-current liabilities. The Company will remeasure the embedded derivatives each reporting period and report changes in the estimated fair value as gains or losses in interest and other income, net, in the condensed consolidated statement of operations.
Fair Value of Financial Instruments
The carrying value of the Company’s cash and cash equivalents, short-term investments, accounts receivable, long-term investments and other current assets, other assets, accounts payable, accrued liabilities approximate fair value due to the short-term nature or determinable value of these items. See also Note 43 for further details of the Company’s fair value instruments.
Income Taxes
The Company accounts for income taxes under the asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company follows the provisions of ASC 740, Income Taxes, under which it assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.
Basic and Diluted Net Loss Per Share
Basic net loss per share is based upon the weighted average number of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents outstanding during the period. Common stock equivalents are optionsequity awards granted under the Company’s stock awards plans and are calculated under the treasury stock method. Common equivalent shares from unexercised stock options and unvested restricted stock units are excluded from the computation when there is a loss as their effect is anti-dilutive, or if the exercise price of such options is greater than the average market price of the stock for the period.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Stock-Based Compensation
The Company accounts for stock-based compensation of stock options granted to employees and directors and for employee stock purchase plan shares by estimating the fair value of stock-based awards using the Black-Scholes option-pricing model. The Company accounts for stock-based compensation of restricted stock units granted to employees based on the closing price of the Company’s common stock on the date of grant. The fair value of stock-based awards, net of estimated forfeitures, is recognized and amortized over the applicable vesting period. All stock options awarded to non-employees are accounted for at the fair value of the consideration received or the fair value of the equity instrument issued, as calculated using the Black-Scholes model. Stock options granted to non-employees are subject to periodic revaluation at each reporting date as the underlying equity instruments vest.
In order to estimate the value of share-based awards, the Company uses the Black-Scholes model, which requires the use of certain subjective assumptions. The most significant subjective assumptions are management’s estimates of the expected volatility and the expected term of the award. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from any of these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Recent Accounting Pronouncements
Accounting Pronouncements Adopted in 2019
In May 2014,February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. The amendment in this ASU provides guidance on the revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle of this update provides guidance to identify the performance obligations under the contract(s) with a customer and how to allocate the transaction price to the performance obligations in the contract. It further provides guidance to recognize revenue when (or as) the entity satisfies a performance obligation. This standard will replace most existing revenue recognition guidance. On July 9, 2015, the FASB approved a one-year deferral of the effective date of this standard to 2018 for public companies, with an option that would permit companies to adopt the standard as early as the original effective date of 2017. Early adoption prior to the original effective date is not permitted. Since the issuance of ASU 2014-09, the FASB has issued several amendments which clarify certain points, including ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Identifying Performance Obligations and Licensing; ASU 2016-11, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting; ASU 2016-12, Narrow-Scope Improvements and Practical Expedients; ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers; and ASU 2017-14, Income Statement-Reporting Comprehensive Income2016-02, Leases (Topic 220), Revenue Recognition (Topic 605), and Revenue from contracts with Customers (Topic 606).The Company will adopt the new standard in the first quarter of fiscal year 2018 using the full retrospective method. The Company has evaluated the effect the new guidance will have on its consolidated financial statements and expects the adoption of this guidance to have no material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases842). The authoritative guidance significantly amends the current accounting for leases. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) a financing lease or (ii) an operating lease. Lessor accounting remains substantially unchanged withIn July 2018, the exception that no leases entered into afterFASB issued ASU No. 2018-10, Codification Improvements to Topic 842 (Leases), which amends narrow aspects of the effective date will be classified as leveraged leases. For sale leaseback transactions, a sale will only be recognized if the criteriaguidance issued in the amendments in ASU 2016-02, and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows entities to recognize a cumulative-effect adjustment from the application of ASU 2016-02 to the opening balance of retained earnings in the period of adoption. Effective January 1, 2019, the Company adopted Topic 842 using the modified retrospective method as of January 1, 2019 and will not restate comparative periods. The Company elected the optional package of practical expedients, which allowed the Company to not reassess: (i) whether any expired or existing contracts are considered or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The new revenuestandard also allows entities to make certain policy elections, including a policy to not separate lease and non-lease components, which the Company did not elect for its facility and office equipment lease. The adjustments due to the adoption of Topic 842 primarily related to the recognition standard are met. For public business entities,of an operating lease right-of-use asset and operating lease liability for the lease. The impact on the consolidated balance sheet as of January 1, 2019, was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, 2018 | | Adjustment due to the Adoption of Topic 842 | | January 1, 2019 |
Operating lease right-of-use assets | $ | — | | | $ | 7,566 | | | $ | 7,566 | |
Other current liabilities | 512 | | | 768 | | | 1,280 | |
Long-term portion of operating lease liabilities | — | | | 8,643 | | | 8,643 | |
Other non-current liabilities | 3,196 | | | (1,844) | | | 1,352 | |
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Previously, accounting for share-based payments to employees was covered by ASC Topic 718 while accounting for such payments to non-employees was covered by ASC Subtopic 505-50. Under this new guidance, both sets of awards, for employees and non-employees, will essentially follow the same model, with small variations related to determining the term assumption when valuing a non-employee award as well as a different expense attribution model for non-employee awards as opposed to employee awards. This guidance is effective for fiscal periodsyears beginning after December 15, 2018 and interim periods thereafter. Early2018. The adoption is permitted. The Company is currently evaluatingof this standard did not have a material impact on the effect the new guidance will have on itsCompany’s consolidated financial statements. statements
New Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments.Instruments; in November 2018 the FASB issued a subsequent amendment ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses; in April 2019 the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; in May 2019 the FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief; and in November 2019 the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The new guidance changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. In November 2019 the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)—Effective Dates, which defers the effective date of ASU 2016-13 for all entities except SEC reporting companies that are not smaller reporting companies. As a smaller reporting company, this guidance is effective for fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the timing and effect the new guidance will have on its consolidated financial statements.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the effect the new guidance will have on its consolidated financial statements.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) – Scope of Modification Accounting. The new guidance clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. This guidance is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The Companybut does not expect the adoption of the new guidance to have a material impact on its consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which amends ASC 808 to clarify ASC 606 should apply in entirety to certain transactions between collaborative arrangement participants. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating but does not expect the new guidance to have a material impact on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, which is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating but does not expect the new guidance to have a material impact on its consolidated financial statements.
3. BALANCE SHEET COMPONENTS
Prepaid expenses and other current assets (in thousands)
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Prepaid expenses | $ | 2,638 |
| | $ | 1,316 |
|
Income tax receivable | 1,007 |
| | 168 |
|
Other current assets | 17 |
| | 1,057 |
|
Prepaid expenses and other current assets | $ | 3,662 |
| | $ | 2,541 |
|
Property and equipment, net (in thousands)
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Computer equipment and software | $ | 3,289 |
| | $ | 2,128 |
|
Equipment | 252 |
| | 252 |
|
Furniture and fixtures | 466 |
| | 466 |
|
Leasehold improvements | 1,645 |
| | 1,645 |
|
| 5,652 |
| | 4,491 |
|
Less: Accumulated depreciation and amortization | (2,520 | ) | | (1,335 | ) |
Property and equipment, net | $ | 3,132 |
| | $ | 3,156 |
|
Depreciation expense was $1,194,000, $808,000, and $435,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
Accrued liabilities (in thousands)
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Accrued employee related costs | $ | 5,499 |
| | $ | 3,696 |
|
Clinical trial accruals | 1,720 |
| | 1,041 |
|
Accrued consulting and other professional fees | 4,897 |
| | 864 |
|
Other | 269 |
| | 266 |
|
Accrued liabilities | $ | 12,385 |
| | $ | 5,867 |
|
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
4. FAIR VALUE MEASUREMENTS
In accordance with ASC 820-10, Fair Value Measurements and Disclosures, the Company determines the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
•Level 1 inputs, which include quoted prices in active markets for identical assets or liabilities;
•Level 2 inputs, which include observable inputs other than Level 1 inputs, such as quoted prices 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 asset or liability. For available-for-sale securities, the Company reviews trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
•Level 3 inputs, which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies, or similar valuation techniques, as well as significant management judgment or estimation.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table represents the fair value hierarchy for the Company’s financial assets and liabilities which require fair value measurement on a recurring basis (in thousands):
| | | December 31, 2017 | | December 31, 2019 | |
| Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | Assets: | | | | | | | |
Money market | $ | 68,501 |
| | $ | 68,501 |
| | $ | — |
| | $ | — |
| Money market | $ | 27,720 | | | $ | 27,720 | | | $ | — | | | $ | — | |
Corporate debt | 23,471 |
| | — |
| | 23,471 |
| | — |
| Corporate debt | 22,576 | | | — | | | 22,576 | | | — | |
U.S. Treasury notes | 61,646 |
| | — |
| | 61,646 |
| | — |
| U.S. Treasury notes | 37,811 | | | — | | | 37,811 | | | — | |
Commercial paper | | Commercial paper | 10,928 | | | $ | — | | | 10,928 | | | $ | — | |
Total assets measured at fair value | $ | 153,618 |
| | $ | 68,501 |
| | $ | 85,117 |
| | $ | — |
| Total assets measured at fair value | $ | 99,035 | | | $ | 27,720 | | | $ | 71,315 | | | $ | — | |
Liabilities: | | | | | | | | Liabilities: | | | | | | | |
Embedded derivative liability | $ | 470 |
| | $ | — |
| | $ | — |
| | $ | 470 |
| Embedded derivative liability | $ | 2,157 | | | $ | — | | | $ | — | | | $ | 2,157 | |
Total liabilities measured at fair value | $ | 470 |
| | $ | — |
| | $ | — |
| | $ | 470 |
| Total liabilities measured at fair value | $ | 2,157 | | | $ | — | | | $ | — | | | $ | 2,157 | |
| | | December 31, 2016 | | December 31, 2018 | |
| Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | Assets: | | | | | | | |
Money market | $ | 192 |
| | $ | 192 |
| | $ | — |
| | $ | — |
| Money market | $ | 17,789 | | | $ | 17,789 | | | $ | — | | | $ | — | |
Corporate debt | 51,233 |
| | — |
| | 51,233 |
| | — |
| Corporate debt | 19,792 | | | — | | | 19,792 | | | — | |
U.S. Treasury notes | 60,976 |
| | — |
| | 60,976 |
| | — |
| U.S. Treasury notes | 131,512 | | | — | | | 131,512 | | | — | |
Commercial paper | | Commercial paper | 2,961 | | | — | | | 2,961 | | | — | |
Total assets measured at fair value | $ | 112,401 |
| | $ | 192 |
| | $ | 112,209 |
| | $ | — |
| Total assets measured at fair value | $ | 172,054 | | | $ | 17,789 | | | $ | 154,265 | | | $ | — | |
Liabilities: | | Liabilities: | | | | | | | |
Embedded derivative liability | | Embedded derivative liability | $ | 1,352 | | | $ | — | | | $ | — | | | $ | 1,352 | |
Total liabilities measured at fair value | | Total liabilities measured at fair value | $ | 1,352 | | | $ | — | | | $ | — | | | $ | 1,352 | |
Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.
Corporate debt, and U.S. Treasury notessecurities, and commercial paper are measured at fair value using Level 2 inputs. The Company reviews trading activity and pricing for these investments as of each measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
of these securities as Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to valuation, the related assets or liabilities are classified as Level 3. The Company classified an embedded derivative related to the Royalty-Backed LoanCompany’s royalty-backed loan agreement (the “Royalty-Backed Loan”) with HealthCare Royalty Partners (“HCRP”) as a Level 3 liability.
The fair value of the embedded derivative as a result of a change in control was calculated using a probability-weighted discounted cash flow model. The model used in valuing this embedded derivative requires the use of significant estimates and assumptions including but not limited to: 1) expected cash flows the Company expects to receive on U.S. net sales of GOCOVRI and on royalties from Allergan on U.S. net sales of Namzaric; 2) the Company’s risk adjusted discount rates; 3) the probability of receipt of orphan drug exclusivity for GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease; and 4)3) the probability of a change in control occurring during the term of the note based on the percentage of similar companies that were acquired over the previous five year period. Changes in the estimated fair value of the bifurcated embedded derivative are reported as gains or losses in interest and other income, net, in the condensed consolidated statement of operations. In the periods presented, the Company evaluated the embedded derivative value as a result of an event of default and the value as a result of increased costs due to a regulatory change and considered both
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
to have no material value based on current assessment of probability, but could become material in future periods if a specified event of default or regulatory change became more probable than is currently estimated. See Note 910 “Long-Term Debt” for further description.
The following table sets forth a summary of the changes in the estimated fair value of the Company’s embedded derivative, which is measured at fair value as a Level 3 liability on a recurring basis (in thousands):
|
| | | | |
Balance as of December 31, 2016 | | $ | — |
|
Issuance of long-term debt with embedded derivative | | 764 |
|
Change in fair value included in interest and other income, net | | (294 | ) |
Balance as of December 31, 2017 | | $ | 470 |
|
| | | | | | | | |
| | |
| | |
| | |
| | |
Balance as of December 31, 2016 | | $ | — | |
Issuance of long-term debt with embedded derivative | | 764 | |
Change in fair value included in interest and other income, net | | (294) | |
Balance as of December 31, 2017 | | 470 | |
Change in fair value included in interest and other income, net | | 882 | |
Balance as of December 31, 2018 | | 1,352 | |
Change in fair value included in interest and other income, net | | 805 | |
Balance as of December 31, 2019 | | $ | 2,157 | |
There were no transfers between any of the levels of the fair value hierarchy during the years ended December 31, 20172019 and 2016.2018.
5.4. INVESTMENTS
The Company’s investments consist of corporate debt, and U.S. Treasury notessecurities, and commercial paper classified as available-for-sale securities.
The Company limits the amount of investment exposure as to institution, maturity, and investment type. To mitigate credit risk, the Company invests in investment grade corporate debt, U.S. Treasury securities, and United States Treasury notes.commercial paper. Such securities are reported at fair value, with unrealized gains and losses excluded from earnings and shown separately as a component of accumulated other comprehensive loss within stockholders’ equity. Realized gains and losses are reclassified from other comprehensive loss to other income on the condensed consolidated statements of operations when incurred. The Company may pay a premium or receive a discount upon the purchase of available-for-sale securities. Interest earned and gains realized on available-for-sale securities and amortization of discounts received and accretion of premiums paid on the purchase of available-for-sale securities are included in investment income.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table is a summary of amortized cost, unrealized gain and loss, and the fair value of available-for-sale securities as of December 31, 20172019, and 20162018 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | |
Investments: | | | | | | | |
Corporate debt | $ | 22,582 | | | $ | 3 | | | $ | (9) | | | $ | 22,576 | |
U.S. Treasury notes | 37,789 | | | 22 | | | — | | | 37,811 | |
Commercial paper | 6,446 | | | — | | | — | | | 6,446 | |
Total | $ | 66,817 | | | $ | 25 | | | $ | (9) | | | $ | 66,833 | |
Reported as: | | | | | | | |
Short-term investments | $ | 66,817 | | | $ | 25 | | | $ | (9) | | | $ | 66,833 | |
Long-term investments | — | | | — | | | — | | | — | |
Total | $ | 66,817 | | | $ | 25 | | | $ | (9) | | | $ | 66,833 | |
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
| | | Gross Unrealized | | Gross Unrealized | | |
| Amortized Cost | | Gains | | Losses | | Fair Value |
Investments: | | | | | | | |
Corporate debt | $ | 23,507 |
| | $ | — |
| | $ | (36 | ) | | $ | 23,471 |
|
U.S. Treasury notes | 61,777 |
| | — |
| | (131 | ) | | 61,646 |
|
Total | $ | 85,284 |
| | $ | — |
| | $ | (167 | ) | | $ | 85,117 |
|
Reported as: | | | |
| | |
| | |
|
Short-term investments | $ | 82,280 |
| |
|
| | $ | (154 | ) | | $ | 82,126 |
|
Long-term investments | 3,004 |
| |
|
| | (13 | ) | | 2,991 |
|
Total | $ | 85,284 |
| | $ | — |
| | $ | (167 | ) | | $ | 85,117 |
|
| | | December 31, 2016 | | December 31, 2018 | |
| | | Gross Unrealized | | Gross Unrealized | | | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Amortized Cost | | Gains | | Losses | | Fair Value | | | | | | | | |
Investments: | | | | | | | | Investments: | | | | | | | |
Corporate debt | $ | 51,354 |
| | $ | — |
| | $ | (121 | ) | | $ | 51,233 |
| Corporate debt | $ | 19,833 | | | $ | — | | | $ | (41) | | | $ | 19,792 | |
U.S. Treasury notes | 61,048 |
| | 5 |
| | (77 | ) | | 60,976 |
| U.S. Treasury notes | 131,735 | | | 10 | | | (233) | | | 131,512 | |
Commercial paper | | Commercial paper | 2,961 | | | — | | | — | | | 2,961 | |
Total | $ | 112,402 |
| | $ | 5 |
| | $ | (198 | ) | | $ | 112,209 |
| Total | $ | 154,529 | | | $ | 10 | | | $ | (274) | | | $ | 154,265 | |
Reported as: | | | |
| | |
| | |
| Reported as: | | | | | | | |
Short-term investments | $ | 90,050 |
| | $ | 1 |
| | $ | (134 | ) | | $ | 89,917 |
| Short-term investments | $ | 154,529 | | | $ | 10 | | | $ | (274) | | | $ | 154,265 | |
Long-term investments | 22,352 |
| | 4 |
| | (64 | ) | | 22,292 |
| Long-term investments | — | | | — | | | — | | | — | |
Total | $ | 112,402 |
| | $ | 5 |
| | $ | (198 | ) | | $ | 112,209 |
| Total | $ | 154,529 | | | $ | 10 | | | $ | (274) | | | $ | 154,265 | |
Short-term and long-term investments include accrued interest of $0.6$0.4 million and $14,000, respectively,$0.5 million as of December 31, 2017. Short-term2019 and long-term investments includes accrued interest of $0.3 million and $0.1 million, respectively, as of December 31, 2016.2018, respectively. The Company has not incurred any realized gains or losses on investments for the years ended December 31, 20172019 and 2016.2018. Investments are classified as short-term or long-term depending on the underlying investment’s maturity date. Long-termThe Company had no investments held by the Company havewith a maturity date range of greater than 12 months and a maximum of 13 months as of December 31, 2017.2019 and 2018. All investments with unrealized losses at December 31, 20172019, have been in a loss position for less than twelve months or the loss is not material and were temporary in nature. The Company does not intend to sell the investments that are in an unrealized loss position before recovery of their amortized cost basis.
5. BALANCE SHEET COMPONENTS
| | | | | | | | | | | |
Prepaid expenses and other current assets (in thousands) | | | |
| December 31, | | |
| 2019 | | 2018 |
Prepaid expenses | $ | 2,624 | | | $ | 2,969 | |
Prepaid clinical trial | 2,710 | | | 2,299 | |
Income tax receivable | 1,259 | | | 840 | |
Other current assets | 83 | | | 763 | |
Prepaid expenses and other current assets | $ | 6,676 | | | $ | 6,871 | |
| | | | | | | | | | | |
Property and equipment, net (in thousands) | | | |
| December 31, | | |
| 2019 | | 2018 |
Computer equipment and software | $ | 3,297 | | | $ | 3,286 | |
Equipment | 384 | | | 384 | |
Furniture and fixtures | 336 | | | 336 | |
Leasehold improvements | 1,891 | | | 1,891 | |
| 5,908 | | | 5,897 | |
Less: Accumulated depreciation and amortization | (3,459) | | | (2,245) | |
Property and equipment, net | $ | 2,449 | | | $ | 3,652 | |
Depreciation expense was $1.2 million, $1.5 million, and $1.2 million for the years ended December 31, 2019, 2018, and 2017, respectively.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
| | | | | | | | | | | |
Accrued liabilities (in thousands) | | | |
| December 31, | | |
| 2019 | | 2018 |
Accrued employee related costs | $ | 7,682 | | | $ | 7,472 | |
Clinical trial accruals | 1,680 | | | 2,434 | |
Accrued consulting and other professional fees | 4,867 | | | 4,230 | |
| | | |
| | | |
Accrued sales deductions | 1,822 | | | 1,053 | |
Other | 66 | | | 341 | |
Accrued liabilities | $ | 16,117 | | | $ | 15,530 | |
6. INVENTORY
The Company began capitalizing inventory in August 2017 once the FDA approved GOCOVRI. Inventory consists of the following (in thousands):
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
Raw materials | $ | 1,057 | | | $ | 1,330 | |
Work-in-process | 1,925 | | | 2,174 | |
Finished goods | 2,285 | | | 1,617 | |
Total inventory | $ | 5,267 | | | $ | 5,121 | |
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Raw materials | $ | 859 |
| | $ | — |
|
Work-in-process | 817 |
| | — |
|
Finished goods | 28 |
| | — |
|
Total inventory | $ | 1,704 |
| | $ | — |
|
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
7. LICENSE AGREEMENTS
In November 2012, the Company granted Forest Laboratories Holdings Limited “Forest”, an indirect, wholly-owned subsidiary of Allergan plc (collectively “Allergan”) an exclusive license, with right to sublicense, certain of the Company’s intellectual property rights relating to human therapeutics containing memantine in the United States. In connection with these rights, Allergan markets and sells Namzaric® and Namenda XR® for the treatment of moderate to severe dementia related to Alzheimer’s disease.
Pursuant to the agreement, Allergan made an upfront payment of $65.0 million. The Company earned and received additional cash payments totaling $95.0 million upon achievement by Allergan of certain development and regulatory milestones. Under the agreement, external costs incurred related to the prosecution and litigation of intellectual property rights are reimbursable. For the twelve months ended December 31, 2017 and 2016, reimbursed expenses amounting to $33,000 and $2.4 million, respectively,Reimbursable external costs are reflectedrecorded as a reduction to selling, general and administrative, net. For the twelve months ended December 31, 2019, 2018, and 2017, there were 0, $1,000, and $33,000 of reimbursable external costs, respectively, for prosecution or litigation of intellectual property rights.
In addition, the Company may earn tiered royalty payments based on future net sales of Namzaric and Namenda XR.
The Company identified the following two non-contingent performance deliverables under the license agreement: (i) transfer of intellectual property rights, inclusive of the related technology know-how conveyance (“license and know-how” or “license”) and (ii) theXR; however, Allergan’s obligation to participate on the Joint Development Committee (“JDC”). The Company concluded that the license and the know-how together represent a single deliverable, and therefore the two together have been accountedpay royalties for as a single unit of accounting. There was no separate consideration identified in the agreement for the deliverables and there was no right of return under the agreement. The Company considered the provisions of the multiple-element arrangement guidance in determining whether the deliverables outlined above have standalone value. The transfer of license and know-how has standalone value separate from the obligation to participate on the JDC, as the agreement allows Allergan to sublicense its rights to the acquired license to a third party. Further, the Company believes that Allergan has research and development expertise with compounds similar to those licensed under the agreement and has the ability to engage other third parties to develop these compounds, allowing Allergan to realize the value of the license and know-how without receiving the JDC participation.
The Company developed its best estimates of selling prices (“BESP”) for each deliverable in order to allocate the non‑contingent arrangement consideration to the two units of accounting. Based on BESP analysis, value assigned to the obligation to participate on the JDC was a negligible amount. Accordingly, the entire upfront license fee of $65.0 million was allocated to the transfer of license and technical know-how. Revenue recognition commenced upon delivery of the license and was recognized on a straight-line basis through the period of the transfer of the know-how. Allergan was able to derive value from the license as the know-how was transferred. A straight-line pattern of revenue recognition is only acceptable when a more precise pattern cannot be discerned. The way in which the transfer of know-how occurred did not give rise to a more precise pattern of recognition, and the Company therefore recognized revenue on a straight-line basis over the period of the transfer of the know-how (from November 2012 to February 2013).
In November and December 2013, the Company received a total of $40.0 million in milestone payments under its license agreement with Allergan. The milestone payments were for the successful completion of studies that supported the New Drug Application (“NDA”) filing with the FDA for Namzaric by Allergan. In May 2014, the Company received an additional $25.0 million milestone payment under the license agreement. This milestone payment was a result of the FDA’s acceptance of the NDA for Namzaric. In December 2014, the Company received a final $30.0 million milestone payment in connection with the FDA approval of Namzaric. These amounts have been recorded as revenue when received in the consolidated statements of operations and comprehensive income during 2013 and 2014, respectively.
The Company is entitled to receive royalties on net sales in the United States by Allergan, its affiliates, or any of its sublicensees of controlled-release versions of memantine productsproduct covered by the terms of the license agreement.is eliminated in any quarter where there is significant competition from generics. Beginning in May 2020, the Company will be entitled to receive royalties at rates in the low double digits to mid-teens from Allergan for sales of Namzaric in the United States. Beginning in June 2018,Based on 2019 net sales of Namzaric, the Company willexpects the tiered royalty to be entitled to receive royalties in the low to mid-singledouble digits for salesthrough the term of Namenda XR in the United States.agreement. Allergan’s obligation to pay royalties with respect to fixed-dose memantine-donepezil products, including Namzaric, continues until the later of (i) 15 years after the commercial launch of the first fixed-dose memantine-donepezil product by Allergan in the United States or (ii) the expiration of the Orange Book listed patents for which Allergan obtained rights from the Company covering such product. Allergan’s obligationBeginning in June 2018, the Company was entitled to payreceive royalties with respectat rates in the low to mid-single digits for sales of Namenda XR continues untilin the expirationUnited States. The Company does not expect to receive royalties on net sales of Namenda XR, due to the entry of generic versions of Namenda XR. Royalties under the license agreement will be recognized when the related sales occur, in accordance with the sales-based royalty exception.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Orange Book listed patents covering such products. However, Allergan’s obligation to pay royalties for any product covered by the license is eliminated in any quarter where there is significant competition from generics.
8. COMMITMENTS AND CONTINGENCIESLEASES
Lease Commitments
The Company performed an evaluation of its contracts in accordance with Topic 842 and determined that, except for its facility, vehicle, and office equipment leases, approximately 18,500described below, none of its other contracts contain a lease. The Company evaluated all its leases and determined they were operating leases.
In January 2018, the Company amended its Emeryville, California, office facility lease agreement to extend the term to April 30, 2025, and relocate and expand its office space to 37,626 rentable square feet within the same building. The lease contains an option to extend the term for 1 additional five-year period. The extension option has not been considered in the determination of office space in Emeryville, California under an operatingthe right-of-use asset or the lease liability as the Company did not consider it reasonably certain that expires April 30, 2020.it would exercise such option. The lease provides for periodsa tenant improvement allowance of escalating rent. The totalapproximately $1.1 million, which the Company fully utilized during the third quarter of 2018.
In 2018, the Company entered into a three-year lease for office equipment that commenced in June 2018 and will be required to make cash payments overtotaling $0.2 million during the lifeterm of the lease.
In March 2019, the Company entered into a three-year vehicle lease are divided byagreement, pursuant to which it currently leases 65 vehicles. Delivery of the total numbervehicles commenced during the second quarter of 2019. The term for each leased vehicle commences upon the delivery of the vehicle and is for a period of 12 months, inwith renewal terms at the Company’s discretion that can extend the lease period andterm up to 50 months.
As of December 31, 2019, the average rent is chargedCompany did not have additional operating leases that have not yet commenced.
Supplemental balance sheet information related to expense each month duringoperating leases were as follows (in thousands):
| | | | | | | |
| December 31, 2019 | | |
Assets | | | |
Operating lease right-of-use assets | $ | 8,048 | | | |
Total right-of-use assets | $ | 8,048 | | | |
Liabilities | | | |
Current portion included in other current liabilities | $ | 1,669 | | | |
Long-term portion of operating lease liabilities | 8,272 | | | |
Total operating lease liabilities | $ | 9,941 | | | |
The Company’s total lease cost was approximately $2.4 million for the lease period. The Company’syear ended December 31, 2019; total rent expense was approximately $667,000, $625,000,$1.2 million and $628,000$0.7 million for the years ended December 31, 2018, and 2017, 2016,respectively. The components of lease costs, which were included in selling, general and 2015, respectively.administrative, net in its consolidated statements of operations, were as follows (in thousands):
| | | | | | | | | |
| Year Ended December 31, 2019 | | | | |
| | | | | |
Operating lease cost | $ | 2,037 | | | | | |
Variable lease cost | 320 | | | | | |
Total lease cost | $ | 2,357 | | | | | |
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2019, the maturities of operating lease liabilities were as follows (in thousands):
| | | | | |
| Operating leases |
2020 | $ | 2,603 | |
2021 | 2,610 | |
2022 | 2,431 | |
2023 | 2,181 | |
2024 | 2,247 | |
Thereafter | 764 | |
Total lease payments | 12,836 | |
Less: Imputed interest | (2,895) | |
Operating lease liabilities | $ | 9,941 | |
As of December 31, 2019, the weighted average remaining lease term is 4.9 years and the weighted average operating discount rate used to determine the operating lease liability was 10.3%.
ASC 840 Disclosure
The Company elected the alternative modified transition method and included the following tables previously disclosed. As of December 31, 2018, future minimum lease payments under the non-cancelable facility operating lease, were as follows (in thousands):
| | | | | |
| Amount |
2019 | $ | 1,938 | |
2020 | 1,996 | |
2021 | 2,056 | |
2022 | 2,118 | |
2023 | 2,181 | |
Thereafter | 3,011 | |
Total | $ | 13,300 | |
9. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company has entered into agreements for the supply of API and the manufacture of commercial supply of GOCOVRI, with Moehs Ibérica, S.L. and Catalent Pharma Solutions, LLC, respectively. Under the terms of the agreements, the Company will supply the vendors with non-cancelable firm commitment purchase orders. The Company has also entered into other agreements with certain vendors for the provision of services, including services related to data access and packaging, under which the Company is contractually obligated to make certain payments to the vendors.
The Company enters into contracts in the normal course of business that include, among others, arrangements with CROs for clinical trials, vendors for pre-clinicalpreclinical research, and vendors for manufacturing. These contracts generally provide for termination upon notice, and therefore the Company believes that its obligations under these agreements are not material.
As of December 31, 2017, future minimum lease payments under2019, the non-cancelable facility operating lease andCompany had non-cancelable purchase commitments were as follows (in thousands):
|
| | | |
| December 31, 2017 |
2018 | $ | 3,782 |
|
2019 | 2,019 |
|
2020 | 591 |
|
2021 | — |
|
2022 | — |
|
Thereafter | — |
|
Total | $ | 6,392 |
|
of $4.0 million due within one year.Contingencies
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
agreements is unknown, because it involves claims that may be made against the Company in the future, but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
Indemnification
In accordance with the Company’s amended and restated certificate of incorporation and amended and restated bylaws, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving in such capacity. There have been no claims to date, and theThe Company has a directors and officers liability insurance policy that may enable it to recover a portion of any amounts paid for future claims.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In addition, in the normal course of business, the Company enters into contracts and agreements that may contain a variety of representations and warranties and provide for general indemnifications. For example, the Company provided certain indemnifications to its agents and underwriters as part of the Company’s January 2018 underwritten secondary public offering of common stock. Underwriters have now made a claim to such indemnifications in conjunction with the ongoing litigation involving that transaction.
Litigation and Other Legal Proceedings
In November 2012, the Company granted Forest an exclusive license to certain of the Company’s intellectual property rights relating to human therapeutics containing memantine in the United States. Under the terms of that license agreement, Forest has the right to enforce such intellectual property rights which are related to its right to market and sell Namzaric and Namenda XR for the treatment of moderate to severe dementia related to Alzheimer’s disease. The Company has a right to participate in, but not control, such enforcement actions by Forest.
AsIn 2018 and as of the date of this filing, severalmultiple generic companies have submitted Abbreviated New Drug Applications, or ANDAs, including one or more certifications pursuant to 21 U.S.C. § 355(j)(2)(A)(vii)(iv) to the FDA requesting approval to manufacture and marketlaunched generic versions of Namenda XR, on which the Company is entitled to receive royalties from Forest beginning in June 2018. In the notices, these companies allege that the patents associated with Namenda XR, some of which are owned by Forest or licensed by Forest from Merz Pharma GmbH & Co. KGaA, and others of which are owned by the Company and licensed by the Company exclusively to Forest in the United States, are invalid, unenforceable, and/or will not be infringed by the companies’ manufacture, use, or sale of generic versions of Namenda XR. The Company, Forest, Merz Pharma GmbH & Co. KGaA, and Merz Pharmaceuticals GmbH (together Merz) filed lawsuits in the U.S. District Court for the District of Delaware for infringement of the relevant patents against all of these companies. The Company and Forest will continue to enforce the patents associated with Namenda XR.
The Company and Forest have entered into a series of settlement agreements with all Namenda XR ANDA filers, except for one ANDA filer. Entry dates for generic Namenda XR are governed by the settlement agreements in that action. Subject to those agreements, the earliest date on which any of these agreements grants a license to market generic version of Namenda XR is January 31, 2020 or in the alternative, an option to launch an authorized generic version of Namenda XR beginning on January 31, 2021.
In January 2016, the Delaware District Court issued a claim construction (Markman) ruling in the Namenda XR litigation that includes findings of indefiniteness as to certain claim terms in the asserted patents licensed by the Company to Forest. On July 26, 2016, the District Court issued a final judgment of invalidity on those patents based upon the Markman ruling. The Company and Forest filed the notice of appeal of that final judgment to the United States Court of Appeals for the Federal Circuit (“Federal Circuit”). On December 11, 2017, the Federal Circuit issued a non-precedential opinion affirming the final judgment of the district court. On January 10, 2018, the Company and Forest filed a petition for rehearing/rehearing enbanc with the Federal Circuit. On February 12, 2018, the appellate court denied that petition and on February 20, 2018, the mandate of the court was issued. Based upon the terms of certain settlement agreements with generic filers related to Namenda XR, certain generic filers can now commercialize generic versions of Namenda XR, if approved by the FDA.
On June 2, 2017, the Company and Forest filed a lawsuit against the remaining ANDA filer in the U.S. District Court for the District of Delaware for infringement of certain patents based on that filer’s filing of an ANDA seeking FDA approval to manufacture and market generic versions of Namenda XR that included one or more certifications pursuant to 21 U.S.C. § 355(j)(2)(A)(vii)(iv). This action is ongoing and in a very early stage.
On July 24, 2017, an ANDA filer that previously entered into a settlement agreement with Forrest and the Company filed a complaint against the Company and Forest in the Court of Chancery of the State of Delaware alleging that Forest and the Company breached the license agreement and settlement agreement entered into with that filer to settle the litigation related to its ANDA referencing Namenda XR as the reference listed drug. As of the date of this filing, this action has been settled by the parties.
Additionally, as of the date of this filing, a number of companies have submitted ANDAs including one or more certifications pursuant to 21 U.S.C. § 355(j)(2)(A)(vii)(iv) to the FDA requesting approval to manufacture and market generic versions of Namzaric, on which the Company is entitled to receive royalties from Forest beginning in May 2020. The Company and Forest have filed lawsuits alleging infringement of the relevant patents against Namzaric ANDA filers, who are seeking to launch generic versions of Namzaric, in the same court as heard the Namenda XR litigation. As of the date of this filing, the Company and Forest have settled with all but one of thesuch Namzaric ANDA filers, including all first filers on all the available dosage forms of Namzaric. Entry dates for generic Namzaric are governed by the settlement agreements in those actions. Subject to those agreements, the earliest date on which any of these agreements grants a license to market generic version of Namzaric is January 1, 2025 or in the alternative, an option to launch an authorized
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
generic version of Namzaric beginning on January 1, 2026, or earlier in certain circumstances. The Company and Forest intend to continue to enforce the patents associated with Namzaric.
On June 2, 2017, the Company and Forest filed a lawsuit against the remaining ANDA filer in the U.S. District Court for the District of Delaware for infringement of certain patents based on its filing of an ANDA seeking FDA approval to manufacture and market generic versions of Namzaric that included one or more certifications pursuant to 21 U.S.C. § 355(j)(2)(A)(vii)(iv). This action is ongoing and in a very early stage.
On April 20, 2017, an opposition was filed against the Company’s European Patent EP 2 506 709 B1, which relates to extended release compositions comprising amantadine or a pharmaceutically acceptable salt thereof. On May 26, 2017, the Company received a Communication of Notices of Opposition (R. 79(1) EPC) from the European Patent Office that requested the Company file its observations in response to the opposition within a period of four months from May 26, 2017. The Company filed its response to the opposition on October 5, 2017.
On February 16, 2018, Osmotica Pharmaceuticals LLC and Vertical Pharmaceuticals LCCLLC (“Osmotica”) filed an action against the Company in U.S. District Court for the state of Delaware, requesting a declaratory judgment that Osmotica’s newly-approved product Osmolex ER™ (amantadine) extended release tablets doesdo not infringe certain of Adamas’the Company’s patents. AsOn September 20, 2018, the Company filed its first amended answer including infringement counterclaims against Osmotica asserting Osmotica has infringed nine Company patents under 35 U.S.C. §§ 271(a), (b), and/or (c) and 35 U.S.C. § 271(e)(2)(A) and seeking various forms of relief, including damages, treble damages, injunctive relief, and an order pursuant to 35 U.S.C. § 271(e)(4)(A) that the effective date of any approval of Osmotica’s NDA for Osmolex ER™ be a date that is not earlier than the latest expiration date of the Company patents involved in the lawsuit. This action is ongoing, but was stayed on May 23, 2019 at the parties’ joint request.
On March 13, 2018, the FDA’s New Paragraph IV Certifications list was updated to reflect that an ANDA seeking authorization from the FDA to manufacture, use, or sell a generic version of GOCOVRI (amantadine) extended release capsules, containing one or more certifications pursuant to 21 U.S.C. § 355(j)(2)(A)(vii)(IV) (“paragraph IV certification”), was submitted to the FDA on January 16, 2018, and has been accepted for filing. Subsequent to this date, the Company received a letter from attorneys representing Sandoz, Inc. (“Sandoz”) dated March 29, 2018, notifying it that Sandoz filed an ANDA for Amantadine Extended-Release Capsules, 137 mg that contains paragraph IV certifications seeking to obtain approval to engage in the commercial manufacture, use or sale of Amantadine Extended-Release Capsules, 137 mg before the expiration of U.S. Patent Nos. 8,389,578; 8,741,343; 8,796,337; 8,889,740; 8,895,614; 8,895,615; 8,895,616; 8,895,617; 8,895,618; 9,867,791; 9,867,792; 9,867,793; and 9,877,933. On May 10, 2018, Adamas Pharma, LLC, a wholly-owned subsidiary of the Company, filed a lawsuit against Sandoz alleging
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
infringement of these patents against Sandoz in the United States District Court for the District of New Jersey. On February 7, 2019, Adamas Pharma, LLC amended its complaint in this case to also allege infringement of U.S. Patent No. 10,154,971. On December 30, 2019, Adamas Pharma, LLC entered into a definitive agreement (the “Settlement Agreement”) with Sandoz pursuant to which the parties agreed to end the lawsuit and dismiss it without prejudice, and the Court dismissed the lawsuit on January 6, 2020. Pursuant to the Settlement Agreement, Adamas Pharma, LLC grants Sandoz a license to make, use, sell, offer to sell and import a generic version of GOCOVRI (amantadine) extended release capsules (including for any new indications approved under the GOCOVRI NDA), effective as of March 4, 2030, or earlier in certain circumstances typical for such agreements. The Settlement Agreement contains provisions that may accelerate the license date, including if unit sales of GOCOVRI for the 12-month period ending July 31, 2025 or any subsequent 12-month period decline by a specified percentage below GOCOVRI unit sales for the year ending December 31, 2019. The Company and Adamas Pharma LLC intend to continue to enforce the patents associated with GOCOVRI.
On April 1, 2019, the Company was served with a complaint filed in the United States District Court for the Northern District of California (Case No. 3:18-cv-03018-JCS) against the Company and several Allergan entities alleging violations of Federal and state false claims acts (“FCA”) in connection with the commercialization of Namenda XR and Namzaric by Allergan. The lawsuit is a qui tam complaint brought by a named individual, Zachary Silbersher, asserting rights of the Federal government and various state governments. The lawsuit was originally filed in May 2018 under seal, and the Company became aware of the lawsuit when it was served. The complaint alleges that patents held by Allergan and the Company covering Namenda XR and Namzaric were procured through fraud on the United States Patent and Trademark Office and that these patents were asserted against potential generic manufacturers of Namenda XR and Namzaric to prevent the generic manufacturers from entering the market, thereby wrongfully excluding generic competition resulting in an artificially high price being charged to government payors. The Company’s patents in question were licensed exclusively to Forest. The complaint includes a claim for damages of “potentially more than $2.5 billion dollars,” treble damages “under the federal FCA and most of the State FCAs,” and “statutory penalties that can be assessed for each false claim.” This action is ongoing.
The federal and state governments have declined to intervene in this action. To the Company’s knowledge, the individual plaintiff is pursuing the lawsuit in his individual capacity. The Company believes it has strong factual and legal defenses and intends to defend itself vigorously. The Company is in the early stages of this filing, Adamaslitigation.
On May 13, 2019, a putative class action lawsuit alleging violations of the federal securities laws was filed in California Superior Court for the County of Alameda (Case No. RG1901875). The lawsuit alleges violations of the Securities Act of 1933 by the Company and certain of the Company’s current and former directors and officers for allegedly making false statements and omissions in the registration statement and prospectus filed by the Company in connection with our January 24, 2018, secondary public offering of common stock. On December 10, 2019, another putative class action lawsuit alleging violations of the federal securities laws was filed in federal court in the Northern District of California (Case No. 4:19-cv-08051). This lawsuit alleges violations of the Securities Act of 1934 by the Company and certain of the Company’s former officers. Other similar cases may be filed in the future. In both of these actions, Plaintiffs seek unspecified monetary damages and other relief. These actions are ongoing. The Company believes it has not received service of a summonsstrong factual and complaint.legal defenses to both actions and intends to defend itself vigorously.
From time to time, the Company may be party to legal proceedings, investigations, and claims in the ordinary course of its business. Other than the matters described above, the Company is not0t currently party to any material legal proceedings.
9.10. LONG-TERM DEBT
Royalty-Backed Loan Agreement
In May 2017, the Company, through a new wholly-owned subsidiary, Adamas Pharma, LLC, entered into a Royalty-Backed Loan with HCRP, whereby the Company initially borrowed $35.0$35 million, followed by an additional $65.0$65 million received in the fourth quarter 2017 upon FDA approval and FDA’s recognition in the Orange Book of the seven-year orphan drug exclusivity, which GOCOVRI earned upon approval on August 24, 2017. Principal and interest will be payable quarterly from the proceeds of a 12.5% royalty on U.S. net sales of GOCOVRI and up to $15.0$15 million of the Company’s annual royalties from Allergan on U.S. net sales of Namzaric starting in May 2020, pursuant to the Company’s license
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
agreement with Allergan. The royalty rate on net sales of GOCOVRI will drop to 6.25% after the principal amount of the loan has been repaid in full, until the Company has made total payments of 200% of the funded amounts. The Company may elect to voluntarily prepay the loan at any time;time, or may be required to prepay subject to specified prepayment trigger events as described below, in which case the amount due will be 200% of the funded amounts, less total payments made to date. Royalty rates are subject to increase to 17.5% and 22.5% if total principal and interest payments have not reached minimum specified levels at measurement dates on December 2021 and December 2022, respectively. Under the terms of the loan, HCRP has recourse to Adamas Pharma, LLC, not the Company. The loan agreement matures in December 2026 but as the repayment of the loan amount is contingent upon the sales volumes of GOCOVRI and royalties from Allergan, the repayment term may be shortened depending on the actual sales of GOCOVRI and actual royalties received from Allergan.
The loans bear interest at an annual rate of 11% on the outstanding principal amount and includes an interest-only period until the interest payment date following the ninth full calendar quarter after the $65.0$65 million additional loan.loan received in the fourth quarter 2017. To the extent that royalties are insufficient to pay interest in full during the first nine quarters of the loan, any unpaid portion of the quarterly interest payment will be added to the principal amount of the loans. For the twelve months ended December 31, 2017, accrued interest in the amount of $4.4 million was added to the principal balance of the loan.
In connection with the Royalty-Backed Loan, in 2017 the Company paid HCRP a lender expense amount of $0.4 million and incurred additional debt issuance costs totaling $0.8 million. The lender expense and additional debt issuance costs have been recorded as a debt discount and are being amortized and recorded as interest expense over the estimated term of the loan using the effective interest method. The Company recorded interest expense, including amortization of
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
the debt discount, related to the Royalty-Backed Loan, of $15.0 million, $19.1 million, and $4.6 million for the twelve months ended December 31, 2017.2019, 2018, and 2017, respectively. Interest expense over the life of the Royalty-Backed Loan includes an annual interest rate of 11% on the outstanding principal, a royalty rate of 6.25% on net sales of GOCOVRI after the principal amount is paid, and amortization of the debt discount. The effective interest rate as of December 31, 20172019 on the amounts borrowed under the Royalty-Backed Loan, including the amortization of the debt discount, was 19.1%13.4%.
The assumptions used in determining the expected repayment term of the loan and amortization period of the debt discount require that the Company make estimates that could impact the short and long-term classification of these costs, as well as the period over which these costs will be amortized and the effective interest rate.
The Company may be required to make mandatory prepayments of the borrowings under the Royalty-Backed Loan subject toupon the occurrence of specified prepayment trigger events, including: (1) the occurrence of any event of default or (2) the occurrence of a change in control. Upon the prepayment of all or any of the outstanding principal balance, the Company shall pay, in addition to such prepayment, a prepayment premium. As HCRP, as the holder of the loans, may exercise the option to require prepayment by the Company, the prepayment premium is considered to be an embedded derivative which is required to be bifurcated from its host contract and accounted for as a separate financial instrument. The valuation of the embedded derivative is described further in Note 4.3.
Long-term debt and unamortized debt discount balancesPayment obligations under the Royalty-Backed Loan are as follows (in thousands):
| | | | | | | | December 31, | |
| December 31, 2017 | | December 31, 2016 | | 2019 | | 2018 |
Loans payable, gross | $ | 100,000 |
| | $ | — |
| |
Less: Unamortized debt discount and issuance costs | (1,747 | ) | | — |
| |
Plus: Unpaid portion of quarterly interest payment | 4,394 |
| | — |
| |
Total repayment obligation | | Total repayment obligation | $ | 200,000 | | | $ | 200,000 | |
Less: Interest to be accreted in future periods | | Less: Interest to be accreted in future periods | (63,217) | | | (78,261) | |
Less: Payments made | | Less: Payments made | (9,068) | | | (2,618) | |
Carrying value of loans payable | $ | 102,647 |
| | $ | — |
| Carrying value of loans payable | $ | 127,715 | | | $ | 119,121 | |
Less: Current portion of long-term debt | — |
| | — |
| Less: Current portion of long-term debt | (2,041) | | | (1,664) | |
Non-current portion of long-term debt | $ | 102,647 |
| | $ | — |
| Non-current portion of long-term debt | $ | 125,674 | | | $ | 117,457 | |
The estimated fair value of the long-term debt, as measured using Level 3 inputs, approximates $109.5$108.1 million as of December 31, 2017.2019. The estimated fair value was calculated in the same methodology as the valuation of the embedded derivative as described further in Note 4. 3.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
There are no contractual minimum principal payments due until the loan matures in December 2026 as the repayment of the loan amount is contingent upon the sales volumes of GOCOVRI and royalties from Allergan.Allergan on U.S. net sales of Namzaric.
10.11. CONVERTIBLE PREFERRED STOCK
The Company’s amended and restated certificate of incorporation filed on April 15, 2014, authorizes 5,000,000 shares of preferred stock, of which there were no0 shares outstanding as of December 31, 20172019 and 2016. 2018.
11.12. STOCKHOLDERS’ EQUITY
Common Stock
The amended and restated certificate of incorporation authorizes the Company to issue 100,000,000 shares of common stock. Common stockholders are entitled to dividends as and when declared by the board of directors, subject to the rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no0 dividends declared to date. Each share of common stock is entitled to one1 vote.
Public Offering
In January 2016,2018, the Company completed a follow-on public offering of 2,875,0003,450,000 shares of common stock, which includes the exercise in full by the underwriters of their option to purchase 375,000450,000 shares of common stock, at an
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
offering price of $23.00$41.50 per share. Proceeds from the follow-on public offering were approximately $61.8$134.3 million, net of underwriting discounts and offering-related transaction costs.
Sales AgreementsAgreement
In June 2015,November 2019 the Company entered into a sales agreement (“2015 Sales Agreement”) with a sales agent, pursuant to which the Company was able to, at its discretion, issue and sell common stock from time to time with a value of up to a maximum of $25.0 million in an at-the-market offering. The sales agent earned a 3% commission on gross proceeds for any sales of common stock made under the 2015 Sales Agreement. The 2015 Sales Agreement was terminated in November 2016. During the year ended December 31, 2016, there were no shares sold under the 2015 Sales Agreement. The Company sold a total of 509,741 shares under the 2015 Sales Agreement in 2015 at prevailing market prices with an average price of $20.04 for net proceeds of $9.7 million.
In May 2017, the Company entered into a sales agreement (“2017 Sales Agreement”) with Cowen and Company, LLC (“Cowen”), as sales agent, pursuant to which the Company may, from time to time, issue and sell at its option, shares of the Company’s common stock for an aggregate offering price of up to $50.0 million under an at-the-market offering (“ATM Offering”). Sales of the common stock, if any, will be made pursuant to a shelf registration statement that was declared effective by the Securities and Exchange Commission (“SEC”) on November 21, 2016.December 2, 2019. Cowen is acting as sole sales agent for any sales made under the Sales Agreement and the Company will pay Cowen a commission of up to 3% of the gross proceeds. The Company’s common stock will be sold at prevailing market prices at the time of the sale, and, as a result, prices may vary. The Company is not obligated to make any sales of shares of common stock under the Sales Agreement. Unless otherwise terminated earlier, the Sales Agreement continues until all shares available under the Sales Agreement have been sold. As of December 31, 2017,2019, no shares have been sold under the Sales Agreement.
Shares reservedReserved for Future Issuance
Shares of the Company’s common stock reserved for future issuance are as follows:
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
Common stock awards issued and outstanding | 6,874,633 | | | 5,949,436 | |
Authorized for future issuance under 2014 Equity Incentive Plan | 2,376,613 | | | 1,814,179 | |
Authorized for future issuance under 2016 Inducement Plan | 236,269 | | | 512,440 | |
Employee stock purchase plan | 926,943 | | | 847,105 | |
Total | 10,414,458 | | | 9,123,160 | |
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
| | | | | |
| December 31, 2017 | | December 31, 2016 |
Common stock awards issued and outstanding | 5,564,635 |
| | 5,483,557 |
|
Authorized for future issuance under 2014 Equity Incentive Plan | 1,723,733 |
| | 1,576,926 |
|
Authorized for future issuance under 2016 Inducement Plan | 188,715 |
| | 334,062 |
|
Employee stock purchase plan | 693,856 |
| | 532,849 |
|
Total | 8,170,939 |
| | 7,927,394 |
|
12.13. STOCK-BASED COMPENSATION
Stock Compensation Plans
In October 2002, the Company established its 2002 Employee, Director, and Consultant Stock Plan and in December 2007, the Company established its 2007 Stock Plan. NoNaN further grants were then made under the 2002 Plan.
In February 2014, the Company’s board of directors adopted, and in March 2014 the Company’s stockholders approved, the 2014 Equity Incentive Plan (the “2014 Plan”), which became effective on the completion of the IPO. NoNaN further grants were then made under the 2007 Plan. Under the 2014 Plan, 1,993,394 shares of the Company’s common stock were made available for issuance which included all shares that, as of the effective time, were reserved for issuance pursuant to the 2007 Plan, and is subject to further increase for shares that were subject to outstanding options under the 2007 Plan and the 2002 Plan as of the effective time that thereafter expire, terminate, or otherwise are forfeited or reacquired. The number of shares of the Company’s common stock reserved for issuance pursuant to the 2014 Plan will automatically increase on the first day of each fiscal year for a period of up to 10 years, commencing on the first day of the fiscal year following 2014, in an amount equal to 4% of the total number of shares of the Company’s capital stock outstanding on the last day of the preceding fiscal year, or a lesser number of shares as determined by the Company’s board of directors. For 2017, 2016, and 2015,On January 1, 2019, the common stock available for issuance under the 2014 Plan increased by
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
880,362, 739,708, and 701,763 shares of common stock, respectively. 1,097,374 shares. As of December 31, 2017,2019, the number of shares available for issuance under the 2014 Plan was 1,723,733.2,376,613.
Options granted under the 2014 Stock Plan may have terms of up to ten years. All options issued to date have had a ten year life. The exercise price of an ISO shall not be less than 100% of the estimated fair value of the shares on the date of grant, as determined by the board of directors. The exercise price of an ISO and NSO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant, respectively, as determined by the board of directors. The exercise price of a NSO shall not be less than the par value per share of common stock. The optionsOptions and restricted stock units granted generally vest over four years and vest at a rate years. Certain grants have other vesting periods approved by the Company’s Board of 25% upon the first anniversary of the issuance date and 1/48th per month thereafter. Restricted stock units granted vest at a rate of 25% per year over four years.Directors or an authorized committee.
In March 2016, the Company’s board of directors approved the 2016 Inducement Plan (the “Inducement Plan”) under which 450,000 shares of the Company’s common stock were made available for issuance. In each of January 2017, November 2017, and March 2019, an amendment to the Inducement Plan was approved to increase the number of shares available for issuance an additional 450,000 shares, for a total of 900,000 shares.1,350,000 shares, resulting in a total of 1,800,000 shares of common stock issuable under the Inducement Plan. As of December 31, 2019, the number of shares available for issuance under the Inducement Plan was 236,269. Options granted under the Inducement Plan may have terms of up to ten years. All options issued to date have had a ten year life. Consistent with the 2014 Plan, options and restricted stock units granted generally vest over four years and vest at a rate of 25% upon the first anniversary of the issuance date and 1/48th per month thereafter. Restricted stock units granted vest at a rate of 25% per year over four years. The Inducement Plan was adopted by the board of directors without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Stock Option Activity
The stockStock option and related activity under all of the Company’s stock compensation plans is summarized as follows:
| | | | Outstanding Options | | Weighted Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value (thousands) | | Outstanding Options | | | Weighted Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value (thousands) |
| | Number of Shares | | Weighted Average Exercise Price | | | Number of Shares | | Weighted Average Exercise Price | | | | |
Stock Options | | Weighted Average Remaining Contractual Term (years) | Stock Options | | | | | | | Aggregate Intrinsic Value (thousands) |
Balances, December 31, 2016 | | 5,270,196 |
| | $ | 9.60 |
| | | |
| |
Balances, December 31, 2018 | | Balances, December 31, 2018 | | 5,301,066 | | | $ | 14.98 | | | | | |
Options granted | | 1,444,675 |
| | 18.87 |
| | | | | Options granted | | 1,721,508 | | | 6.48 | | | | | |
Options exercised | | (1,183,353 | ) | | 7.63 |
| | | | |
| Options exercised | | (184,626) | | | 1.59 | | | | | |
Options forfeited | | (383,243 | ) | | 16.42 |
| | | | | Options forfeited | | (605,595) | | | 18.69 | | | | | |
Options expired | | (10,691 | ) | | 20.29 |
| | | | | Options expired | | (715,669) | | | 17.34 | | | | | |
Balances, December 31, 2017 | | 5,137,584 |
| | $ | 12.12 |
| | 6.48 | | $ | 111,981 |
| |
Vested and expected to vest, December 31, 2017 | | 4,991,486 |
| | $ | 11.99 |
| | 6.43 | | $ | 109,438 |
| |
Exercisable, December 31, 2017 | | 3,363,191 |
| | $ | 9.01 |
| | 5.31 | | $ | 83,688 |
| |
Balances, December 31, 2019 | | Balances, December 31, 2019 | | 5,516,684 | | | $ | 12.06 | | | 5.43 | | $ | 2,015 | |
Vested and expected to vest, December 31, 2019 | | Vested and expected to vest, December 31, 2019 | | 5,334,042 | | | $ | 12.09 | | | 5.35 | | $ | 2,015 | |
Exercisable, December 31, 2019 | | Exercisable, December 31, 2019 | | 3,487,330 | | | $ | 12.54 | | | 3.97 | | $ | 2,015 | |
The aggregate intrinsic value of options outstanding, vested and expected to vest, and exercisable were calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of December 31, 20172019 of $33.89.$3.79. The intrinsic value of options exercised, calculated as the difference between the exercise price and the fair value of the Company’s common stock on the date of exercise, was approximately $18.1$0.9 million, $6.6$9.2 million, and $6.6$18.1 million for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, respectively.
During the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, the Company granted stock options to employees to purchase 1,439,675, 1,030,375,1,721,508, 1,289,396, and 917,1501,439,675 shares of common stock, respectively, with a weighted-average grant date fair value of $11.93, $9.15,$4.01, $16.08, and $11.47,$11.93, respectively. As of December 31, 2017,2019, there was total unrecognized compensation cost related to unvested options of approximately $21.4$10.5 million. This cost is expected to be recognized over a weighted average remaining vesting period of 2.6 years. The total fair value of employee stock options vested for the years ended December 31, 2019, 2018, and 2017 2016,was $9.6 million, $12.1 million and 2015 was $10.6 million, $8.4 million and $10.0 million, respectively.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Restricted Stock Unit Activity
The restrictedRestricted stock unit and related activity under all of the Company’s stock compensation plans is summarized as follows:
| | | | | | | | | | | | | | |
| | Outstanding Units | | |
| | | | Weighted-Average Grant Date Fair Value |
| | | | |
Restricted Stock Units | | Number of Shares | | |
Unvested, December 31, 2018 | | 648,370 | | | $ | 16.57 | |
Granted | | 1,185,093 | | | 5.61 | |
Vested | | (151,288) | | | 16.94 | |
Forfeited | | (324,226) | | | 13.12 | |
Unvested, December 31, 2019 | | 1,357,949 | | | $ | 7.79 | |
|
| | | | | | | |
| | Outstanding Units |
| | | | Weighted-Average Grant Date Fair Value |
| | | |
Restricted Stock Units | | Number of Shares | |
Unvested, December 31, 2016 | | 213,361 |
| | $ | 14.66 |
|
Granted | | 349,896 |
| | 19.97 |
|
Vested | | (64,471 | ) | | 14.96 |
|
Forfeited | | (71,735 | ) | | 16.13 |
|
Unvested, December 31, 2017 | | 427,051 |
| | $ | 18.72 |
|
The aggregate intrinsic value of RSUs outstanding on December 31, 20172019 was $14.5$5.1 million based on the fair value of the Company’s common stock on that date. The aggregate intrinsic value of RSUs vested was approximately $1.2 million for the year ended December 31, 2017 and zero for both years ended December 31, 20162019, 2018, and 2015.2017 was $1.0 million, $2.3 million, and $1.2 million, respectively. As of December 31, 2017,2019, there was total unrecognized compensation cost related to unvested RSUs of approximately $7.0$7.7 million. This cost is expected to be recognized over a weighted average remaining vesting period of 3.42.4 years.
Employee Stock Purchase Plan
In February 2014, the Company’s board of directors adopted and, in March 2014, the Company’s stockholders approved, the 2014 Employee Stock Purchase Plan (the “ESPP”), which became effective on the completion of the Company’s IPO. The ESPP authorized the issuance of 262,762 shares. Under the ESPP, employees, subject to certain
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
restrictions, may purchase shares of common stock at 85% of the fair market value at either the beginning of the offering period or the date of purchase, whichever is less. Purchases are limited to the lesser of 15% of each employee’s eligible annual compensation or $25,000. Through the end of 2017,2019, the Company has issued a total of 149,363423,826 shares under the ESPP. The number of shares available for future issuance under the plan were 693,856926,943 at December 31, 2017.2019. Beginning January 1, 2015 and continuing through and including January 1, 2024, the amount of common stock reserved for issuance under the ESPP will increase annually on that date by the lesser of (i) one percent (1%) of the total number of shares of common stock outstanding on such December 31, (ii) 520,000 shares of common stock, or (iii) a number of shares as determined by the board of directors prior to the beginning of each year, which shall be the lesser of (i) or (ii) above. For 2017, 2016, and 2015,On January 1, 2019, the common stock available for issuance under the ESPP increased by 220,090, 184,927, and 175,440 shares of common stock, respectively.274,344 shares.
Stock-Based Compensation Expense
The following table reflects stock-based compensation expense recognized for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 (in thousands):
| | | | | | | | | | Years Ended December 31, | |
| Years Ended December 31, | | 2019 | | 2018 | | 2017 |
| 2017 | | 2016 | | 2015 | |
Research and development | $ | 3,597 |
| | $ | 2,855 |
| | $ | 3,156 |
| Research and development | $ | 1,732 | | | $ | 2,822 | | | $ | 3,597 | |
Selling, general and administrative | 9,770 |
| | 7,716 |
| | 6,800 |
| Selling, general and administrative | 11,120 | | | 12,964 | | | 9,770 | |
| Total stock-based compensation expense | $ | 13,367 |
| | $ | 10,571 |
| | $ | 9,956 |
| Total stock-based compensation expense | $ | 12,852 | | | $ | 15,786 | | | $ | 13,367 | |
Stock-based compensation of $208,000, $202,000, and $39,000 was capitalized into inventory for the twelve months ended December 31, 2019, 2018, and 2017. Stock-based compensation capitalized into inventory is recognized as cost of sales when the related product is sold.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company’s method of valuation for share-based awards is based on the Black-Scholes model. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. A description of the assumptions follows:
•The expected stock price volatility assumption was determined by examining the historical volatilities of a group of industry peers, as well as taking into consideration the Company’s own historical volatility since its IPO in 2014.
•The risk-free interest rate is based on the U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
•The expected term of the options granted represents the average period the stock options are expected to remain outstanding. The Company has elected to use the “simplified method” for estimating the expected term, which is calculated as the mid-point between the vesting period and the contractual term of the options.
•The expected dividend yield assumption was based on the Company’s historicalfact that the Company has never paid cash dividends and expectation of dividend payouts.
Determination of the fair value of the shares of common stock underlying the stock options historicallycurrently has been the responsibility of the Company’s board of directors. Subsequentno intention to the IPO in April 2014, the fair value of common stock is determined based on the closing price of the Nasdaq Global Market.pay cash dividends.
As stock-based compensation expense recognized in the Consolidated Statement of Operations for fiscal years 2017, 2016,2019, 2018, and 20152017 is based on awards ultimately expected to vest, each has been reduced for estimated forfeitures, based on historical experience. ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company estimated the fair value of employee stock options and ESPP shares on the date of grant using the Black-Scholes model with the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
Stock Options | | | | | |
Expected price volatility | 65% - 69% | | 67% - 70% | | 68% - 70% |
Risk-free interest rate | 1.52% - 2.58% | | 2.27% - 3.06% | | 1.83% - 2.17% |
Expected term (in years) | 5.50 - 6.25 | | 5.50 - 6.25 | | 5.50 - 6.25 |
Dividend yield | — | | | — | | | — | |
|
| | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Stock Options | | | | | |
Expected price volatility | 68% - 70% | | 69% - 71% | | 68% - 80% |
Risk-free interest rate | 1.83% - 2.17% | | 1.23% - 1.81% | | 1.37% - 1.95% |
Expected term (in years) | 5.50 - 6.25 | | 5.50 - 6.25 | | 5.50 - 6.25 |
Dividend yield | — | | — | | — |
| | | Years Ended December 31, | | Years Ended December 31, | |
| 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Employee Stock Purchase Plan | | Employee Stock Purchase Plan | | | | | |
Expected price volatility | 51% - 71% | | 68% - 73% | | 56% - 62% | Expected price volatility | 53% - 56% | | 62% - 64% | | 51% - 71% |
Risk-free interest rate | 0.60% - 1.45% | | 0.49% - 0.60% | | 0.07% - 0.41% | Risk-free interest rate | 1.60% - 2.35% | | 2.10% - 2.56% | | 0.60% - 1.45% |
Expected term (in years) | 0.50 | | 0.50 | | 0.50 | Expected term (in years) | 0.50 | | 0.50 | | 0.50 |
Dividend yield | — | | — | | — | Dividend yield | — | | | — | | | — | |
Stock-based compensation expense related to employee stock options for the years ended December 31, 2019, 2018, and 2017 2016, and 2015 was $11.2$9.4 million, $9.3$12.7 million, and $8.7$11.2 million, respectively. Stock-based compensation expense related to the ESPP plan for the years ended December 31, 2019, 2018, and 2017 2016, and 2015 was $0.3$0.4 million, $0.3$0.6 million, and
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
$0.2 $0.3 million, respectively. Stock-based compensation expense related to restricted stock units was $1.3$3.1 million, $0.5$2.3 million, and zero$1.3 million for the years ended December 31, 2019, 2018 and 2017, 2016respectively.
Included in stock-based compensation expense for the year ended 2019 was expense of approximately $2.2 million recognized as a result of the modification of certain stock options and 2015, respectively.restricted stock units associated with the termination of employment in September 2019 of the Company’s Chief Executive Officer and notification of retirement in August 2019 of the Company’s Chief Financial Officer.
Non-Employee Stock-Based Compensation
The Company granted 5,0000 options to purchase common stock and 12,4370 restricted stock units to consultants during the yearyears ended December 31, 2017, 12,600 options to purchase common stock during2019 and 2018. During the year ended 2016,2017, the Company granted 5,000 options and zero shares during the year ended 2015.12,437 restricted stock units to consultants. These restricted stock units and options are granted in exchange for consulting services to be rendered and are measured and recognized as they are earned. Options issued during the year ended 2016 were granted to a member of the Company’s board of directors. The Company believes that the estimated fair value of the restricted stock units and stock options is more readily measurable than the fair value of the services rendered.
The Company estimated the fair value of non-employee stock options using the Black-Scholes model with the following weighted-average assumptions:
| | | Years Ended December 31, | | Years Ended December 31, | |
| 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Expected price volatility | 68% - 80% | | 71% - 77% | | 76% - 82% | Expected price volatility | — | | | 69% - 74% | | 68% - 80% |
Risk-free interest rate | 1.94% - 2.36% | | 1.47% - 2.46% | | 1.84% - 2.26% | Risk-free interest rate | — | | | 2.32% - 2.45% | | 1.94% - 2.36% |
Expected term (in years) | 6.00 - 9.75 | | 7.00 - 9.75 | | 8.00 - 9.00 | Expected term (in years) | — | | | 6.00 - 9.50 | | 6.00 - 9.75 |
Dividend yield | — | | — | | — | Dividend yield | — | | | — | | | — | |
Compensation expense related to non-employee restricted stock units and options for years ended December 31, 2017, 2016,2019, 2018, and 20152017 was approximately $0.6 million, $0.50, $0.2 million, and $1.1$0.6 million, respectively.
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
14. INCOME TAXES
Loss before provisionbenefit for income tax is summarized as follows (in thousands):
| | | Year Ended December 31, | | Years Ended December 31, | |
| 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
United States | $ | (91,220 | ) | | $ | (60,147 | ) | | $ | (57,074 | ) | United States | $ | (105,186) | | | $ | (130,999) | | | $ | (91,220) | |
International | — |
| | (26 | ) | | — |
| International | — | | | — | | | — | |
Total | $ | (91,220 | ) | | $ | (60,173 | ) | | $ | (57,074 | ) | Total | $ | (105,186) | | | $ | (130,999) | | | $ | (91,220) | |
The provisionbenefit for income taxes is summarized as follows (in thousands):
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (1,730 | ) | | $ | (116 | ) | | $ | (5,273 | ) |
State | — |
| | 1 |
| | 1 |
|
Foreign | — |
| | — |
| | — |
|
| (1,730 | ) | | (115 | ) | | (5,272 | ) |
Deferred: | | | | | |
Federal | — |
| | — |
| | — |
|
State | — |
| | — |
| | — |
|
Foreign | — |
| | — |
| | — |
|
| — |
| | — |
| | — |
|
Benefit for income taxes | $ | (1,730 | ) | | $ | (115 | ) | | $ | (5,272 | ) |
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
| | | | | | | | | | | | | | | | | |
| December 31, | | | | |
| 2019 | | 2018 | | 2017 |
Current: | | | | | |
Federal | $ | — | | | $ | — | | | $ | (1,730) | |
State | — | | | — | | | — | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Benefit for income taxes | $ | — | | | $ | — | | | $ | (1,730) | |
The provisionbenefit for income taxes differs from the amount computed by applying the federal income tax rate of 35%21% to pretax loss from operations as a result of the following:
| | | | | | | | | | | | | | | | | |
| December 31, | | | | |
| 2019 | | 2018 | | 2017 |
Statutory federal income tax rate | $ | (22,079) | | | $ | (27,510) | | | $ | (31,927) | |
State income taxes, net of federal tax benefits | (8,473) | | | (10,296) | | | (5,041) | |
| | | | | |
| | | | | |
Tax credits | (1,398) | | | (2,587) | | | (2,306) | |
Impact of federal rate change | — | | | — | | | 24,907 | |
| | | | | |
Change in statutory rates | — | | | 34 | | | (1,440) | |
Stock compensation | 2,648 | | | (569) | | | (2,558) | |
Nondeductible compensation | 278 | | | — | | | — | |
State net operating losses | — | | | — | | | 633 | |
Other | 198 | | | 798 | | | — | |
Change in valuation allowance | 28,826 | | | 40,130 | | | 16,002 | |
Income tax benefit | $ | — | | | $ | — | | | $ | (1,730) | |
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Statutory federal income tax rate | $ | (31,927 | ) | | $ | (21,079 | ) | | $ | (19,976 | ) |
State income taxes, net of federal tax benefits | (5,041 | ) | | (9 | ) | | 1 |
|
Foreign rate differential | — |
| | 10 |
| | — |
|
Tax credits | (2,306 | ) | | (3,905 | ) | | (8,303 | ) |
Impact of federal rate change | 24,907 |
| | — |
| | — |
|
Net operating loss carryback | — |
| | — |
| | 4,099 |
|
Change in statutory rates | (1,440 | ) | | 624 |
| | — |
|
Stock compensation | (2,558 | ) | | (1,109 | ) | | 821 |
|
State net operating losses | 633 |
| | 1,779 |
| | — |
|
Other | — |
| | 109 |
| | 1,330 |
|
Change in valuation allowance | 16,002 |
| | 23,465 |
| | 16,756 |
|
Income tax provision | $ | (1,730 | ) | | $ | (115 | ) | | $ | (5,272 | ) |
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | | December 31, | |
| December 31, | | 2019 | | 2018 |
| 2017 | | 2016 | |
Deferred tax assets | | Deferred tax assets | | | |
Net operating loss carryforwards | $ | 44,177 |
| | $ | 29,102 |
| Net operating loss carryforwards | $ | 99,449 | | | $ | 75,143 | |
Research and development tax credits | 16,189 |
| | 14,453 |
| Research and development tax credits | 20,174 | | | 18,776 | |
Accruals and reserves | 371 |
| | 395 |
| Accruals and reserves | 7,004 | | | 4,655 | |
Stock compensation | 6,244 |
| | 6,902 |
| Stock compensation | 9,291 | | | 8,662 | |
Depreciation and amortization | 1,638 |
| | 1,765 |
| Depreciation and amortization | 1,108 | | | 1,437 | |
Total deferred tax assets | 68,619 |
| | 52,617 |
| |
Lease liabilities | | Lease liabilities | 2,889 | | | — | |
Other (rate change) | | Other (rate change) | — | | | 77 | |
Gross deferred tax assets | | Gross deferred tax assets | 139,915 | | | 108,750 | |
Less: Valuation allowance | (68,619 | ) | | (52,617 | ) | Less: Valuation allowance | (137,576) | | | (108,750) | |
Net deferred tax assets | $ | — |
| | $ | — |
| Net deferred tax assets | 2,339 | | | — | |
Deferred tax liabilities | | Deferred tax liabilities | | | | | |
Right of use assets | | Right of use assets | (2,339) | | | — | |
Net deferred tax liabilities | | Net deferred tax liabilities | (2,339) | | | — | |
Net deferred taxes | | Net deferred taxes | $ | — | | | $ | — | |
The deferred income tax assets have been fully offset by a valuation allowance, as realization is dependent on future earnings, if any, the timing and amount of which are uncertain. The net valuation allowance increased by $16.0$28.8 million and $23.5$40.1 million for the years ended December 31, 20172019 and 2016,2018, respectively.
The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizabilityrealization of its net deferred tax assets. The Company primarily considered such factors as its history of operating losses, the nature of the Company’s deferred tax assets, and the timing, likelihood, and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. The Tax Act repealed corporate alternative minimum tax (“AMT”) for tax years beginning after December 31, 2017, and provides that existing AMT credit carryovers are refundable beginning in 2018 through 2022. The Company has approximately $1.7 million of AMT credit carryovers that are to be fully refunded by 2022 and therefore the deferred tax asset has beenwas reclassed to an income tax receivable.receivable in 2017. As for the remaining deferred tax assets, the Company does not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying balance sheets.
The Company has federal research and development tax credit carryforwards of approximately $3.5$6.6 million. If not utilized, the carryforwards will begin expiring in 2024.2023. The Company has state research and development credit carryforwards of approximately $3.2$4.3 million which do not expire. The Company also has orphan drug credit carryforwards of $13.5 million.$14.4 million which begin to expire in 2035.
Under federal and similar state tax statutes, changes in the Company’s ownership may limit its ability to use its available net operating loss and tax credit carryforwards. The annual limitation, as a result of a change of control, may result in the expiration of net operating losses and credits before utilization.
The Company’s ability to use its remaining net operating loss and tax credit carryforwards may be further limited if the Company experiences a Section 382 ownership change in connection with future changes in its stock
ownership. The Company has completed an IRC Section 382/383 analysis regarding the limitation of net operating loss and research and development credit carryforwards through April 2018 and found that there is no forfeiture of the Company’s attributes.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):