sbbp_Current Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2019

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the Transition Period from _____________ to _____________

Commission file number 001-37569

 

Strongbridge Biopharma plc

(Exact name of Registrant as specified in its charter)

 

 

 

 

Ireland

 

98-1275166

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

900 Northbrook Drive

Suite 200

Trevose, PA 19053

(Address of principal executive offices)

Registrant’s Telephone Number, Including Area Code: +1 6102549200

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and emerging growth company in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large Accelerated Filer

[  ]

Accelerated Filer

[X]

 

 

 

 

Non-Accelerated Filer

[  ]

Smaller Reporting Company

[X]

 

 

 

 

 

 

Emerging Growth Company

[X]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of April 29, 2019, there were 54,172,061 ordinary shares of the registrant issued and outstanding.

 

 

 


 

 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I. 

Financial Information

1

 

 

 

Item 1. 

Financial Statements

1

 

Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018

1

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (unaudited)

2

 

Consolidated Statements of Stockholders’ Equity (unaudited)

3

 

Consolidated Statements of Cash Flow for the Three Months Ended March 31, 2019 and 2018 (unaudited)

4

 

Notes to the Unaudited Consolidated Financial Statements

5

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4. 

Controls and Procedures

22

 

 

 

PART II. 

Other Information

23

 

 

 

Item 1. 

Legal Proceedings

23

Item 1A. 

Risk Factors

23

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3. 

Defaults Upon Senior Securities

25

Item 4. 

Mine Safety Disclosures

25

Item 5. 

Other Information

25

Item 6. 

Exhibits

25

 

 

 

SIGNATURES 

26

 

Solely for convenience, the trademarks and trade names in this Quarterly Report on Form 10-Q (this “Quarterly Report”) are referred to without the ® and symbols, but absence of such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. The trademarks, trade names and service marks appearing in this Quarterly Report are the property of their respective owners.

 

 

 


 

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STRONGBRIDGE BIOPHARMA plc

Consolidated Balance Sheets

(In thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

March 31, 

    

December 31, 

    

 

2019

 

2018

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

104,306

 

$

122,490

 

Accounts receivable

 

3,916

 

 

1,626

 

Inventory

 

4,202

 

 

3,946

 

Prepaid expenses and other current assets

 

2,726

 

 

4,236

 

Total current assets

 

115,150

 

 

132,298

 

Property and equipment, net

 

292

 

 

294

 

Right of use assets, net

 

1,046

 

 

 —

 

Intangible asset, net

 

28,876

 

 

30,132

 

Goodwill

 

7,256

 

 

7,256

 

Other assets

 

862

 

 

305

 

Total assets

$

153,482

 

$

170,285

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

7,494

 

$

1,184

 

Accrued liabilities and other current liabilities

 

14,854

 

 

16,065

 

Total current liabilities

 

22,348

 

 

17,249

 

Warrant liability

 

17,333

 

 

15,513

 

Supply agreement liability, noncurrent

 

15,454

 

 

24,568

 

Other long-term liabilities

 

1,364

 

 

 —

 

Total liabilities

 

56,499

 

 

57,330

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Deferred shares, $1.098 par value, 40,000 shares authorized, issued and outstanding at March 31, 2019 and December 31, 2018

 

44

 

 

44

 

Ordinary shares, $0.01 par value, 600,000,000 shares authorized at March 31, 2019 and December 31, 2018; 54,167,948 and 54,122,074 shares issued and outstanding at March 31, 2019 and December 31, 2018

 

542

 

 

541

 

Additional paid-in capital

 

325,863

 

 

323,402

 

Accumulated deficit

 

(229,466)

 

 

(211,032)

 

Total stockholders’ equity

 

96,983

 

 

112,955

 

Total liabilities and stockholders’ equity

$

153,482

 

$

170,285

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

1


 

Table of Contents

STRONGBRIDGE BIOPHARMA plc

Consolidated Statements of Operations

(In thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31 

 

 

    

2019

    

2018

    

Revenues:

 

 

 

 

 

 

 

Net product sales

 

$

4,333

 

$

3,870

 

Royalty revenues

 

 

10

 

 

 —

 

Total revenues

 

 

4,343

 

 

3,870

 

 

 

 

 

 

 

 

 

Cost and expenses:

 

 

 

 

 

 

 

Cost of sales (excluding amortization of intangible assets)

 

$

813

 

$

667

 

Selling, general and administrative

 

 

12,100

 

 

12,362

 

Research and development

 

 

6,583

 

 

4,881

 

Amortization of intangible assets

 

 

1,256

 

 

1,769

 

Total cost and expenses

 

 

20,752

 

 

19,679

 

Operating loss

 

 

(16,409)

 

 

(15,809)

 

Other expense, net:

 

 

 

 

 

 

 

Income from field services agreement

 

 

2,016

 

 

 —

 

Expense from field services agreement

 

 

(2,229)

 

 

 —

 

Unrealized loss on fair value of warrants

 

 

(1,820)

 

 

(9,700)

 

Interest expense

 

 

 —

 

 

(2,874)

 

Loss on extinguishment of debt

 

 

 —

 

 

(500)

 

Other income, net

 

 

685

 

 

160

 

Total other expense, net

 

 

(1,348)

 

 

(12,914)

 

Loss before income taxes

 

 

(17,757)

 

 

(28,723)

 

Income tax expense

 

 

(677)

 

 

 —

 

Net loss

 

$

(18,434)

 

$

(28,723)

 

 

 

 

 

 

 

 

 

Net loss attributable to ordinary shareholders:

 

 

 

 

 

 

 

Basic and diluted

 

$

(18,434)

 

$

(28,723)

 

Net loss per share attributable to ordinary shareholders:

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.34)

 

$

(0.66)

 

Weighted-average shares used in computing net loss per share attributable to ordinary shareholders:

 

 

 

 

 

 

 

Basic and diluted

 

 

54,155,034

 

 

43,620,746

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

2


 

Table of Contents

STRONGBRIDGE BIOPHARMA plc

Consolidated Statement of Stockholders’ (Deficit) Equity

(In thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

 

Additional

    

 

 

    

Total

 

 

 

Ordinary Shares

 

Deferred Shares

 

Paid-In

 

Accumulated

 

Shareholders’

 

 

 

Shares

    

Amount

    

Shares

    

Amount

    

Capital

 

Deficit

 

(Deficit) Equity

 

Balance—December 31, 2017

 

40,149,812

 

$

401

 

40,000

 

$

44

 

$

230,524

 

$

(242,883)

 

$

(11,914)

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(28,723)

 

 

(28,723)

 

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,688

 

 

 —

 

 

1,688

 

Issuance of shares, net of offering costs

 

5,255,683

 

 

53

 

 —

 

 

 —

 

 

33,455

 

 

 —

 

 

33,508

 

Common stock issued, net of shares withheld for employee taxes

 

89,163

 

 

 1

 

 —

 

 

 —

 

 

(429)

 

 

 —

 

 

(428)

 

Exercise of stock options

 

37,169

 

 

*

 

 —

 

 

 —

 

 

59

 

 

 —

 

 

59

 

Issuance of warrants related to loan agreements

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,663

 

 

 —

 

 

7,663

 

Balance—March 31, 2018

 

45,531,827

 

$

455

 

40,000

 

$

44

 

$

272,960

 

$

(271,606)

 

$

1,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—December 31, 2018

 

54,122,074

 

$

541

 

40,000

 

$

44

 

$

323,402

 

$

(211,032)

 

$

112,955

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(18,434)

 

 

(18,434)

 

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,323

 

 

 —

 

 

2,323

 

Exercise of stock options

 

39,728

 

 

 1

 

 —

 

 

 —

 

 

165

 

 

 —

 

 

166

 

Ordinary shares issued, net of shares withheld for employee taxes

 

6,146

 

 

*

 

 —

 

 

 —

 

 

(27)

 

 

 —

 

 

(27)

 

Balance—March 31, 2019

 

54,167,948

 

$

542

 

40,000

 

$

44

 

$

325,863

 

$

(229,466)

 

$

96,983

 

* Represents an amount less than $1.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3


 

Table of Contents

STRONGBRIDGE BIOPHARMA plc

Consolidated Statements of Cash Flow

(In thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2019

 

2018

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(18,434)

 

$

(28,723)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Change in fair value of warrant liability

 

 

1,820

 

 

9,700

Stock-based compensation

 

 

2,323

 

 

1,688

Amortization of intangible assets

 

 

1,256

 

 

1,769

Interest and related guarantee fees paid in kind

 

 

 —

 

 

766

Amortization of debt discounts and debt issuance costs

 

 

 —

 

 

314

Loss on extinguishment of debt

 

 

 —

 

 

500

Depreciation

 

 

18

 

 

 3

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(2,290)

 

 

(432)

Inventory

 

 

(649)

 

 

(1,150)

Prepaid expenses and other current assets

 

 

1,510

 

 

(567)

Other assets

 

 

(1,210)

 

 

325

Accounts payable

 

 

539

 

 

921

Accrued liabilities and other liabilities

 

 

(3,191)

 

 

(3,133)

Net cash used in operating activities

 

 

(18,308)

 

 

(18,019)

Cash flows from investing activities:

 

 

 

 

 

 

Payment for acquisitions

 

 

 —

 

 

(24,655)

Purchases of property and equipment

 

 

(15)

 

 

 —

Net cash used in investing activities

 

 

(15)

 

 

(24,655)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from long-term debt, net

 

 

 —

 

 

44,930

Payment for loss on extinguishment of debt

 

 

 —

 

 

(500)

Proceeds from issuance of ordinary shares, net

 

 

 —

 

 

33,508

Proceeds from exercise of stock options

 

 

166

 

 

59

Payments related to tax withholding for net-share settled equity awards

 

 

(27)

 

 

(428)

Net cash provided by financing activities

 

 

139

 

 

77,569

Net (decrease) increase in cash and cash equivalents

 

 

(18,184)

 

 

34,895

Cash and cash equivalents—beginning of period

 

 

122,490

 

 

57,510

Cash and cash equivalents—end of period

 

$

104,306

 

$

92,405

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

Interest

 

$

 —

 

$

1,642

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4


 

Table of Contents

 

STRONGBRIDGE BIOPHARMA plc

Notes to Unaudited Consolidated Financial Statements

1. Organization

We are a global, commercial-stage biopharmaceutical company focused on the development and commercialization of therapies for rare diseases with significant unmet needs.

Our first commercial product is Keveyis (dichlorphenamide), the first and only treatment approved by the U.S. Food and Drug Administration (the “FDA”) for hyperkalemic, hypokalemic, and related variants of primary periodic paralysis (“PPP”), a group of rare hereditary disorders that cause episodes of muscle weakness or paralysis.

In January 2018, Strongbridge Ireland Ltd., one of our wholly-owned subsidiaries, acquired the U.S. and Canadian rights to Macrilen (macimorelin), the first and only oral drug approved by the FDA for the diagnosis of patients with adult growth hormone deficiency. We launched Macrilen in the United States in July 2018. In December 2018, we sold Strongbridge Ireland Ltd. to Novo Nordisk Healthcare AG (“Novo”) for $145 million plus the right to receive tiered royalties on net sales of Macrilen through 2027. In addition, Strongbridge U.S. Inc, another of our wholly-owned subsidiaries, entered into an agreement with Novo Nordisk Inc., subsidiary of Novo (“NNI”), pursuant to which NNI will fund the costs of 23 of our field-based employees to provide full-time ongoing services to NNI, including the promotion of Macrilen in the United States, for a period of three years.

We have two clinical-stage product candidates for rare endocrine diseases, Recorlev and veldoreotide. Recorlev (levoketoconazole) is a cortisol synthesis inhibitor currently being studied for the treatment of endogenous Cushing's syndrome. Veldoreotide is a next-generation somatostatin analog being investigated for potential applications in conditions amenable to somatostatin receptor activation, such as acromegaly. Both Recorlev and veldoreotide have received orphan designation from the FDA and the European Medicines Agency (“EMA”).

Liquidity

We believe that our cash resources of $104.3 million at March 31, 2019 will be sufficient to allow us to fund planned operations for at least 12 months beyond the issuance date of these financial statements.

We may never achieve profitability, and unless and until we do, we will continue to need to raise additional capital. We plan to continue to fund our operations and capital funding needs through equity or debt financing along with revenues from Keveyis and royalty revenues from Macrilen. There can be no assurances, however, that additional funding will be available on terms acceptable to us.

 

2. Summary of significant accounting policies and basis of presentation

Basis of presentation

These unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). The unaudited consolidated financial statements reflect all adjustments, which include only normal recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the operating results and financial position for the periods presented.

The preparation of the unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures in the consolidated financial statements.  Actual results could differ from those estimates. Results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

5


 

Table of Contents

These unaudited consolidated financial statements should be read in conjunction with the accounting policies and notes to the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission on February 27, 2019 (the “2018 Annual Report”). Our significant accounting policies are described in Note 2 of the notes to the audited consolidated financial statements included in our 2018 Annual Report. Since the date of those financial statements, there have been no changes to our significant accounting policies.

Royalty Revenues

Royalty revenues are from commercial sales of Macrilen by Novo Nordisk Healthcare AG, based on net sales.

Leases

We account for leases in accordance with Accounting Standards Codification Topic 842, Leases, (“ASC 842”). We determine if an arrangement is a lease at contract inception. A lease exists when a contract conveys to us the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and equipment), and (2) we have the right to control the use of the identified asset.

Operating leases where we are the lessee are included in Right of use (“ROU”) assets and Other current liabilities and Other long-term liabilities on our Consolidated Balance Sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.

Key estimates and judgments include how we determined (1) the discount rate we use to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.

ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

The lease term for all of our leases includes the noncancellable period of the lease. Lease payments included in the measurement of the lease asset or liability comprise of our fixed payments

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date less any lease incentives received.

For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We monitor for events or changes in circumstances that require a reassessment of a lease. If a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.

We have elected not to recognize ROU assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. We recognize the lease payments associated with our short-term leases as an expense on a straight-line basis over the lease term. Variable lease payments associated with these leases are recognized and presented in the same manner as for all our other leases.

6


 

Table of Contents

We adopted ASC 842 using a modified retrospective transition approach as of the effective date, as permitted by the amendments in ASU 2018-11, which provides an alternative modified retrospective transition method. As a result, we were not required to adjust our comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e., January 1, 2019). We have elected to adopt the package of transition practical expedients and, therefore, have not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. We did not elect the practical expedient to use hindsight for leases existing at the adoption date. Further, we do not expect the amendments in ASU 2018-01: Land Easement Practical Expedient to have an effect on us because we do not enter into land easement arrangements.

Income and Expense from Field Services Agreement

For our field services agreement with NNI, our income and expense are being recorded as non-operating income and expense, respectively.

Segment information

Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. We view our operations and manage our business in one operating segment. 

Net loss per share

Basic net loss per share is calculated by dividing the net loss attributable to shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss attributable to shareholders by the weighted‑average number of ordinary shares outstanding for the period, including any dilutive effect from outstanding stock options or other equity-based awards. Shares used in the diluted net loss per share calculations exclude anti‑dilutive ordinary share equivalents, which currently consist of outstanding stock options, unvested restricted stock units (“RSUs”) and warrants.

The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as of March 31, 2019 and 2018, as they would be anti-dilutive:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2019

2018

Warrants

 

 

6,833,253

 

8,803,253

Stock options issued and outstanding

    

 

10,205,851

 

7,960,469

Unvested RSUs

 

 

758,850

 

173,400

 

Recent accounting pronouncements – not yet adopted

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other:  Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard, which will be effective for us beginning in the first quarter of fiscal year 2020, is required to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact this new accounting guidance will have on our consolidated financial statements.

 

 

7


 

Table of Contents

3. Revenue recognition

Product sales, net

We sell Keveyis to one specialty pharmacy provider (the “Customer”), who is the exclusive distributor of Keveyis in the United States.  The Customer subsequently resells Keveyis to patients,  most of whom are covered by payors that may provide for government-mandated or privately negotiated rebates with respect to the purchase of Keveyis. 

Revenues from sales of Keveyis are recognized when we satisfy a performance obligation by transferring control of the product to our customers. Transfer of control occurs upon receipt of the product by the customer.  We expense incremental costs related to the set-up of contracts with our customers when incurred, as these costs do not meet the criteria for capitalization.

Reserves for variable consideration

 

Revenues from sales of Keveyis are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and that result from rebates, co-pay assistance and other allowances that are offered between us and the patients’ payors.  There is no variable consideration reserve for returns as we do not accept returns of Keveyis.  These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than the Customer). Where appropriate, these estimates may take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. We reassess our estimates on an ongoing basis. If actual results in the future vary from our estimates, we will adjust our estimates. Any such adjustments would affect net product revenue and earnings in the period such variances become known.

Trade Discount: We provide the Customer with a discount that is explicitly stated in our contract and is recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we receive sales order management, data and distribution services from the Customer. To the extent, the services received are distinct from our sale of Keveyis to the Customer, these payments are classified in selling, general and administrative expenses in our consolidated statement of operations and comprehensive loss.

Funded Co-pay Assistance Program: We contract with a third-party to manage the co-pay assistance program intended to provide financial assistance to qualified insured patients. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with Keveyis that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period. These payments are consideration payable to the Customer and the related reserve is recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheet.

Government Rebates: We are subject to discount obligations under state Medicaid programs and Medicare. We estimate our Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated patient mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included in accrued expenses on the consolidated balance sheet. For Medicaid, accruals are based on estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. Effective January 1, 2011, manufacturers of pharmaceutical products are responsible for 50% of the patient’s cost of branded prescription drugs related to the Medicare Part D Coverage Gap. In order to estimate the cost to us of this Medicare

8


 

Table of Contents

coverage gap responsibility, we estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Our liability for these rebates consists of estimates of claims for the current quarter and estimated future claims that will be made for Keveyis that have been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.

Temporary Supply and Patient Assistance Programs: We provide free Keveyis to uninsured patients who satisfy pre-established criteria for either the Temporary Supply Program or the Patient Assistance Program.  Patients who meet the Temporary Supply Program eligibility criteria may receive a temporary supply of free Keveyis for no more than sixty days while there is a determination of the patient’s third-party insurance, prescription drug benefit or other third-party coverage for Keveyis.  The Patient Assistance Program provides free Keveyis for up to twelve months to uninsured patients who satisfy pre-established criteria for financial need.  We do not recognize any revenue related to these free products and the associated costs are classified in selling, general and administrative expenses in our consolidated statements of operations and comprehensive loss.

Royalty Revenues

Royalty revenues are from commercial sales of Macrilen by Novo Nordisk Healthcare AG, based on net sales.

 

4. Fair value measurement

We follow FASB accounting guidance on fair value measurements for financial assets and liabilities measured on a recurring basis. Because of their short-term nature, the amounts reported in the balance sheet for cash and accounts payable approximate fair value.

The guidance requires fair value measurements to maximize the use of “observable inputs.” The three-level hierarchy of inputs to measure fair value are as follows: 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Because of their short-term nature, the amounts reported in the balance sheet for cash and accounts payable approximate fair value.

Level 2: Significant observable inputs other than Level 1 prices such as quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The fair values of the outstanding warrants were measured using the Black-Scholes option-pricing model. Inputs used to determine estimated fair value of the warrant liabilities include the estimated fair value of the underlying stock at the valuation date, the estimated term of the warrants, risk-free interest rates, expected dividends and the expected volatility of the underlying stock. The significant unobservable inputs used in the fair value measurement of the warrant liabilities were the volatility rate and the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement.

We did not have any transfers between the different levels.

9


 

Table of Contents

The following table presents our assets and liabilities that are measured at fair value on a recurring basis for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2019

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Cash equivalents

 

 

103,939

 

 

 —

 

 

 —

 

 

103,939

 

Total assets

 

$

103,939

 

$

 —

 

$

 —

 

$

103,939

 

Warrant liability

 

 

 

 

 —

 

 

17,333

 

 

17,333

 

Total liabilities

 

$

 —

 

$

 —

 

$

17,333

 

$

17,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Cash equivalents

 

 

122,300

 

 

 —

 

 

 —

 

 

122,300

 

Total assets

 

$

122,300

 

$

 —

 

$

 —

 

$

122,300

 

Warrant liability

 

 

 

 

 —

 

 

15,513

 

 

15,513

 

Total liabilities

 

$

 —

 

$

 —

 

$

15,513

 

$

15,513

 

 

 

 

 

 

The following table presents a reconciliation of our level 3 Warrant liability (in thousands):

 

 

 

 

 

    

 

March 31, 2019

 

 

 

 

Balance as of 12/31/2018

 

$

15,513

Unrealized loss on fair value of warrants for the three months ended March 31, 2019

 

 

1,820

Balance as of 3/31/2019

 

$

17,333

 

 

 

5. Intangible assets and goodwill

The following represents the balance of our intangible assets as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2019

 

 

 

Beginning of Period

 

Additions

 

Sold

 

Amortization

 

End of Period

 

Keveyis

 

$

30,132

 

$

 —

 

$

 —

 

$

(1,256)

 

$

28,876

 

Goodwill

 

 

7,256

 

 

 —

 

 

 —

 

 

 —

 

 

7,256

 

Total

 

$

37,388

 

$

 —

 

$

 —

 

$

(1,256)

 

$

36,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

Beginning of Period

 

Additions

 

Sold

 

Amortization

 

End of Period

 

Keveyis

    

$

35,155

    

$

 —

    

$

 —

    

$

(5,023)

    

$

30,132

 

Macrilen

 

 

 —

 

 

24,834

 

 

(22,670)

 

 

(2,164)

 

 

 —

 

Goodwill

 

 

7,256

 

 

 —

 

 

 —

 

 

 —

 

 

7,256

 

Total

 

$

42,411

 

$

24,834

 

$

(22,670)

 

$

(7,187)

 

$

37,388

 

 

Our finite lived intangible assets consist of acquired developed product rights obtained from our acquisition of Keveyis (dichlorphenamide) from a subsidiary of Taro Pharmaceutical Industries Ltd. (“Taro”) .

Pursuant to the terms of the Asset Purchase Agreement and Supply Agreement that we entered into with Taro, we paid Taro an upfront payment in two installments of $1 million in December 2016 and $7.5 million in March 2017.  We concluded that the supply price payable by us exceeds fair value and, therefore, used a discounted cash flow method with a probability assumption to value the payments in excess of fair value at $29.3 million, for which we have recorded an intangible asset and corresponding liability. This liability will be reduced as we purchase inventory over the term of the Supply Agreement.  In addition, we incurred transaction costs of $2.4 million. The overall recording of the

10


 

Table of Contents

transaction resulted in the recording of an intangible asset of $40.2 million. This asset is being amortized over an eight-year period using the straight-line method. 

We recorded amortization expense of $1.3 million and $1.8 for the three months ended March 31, 2019 and 2018, respectively

6. Accrued liabilities and other current liabilities

Accrued liabilities and other current liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2019

 

2018

 

Supply agreement - current portion

 

$

5,375

 

$

1,638

 

Consulting and professional fees

 

 

2,659

 

 

4,145

 

Employee compensation

 

 

1,711

 

 

5,717

 

Accrued sales allowances

 

 

1,815

 

 

2,233

 

Accrued royalties

 

 

1,367

 

 

802

 

Accrued Taxes

 

 

1,193

 

 

535

 

Lease liability - current portion

 

 

326

 

 

 —

 

Other

 

 

408

 

 

995

 

Total accrued liabilities

 

$

14,854

 

$

16,065

 

 

 

 

7. Commitments and contingencies

(a) Commitments to Taro Pharmaceuticals Industries Ltd.

In December 2016, we acquired the U.S. marketing rights to Keveyis (dichlorphenamide) from Taro. Under the terms of an asset purchase agreement, we paid Taro an upfront payment in two installments of $1 million in December 2016 and $7.5 million in March 2017, and will pay an aggregate of $7.5 million in potential milestones upon the achievement of certain product sales targets. Taro has agreed to continue to manufacture Keveyis for us under an exclusive supply agreement through the orphan exclusivity period. We are obligated to purchase certain annual minimum amounts of product totaling approximately $29 million over a six-year period. As of March 31, 2019, our remaining obligation was $22.1 million. The supply agreement may extend beyond the orphan exclusivity period unless terminated by either party pursuant to the terms of the agreement. If terminated by Taro at the conclusion of the orphan exclusivity period, we have the right to manufacture the product on our own or have the product manufactured by a third party on our behalf. We are required to reimburse Taro for their royalty obligation resulting from their sale of Keveyis to us.

(b) Indemnifications

In the ordinary course of business and in connection with the sale of assets and businesses and other transactions, we often indemnify our counterparties against certain liabilities that may arise in connection with the transaction or that are related to events and activities prior to or following a transaction, such as breaches of contracts, unfavorable tax consequences and employee liabilities. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we may be required to reimburse the loss and such amount could be material to our financial statements. Where appropriate, the obligation for such indemnifications is recorded as a liability. Because the amount of these types of indemnifications generally is not specifically stated, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. However, we believe that the likelihood of a material liability being triggered under these indemnification obligations is not probable at this time.

11


 

Table of Contents

8. Leases

We lease office space under operating leases. Our leases have initial lease terms ranging from one to five years. Our lease agreements contain provisions for future rent increases.

As of March 31, 2019, future minimum commitments under facility operating leases were as follows (in thousands):

 

 

 

 

 

 

    

Operating

 

 

 

leases

 

 

 

 

 

 

2019

 

 

326

 

2020

 

 

470

 

2021

 

 

481

 

2022

 

 

492

 

2023

 

 

207

 

Total minimum lease payments

 

$

1,976

 

 

The components of lease cost for the quarter ended March 31, 2019 are as follows (in thousands):

 

 

 

 

 

 

 

Three Months

 

 

 

Ended

 

    

 

March 31, 2019

Lease costs

 

 

 

Amortization of right of use assets

 

$

110

Interest on lease liabilities

 

 

33

Total lease cost

 

$

143

 

Amounts reported in the Consolidated Balance Sheets for leases where we are the lessee as of the quarter ended March 31, 2019 were as follows (in thousands):

 

 

 

 

 

 

 

March 31, 2019

Operating Leases

 

 

 

Right of use asset

 

$

1,046

Lease liability

 

$

1,690

 

 

 

 

Remaining lease term

 

 

 

Operating leases

 

 

4 years

 

 

 

 

Discount rate

 

 

 

Operating leases

 

 

7.69%

 

 

9. Income taxes 

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts and tax bases of assets and liabilities and operating loss carryforwards and other attributes using enacted rates expected to be in effect when those differences reverse. Valuation allowances are provided against deferred tax assets that are not more likely than not to be realized.

We assess our ability to realize deferred tax assets. Changes in future earnings projections, among other factors, may cause us to adjust our valuation allowance on deferred tax assets. Any such adjustments would impact our income tax expense in the period in which it is determined that these factors have changed.

12


 

Table of Contents

We recorded income tax expense of $0.7 million for the three months ended March 31, 2019, as a result of tax liability expected in connection with the intercompany transfer of intellectual property.

The global intangible low-taxed income tax and base erosion provisions are effective for taxable years beginning after December 31, 2017. We do not currently expect these provisions to have a material impact on our tax rate as we do not own any controlled foreign corporations and they are currently below the gross receipts threshold for purposes of the base erosion provisions.

10. Warrants

Warrants

Our outstanding warrants as of March 31, 2019 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

 

 

 

 

    

Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

Exercise

    

Expiration

    

Warrants

    

Warrants

 

March 31, 

 

 

 

Classification

 

Price

 

Date

 

Issued

 

Exercised

 

2019

 

Warrants in connection with private equity placement

    

Liability

    

$

2.50

    

6/28/2022

    

7,000,000

 

(1,970,000)

 

5,030,000

 

Warrants in connection with Horizon and Oxford loan agreement

 

Equity

 

$

2.45

 

12/28/2026

 

428,571

 

(267,857)

 

160,714

 

Warrants in connection with CRG loan agreement

 

Equity

 

$

7.37

 

7/14/2024

 

394,289

 

 —

 

394,289

 

Warrants in connection with CRG loan amendment in January 2018

 

Equity

 

$

10.00

 

1/16/2025

 

1,248,250

 

 —

 

1,248,250

 

 

 

 

 

 

 

 

 

 

9,071,110

 

 

 

6,833,253

 

 

 

11. Stock‑based compensation

Our board of directors has adopted the 2017 Inducement Plan (the “Inducement Plan”). The Inducement Plan provides for the grant of equity-based awards to new employees. The purpose of the Inducement Plan is to attract valued employees by offering them a greater stake in our success and a closer identity with us, and to encourage ownership of our ordinary shares by such employees. The Inducement Plan became effective on February 23, 2017. As of March 31, 2019, 738,953 shares are available for issuance pursuant to the Inducement Plan.

Our board of directors has adopted, and our shareholders have approved, the 2015 Equity Compensation Plan (the “2015 Plan”). The 2015 Plan provides for the grant of incentive stock options to our employees and any parent or subsidiary corporation’s employees, and for the grant of nonstatutory stock options, stock awards, and RSUs to our employees, directors and consultants and our parent or subsidiary corporations’ employees and consultants. The 2015 Plan became effective on September 3, 2015.  As of March 31, 2019, 262,168 shares are available for issuance pursuant to the 2015 Plan.

Our board of directors has adopted, and our shareholders have approved, the Non‑Employee Director Equity Compensation Plan (the “Non‑Employee Director Plan”). The Non‑Employee Director Plan provides for the grant of nonstatutory stock options, stock awards, and RSUs to our non‑employee directors. The Non‑Employee Director Plan became effective on September 3, 2015.  As of March 31, 2019, 272,151 shares are available for issuance pursuant to the Non‑Employee Director Plan.

13


 

Table of Contents

A summary of our outstanding stock options as of March 31, 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

 

    

 

    

 

 

    

Weighted-

    

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

 

 

 

 

 

 

 

Average

 

Contractual

 

 

 

 

 

 

Number of

 

Exercise

 

Term

 

Aggregate

 

 

 

Shares

 

Price

 

(Years)

 

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Outstanding—January 1, 2019

 

8,579,511

 

$

7.35

 

7.57

 

$

3,281

 

Granted

 

1,767,400

 

$

4.70

 

 

 

 

 

 

Forfeited and cancelled

 

(101,332)

 

$

6.31

 

 

 

 

 

 

Exercised

 

(39,728)

 

$

4.19

 

 

 

 

 

 

Outstanding—March 31, 2019

 

10,205,851

 

$

6.91

 

7.77

 

$

5,385

 

Vested and exercisable—March 31, 2019

 

4,224,745

 

$

8.63

 

6.25

 

$

2,506

 

Included in the stock options outstanding at March 31, 2019 are unvested stock options to purchase 88,908 shares at a weighted average exercise price of $18.80 per share for which the vesting of certain tranches will accelerate if the fair value per share of our stock reaches $31.46. In addition, the options outstanding as of March 31, 2019 include 97,652 shares that vest upon a market appreciation event, so long as it occurs prior to the date specified in the applicable award agreement and 97,652 shares that will vest upon the one year anniversary of the market appreciation event. The market appreciation event, which had not yet occurred as of March 31, 2019, is defined as the last trading day in the period in which our closing stock price on each of 20 consecutive trading days reported on Nasdaq has been at least $30.14 or $33.66 for the respective grantee.

Stock‑based compensation expense

We recognized stock‑based compensation expense for employees and directors for stock options and RSUs as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

 

Selling, general and administrative

 

$

1,811

 

$

1,280

 

Research and development

 

 

512

 

 

408

 

Total stock-based compensation

 

$

2,323

 

$

1,688

 

As of March 31, 2019, the total unrecognized compensation expense related to unvested stock options, net of estimated forfeitures, is $19.0 million, which we expect to recognize over an estimated weighted‑average period of 2.95 years.

In determining the estimated fair value of our service-based awards, we use the Black‑Scholes option‑pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment. The fair value of our service-based awards that were granted during the years was estimated with the following assumptions:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

     

2019

     

2018

 

Expected term (in years)

 

6.09

 

6.08

 

Risk-free interest rate

 

2.47% - 2.61%

 

2.25% - 2.71%

 

Expected volatility

 

80.00% - 80.85%

 

85.00%

 

Dividend rate

 

—%

 

—%

 

 

14


 

Table of Contents

Restricted stock units

Our board of directors have approved grants of RSUs to employees.  These RSUs vest two years from the date of issuance, provided that the employee is employed by us on such vesting date. All RSUs will fully vest upon a change of control of our company.  If and when the RSUs vest, we will issue one ordinary share for each whole RSU that has vested, subject to satisfaction of the executive’s tax withholding obligations. The RSUs will cease to be outstanding upon such issuance of ordinary shares. We recorded expense, which is included in the stock-based compensation table above, of $239,000 and $149,000 for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, the total unrecognized compensation expense related to unvested RSUs is $3.1 million, which we expect to recognize over an estimated weighted‑average period of 1.8 years.

A summary of our unvested RSUs as of March 31, 2019 is as follows:

 

 

 

 

 

 

Number of

 

 

 

Shares

 

Outstanding—January 1, 2019

 

143,100

 

Granted

 

634,000

 

Forfeited

 

(6,250)

 

Vested

 

(12,000)

 

Unvested—March 31, 2019

 

758,850

 

 

 

 

 

ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our interim unaudited consolidated financial statements and related notes for the three months ended March 31, 2019 included elsewhere in this Quarterly Report on 10-Q (this “Quarterly Report”) and the audited financial statements and related notes for the year ended December 31, 2018 and related Management’s Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on February 27, 2019. As used in this Quarterly Report, unless the context suggests otherwise, “we,” “us,” “our,” or “Strongbridge” refer to Strongbridge Biopharma plc.

Special Note Regarding Forward-Looking Statements

This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, prospective products, size or market or patient population, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and healthcare, regulatory and scientific developments and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may

15


 

Table of Contents

differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report except as required by law. You should also read carefully the factors described in the “Risk Factors” section of our 2018 Annual Report and this Quarterly Report to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

Overview

We are a global, commercial-stage biopharmaceutical company focused on the development and commercialization of therapies for rare diseases with significant unmet needs.